Budgeting Methods

Budgeting Methods

Net Present Value (NPV)

The Net Present Value in finance is the summation of present values of the individual cash flows in one entity. It is a time series of cash flows which are both incoming and outgoing. NPV is an important tool in discounted cash flow analysis since it is a standard method for the appraisal of long term projects using time value of money. It is also used for capital budgeting throughout finance, economics and accounting. NPV measures the shortfall or excess of cash flows in terms of the present value and above the cost of funds. Therefore, the method is appropriate since it makes proper use of all cash flows and tries to incorporate the time value of money. However, some companies find this method not applicable since it requires an appropriate rate of discount, which is difficult to obtain. The rate used to discount present value to future cash flows should be appropriate since it is an important variable in this process. NPV is relatively more difficult to explain. This is because the method has many computations, which some organizations may find to be more difficult to apply (Capital, 2012).

The Net Present Value method represents the dynamic investment appraisal and a cash flow method that is discounted. The basis for this method is the assumption that today’s euro is worth that tomorrow’s. The reason being that, today’s euro can be invested somewhere to generate interest. NPV method is appropriate for assessing new investments and comparing investment alternatives. The investment with the highest net present value is a more favorable alternative. Since it is an additive process, the investments net profit value can be summed up with the discount rates that are mutually unexclusive. The Net Present Value is obtained by adding up all discounted cash flows less expenditure on investments (Economic Feasibility Studies , 2010).

In a real world situation, an organization must decide on whether to introduce a new product in the market. The product will have various expenditures on the operations and start up and will have associated the incoming disbursements and cash receipts. Therefore, the project will have an initial cash outflow, which includes cash paid to machinery, transportation costs and disbursements on training employees. The project is estimated to cover the startup expenditures and step to a break-even point at the end of ten years. The present cash is therefore important since it would be better for an organization to invest in a project that will generate revenue in the future rather than do nothing with the money (Volkman, 2012).

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is a rate of return that is applied in capital budgeting for measuring and comparing the investments’ profitability. The calculation does not incorporate the environmental factors such as inflation and interest rate. This method is a capital budgeting technique that is mostly used by many organizations.  Business people prefer the method because they like to see their results from the calculation in annual rates rather than actual dollar returns. This enables them to make comparisons of different projects for ranking. The ranking enables them to see the project that is going to provide more bang for the buck. The project with the highest rate of return on investments is the most advantageous for the organization. However, the method is more complicated to calculate by hand. Therefore, it requires the use of a scientific calculator or application of a spreadsheet (Research and Library Services:Northern Ireland Assembly, 2010).

IRR method is time consuming since it is more difficult to calculate by hand. The financial analysts spend extra time to identify and solve problems with the IRR. This may be due to the complications that may arise out of the method utilization when there is no pattern on the conventional cash flow. However, due to the intuitive appeal of the method, it becomes the most preferred in practical application of the techniques in capital budgeting.

One disadvantage of using IRR method is that it does not account for the size of projects when doing comparison. Cash flows are compared to the outlay capital, which generate them. This can bring trouble when different projects require different amounts of capital outlay, but the smaller project brings a higher IRR.  The method also ignores future costs and concerns itself with the projected cash flows, which are generated by a capital injection. Although IRR allows one to make calculations on future cash flows, it makes a wrong assumption that the cash flows can be invested again at the IRR rate. This assumption is not real since the IRR is a high number and the opportunities, which yield the return, are significantly limited or not available at all. Therefore, the Internal Rate of Return is not suitable for making comparisons of several investment projects that vary in amounts, timing and length. It is quite possible that the investment with a lower internal rate of return has a higher net present value than an investment with a higher internal rate of return (mary, 2011).

Budgeting Methods Dissertations
Budgeting Methods Dissertations

In a real world situation, a project with high internal rate of return should have a high net present value and the vice versa is also true. Organizations should therefore consider investing in big projects, which have high internal rate of return since it would be more advantageous for the organization.

Profitability Index

Profitability index is the investment ratio to the payoff of a suggested project. The method is a useful technique in budgeting in the grading of projects. This is because it measures the value recorded by every unit of investment that is made by the investor. The profitability index of a company’s investment indicates the benefits and costs of investing in a particular capital project by the firm. It is a cost-benefit ratio used in the financial analysis of capital budgeting. The method is useful in telling whether an investment increases the value of the firm or not. If the investment increases the value of the firm, more concentration and efforts are employed on it. On the other hand, if the investment does not increase the value, the firm may be tempted to withdraw its capital from the investment. The method considers all cash flows of the project and the time value of money. It is also useful in considering the risk of future cash flows through the cost of capital. Ranking and selecting of projects is also enhanced when capital is rationed. This allows the organization know the projects, which increases the value of the firm, and revenue generating projects. The method is important as it direct organizations on the areas where they should invest their capital and the risks involved (Dra, 2013).

One of the drawbacks of this method is that it requires an estimate of the capital costs for calculating the profitability index. The method may not give a clear decision when comparing projects, which are mutually exclusive. Therefore, it is not the appropriate method to measure the investment decisions of an organization since it lacks efficiency.

Many organizations direct their profits to investments with the target of getting extra revenues from those projects. The profitability index method is crucial in identifying the projects, which add value to the organization, as well as the dormant projects. Through the application of this budgeting method, an organization is able to focus on the highest revenue generating projects and to identify areas where more capital should be employed (Economic Feasibility Studies , 2010).

Modified Internal Rate of Return (MIRR)

Modified Internal Rate of Returns (MIRR) is a financial measure of the attractiveness in an investment. It is a useful measure in capital budgeting to rank various investments of equal size. Also, the method is a discount rate that equates the present value of outflows to the future inflows value. This is a modified method of Internal Rate of Returns, and as such, its aim is to resolve the problems of the IRR. While the Internal Rate of Return assumes the projects’ cash flows are invested again at the IRR, the Modified Internal Rate of Returns assumes that positive cash flows are invested again at the cost of capital for the organization and the firm’s financial cost finances the initial outlays. Therefore, MIRR is a more accurate measure that reflects the costs and profitability of an organization’s project (Capital, 2012).

One of the advantages of this method is that it tells whether an investment increases the value of the firm. This is important for organizations to focus on the weaknesses of its investments. MIRR considers all cash flows in the project and puts in consideration the money time value. Just like other methods of budgeting, MIRR considers the future cash flows riskiness through the capital cost in the rule of decision. The Modified internal rate of return cannot be used for ranking order projects with different sizes. This is because a project with a larger modified internal rate of return may have a lower present value and vice versa. However, there are some variants, which exist for the modified internal rate of return that can be used to compare such projects (Research and Library Services:Northern Ireland Assembly, 2010).

One of the drawbacks of the Modified Internal rate of returns is that it requires the cost of capital estimates in order to make a decision. This may not be practical in an organization. The method may also not give the value maximizing decision when comparing projects, which are mutually exclusive. Lastly, the method may not give a decision when used to select projects in case of capital rationing.

Discounted Payback Period (DPP)

Discounted Payback Period is a procedure for determining the profitability of a project in a certain organization. In comparison to NPV analysis, which gives the project’s overall value, a discounted payback period indicates the length of time in years an organization would take to break even from the initial expenditure undertaken. Future cash flows are assumed to be discounted to time zero. This method has many similarities to payback period. However, the payback period is a measure of how long the initial cash flow would take to be paid back without taking into account the money time value. Discounted payback period is the time taken for the cash flows present value to recover the initial investment (Rogers, 2011).

This method is important since it puts into consideration the time value of money. Also discounted payback period considers the riskiness of cash flows of organization’s projects through the cost of capital employed. However,  there are no concrete criteria of making a decision which would indicate whether the investments increases the value of the firm. This means that the firm cannot identify the projects which adds value to the organization and might end up funding all projects including the dormant ones. The method also requires the capital costs to make payback calculations, which may not be available. Discounted Payback Period method ignores the cash flows that are beyond the payback period (Dra, 2013).

Projects with a negative net present value will lack a discounted payback period because the initial outlay will never be repaid fully. This is unlike the payback period the inflow from future cash flows could exceed the initial outflow. However, when inflows are discounted, a negative NPV is recorded.

Conclusion

NPV is a better and popular theoretical approach to capital budgeting based on several factors. Most important is that the Net Present Value use assumed that any cash flows that are intermediate generated by an investment are reinvested at the cost of capital for the firm. Due to the reasonable estimate of the cost of capital, at which the firm could invest its cash inflows, the use of NPV becomes a more realistic and conservative reinvestment rate in the preferred theory. In addition, certain properties of mathematics may cause a project with zero conventional cash inflow to have more than one IRR. The NPV approach does not have this problem (Capital, 2012).

References

Capital. (2012). Comparing Budgeting, 1-50.

Dra, P. P. (2013). budgetary methods. Advantage and disadvantages of, 1-2.

Economic Feasibility Studies . (2010). Capital Budgeting Techniques . Capital Budgeting Techniques , 1-8.

Mary, s. m. (2011). worklife resource ministry. budgeting methods, 1-3.

Research and Library Services:Northern Ireland Assembly. (2010). Research and Library Services. Northern Ireland Assembly, Research and Library Service, 1-30.

Rogers, M. (2011). Comparing Budgeting. Comparing Budgeting, 1-7.

Volkman, D. A. (2012). Journal Of Financial And Strategic Decisions. A Consistent Yield-Based Capital Budgeting Method, 1-88.

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Business Strategy BT

Development Strategy for Business Resilience and Sustainability through an Incremental Strategy – A Study of British Telecom

This report discusses the comparative analysis of three strategies namely incremental, renovate and inventive within the context of the internal as well as the external environment of a company such as BT (British Telecommunications Limited) which is a multinational telecommunications services company headquartered in London. It also evaluates a change management programme that can bring about strategic change within this organisation. BT has a global services as well as a retail division. Its operations span 170 countries throughout the world.

