Initial Public Offering.

by Kunal Rathi (Written on: 5th December 2008)

Introduction

Initial Public Offering (IPO), are one of the common methods used by companies to raise huge amount of capital for their future projects and expansion. Management and owners sell a part of firm in form of shares to public in order to get more money in return. IPOs are more popular than bank loans because of the fact that bank loans are needed to be repaid before specific deadline, where as in IPO (shared) can be repurchased in later dates i.e. if or whenever a company wishes to do so. In this assignment I would be summarising the main argument of Roger, Jody, & Jay (n.d.) article “Initial Public Offering” printed Donald H. Chew, Jr. (eds) ‘The New Corporate Finance: Where Theory Meets Practice’ 3^rd Edition. I would be discussing the topic, what Initial Public Offerings and Underwriters are? Also discussing about the process of issuing of IPO and how their prices are set in the market. In the last I would be adding some practical and experimental findings of different writers supporting this article {Roger, et. Al., n.d.} from different case studies and articles as well as brief current market condition of IPOs after world financial crisis.

Initial Public Offerings

IPOs are also referred as ‘Public Offering’. IPO takes place when a company issues shares or common stock to public for the first time. It’s often done by smaller and young companies looking for capital for new projects and to expand. Large privately-owned companies can also issue IPO to becoming publicly traded. (Gregoriou, 2006)

IPOs are almost all the time risky. Risks are faced and involved by each of the three major parties: investment banker (underwriters), issuer and investor. The pricing of IPOs is a difficult job. The reason being is that there is no observable market price prior to the offering and also because many of the issuing firms have little or no operating history. If the prices are set too low, the issuer does not get the full advantage of its ability to raise capital. On the other hand if the prices are set too high, then the investor would get an inferior return and can also result in rejection of the offering. “Numerous empirical studies have shown that unseasoned new issues are significantly underpriced, on average” (Roger, et al, n.d.: 309)

Underwriters

Underwriter is a company which manages the public issuance and allocation of securities for a business firm or some other issuing body. It works with the issuing body closely to determine the offering price of the security, then they buy them from the issuing firm and sell to different investors through a network known ad underwriter’s distribution network. If an underwriter is not able to sell the securities at the specified prise offered, they are forced to sell the security at lower price than they paid for them to issuer or they can just retain the security. Hence, it’s very important to get a good underwriter for the firm as they are responsible for pricing, marketing and positioning firm’s IPO and therefore is critical to its ultimate success. (Berg, 1996)

The Process

Interpretation for issuing of IPOs by the company can be stated as by going public the firm is provided by more capital at the same time original owners of the firm can diversify their holdings. The setting up of the prices and the response of the people outside the firm to the price give a picture to the management and shareholders with the outside information about the firm value. In IPO, the issuer is selling a part of his firm to public in form of shares, and will be willing to get as much as possible and maximum funds for the expansion and new projects. The price of the share or IPO at which the company trade ownership for cash depends upon the company position in market, policies of the investment bankers and specifics of the firm. IPO can be made by two different ways; “firm commitment” or “best efforts”. (Jay, 1987; Jay, et al, 1977 cited in Roger, et al, n.d.: 310)

Setting The Price

A successful offering is all based upon setting the price of IPO as the firm is going public for the first time and has no price history and is totally unaware of the market reaction on the price of security. (Roger, et al, n.d.: 310-1) In the past IPOs were being underpriced globally. Reasoning behind is that the underpriced IPOs can be defined and supported by the term that it generates additional interest in stock for the investors when the company first time becomes publicly traded. However, under pricing can result in “money left on table” i.e. loss of capital, which could be yield with high price stock. For IPO issuing companies, overpricing of the stock is also an important consideration. It could result in the price of the stock higher then market expectation and as a result underwriters will be able to collect less capital for the company, as less investor will take interest in investing their money. According to research and historical statistic whenever a company issue it’s IPO under overprice condition, there are chances in fall of stock prices in the first day of trading, and company can also lose its marketability and can result in less investor in future and hence more of its value falls. (Loughran & Ritter, 2004; Roger, et al, n.d.: 310) So we can say that both under and over pricing of IPO could have a bad effect for the future of the company. But to attract investors to invest in IPO the company has to under price its IPO but not with a high percentage. It should reflect the investor positive side of the company for future investment.

Boron & Holmstrom (1980) have shared their views on the theory that underwriters are significantly informed better then the issuer itself. The main reasoning of the statement can be that underwriters are mainly more informed about the market-clearing price because of their marked survey and experience on new issues. It doesn’t matter if the issuer knows more about their firm’s specifics; it’s the underwriter who knows more about what market thinks about the firm then issuer. (Boron, et al., 1980 cited in Roger, et al, n.d.: 314)

Practical And Experimental Findings

Many writers and scholars have given their views and assumptions on IPO in the history. Now I would be discussing some these cases which will clear th understand of why underpricing has changed over time?; how UK firms chose to list contracts; Effects of investors uncertainty on underpricing; Asymmetric Information model; and on how underpricing can become signal of firm quality.

Why has underpricing changed over time?

