Arauco(a): Forward Integration or Horizontal Expansion.

Summary: Arauco(A): Forward Integration or Horizontal Expansion. Conclusion There is an obvious need for transformation in this company to protect its debt holders, shareholders, and employees. Concentrating on products that will have a growing demand such as toilet paper, tissue paper, and magazine paper would aid in stabilizing the company’s earnings. Having over 50% of revenues derive from pulp sales increases risk of instability. Attempting to first reduce costs and pay outstanding debts should be Celulosa-Arauco’s primary goals.

Eventually there will be restrictions placed on these companies causing them to rely solely on their plantations. The slow inventory production and turnover could cause significant problems for Celulosa-Arauco. Celulosa-Arauco should seek to limit risks that they have incurred by operating in a better planned and more organized manner. Arauco should consider greater positioning in China as it will be the world’s largest paper consumer. This is evident from the increase in educational spending but lack of functional computer software for students.

The immense amount of Chinese characters creates great constraints on using non-paper educational tools. The fact that Chinese characters are not standardized across the different provinces should also add to a long-term consumption of paper. Cutting the current dividend and transforming the company into lean, efficient, well-managed segments with appropriate oversight is crucial at this point. Here are possible transformations that Arauco could proceed with: ? Change the product / services portfolio ? Change operations

With a threat on Celulosa-Arauco’s core competence, pursuing a transformation on the first option could result in a transformation that is more drastic than Celulosa-Arauco can sustain. Second, Celulosa-Arauco can proceed by changing operations. One alternative to proceed with this transformation would be to migrate out of the political and legal pressures. Celulosa-Arauco can explore diversifying their operations to other countries, possibly those with more stable political policy. Such a migration requires logistical concerns and expenses.

In order for Celulosa Arauco to sustain success or even thrive in this changing market, it would have to undergo a transformation. Forestry operations, although still a sustainable market, is undergoing greater scrutiny due to raising environmental concerns. In the last few years, Celulosa Arauco underwent great scrutiny over a few of the company’s sawmills. In the last few years, the Chilean government increased political and legal pressure on Arauco due to great environmental concerns with Arauco’s operations.

This increased pressure forced Arauco to close saw mills in Chile, resulting in millions of US$ in profits (~ US$250,000 per day) ii. The increased political/legal pressure and uncertainty results in the third trigger of industry transformation: “a change in regulation can alter the mix of buyer value and cost that companies are permitted to offer”. However, there’s no indication of an urgent matter with the environmental concerns. Celulosa-Arauco would not be able to sustain success if they continue to just suspend or close saw mills as that results in loss of profits and investment.

If the concerns grow and political / legal pressures escalate, this could prove fatal to Celulosa-Arauco. Resources I “Celulosa Arauco: Forward Integration or Horizontal Expansion? ” ii Celulosa Arauco Annual Report 2006; http://www. arauco. cl/pdf/Arauco20-F_2006. pdf iii “Industry Transformation”; Michael E. Porter and Jan W. Rivkin; 2000; Harvard Business School Reprint 9-701-008 iv “Leading Change: Why Transformation Efforts Fail”; John P. Kotter; 2006; Harvard Business School Reprint R0701

Individual: Organizational Learning Disabilities

Running Head: INDIVIDUAL: ORGANIZATIONAL LEARNING DISABILITIES Individual: Organizational Learning Disabilities [Name of the writer] [Name of the institution] Individual: Organizational Learning Disabilities Introduction Though there is large interest in organizational learning amidst both academicians and practitioners, the publication continues a bewildering blend of ideas mostly unconfirmed by empirical research. (Leong, 2005) The aim of this study is to help clarify organizational learning by focusing on one significant facet, organizational learning disabilities (i. e. obstacles that can inhibit organizational learning). Specifically, this dissertation has taken a theoretical approach to analyzing organizational learning disabilities by speaking to three basic study questions: (1) What are organizational learning disabilities? (2) Does the occurrence of the learning disabilities decrease the organizational conclusions of innovativeness and competitiveness? and (3) What antecedent variables are associated to the learning disabilities? The antecedent variables advised are homeland heritage, organizational heritage, HRM, authority, and ecological change.

Specific hypotheses between the variables are evolved and checked empirically. (Leong, 2005) Theoretical Structure A theoretical structure connecting the learning disabilities to their antecedents and conclusions is evolved to analyze these questions. This structure engages a four-stage form of organizational learning (Discovery, Invention, Production, and Generalization), and some organizational learning disabilities are recognised inside each stage. Measures that operationalize the organizational learning disabilities are evolved and a large piece of this dissertation agreements with their assemble development and validation.

A multi-method study scheme engaging large-scale reviews, archival causes and case study ethnographies was engaged, permitting for both deepness and wideness in the analysis. (Leong, 2005) The review produced in roughly 2,000 answers from 253 working associations established mainly in Asia, Europe and North America. (Anderson, Knox, Horney, 2006) A key informant approach was utilized and all facts and numbers were aggregated to the enterprise unit level. Measurement matters and the hypotheses are considered utilising the LISREL procedure of functional formula modeling.

Results show that the occurrence of organizational learning disabilities decreases organizational innovativeness, and through innovativeness, performance. Of specific significance are disabilities that (1) impede evaluations of the natural environment, (2) decrease the kind of perspectives in the firm, (3) avert activities from being taken, and (4) limit learning to a lone unit. The disabilities are furthermore leveraged by nationwide heritage, organizational heritage, HRM practices, and to a lesser span, leadership. The significances for study and perform are discussed.

Serious organizational discovering difficulties are generally fixed in a malfunction of ideas… • Trying to run an association undergoing fast change as a bureaucracy • Reliance on top–down decision–making and ineffective organizational communication • Overuse of organizational government to “solve” problems • Antiquated organizational pays systems • Poor planning • Avoiding making decisions • Separation of human assets administration from the main heading of the organization • Management by the numbers Poor value of merchandise or service and of administration processes • “Cookie–cutter” equations for downsizing to decline costs • Jumping on “flavor of the month” administration fads • Failure to provide work accessible in–house assets to explain problems … or a malfunction of ethics… • persistent conclusions which are “smart” but unprincipled – departing a awaken of lawful and administrative problems • short-sighted greed where one assembly of stakeholders endeavours to boost its worth at he total cost of other stakeholders References Leong, C. K. 2005. Effects of on-line reading and simultaneous DECtalk auding in helping below-average and poor readers comprehend and summarize text. Learning Disabilities Quarterly 18 (2): 101-14. Anderson-Inman, L. , C. Knox-Quinn, and M. A. Horney. 2006. Computer-based study strategies for students with learning disabilities: Individual differences associated with adoption level. Journal of Learning Disabilities 29 (5): 461-84.

Li & Fung – the Global Value Chain Configurator

This case study explains both the philosophy behind supply-chain management and the specific practices that Li & Fung has developed to reduce costs and lead times, allowing its customers to buy “closer to the market. ” Li & Fung, Hong Kong’s largest export trading company, has been an innovator in global supply-chain management. Li & Fung has also been a pioneer in “dispersed manufacturing. It performs the higher-value-added tasks such as design and quality control in Hong Kong, and outsources the lower-value-added tasks to the best possible locations around the world. The result is something new: a truly global product. To produce a garment, for example, the company might purchase yarn from Korea that will be woven and dyed in Taiwan, then shipped to Thailand for final assembly, where it will be matched with zippers from a Japanese company.

For every order, the goal is to customize the value chain to meet the customer’s specific needs. To be run effectively, the company maintains, trading companies have to be small and entrepreneurial. He describes the organizational approaches that keep the company that way despite its growing size and geographic scope: its organization around small, customer-focused units; its incentives and compensation structure; and its use of venture capital as a vehicle for business development. The Issues raised in the case study are: Understand how a regional trading company used its core advantage (its vast sourcing knowledge and network) to become a global value chain manager, providing global economies of scale and scope to its customers •Study the importance of efficient value chain management for a global company •Examine the role of IT and the Internet as major drivers of globalization •Study the importance of acquisitions and alliances in a company’s globalization strategies •Understand how innovation, differentiation and customization can be used as strategic and competitive advantages by a company, to maintain its leadership in the domestic market, and emerge as a global player •Study the changes taking place in the retailing and trading industry with respect to customer requirements and examine the need for a customer-centric business model for an export trading company a. According to John Mathews , A professor of management in Macquaire Graduate school of management, Sydney; and author of “Dragon Multinational: A new Model for Global Growth,” Li & Fung is one of the first truly global companies. How did Li & Fung use the value chain configuration in its globalization process? Li & Fung’s major strategy was to become an intergraded global player in the Supply chain management.

It focused on its value chain to achieve its objective. Li & Fung’s top management constantly examined the value chain to understand where the value lay and how it could be further increased. By the 1980s, Hong Kong had become a relatively expensive and uncompetitive manufacturing location, compared to other countries in south east Asia. For example, in the transistor radio business, Hong Kong faced intense competition from Taiwan and Korea. The situation prompted Li & Fung to improve efficiency and cut costs by reconfiguring its value chain. The company began to send kits containing components to China for the labour intensive assembly process.

The assembled transistors were then brought back to Hong Kong for inspection and testing. Li & Fung replicated the strategy for Baby dolls. It did the design work and prepared the moulds in Hong Kong. The moulds were shipped to China, for plastic injection, painting and tailoring of the doll’s clothing. The dolls came back to Hong Kong for inspection, testing and packing. Hong Kong’s well-developed banking system facilitated efficient LC negotiation while its status as a regional shipping centre helped in the distribution of products around the world. By the late 1990s, Li & Fung’s value chain configuration across countries had become even more sophisticated.

For a typical garment order from a retailer in the West, Li & Fung would decide to buy yarn from say, a Korean producer, but do the weaving and dyeing in Taiwan. It would source zippers from the Chinese plants of leading Japanese companies. Based on quotas and cost of labour, Li & Fung would then decide where the production of garments would take place. To reduce dependence on a single production point, the order would typically be distributed among different factories within the country. In the case of shirts for the American market, Li & Fung would buy cotton from America, knit it and dye it in China and sew the garment in Bangladesh. By spreading its value chain across different countries, Li & Fung had reduced the time between obtaining orders and their execution.

With customer tastes rapidly changing, retailers in the West had more seasons a year and a shorter lead time for the fashion trends to be noticed. As a result, the business had become time sensitive. Li & Fung had attempted to build excellent relationships with its suppliers, and win their loyalty to ensure that they responded quickly to any situation . For a company so heavily dependent on outsourcing, quality control had become a major issue. Li & Fung carried out regular inspections at the raw materials, manufacturing and finished goods stages. Li & Fung had attempted to differentiate itself from its competitors by its ability to locate raw materials and components.

Trading staff had detailed information on where the cheapest and the best quality material such as embroidery, electronic components and plastics were available. The above examples provide a detailed insight in to the use of the value chain configuration in Li & Fung’s globalization process. b. Li & Fung owes much of its ongoing success to its expertise in global value chain configuration. Define the concept of value chain and critically discuss the importance of value chain management for global companies drawing from the experience of Li & Fung. Answer: The value chain is a concept from business management. A value chain is a chain of activities. Products pass through all activities of the chain in order and at each activity the product gains some value.

The chain of activities gives the products more added value than the sum of added values of all activities. It is important not to mix the concept of the value chain with the costs occurring throughout the activities. A diamond cutter can be used as an example of the difference. The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond. The function of value chain management is to design and manage the processes, assets, and flows of material and information required to satisfy customers’ demands. Supply logistics related costs account for a substantial part of the typical firm’s total cost.

On the revenue side the Value chain decisions have a direct impact on the market penetration and customer service. Globalization of economy and electronic commerce has heightened the strategic importance of value chain management and created new opportunities for using value chain strategy and planning as a competitive tool. Electronic commerce has not only created new distribution channels for consumers but also revolutionized the industrial marketplace by facilitating interfirm communication, especially relevant for global companies, and by creating efficient markets through trading communities. Moreover combination of enterprise information infrastructure and the Internet has paved the way for a variety of value chain optimization technologies.

The global companies in current market place need to look at the importance of the value chain management process from the following parameters, which were also essentially used by Li & Fung: •To develop an understanding of key drivers of value chain performance and their inter-relationships with strategy and other functions of the company such as marketing, manufacturing and accounting. •To impart analytical and problem solving skills necessary to develop solutions for a variety of value chain management and design problems and develop an understanding for use of information technology in value chain optimization. •To understand the complexity of inter-firm and intra-firm coordination in implementing programs such as e-collaboration, quick response, jointly managed inventories and strategic alliances. To develop the ability to design logistics systems and formulate integrated value chain strategy, so that all components are not only internally synchronized but also tuned to fit corporate strategy, competitive realities and market needs. •To understand which information should be exchanged in a value chain and how it should be used to benefit the entire value chain. •To identify improvement opportunities that exist within value chains in different industries and to quantify the improvements that various value chain strategies offer. •To understand which barriers companies face during the implementation of new value chain strategies. Li & Fung was the leader in positioning itself as the global value chain manager.

It was able to achieve the objective by integration of operational strategy with its organizational strategies, customer-centric organizational structure, technology and Internet initiatives, and globalization efforts, which contributed to the company’s emergence as one of the world’s leading consumer goods trading companies. At the heart of all above was the value chain management. This was driven partly by the fact that manufacturers and retailers were increasingly able to communicate and do business with each other directly, thereby threatening the existence of pure “middle men” or “agents”. The founding partners at Li & Fung believed that the role of an agent went beyond matching the needs of the buyers and sellers to add value in innovative ways.

Hershey Foods Corporation


HERSHEY’S GROWTH CHART Source: www. hersheys. com 8 PLATE NO. 2 GLOBALLY GROWTH CHART Source: Global Market Review Report 9 PLATE NO. 3 MAJOR BRANDS AND PRODUCT LINES Source: www. hersheys. com 10 PLATE NO. 4 HERSHEY’S INCOME CHART Source: Case -5 Hershey Foods Corporation 13 PLATE NO. 5 2004 SALES CHART Source: Balance Sheets of Nestle, Mars etc. 13 PLATE NO. 6 CHART OF HERSHEY’S EXPENSES Source: Case -5 Hershey Foods Corporation 15 PLATE NO. 7 MARKET SHARE OF DIFFERENT PRODUCTS Source: www. investis. com 17 PLATE NO. 8 ORGANIZATION STRUCTURE (FINDINGS) Source: Case -5 Hershey Foods Corporation 19 PLATE NO. 9

ORGANIZATION STRUCTURE (RECOMMENDATION) Source: Self 20 Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 4 EXECUTIVE SUMMARY Hershey, Pennsylvania the home of Hershey Foods Corporation known as Chocolate Town, USA, the air in this city actually smells like chocolate. Hershey has grown from a one product, one plant operation in 1894 to a $ 4. 4 billion company producing as array of quality chocolate, nonchocolate and grocery products. SWOT Analysis to define the Hershey Strengths, Weaknesses, Opportunities and Threats. Hershey market share is less than 10 percent, lowest among its competitor.