Company’s Internal and External Environment and Its Strategy Type

In the current business scenario, intense competition, integration across global markets, changes in technology and the advancement of the telecommunications sector are some of the external factors that influence the change management program of BT. the Company’s managerial talent and the level of the motivation of its workforce are some of the internal factors influencing strategic management. In order to improve the effectiveness of the organisation, strategy is the key because it leverages the capabilities of the individuals and the institution in a cohesive manner. The ideal development strategy for a company like BT that seeks business resilience and sustainability throughout its line of operations is an incremental approach.

Strategic Capabilities

Incremental strategies are effective within the current dynamic environment. Regulatory convergence is a key factor in the selection of incremental strategy for handling change and sustaining profits. The challenges of global competition have to be seen within the broader regulatory framework for effective strategic management. The incremental approach to strategic management is in response to the complex and ever changing corporate environment. Consequently, the strategic process moved in an incremental manner adapting to changes in the internal and external environment of the company. Decisions will then be driven by multiple goals. BT has low levels of business resources with respect to its telecommunications services though it is steadily expanding in the field of broadband communications. BT has reported a fall in sales though it experienced a healthy profit in 2013. Moderate or high business resources imply greater strategic capabilities which enable the company to excel using innovation or denotative strategic management. Annual pre-tax profits of BT were up by more than 40% but sales fell by 4%.

Business Strategy BT Competitive Analysis

The major feature of the incremental strategy is that it is decentralised and it responds to dynamic environmental challenges. BT is facing a changing socioeconomic milieu wherein the incremental approach accounts for this variable. An incremental strategy enables the organisation to fulfil its mission by closing the divide between long as well as short term goals within a changing environment. Organisational design followed a contingency approach since landmark research was conducted by Emery and Trist (1965) as well as Lawrence and Lorsch (1967). When a company faces a challenging environment, incremental strategy is far better than inventive or renovate strategies on account of the challenging environment faced by the company. As a British MNC which has to face global competition, BT should opt for an incremental strategy to boost its prospects and sales.  The degree to which the environment of a company is globalised also influences its development strategy. Porter has proposed the five force model for analyses of competition presented below:

Porters 5 Force Model
Porters 5 Force Model

Figure 1: Porter’s 5 Force Model from Michael Porter, “Competitive Strategies”

Porter’s model elucidates how competition from different sources can create industry rivalry. Competitive analyses in the context of an incremental strategy is suitable for organisations such as BT which want to cope with competition from different sources, as discussed in Porter’s model.

Business Strategy BT Competitive Advantage

BT needs to consider the complete gamut of competitors through an incremental approach to change management. Porter (1980) has argued that organisations should consider the behaviour of firms that are producing same/similar products as well as the action of suppliers, competitors producing substitute products and the customers themselves. An incremental strategy enables companies such as BT to develop a holistic view of the market to promote business resilience and boost profits. Competitive advantage has been discussed through a model proposed by Porter discussed below:

Porters Generic Strategies Model
Porters Generic Strategies Model

Figure 2: Porter’s Generic Strategies Model (Porter, 1980)

Ansoff (1985) has discussed how companies should also develop the strategy keeping in mind the flow of critical resources for production. They should also consider how they will impact non-market actors. Nonmarket actors or strategic interest groups also have an important role to play in influencing the development strategy of a firm. BT should follow a cost leadership strategy for low cost rather than aiming for product uniqueness as there are many rivals offering advanced services in this sector.

Culture

The culture of an organisation also plays a key role in influencing the strategy it adopts. The company’s abilities revolve around the resource, skills and procedures as well as its competencies. Attitudes and other cognitive factors reflect an organisation’s culture. The work culture at BT is unique. It focuses on completion of projects and garnering of crucial contracts. The organisational culture of a company influences its success in current times. BT needs to follow an incremental strategy whereby it adapts to changing global and domestic environment so that it can keep up with its competitors. The choice of a strategic management approach is based on several critical considerations such as an organisation’s strategic capabilities, competitive analyses, competitive advantage and culture.

An organisation must have a strategy that can meet the challenges of its internal or external environment (Ashby, 1961). Therefore, an incremental strategy would be ideal for enhancing the sustainability of business practices and the resilience of British Telecom. Consider the personnel, structure, systems and financial resources to be important factors in any strategy for change management. An incremental strategy follows a contingency approach which is ideal for British Telecom.

The organisation’s culture as reflected by collective values, experiences and beliefs of its members also has a critical role to play in its success. An incremental strategy for development and change management incorporates this effectively, making it the viable and effective choice for BT which has skilled employees. An incremental strategy is ideal for bringing about small but important changes in the organisational functioning compared to inventive or renovate strategies which focus on large scale change.

In order to possess business resilience and sustainability in its operations, BT needs to follow an incremental strategy to bolster its current organisational culture. Companies need to be proactive to cope with changes such as economic slowdowns, increased global competition and massive amount of technological advancement. BT would do well to adopt an incremental, contingency oriented approach to strategic management to cope with this.

Critical Evaluation of the Incremental Strategy

Incremental strategy is ideal for British Telecom.  An incremental strategy enables the company to have flexibility in coping with uncertainties in the field of policy regulation and governance.

People

There is a need to bargain with stakeholders and integrate human and organisational capabilities to catapult the company to the path of success. Renovate and innovative strategies can only be effective in environments where there are less regulation uncertainties (Lindblom, 1979). Each of the different resources within a company plays a critical role in its success. Through an incremental approach, British Telecom can impact its employees in a positive way. By instilling coping skills and out of the box thinking to manage dynamic and changing situations, BT can boost its profits.

Employees also differ in terms of their personal knowledge, perception, limitations, and it is due to this inherent complexity that incremental strategy can be the perfect tool for change. Diversity is one of the chief features of the workforce at BT. Therefore; development strategies followed here should take advantage of this versatility. Incremental approaches to strategic management can accomplish this.  Top managers within the same company can approach the same problem with different solutions (Bower & Doz, 1979).

Operations

Operations system provides guidance regarding how work procedures must be carried on and provides the framework for performing the work People are the key resources of any company. They are the prime assets which spur the growth and development of the organisation. Operations are a key area where rapid changes have to be kept pace with. The internal as well as external stakeholders also play a central role in the company’s success (Lindblom, 1959; Mintzberg, 1919). Balancing the goals and interests of stakeholders is the key to organisational success (Ansoff, 1985). BT should adopt an incremental strategy to improve operations.

Finance

Financial resources are necessary to accomplish goals and provide rewards. Money is one of the primary motivators for obtaining optimal performance from employees in the work setting. Annual pre-tax profits were up 42% to £2.4bn, last year for BT while sales were down 4%. An incremental strategy is ideal for a company such as BT which has ample financial resources.

Technology

Technology sets the stage for the company to maximise its capabilities if it keeps pace with it. Effective utilisation of resources is a must if a company has to progress and make healthy profits. An organisation’s culture is maintained and transmitted by its workers. Leaders of internal stakeholder groups are the key assets to instil positive change within an organisation. For companies such as BT that are facing moderate to heavy environmental turbulence, an incremental strategy for strategic management is needed (Mintzberg, 1973).

Several comprehensive reviews have been conducted by leading researchers in the field of strategic management (Hofer, 1976; Vancil, 1976; Armstrong, 1982). Research has found that degree of formality centralisation, hierarchical structure and comprehensiveness of any company is influenced by its environment, and complexity (Armstong, 1982, Hofer, 1976). In current scenario, an incremental strategy is optimal for BT.

Change Management Programme

A change management programme for British Telecom must incorporate an incremental approach. This is because its external and internal environment is more suited to an approach that makes allowances for sudden and rapid changes. Whether it is people, financial aspects, technological advancements or  organisational culture, all aspects of an organisation’s functioning need to be taken into account for effective change management. A conventional approach towards change management will not be successful. In 1995, John Kotter published his landmark paper “Leading Change: Why Transformation Efforts Fail”. This paper cited how only 30% of change programs are successful.

The biggest advantages of a change management programme for British Telecom through an incremental strategy is that it will make allowances for the rapid changes in technology and competition that are taking place in the Indian telecommunications sector. Colin Price and Emily Lawson (2003) suggested that the conditions which must be met for employees within an organisation to embrace change include their agreement to the change, effective role modelling for inculcation of change oriented behaviours, and reinforcement systems that encourage the behaviour and the skills required for change. The structures, systems, processes and incentives within a change management program should be conducive towards a positive transformation of the company into a reliable and sustainable business.

An incremental approach to strategic management can bring about this transformation for British Telecom. But change management processes should have an appeal for employees. Businesses that want to do more than survive have to remodel themselves to match up to competitors. Change management programmes have incorporated various methods such as total quality management, rightsizing, restructuring, cultural change and turnarounds in a bid to improve their profit margins. British Telecom needs to follow a change programme that pursues innovation in a way that is flexible and keeps in line with the incremental strategy of adapting to changes. Too many companies fail to progress beyond a certain point when it comes to garnering market share because they do not anticipate change due to factors such as advances in technology and industrial competition. Even a change management programme based on the incremental approach can have a few pitfalls though. Anticipating change is not easy. Many times, market analysts may be predicting a trend which is short-lived. Kotter’s 10 year study of more than 100 companies found unsuccessful change management programmes failed to generate the urgency or formulate a vision that could be communicated well to bring about a complete transition.

Companies need to be practical and realistic in their aspirations. Only then can change management programmes succeed in a complete sense. Obstacles to the change management programme suggested in this paper include rapid changes in the regulatory framework, unforeseen innovations and advancements in the field of technology and lack of market foresight. Genuine transformations require game changing ideas which can bring about creative solutions to problems. A change management programme based on an incremental strategy can only succeed if company personnel have the objectivity to view successes and failures in accurate ways.