“Underpricing is estimated as the percentage difference between the price at which the IPO shares were sold to investors (the offer price) and the price at which the shares subsequently trade in the market.” (Ljungqvist, 2006: 6)

During the period of 1980s, the first-day returns on IPOs were average to 7%, which almost doubled during 1990-1998 to 15%. But during bubble year of 1999-2000 the return were at its unexpected heights of 65% and then reverting to 12% during 2001-2003. (Loughran & Ritter, 2004: 5) These figures clearly shows the underpricing of IPOs have changed over time. Now the question arise that “Why has underpricing changed over time?” Loughran & Ritter (2004) suggests that three non-mutually and limited reasons i.e. a realignment of incentives, a changing issuer objective function, and changing risk composition. Their research was based on assumption of hypothesis. They saw the during 1980s and 1990s the physical riskiness of firms going public didn’t changed greatly, but high percentage of very young firms were going public during bubble period, and high percentage of older firms in post-bubble period. Through realignment of incentives hypothesis they argued that managerial incentives to reduce underpricing have decreased with time for the reason that it reduced CEO ownership and a higher percentage of IPOs were with no secondary shares. Loughran & Ritter (2004) found two reasons that why issuers become smugger about underpricing in the 1990s and internet bubble period through changing issuer objective function hypothesis. They stated two reasons as; firstly, market analyst coverage became a more significant factor for issuers choosing a direct underwriter, reasoning being more assessment then in the 1980s. Lastly, the executives and venture capitalists of the firms issuing IPOs were appoint through the allotment of hot IPOs to their private brokerage accounts. (Loughran & Ritter, 2004)

The Strategy of Going Public: How UK Firms Choose Their Listing Contracts

Goergen, Khurshed & Mudambi (2006) state that the firms in UK have a choice when they are going public between placing and public offers. As this choice can have significant inference on the fact that who bears the risk of the issue failing and of its costs. Their study proposed that the constrict choices are essentially subjective by three types of factors: ex ante uncertainty, certification, and the exposure or visibility of the issue. Higher will be the ex ante uncertainty at the time of IPOs, greater will be the odds that the firm chooses a placing contract. Thus, it’s the facts that sponsor and creditor screening signals the quality of the IPO firm. Goergen, Khurshed & Mudambi (2006) propose that MNCs and large corporations should show a resemblance towards a public offers and also suggested that the firm making small issues will find it much more cost efficient to use placing contracts. High IPO activity periods are characterised by higher regularity of placing contracts. It has been seen that UK industries don’t show any similarity to any kind of IPO contracts in compare to US industries (exception in this result were vehicle, metal goods and engineering industries). “The evidence suggests that in general the decision to choose a placing rather than an offer or vice versa is taken by the firm within the framework of rational behavior.” (Goergen, Khurshed & Mudambi, 2006) Firms in United Kingdom were aware of the characteristics of their company and were taking it into account when deciding on listing contracts.

The Effects of Investors’ Uncertainty on Underpricing

The average initial returns for 2439 IPOs during 1975-1984 were 20.7% that were listed in going public. During the period IPO firms were categorized according to annual sales they use to make, with the thinking that sales might serve as an alternative for the investors’ uncertainty about the firm. From the data it can be seen that the firms with the less annual sales are underpricing their IPOs so that it can attract investors to invest in their company as on the first day (initial return) it would give them return for more than 30% which is almost 50% more than the average initial return, compare to firms with large amount of annual sales giving less than 10% of initial return which is less than 50% of the average initial return. (Roger, et al, n.d.: 313-4) Seeing this figures one can say that underpricing of the security is one of the major technique for the small and new companies to go public and with a successful attraction for the investors, but a huge percentage of underpricing for good firms (good sales record, old and known firm) is a bad idea, as they can lose the huge amount of money which they could have generated by rise in price of IPO and reducing the margin of underpricing of IPOs.

Roger (n.d.) has found that the effect of uncertainty of investor’s on IPOs underpricing is the recent experience of “reverse LBOs”. A study by Chris and Michael (1988) suggested that during 1976-1987 the average initial return to IPOs’ investors was only 2.1%. (Chris and Michael, 1988; cited in Roger, n.d.: 314)

Roger (n.d.) found and suggested that IPO arc on an average are normally underpriced; more established an issuer results in very less uncertainty to the investors about the firm giving real image of firm to market, results in lower underpricing amount; hot and cold performance are predictable and come in wave; cold issue market can have a negative average initial returns; there can be waves of number of new offerings in form of highly correlated heavy and light activities; and underpricing of IPO are normally followed by new offerings issued within an year. (Roger, n.d.: 314)

Asymmetric Information Model: The Winner’s Curse

In an IPO the bank, issuing firm and the investors are the three main parties. Asymmetric information model of underpricing assumes that the information is not evenly distributed to three of the parties, and one knows more than other. Till the date Rock’s (1986) winner’s curse is the best-known model in asymmetric information, which is an application of Akerlof’s (1970) lemons problem. (Chris & Michael, 1988:11)

Rock (1986) presumed that few of the investors are better informed about the true value of the offered shares then other investors, its underwriting back, or the issuing firm as it is more costly and difficult for them to be informed. This results in that the uninformed investors bid at random, but informed investors only bid for IPOs with attractive price. This oblige a ‘winner’s curse’ on uninformed investors resulting in unattractive offerings and receive all the shares they have bid for. While on the other hand attractive offerings are partly crowded out by informed investors. In such case the uninformed investor can partly or completely receive 100 percent allocations in overpriced IPOs in place of underpriced IPOs, resulting in negative average return on the investment.