So, Hershey should come up with new strategies in finance, marketing, production department and in organization structure to increase the market share and compete globally. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 5 OBJECTIVE OF THE STUDY To Analysis the Hershey Food Corporation situation and suggest certain strategies department wise to overcome from the main threat i. e. competitor. Suggest the certain techniques and strategies to increase the market share and to compete globally. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School]

Page 6 1. 1 BACKGROUND Milton Hershey’s love for candy making began with a childhood apprenticeship under candy maker Joe Royer of Lancaster, Pennsylvania. Mr. Hershey was eager to own a candy-making business. After numerous attempts and even bankruptcy, he finally gained success in the caramel business. Mr. Milton S. Hershey Hershey has grown from a one-product, one plant operation in 1894 to a $4. 4. Billion company producing as array of quality chocolate, non chocolate, and grocery products. The company markets confectionery and grocery products in over 60 countries worldwide, down from 90 countries a ew years ago. By 1901, the chocolate industry in America was growing rapidly. Hershey’s sales reached $662,000 that year, creating the need for a new factory. Mr. Hershey’ moved his company to Derry Church, Pennsylvania, a town that was renamed Hershey in 1906. In 1909, the Milton Hershey School for Orphans was founded. Mr. and Mrs. Hershey could not have children, so for years the Hershey Chocolate Company operated mainly to provide funds for the orphanages. In 1927, the Hershey Chocolate Company was incorporated under the laws of the state of Delaware and listed on the New York Stock Exchange.

That same year, 20 percent of Hershey’s stock was sold to the public. Between 1930 and 1960, Hershey went through rapid growth; the name “Hershey” became a household word. The legendary Milton Hershey died in 1945. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 7 1. 2 GROWTH In the year of 1901, the Hershey company sales were only $662,000 and within the span of 10 years the Hershey sales reached $ 5 million in 1911. Thereafter Hershey’s sales increased 4 to 5 percent annually as we can see in the Figure . 1. 1. HERSHEY GROWTH CHART (in $ million) Growth (in million) 00 400 300 200 100 0 1998 1999 2000 2001 2002 2003 2004 2005 Source: www. hersheys. com Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 8 1. 3 GROWTH GLOBALLY Premium chocolate represents a fast-growing and dynamic market in many parts of the world, with global sales having risen by over 18% within the last year. The global chocolate market is forecast to reach a value of US$12. 9bn by 2011. This represents an increase of more than 85% in value terms compared with present levels, and provides an indication that the market in many parts of the world has only just started to develop towards its potential. GLOBALLY GROWTH CHART (IN $ BILLION) Growth 16 14 12 10 8 6 4 2 0 2000 2002 2004 2006 2008 2010 2012 2014 2015, 14 2016 Source: Global Market Review Report Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 9 2. PRODUCTS Hershey’s North America operations produce an extensive line of chocolate and non chocolate products sold in the form of single bars, bagged goods, and boxed items. These products are marketed under more than 50 brands names and sold in over 2 million retail outlets in North America.

In 2004; Hershey introduced the following new products: Hershey’s Kisses filled with caramel milk chocolates; Ice Breakers Liquid Ice mints; Hershey’s Snack Barz rice and marshmallow bars; Hershey’s Smart Zone nutrition bars; Take5 candy bars; Hershey’s Almond Joy, York, and Reese’s cookies; Reese’s Piece candy with peanuts; and Reese’s Big Cup, etc. MAJOR BRANDS AND PRODUCT LINES Hershey’s Hershey’s Bliss Reese’s Ice Breakers Major Barnds Kit Kat Jolly Rancher Twizzlers Kisses Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 10 3. SWOT ANALYSIS 3. 1 STRENGTHS: ? ? ? ? ? ? ?

Huge Market Share in North America. Marketed under more than 50 brand names. Derry Church, Pennsylvania, a town that was renamed Hershey in 1906. The name “Hershey” became a household word. Hershey acquired or purchased many corporations in America. Annexure . 1. (Hershey Mergers & Acquisitions list) Huge man power approx. 13,700 full-time and 2,300 part-time employees. Increasing sales 3 to 4 percent annually. 3. 2 WEAKNESSES: ? ? ? ? ? Hershey operates from a centralized, functional structure with no divisional president. Very few multinational distributors. They are not able to adopt “Global Channels of Distribution”.

Less than 10 percent of Hershey’s sales are generated outside the United States. Lack of experience of International Market. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 11 3. 3 OPPORTUNITIES: ? ? ? ? Emergence of International Market. Innovation in the product. Innovation in low fat and functional candy category. They can adopt “Global Channels of Distribution”. 3. 4 THREATS: ? ? International Competitors. Change in Consumer’s life style towards low fat and healthy food. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 12 4.

FINANCE 4. 1 FINDINGS 3. HERSHEY’S INCOME CHART (IN US$) Income 700000 600000 500000 400000 300000 200000 100000 0 1998 1999 2000 2001 2002 2003 2004 2005 Source: Case 5 – Hershey Foods Corporation -2005& www. hersheys. com 4. 2004 SALES CHART (IN BILLION) Sales Hershey Nestle 3% 22% M Mars 75% Source: Balance sheet of Hershey, Nestle & M Mars Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 13 Figure No. 3, is defining the income of Hershey’s food, the figure is clearly showing the growth of Income in Hershey’s Food after 2001. Hershey’s net income was $590. million in 2004 compared to $457. 6 million in 2003. Now from the Figure No. 4, we can easily identify the Nestle is leading with 75 percent of sales from its competitors because it is the largest food company in the world. Nestle sells products in over 360 countries on all seven continents. But if we talk about Hershey Food Corporation, it has the minimum percentage of sales i. e. 3 percent which is very low comparatively other two competitors because it has only limited branches worldwide, the company markets its products in over 60 countries worldwide and it generates only 10 percent sales from outside the United states. . 2 RECOMMENDATIONS To overcome from the problem means to increase the sales Hershey should adopt certain strategies like, ? ? ? ? Hershey should go globally. They have to take experience of outside market (untapped market). They have to come up with new candies like fat less candies because consumers are going to be health, nutrition and weight conscious. Hershey should adopt the “Global Channels of Distribution” to increase the sales worldwide. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 14 5. MARKETING 5. 1 FINDINGS 5. Chart of Hershey’s Expenses (in millions)

Expense Chart 900 800 700 600 500 400 300 200 100 0 Expense in million $ 1998 1. 00 Advertisement Selling, Marketing Expenses Income 187. 5 868. 7 410. 2 2002 2. 00 162. 9 833. 4 403. 5 2003 3. 00 145. 4 816. 4 457. 5 2004 4. 00 137. 9 847. 5 590. 8 Source: Case 5 – Hershey Foods Corporation 2005 This Figure is indicating the Expense of Hershey Food Corporation and Income also, by the help of this figure we can identify that in which year Hershey invested more amount on Advertisement and Other Expenses then we can relate with the Income and find out the Expenses was worthwhile or not.

Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 15 As per the figure Hershey decreased its expenses, in the year of 1998, Hershey invested $ 187. 5 million on Advertisements and $ 868. 7 million in Selling, Marketing and other expenses, total $ 1056. 2 million in 1998. But in 2004, Hershey invested only $ 137. 9 on Advertisements and $ 847. 5 million in Selling, Marketing and other expenses, total $ 985. 4 million in 2002. But on the other hand Income is increasing. In 1998, Hershey income was 410. 2 million and it increased about 44 percent in 2004. . 2 RECOMMENDATIONS ? ? ? ? They have to invest in advertisement, if they have to have to maintain the market share/increase the market share. They have to find out the new channels of distribution and adopt the new channels to increase the sales. Go international advertisement to promote the product. Use Multinational channel to increase the sales. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 16 6. PRODUCTION 6. 1 FINDINGS 6. MARKET SHARE OF DIFFERENT PRODUCT (IN US$SHARE) Market Share (in US $ Share) Kraft Ferrero Hershey Nestle Mars 0. 0% 5. % Mars 10. 0% Nestle 7. 8% 12. 6% 1. 0% 3. 2% 15. 0% Hershey 5. 5% 8. 2% 1. 1% 2. 7% 20. 0% 25. 0% Ferrero 4. 4% 7. 3% 1. 5% 30. 0% Kraft 4. 3% 7. 7% 1. 0% 1. 0% Confectionery Market Chocolate Gum Candy 9. 0% 14. 8% 3. 0% Source: www. investis. com Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 17 6. 2 RECOMMENDATIONS ? ? ? ? Increase the production capacity of Chocolate and Candy. Come up with different types of candies and chocolate because people rarely select the same candy bar twice in a row; consequently, product variety is crucial to success.

Should increase the production of candies to be the market leader. Company can come up with variety of Gum product to increase the market share. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 18 7. OGANIZATION STRUCTURE 7. 1 FINDINGS VP for Strategy and Innovation Senior VP for Business Planning and Development Senior VP and General Counsel Chief Marketing Officer Chief Customer Office Chairman of the Board President and CEO R. H. Lenny Senior VP and President Hershey International Chief Accounting Officer Chief Information Officer

Chief People Officer Chief Financial Officer Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 19 Hershey does not make public an organization chart, but titles of executives suggest that Hershey operates from a centralized, functional structure with no divisional presidents. This type of structure would be somewhat unusual for an organization of Hershey’s size, since the more common design would be decentralized in some manner. 7. 2 RECOMMENDATION I am suggesting the new organization structure to Hershey Food Corporation.

In this structure, I have suggested continental president, which will help to complete globally or to increase the market share globally because they will have the experience of the particular continents and they will work according to market conditions. Chairman of the Board President in United State of America President in Asia- Pacific President in Europe President in Russia VP for Strategy and Innovate Senior VP for Business Planning Senior VP for General Counsel Chief Marketi ng Officer Chief Custom er Officer Senior VP and Presiden t Chief Accounti ng Officer Chief Informat ion Officer

Chief People Officer Chief Financial Officer Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 20 RESULT OF THE STUDY This study used Hershey Food Corporation as a case to demonstrate how to formulate global product strategy to penetrate growing international markets. The results from the SWOT analysis indicate that Hershey Foods Corporation has great strengths and opportunities but also has significant weaknesses and faces potential threats. This study focused on the formulation of global product strategies for Hershey’s future expansion.

Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 21 BIBLOGRAPHY 1. Case: Hershey Foods Corporation – 2005 Fred R. David (Francis Marion University). 2. Hershey Website – www. hersheys. com 3. Nestle Website – www. nestle. in 4. M Mars Website – www. mars. com 5. Search Engine – www. google. co. in 6. Hershey Annual Report 7. Nestle Annual Report 8. M Mars Annual Report 9. Hindu Business Line article dated 19th April 2007. 10. Indian Express article dated 9th September 2009. Case Analysis – Hershey Food Corporation by Atul Jain [FOSTIIMA Business School] Page 22

Optimal Portfolio Mix

OPTIMUM PORTFOLIO: An Empirical Analysis Submitted By: Neha Dhingra Enroll No. -07BS2482 ICFAI Business School, Bangalore OPTIMUM PORTFOLIO: An Empirical Analysis Submitted By: Neha Dhingra 07BS2482 A report submitted in partial fulfillment of the Requirements of MBA Program of ICFAI Business School, Bangalore Faculty Guide: Company Guide: Prof. Ashish Dash Ms. Rangapriya.


CHAPTER THREE: FUNDAMENTAL ANALYSIS38 COMPANY ANALYSIS40 CHAPTER FOUR: OPTIMAL PORTFOLIO CONSTRUCTION AND CORRELTION ANALYSIS63 OPTIMAL PORTFOLIO64 OBSERVED PORTFOLIO67 CHAPTER FIVE: CONCLUSION70 CONCLUSION71 REFERENCES:74 APPENDIX I: Company description76 APPENDIX II: Explains the financial ratios considered for the purpose of company analysis. 79 List of Tables |Table 1. 1 |Reviews the literatures that have been studied for the purpose of this study. | |Table 1. 2 |Lists various information available and unavailable in each of the databases used for the purpose of | | |this study. |Table 1. 3 |Displays the various stages and the dates of evaluations. | |Table 2. 1 |Shows the respective shares of foreign as well as Public Sector Banks in terms of branches, staff, | | |deposits, advances and net profit | |Table 3. 1 |Lists the values of the various ratios used for analyzing the fundamentals | |Table 4. 1 |Lists the percentage allocation to each of these securities in the optimum portfolio. | |Table 4. |Lists the percentage allocation to each of these securities in portfolio of Reliance Growth mutual fund| | |as on 31st March 2008. | List of Figures |Figure 2. 1 |Shows the categorization of various producers on the basis of products produced by them in | | |Automobiles Sector | |Figure 2. 2 |Market Shares of Telecom Service Providers | |Figure 3. 1 |Shows the various financial ratios that form the company fundamentals. | |Figure 4. |Portrays the allocation in the Optimal and Observed Portfolio to various sectors. | ABSTRACT This project explains how theory can serve as an instrument to analyze the fundamentals of thirty five companies before recommending them as an investment avenue. It discusses how to construct an optimal portfolio making use of modern portfolio theory and thereby concluding that their exists very less correlation between the observed portfolio of a mutual fund and an optimal portfolio thereby proving that this well performing fund do not use theories rather the experience of fund managers which makes them yield good returns.

EXECUTIVE SUMMARY Name: Neha Dhingra Enrollment No. :07BS2482 Company Description: Right Horizons( www. righthorizons. com ) is an end to end investment advisory and wealth management firm that focuses on providing a solution that is specific to customer needs like corporate treasury management, Tax planning, corpus fund planning etc. Title of the project: The study titled “Optimum Portfolio: An Empirical Analysis” is carried out during 22nd February 2008 to 22nd May 2008 at Right Horizons Financial Services Pvt.