References

Armstrong, 1. S. (1982). The value of formal planning for strategic decisions: Review of empirical research, Strategic Management Journal, 3: 191-21 1.

Barnard, C. I. (1938). The Functions of the Executive, Cambridge, Massachusetts:  Harvard University Press

Baumol, W. (1968). Entrepreneurship in economic theory, American Economic Review, 581 64-72.

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach, Boston: Pitman.

Hofer, C. W. (1975). Toward a contingency theory of business strategy, Academy of Management Journal, l8: 784-810.

Hofer, C. W. (1976). Research on strategic planning: A survey of past studies and suggestions for future efforts, Journal of Economics and Business, 28: 261-286.

Isern, Joseph and Pung, Caroline, “Organizing for successful change management: A McKinsey global survey”, 4.The McKinsey Quarterly, June 2006.

Kotter, John, “Leading Change: Why Transformation Efforts Fail”, Harvard Business Review, March–April 1995, p 1.

Jensen, M. C., and Meckling, W. H, (1976). Theory of the firm: Managerial behavior, agency, costs and ownership structure, Journal of Financial Economics, 3:305-360.

Lawrence, P. R., and Lorsch, J. W. (1967}. Organization and Environment: Managing Differentiation and Integration, Graduate School of Business Administration, Harvard University, Boston.

Lorsch, J. W. (1986). Managing culture: The invisible barrier to strategic change, California Management Review, 23: 95-109.

Mintzberg, H. (1973). Strategy making in three modes, California Management Review, I6: 44-53.

Mintzberg, H. (1977). Policy as a field of management theory, Academy of Management Review, 2: 88-103.

Mintzberg, H. (1978). Patterns in strategy formation, Management Science, 24: 934-948.

Mintzberg, H. (1979). The Structuring of Organizations, Englewood Cliffs, New Jersey: Prentice-Hall.

Mintzberg, H. (1987). Crafting strategy, Harvard Business Review, 65: 66-75.

Mintzberg, H., and Walters, J. A. (1985). Of strategies, deliberate and emergent, Strategic Management Journal, 6: 25?-272.

Pettigrew, A. M. (1977). Strategy formation as a political process, International Studies on Management and Organization, 7: 78-87.

Price, Colin and Lawson, Emily, “The Psychology of Change Management,”7.The McKinsey Quarterly, 2003, Number 2, Special Edition: Organization.

Schumpeter, J. A. (1934). The Theory of Economic Development, Cambridge, Massachusetts: Harvard University Press.

Vancil, R. F. (l 9? 6}. Strategy formulations in complex organizations, Sloan Management Review, I7: 1—13.

Quinn, J. B. (1977). Strategic goals: Process and politics, Sloan Management Review, 18:21-27.

Williamson, 0. E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications, New York: Free Press.

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Brand Loyalty Customer Behavior

How does Brand Loyalty Influence Customer Behavior?

The rise in living standards, ease of accessibility to finance coupled with a wide variety to choose from has made consumer durable market to grow with a rapid rate. Many players are getting into the market. With the advances in communication and technology, new lifestyles and the quest to appear young and beautiful, the demand for quality beauty products has increased significantly. Consumer quality sector is characterized by the emergence of exchange offers, discounts and intensive competition. People nowadays want to imitate in regards to dressing, language, and politics among other lifestyle aspects. The increasing population is bombarded with information about maintaining a youthful look, making women seek for cosmetics that suit them.  With this knowledge in mind, beauty manufacturing product companies make every effort to brand them to capture the booming market. Companies are competing on the basis of firm grasp of the local and international market, their well acknowledged brands and hold over wide distribution network. The penetration level of consumer products remains high.

This research is scoped down to understand the relationship between consumer behavior and brand loyalty, factors affecting consumer decision making, the role of brand loyalty in consumer durable goods and the position of the individual consumer in the segment. The path forward will be to study the secondary data for industry overview, collect primary data for more insight and  derive conclusions based on primary and secondary data. The research findings will be addressed based on the theories of consumer buying behavior and brand loyalty.

Organizations must engage in making strategic decisions that are capable of improving the firms’ image so that they can have an advantage over competitors. To be specific, these image enhancing strategies ensure that the organization increase the loyalty of the current customers. In addition, the image enhancing strategies should help in the attraction of new customers to the organization. Strategic decisions that can bring enhanced image to the organization have included the selection of target markets, and modification of products to suit the demands of the customers. Other strategic decisions on prices, location of products and services, promotional efforts, and operating policies help in improving the organizations’ image.

The implementation of these strategies ensures that there is a solid background for effective image in the organization. An organization’s image ensures that if there is something about it that is not known, the knowledge the customers have on the organization fills the void. The main concern of this research is to determine whether the perception about the brand image affects customer behavior.

Research Objectives

The interest of the research is to determine if brand loyalty influences consumer behavior. This study would be of value to those organizations concerned about the society and those concerned with the attaining off the highest possible profit. Further, the study aims to find if consumers have positive attitudes for those organizations that improve their brand loyalty and social responsibility.

Specific research objectives include:

  1. To find the relationship between consumer behavior and brand loyalty.
  2. To find out whether consumer behavior leads to change in the brand image quality, for instance, product quality or service quality.
  3. The influence of customer satisfaction on the brand’s image
  4. Does consumer behavior affect brand image?
  5. Does consumer behavior lead to change in the brand image quality?
  6. Does customer satisfaction affect brand image?

Literature Review

The main focus of this study is to measure the attitudes of customers in relation to brand loyalty and to ascertain its influence of this attitude on brand loyalty. Study of attitudes enables organization managers to answer questions as to why a consumer purchased one product over another. The understanding of the consumer attitude towards particular products ensures that they come up with strategies and decisions on major products and market decisions.

The image associated with a particular product or service ensures that it has a competitive advantage over other products and services. A company’s brand is valuable strategic asset in achieving goals and objectives. Brand loyalty can be referred to as the consumer decision; whether conscious or unconscious concerning the use of a product or service. It may also refer to the intention to buy or use a particular product for a long duration of time. Brand loyalty is achieved due to the right features, and the quality of the brand. Quality of the product must be at the right price for the consumer to perceive the brand as being loyal to their needs. Organizations can change consumer behavior concerning a particular product or service through advertising. Advertising ensures that consumers acquire new habits, and instill those habits by telling the consumers how the product is of value to their money. Consumers should also be encouraged to continue using the products and services in the future (Hoyer and Maclnnis, 2008, p. 27).

According to Pride and Ferrel (2008, p.123), the main reason why organizations do not have strong brand loyalty is because they are not familiar with various ways of disseminating a strong and clear message that distinguishes their product with that of the competitor. In addition, the message should distinguish the product in a positive and memorable manner. The major challenge of organizations is to avoid the disadvantages of portraying a particular product or service as having negative image. An organization’s image should not be viewed in terms of the product and service attributes; the organization’s philosophies concerning environmental management, philanthropy, and ethical considerations are critical in influencing consumer behavior.

Societal Conscious Marketing

Most organizations have adopted marketing strategies that focus on societal needs. Each of these strategies is philosophical or operational concepts used by organizational leaders to enhance the objectives of their businesses. The following are some of the concepts widely used in organizations (Phillips, 2010, p. 45).

  1. Product concept: products should be produced in large volumes since all of it can be sold to the consumers
  2. Selling concept; products can only be consumed if they are heavily promoted
  3. Product concept; consumers will buy high quality products that are within their price range
  4. Marketing concept: specific customer demands can only be met if organization produces products that are equal or better than those of the competitor. In addition, the products should be priced lower than the competitor.
  5. Societal marketing concept: This term involves marketing in a manner that does not harm the society, people, and the environment. Societal marketing concept is motivated by the need to satisfy direct customers and other constituents in the market.

Brand loyalty can be exercised in several ways. The main activities that organizations can do to improve brand loyalty include environmental friendly activities, philanthropy, ethical activities with local, national, and international communities, customers, and employees. Environmentally friendly activities can include recycling, waste reduction, and other strategies aimed at minimizing the organization’s impact on the environment. Philanthropic activities include engaging donations of money, food, facilities, and time. These activities are classified under the title known as cause related marketing (Kahren, 2009, p.36).

Brand Loyalty
Brand Loyalty

According to Dutton (1997), organizations have been turning philanthropy activities inward towards their employees. This is done through paying them in order to volunteer for their favorite charities. She asserts that words like “ethics’, honesty, truth and trust are good sentiments. She, however, notes that they mean nothing if they are not adopted by organizations. Ethical activities include using different hiring practices and employee relations such as high moral values, fair pay, equal treatment, and equal opportunity for all workers. Organizations that do not treat workers fairly have the risk of lowering their brand image. Brand image should start with internal operations; there is no point of trying to show the external clients that business ethics are good while simultaneously engaging in unethical activities towards the employees. Employees play an important role in advertising the organization to outside clients more than any other marketing strategy.

The question of how brand loyalty affects product evaluation was examined by Brown and Dacin (1997). Their study looked into the differences between the impact of organization brand loyalty which include the organization’s ability to produce and deliver quality products and services and the corporate social responsibility’s impacts on consumers. In their first research, students analyzed their hypothetical scenarios. The outcome was that brand loyalty had a significant effect on the way consumers evaluated the product attributes and the overall image of the organization. Further, the authors found out that social responsibility had no direct impact on the organization’s image. Their second study found out that social responsibility became significant predictor of product loyalty in the consumers and its evaluation.

According to Kim (1996) product demand is determined by non-product factors such as cleanliness, public relations, atmosphere, advertising and the convenience of the brands’ locations. In any organization, quality of products can be determined according to the consumer attitude towards the product with other products available to the consumer in the market.