Underpricing as a Signal of Firm Quality

Rock’s assumption of informational asymmetry is reversed by this model. It believed that if businesses have better knowledge regarding present value or their future cash flow risk than underpricing of IPO can be used to signal companies’ true high value. This process is costly, but if successful, can result in issuer’s return in market to sell equities at later date on better terms and conditions. Ibbotson (1975) and Welch (n.d.) believes that issuer only under price is order to ‘leave good taste in investors’ mouth’. (Ljungqvist, 2006: 36) Researches have shown that one out of three companies that issues IPOs in late 1970s and 1980s issues additional equities to the public at least once more. (Welch, n.d. cited in Roger, n.d.)

Current Condition of IPOs and Examples

In this example I would be showing a brief view of the current market condition of IPOs after the world financial crisis. In current time, we should not be surprised that the investors have little interest in IPOs. Even though market has enjoyed meek recovery in past, but they are still struggling. Due to investors’ unwillingness to buy IPOs their price in NASDAQ has fallen by about 7.1% where as in S&P 500 by 5.3%. (Ellis, 2008) Large size IPOs is having no sign of recovery, such as Ventures India and Abani Power. These companies were planning to rise there capital about 8 billion pounds which is likely to be delayed due to current market condition. Failures of high profiled offers have forced issuers to take a back-foot approach i.e. cautious view of primary market.

Conclusion

The experiential IPO’s short story has now fairly matures. We know that IPOs are globally underpriced and numerous companies are now going public or/and will be going public shortly. There are theories explaining IPO’s underpricing and most of them are subjected to accurate testing. The only thing which companies can learn who is going public is that underwriters should not under price their securities (IPO) too much (too little) as it can lose business from issuers (investors). To make a final note, underpricing can be reduced if information asymmetry between uninformed and informed investors is reduced or eliminated. To do so an issuer can disclose as much information as possible about the company at the time of going public.

References & Bibliography.

1. Akerlof, G. (1970) ‘The Market of “Lemons”: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, (23): 303-323.

2. Berg, C. (1996) ‘how to choose a qualified IPO underwriter’, Business Courier. Updated 14^th June 1996. (Accessed on: 5^th December 2008) Available at: http://www.bizjournals.com/cincinnati/stories/1996/06/17/smallb6.html

3. Boron, D.P. & Holmstrom, B. (1980) ‘The investment Banking Contract for New Issuers Under Asymmetric Information: Delegation and the Incentive Problem’, Journal of Finance, (35): 1115-1138.

4. Chris, J. M. & Michael R. V. (1988) “The Underpricing of ‘Secondary’ Initial Public Offerings”, Unpublished Southern Methodist University working paper.

5. Ellis, D. (2008) ‘IPO market is stuck in neutral’ CNNMoney.com. Last Updated: 23^rd May 2008. (Accessed on: 5^th December 2008) Available at: http://money.cnn.com/2008/05/23/markets/ipo/ipos/index.htm?postversion=2008052311

6. Gurav, V. (2008) ‘Fate of big IPOs hanging in balance’ Economics Times. Last updated: 26^th November 2008. Accessed on: 5^th December 2008. Available at: http://economictimes.indiatimes.com/Markets/IPOs/Fate_of_big_IPOs_hangs_in_balance/articleshow/3757197.cms

7. Goergen, M., Khurshed, A. & Mudambi, R. (2006) “The Strategy of Going Public: How UK Firms Choose Their Listing Contracts”, Journal of Business Finance & Accounting, 33(1 & 2):79-101

8. Gregoriou, G. (2006), Initial Public Offerings (IPOs), Butterworth-Heinemann, an imprint of Elsevier.

9. Ibbotson, R.G., (1975) ‘Price Performance of Common Stock New Issues’, Journal of Financial Economics, (2): 235-272.

10. Jay R. R., “The Cost of Going Public”, Journal of Financial Economics (December 1987) 19: 269-281.

11. Jay R. R., Mandelker, G. & Raviv, A., “Investment Banking: An Economic Analysis of Optimal Underwriting Contracts”, Journal of Finance (June 1977) 32: 683-694.

12. Ljungqvist, A. (2006) “IPO Underpricing” in Eckbo, B. E., (eds.) ‘Handbook of Corporate Finance: Empirical Corporate Finance, Volume A’, Handbooks in Finance Series, Holland.

13. Loughran, T. & Ritter, J.R. (2004) “Why Has IPO Underpricing Changed Over Time?”, Financial Management, 33(3): 5-37

14. Rock, K. (1986) ‘Why New Issues Are Underpriced’, journal of Financial Economics, (15): 187-212.

15. Roger, G. I., Jody, L. S. & Jay R. R. (n.d.) “Initial Public Offering” in Donald H. Chew, Jr. (eds) ‘The New Corporate Finance: Where Theory Meets Practice’ 3^rd Edition, McGraw-Hill, London.

16. Welch, I. (n.d.) ‘Seasoned Offerings Imitation costs, and the underpricing of Initial Public Offerings’, Unpublished University of Chicago working paper.

 

Source: Kunal Rathi’s University’s Assignment (2009)

You’ve Got To Be A Billionaire To Be A Millionaire…

by Kunal Rathi (edited article/blog) (Edited on: 12^th January 2010)

“You’ve got to be a billionaire to be a millionaire” was initially from Freddy Laker, owner of an airline company named Laker Airways. Sadly neither he, nor is his airline are around these days. But sadly the one thing that causes a terrible shiver down anyone’s spine is hearing a well known airlines company ‘British Airways’ showing a loss on the books every year.