Ltd. Objectives of the project: Following are the objectives for this study: ? To understand and analyze key sectors such as Automobiles, Telecommunication and Banking sectors for considering equity investments. ? To identify companies within these sectors as well the ones comprising portfolio of Reliance Growth mutual fund and conduct a Fundamental Analysis on these equities. ? To construct an optimal portfolio, that includes the selected shares of the sectors as well as shares comprising portfolio of Reliance Growth mutual fund. To compare the observed portfolio of a top performing mutual fund with the optimal portfolio. Background: Portfolio Management is one of the most important aspects of financial services. It aims at minimizing the risk of an investor and at the same time it attempts to maximize the returns. This study is an attempt to search out existing theoretical and empirical knowledge in the area of portfolio management and further devise strategies to design an optimally diversified portfolio. Methodology used:

The study analyzes several key sectors such as Banking, Telecommunications and Automobiles Further, an attempt is made to analyze thirty five companies from the portfolio of Reliance Growth mutual fund (which is a well performing mutual fund) operating in Indian equity market by using various financial ratios. It then constructs an optimal portfolio using the empirical framework developed by Elton Gruber and Pedberg. Further, the performance of the observed portfolio of Reliance growth and that of the optimal portfolio constructed in this study are compared. Findings and conclusion:

The study concludes that there is a very low correlation of . 0939 between Reliance growth mutual fund and that of the optimal portfolio constructed in this study. The expected returns are calculated for the optimal portfolio which yields 47. 83 percent per year which is slightly lower than returns yielded by the observed portfolio of Reliance growth i. e. 52. 35 percent per year calculated on the basis of average monthly returns over the period March 2005 to March 2008. However, this higher return could be attributed to the higher risk thsat is taken in the construction of the portfolio of Reliance growth.

The study finds that though the observed portfolio (of Reliance growth) is yielding higher returns at the same time it is exposed to higher risk. Special Achievements & Recognitions: • The Investment suggestions that are made out of the findings and initial observations of this study are implemented for various high end Clients. These suggestions included: ? Recommendations were given during the market correction of March 2008 to various high end clients for switching from debt to equity mutual funds. Identifying and communicating investment ideas relating to mutual funds ( NFOs) and equities to clients for consideration of Investment. • Recognized for good performance and hard work related to the organization. • Recognized for choosing appropriate candidates for recruitment of financial analyst and marketing executives. • Personal satisfaction and confidence towards successfully integrating Standard Portfolio theory and financial ratio analysis in investment decision making for high end clients. Exposure to databases like Prowess, Capital Line has further the enriched the learning experience of undertaking this study. ACKNOWLEDGEMENTS I would like to thank Right Horizons Financial Services Pvt Ltd. And especially for Ms. Rangapriya. S for giving me an opportunity to do my internship with such an esteemed organization and providing me with help and guidance in completing my study and provided me with an opportunity to learn insights into the Financial Services Industry and gave me an exposure across domains so that I can learn every aspect of management.

I would also like to thank Prof. T. R. Venkatesh, Director of ICFAI Business School for his words of encouragement and Prof. Ashish Dash, my Faculty guide for his guidance, support, special training and the time he committed to enhance the learning during the course of this project and his help at every stage of project completion. Also, I would like to thank the Placement team IBS Bangalore and Ms. Sharon Jose, SIP coordinator for supporting me to get a suitable project for pursuing my internship with an organization that has enhanced my learning’s. | | Chapter 1: OVERVIEW | | (This chapter discusses the basic motivation behind the study and the initial | |thought process when this study was undertaken describing each and every step taken| |to achieve the goals. ) | MOTIVATION Portfolio Management is one of the most important aspects of financial services.

It aims at minimizing the risk of an investor and at the same time it attempts to maximize the returns. To start with several researchable questions occur to one’s mind in the context of portfolio management like the ones listed below: • What are the various intricacies involved in making investment decision in favor of a particular stock? • How risk can be managed while investing in equities? • What are the alternative criteria for making investment decision in a stock? • What criterions financial companies consider while making investment recommendation in favor of a particular stock to their clients? Do historically well performing mutual funds also invest in similar equities? If so to what extent. • To what extent optimal portfolio is correlated with the observed portfolio of well performing Mutual funds? • Whether Mutual funds that are closely related to optimal portfolio have performed well in terms of historical returns? The real motivating factor behind this study is to find plausible answers for the questions raised above. While the present Summer Internship Program at ‘Right Horizons Financial Services Pvt. Ltd. [1]will certainly give a practical exposure to the art of security analysis and the craft of Investment decision making (among others), an added attempt is undertaken to search out existing theoretical and empirical knowledge in the area of portfolio management and review the same to formulate a set of objectives for this study. LITRATURE REVIEW: While seminal works such as Sharpe et al (1994), Elton et al (1996), Fisher et al provides an excellent review of theoretical aspects of portfolio diversification and investment decisions, the following table summarizes the theoretical and empirical review of related studies.

Table 1. 1: Reviews the literatures that have been studied for the purpose of this study. |Title |Author |Date |Remarks | |Modern Portfolio Theory and |Edwin J. Elton et al |1996 |This book deals with the economics behind designing a| |Investment Analysis | | |portfolio as well as theories regarding portfolio | | | | |optimization. |Investments |William F. Sharpe et al |2007 |This book deals with art of buying and selling | | | | |securities as well as security markets. Also, it | | | | |explains the Modern Portfolio theory of Elton et al | | | | |and Sharpe ratio as an art of designing portfolios | |Security Analysis and Portfolio |Donald E.

Fisher et al |1995 |This book portrays the art of Industry and Company | |Management | | |analysis and the basics of designing a portfolio by | | | | |selecting stocks from the securities market. |“Constructing an optimal |Debashish Dutt |2002 |This paper has constructed an optimal portfolio using| |portfolio using Sharpe’s single | | |the Sharpe’s Model taking BSE 100 as the market index| |index model” | | |but it has not made use of adjusted share price data | | | | |which has affected the outcome to a large extent the | | | | |portfolio is biased towards Banking stocks with the | | | | |complete 100 per cent of the corpus invested in | | | | |banking stocks which will be faced with volatility as| | | | |and when any changes in banking sector comes in | | | | |operation. |“Return Forecasts and Optimal |Lingjie ma et al |2007 |This paper uses the quantile regression model in | |Portfolio Construction: a | | |financial markets and proposes models for return | |Quantile Regression Approach” | | |forecasting and portfolio construction. This study | | | | |concludes that the Quantile Regression method is more| | | | |useful than classical conditional mean method. | |R2: A Market-Based Measure of |John E.

Cresson |2000 |This study evaluates [pic]as a valid measure of | |Portfolio and Mutual Fund | | |portfolio and mutual fund diversification and it | |Diversification | | |provides evidence of diversified portfolios and | | | | |diversified mutual funds having significantly higher | | | | |[pic]than undiversified portfolios and undiversified | | | | |mutual funds. |Modern Portfolio Theory(MPT) and |Gregory Curtis |2002 |This article examines selected limits to the | |Quantum Mechanics | | |usefulness of MPT and through critical examination of| | | | |the assumptions underlying, draws conclusions how MPT| | | | |can provide helpful insights to investors. It | | | | |attempts to classify various asset classes, the role | | | | |and use of hedge funds, real estate, or hard assets. | | | |In conclusion, This study recommends employability of| | | | |MPT concepts in financial advisory area. | |The Impact of Mutual Fund Family |Elton et al |New York University, |This paper discusses how investors who confine their | |Membership on Investor Risk | |May 2004 |mutual fund holdings to a single fund family, tend to| | | | |restrict their returns exposing their portfolio to | | | | |much higher risk.

As, empirical evidence shows that | | | | |degree of correlation between two similar category | | | | |funds of similar mutual fund family is much higher as| | | | |compared to two funds in same category but different | | | | |fund families. | These literatures have also helped in understanding the empirical framework which could be used for the construction of optimal portfolio. Further base on the above literature review the following objectives are set out for this study. OBJECTIVE: Following are the objectives for the study: 1.

To understand and analyze Automobiles, Telecommunication and Banking sectors [2] for consideration of equity investment. 2. To identify companies within these sectors as well the ones comprising portfolio of Reliance Growth mutual fund [3] and conduct a Fundamental Analysis on these equities. 3. To construct an optimal portfolio, that includes the selected shares of the sectors as well as shares comprising portfolio of Reliance Growth mutual fund. 4. To compare the observed portfolio of a top performing mutual fund with the optimal portfolio. SCOPE OF THE STUDY: The scope of the present study in terms of portfolio diversification is restricted to India.

Further, the asset class that has been considered is restricted to Indian equity market and more specifically national stock exchange of India (NSE). EMPIRICAL FRAMEWORK: 1. An Analysis of the sectors would be undertaken to identify stocks that are among the top performers in their respective sectors. In doing so the study will focus on various financial ratios such as Price/Earnings ratio, Book value per share, Earnings per share, Interest Coverage ratio, Debt equity ratio to mention a few. 2. The Mutual fund that is performing well would be identified using historical performance and the allocation of funds in these mutual funds would be examined. 3.

An optimal portfolio would be developed in line with Elton et al (1981) where the identified shares from the above analysis would be included. The steps for the construction of an optimal portfolio in line with Elton et al, as provided in Sharp et al (1995) are as follows: i. Compute the return on various securities and the market return. ii. Calculate the excess return-to-beta ratio for each stock under consideration and rank them from highest to lowest order. [pic] Where, R[pic]—- The expected return on stock i R[pic]—- The return on a riskless asset [pic]—- The expected change in the rate of return on stock I associated with a 1 per cent change in market return. iii. Find out [pic] by using the formulae: [pic] Where, [pic] iv.

The optimal Portfolio consists of investing in all stocks for which excess return over beta is greater that a particular cut-off point C. v. Once the cut-off rate is determined, we know which security will figure in the optimal portfolio. The next step is to calculate the proportion to be invested in each security. The proportion to be invested in each security is: [pic] Where, [pic] 4. Finally this optimal portfolio would be compared with that of the mutual funds. DATABASE: The Databases for the present study are secondary in nature. Table 1 provides information relating to the secondary databases useful in the context of present study. Table 1. : Lists various information’s available an not available in each of these databases |Data |URL |Data collected |Limitations(If any) | |Companies Data |www. moneycontrol. com |Share prices |Adjusted share price data not| | | | |available | | |Prowess Database |Share prices & ratios |– | | |www. nseindia. om |Indices |Adjusted share price data not| | | | |available | |Mutual Fund |www. moneycontrol. com |Portfolio’s |– | | |www. valueresearchonline. com |Portfolio’s |Only top five allocations are| | | | |available | |Sectoral Data |www. trai. gov. n |Telecom Industry |– | | |Economic Survey of India 07-08 |Sectoral Productions |– | | |Union Budget 2008-09 |Changes in Taxes and excise duties|– | | |Finance Ministry of India |Indian Economy in Comparison with |– | | | |ROW | | | |acmainfo. com |Auto ancillary Industry |– | |Research |www. ssrn. com |Journals |– | | |Search. ebscohost. com |Journals |– | Source: Compiled by the author The time period is 2006-2008 for which various information have been collected. TIME FRAME: Table 1. 3: Displays the various stages and the dates of evaluations. Evaluation Stage |Date |Activity | |Stage- I |24th – 29th March, 2008 |Project Proposal | |Stage- II |21st – 26th April, 2008 |Project Interim Evaluation | |Stage- III |19th – 24th May, 2008 |Project Final Evaluation | |Stage- IV |19th – 24th May, 2008 |Project Specific Evaluation | Source: Student Hand book, SIP, 2008 CHAPTER SCHEME: The next chapter focuses on the analysis of Automobiles, Telecommunications, and Banking sectors. Chapter three provides the Fundamental analysis of thirty five securities that have been selected on the basis of the securities comprising the portfolio of Reliance Growth mutual fund as on 31 March 2008. Chapter four attempts to construct an optimal portfolio and compare the same with that of observed portfolio of the mutual fund. Chapter five summarizes the main findings of the study and concludes. | |Chapter two: | |SECTORAL ANALYSIS | |(This chapter aims at analyzing three sectors namely Automobiles, Banking and Telecommunications. | |This would help in understanding the sectoral growth and performance which in turn would be | |useful for making investment decisions in the equities of these sectors. ) | 2. 1 AUTOMOBILE SECTOR: Production of automotive industry which provides extensive forward and backward linkages to other key segments of the economy is growing at an impressive rate.

However, as the Indian Industrial Production (IIP) data suggest, their production growth has been negative during April-November 2007. But, the turnover of the fast growing auto component industry, comprising around 500 firms in the organized sector and more than 10,000 firms in the small and unorganized sector, grew from US$ 3. 1 billion to US$ 15 billion between 1997-98 and 2006-07[4]. The quality standards have also improved which is evident from the International recognition as well as the expanding exports which grew at a compound annual growth rate of 29. 07 per cent to reach US$ 2. 9 billion while imports grew by 31 per cent to reach US$ 3. 33 billion.

Though, India is a net importer of auto components in the current liberalized duty regime, the challenges faced by the industry is to innovate and upgrade continuously to remain competitive in the international market and strive to increase its market share from current 0. 4 per cent share of the global Auto Components Industry. Indian government has also finalized the Automotive Mission Plan (AMP) 2006-16 for making India a preferred destination for design and manufacture of automobiles and automotive components[5]. Figure 2. 1: Shows the categorization of various producers on the basis of products produced by them [pic](Source: Overview of the automotive component sector in India, April 2007 – The Indo-Italian Chamber of Commerce and Industry)

The Auto Component Industry is graduating to World- class by substantially increasing investments in production capacities and by establishing partnerships in India and abroad, investing in or acquiring companies overseas. Budget 2008-09: • Customs duty reduced on steel melting scrap and aluminum scrap from 5 per cent to nil. • Excise duty reduced on buses and their chassis from 16 per cent to 12 per cent. • Excise duty reduced on small cars from 16 per cent to 12 per cent and on hybrid cars from 24 per cent to the general revised rate of 14 per cent. • Excise duty reduced on two wheelers and three wheelers from 16 per cent to12 per cent. Impact on sector: Customs duty nullified on select metal scrap might reduce the raw material cost for some of the auto component players • Excise duty reduction in select auto segments will help spur demand for automobiles, which in turn will benefit the components industry. 2. 2 TELECOMMUNICATIONS: With more than 270 million connections, India’s telecommunication network is the third largest in the world and the second largest among the emerging economies of Asia. The telecom sector continued to register significant growth during the year 2007 and has emerged as one of the key sectors contributing to the Indian economic growth. This has been possible due to the supportive Government policies coupled with the private sector initiative.

The focus of the policy has been on network expansion, rural telephony, broadband coverage and R&D and on providing an enabling environment for the competitive growth of the sector. Opening of the sector has created an impressive forward momentum in India resulting in massive investment and expansion with technological changes and improvement in quality of the telecom services. The liberalization efforts of the Government are evident in the growing share of private sector in total telephone connections, which has increased from 39. 2 per cent in 2004 to 72. 4 percent in December 2007. The growth of wireless services, in particular, has been phenomenal, with number of wireless subscribers growing at a compound annual growth rate (CAGR) of 87. 7 percent per annum since 2003[6].