“Perceived quality is different from objective or actual quality, a higher level abstraction rather than a specific attribute of a product, a global assessment that in some case resembles attitude, and a judgment usually made within a consumer’s evoked set” (Zeithaml, 1988, p.4).

Zeitmal further assert that few consumers are able to analyze and measure the objective properties of a product. This is because the objective assessment depends on the verifiable standards, the objective measurement can be questioned because it depends on who set the standards.

Theoretical framework

The A Priori Approach

According to Lunn (2011), the theory introduces theories and concepts from other disciplines including behavioral sciences. The value of behavioral sciences has been used in consumer knowing what the consumer wants. Well known examples are included in the manifestations of motivational research and such attitude theories as those of Festinger and Fishbein. The A Priori approach involves giving the consumer an all embracing label such as “economic man”, “problem solver”, “learner”, and “existentialist”. The strength of the a priori lies in the organization and the systematic basis of knowledge provided about certain aspects of the consumer.

Brand Loyalty Theory

According to Katz (1960), Brand loyalty theory has three distinct dimensions. The first dimension is referred to as emotive tendency towards products and services. The emotive tendency refers to the consumer likes and dislikes which is manifested on how they purchase a particular brand in the market. The second dimension is known as evaluative tendency towards products and services. Katz refers to this tendency as positively biased evaluation of a product or service. Organizations use positive characteristics to define brand utili6ty to the customers. The evaluative tendency of the product or service can also be determined from past experience in using the brand.

Behavioral tendency towards the brand is the next dimension. Katz (1960) refers to the behavior tendency as the biased responses consumers have towards a particular product or service regarding its procurement, purchase and consumption characteristics. Consumer characteristics such as shopping, paying for the product, as well as its consumption determine the behavior tendency. Behavior tendency is developed after using the product for a long period of time. In addition, behavior tendency can be developed from good or bad tendencies toward other brands.

Black Box Theory of Behaviorism

Sandhusen (2000) assert that the black box model is an interaction of several perspectives concerning a specific brand. The perspectives include the stimuli, consumer characteristics, choice patterns and consumer responses. The focus of the organization is not in the internal processes within the customer: the organization focuses on the relation between stimuli and response of the customer. Stimuli are related to the marketing characteristics developed by an organization in order to lure the customer in purchasing of the brand. The environmental stimuli are determined by social factors such as politics, economy and the culture in which the brand is to be used. The black box symbolizes the buyer characteristics and their choice patterns, which determine their response towards a particular brand.

Hypothesis

This research focuses on the various factors that influence consumers’ brand loyalty towards a given brand. From the various factors that influence brand loyalty, below are the hypothesis derived.

H1: There is a positive correlation between brand loyalty product and brand name

H2: There is a positive correlation between brand loyalty and product quality.

H3: There is a positive significant relationship between brand loyalty and product design

H4: There is a positive significant relationship between brand loyalty and product price.

H5: There is a positive correlation between brand loyalty and promotion.

H6: There is a significant correlation between service quality and brand loyalty.

H7: There is a positive significant relationship between store environment and brand loyalty.

Research Methodology

The main objective of this research was to establish how brand loyalty influences cosmetics buying behavior of UK female consumers. This section also highlights the various processes undertaken in obtaining and analyzing the information gathered for this research. This includes a description of the research design and methods used in collecting the data that were analyzed to arrive at a conclusion in the study.

Research philosophy

Based on the nature and the topic to be studied, this research will be conducted on positivist philosophy. It will be based on this philosophy because the research will involve testing of hypothesis developed from deductive theory, involving measurement of observable social realities.

Approach

This research will be conducted on deductive approach based on hypothesis testing from the data collected. Data will then be analyzed to either confirm or disapprove the hypothesis.

Data Collection Methods

Data collection will consist of surveys, filling in questionnaires and conducting interviews with cosmetic consumers and dealers in London, UK. Qualitative evaluation shall be employed in this research besides using subjective techniques such as interviews and observations to gather relevant and substantive data. Quantitative approach is preferred for this research due to the varying experiences of the consumers of these products. Upon collecting data using interviews and questionnaires, the data will then be carefully analyzed. This shall be carried out using both the One-way ANOVA and the Pearson’s guideline to establish how brand loyalty influences consumer behavior with respect to cosmetic consumption in UK.

Questionnaire Design

In this research, a questionnaire was developed, and pilot tested through personal interviews with seven senior-most managers at Superdrug, which is the second largest health and beauty retail shop in UK. The questionnaire used for collecting data was divided into two segments: the first section concerns the demographics of consumers and the second were about brand loyalty factors. This research involved sampling randomly 400 female cosmetic consumer of between 18 to 42 years of age. In order to obtain a reliable data, the survey was distributed in London City at five major cosmetic shops. The malls included L’Occitane, Jo Malone, Floris London, Boots and Screenface, in addition to Superdrug retail shop.  A total of 400 usable questionnaires were then returned and collected 60% response rate.

Table 1 reveals that age composition of those aged between 18-25 years were 25% of the respondents. Yet again, the table reveals that close to half of the respondents ages varied between 27-35 years. About 26% of the respondents were between the ages of 36-42. The sample survey was almost balanced at 51% for the married and 49% for the unmarried. With regard to education level, the surveyed respondent revealed that 72% of the respondent had at least a degree and 18% having completed high school. This implies that only 10% of the respondents had postgraduate degrees.

Data Analysis

This research used the One-way ANOVA to establish whether there is any significant correlation between independent variables (product quality, brand name, design, price, service quality, promotion, and store environment) and age and income the consumers interviewed. The main reason for adopting the One-way ANOVA as the most appropriate tool is that it was found to be the best for testing the hypothesis when at least two groups are measured on an interval scale. The purpose of the One-way ANOVA is to show the degree of variability of the sample values taken by considering to what extent the observation within each group differs and how much the group means differ.  Apart from the One –Way ANOVA, the researchers also found it appropriate to use the Pearson Correlation for purposes of analyzing the relationship between the two variables, which are both ratio and interval-scaled. This is based on the fact that the correlation coefficients determined using the Pearson’s guideline is used to establish the degree and direction of the correlation, which is suitable for hypothesis testing. In this regard, the research used Pearson correlation principle to test the independent variables (product quality, brand name, price, promotion, design, store environment and service quality) that influenced consumer brand loyalty and to establish if there is any correlation between the variables.

Results

Table 2 below shows the Cronbach’s Alpha (coefficient alpha) of each of the variables tested.  The findings reveal that all the variables have a high degree of reliability. Table 3, on the other hand, shows the seven autonomous variable factors of brand loyalty that were experimented during the research through questionnaires given out to the respondents. The results were also ranked using the Likert scale in the questionnaire: strongly disagree, disagree, neutral, agree and strongly agree. The result is then gotten from the uppermost average score of brand loyalty factors based on the answers provident by the respondents. In overall, the result reveals that product quality is the most vital factor. In UK environment, most respondents choose product quality as the core aspect that influences their brand loyalty.

The One-way ANOVA scrutiny of the factors of income level and brand loyalty was conducted. This was meant to establish if there could be any significant relationship between the two variables. Here, there are four variables that are most significant according to the study, which include brand name (0.000) promotion (0.004), product quality (0.009) and service quality (0.038). In overall, the result shows that, in UK, majority of the consumers prefer brand name, promotion, and product and service quality as factors of brand loyalty. According to table five below, only two variables that are significant. These are price (0.014) and the brand name (0.050). An analysis of this data reveals that, among the age groups surveyed, female consumers aged between 36-42 prefer brand names more compare to other age groups.

Test of Hypothesis

As revealed in Table 4 below, brand name was found to have considerable positive relationship with brand loyalty. The results of this research revealed that consumers preferred brand image only when they foresee positive functions or benefits from the product in question. It is then that they will recommend the brand, react positively to the price premium and accept brand extension to other categories of products within the same brand.

The quality of the products was shown to have a positive correlation with brand loyalty. This kind of correlation is demonstrated based on Cohen’s (1988) principle, in which a correlation of (r=0.0302) is considered moderate. Therefore, based on these statistics, the finding showed that product quality has a lot of significance with regard to consumer decision-making process. The findings of this research revealed that brand loyalty and price had a positive relationship. In this case, price was found to be more important for any average consumer in the market. Nevertheless, those consumers with high brand loyalty were not very much sensitive to prices. The research showed that as long as these consumers were satisfied with a given brand, they would continue buying the product with the same brand irrespective of the price increase.  On the other hand, the findings did not show any correlation between product design and brand loyalty. Out of all the seven variables tested, many consumers did not consider product design as an important factor for UK consumers to become loyal to a given cosmetic brand.

According to the findings, promotion and brand loyalty were found to have a positive relationship. Product promotion was considered as one of the most valuable factor in determining a consumer’s brand loyalty. This includes the use of sales promotions, commercial adverts, personal and public selling. In fact, the research revealed that many female consumers spent considerable time reading product labels before purchasing the product. The research also revealed that brand loyalty and service quality had a positive relationship. Findings showed that service quality encouraged many consumers to prioritize a store. The result indicated that salesperson consumer relationship results in long-term orientation of customers towards a given store. Similarly, trust developed in the salesperson seems to relate to the overall discernment of the store’s service quality, which leads to customer’s total satisfaction with the store.

The findings also showed that the environment of the store is also positively related to brand loyalty. The store environment is seen as major factors that influence consumer brand loyalty. This research revealed that many consumers were much sensitive to attributes of the store such as a variety of selection, merchandise displays, packing space, and ease of accessibility to vehicles and the overall goodwill of the store in buying products.