It’s an even bigger shame when you consider that the airline industry as a whole is going down the pan faster than banks closing. In the year 2009 there have been a number of airlines that have been run-to the ground, and that’s the tip of the iceberg.

Those that have gone under are those who were already badly financed and badly planned, yet there have been some exceptions. XL Airways was one of the bigger losers to the saga.

To really make matters worse, you have to consider how on earth did the airline industry got into this mess. The simple answer is a lack of foresight and egos their aircraft’s have to carry, not to mention the cost of an aircraft, the fuel, the staff, the overheads in general… and so on. The only thing that could be added here would be the airports, which would be talked as this article goes further.

To run an airline is a very complex and highly risky affair, which involves juggling very volatile fuel and also passengers. In the old days it was simple, call the bank, ask for loads of money and hope for the best, not to mention to the bank that you secured your home if the affair goes bust. You then have to logistically tackle the demands of money and people by poking it with a stick and then satisfy government intent in making life harder for everyone and at the same time satisfy the authorities, environmentalists and NIMBYs.

Today, you not only need to secure your home, but your family, yourself and your passengers as security to get money from tight money grabbing bankers. Bankers are however the driving forces of any airline company. As a good example, just look at British Airways. In the year 2008 they decided to launch a New York service via London City Airport using a very small jet aircraft that barely takes-off and lands.

British Airways’ policy is to fleece the Business Traveller to the hilt and then claim service justice against economy customers. On the other hand, Ryan Air’s policy is simple, you are pigs and you deserve cheap service that resembles precisely the level of service that this country is run on, over-priced and under-reliable transport with uncomfortable seats and un-desirable passengers.

The other problem with airlines is the nationalised or mammoths of an airline. Monopoly is a game that requires you to dominate a board of people who have the same intentions to buy every single property and then demand excessive costs against other airlines and take them-over.

Air France-KLM is one prime illustration, they operate as one entity, but financially independent, but the idea of having a very large civilian air force is something that has a massive string attached. If this behemoth of an airline goes down, the world’s economy would suffer so much that we would be financially be living in the Stone Age.

You are probably thinking that it would never happen. Think again, consider Pan Am, it collapsed spectacularly and in style when there was so many of its aircraft’s were in accidents and terrorism, it financially could not remain buoyant. Juan Tripp quite literary rolled in his grave when he heard it collapse and it also meant that there were millions of passengers losing their money and also stuck in Terminal limbo, where they have no means to get them home.

TWA was another airline, immortalised by the film The Aviator which involves a mad Bi-polar egotist who prides himself in being distant and in control.

Aside from the human error in airlines, we should also not forget about the airports, and how about Heathrow? Heathrow is an airport built on lies and deceit, and airport that when fully built was of the wrong design and planned with the efficiency of a trainee butcher with a blunt knife. The biggest problem with Heathrow is that it was built so fast with very little planning that trying to make sense to a person who flies in would make them realise that actually they are human social guinea pigs in an aviation world.

Heathrow sorts out this problem by hiding from the realities. Take note that when you approach Heathrow, you are first led underground, and you never see the airport as an entirety. The first thing you need to also understand is, the terminal buildings are like a family with children who misbehave… most notably the bowels of these children don’t always work and eventually you have a baggage belt problem, which also means having piles… piles of luggage all going to Milan for sorting…

The other problem is that you are in the sole control of the master of all airport controllers, that is BAA, they herd passengers like sheep to the slaughter or in reality the shops.

Did you know that BAA makes its money from you spending cash at a shop? It should be called a retail business rather than an air transport business. And if you think that you will get money back from the tax-free shopping then you are a fool.

Airports do strangle the imagination of airlines in that airports favour bigger more “stable” airlines which bring in lots of sheep into the country. Airports cause problems for starters in that airports charge fees that are more akin to traffic cameras at the side of the road. They generate lots of money and feed the money into a black-hole called a chief executive. Money is supposed to be used to make facilities better, but with the thought of using it to generate profits.

Reference & Bibliography.

1. Anonymous (2009) http://binkyairways.wordpress.com/ 2009/07/31/youve-got-to-be-a-billionaire-to-be-a-millionaire/ (Accessed on: 12^th January 2010).

Source: Binky Airways Blog. (original article/blog)

According to Markides (1999) “There is surprisingly little agreement on what strategy really is”. (I have critically analysed this statement.)

by Kunal Rathi (Written on: 16th March 2009)

Introduction

This assignment will argue and analyse the statement of Markides (1999) “There is surprisingly little agreement on what strategy really is.” (Markides, 1999) It will look over the writings of different authors and will extract their view points, opinions and definitions on the field of strategy. With the study just over the statement on Markides (1999) it just looks like a very less authors have given light over the field of strategy in management literature. But as the assignment will progress towards its end we will look over the different statements, view points, opinions and definition given by different authors on the field of strategy.