Today, the wireless subscribers are not only much more than the fixed subscribers in the country, but also increasing at a much faster pace. The share of wireless phones has increased from 24. 3 per cent in March 2003 to 85. 6 per cent in December 2007. Improved affordability of wireless phone has made the universal access objective more feasible. The Universal Service Obligation Fund (USFO) continues to be used to subsidize the developments in the telecom sector in the rural areas. Figure 2. 1: Market Shares of Telecom Service Providers: [pic] (Source: The Indian Telecom Services Performance Indicators July– September 2007. TRAI) Budget 2008-09 • Specified inputs and raw materials for manufacture of specified electronics/ IT hardware items have been exempted from excise duty. Additional duty of 1 per cent to be levied on imported mobile phones towards national calamity contingency reserve. • Countervailing duty on wireless data modem cards with exempted by way of excise duty exemption. These goods are already exempt from customs duty. However, 4 per cent additional duty of customs will be attracted. • Internet telecommunication service brought under the service tax net. • Customs duty on convergence products to be reduced from 10 per cent to 5 per cent. Impact on Sector: • Exemption from excise duty for specified inputs and raw materials for manufacture of specified electronics/ IT hardware to lower the network cost for telecom service providers. • Additional duty on imported mobile hones to make handsets expensive, thus prohibiting a faster acceptance. • Imposition of service tax on Internet telecommunication services to make them expensive. • Reduction in customs duty on convergence products to help establish parity between devices used in the information/communication sector and the entertainment sector. 2. 3 BANKING SECTOR: With the Indian economy developing and incomes rising even though standard of living is rising there has been a trend of increasing Investment in the economy. So, the Indian banking sector is at a turning point towards growth. Further, as Indian companies are globalizing, several Indian banks are pursuing global strategies in order to compete with Foreign Banks.

There are in totality 222 commercial banks in India (of which 133 RRBs) with nearly 70% of branches in rural/semi-urban areas. The ratio of assets of commercial banks to GDP has increased to 92. 5 per cent at end-March 2007[7]. Consequently, the degree of leverage enjoyed by the banking system, as reflected in the equity multiplier has increased by 3. 9 percent at the end of March 2007[8]. Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks. These foreign banks with huge capital reserves, cutting edge technology, best international practices and skilled personnel will create a major competitive challenge for Indian banks, especially the public sector banks.

Banks are supporting growth in the economy by financing productive sectors with bulk of commercial bank financing for short-term working capital needs of industry, trade, agriculture & personal segment. Credit – Deposit ratio (CD Ratio) increased to 72. 5% against benchmark 60% reflecting the strong underlying credit momentum. Table 2. 2: Shows the respective shares of foreign as well as Public Sector Banks in terms of branches, staff, deposits, advances and net profit | |Branches |Staff |Deposits |Advances |Net Profit | | |% age share in total | |Public Sector Branches |88. 41 |87. 3 |75. 24 |73. 25 |73. 62 | |Private Sector Branches |11. 33 |10. 76 |19. 42 |20. 24 |16. 95 | |Foreign Banks |0. 26 |2. 01 |5. 44 |6. 51 |9. 43 | |ASCB Total Banks |100 |100 |100 |100 |100 | (Source: Indian Banking: Shaping an Economic Powerhouse, Sh. T. S. Bhattarachya, M. D. SBI, 2006) Budget 2008-09: • Initial provision of Rs 1,600 crore made for interest subvention in 2008-09. PSU banks and regional rural banks (RRBs) to offer debt waiver on all agricultural loans disbursed up to March 2007 and due until the end of December 2007. • Complete debt waiver on all loans given to small and marginal farmers. • The total value of relief to be offered to farmers is estimated at Rs 60,000 crore. • The government has advised PSU banks and RRBs to add at least 250 rural household accounts every year at each of their rural and semi-urban branches. • Public sector banks have been asked to include Indira Awas Yojana (IAY) houses under the differential rate of interest (DRI) scheme and lend up to Rs 20,000 per unit at annual interest rate of 4 per cent. • Banking Cash Transaction Tax (BCTT) being withdrawn with effect from April 1, 2009. Impact on sector: PSU banks are expected to face pressure on their net interest margins until the subsidy for waiver of agricultural loans and one time settlement of loans is released from the government. • The cost of adding more rural households in their rural branches may increase the operating cost for the PSU banks. • Including Indira Awas Yojana (IAY) houses under the differential rate of interest scheme at an interest rate of 4 per cent will increase the proportion of sub-PLR lending for the PSU banks. Taking the above developments into consideration, ever since Indian economy opened its doors to MNCs, the Indian banking sector has been witnessing bizarre changes in terms of new products and services and stiff competition as well. The sorts of IPOs that have been taking place in banking sector are amazing.

In the light of these recent developments, a careful analysis of the profitability of Indian banking sector is inevitable. The present study attempts to analyze the profitability of the two major banks in India: SBI and HDFC one of which is a public sector undertaking and other a private sector venture. Conclusion: Therefore this chapter has determined the basic outlining features of these sectors so that the investment decisions can be undertaken can be undertaken keeping in view the research conducted on the basic fundamentals, the growth achieved by each of these sectors in the past as well as the future prospects projected on the basis of Union Budget 2008-09 which has impacted each of these sectors in an entirely different way. | |Chapter three: | |Fundamental Analysis | |(This chapter intends to understand the fundamentals of the selected companies using financial| |ratio analysis to consider these companies for investment purpose. ) | Fundamental Analysis: The thirty five companies selected from the portfolio of Reliance Growth’s growth plan. These companies includes various sectors namely Automobiles, Banking, Breweries, Chemicals, Construction, diversified, electrical equipments, Energy, Information technology, Media, Mining, Oil drilling, Petrochemicals, Pharmaceuticals, Shipping, Steel, Power, Telecommunication and Trading. Ratio analysis of these companies will be undertaken considering following ratios[9]: Figure 3. 1: Shows the various financial ratios that form the company fundamentals. [pic]

Compiled by the author Company Analysis[10]: Table 3. 1: Lists the values of the various ratios[11] used for analyzing the fundamentals [pic] Bharti Airtel: [pic] Performance in FY07: Profitability aspects this company is yielding very good returns to its shareholders with a ROCE of 46. 01 per cent, Earnings per share equal to 21. 17 and a PE of 36. 08x. The earnings are yielding a return of 5. 35 per cent to the market capitalization of this company at FY end. The company has a policy of reinvesting its earnings into its operations. But, from the aspect of riskiness as the current ratio for this company is very low i. e. 0. 35 which implies it has 0. 5 units of current assets to pay of 1 unit of its current liabilities which may act as a source of financial risk to the company. On the other hand the ICR of the company is appropriate as it has 0. 46 units of dent for every one unit of equity in its capital structure. Reliance Telecommunications: [pic] Performance in FY07: From the aspect of profitability it is giving less return on the employed capital as compared to its peer Bharti Airtel of 11. 57 per cent with an EPS of Rs. 35. 37 and an earnings yield of 5. 49 per cent. It is also giving very low dividends of Rs. 0. 50/share with a yield of 0. 12 per cent on its market price as on 31 Dec 07. It is paying out 4. 0 per cent of its earnings as dividend and the rest 95. 80 per cent is being ploughed back into its operations. But, from the aspect of riskiness it is considered to be more risky than Bharti airtel with a lower current ratio of 0. 34 and quick ratio of 0. 08. Since its utilizing more debt in its capital i. e. 0. 71 units of debt for every one unit of equity, its ICR is at a safe level of 6. 32 per cent. Therefore, it can be concluded that comparing the two companies comprising the portfolio, Bharti Airtel is considered to be yielding High return with high risk, and Reliance Communications is yielding lower returns with higher risk. Bank of Baroda: [pic] Performance in FY07

The bank has been able to improve business performance, achieving record business growth; significantly improving asset quality & reducing NPA levels which can be determined with the return on capital employed equal to 51. 52 per cent and a PE of 7. 63x. Even though it has yielded the highest yield on earnings out of the thirty five companies yielding returns on dividend of 2. 79 per cent. Taking the risk aspects it is not in a very safe position with the interest coverage ratio of 1. 3 per cent; it is not in a position to take up more debt in its capital even though it has a very low DE ratio of 0. 45. HDFC Bank: [pic] Performance in FY 07 HDFC Bank is considered to be a risky investment with a very low on all ratios except current ratio.

But, it is giving good returns with a ROCE of 47. 57 percent and EPS 0f Rs. 35. 74 and a PE of 26. 7, it is considered to be a security with high risk high return yielding capacity and can be strongly considered for the aggressive portion of a portfolio. State Bank of India: [pic] Performance in FY07 SBI has yielded returns of 60. 69 percent on its earnings and 1. 49 percent on the dividend paid. With a PE of 11. 67x it definitely seems to be a strong option for investment in the blue chip companies. Considering the risk aspects, it has a very low interest coverage ratio of 1. 32 per cent and with very high debt equity ratio of 1. 79, it may expose the bank to very high risk levels.

Therefore, it can be concluded that HDFC Bank is considered as possessing the strongest fundamentals followed by SBI which has a strong backing from government of India and lastly Bank of Baroda as it is still in the phase of modernization and will take time to reach at the levels of operation of other two banks. Radico Khaitan Limited: [pic] Performance in FY07 The company has given less than average returns in last FY with a yield on its earnings of 7. 10 percent and the lowest EPS in the whole group of Rs. 3. 37. From the aspect of riskiness even though it has current ratio at adequate levels it has a very high concentration of debt in its portfolio i. e. 2. 73 units of debt for every one unit of equity which can be analyzed from the low levels of ICR.

But, it can be considered for the purpose of diversification across sectors. United Phosphorous: [pic] Performance in FY07 UPL is considered to be a safe investment with current ratio at appropriate level but it has a high debt-equity ratio of 1. 76. This company can be considered to be an overpriced security by a PE of 66. 78 but it is yielding low returns of 6. 17 percent as it is not paying out any dividends also, but it can be considered for investment due to the growth prospects in the chemicals sector. Adani Enterprises Limited: [pic] Performance in FY07 Adani enterprises have yielded good returns on the capital employed in the company i. e. 24. 72 percent. But considering the PE ratio 34. 1x it seems to be an overpriced share as the earnings are not justified by the price demanded by the security which is proved by a low yield on its dividend i. e. 0. 21 percent even though it has a very high proportion of debt in its capital structure it is not able to give adequate returns to its ordinary shareholders. Jai Prakash Associates: [pic] Performance in FY07 Jaypee Group is an accredited brand in the construction domain and it has also performed well in the last FY giving dividends yield to the extent of 3. 34 percent and an EPS of Rs. 18. 93. On the aspect of riskiness also it is considered to have moderate levels of risk with an exception towards Quick ratio which is much lower than acceptable levels.

Therefore it can be considered to be a more than average returns and moderate level of risk exposed company. Madhucon Projects: [pic] Performance in FY07 Madhucon project can be considered to be yielding average returns with average level of risk which can be seen by ICR, Current ratio and Dent Equity ratio at adequate levels except Quick ratio which is low and can expose the company to higher risk. Also, it has yielded average returns to its shareholders with an EPS of Rs. 11. 30 and a dividend payout ratio of 5. 31 per cent it has paid a dividend of 60 paisa per share as dividends. Therefore it can be concluded that in the domain of construction Jai Prakash associates can be considered as a better avenue for investment than Madhucon Projects.

But, keeping in view the growth potential in Infrastructure sector especially in a growing economy like India, construction sector is projected to yield good returns. Greaves Cotton Limited: [pic] Performance in FY07 With an ICR of 10. 84 and debt-equity ratio of 0. 25 graves cotton seems to be performing lower than average on risk aspects and yielding ROCE of 51. 38 percent and an EPS of Rs. 15. 48, it yielding a returns on dividends of 2. 20 percent. Even though it is exposed to less financial risk, it is exposed to a high degree of business risk because of the intensive competition in this sector especially in an open economy like ours. Orient Paper and Industries: [pic] Performance in FY07 OPIL is yielding the highest ROCE in all the selected companies of 53. 1 percent and the lowest PE of 5x.

Also, it is yielding the highest returns on its dividends of 24. 37 percent. The company is also exposed to less risk in terms of the Current ratio, ICR. But, the company has a large amount of debt in its capital of 2. 01 units for every one unit of equity which may act as a matter of concern for its future growth prospects. Reliance Industries Limited: [pic] Performance in FY07 The company has yielded very high returns in FY07 with EPS of Rs. 78. 28 and a ROCE of 22 percent. Even though it is considered to be risky investment considering the Quick and Current ratios but the returns have justified the risk taken by an investor in expectations of higher returns.

Therefore, RIL can be considered for the aggressive portion of the portfolio as this company has a backing of Reliance group and it is expected to yield good returns even in the future especially with its presence across sectors. Crompton Greaves Limited: [pic] Performance in FY07 With a PE of 38. 02x it has yielded a ROCE of 40. 25 percent, it can be considered to be a less than average risk and more than average returns. This company can definitely be considered for the moderate part of portfolio as electricity generation is one arena where the economy is less open and thereby exposed to less competition and thereby is exposed to less business risk. Reliance Energy: [pic] Performance in FY07 Reliance Energy yielded EPS of Rs. 32. 83 per share with a dividend payout ratio of 16. 14 percent yielding returns on its dividends of 1. 07 percent.

From the aspect of riskiness it can be considered to be exposed to average level of riskiness with a high ICR and low debt equity ratio 0. 68 and current and quick ratio in a moderate position. AIA Engineering Limited: [pic] Performance in FY07 The company can be considered to be exposed to very high risk since all the current assets held by the company are in the form of inventory which is not as liquid as any other current asset thereby not able to support the financials at a stage of crisis except that it is yielding enough profits to bear the interest cost as can be observed by the ICR of 70. 17 per cent. But, since it is yielding good returns to its shareholders with an EPS of Rs. 35. 60, it seems to be attractive trading at a PE of 33. 2x. BEML India: [pic] Performance in FY07 The company has a backing by the GOI and is yielding good returns observed by EPS of Rs. 55. 77 and ROCE of 33. 97 percent. The company’s earnings are justified as it is not paying out any dividends to its shareholders instead it is investing it back into the company’s operations. With a very low Debt Equity ratio, it is considered to be Good Avenue for investment. Gujarat State Fertilizers & Chemicals Ltd: [pic] Performance in FY07 The company is yielding good returns on its dividends of 2. 58 percent and an EPS of Rs. 30. 50. Even from the aspect of riskiness it is exposed to less than average risk.

But, since Indian Economy is transforming from an Agrarian Economy and the share of Agriculture in Indian GDP is reducing the future growth prospects for this business may get restricted due to this fact. Infosys Technologies: [pic] Performance in FY07 Infosys Technologies doesn’t have debt in its capital, which implies it is completely owned by its shareholders which imply that less is divided amongst each shareholder with a dividend yield of only 0. 57 percent. But, since the company has very strong fundamentals it can be invested into for the stable part of the portfolio as these blue chip companies have a very less chances of a major fall in earnings or share prices.

