Archive for November, 2017

Levels of Strategy

Strategy may operate at different levels of an organization – corporate level, business level, and functional level.

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Corporate Level Strategy

Corporate level strategy occupies the highest level of strategic decision-making and covers actions dealing with the objective of the firm, acquisition and allocation of resources and coordination of strategies of various SBUs for optimal performance. Top management of the organization makes such decisions. The nature of strategic decisions tends to be value oriented, conceptual and less concrete than decisions at the business or functional level.

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Business-Level Strategy

Business-level strategy is – applicable in those organizations, which have different businesses-and each business is treated as strategic business unit (SBU). The fundamental concept in SBU is to identify the discrete independent product/market segments served by an organization. Since each product/market segment has a distinct environment, a SBU is created for each such segment.

For example, Reliance Industries Limited operates in textile fabrics, yarns, fibers, and a variety of petrochemical products. For each product group, the nature of market in terms of customers, competition, and marketing channel differs. Therefore, it requires different strategies for its different product groups. Thus, where SBU concept is applied, each SBU sets its own strategies to make the best use of its resources (its strategic advantages) given the environment it faces. At such a level, strategy is a comprehensive plan providing objectives for SBUs, allocation of re-sources among functional areas and coordination between them for making optimal contribution to the achievement of corporate-level objectives.

Such strategies operate within the overall strategies of the organization. The corporate strategy sets the long-term objectives of the firm and the broad constraints and policies within which a SBU operates. The corporate level will help the SBU define its scope of operations and also limit or enhance the SBUs operations by the resources the corporate level assigns to it. There is a difference between corporate-level and business level strategies.

For example, Andrews says that in an organization of any size or diversity, corporate strategy usually applies to the whole enterprise, while business strategy, less comprehensive, defines the choice of product or service and market of individual business within the firm. In other words, business strategy relates to the ‘how’ and corporate strategy to the ‘what’. Corporate strategy defines the business in which a company will compete preferably in a way that focuses resources to convert distinctive competence into competitive advantage.’

Corporate strategy is not the sum total of business strategies of the corporation but it deals with different subject matter. While the corporation is concerned with and has impact on business strategy, the former is concerned with the shape and balancing of growth and renewal rather than in market execution.

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Functional-Level Strategy

Functional strategy, as is suggested by the title, relates to a single functional operation and the activities involved therein.

Decisions at this level within the organization are often described as tactical. Such decisions are guided and constrained by some overall strategic considerations. Functional strategy deals with relatively restricted plan providing objectives for specific function, allocation of resources among different operations within that functional area and coordination between them for optimal contribution to the achievement of the SBU and corporate-level objectives. Below the functional level strategy, there may be operations-level strategies as each function may be dividend into several sub functions. For example, marketing strategy, a functional strategy, can be subdivided into promotion, sales, distribution, pricing strategies with each sub function strategy contributing to functional strategy.

Strategies at all the three levels are interlinked in which a higher level strategy generates a lower-level strategy and a lower-level strategy contributes to the achievement of the objectives of higher-level strategy.

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Formulation of Strategy

Formulation of strategies is a creative and analytical process. It is a process because particular functions are performed in a sequence over the period of time. The process involves a number of activities and their analysis to arrive at a decision.

Though there may not be unanimity over these activities particularly in the context of organizational variability, a complete process of strategy formulation and implementation can be understood.

The process set out above includes strategy formulation and its implementation, what has been referred to as strategic management process. The same process can be applied to both strategy and policy. The figure suggests the various elements of strategy formulation and process and the way they interact among themselves. Accordingly, the various elements are organizational mission and objectives, environmental analysis, corporate analysis, identification of alternatives, and choice of alternative. Up to this stage the formulation is complete. However, implementation is closely related with formulation because it will provide feedback for adjusting strategy.

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Why are caps and collars considered insurance products?

Insurance products are contingent claims. The insured party pays a premium for the contract (for example, an automobile policy). Should the specified condition (for example, an automobile accident) not occur, no payment is made under the policy. However, if the condition does take place, the insurer pays according to the contract’s terms. Caps and collars work exactly in this way. A borrower who wishes to limit its interest rate exposure pays a premium to the writer of the contract. Should interest rates remain below the cap or within the collar, no payment is made to the borrower. However, if rates move outside the specified limits, the writer of the contract reimburses the borrower, in this case by the amount of the interest payment resulting from the difference between the actual and contract rates.

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What are the Contingent Liabilities

Contingent liability is a potential obligation which may in the future develop into actual liability or may dissolve without necessitating any outlay. The crucial characteristics of contingent liability is uncertainty i.e, whether it will or will not develop into a real liability. Thus a contingent liability is that which may or may not arise after the preparation of balance sheet.

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Which party bears interest-rate risk exposure in a fixed rate loan? in a floating rate loan?

To the extent that risk means future uncertainty, both parties bear risk when interest rates are floating that they do not bear when rates are fixed. However, most lenders and borrowers are primarily concerned with the possibility that interest rates will move against them. Accordingly, the risk depends on the direction in which rates might move. In a fixed rate loan, the risk comes from not being able to benefit from a change in rates. The lender bears the risk that interest rates will rise, and it will be unable to increase the rate it is charging; the borrower bears the risk that rates will fall, and it will be unable to reduce the rate it is paying. In a floating rate loan, the risk comes from being hurt by a change in rates. The lender bears the risk that interest rates will fall, and so will its earnings; the borrower bears the risk that rates will rise, and so will the amount it is paying in interest.

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Usual Contents of Work Paper File

The following are the usual contents of work paper file:

1. A complete list of all the books in use, and the names of the clerks in charge of each of each should be prepared.

2. All cash and cheques in hand on the closing date of the audit period should be sent to bank, if possible, and if not, the Cash book should be kept written up to the date of the auditor’s visit.

3. A statement reconciling the Bank balance as per cash book with that of the Bank statement should be ready together with a Bank Certificate.

4. All postings, additions, carry-forwards etc, should be ready written in ink, the requisite balances extracted and trial balance agreed.

5. Schedule of debtors, creditors, duly agreed with their control account in the general ledger should be kept ready with confirmation of the parties regarding balance due to or by them.

6. All important contacts, title deeds and other documents having any bearing on accounts to be kept ready for reference.

7. Minutes books, copies of Partnership Deed or Memorandum and Articles of Association and Prospectus etc. to be kept at hand.

8. All vouchers should be available arranged in order of books entries.

9. Bills receivables, post-dated cheques, bonds and securities and investments should be ready for production when required and a list thereof kept ready.

10. List of all prepared expenses, advances, accrued income and of outstanding expenses etc, to be prepared and kept ready.

11. A complete list of stocks of stores should be prepared.

12. A list of over-dues and doubtful debts included in the schedule of debtors stating suggested provisions deemed desirable against possible loss should be prepared.

13. The draft Profit and Loss Account and Balance sheet be prepared, and in case of limited company, should be passed by the Directors.

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Why would any company purchase a floor

Why would any company purchase a floor, since it keeps its interest payments up when interest rates fall?

While borrowers do not purchase floors by themselves for this reason, they do purchase them along with caps to create collars. Since the insurer benefits from a floor, it is willing to sell a collar for a lower premium than just a cap alone. The borrower gets the protection of the cap at a lower price than by simply purchasing the cap alone.

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