One would be amazed to find out two different people within academic or business world that might be having the same definition and share the same view point about the strategy. (Markides, 1999) No wonder due to this reasoning the economist says that, “Nobody really knows what strategy really is.” (The Economist, 1993: 106) According to Bernus et al. (2003) the word strategic as well as strategy are well known and are generally used as well as misused in the modern business environment. Although strategy is an important aspect in today’s business environment, amazingly there are very little definitions given on what a strategy really is. (Markides, 1999; Bernus et al., 2003) Strategy is a word which is commonly used for different reasons that it’s meaning’s clarity has just lost. (Kalpic, 2002) The notion of strategy historically has been taken from the military and today is widely used in business world. (Nickols, 2006) Nickols (2006) believed that tactics as well as strategy are the bridges to fill the gap between means as well as ends. Means through which policies can be easily affected is strategy, and there is saying that wars are an extension of political relations through other means. (ibid, 2006) Markides (1999) believed that looking over a problem from different perspective gives us more productive results than bring together limitless data and examining them. The author thought that it is critical to experiment new thoughts rather than going for scientific analysis plus discussion. (Markides, 1999) Today authors believe that making a successful strategy is never ending process. Wal-mart as well as Dell are two companies successful today due to the reason that they currently have superior strategy in business world. But this cannot guarantee them to be successful company in future. The reasoning being that none of the firm ever will be able to know or predict exactly how the environment will change and when these changes are going to take place in future. (ibid, 1999)

Historically the word strategy was associated with the military. Strategy is an art in general as well as it has been represented as a set of psychological skill along with behavioral skill of a character. (Bernus et al., 2003) For the first time the strategy word was linked with management as well as managerial skills during the time of 450 B.C. by Pericles. Alexander during 330 B.C. defined strategy as a skill to overcome opposition through employing forces as well as creating a joined structure of worldwide authority. (Kalpic, 2002) Harvard Business School from 1912 started a course which was intended to incorporate knowledge expansion in functional areas such as operations, finance as well as accounting thus providing students of management with a wider viewpoint on the strategic problems which management in an organization has to deal with. Strategy as a result can be understood as a symbol that widths the function area in organizations. (ibid, 2003) Making of a strategy is actually an interdisciplinary ground which involves management, economics, law as well as organizational theory. Although the subject of business strategy is being taught and academic researched are been conducted on the subject from over a century, still significant amount of disagreement is present on the topic of ‘what strategy really is?’, along with ‘how a good strategy is developed?’. (Miles and Snow, 1978; cited in Bernus et al., 2003)

“Strategy is generally related to time-consuming stages of planning, in a hierarchically planned system of objectives as well as goals, and linked to a preferred way of creating a fit among external environment, abilities and internal resources.” (Bernus et al., 2003) Bernus et al (2003) gives a narrow view over strategic management in his writing that strategy is the outcome of combined group actions, believe to be a continuing development as well as characteristic in this core moreover should be recognized as the formation of organization’s future, but not as a category. (ibid, 2003) Although several writers have enlightened the concept of strategy and business strategy through their various definitions, but we can see that a true meaning of business strategy is still missing or we can say writers are avoiding offering of a common or standard strategy definition. Instead, numerous theoretical traditions and strategic definitions are presented which overflows the strategic management field. (Ghemawat, 1999) Bernus et al (2003) offered resource based view in his writing for the reason that in the field of strategic management this view was the main govern theoretical schools, however it was ignored over and over again by managers. (Bernus et al., 2003) The explanation behind resource based view approach emerges to be that there are products as well as markets that distinguish the instant failure or else success of an organization, and a resource based view is separated from this daily reality. (Mahoney and Pandian, 1992)

Schendel (1994) in his writing says that strategic management is basically an interdisciplinary topic where the viewpoint will always shift with new researches and approaches; it is suspect that a single n globally accepted theory of strategy will ever be established in the field of business. (Bernus et al., 2003) Hart (1967) in his writings has examined warfare which took place in ancient history till the modern world. His suggestions and writings are towards the literature of strategy, tactics as well as policies; the author defines strategy as, “an art of applying as well as allocating military resources to realize the ends of policy (objectives).” (Hart, 1967) But the definition was created with the influence of word military in mind, thus by eliminating (or subtitling) the word military (by business) from Hart’s definition, it can be easily related to the notion of strategy with world of business i.e., “strategy is an art of applying as well as allocating (business) resource to realize the ends of policies (objectives).” (Nickols, 2006) Steiner (1979) in his writings defines strategy in a very short sentence and explains strategy to be a way through which one (business) can counter its rival’s actual or predicted actions. He also makes a note on the point that there is very little conformity on the definitions of what strategy is in business world. (Nickols, 2006) Mintzberg (1994) said that there are several means through which people can use strategy. Mintzberg (1994) also made a note that strategy is a plan of getting from one stage to another; a how; it is a position, perspective as well as a pattern in actions over time. The writer says that strategies have risen as meaning which run into as well as accommodate a changing of reality over the time. Thus this is the pattern in decision as well as actions which Mintzberg identified as realized or emergent strategy. (Nickols, 2006) As a result Andrew’s (1980) definition shows expectation and links to Mintzberg’s (1994) attention to plan, perspective and pattern. (Nickols, 2006) Andrew (1980) in his writing has also drawn division between business strategies; which identify the basis of rivalry for a given organisation, as well as corporate strategy; which on the other hand decides for the organisation on which firm to compete with. Thus, anticipating position as a form of strategy. (Nickols, 2006) Porter (1986) in has writing said that competitive strategy is all about bring the difference in an organisation. In addition he says that it means purposely opt for a diverse range of actions to bring a distinctive mix up of benefits. (Porter, 1986; 1996) The author has also given light on the topic that strategy is about competitive position, about making difference and distinguishing your company from other from customer’s point of view. It is also about adding values to the company through a set of activities used together to achieve goal and should be different from other firms. (ibid, 1986; 1996) In addition he defines competitive strategy in another way by saying, “competitive strategy is a grouping of different objectives for which the company is motivated as well as the plans through which companies make attempt to reach its set objectives.” (ibid 1986; 1996) Porter seems to hold strategy as both position as well as plan. (Nickols, 2006)