Northgate Technologies Ltd. : [pic] Performance in FY07 Northgate Technologies has the highest ICR of 135. 13 as it does not have any debt in its capital which inturn has an impact on the yield to its ordinary shareholders which is visible by the yield earned by its dividends which is 0. 92 percent. Currently trading at a PE of 28. 57x it can be considered for investment due to the strong growth potential in the innovative technologies being introduced by the company. As it is still in the phase of growth it can be considered to be an avenue for investment that is exposed to moderate levels of risk and return. New Delhi Television Ltd. : [pic] Performance in FY07

NDTV seems to be an overpriced security trading at PE of 86. 43x which is the highest but it is a company with very high risk levels at ICR of -0. 57 percent and a ROCE of -3. 17 percent. But its current and quick ratios are at appropriate levels. It is yielding a low returns on its dividends of 0. 25 percent and that on its earnings of 1. 29 percent which is the lowest in the group. But it can be considered for investment only on the grounds of growth prospects in this industry, so that adequate diversification can be accomplished to take advantage of growing per capita incomes in the country. Gujarat Mineral Development Corporation Limited: [pic]

Performance in FY07 GMDC has the highest dividend payout ratio of 55. 53 percent and is therefore yielding a return on its dividends of 10. 52 percent with a ROCE of 11. 01 percent. From the aspect of riskiness it is considered to be having more than average risk since it has a low quick ratio implying that its current assets are more in the form of inventories also it has a high concentration of debt in its capital with an ICR of 2. 65 percent. Jain Irrigation Systems Ltd. : [pic] Performance in FY07 This company belongs to the miscellaneous sector having a DPR of 13. 23 percent with an earnings yield of 8. 87 percent currently trading at 27. 1 x seems to be yielding good returns considering from the aspect of riskiness it has a high concentration of debt than equity in its capital allocation with an interest coverage ratio of 2. 53 percent it seems to be yielding high returns exposing the portfolio to high risk. Shiv-Vani Oil & Gas Exploration Services Ltd. : [pic] Performance in FY07 This company has the policy of not giving out any dividends to its shareholders rather reinvesting it into the business. This company can be considered to be exposed to less than average risk levels because of Current, Quick and ICR with the only concern being the high concentration of debt in its capital which is 2. 4 unit of debt for every one unit of equity. From the aspect of returns it is yielding higher than average returns currently trading at a PE of 37. 91x, it can be considered as a safe investment. Bombay Dyeing & Mfg. Co. Ltd. : [pic] Performance in FY07 This company has the highest concentration of debt in its capital i. e. 3,21 units of debt for every one unit of equity which is the reason behind a low ICR, Quick and current ratio. But, it seems to be an overpriced share with currently trading at PE of 58. 16. It can be considered for investment on the grounds of backing it has from the Wadia group of companies. Divi’S Laboratories Ltd. : [pic] Performance in FY07

This company does not have the policy to give out dividends rather they believe in yielding capital appreciation for its shareholders. It can be considered as a safe investment with all the risk ratios at appropriate levels, it is also yielding good returns to its shareholders with an EPS of Rs. 148. 50 and yield on earnings at 6. 53 percent level. Lupin Ltd. : [pic] Performance in FY07 Lupin seems to be an underpriced share with a PE of 16. 12 and its dividends yielding a return of 1. 65 percent and a ROCE of 21. 93 percent and dividends of Rs. 10 per share. Considering from the aspect of riskiness all the ratios are at appropriate levels, it can be concluded to be a low risk and average returns yielding company Bharati Shipyard Ltd. : [pic] Performance in FY07

Bharati ship yard is yielding less return on dividends paid by of 0. 86 percent, with an EPS of Rs. 32. 51 and all the risk ratios at appropriate levels. Bharati Shipyard can be regarded as an underpriced security especially with the growth propects in the shipping industry especially due to increasing foreign trade in the country. J S W Steel Ltd. : [pic] Performance in FY07 JSW steel is yielding much more than average returns on its dividends of 2. 53 percent with an EPS of Rs. 85. 44. Keeping in view the risk ratios it can be considered as a high risk company but with yielding high returns. Therefore, it can be concluded an underpriced security trading s PE of 5. 7x with the amount of returns its yielding even though it is exposing the portfolio to higher risk. Jindal Saw Ltd. : [pic] Performance in FY07 With the growth prospects in steel sector this security seems to be underpriced as currently is being traded at a PE 9. 26x and earnings yielding returns of 18. 87 percent. Even from the aspect of riskiness it is considered to be average risk as all the ratios are at appropriate levels except Quick ratio which implies that current assets are more in the form of inventories which cannot be liquidated in an unforeseen circumstance. Jindal Steel & Power Ltd. : [pic] Performance in FY07 JSPL is the company yielding the highest EPS of Rs. 228. 0 and the highest dividend per share of Rs. 18. From the aspect of riskiness it is considered to be a highly risky investment from the aspect of current and quick ratio but the interest cost can be easily covered by the company’s financials. Amtek Auto Ltd: [pic] Performance in FY07 This company if considered from the aspect of riskiness it carries less than average risk with quick ratio of nine and current ratio of 12. 18 but the returns is yielded is less than its counterparts in the same domain which is the major reason this company is not considered to be a viable option for investment. Motherson Sumi Systems Ltd. : [pic] Performance in FY07

The company has performed pretty well in FY07 especially with the budget completely in the favor of this sector it has been well positioned to leverage the benefits of the same by yielding a return on total capital invested equal to 27. 82 per cent and EPS of Rs. 4. 86 yielding returns on dividend of 2. 09 per cent. From the aspect of riskiness this company is considered to fall in the bracket of low risk due to a high interest coverage ratio. It can be considered risky only due to a low Quick ratio due to a large amount of current assets in form of inventories. Escorts Limited: [pic] Performance in FY07 The company has yielded good returns on its earnings as high as 30. 6 per cent being the third highest in the group of selected companies but it is exposed to very high levels of risk with a low on current, quick and interest coverage ratio and also the company is not paying any dividends to its shareholders it is not yielding adequate returns. Maruti Suzuki Limited: [pic] Performance in FY07 The company has performed very well in the last FY yielding EPS of Rs. 54. 50 and ROCE of 34. 4 per cent. Considering from the risk aspects the company has very less amount of debt i. e. 0. 11 units of debt for every one unit of equity, thereby it has a very high interest coverage ratio of 59. 39 per cent and current and quick ratios are also at appropriate levels.

Therefore, in the domain of Automobiles Amtek Auto is not considered to be a feasible for investment due to its inability to venture on the opportunities that have come its way as the other three companies have appropriately ventured upon. Conclusion This chapter has analyzed each of these companies making use of risk and return ratios in order to categorize these companies on the basis of parameters like high risk, low risk, high return and low returns so as to determine which of these companies can be considered as a part of a portfolio and how to invest adequately into these companies so that the joint motive of capital safety as well as capital appreciation can be realized. Chapter Four: | |Optimal Portfolio Construction & Correlation Analysis | |(This chapter aims at designing an optimal portfolio using the Modern Portfolio Theory so as to | |determine the allocations assigned to each of these securities so that the investible surplus can| |be adequately invested to achieve a well diversified portfolio. ) | Optimal Portfolio: The following table shows the optimal portfolio constructed making use of the adjusted share price data of last three years i. e. March 2005-2008. The following are the allocations corresponding to each share from the investible surplus to yield good returns. Table 4. 1: Lists the percentage allocation to each of these securities in the optimum portfolio. [pic] From the above portfolio it is observed that Bharti Airtel of telecommunications sector having a PE of 44. 5x and yielding a return on capital employed equal to 46. 1 per cent is absorbing the highest proportion of the investible surplus. But, if considered from the aspect of riskiness it is considered to be moderately risky investment with a low current ratio of 0. 35 units and very low quick ratio of 0. 14[12]. The next highest investment is in HDFC Bank from the banking domain having a PE of 28. 58x and return on capital employed at 47. 57 per cent of the total invested capital is also a risky investment because of high debt- equity ratio at 0. 95 units and interest coverage ratio of 1. 51, since the company is possessing a very high leverage it is in a position to yield good returns for its equity shareholders.

Next on the portfolio is Reliance communications from the telecommunications domain which is company trading at 66. 93x which is the highest in this sector the major reason being the strong backing that it possess from the Reliance Group of Companies. Further, the portfolio has been diversified to maintain adequate levels of riskiness along with providing adequate returns. Keeping in view to allocate the surplus in such a manner that adequate diversification can be undertaken across sectors rather than concentrating into a few sectors thereby reducing the amount of volatility that the portfolio is exposed to and reducing the impact on consistent returns. Two securities Adani Enterprises from trading sector which was attracting 2. 3 per cent investment in the portfolio of reliance growth and Amtek Auto Ltd from the automobiles domain has been excluded from the Optimal Portfolio as it was yielding returns less than cut off point determined in the model. Observed Portfolio: Table 4. 2: Lists the percentage allocation to each of these securities in the portfolio of Reliance Growth mutual fund as on 31st March 2008. [pic] DEGREE OF CORRELATION The degree of Spearman’s rank correlation between the observed portfolio of Reliance Growth and Optimal Portfolio is very less of . 0939 which shows that the theoretical views are not being followed in the operation of these mutual funds rather they are investing on the basis of some unknown factors or intuition of the Fund Manager. The returns from the portfolio calculated on the basis of average returns over the considered period are 47. 3 percent per year which is lower than returns yielded by the allocations to these securities in the observed portfolio of Reliance growth which is yielding returns equal to 52. 35 percent per year considering the average returns over the period considered. Conclusion: Thereby, it can be concluded that the optimal portfolio is considering the risk-return parameters while deciding the allocations to the various securities but it is designed keeping in view moderate riskiness thereby it is yielding lesser returns than the Reliance growth which is considered to be an aggressive fund but a consistent performer in the mutual fund arena, but in the optimal portfolio the risk levels are maintained appropriately across allocation to various securities.

As if an individual invests in securities he may not have the mindset to expose its money to such high risk levels, he may rather settle at lower returns keeping in view the capital safety criterions. | | |Chapter Five: | |Conclusion | |(This chapter aims at summarizing and concluding the study. ) | CONCLUSION The study concludes that there is a very low degree of correlation of . 939 between portfolio of Reliance growth mutual fund and that of the optimal portfolio constructed in this study. The expected returns are calculated for the optimal portfolio which yields 47. 83 percent per year which is slightly lower than returns yielded by the observed portfolio of Reliance growth i. e. 52. 35 percent per year calculated on the basis of average monthly returns over the period March 2005 to March 2008. This difference can be attributed to the fact that Optimal Portfolio’s risk exposure is 0. 63 percent as compared to Reliance growth of 6. 98 percent. This is due to the fact that the optimum allocation is such that it is exposed to lowest possible risk and is yeilding highest possible returns provided the level of risk.

Similarly their may be other possible allocations but it will either expose the portfolio to a higher level of risk thus yeilding higher returns or a lower level of risk and lower returns. Therefore, it can be concluded that the Optimal Portfolio is the best possible allocation on the efficient frontier, other allocations are possible but with all possessing different combinations of risk and returns. Sectoral Allocations of the Portfolio’s: Figure 5. 1: Portrays the allocation in the Observed Portfolio and Optimum Portfolio to various sectors. [pic] Optimum portfolio is well diversified in terms of sectoral allocation with a little biased towards the telecommunications sector absorbing 15. percent which is considered to be bullish due to the communication vertical and with majority of the Indian telecom service providers as they are offering new breed of services such as mobile TV, broadband and IPTV. Followed by banking sector having a share of 12. 3 percent as after the farm loan waiver and forex derivative losses in the Union Budget 2008 has caused huge price and valuation distortions in banking stocks making them prospective investments for long term. Both Pharma and Diverfied sectors have equal allocation of 7. 8 percent. Various other sectors are absorbing between 5 percent to nil of the overall allocation which makes it less volatile due to allocation of twenty five different sectors.

Observed portfolio has the highest sectoral allocation towards diversified of 9. 3 percent with a which is considered to be a viable option since operations of these companies are not concentrated in one product thereby even if a particular product is losing in the market other products can save the bottom line of the company. Followed by Steel sector having a share of 7. 2 percent since the growth prospects in this sector over a long term period. Miscellaneous, Pharma Construction and steel & power sre absorbing approximately equal shares of 6. 8 percent therefore a source of high concentration in sectors where high pricing presures exist from the government which in the future may eat up the companies bottom lines.

Various other sectors are absorbing between 5 percent to nil of the overall allocation. The study finds that though the observed portfolio (of Reliance growth) is yielding higher returns at the same time it is exposed to higher risk since its highly concentrated in a few sectors allocation meager allocations to other sectors. On the other hand, optimal portfolio is not concentrating in a few sectors rather allocating less to medium allocations to other sectors. Therefore it is found out to be the best possible allocation on the Efficient frontier. REFERENCES: Books: • William F. Sharpe, Gordo J. Alexander and Jeffery V. Bailey (Sixth Edition), “Investments”- Chapter 6-7. • Edwin J. Elton and Martin J. Gruber, Fifth Edition. “Modern Portfolio Theory and Investment Analysis” – Chapter 7-9. • By Donald E. Fischer and Ronaki J. Jordan(1995). “Security Analysis and Portfolio Management” Chapter 9-12. Journal Articles: • Edwin J. Elton , Martin J. Gruber and T. Clifton Green(2004), “The Impact of Mutual Fund Family Membership on Investor Risk” URL-http://pages. stern. nyu. edu/~mgruber/working%20papers/mutual%20fund%20family%20membership. pdf • Gregory Curtis (2002) “Modern portfolio theory and Quantum mechanics” URL-http://www. greycourt. com/whitepapers/WhitePaper020-MPT. pdf • Debashish Dutt (2006), “Constructing an optimal portfolio using Sharpe’s single index model”, URL: http://www. myicwai. com/knowledgebank/fm09. df • Lingjie ma and Larry pohlman (2005), “Return Forecasts and Optimal Portfolio Construction: a Quantile Regression Approach” Url- http://www. fma. org/Chicago/Papers/equityQR2. pdf Published Government Reports: • Government Of India(2008), Economic Survey of India 2008, Ministry of Finance, New Delhi Articles from Websites: • Business Line “Oracle bullish on telecom vertical” Dated 15th December 2006. URL http://www. thehindubusinessline. com/2006/12/16/stories/2006121603130400. htm • CNBC TV-18, “Bullish on public sector banking space: Sundaram BNP” Dated 17th April 2008 URL-http://www. moneycontrol. com/mccode/news/article/news_article. php? utono=334629 • TRAI (2008) “The Indian Telecom services Performance Indicator Report for the Quarter ending March

Consequences of the Financial Crisis on the in Peru?S Economy

Consequences of the financial crisis on the in Peru? s Economy Claudia H. Gonzales School of Management, Wuhan University of Technology, Wuhan, P. R. China, 430070 Abstract Peru has shown signs of a slowdown in employment. This situation has increased the number of unemployment rate in Peru. In this scenario it is possible that employment opportunities to grow this 2009? This paper try to show how the crisis can affect the economy and what will be the consequences in the future.

