IT Outsourcing Commercial Banks China

IT Outsourcing For Commercial Banks in China

The issue of outsourcing has gained significant attention in recent years, in different industries. The different industries have varied factors that influence the scope and nature of outsourcing. China has been one of the most active destinations for outsourced processes and activities. This study focuses on the decision-making models and processes considered by bank managers in developing IT outsourcing strategies, in China. This is based on the increasing use of IT outsourcing in the banking and financial services industry in order to meet customer demands. China was selected because of the challenges it may present for decision makers. Its research objectives are to determine and assess the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities.

The study seeks to assess the key decision factors that Chinese commercial banks consider in their IT outsourcing strategies. The methodology employed focuses on the strategic model, as well as the criticality of outsourcing to financial institutions and management attitudes. Analysis of the findings utilizes two constructs to assess the decisions made by commercial banks regarding outsourcing in China. The study proposes to accomplish its objectives using a qualitative study design that utilizes face-to-face interviews to collect data. The data will be coded and assessed using the two constructs of perceived risk and benefit in order to develop a new model. The findings of the study will be highly relevant and significant to medium-sized commercial banks and outsourcing services vendors.

The Global Outsourcing Landscape

The issue of outsourcing has grown significantly in the global economy. Firms are subcontracting an ever-increasing number of activities ranging from marketing, customer care, research and development, as well as manufacturing. As a result, some organizations have developed into virtual manufacturers that own the designs, but do not make any of the products. Vertical disintegration has become a significant aspect in international trade. The production of particular cars in the US includeonly 37% of their value generated within the country while the rest is from different places. When most people refer to the issue of globalization, they think of a manufacturing process that takes place across different geographical locations.

The purchase of raw materials and development of standardized products was the initial view of outsourcing, but it has changed significantly with time. Today, it refers to the selection of strategic partners to establish bilateral relationships in order to undertake investments that enable it to fit into the firm’s particular needs. As a result, outsourcing involves more than just purchasing goods and partners have to act with care. These complexities have made outsourcing difficult to measure at an international level (World Trade Organization, 1998). Some scholars on the topic have used trade in intermediate inputs or components as a proxy for what they have termed as global production sharing or intra-product specialization (Rapoport & Yi, 2001).

Although the measures used in assessing the growth of international outsourcing are imperfect, they show rapid expansion. The rapid expansion in outsourcing has been in key sectors and industries such As textiles, machinery, electrical equipment, and footwear. Outsourcing in intermediate products and business services are some of the principal areas that have received the most attention in relation to outsourcing (Baldwin, Irani, & Love, 2001).

IT outsourcing is one of the key growth areas in today’s business environment. This is because of the increasing significance of ICT to the operation and success of businesses. The size of the global outsourcing industry was estimated by Dataquest to be more than $100 billion in 2001 and growing at the rate of 20% per Annum. A survey of the FTSE index in the London Stock Exchange found a significant correlation between high levels of outsourcing and stock market performance. This highlights the significance of outsourcing and suggests that companies that manage it best are likely to reap the benefits. According to the research company Gartner, the worldwide IT outsourcing market is expected to reach $288 billion by the end of 2013, a 2.8% increase from 2012.

Definition of Outsourcing

Outsourcing simply refers to the contracting of work to outside firms. These firms can be domestic or foreign, and they enable the outsourcer to concentrate on key competencies. It involves business processes that the outsourcing firm feels can be accomplished more effectively by the outside firm as opposed to in-house. It involves different processes that may include manufacturing or the provision of services such as customer care, or marketing. Most companies engage in outsourcing in order to address challenges regarding the availability of skills and resources. They seek efficient and highly qualified outsourcing companies to provide services for their customers or internal operations.

Today outsourcing is used as a means of reducing costs and achieving strategic goals. Different models are applied depending on the focus of the organization. The changing waves of outsourcing are developed in response to changes in the business environment. The three main segments of outsourcing applied in today’s world are business process outsourcing, information technology outsourcing, and knowledge process outsourcing. The potential impact of outsourcing can be seen across various business activities and processes. Information Technology outsourcing involves issues such as programming, applications development, and coding. This is mainly geared towards enhancing the ability of organizations to access IT resources that may be difficult to exploit in-house. Outsourcing also involves the performance of a particular business processes and functions such as finance and accounting, back-office operations, processing, and administration, as well as contract functions. This is known as business process outsourcing with organizations seeking service providers to undertake their non-core processes to enhance efficiency.

Knowledge process outsourcing (KPO) involves offshoring of domestic business functions to lower cost foreign providers. It helps companies to gain competitive advantages by virtue of the type of activities and processes outsourced. Unlike BPO and ITO, KPO involves high end or knowledge-driven processes. These processes require specialized domain expertise such as financial management, risk assessment, insurance underwriting, clinical trials, legal services, or R&D. KPO is unlike BPO and ITO because it does not involve simple rule-based process expertise and leveraging economies of scale. It focuses on accessing the global talent pool in order to carry out processes that require specialized analytical and technical skills, as well as decision-making and judgment. KPO adds value by providing high quality expertise and superior productivity (Baldia, 2012).