Table 1. Demographic Sample Description

Frequency Percentage (%)
Age18-2527-3536-42 100196104 254926
Marital statusMarriedUnmarried 204196 5149
Education:High SchoolUndergraduatePostgraduate 7228840 187210

Table 2. Reliability Analysis of Brand Loyalty factors

Variables Alpha
Product QualityBrand namePricePromotion

Design

Service Quality

Store Environment

Brand Loyalty

0.65720.70280.66180.6974

0.7482

0.8200

0.7139

0.6646

Table 3. Brand Loyalty factor Ranking

Factor of Brand Loyalty

Ranking Mean/Average
Product Quality 1 3.68
Q1. The brand is durable than others 3.69
Q2. The materials used by the brand are natural 4.11
Q3. The brand has sufficient color 3.65
Q4. The brand has good functional quality 3.77
Mean Average 3.80
Design   2
Q1. The brand provides wide variety of designs 3.72
Q2. Designs of the brand are suitable for me 3.79
Q3. Designs of the brand have distinctive features 3.73
Q4. Designs of the brand are trendy and fashionable 3.85
Mean Average 3.77
Brand Name                                       3
Q1. The brand is trustworthy 3.70
Q2. Brand image and name attract me to buy 3.82
Q3. Brand Name is selected irrespective of price 3.41
Q4. Brand reveals my individual personality 3.96
Mean Average 3.72
Promotion               4
Q1 Ads of the brand is attractive 3.64
Q2. Ads of the brand attract me towards purchasing the product 3.44
Q3. Product displays are entrancing 3.62
Mean Average 3.56
Store Environment                                5
Q1. The brand has good store location 3.64
Q2. There are adequate outlets for the brand 3.76
Q3. The interior show is gorgeous 3.50
Q4. Music and color inside the store are beautiful 3.36
Mean Average 3.57
Price        6
Q1. Increases of price not hinder me to purchase 2.99
Q2. The brand provides goods value for money 3.52
Average Mean 3.56
Service Quality         7
Q1The salesmen in the store are knowledgeable 3.21
Q2. The salesmen in the store are willing to help 3.39
Q3. Vendor of the store is and courteous and friendly 3.18
Q4Vendors in the store have neat appearance 3.33

Mean Average 3.28

Table 4. Significance of Brand Loyalty factors with brand loyalty

Variables

Pearson Correlation Sig. (2-tailed)a
Product Quality

Brand name

Price

Promotion

Design

Service Quality

Store Environment

Brand Loyalty0.304

0.561

0.466

0.411

0.140

0.333

0.369

0.002

0.002

0.005

0.006

0.162

0.001

0.010

 

Conclusions and Findings

Various studies have focused on understanding the concept of brand loyalty and the factors influencing it. Product attributes, after sale service, marketing capabilities, perceived quality or aesthetics, depth of product line as the key differencing factors influencing the behavior of purchasers. Brand commitment is also a necessary condition for true brand loyalty to occur.  Packaging, new product trial, price, store location corporate social responsibility and advertisements influence consumer behavior. While several factors influencing brand loyalty have been studied in the extant literature, this research has revealed that brand loyalty influences consumer behavior. Consumers may also compel entrepreneurs to change the brand image in terms of product or service quality. Similarly, the brand image has been proven to satisfy the consumer expectations.

The dimensions of brand loyalty theory clearly depict how consumer’s tastes and preferences influence their buying power. This is followed by an assessment of the product to decide if they will buy it or not. The assessment also referred to as evaluative tendency compels organizations to brand their products to attract customers, an aspect of competition. Product branding can be enhanced by advertising, changing the brand name and promoting it to improve recognition.  The behavioral tendency proposed by Katz is creations of a bandwagon effect among consumers to enable them continue buying the product. The initial products are branded in a way of attracting customers though subsequent ones show depreciation, a strategy used by marketers.  Branding through advertisement show some favor of the product while despising others, thus discouraging customers from using those other products whether related or not. The black box model looks into the customers willingness created by the company’s emphasis of the product. The characteristics of the buyer determine their choice of product.

From this research, the brand name and image has a significant impact on customer choice with all factors kept constant. As part of consumer behavior, every brand has some features which consumers always associate the brand with. They consume a given brand on the basis of its features. Again, the consumers take into account the quality, and price while making buying decisions. The point of purchase is another factor that comes to a buyer’s mind. Being a highly demanded product by women, they want to buy cosmetics from a good reputed and trustworthy purchase point. Exhibition malls serves as favorite consumer purchase point.

Other factors like age, occupation and education of consumers will influence buying decisions following the way each group has been exposed about the product. Young people will have more taste of cosmetics because they want to look good while old ones are slightly less concerned with beauty. Exposure and knowledge of a product affects its demand. The raw materials making the brand also play a vital role of its choice. If a sample cosmetic is known to contain harmful chemicals, it loses its market. An organization will get to know what factors influence the purchase decision of a consumer before branding the product. Accordingly, it will direct its marketing effort so that it can get potential customers to purchase the products.

Subject Issues Learnt

Brand loyalty is the consumer’s conscious or unconscious choice that is expressed intentionally or a behavioral pattern to repurchase a brand again. This happens following the perception of the consumer that the brand provides the right image, characteristics or quality based on reasonable price. Hence, consumer behavior is habitual. Beginning from product design to creation of a mature brand, good marketing strategies, which depend on a clear understanding of the memory, motivation, learning and decision processes, influence the consumer’s choice. Launching of new products, market segmentation, timing market entry and brand management are all related to the theoretical framework employed in the research.  Branding is by far and large the most important factor influencing the product’s success or failure in the market place. It can also greatly impact the company’s perception by the buying public. Brand is not only a company’s product but also a representation of the individual company and that is where the core of brand loyalty falls.

Brand loyalty is simply more than the consumer’s commitment to repurchase a product. It incorporates the high attitude towards the product demonstrated by repeated buying.  This loyalty is a business investment because of the high prices being paid by the customers.  Depending upon the nature of the product versus basic necessities or luxuries, consumers a single or brand loyalty. This brand loyalty is affected by their brand choice as well as by their store loyalty behavior. The bondage of brand loyalty is strong especially through repeated advertising and promotional schemes. The main factors that influence brand loyalty are the quality of product, habit of use and regular availability of the product. Searching for a product means mental and physical information about products, prices and shops. Consumer information is thus a marketing tool that can be used to understand the interactions between a specific target segment and marketplace so as to meet the consumers’ needs and wants.

Brand image or the good reputation of a particular service ensures that it maintains a competitive advantage over other products and services. An organization’s brand is valuable strategic asset in achieving goals and objectives. Brand loyalty can be referred to as the consumer decision; whether conscious or unconscious concerning the use of a product or service. It may also refer to the intention to buy or use a particular product for a long duration of time. Brand loyalty is achieved due to the right features, and the quality of the brand. Quality of the product must be at the right price for the consumer to perceive the brand as being loyal to their needs. Organizations can change consumer behavior concerning a particular product or service through advertising.

The reasons why people become brand loyal are because the favored brand satisfies the consumer needs and wants than the competitors do. Again, there is a reduction of perceived risk, sticking with a favorite brand improves certainty. Brand loyalty helps maintain self image in reinforcing the customer’s self concept and confidence. It is also the path to least resistance. Marketers use strategies like in-store and o-location impulse triggers, notably point-of purchase displays.  Consumer innovativeness is the predisposition to buy new and different products rather than remain with the previous choices and consumption patterns.

Consumer behavior is influenced by social, cultural, Psychological and personal factors. Culture influences buying behavior depending on the country, geographical region, religion, nationality and racial groups. The societal classes such as wealth distribution, education and occupation impact the behavior of consumers towards a product. Social factors like family, reference groups, roles and statuses influence buyer behavior. Personal factors include lifestyle, economic situations, age, occupation, personality and self concept. Perception, motivation, learning, beliefs and attitudes are psychological factors affecting consumer behavior. Marketers should, therefore, look into these factors in branding particular products.

References

Brown, T. and Dacin, P., 1997. The Company And The Product: Corporate Associations And Consumer Product Responses. Journal Of Marketing, 61 (1), pp.68-84.

Dutton, G., 1997. Warming The Cold Heart Of Business, Management Review 86 (6), pp.17-20.

Hoyer, W. and Maclnnis, D., 2008. Consumer Behavior. New York: Cengage Learning.

Kahren, F., 2009. Brand Loyalty. Washington D. C: Whimsical Publications.

Katz, D.,1960. The Functional Approach To The Study Of Attitudes. New York; Public Opinion Quarterly.

Kim, H., 1996. Perceptual Mapping of Attributes and Preferences: An Empirical Examination of Hotel FandB Products in Korea. International Journal of Hospitality Management 15 (4), pp.373-391.

Lunn, J., 2011. Models Of Buyer Behavior: Consumer Decision Process Models. New York: Marketing Classics Press.

Phillips, C., 2010. Brand Loyalty. New York: Youwriteon.

Pride, W., and Ferrell, C., 2008. Marketing. New York: Cengage Learning.

Sandhusen, R., 2000. Marketing. London: Routledge.

Zeithmal, V.,  1988. Consumer Perceptions Of Price, Quality, And Value: A Means-End Model And Synthesis Of Evidence, Journal Of Marketing, July, pp2-22.

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Barrier Analysis

Barrier Analysis as a Safety Tool

Barrier Analysis is the technique used for identifying the harmful or hazardous effects associated with the harmful sources of energy. Barrier Analysis provides an equipment to study the unwanted flow of energy sources to the potential targets, people or objects, through the assessment of various barriers in order to prevent the dangerous energy flow.

Barrier analysis is an effective and efficient system safety tool used to identifying the risks associated with the defined sources of energy. The successively organized paradigm of this analysis provides reliable, rationally reasoned and independent findings about various hazards and barrier controls as compared to many other methods available for the analysis purpose.