Keywords financial crisis, export, products, slowdown, employment 1 Introduction In the year 2008 the world began to feel the crippling effects of the financial crisis that began in the United States in the summer of 2007. In the face of this crisis there were unusually aggressive actions by governments and central banks to support financial markets, financial institutions and their economies. But despite these efforts the outlook for the global economic growth is the worst since the 1930s. The economy of the United States is at the center of this global financial disaster.

The American housing market meltdown, the credit crunch, the collapse of the “shadow banking sector,” as reflected in derivatives trading, hedge funds and equity markets, have already triggered a year long American recession and a loss of 2. 6 million payroll jobs in 2008. Central banks around the world, including the U. S. Federal Reserve, the Bank of Canada, the European Central Bank (ECB) and the Bank of England have sharply reduced interest rates to support their economies, as most are clearly in recession. In the United States, its central bank the Federal Reserve cut its target for overnight interest rates to a range of 0% to 0. 5% on December 15th. Japan’s central bank interest rate is also effectively zero. The European Central Bank rate is at 2% and the Bank of England has a 1. 5% policy rate. The Bank of Canada lowered its overnight policy rate to 1% on January 20th. At 1%, Canada’s central bank rate is only slightly higher than the effective zero rates in the U. S. and Japan. But even with these low or zero central bank interest rates virtually everywhere, private interest rates are still quite high and credit availability is still too tight.

There is clear evidence that very low interest rates are not working to expand economic activity. In the current recessionary environment, banks are obviously worried about lending to each other, and of course, are worried about lending to consumers and firms. Bankers also worry that recessions are a bad time to be pushing loans. Interest rates that count, such as, inter-bank lending rates, mortgage lending rates, bank commercial lending rates, are all unusually high especially considering that inflation is also very close to zero.

Even though prime bank lending rates are low, the conditions for loans at those rates have increased. Thus, loan rates look low but banks are lending at much higher rates above their nominal prime rates. 2 . The history of the Peru? s economy Through the nineteenth century and into the mid-twentieth century, the great majority of the Peruvian 1/13 population depended on agriculture and lived in the countryside. By 1876 Lima was the only Peruvian city with over 100,000 people–only 4 percent of the population.

Much of the impetus for economic growth came from primary exports. In common with the rest of Latin America up to the 1930s, Peru maintained an open economic system with little government intervention and few restrictions on either imports or foreign investment. Such investment became highly important in the twentieth century, especially in the extraction of raw materials for export. For many Latin American countries, the impact of falling export prices and curtailed external credit in the Great Depression of the 1930s led to fundamental changes in economic policies.

Many governments began to raise protection against imports in order to stimulate domestic industry and to take more active roles in shaping economic change. But Peru held back from this common move and kept on with a relatively open economy. That put it behind many other countries in post-World War II industrialization and led to increasing pressures for change. Significant protection started in the 1960s, accompanied by both new restrictions on foreign investment and a more active role of government in the economy.

One of the country’s basic problems has been that the growth of population in the twentieth century outran the capability to use labor productively. The ratio of arable land to population– much lower than the average for Latin America–continued decreasing through the 1970s. Employment in the modern manufacturing sector did not grow fast enough to keep up with the growth of the labor force, let alone provide enough opportunities for people moving out of rural poverty to seek urban employment.

The manufacturing sector’s employment as a share of the labor force fell from 13 percent in 1950 to 10 percent in 1990. 3. Orientation Toward Primary Product Exports Peru’s most famous exports have been gold, silver, and guano. Its gold was taken out on a large scale by the Spanish for many years following the conquest and is of little significance now, but silver remains an important export. Guano served as Europe’s most important fertilizer in the mid-nineteenth century and made Peru for a time the largest Latin American exporter to Europe.

The guano boom ran out about 1870, after generating a long period of exceptional economic growth. When the guano boom ended, the economy retreated temporarily but then recovered with two new directions for expansion. One was a new set of primary product exports and the other a turn toward more industrial production for the domestic market. The alternative primary exports that initially replaced guano included silver, cotton, rubber, sugar, and lead. As of 1890, silver provided 33 percent of all export earnings, sugar 28 percent, and cotton, rubber, and wool collectively 37 percent.

Copper became important at the beginning of the twentieth century, followed on a smaller scale by petroleum after 1915. Then, in the post-World War II period, fish meal from anchovies caught off the Peruvian coast became yet another highly valuable primary product export. Industrial products remained notably absent from Peru’s list of exports until the 1970s. As late as 1960, manufactured goods were only 1 percent of total exports. Manufacturing for the home market has had many ups and downs. The first major downturn came with the guano boom of the mid- nineteenth century.

Foreign-exchange earnings from guano exports became so abundant and, therefore, imported goods so cheap that much of Peru’s small-scale local industry went out of production. The end of the guano boom relieved this pressure, and in the 1890s a new factor, a 2/13 prolonged depreciation of the currency, came into play to stimulate manufacturing. The currency was at that time based on silver, and falling world market prices for silver in this period acted to raise both import prices and export values (of products other than silver), relative to Peruvian costs of production.

Without any overt change in national policies, Peru began a process of import-substitution industrialization combined with stronger incentives for exports. Domestic entrepreneurs responded successfully, and the economy began to show promising signs of more diversified and autonomous growth. This redirection of Peruvian development was in turn sidetracked in the 1900-1930 period, in part by a decision to abandon the silver-based currency and adopt the gold standard instead.

The change was intended to make the currency more stable and, in particular, to remove the inflationary effect of depreciation. The change succeeded in making the currency more stable and to some degree in holding down inflation, but Peruvian costs and prices nevertheless rose gradually relative to external prices. That trend hurt exports and the trade balance, especially in the 1920s, but instead of devaluing the currency to correct the country’s weakening competitive position, the government chose to borrow abroad to keep up its value.

As has been noted, many Latin American countries reacted to the Great Depression by imposing extensive import restrictions and by adopting more activist government policies to promote industrialization. But at that point, Peru departed from the common pattern by rejecting the trend toward protection and intervention. After a brief experience with populist-style controls from 1945 to 1948, Peru returned to the open economy model and a basically conservative style of internal economic management, in sharp contrast to the growing emphasis on import substitution and government control in Argentina, Brazil, Chile, and Colombia.

Aided by the early recovery of some of its main exports in the 1930s, and then by development of new primary exports in the early post-World War II period, Peru had in many respects the most successful economy in Latin America up to the mid-1960s. But increasing pressure on the land from a rapidly growing population, accompanied by rising costs and limited supplies of some of the country’s natural resources, began to intensify demands for change.

One of the worst blows for continued reliance on growth of primary exports was a sudden drop in the fish catch that provided supplies for Peru’s important fish meal exports; over-fishing plus adverse changes in the ocean currents off Peru cut supplies drastically in the early 1970s. That reversal coincided with supply problems in copper mining. Costs had begun to rise steeply in the older mines, and development of new projects required such largescale investment that the foreign companies dominant in copper hesitated to go ahead with them.

Further, population pressure and increasing difficulties in raising output of food converted Peru into an importer for a rising share of its food supply and began to work against use of land for agricultural exports. Although new investment and better agricultural techniques could presumably have helped a great deal, it began to seem likely that the only way to maintain high rates of growth would be to shift the structure of the economy more toward the industrial sector.

Evolution of Foreign Investment During its long period of attachment to an open economic system, Peru welcomed foreign investment and in some periods adopted tax laws specifically designed to encourage it. That is to say, until the 1960s the small fraction of Peruvians in a position to determine the country’s economic policies welcomed foreign investment without paying much attention to growing signs of popular opposition. In 3/13 the 1960s, many things changed.

The major change for foreign investors was that growing criticism of their role in the economy led to nationalization of several of the largest firms and to much more restrictive legislation. Foreign investment played a relatively minor role in the nineteenth century, although it included railroads, British interests in banking and oil, and United States participation in sugar production and exports. Its role grew rapidly in the twentieth century, concentrated especially in export fields.

In 1901, just as Peruvian copper began to gain importance, United States firms entered and began buying up all but the smallest of the country’s copper mines. The International Petroleum Company (IPC), a Canadian subsidiary of Standard Oil of New Jersey, established domination of oil production by 1914 through purchase of the restricted rights needed to work the main oil fields. The trend to foreign entry in manufacturing as well as finance and mining was stimulated by promotional legislation under the eleven-year government of Augusto B.

Leguia (1908-1912, 1919-1930), an initially elected president turned dictator who regarded foreign investment as the key to modernization of Peru. That muchpublicized partnership between a repressive government and foreign investors was to play an important role for the future of Peru, by feeding convictions that foreign investment was inescapably linked to control of the country by the few at the expense of the public. By the end of the 1920s, foreign firms accounted for over 60 percent of Peru’s exports.

The Great Depression of the 1930s changed that by bringing new foreign investment to a halt and by driving down the prices of the products of foreign firms (chiefly copper) much further than those exported by Peruvian firms. That double effect brought the share of exports by foreign firms down to about 30 percent by the end of the 1940s. Foreign investment remained low in the first postwar years, both because investors in the industrialized countries were preoccupied at home and because it was not encouraged by the populist government in Peru from 1945 to 1948.

After a military coup installed a conservative dictator in 1948, the government offered a renewed welcome to foreign investors, made particularly effective by the Mining Code of 1950. This law offered very favorable tax provisions and quickly led to an upsurge of new investment. History repeated itself: as in the 1920s, a repressive government turned to foreign investors for economic growth and for its own support, adding fuel to widespread public distrust of foreign firms. Public opposition to foreign ownership focused particularly on the largest firms owning and exporting natural resources, above all in copper and petroleum.

The IPC became the center of increasing conflict over the terms of its operating rights and its financial support of conservative governments. When Fernando Belaunde Terry (1963-1968, 1980-1985) took office as president in 1963, he promised to reopen negotiations over the contract with IPC, but he then delayed the question for years and finally backed away from this promise in 1968. His failure to act provoked the military coup led by General Juan Velasco Alvarado (1968-1975), this time from the left wing. The Velasco government promptly nationalized IPC and started a determined campaign to restrict foreign nvestment. Although the government subsequently moderated its hostility to foreign firms, continuing disputes and then the deterioration of the economy led some companies to withdraw and held foreign investment down to very low levels through the 1980s. The redirection of economic strategy under the Fujimori government in 1990-91 included a return to welcoming conditions for foreign investment, providing a much more favorable legal context, and 4/13 disavowing completely the control-oriented policies of the governments of Juan Velasco Alvarado and Alan Garcia (2005 – actual).

Several foreign oil companies responded immediately, although the disorganized state of the economy and the context of political violence discouraged any general inflow of new foreign investment. 4. Effects of the crisis in the Peruvian Economy 4. 1 Transmission channels Four contagion channels operate to extend the economic shock resulting from the financial crisis, originating in the United States to the rest of the world. : external demand, commodity prices, financial flows and remittances. 4. 1. 1 Decreased demand for Peru’s exports

The decreased demand by Peru’s trading partners reduced trade flows. The magnitude of impact will depend on the degree of Peru’s dependence, directly or indirectly, on, in particular, its three major trading partners, the countries affected by the crisis as the United States and European Union and China respectively. Participation in the Exports by Country and Products, 2008 Group of products Traditional Cooper Gold Others Non traditional Textile Agricultural Chemical Others Total U. S. A 12. 3 2. 7 2. 1 7. 6 6. 1 2. 6 1. 9 0. 2 1. 4 18. 4 E. U 12. 5 6. 4 0. 5 5. 7 4. 0. 6 2. 3 0. 4 1. 1 16. 8 CHINA 11. 3 5. 4 0. 1 5. 9 0. 7 0 0. 1 0 0. 5 12 THE OTHERS WORLD 39. 6 10. 2 15. 2 14. 2 13. 1 3. 3 1. 9 2. 8 5. 2 52. 7 75. 8 24. 6 17. 9 33. 3 24. 2 6. 5 6. 1 3. 3 8. 3 100 Note that Peru’s dependence the United States and the European Union has decreased considerably as a result of the Peru having diversified its exports and of the increasing importance of newly emerging economies. In 2000, the U. S. and the European Union consumed 27. 7% and 21. 4% of Peru’s exports, respectively. Today, each consumes 18. 4% and 16. 8%, respectively.

Evolution of the volume indicator of global demand (Var. %) 5/13 United States European Union Worl d Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Lower external demand resulted in both smaller others and more cancellations to Peru’s export oriented industries. They also affect the flow of tourist, the number of there is down, and the spends and the average stay. In turn, the decrease in Peruvian exports reduces economic and employment growth, while also leading to the deterioration of current account deficit and creating pressure on its exchange rate.

A look at our exports in recent months showed a contraction in external demand. In terms of volumes, the export of non-traditional products were the most affected mainly textiles and chemicals. Evolution of the exports of products non traditional Export of agricultural products (Var % per year) Export of fishing products (Var % per year) Export of textile products (Var % per year) Export of chemical products (Var % per year) 4. 1. 2 Remittances The importance of income from remittances has been increasing as a result of increased the number of /13 migrants and economic growth in host countries has seen remittances grow significantly. According to Central Bank statistics, income from remittances totaled $ 2,437 million in 2008, registering a growth of 14. 4% compared to 2007 and its share in GDP over from 1. 3% in 2000 to 1. 9% in 2008. According to the survey of Public Opinion to Receivers of Remittances in Peru, dating from 2005, about 10% of adults in Peru receives remittances from abroad, forming an important component of disposable income and therefore consumption.

Evolution of Workers’ Remittances 1990 -2008 %GDP Source : BCR Migrant workers, especially those in industries most affected by rising unemployment, notably, such as, the service industries and construction, have dramatically reduced their remittances. In addition, stricter restrictions on foreign labor by host countries has reduced Peruvians’ ability to work abroad, which decreases remittances yet further. In recent months, remittances fell significantly. While in the first quarter of 2008 growth was 20. 1% in the fourth quarter of last year growth was only 2. %. 4. 1. 3 Deterioration of Commodity Prices The terms of trade have always played a critical role in the evolution of the Peru’s economic cycles. Falling prices of raw materials significantly affects the prices of Peru’s main export products, specifically those in the mining sector (copper, zinc, tin, lead, molybdenum, among others). The drastic fall in international prices directly affects the income of exporters and sectors related to this sector.. In addition, affecting the external sector, the decreased income mining results in a decline in tax revenue.