Tregoe and Zimmerman (1980) have defined strategy in their writings as, “the framework which channels those preferences which determines the nature as well as the course of a business firm.” (Tregoe & Zimmerman, 1980) Tregoe & Zimmerman (1980) have based their decisions on a single driving force of the business. They took the position that strategy is essentially a matter of perspective. (ibid, 1980; Nickols, 2006)According to Andrews (1980), “Corporate strategy is the model of choices made in an organisation which decides the objectives, generates the most important plans as well as policies for the variety of trade the organisation is to deal in, the kind of economics as well as human organisation it is or else intending to become or to be, also the character of the non-economic as well as economic payout intended to be made to its employees, shareholders, communities as well as customers.” (Andrews, 1980: 18-19) Robert (1993) states that the genuine problem is thinking strategically as well as with strategic management. (Nickols, 2006) Similar to the arguments of Tregoe & Zimmerman (1980), Robert (1993) states that judgments made by companies about which services as well as product to offer, what kind of market segments to be served, which customer is to be served, in which of the geographic area should be prepared, all this is based on the single driving force. (Robert, 1993; ibid, 2006) Robert (1993) also states that there is existence of several driving force, but similar to Tregoe & Zimmerman (1980) only one can be used. (ibid, 1993; 2003; Nickols, 2006) Treacy and Wiersema (1994) stated that organisations attain positions of leadership by a narrow business focus not by a broader one. Treacy and Wiersema (1993) also acknowledged in their writing about three significance disciplines that can be provided as the source for every strategy and according to them these were customer understanding, product management as well as operational quality in addition to this only one can be the source for every strategy. (Treacy and Wiersema, 1993; 1994; Nickols, 2006)

Conclusion

Markides (1999) in his article ‘In Search of Strategy’ was true that digging deep in the field of strategy raises more questions than answers. (Markides, 1999) After looking over a wide range of definitions for different authors in the field of management and strategy, we can see that every author has presented their own different definition with some kind of disagreement on a previous definition with a sense of trying to make some modification in their new definition, although there are numerous kinds of definitions given in different languages or ways (simple, hard, paragraphed or just a note) they all mean the same i.e. in a very short and simple way a strategy can be defined as to ‘tactics which makes it easier for a firm to achieve its goal by applying different business resources into action.’ Thus, we can say that Markides’s (1999) statement was authentic that “there is surprisingly little agreement on what strategy really is.” (Markides, 1999)

Reference & Bibliography.

1. Andrews, K. (1980) The Concept of Corporate Strategy, 2^nd Edition, Dow-Jones Irwin.

2. Bernus, P., Nemes, L., Schmidt, G. (2003) Handbook on enterprise architecture, Springer.

3. Ghemawat, P. (1999) Strategy and the Business Landscape: Text and Cases, Hallow, Addison-Wesley.

4. Hart, B. H. L. (1967) Strategy, Basic Books.

5. Kalpic, B. (2002) Strategic Management: Theory and Application, Griffith University, December 2002

6. Mahoney, J. T. & Pandian, J. R. (1992) ‘The Resource-based view within the conversation of strategic management’, Strategic Management Journal, 13(5):363-380.

7. Markides, C. C. (1999) ‘In Search of Strategy’, Sloan Management Review, Spring, pp 6 -7.

8. Miles, R. E. & Snow C. C. (1978) Organizational strategy, structure and process, New York, McGraw-Hill.

9. Mintzberg, H. (1994) The Rise and Fall of Strategic Planning, Basic Books.

10. Nickols, F. (2006) Strategy: Definitions and meaning, Skullworks.

11. Porter, M. (1986) Competitive Strategy, Harvard Business School Press.

12. Porter, M. (1996) ‘What is Strategy?’, Harvard Business Review, Nov-Dec 1996.

13. Robert, M. (1993) Strategy: Pure and Simple, McGraw-Hill.

14. Steiner, G. (1979) Strategic Planning, Free Press.

15. The Economist, 20 March 1993, pp: 106.

16. Treacy, M. & Wiersema, M. (1994) The Discipline of Market Leaders, Addison-Wesley.

17. Treacy, M. & Wiersema, M. (1993) ‘Customer Intimacy and Other Value Disciplines’, Harvard Business Review, Jan-Feb 1993.

18. Tregoe, B. & Zimmerman, J. (1980) Top Management Strategy, Simon and Schuster.

Source: Kunal Rathi’s University’s Assignment (2009)

What is radical consumption? (Discussed critically by making reference to theories and empirical examples of green and ethical marketing.)

by Kunal Rathi (Written on: 20th April 2009)

Introduction

“Environmental Protection and Sustainable development must be an integral part of the mandates of all agencies of governments, of international organisations, and major private sectors institutions.” (World Commission on Environment and Development, 1984; cited in Alma & Lozada, 1996) Radical Consumption is indeed the basic nature of the consumption or the fundamental consumption. (Hole & Hawker, 2006) Radical consumption and ethical consumption is moreover a similar aspects in the theory, both of the term means the buying of those goods which are ethically made or/and are having some aspect towards greenness. Ethical consumption in today’s time is the biggest movement towards brand building by any company. Ethical consumption is purchasing of products as well as services which a consumer considers to be made ethically and marketed ethically by a company. It basically means minimum harm to animal and natural environment with minimum exploitation of human and/or employees. (Anonymous, 2009)