Barrier analysis came into the picture to help experts analyze accidents and risks. Talking in general terms, the main use of a barrier is to prevent an action from happening or in other words provide a shield to the people that are a part of that environment, from the consequences. This report will highlight the relation between accidents and the barrier analysis by providing a technique to thoroughly search or investigate the accidents and safety programs. An accident can be described as the set of barriers that have failed, although the reason of failure will be mostly not included in the list of suspected causes. A barrier, in this respect, can be a hindrance, an obstruction or a hurdle that prevents an action to take place or reduces the impact of the harmful consequences. Barriers are important to be analyzed for understanding and prevention of accidents in two ways –

  • The fact that accident has occurred implies that one, or more, of the defined barriers failed. This can be either because they were dysfunctional (Polet, 2002) or they did not serve the purpose properly. The search of such barriers is therefore considered an important part in understand the cause of the accident
  • Once the anatomy of the accident has been analyzed and casual ways have been identified, the defined barriers can be used in order to prevent similar kinds of accidents that take place in the future. For this, the pattern needs to be determined.

Hence, the barrier analysis provides an effective way to consider the events that are related to the failure of a safety system (Livingston et al., 2001). However, it is not a system that is comprehensive enough to act as the sole safety analysis of the system as it may miss a few points due to system failures or human errors (Reason, 1992) while producing the results.

According to the Energy Theory or the Barrier Analysis, whenever there is a chance that the person or an object is approaching the energy flow or trying to come in contact with the environment state that can cause harm to the person or the object, it is required to isolate such environmental state or the energy flow.

As the Barrier Analysis technique is quite different from others, with a limit scope of analysis, it doesn’t fulfill all the requirements completely. But at the same time the technique is most often used to provide support to the system design hazard analysis type, preliminary design hazard analysis type or detailed design hazard analysis type. The technique is also known as the Energy Trace and Barrier Analysis or sometimes the Energy Trace Analysis.

Quite often it is seen that even if the source of energy is harmful, it cannot be removed from the system as it is an essential element of that designed system. Now here comes the role of barrier analysis. The purpose of the barrier analysis here is to identify these sources of energy and evaluate if the potential harms in the designed system can be considerably reduced with the use of relevant energy barriers. The analysis provides a simple tool to separate the energy source from the target to prevent it from the hazards. It acts as a powerful tool in the game of accident analysis and prevention. It should be known at the time of evaluation of the system that the undesirable source of energy coming from a single source is capable of affecting multiple targets. In such cases, there might be a requirement to use multiple barriers to save these multiple potential targets from dangers and provide them optimal safety.

Barrier Analysis Safety
Barrier Analysis Safety

The Barrier Analysis technique is executed by evaluating the source of energy, the energy flow paths that may be harmful for the system, and then identifying and creating the right barriers that must be placed in order to prevent the flow of energy from harming the person or the target equipment (here the target can be objects or people). In general, there are various types and ways of energy barriers that can be used in a designed system. The commonly known barriers are – procedural barrier, physical barrier or a time barrier. These barriers are created with a purpose to counteract the harmful effects of the energy paths in order to reduce the likelihood and severity of system/object damage or a personnel injury.

The type of analysis is generally used for all the types of systems with a goal that it is created to ensure consistent, effective, disciplined and efficient methods for the identification of hazards in the provided system. It is often used during the investigation of accidents in order to help understand the root cause of the incident and to study the damage conditions to ensure they do not occur in the future. The Barrier Analysis has fully devoted itself to overview the types of energy sources in the system, their attributes to understand if they are harmful; it is a tool to guide the discovery for the risks due to the energy sources that need more detailed analysis.

This tool is capable of fabricating detailed analysis report of risks in existing as well as new systems. By correctly and rationally identifying the energy flows into and out of the system, the Barrier analysis enables the growth of each of the sources of energy used in the system. A thorough knowledge and understanding of the sources of energy used in the system is important to get a clear picture of the complete system design and its behavior. The tool is pretty simple and easy to learn.

Barrier Analysis History

Although the concept was introduced more than 20 years ago, they have been only a few instances where the barrier concept was actually used. Haddon introduced the concept that the harmful effects of the flow of energy can be controlled by one of the provided barriers (Haddon, William Jr. 1973). The barriers can be listed as below:

  • Prevention of energy manufacturing or production
  • Reduction in the amount of energy like fuel storage, voltage
  • Preventing the release
  • Manipulating the rate of release, for example slow down the burning rate
  • Isolate in time or space, for example make the electric line go out of the reach
  • Strengthen the defined target, for example create earthquake proof buildings
  • Reorient persons and objects
  • Limit the extent of the damage caused, for example use of sprinklers

The barrier analysis is grounded on the concepts introduced by Haddon; these concepts were understood, adopted and improved by various other experts until the time this technique was used to give birth to a useful tool for the purpose of safety analysis.

Barrier Analysis Theory

The Barrier Analysis is based on the concept that when harmful and hazardous sources are present with in the environment, they act as a serious threat to certain targets. According to this theory, by placing effective barriers between these hazardous energy sources and the targets there is a chance to lessen the threat to these targets. In other words, when there is no isolation or a barrier between the source of energy and the target, it leads to disasters whereas placing a barrier between the energy flow and the target leads to a safe exit.  In situations where there is no barrier placed, effective safety requirement should be created to launch and implement effective barriers.

To understand the theory of barriers, there was work done on the barriers subject called Management Oversight and Risk Tree (MORT) programme. The MORT approach (Knox & Eicher, 1983) defines a method for a complete investigation of accidents as well as a method to analyze safety programmes. This MORT barrier analysis (Trost & Nertney, 1985) is capable of discriminating between safety barriers and control barriers. The difference between the two types of barriers is that the control barriers are related to the wanted energy flow path and the safety barriers are related to the unwanted energy flow paths.

MORT even offers distinguishing between various types of barriers like: physical barriers, warning devices, design of equipment, procedures, and skills. Hence, it provides a more detailed distinction as compared to that given by Svenson (1991) and Kecklund et al. (1996) into human, organizational and technical barriers.

The process that revolves around this tool called barrier analysis is a thorough analysis of the energy sources that are involved in the system and the possible effect these sources have on the attributes present in the environment; these attributes can be any equipment or any personnel. Experts mainly carry out the barrier analysis using a worksheet or some sort of a form to provide documentation, structure and nature of the analysis and the consistency. There is so specific format that is used by the experts as all that matters is the data contained in the worksheet.

Most of the times, the worksheets, that come with columns, are used to help maintain focus and structure in the analysis. The basic information that should be contained in these analysis worksheets should be as following:

  1. List of all the energy sources, present in the system, that provide a threat to the environment
  2. Targets that are a part of this system and are prone to damage, of any sort, from these energy sources
  3. Barriers, already in place, that are meant to control the energy sources to prevent targets from hazards
  4. Barriers, not there already, that should have been placed to control the energy risks
  5. Overall system risk for the energy sources – barrier risks.

While learning as a beginner to perform an analysis, following points should be considered in order to commit one or more problems:

  • Do not try to identify all the sources of energy present in the system
  • Do not evaluate the cascading outcome of the energy sources
  • Not understanding all the energy source paths
  • Not consider the entire system in one shot, rather take a narrow view of each of the energy paths.

Methodology

The main ingredients of an accident are: the energy flow that causes the harm, the people who are the victim of this harm caused due to energy flow, lack of the barriers of failure of barrier system that are created to keep the accidents apart and the events that lead to the final accident situation.  If all these mentioned ingredients are present in a place, accident has to happen; failure of one leads to prevention of accident.

Hence, the generic constituents of barrier analysis are the energy sources, the barriers and the targets. The forms the basis of the barrier analysis and each of these components must be clearly understood and inferred with reference to the context. The first step in the analysis is the identification of the energy sources. Once these sources have been found out, a problem analysis should be done to nail done the questions which help in understanding the hazardous elements in the design. Some of these questions can be like:

Have the hazardous sources of energy been identified?

What are the energy paths?

What are the potential targets?

What are the safety barriers?

Have the safety barriers been thoroughly identified?

The answers to these questions can be provided after acquiring the knowledge on the system design and its operation, knowledge on the system environmental variables and energy sources.  The analysis process studies and verifies the authenticity of the engineered and the administrative barriers. Here the created safety attributes are considered as the hard barriers and the administrative controls like warning signs, safety procedures and the controlling checks are termed as the soft barriers. As it is difficult to deal with the hard barriers as compared to the soft barriers, the hard barriers are preferred over the soft option. But it doesn’t mean that soft barriers are not used at all; these may be used in certain conditions. Barriers can be categorized under various heads based on their location, function or type.

Barrier analysis Process

The technique that was used in the analysis of Barrier concept was to identify various tasks around the energy sources and the steps taken to achieve the goal.

  1. Identifying the energy sources – in order to achieve this, it is required to study the system and identify all the possible harmful sources of energy. In this step, energy quantity and location should also be identified, whenever possible, to create the list of energy sources. To quote some examples, we have electromagnetic radiations, electricity, explosives and so on.
  2. Identification of energy paths – all the potential energy flow path leading to the target should be identified that can act as a harmful source of energy. Target can be any object, environment or people.
  3. Finding the multiple energy paths – there can be multiple energy flows, more than one dedicated energy flow, leading to the target that can cause a mishap. For an instance, electrical and mechanical functions of a fuse.
  4. Defining targets – for each of the existing energy source, study its flow from the starting point till the end to identify all the possible targets that are likely to be harmed by the harmful energy sources.
  5. Finding out the vulnerability of the defined targets – the vulnerability of the target should be identified. For an instance, faulty equipment might have very little impact on human but can damage another device say microprocessor.
  6. Identifying of the safety barriers – this is the most important step in taking safety measures. All the probable barriers in the energy path from an energy source to the target should be identified. Also, study the effectiveness of all such barriers, the impact of the sudden failure of these barriers, reliability of the existing ones.
  7. Evaluation of the system risk factor study the effect and the extent of harm caused to the target due to the energy flow, or multiple energy flows, to evaluate the risk factor. This analysis should be done with the potential barriers and without the barriers.
  8. Determine the corrective measures – analyze if the barriers provided are effective and adequate for safety of target, else recommend the barriers that should be provided to reduce the risk factor and ensure the safety of the target from the energy sources. Also determine if there is a need to analyze the situation using other techniques to understand completely all the hazards and factors leading to accidents
  9. Identify hazards – determine and track the hazards using a tracking tool
  10. Document all the steps involved in the analysis and the findings

Advantages and Disadvantages

Barrier Analysis has provided huge contribution towards analysis of various energy sources and as a tool in preventing hazards.