Lower revenue, threatens long-term fiscal sustainability, as well as constraining fiscal policy, which should be closely linked to the magnitude and duration of the international crisis and its effect on income. 4. 1. 4 Contraction of capital flows In the context of globalization, uncertainty, the perception of high risk and the pursuit of security has led 7/13 to international investors and lenders to sharply reduce foreign investment and external loans to the private and public sectors, especially in developing economies.

Such decrease in foreign capital results in a shortage of foreign credit, lower levels of foreign direct investment, and capital outflows, due to foreign investors withdrawing from in Peru’s capital markets. To liquidate their assets, foreign investors provide capital outflow from the country, which together with the current account deficit, upward pressure on exchange rate, affecting the fit of the balance sheets of businesses and individuals’ income in soles and debts in dollars, as well as banks. Recent months, revealed significant short-term and long-term capital outflows from Peru.

At the end of the fourth quarter of 2008, the net flow of short-term capital was negative U. S. $ 2, 213 million, as foreign banks withdrew their investments from short-term in soles and in dollars, in part, to overcome a huge amount of CDBCRP acquired by non-residents in the reevaluated period. Net flow of short-term capital (Millions in US$) Quarterly Annual Source: BCRP, Projections MEF The Foreign direct investment recorded a negative value of $ 1,113 million in the fourth quarter of 2008, while foreign investment in domestic bonds and equities showed a small inflow of U.

S. $ 23 million. Long-term loans decreased in the fourth quarter of 2007, but increased from the previous quarter, amounting to U. S. $ 801 million. The largest credit ratings in international capital markets, limits the availability of funds for credit lines to companies and financial system for the corporate sector with direct access to international banks. Such limited sources of external financing limits the availability of domestic credit, raising investment costs, which, in turn, reduces economic growth. eads to a strong set of domestic credit conditions, affecting the cost of financing, and therefore the potential for growth, especially in the developing world economies, such as Peru. the emerging world which is part of Latin America. In Peru, the impact on the credit have become relative weaker, the product of prudent macroeconomic policy and the prudent banking regulations applied in previous years, as well as appropriate management of the expectations through the timely implementation of the Economic Stimulus Plan and monetary management by the BCRP.

Thus, the financial and banking system continue to make credit available despite the foreign capital outflows in the fourth quarter of 2008 and first quarter of 2009. 8/13 The credits of the financial system grew in late December 2008 and March 15, 2009 compared to September of last year and were in all sectors and both soles and dollars. Credits in foreign currencies continue to rise, while in dollars, while they grew up to March 15, on an annual basis there is a slight deceleration: 38. 5% compared with growth of 41. 8% and 39. 7% June and September respectively.

Increases in commercial loans, mortgages and small business loans, but the case of consumer credit, indicates a significant slowdown. The growth rate of these loans fell from 34. 5% in September 2008 to 21. 3% at March 15, a result of both the more restricted access to credit cards and their more unfavorable terms of credit. 5. Employment growth in Peru In recent months, employment growth in Peru has slowed. as reflected by national indicators from the Ministry of Labor. Employment in December reached 6. 9% and 5. 2% in January, in December 138,300 people were formally employed and in January, fell to 131,600.

In February showed a strong decrease of -2. 3%, where only 128,600 people had suitable employment, as shown in figure 1. Figure 1 Urban Peru: evolution of the monitory index monthly in companies with 10 and more workers, January 2007 – February 2009 Note: the information is about the first day of each month Source: Ministry of Labor – DNPEFP Elaboration: MTPE – Programa de Estadistica y Estudios Laborales (PEEL) The latter decline was due to the contraction in employment in the extractive sectors (-6. 6%), services (3. 1%), manufacturing (-2. %), industry, transport, storage and communication (– 0. 4%) and trade (0. 3%). In the first quarter, in Lima, employment in manufacturing fell by 4% over the last quarter of 2008, alone. According to the National Institute of Statistics and Informatics (INEI), October to December last year, this sector employs a 691,600 people, but in the first quarter of 2009 fell to 663,900. This means that 26,700 workers lost their jobs. The figure would increase in the country, as there is a greater percentage of the population engaged in exports. In addition to this, the contraction of 2. 1% in the mining and hydrocarbons sector, which resulted in the reduction of jobs. According to the federation of mining 8,000 workers are dismissed by the crisis, while 9/13 the Ministry of labor, said that the number of redundancies in this sector amounts to 5,000, a figure that matches with the figures given by the National Society Mining, Petroleum and Energy. A decrease in Peru’s economic growth and employment begins to reflect the impact of the external crisis. The impact of the external crisis is beginning to be reflected in employment in Peru.

Exports of agricultural products, textiles, fisheries and chemicals have experienced a sharp decline of -20%. 5. 1 Employment in decline Peru was one of the countries that would better withstand the international financial crisis, and hence employment. The International Monetary Fund projected economic growth of 7%; Cepal, 5% and the World Bank 5. 2%. GDP (Gross Domestic Product) measures the output of a country. And if there is more production, more labor intensive and, therefore, there are more employment opportunities. Conversely, if production is low, there is little chance of getting a job.

Thus the impact of the external crisis is beginning to be reflected in employment in Peru. Exports of agricultural products, textiles, fisheries and chemicals have a strong data shows a fall of -20%. In the beginning of this year, the government projected an economic growth of 5%. The Ministry of Labor estimated to achieve this goal Peru would need to create 435,800 new jobs. But according to several analysts, the employment rate continues to decrease, because if the economy continued to fall in the latest statistics INEI February GDP grew only 0. 9%, the projections for employment in the coming months will be daunting. The International Labor Organization (ILO) argues that employment will decrease inevitably, because the occupancy rate is in decline since the early months of the year. So inevitably fall, during periods of recession because the economically active population is increasing and is more difficult for people to find work. A few months ago, the ILO undertook a project in two stages of unemployment to Lima in 2009. In the positive way, 42 thousand people would be dismissed and the negative 62 mil would be fired.

These projections were made at 5%, so the figures could rise. It is not expected that the GDP fell as much as recorded for February INEI. The growth of the workforce is 2. 5% per year and is possible to increase because of the recession. To absorb this sector would require a GDP of 4% if the Peru does not achieve this goal, it cannot meet the need of the work of this group and, hence, employment is reduced. Even less if Peru only can grow just 1%, as projected by some analysts. The real concern is the labor items is the under-employment. Then this figure will also increase.

The process of adjustment of labor markets in Peru is not the way open unemployment, if not of the underemployment. Many analysts are not giving attention in this area. Unemployment can vary a 1 percentage point, but the underemployment can increase by 7 points (a rate that is more significant) and this may worsen crisis. INEI reports that informal employment is at 45. 6% of the economically active population only in Lima. 5. 2 Expectations Recruitment The situation traced by analysts coincides with the “Quarterly survey of employment expectations 10/13 ationwide” of the national human resources consulting firm Manpower. For the second quarter, employers are reluctant to hire staff in all economic sectors. The sample, which can be seen in the table below shows that between April and June, 15% of employers planned to reduce staff. This figure is far from 6% in the previous semester; more when compared with the period last year (April-June 2008), where only 1% showed moderate to recruit employees. The global crisis has forced employers to rethink Peruvian projects and be more conservative about it.

This study shows that employers in two sectors: mining and construction and manufacturing, this sectors show pessimism to recruit new workers. This will indicate negative figures in the mining and construction (-2%) and manufacturing (5%). Expectation of Recruitment 2 quarter 2006 to 2nd quarter 2009 % nd 6. Forecast 6. 1 The economists make a projection about the grow and slowdown to the Peru? s economy one of this is the inflation, that it will be for the 2009 in 2. 2% 6. 2 It is estimated that exports would amount to U. S. $ 23,797 (millions) less than 24. 7% as recorded in 2008.

This decrease is explained by the decline of traditional exports (28. 5%) and non-traditional (13. 1%). The decrease of the first crash would basically to export mining products (26. 6%) and petroleum and its derivatives (47. 5%). However, the demand for gold as asset coverage is increasing. For its part, the magnitude of the fall in non-traditional exports was influenced mainly by the contraction in sales of textile products (17. 2%), agriculture (13. 7%) and iron and steel (34. 7%). 6. 3 For this year it is expected that the Gross Domestic Product (GDP) will grow 3. % in real terms over the previous year as a result of the performance of the components of domestic demand (4. 1%) both public and private. 11/13 6. 4 Peru hopes that in 2009, the imports will register a value of US$24, 451 millions, reducing in nominal terms 14% respect to 2008. This decline would be associated to lower fuel imports product from falling international oil prices and weakening domestic demand. The latter induced by the slowdown in private consumption and private investment, and non-primary production sectors, which demand less raw materials and capital goods.

However, it is not ruled out the possibility of slower growth in domestic demand brought about a greater contraction in imports. 6. 5 The base scenario considers that in the terms of trade, it will decrease 6% compared to 2008 as a result of the contraction of export prices (25. 1%) and falling prices of imports (19. 1%). 6. 6 Peru expected a deficit in the current account balance of U. S. $ 3,706 million (3. 3% of GDP), based on the gap in the trade balance deficit of $ 1,091 million and in the lower flow of income of remittances of workers abroad. 7. Recommendations From the results of studies, the Peru? Government should prioritize the sector that was most affected by the financial crisis, as we have seen in this paper, one of the sectors most affected were the exportations, because Peru is a producer of raw material, Currently the government is carrying out the economic stimulus plan, projected for 2010 through 2012, with which are also implementing a series of regulations to benefit certain sectors. Besides them the Ministry of Labor has begun a project to those workers, mainly from the mining sector, could be relocated to other companies as an alternative to this has been proposed to integrate the construction sector.

There is much to take at this stage that although the agreements signed with other countries, free trade agreements were created to stimulate trade between Peru and these countries, we now have more disadvantages than advantages as prices raw materials have decreased. 8. Conclusions This paper has been prepared to show which have been the consequences of the financial crisis on the economy of Peru, although it is true, some indicators suggest it has not been fully involved, the reality is that the outlook for growth that it was experienced has been greatly reduced, so that shows the projection of the estimated GDP for 2009, which would be 3. % while the year 2008 was 9. 8% among the highest in the world. In the opinion of the Bank of Finance (BIF) both Peru and Brazil are the first countries to show the first recovery? s indicators of the financial crisis. In Peru has seen this recovery because it is a country with an emerging economy, while the developed countries the financial crisis has had a greater impact. The Peru is currently in a stable macroeconomic situation, which has secured funding lines to face any contingency.

The Peruvian government has launched the Economic Stimulus Plan (ESP) that aims to generate 88 thousand direct jobs in construction, steel, wood, glass, among others, and other plans to create 215 thousand jobs. Also it plans to disburse between this year and 2010 US$4, 187 million dollars to develop the ESP, which provides face the international financial crisis. 12/13 9. References [1] HURTADO, ROSARIO. Menudo Empleo, Revista Ideele 2008 (Spanish version) [2] DONNER, ARTHUR and PETERS, DOUG, Money, Bank Capital and Zero Interest Rates, Behind the Numbers, Canadian Center for Policy Alternatives , 2009 [3] BAKEWELL, PETER.

Silver and Entrepreneurship in Seventeenth- Century Potosi: The Life and Times of Antonio Lopez de Quiroga. Albuquerque: University of New Mexico Press, 1988. [4] FIGUEROA, ADOLFO. Capitalist Development and the Peasant Economy of Peru. Cambridge [Cambrigeshire]: Cambridge, University Press, 1984. [5] THORP, ROSEMARY, and GEOFFREY BERTRAM. Peru 1890-1977: Growth and Policy in an Open Economy. New York: Columbia, University Press, 1978. [6] REX A. HUDSON, ed. Peru: A Country Study. Washington: GPO for the Library of Congress, 1992. 7] MINISTERY OF FINANCIAL AND ECONOMICS OF PERU, MARCO MACROECONOMICO MULTIANUAL 2010-2012 – PARA CONTINUAR CON EL CRECIMIENTO, EL EMPLEO Y LA INCLUSION SOCIAL [8] COMISION ECONOMICA PARA AMERICA LATINA Y EL CARIBE, CEPAL (2008). Panorama social para America Latina: 2008. Naciones Unidas. Santiago de Chile. [9] COMISION ECONOMICA PARA AMERICA LATINA Y EL CARIBE, CEPAL (2009). “La reaccion de los Gobiernos de America Latina y el Caribe frente a la crisis internacional: una presentacion sintetica de las medidas de politica anunciadas hasta el 31 de marzo del 2009”. Naciones Unidas, Santiago de Chile, pp. 57, Abril. 13/13

Operating Systems – Linux

Running Head: Operating Systems – Linux Operating Systems – Linux Prepared by Jackie Riddick University of Phoenix November 18, 2007 Operating Systems – Linux Brief History. Linus Torvalds created the Linux operating system in 1991 while he was still a student at the University of Helsinki in Finland. He developed and released the Linux kernel under the GNU General Public License so that its source code would be free to all and others could modify it to meet their specific needs. The Linux kernel is “at the heart of all Linux systems” (linux. rg, 2007) and many companies and individuals have developed and released operating systems around this kernel. Unlike Microsoft operating systems, Linux is non-proprietary and the “GNU General Public license is intended to guarantee your freedom to share and change free software–to make sure the software is free for all its users” (linux. org, 2007). The most recent release of the Linux kernel is version 2. 6. 23. Many people have developed Linux operating systems and have made it a “real alternative to Windows and UNIX systems” (cite). Windows continues to dominate the desktop market and UNIX – based systems dominate the server arena.

Hardware Platforms. According to Linux. org, Linux is compatible with “most PC-based CPUs such as Intel, AMD, and Cyrix and non-PC based platforms such as Macintosh, Digital Alpha, and Sun SPARC” (linux. org, 2007). Some major corporations have embraced Linux because it is easy to use on larger systems that run mission-critical applications. This acceptance has led to Linux making major progress in enterprise. However, this acceptance has been mainly as a server platform because Linux was originally designed to improve upon the standards of a Unix-based server system called Minix.

The acceptance of Linux is growing in the server market but struggling in the desktop market and many businesses still resist adopting Linux based operating systems because: •Learning/training difficulty. •Lack of easily available technical support. •Too many versions. •Insufficient number of trained personnel. •Fragmentation of packages and installation routines. •Not enough business applications. •Suspicion that free software is not enterprise-class (Greiner, 2007) In spite of this resistance new Linux systems continue to be developed as well as new applications to address these concerns and issues, and growth continues.