American Marketing Association believed that green marketing is marketing of the products which are supposed to be an environmentally safe product. Green marketing includes a wide range of activities, which includes changes to the production process, change in product, changes in packaging, as well as changes in advertising. Originally the idea of green marketing came into existence during late 1980s. Early marketing researches’ findings have shown the indications of corporate interest in green marketing and suggested major innovation processes and changing steps. Case studies of companies, for example; the Body Shop, Volvo, Ecover, 3M as well as McDonalds were almost cited in every literature over the green marketing as to show how and why green marketing schemes could pay. During 1990s specialist brands like Ecover as well as Down to Earth enjoyed the growth of their companies which they failed to enjoy in later periods, and there was discontinuation in the specialist green range of some major companies like Lever Brothers as well as Sainsbury’s. (Peattie & Crane, 2005) The philosophy as well as process of marketing is built around the customer of a company as well as relationship between them (the company and the customer). Peattie and Crane (2005) suggested that “green marketing will not work in the face of customer distrust, but then that distrust may be partly a product of the types of green marketing that relied upon so far.” (ibid, 2005)

“Green marketing is a part as well as parcel of the overall corporate strategy.” (Menon & Menon, 1997; cited in Prakash, 2002) Green Marketing is also linked closely to the industrial ecological as well as environmental sustainability issues such as extensive producers’ accountability, life-cycle study, material use as well as resource flows, plus eco-efficiency. Prakash (2002) believed that marketing literature on greening products and/or greening firms builds on both the societal as well as social marketing research. (ibid, 2002) According to Ward (2009) green marketing is simply the method of selling products and/or services which are based on their environmental benefits. In such conditions the product or/and production methods and/or packaging methods can be environmentally friendly. The assumption of green marketing is that buying decision of potential consumers will base on services’ and/or products’ greenness. (Ward, 2009)

Schaefer (2007) asks the question that “Is there only an environmental issue to worry about?” (Schaefer, 2007) and suggested that “If taken to natural consumption, green consumption would surely require some sacrifices.” (ibid, 2007) According to Schaefer (2007) the thought behind the green marketing is that today there is large number of customers who are ready to be charged little bit extra for a product which is environmentally friendly and comes from a companies which too are environmentally friendly. But even the idea of green marketing faces some issues in itself. It issue is the idea of greening the world through marketing which companies follow not for the issue to help environment but to increase the sales and profit. Another problem with green marketing is that the green revolution would not work with the current and expected customer demands. Just a small number of customers who are dedicated towards greenness will go to a significant depth in order to promote the issue of green marketing within the business world. (ibid, 2007)

The notion of green consumption according to Guattari ([1989] 2000) is of recycling; buying green products; and the act of consuming less, these three area of green consumption are clearly all linked, related as well as are between each other. (Guattari, [1989] 2000) According to Littler (2009) the issue with the Guattari’s buying green concept is the culture and social divisions around it. Often these kind of green products are charged little more than the normal goods therefore are less preferred by the middle and lower-class people and customers. These kinds of products are not only preferred for the motive of their saving energy but also because people think buying them is luxurious and food products might have better taste and good quality. (Litter, 2009) As we know there are limited resources on the earth which are at the extent of getting finished. The notion of consume less is one of the solution in which if the consumer will consume less which will result in less demand of the good resulting in less production and less requirement of raw-materials. Therefore it is clear: just consume less. The practice of consume less is a well known area of green consumption where a relationship between environmental, mental as well as social ecologies already in circulation. (ibid, 2009) The most complex area in the green consumption is recycling. It is so because of the reason that it involves various steps and numerous material requirements. Many of the company have not yet been able to adopt this method resulting the failure of some process of recycling area in green consumption. (ibid, 2009)

According to Peattie (2005) the market researches taken during 1990s have shows the growing concern of the customers towards environment during that period. But the companies had taken it for granted that green would sell although many firms responded by showing some changes in their campaigns with more ecological friendly manner. (Peattie, 2005) Green marketing has also developed its own tradition. As a result of which the companies, customers, corporation as well as colleagues, they all are having hard time in trying to develop a greener strategy. (ibid, 2005) Peattie (2005) suggested that green marketing is characterised by the socio-environmental subvention that many usual commodities successfully enjoy as well as the performance effect of eliminating unsafe manufactured goods components. Therefore the products which are often believed to be in a very hard as well as aggressive position are green products. (ibid, 2005)

Marketers should have knowledge about the social as well as ethical responsibility along with the issue happening from their actions. (Dibb and Simkin, 2001)In this case Corporate Social Responsibility plays a vital role. Corporate Social Responsibility is a mean by which a business can work ethically and according to Kotler and Lee (2006) “Corporate Social Responsibility is a commitment to improve community well being through discretionary business practices and contributions of resources.” (Kotler and Lee, 2006: 3; cited in Littler, 2009) According to Littler (2009) Corporate Social Responsibility is a mean or a way through which corporations scams on for whitewashing their flawed image in front of public as a result of which it can avoid itself being related to the issues such as human rights abuses and/or labour exploitation – or corporations can also use tokenistic eco projects for greenwashing their brand name in an era of public worry over the issue of global warming. (Littler, 2009) As Littler (2009) in his book says, “Corporate Social Responsibility is a mean by which corporations aim to ‘give something back’ to the society and community they are part of.” (ibid, 2009) According to Brenkert (2008) the critical problem with ethical marketing is on how to plan a system for manufacture, supply, as well as product monitoring in an ethical manner is essential when marketing relations has an important part in the corporation. (Brenkert, 2008) “Current ethical challenges to marketing arise during a time when marketing, as well as most businesses face considerable change.” (ibid, 2008)