Advantages of Barrier Analysis

  • In accident investigation, the tool has proved to be very useful in providing unbiased details on what went wrong which includes not only the physical barrier failures but also the failures of administrative controls. It also provides a visibility on the absence of barriers that should have been in place to avoid the accident.
  • In the field of safety analysis, it offers a common point for humans reliability experts, designers, safety analysts, so that they can all focus on one common goal towards achieving the effectiveness and failure of predicted accidental steps.

Disadvantage of Barrier Analysis

The only drawback of this tool is that while doing a predictive analysis for future, they might assume more amenability with the barriers than actually tends to happen.

Examples

A useful example of how barrier analysis was used to save the target from the hazards:

At the French Cadarache nuclear power plant, barrier analysis was used to evaluate the events that led to the release of various water contaminants in the environment. Sequence of events can be described as mentioned below:

  • Somebody forgot to turn off the tap after using the water to rinse his/her eyes
  • After a certain amount of time, water overflowed from the basin and spilled into the tank used for storage.
  • Tank slowly got filled up but the overflow alarm of the storage tank failed to function
  • When the storage tank also overflowed, the low level radiation tank also overflowed but the alarm for this one also failed.
  • As a consequence, a great quantity of water spilled on the flour and flowed into the sump
  • The pump of the sump was unfortunately connected to the rainwater tank rather than the industrial waste tank so the contaminants flowed in the wrong place.

Analyzing the system for energy source path flows, the barriers and the target, it can be clearly seen that although there were two barriers provided in the system they both failed to function. The first step was the omission of an action, which led the energy source, water in this case, reaches the target. This seems to be a failure of a symbolic barrier that could have been the instructions for using the tap. Although there were no functional barriers involved in this step, use of one could have saved the target. To suggest one, a timer that automatically turns off the tap after a time could have done the task for us.

Although the next two steps involved functional barriers, both failed. These could have been replaced with alternative barriers like having difference types of fittings in the two tanks and so on.

Likewise, there are many other applications and examples that used the Barrier Analysis to study the sources, the barriers and the targets in the provided system to ensure use of effective barriers.

Summary

The report contains an overview of the Barrier concept as applied by various experts and researchers. The aim of the report is to have an understanding of how the Barrier Analysis can be used to understand the various elements of a system to evaluate the nature of the barrier that is used or should have been use. By identifying the energy sources flow and the target, evaluation of barrier can be studied.

The process can be considered as the comprehensive hazard analysis and its effect on the various element of the environment like the objects and the personnel. The analysis is very simple and can be easily used to find out various threats to the system especially the targets that are at the receiving end. Barrier Analysis provides a pictorial view that helps many analysts and researchers to visualize the risk factor involved in the system. Moreover it is pretty inexperience, which makes it excel over other tools. Barrier analysis has the capability to easily recognize most of the energy sources and their flow path; to quote examples it can recognize sources like electricity, compressed gas and so on.

This combined with the accident analysis can be very helpful in learning the pattern of the accident which happened either because of failure of the existing barrier or because of the missing barrier. The retrospective analysis can be used as an effective tool for the predictive use so that the target can be prevented from the hazards.

References

Livingston A D, Jackson G and Priestley K; “Root causes analysis: Literature review. HSE Health & Safety Executive”, 2001

Polet P “Modélisation des Franchissements de Barrières pour l’Analyse des Risques des Systèmes Homme-Machine. Ph.D. thesis presented at Université de Valenciennes et du Hainaut-Cambrésis”, 2002

Reason, J. T. (1992). The identification of latent organisational failures in complex systems. In J. A. Wise, V. D. Hopkin & P. Stager (Eds.), Verification and validation of complex systems: Human factors issues. Berlin: Springer Verlag.

Trost, W. A. & Nertney, R. J. (1985). Barrier analysis (DOE 76-45/29). Idaho Falls, Idaho: EG&G Idaho, Inc.

N. W. Knox and R. W. Eicher, MORT User’s Manual, ODE 76/45-4, SSDC-4 (Revision 2), May 1983

Haddon, William Jr.; “Energy Damage and the Ten Counter-Measure Strategies,” Human 2 Factors Journal, August 1973.

Kecklund, L. J., Edland, A, Wedin, P. & Svenson, O. (1996). Safety barrier function analysis in a process industry: A nuclear power application. Industrial Ergonomics, 17, 275-284

Svenson, O. (1991). The accident evolution and barrier function (AEB) model applied to incident analysis in the processing industries. Risk Analysis, 11(3), 499-507.

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Balance of Payment

Balance of Payment and Multinational Corporations

Introduction

Over the last two decades, the world economy has been changed to an extent on which the nations are interconnected with each other in terms of commerce and financial relationship. This circumstance is popularly known as globalization (Vinals, 2004). This interconnection not only helps to exchange goods or service but also force to keep account of financial payment between two countries (Dabrowski, 2006). This record is known as balance of payment. Generally, a multinational corporation has a strong relationship with the balance of payment between two countries (Stein, 1984). The multinational corporation may be affected positively or negatively in the host or home country by the balance of payment (Wilamoski and Tinkler, 1999). The positive relation between MNCs and Balance of Payment creates many opportunities for the multinational corporation. A manager of multinational company must take necessary steps to grab those nice opportunities.

What is Balance of Payment?

Balance of payment is a process of keeping record of transaction of a country with the rest of the word. It includes not only payment for goods and services but also all others payment over the border (Chamberlin, 2009). According the Sloman John, Balance of payment is an account that contains all monetary transaction of a country with the other countries of the world (1998). The transactions contain exports, import, incoming payment and transfer of finance. The balance of payment is usually evaluated based on certain period such as year.  It is also calculated on a single currency, normally US dollar (Mcbride, 2007). Sources of money are considered positive and deployed of funds is negative items. According to Investopedia, the balance of payment generally should be zero to be optimum (2013). However, it does not happen most of the time. The balance of payment is normally surplus or deficit for maximum country. A surplus balance of payment is said to be exist when the incoming payment is higher than total transfer.  On the other hand, a deficit balance of payment is said to be exist when the transfer payment is higher than the incoming payment.

What is Multinational Corporations or MNCs?

A multinational corporations or MNCs, also known as Multinational enterprise (MNE), is a company that operates is business or produce and sale product in more than one country (Daniels, Radebaugh and Sulivan, 2001). According to Van De Kuil, a multinational corporation follows the internationalized philosophy and operates its business both home and host country (2008). He also added that to be a multinational corporation, a company must have the assets and facilities outside the border of national country. The host country, home country and the multinational company get benefits from a multinational trade (Kokko, 2006). The host country gets higher tax or vat, the home country get foreign currency and the multinational company get profit. Here is some example of well-known multinational company Honda, Toyota, Google, HSBC, Wal-Mart, Samsung and chevron etc.

Relevance of Balance of Payment to Multinational Corporation

There is a strong relationship between the balance of payment and Multinational Corporation. A multinational corporation helps both host and home country to increase their balance of payment. In the contrary, the balance of payment situation of a country impact the operation of a multinational corporation by changing the rules and regulation based on country specific needs (Ker and Yeates, 2013). Let us look the relevance of balance of payment to Multinational Corporation in terms of different situation.

Relevance Based on “Direct impact”

 A country in which a multinational company is located tends to be get higher balance of payment. It experiences capital inflow when a multinational company get started with a certain fee. It also gets funds or money from the portion of profit of that Multinational Company (Shoo, 2005). On the other hand, the multinational company helps to improve the balance of payment of home country. The home country gets funds when the MNC make profit and return the money to the home country.

Relevance Based on “Regulatory Relation”

Another positive or negative relation between balance of payment and the MNCs is regulatory relationship. The balance of payment represents the foreign reserve of a country. The trade policy of a country changes with the changes on balance of payment position. If a country has negative balance of payment, it tries to hold the money by encouraging more export than import (Hale, 2013). It also tries to get more tax or VAT from the normal sources. This tighten money policy affects the business flow of multinational companies. They have to give more tax to the government. The sales volume of MNCs may rise because the local producer is busy to export in other countries. The MNCs can be the market leader. It may not happen all time. The rules and regulation may be strict for both domestic and multinational companies. On the other hand, if a country more reserve or balance of payment, it tries to deployed money. It encourages import than import or it invests money to another country as FDI or foreign direct investment. It may reduce the tax burden for MNCs (Bhusnurmath, 2011). By this way, the MNC can get maximum profit. The host country may be benefited from this policy by getting portion of profit when it will get back to it.

Relevance Based on “Measurement Challenge”

The MNC puts a measurement challenge of balance of payment for both home and host country. The goal of a Multinational company is to maximize the profit in after tax all over the world. To do this, they allocate resources, make mixing price system and make extra bill. These conducts is very difficult to measure for the regulatory bodies (Landefeld, Moulton, and Whichard, 2008). There are some good reasons behind this; the resources of production are not same in all countries and the price too. Therefore, it is very tough to evaluate the perfect amount of balance of payment. The mix price is also difficult to detect. Therefore, the proper amount of payment is in question in all countries due the inappropriate recording of MNCs transactions.