This growth has apparently been significant enough to get Microsoft’s attention as it “is becoming ‘more open’ in terms of releasing a few protocols to developers and has demonstrated some license pricing flexibility, particularly for large government contracts. It has even announced support for Linux in its Virtual Server. ”(Greiner, 2007) Supported Applications. Numerous software applications have been developed specifically for Linux operating systems as well as for multiple operating systems including Linux systems. Most of these applications are released under the GPL and are free to the public just like the Linux kernel.

Indeed there are entire websites on the Internet dedicated to the further development of the Linux kernel and standardizing the various Linux operating systems, but because it is freeware there is no ‘official’ Linux website or organization. Sites such as Linux Online – www. linux. org, and Linux. com – www. linux. com are two of the many sites that provide a wealth of information about Linux in addition to download links for the kernel and applications. From utilities to entertainment software to office automation software, the number of applications for Linux continues to grow. Vendors.

Since the Linux kernel is open source many companies have created their own commercial distributions of Linux operating systems and in the process created a multi-billion dollar industry. Red Hat, Novell/SuSE, Mandriva, Linspire, and Xandros are a few of the numerous commercial Linux distributions. IBM’s z is another commercial Linux distribution. Dell recently started offering desktops and laptops with Linux pre-installed. Red Hat continues to be the industry leader in commercial Linux distributions. Outlook. The outlook for Linux and other open source software is extremely positive and industry adoption continues to grow.

The Santa Cruz Operation (SCO) Group lawsuit against IBM claiming IBM put Unix technology into the Linux kernel has created a huge controversy and their claim is hotly contested by the open source community. Thus the lawsuit has not hindered the growth of Linux systems and applications. According to Greiner, more governments are mandating the evaluation of Linux alternatives to Microsoft operating systems to save money and that they believe open source systems to be more secure than Windows-based systems although that is debatable. In the desktop arena Linux is still behind Microsoft and Apple operating systems.

Linux may never totally usurp Microsoft, Apple, or Unix operating systems, but it has and will continue to put pressure on them to become more open with regard to source code. References Greiner, L. (2007, July). Linux operating systems. Faulkner Information Services. Retrieved November 16, 2007, from FACCTs database. Linux. com. (2007). What is linux. Retrieved November 16, 2007, from http://www. linux. com Linux Online. (2007). General info. Retrieved November 16, 2007, from http://www. linux. org Linux Timeline. (2006, May 31). Linux Journal. Retrieved November 16, 2007, from http://www. linuxjournal. com

The Death of Mrs. Mallard in the Story of an Hour

Mrs. Mallard’s heart trouble is ironically designed in the story. The first sentence of the story tells that she “was afflicted with a heart trouble. ” Readers tended to assume that she’s weak physically. But after reading the whole story, we realized that she was also weak emotionally. According to the doctors’ judgment, the “joy” of seeing her husband killed the poor woman. But actually, just sensing the hope of getting freedom but soon disillusioning made her collapsed. Thus, the heart trouble is ironically designed. The writer gives quite a few clues related to Mrs. Mallard’s heart trouble.

When she was informed about her husband’s death, “she wept at once”. Unlike the other contemporary women who could not believe it, she accepted the fact immediately. It’s the beginning of her change. Alone in her room, she looked out of the window and saw the “new spring life” outside. She sensed “something coming to her and she was waiting for it, fearfully” and tried to “beat it back with her will” as “her bosom rose and fell tumultuously”. A whispered word “escaped” her lips when she “abandoned” herself: “Free! ” At this moment, “her pulses beat fast, and the coursing blood warmed and relaxed every inch of her body. She was cheered up by the coming freedom and became excited. She recalled the life with her husband, which was “fixed with gray and dead”. And she began to imagine the days ahead of her, in which “she would live for herself” absolutely. She put off her sister Josephine’s “imploring” and “her fancy was running riot along those days ahead of her”. She became optimistic and even over-excited. “There was a feverish triumph in her eyes,” A new woman, with freedom and hope was born, “like a goddess of Victory” At this stage, she thought she could grab the freedom, which triggered her heart trouble.

Her pulses beat fast, the blood ran riot throughout her body and she was feverish. These changes hinted that her heart might not bear this “joy”. Mr. Mallard’s reappearance ended the story with “a monstrous joy”. Mrs. Mallard died of heart disease. It’s an ironic ending because the heart trouble was surmised at the beginning of the story. The doctors’ diagnosis was correct technically—-she did die “of joy that kills”. But to make it precise, she died of finding the freedom and hope then suddenly losing it.

Eva vs Roi

Why EVA is better than ROI (ROCE, ROIC, RONA, ROA) and earnings, operating profit etc. Equity investors should earn on their capital a return far over risk-free interest rate in order to induce and maintain capital in the company Therefore earnings should always be judged against the capital used to produce these earnings Earnings can be easily increased simultaneously worsening the position of shareholders e. g. if more capital is poured into! ompany although the return on capital is 5% or less (even lower than long-term government bond) Thus it is clear for most people that any earnings figure can not alone be a reliable performance measure (still some companies use EPS !? ) ! Following slides focus on explaining why also return on capital alone is often an unreliable performance measure EVA is a registered trademark of Stern Stewart & Co. EVA vs. rate of return There are two very good reasons why EVA is much better than ROI (RONA, ROCE, ROIC) as a controlling tool and as a performance measure 1. Steering failure in ROI

Increase in ROI is not necessarily good for shareholders i. e. maximizing ROI can not be set as a target. (Increase in ROI would be unambiguously good only in the companies where capital can be neither increased nor decreased -> however we leave in a world where both operations are easily executed in almost all companies) 2. EVA is more practical and understandable than ROI As an absolute and income statement -based measure EVA is quite easily explained to non-financial employees and furthermore the impacts oi different day-to-day actions can be easily turned into EVA-figures since an additional $100 cost decreases EVA with $100. ROI is neither easy to explain to employees nor can day-to-day actions easily be expressed in terms of ROI) This latter benefit if often totally forgotten in academic discussion since it can not, of course, be visible in desk studies or empirical studies which try to trace the correlation of EVA and share prices 2 Both points are explained in detail in the following slides Reason 1: Steering failure in ROI Suppose of a SBU earning currently a return (ROI, ROIC, ROCE) of 30% and suppose that this SBU faces an investment opportunity producing a return of 20% What happens to the ROI of the SBU if the investment is executed? Before investment: Capital 100, Operating profit 30, Capital cost 10% 3 ROI = 30/100 = 30% , EVA = 30 – (10% x 100) = 20 Investment’s capital requirement 20, return 20%/year: Thus increase in yearly operating profit is 20% x 20 = 4 3 After investment: Capital 120, Operating profit 34, Capital cost 10% 3 ROI = 34/120 = 28% , EVA = 34 – (10% x 120) = 22 In this case decreasing ROI is good for the shareholders, thus ROI should not be maximised and therefore it is problematic controlling tool.

Usually large corporations have at least some very profitable units and particularly these units are steered wrongly with ROI3 Reason 2: EVA is more practical and understandable than rate of return (ROI… ) (1/4) Usually the rate of return is not used and totally understood at the lower leveis of organizations in the companies using ROI as the prime performance measure. Le. operating people like sales people, production engineers and supervisor etc. o not use ROI while making day-to-day operating actions (they use operating profit and perhaps also some turnover times instead) This kind of behaviour is obvious since cost reductions, revenue increases, capital increases and reductions etc. are too difficult to convert into change of ROI with day-to-day activities 3 Furthermore those persentages would not be so informative or illustrative to operating people than absolute dollar changes in operating profit This is even more understandable when we keep in mind that ROI is not an unambigious measure (slide 2: steering failure) Reason 2: EVA is more practical and understandable than rate of return (ROI… ) (2/4) Thus in ROI-steered companies the capital base is left to very little attention in operating activities and operating profit is emphasized Therefore the meaning of capital efficiency is often forgotten and some operating people do not even realize that tynig money in inventories or sales receivables is costly I have heard comments that inventories are not very costly because short interest rates are only 3% per annum…

EVA, in contrast to ROI, is as an absolute measure easy to integrate into operating activities since all cost reductions and revenue increases are already in terms of EVA (reduction in costs in one period = increase in EVA in the same period). In the similar fashion capital increases /reductions are also fairly easy to turn into change of EVA Furthermore EVA is (in contrast to ROI) an unambigious measure i. e. ncreasing EVA increases always the position of shareholders 5 Reason 2: EVA is more practical and understandable than rate of return (ROI… ) (3/4) It is also very common that in ROI-steered companies many employees do not really know what profitability is Often many educated employees know something about the flaws oi ROI and therefore they have some vague conception that real profitability might also improve although ROI decreases Since the company does not have any better profitability measures it is admittedly very difficult to get the whole picture about profitability ROI is also too complex consept to explain to all employees (not many companies have succeeded (or even tried) to explain to factory employees what is ROI and what is real profitability and how they can infmence them) I have also met some financial accountants and account managers that do not have comprehended completely what profitability is and what pitfalls ROI include so it is not wonder that these things are difficult to explain to other employees ” Therefore ROI-steered companies and their employees do not always know how to operate to improve the real profitability i. e. the position of shareholders 6 Reason 2: EVA is more practical and understandable than rate of return (ROI… ) (4/4) Profitability is often viewed as a difficult construct elonging to financial professional although it is in general outline an easy consept understandable to all employees – the question is ultimately whether a company can cover all its costs or not and how much is the excess or deficit EVA clarines the profitability into one unambigious and absolute figure. Thereafter improving profitability is simply increasing EVA After implementing EVA it is fairly easy to explain to all employer groups what is profitability and where should the company aim at ? nanciafly The reason for difficulties for operating people to understand profitability have not been in the consept itself but with the performance measures (like ROI) used so far

The Eightfold Path, World Religions, Buddha, with Works Cited

I got a 50 out of 50 on this paper. Please do not copy this word for word, use the format and information to help you with your own paper. Good Luck. The Eightfold Path by JOE Professor Hartman World Religions PHI243 10 December 2009 Scarbrough 1 JOE Professor Hartman World Religions PHI243 10 December 2009 The Eightfold Path The “Eightfold Path” of the Buddhist religion is believed to be the way to end all suffering. More than steps the “Eightfold Path”are elements. They are not to be followed in to it.

Not only does following the Path lead one to “Nirvana”, but during life it releases one from The Noble “Eightfold Path”is divided into three groups. The first group, “The Moral Discipline Group”, is made up of three steps, “Right Speech”, “Right Conduct”, and “Right Concentration Group” it contains, “Right Effort”, “Right Mindfulness”, and “Right Concentration”. The final group, “The Wisdom Group”, is composed of the final two disciplines, “Right Effort” and “Right Aspirations”. The path that Buddhists follow is embodied within these three groups. With moral discipline as the foundation for concentration, concentration the foundation for teachings of Buddha seem to cover all aspects of an enjoyable, ethical, and honorable way of 2500 years old. The First group, “The Moral Discipline”, contains “Right Speech”, “Right Conduct”, and “Nonindulgence in loose or hurtful talk or in ill will; one must love all creatures with the right sort Page 2 is just as susceptible as anyone to gossip and hurtful talk. Fortunately, Buddhists participate in meditation and concentration which, in principle, ould allow more peace, thereby maintaining a more positive peaceful attitude towards others. This would also apply to the second discipline, means “Choosing the proper occupation of one’s time and energies, obtaining one’s livelihood in ways consistent with Buddhist principles. ”(Noss 183) When a person is becoming of age, and deciding upon an occupation or career, important decisions need to be made. When a The second group called the “Concentration Group” contains “Right Effort”, “Right Mindfulness” and “Right Concentration”.

The “Concentration Group” is more training then it is Mindfulness” and “Right Concentration”in order to endure. Energy is the key to deliverance, if it is focusedcorrectly. Energyon the other hand can also be a Buddhists downfall. Energy can the mind he can overcome anything. A current day Buddhist can use effort, along with (Bodhi 11) Page 3 “Untiring and unremitting intellectual alertness in discrimination between wise and unwise say, and think. When a Buddhist focuses on the correct things, says the correct things, and the past. Perhaps that is because we live in this time.

Understanding and applying this love of others, to harm no living being, and to suppress all misery-producing desires current or Buddhist from the past has the ability to love others, harm no one in any way, and suppress any feeling or emotion that would drag his focus away from the teachings of Buddha then he will have the strength to overcome any large obstaclethat would lie in his or her path. “Eightfold Path”. A Buddhist who has the ability to conquer these eight steps can find an unchallenged true happiness. appears to really allow anyone to break our mind down into smaller simple tasks.

When we go about our day, doing the things that we do, it is easy to forget how to improve our lives. If you were to walk up to someone on the street and ask them what they would do to improve their life, most people would answer with a new job, or a better car, material things and I am as guilty as anyone. Before studying the teachings of Buddha, the only thing that I knew was that he was a Page 4 short, fat, bald guyand even that is not accurate. I find peace in Buddha’steachings. it down into logic. When a person tries to deal with these emotional topics it is very easy to lose focus.

The Path allows us to look at emotions and deal with them systematically. Following this employment would change,I am currently in sales. There is no peace in my career up to this learned from the “Eightfold Path” is that, the best is up to me, inside, not what others perceive me as. I am the only one who can find inner peace for me. This sounds like a simple concept but as a busy American caught up in life I never think of simple things like that. communications within the relationships seem so superficial now that I have taken a look at myself from the outside.

Through Buddha’s teachings I have realized how much I do not work on myself. Now I understand that I just allow life to happen around me. I need to take control of my life and break it apart in orderto fix things. What is so shocking regarding all of the new information that I have learned is that,I never realized how out of control things are. A week ago before I understood any of the information that I do now, I would have thought things were nearly perfect. I knew that there were areas in my life that could use improvement but now I see that I literatelydo not run my own mind.

It is influenced by everything around me. My environment around me has determinedmy reactions, emotions, and decisions. Buddha’s Page 5 found different areasthat I apply to my life. The “Eightfold Path” of the Buddhist religion is something that will permanentlybe part of me. Buddhist. Just like most people in the middle class I aspire for more toys. The Buddhist teachings have altered my thinking a bit. I now need to consider more financial independence. Buddha, although over 2500 years ago, was light-yearsahead of his time. His knowledge and the individual then the group.

He did not tell his followers yes or no, he simply displayed how to focus on control of your mind and emotions. If people, including myself, would focus more on inner peace than what is going on around them, the world would take care of itself. After all if more people applied the “Eightfold Path” to their lives there would be no hate, war, or even anger. Page 6 Work Cited The Noble Eightfold Path: The Way to the End of Suffering”, Bhikkhu Bodhi. Access to Insight, Noss, David S. A History of World’s Religions. New Jersey: Prentice Hall, 2003, 2008.


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