During 1999 there was food scare which was insinuation for retailers, customers, regulators as well as producers. Although government promises, statistics in a NOP opinion poll states that majority of the consumers were worried about the intake genetically modified foodstuff, 88 per cent were having knowledge about GM foods, whereas 60 per cent of the public were worried about its consumption. Supermarkets were guaranteed to take assertion from traders about the GM’s ingredients in goods delivered to them. Safeway as well as Tesco have taken measures to label clearly food products modified by GM. While stores like Sainsbury’s have started with hot-line services in order to help consumers’ queries, issues as well as fears in relation to the GM food products. Some companies to increase their selling has stopped printing the right information on their products, i.e. they no more print about GM ingredients on their goods although they were still in use. (Dibb and Simkin, 2001)

Bandvulc tyres are a leading manufacturer of retread tyres in The United kingdom today. They came over to motivate for the reason of their strong environmental culture imbedded throughout their organisation. Till now the company has helped in focusing their marketing material on the benefits of using recycled tires. In their advertisements the company has been using Varity of material to show their loyalty as well as devotion towards the environmental issues by development of green company logo. In their advertisements company has also been showing how their in-house team been working hard to develop a product for their customers which can help is reduction of CO2 omission in the atmosphere and less fuel consumption by the vehicles using their products. (Anonymous, 2009)

Conclusion

It is clear that Radical Consumption, Green marketing and Ethical marketing revolve around same central concept of rightness and greenness. But they have a very thin line of difference between them. Normally people think green and ethical marketing to be one and a same thing, but theoretically they are two different aspects. As discussed earlier green marketing is mainly related to environmental aspect, the ‘greenness’ aspect, where as ethical marketing is mainly related to the right way of marketing a good, the ‘rightness’ aspect. Radical consumption can also be discussed as ethical consumption, which covers both the green and ethical marketed goods. If a person buys goods which are green and ethical, they are ethical (radical) consumers. As world Commission on Environmental and Development said, it’s just not the part of the company, but government as well as the consumers to make this a success. Different writers came up with different theories and conclusion on these topics. But at the end their writing were having same meaning and bases. As discussed with some example and case study of GM food products and Bandvulc tires, the company promoted their products with green and ethical marketing, and the customers for helping the environment were ready to pay a bit extra for every unit. Although in GM food case, there it was seen to be boycotted by the consumer, as they were worried about the environment and their health as the food product which was sold was not green and genetically modified. Therefore, we can say not just greenness is important but goodness as well as fairness is important too. Thereby, radical consumption is basically consumption of goods which are produced and marketed not just green but also can be ethical good.

Reference & Bibliography.

1. Anonymous (2009) http://www.bandvulc.com/SiteHomepage.aspx Accessed on: 17^th April 2009.

2. Anonymous (2009) http://www.ethicalconsumer.org/ShoppingEthically/WhyBuyEthically.aspx Accessed on: 19^th April 2009.

3. Alma, T. M. & Lozada, H. R. (1996) Green marketing in a Unified Europe, Haworth Press.

4. Brenkert, G. G. (2008) Marketing Ethics, Oxford, Blackwell Publishing.

5. Dibb, S. & Simkin, L. (2001) The Marketing Casebook: cases and concepts, 2^nd Edition, London, Thomson Learning.

6. Guattari, F. ([1989] 2000) The Three Ecologies, Trans. I. Pindar & P. Sutton. London: Continuum.

7. Hole, G. & Hawker, S. (2006) The Oxford English Minidictionary, 6^th Edition, Oxford, Oxford University Press.

8. Kotler, P. & Lee, N. (2006) Corporate Social Responsibility: Doing the most good for your company and your cause, Hoboken, NJ: John Wiley and Sons.

9. Littler, J. (2009) Radical Consumption: Shopping for change in contemporary culture. Maidenhead: Open University Press.

10. Menon, A. and Menon, A. (1997) ‘Enviropreneurial marketing strategy: the emergence of corporate environmentalism as market strategy’, Journal of Marketing, 61: 51-67.

11. Peattie, K. (2005) ‘Green Marketing: legend, myth, force or prophesy?’, Qualitative Market Research: an international Journal, Vol. 8. No. 4. Pp: 357 – 370.

12. Peattie, K. and Crane, A. (2005) ‘Green marketing: legend, myth, farce or prophesy?’, Qualitative Market Research: An International Journal, 8(4): 357-370.

13. Prakash, A. (2002) ‘Green Marketing, Public Policies and Managerial Strategy’, Business Strategy and the Environment, 11: 285-297.

14. Schaefer, A. (2007) http://www.open2.net/blogs/money/index.php/2007/06/25/green_marketing?blog=5. Accessed on: 4^th April 2009.

15. Ward, S. (2009) http://sbinfocanada.about.com/od/marketing/g/greenmarketing.htm. Accessed on: 4^th April 2009.

16. World Commission on Environment & Development (1984) Our Common Future, Oxford, Oxford University Press.

Source: Kunal Rathi’s University’s Assignment (2009)