IT outsourcing in different industries and organizations is undertaken because of the strategic advantages it offers to them. The central driver of IT outsourcing is cost reduction. It allows companies to access high quality services and processes without spending money in installing computing resources. The outsourcing companies provide services at relatively lower costs compared to what the company may access in-house. It also provides an opportunity to select the lowest cost provider to enhance profitability. IT outsourcing is also used because it allows access to superior skills and expertise. The outsourcing company has access to high quality work force to perform the different tasks effectively. The presence of superior skills from the service provider allows high service quality thus enabling the outsourcing company to deliver the same to its customers.

IT outsourcing is a significant aspect in relation to strategy and focus. It allows an organization to select the best-suited service provider to ensure that its services are in line with the needs. Outsourcing allows changes in capacity in line with organizational needs without incurring heavy costs. As a result, it enhances flexibility for the outsourcing company. It plays a strategic role in enhancing the capacity of the outsourcing company to meet its expanding needs for computing (Aalders, 2012).

Importance of IT Outsourcing In the Financial Sector

The financial services sector is one of the largest investors in Information Technology. The financial services sector requires significant computing resources in order to perform their activities efficiently and cooperation across geographical locations. The industry has increased utilization of IT resources in response to the financial crisis that affected the global economy (Bartels & Pass, 2000). Increasing market volatility has also made is essential for financial institutions to have effective IT systems for enhanced efficiency. Increasing competition, shrinking demand, globalization, and regulation require banks and other financial institutions to engage in system upgrades and integration. This activity is especially significant for banks involved in mergers and acquisitions because of the need to integrate the operations of the merging institutions. This has highlighted the need for financial institutions to evaluate their operating models, and make significant changes in processes as well as IT. This has prompted many banks to incorporate IT outsourcing as a way of enhancing their operational efficiency (Hirschhein & Lacity, 2000).

Financial and banking institutions dominate the global ITO industry. The banking and financial services institutions ITO market is worth US$ 100 billion and is dominant in the industry. Improving profitability and customer experience are the most critical objectives influencing IT investment for the banking industry currently. Some of the key themes in relation to IT outsourcing in the industry involve cloud computing, analytics, and social media. These technologies have a significant role to play in enhancing the operation of financial institutions.

The development of informationalization of Chinese commercial banks

The Chinese banking industry has grown significantly with the increasing demand for financial services. This has also increased demand for IT services in the sector enhancing growth of the banking industry IT solution market. The market is expected to grow at an annual compounded rate of 21.7% from 2013 to 2017 (Kearney, 2004). The market will be 9.6% higher than China’s banking industry IT market. The year 2012 was a milestone for the development of the banking sector with the launch of the five-year plan for development and reform of the financial industry. Measures for managing commercial bank capital resulted in the introduction of new capital regulations for the industry (IDC, 2013).

The interest rate market also developed significantly in 2012 because of the bidirectional expansion of floating ranges for loan and deposit interest rates. Financial reforms were a significant aspect in political debate, in 2012 laying the foundation for the development of the banking industry. It experienced significant development in 2012 with business and IT functions being highly integrated. The significance of technology in the industry became more apparent and stepped into a new phase of internationalization.

Indigenous innovation policy and widespread government investment have helped in enhancing technological advancement, in China. In spite of these advancements, China’s computer network and technology still lags behind compared to the advanced economies. Chinese financial institutions have been falling short of international competitors because of low financial innovativeness. This has reduced the ability of such banks to develop into world standard players.

The current situation in the banking industry in China is that the different institutions have realized the significance of technology. They have embarked on strategies for enhancing the utilization of technology in order to increase competitive advantage. The government has also started encouraging collaboration with international players to enhance their global footprint. Initially, financial institutions in China, especially the most sensitive banks, were used to doing everything internally (Daianu, 2005). The “opening up” policy of 1978 enabled Chinese companies to learn from foreign nations and interact in the global market (Hawkins & Mihaljek, 2006). They did not open up to working with foreigners because of their conservative mindset. This mindset is changing, and they are making efforts to enhance performance through the establishment of strong alliances. One such alliance is the collaboration between the Bank of America and China Construction Bank. The two banks sought to get in to collaboration to provide innovative credit card services in China. This collaboration was meant to leverage the financial strength of CCB with BoA’s leading credit card expertise (Bank of America, 2007). This collaboration provided the bank with the capacity to develop solutions that will enable it retain market share while meeting the growing market demand.