Relevance Based on “Foreign Exchange”

The balance of payment is a better indicator of country’s financial status. It helps to evaluate the foreign exchange rate of a country. This exchange rate has direct or indirect effect to the multinational corporation (Wang, 2005). When a currency of a country is strong, the import will cheaper and the export will less competitive. This situation puts pressure to the MNCs to adjust the situation. At that price of goods tends to be cheaper so that the multinational corporation must adjust their price level. Again, when the exchange rate of a country is weaker, the import will expensive and export will high competitive because of inflation. This situation makes higher price level within the country and the MNC have to adjust their price in a high level.

Relevance Based on “Asset Reserve”

The balance of payment also consists of asset such as gold reserve. The higher gold reserve means country has higher trade surplus and thus the higher money supply. This tends to create inflation within the country. Therefore, the MNCs can make higher profit by raising their price level. Conversely, when there is a trade deficit means low assets reserve. This makes the price lower because there is a low money supply. Therefore, the MNCs must adjust their prices level to cope up with host country’s policy.

Relevance Based on “Decision Making”

The balance of payment statistics is very important for all kinds of decision makers. The authority of a country looks carefully the flow of balance of payment. The balance of payment generally is a great indicator of future exchange rate of a country. This put pressure to the monetary authority to take necessary steps to control the money supply. Again, the balance of payment indicates the proper amount of assets reserve for a country. This makes concern for the fiscal authority. They should determine the trade policy, VAT, income taxes and the policy for the multinational corporation. Therefore, we can say, balance of payment accounts are closely related to the overall saving, investment and price policy of a country.

Relevance Based on “Business Policy”

The MNCs are also a good user of balance of payment statistics. They must assess the balance of payment both host and home country for their business policy. The policy of a MNC much depends on the balance of payment flow because change in balance of payment also changes the rules and regulations. When a multinational company try to start their business in another country, they must assess the domestic balance of payment. Because the domestic balance of payment, indicate the permission. If the host country has surplus balance of payment, the MNC can start their operation. Conversely, if the balance of payment is in deficit position the MNC may not get the foreign investment permission. Again, the MNC must assess the host country’s balance of payment. If the host country has already huge surplus balance of payment, it may not give permission to a new MNC because it tries to invest their money not get money. Conversely, if the balance of payment is in deficit position in the host country, they may welcome new money flow to their country. Thus, the balance of payment position in host and home country affect the decision of business start up. The MNC should also asses the foreign exchange rate position in home and host country. The weaker currency in home country means the multinational company have to pay more to start their business in another country. Conversely, if the exchange rate is weaker in host country, the Multinational Corporation can start their business cheaply in the host country. Balance of payment also influence the interest rate because of high bank reserve, the MNC also have to consider the interest rate in the host country. The higher the interest rate means the higher business cost for MNC in the host country.

Finance Essays Balance of Payment
Finance Essays

Changes in Balance of Payment and Management Actions

What is change in balance of payment?

Balance of Payment should be equal in all time. However, in reality, it does not happen. The balance of payment is continuously fluctuating all time. This is called disequilibrium of balance of payment. According to TR Jain, disequilibrium payment is a situation when the balance of payment fluctuates from zero (2008). Another author Cherunilam argues that a country’s balance of payment is disequilibrium when there is surplus or benefit (2010). There are three types of changes in balance of payment favourable, unfavourable and balance. Favourable balance of payment means surplus balance of payment. Unfavourable balance of payment means deficit balance of payment. Balance in BOP means equal incoming fund and outgoing funds.

Causes of Changes in Balance of Payment

There are various causes of change in balance of payment. From them, Raj Kumar, author of international economics pointed out three main reasons such as economic, political and natural (2008). He said that if a country is in developing position it must be in deficit balance of payment. The reasons behind economic cause are huge economic development in infrastructure, inflation or deflation, cyclical fluctuation and changes in foreign exchange rates. Again, the reasons behind political cause in balance of payment are political instability and international relations. The natural consequences such as earthquakes, hurricane and others are the reason for natural cause in balance of payment.

Result of Changes in Balance of Payment

The changes in balance of payment may affect positively or negatively to the economy. Here are some Results of changes in Balance of payment:

  • Positive effects of Changes in BOP increase the creditability of a country. Conversely, Negative changes in BOP lower the international creditability.
  • Positive changes decrease the foreign dependency in terms of financial help. Conversely, Deficit changes in BOP increase the foreign economic dependency.
  • Surplus changes increase the foreign exchange reserve. Conversely, Negative changes in BOP deplete the foreign exchange reserve.
  • Reserve of gold is increase in the case of surplus balance of payment. Conversely, the reserve of gold decreases and goes away in negative BOP situation.
  • Negative balance of payment hampers the economic development. Conversely, positive balance of payment improves the economic condition.
  • Surplus balance of payment increases the global market leadership for the home multinational company. Conversely, Deficit balance of payment hampers to get global market leadership position.

Opportunities for MNCs Revealed by Changes in Balance of Payment

The changes in balance of payment position affects positively and negatively for a country’s economy. As the MNCs are one of the important parts of economy, it also gets affected due to changes in balance of payment. Here are some opportunities for MNCs revealed by the changes in balance of Payment.

Business Growth: A multinational company can get business growth advantages in both home and host country. If the home country has surplus balance of payment, the authority approves MNC to start their business internationally. It means they do not mind in capital outflow from the nation as they have surplus funds to invest. On the other hand, a MNC can expand their business to a host country if they have negative balance of payment. They must try to grab money from the other national to increase their business infrastructure. For this reason, MNC is the best way to get finance.

Low start-up cost: A multinational company can start their operation cheaply in host country due to changes in balance of payment. If the host country has deficit balance of payment, they must encourage funds flow from MNC with low regulations and cost. Again, if the home country has high balance of payment, they allow MNC to start its business with lower fees.

Tax benefits: An MNC can also get tax benefits both home and host country due to fluctuation of balance of payment. The home country encourages FDI when it has surplus balance of payment. For this reason, the tax tends to be lower than deficit BOP to encourage foreign direct investment. Again, in the host country the MNC gets lower tax benefit due to deficit balance of payment (Robert, Dunn and Mutti, 2009). The MNC can also get the lower tax benefit, when the country tries to increase their export and reduce import.

Exchange rate benefits: The fluctuation of exchange rate is highly related to balance of payment. This exchange rate or balance of payment affects the operation cost positively or negatively to a multinational corporation. The MNC pay less if the home country has higher balance of payment or strong exchange rate. Here, they get exchange rate benefits due to weak currency in host country. This strong exchange rate also reduces the resources costs in the host country. Moreover, the MNC can get bill paying benefits due to change in balance of payment system.

Low cost of operation: A multinational corporation can experience low cost of operation due changes in balance of payment in both home and host country. It can get factors of production such as land, labour, machinery and others tools at low prices where the balance of payment is lower. Because, lower balance of payment indicates high rate of unemployment in the host country.

Higher Sales: A multinational corporation can increase their sales due to impact the balance of payment in the host countries. When a country experience lower balance of payment, it tries to increase the export and reduce import to get higher balance of payment. To do this, the country should ensure high production unit. The domestic producer may unable to cope up this policy. Therefore, the MNC get the opportunity to sales more during the recovery situation in balance of payment.

Higher Profit: A multinational corporation can make higher profit due to changes in balance of payment. As we discuss earlier MNC can sale higher volume in the host country in the recovery situation. By this, it can make higher profit because higher sales means higher profit (Deresky, 2009). On the other hand, the MNC can make higher profit if the currency of host country is devaluated. For example, European MNC operates its business in US. If the US dollar is weaker than Euro, the European countries will get higher value of money when they convert the money into their own currency.

Measures to exploit opportunities revolved by changes in BOP

As a MNC operates internationally, it must cope up with the changes on balance of payment in both home and host country. The manager of MNC should be careful to grab every opportunity provided by the BOP. The management measures have been given below:

Seek for growth: A manager of Multinational Corporation should always seek for business growth in home, host or any other country. To seek the business growth opportunity the MNC have to assess the balance of payment position. If the balance of payment is favourable, the manager should grab the opportunity for growth.

Alert all time: The manager should be alert all time to grab the best opportunity for business. As there are various obstacles for a multinational business, the manager have to overcome the obstacle by grabbing the best available opportunity.

Acquire new technology: New technology is very important for a business to get the competitive advantages. A company can implement a new technology to track the balance of payment related data to know the future trend of exchange rate, business cost and tax rate.

Hire business analyst: The manager can hire a business analyst to analyze the balance of payment data and recommend the best opportunity. The analyst also may responsible for making quick and instant decision regarding balance of payment trend.

Implementing short and long-term strategy: The manager can implement a short and long-term strategy for grabbing the opportunity of balance of payment. The short-term strategy may be for less than one year and the long-term strategy may be for above the one year. In addition, this strategy should include the yearly business strategy.

Conclusion

Due to high impact of globalization, every country must engage business internationally through Multinational Corporation. The multinational corporation contribute in the economy of related party’s as well whole world. This report describes that there is a strong relevance of balance of payment to Multinational Corporation. They are related to each other’s in terms of direct impact, regulatory relation, assets measurement, foreign exchange, business policy and decision-making. This report also describes that the changes in balance of payment creates some opportunities for MNC such as business growth, low start up cost, exchange rate, higher sales and higher profit benefit. Moreover, this report suggests that a manager of a company should take some important measures such as implementing new technology, higher business professional and hiring business analyst to grab the best available opportunity revealed by changes in balance of payment.

References

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