Problem Definition

It is critical for administrators and other decisions makers to understand the benefits of IT outsourcing for their organizations. They also require comprehensive information on the risks and potential pitfalls that their businesses can encounter while implementing IT outsourcing. There are many areas that require consideration including the model to be implemented as well as the best way to ensure the security of critical information.

Significance of the study

Most of the available literature on IT outsourcing has focused on advanced economies. China and other emerging economies have been assessed as the destinations for outsourced work from the West. There is limited research on the outsourcing drivers and issues for domestic organizations in China. This study will provide critical information on how banks and the financial services sector can benefit from outsourcing IT (Deloitte Research, 2003). It will also shed light on the considerations made by the administrators and other decisions makers before outsourcing their IT functions. This will play a critical role in aiding companies that provide outsourced IT services to know how to attract commercial banks as clients. It will guide them on the aspects that they have to consider. This will enhance their competitiveness and attract high-value clients such as financial institutions or commercial banks.

The study is also essential in providing a clear understanding of the political economy and the business atmosphere surrounding the financial services sector. The industry is highly dependent on the government, and there are key political factors that require consideration in strategic decisions (King, 2005). The current study will highlight the political factors that have to be considered by decision makers in the financial services sector. This will aid in understanding the considerations that organizations have to remember in order to benefit from outsourcing in the financial services sector.

Purpose of Study

The background information on the banking industry and developments in relation to IT outsourcing show that significant thought is put into such decisions. The managers have to assess critical information regarding their operations as well as the market in order to benefit from outsourcing. It is clear that financial institutions will benefit from outsourcing y ensuring that they implement key strategies effectively. This highlights the purpose of the current study, which seeks to investigate the impact of different factors that influence decisions towards outsourcing strategies applied in commercial banks, in China.

Research Objectives

The research aims and objectives of the study focus on the decision-making aspects considered by managers in commercial banks when adopting IT outsourcing. The objectives of the study are:

To determine the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities
To assess the key factors that Chinese commercial banks consider in their IT outsourcing strategies
To investigate the strategic model that is most appropriate for outsourcing decision-making in commercial banks
To assess the criticality of outsourcing to financial institutions
Assess whether management attitude towards outsourcing influences their perception on the criticality of the strategy

Research Questions

The research objectives of this study will be accomplished by developing effective research questions to be tackled during the study. These questions will focus on the key areas that are significant to decision-makers in the financial services sector. The research questions to be addressed in the study are:

What are the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities?
What are the key factors that Chinese commercial banks consider in their IT outsourcing strategies?
Which strategic model is most appropriate for outsourcing decision-making in commercial banks?
How critical do financial institutions consider outsourcing to be?
Does management attitude towards outsourcing influence their perception on the criticality of the strategy?

Theoretical Framework

The hypothesis considered for this study is that commercial banks have to consider several key aspects before engaging in IT outsourcing. They have to take a core competency focus and ensure regulatory conformity in their operations. These are the two top factors considered by commercial banks when implementing outsourcing strategies. It is critical to consider that commercial banks also worry about the security of their critical information because of the privacy of customers. As a result, the decision makers in commercial banks have to consider the quality of work, as well as the security offered by the service providers. In outsourcing IT functions, in commercial banks, they focus on different factors that may influence the decision. Commercial banks have priorities such as security, quality of work, strategic aspects that they follow in selecting the model and the service provider. This study follows the model of perceived risks and benefits to assess whether they have a significant influence on the decision by managers. It utilizes a model adopted from (Gewald & Dibbern, 2009) to assess the influence of perceived roadblocks, risks, benefits and criticality in adoption of IT outsourcing for commercial banks. The study utilizes the model suggested from Gewald & Dibber (2009), but modifies it to ensure that the constructs of perceived risk and benefits suit the context of the Chinese financial services sector.

Literature Review

This chapter highlights the available literature on the use of IT outsourcing in different industries. Its focus is to show the areas that have been highlighted in previous studies. It will also emphasize strengths as well as weaknesses of the data or available information in order to show gaps.

Outsourcing in Emerging Economies

Outsourcing decisions on different organizations are based on different factors such as labor cost. The cost of labor and services provision is the main reason why many organizations outsource their non-core activities. This is because it provides them an opportunity to access high quality services at competitive prices. This occurs because most of the destinations for outsourcing services are low cost emerging economies that have an abundance of skills. They offer IT and other services at significantly low costs compared to other countries. This has played a critical role in making emerging economies significant destinations for outsourced work. The governments in these countries such as China and India have taken the initiative by encouraging their citizens to establish outsourcing companies (Yeats, 2001). Benefits such as tax breaks act as an incentive for the development of these institutions.

This has made emerging nations key beneficiaries of outsourcing because of their availability of cheap labor, high skill levels, and an appropriate environment for attracting FDI. Most of the clients for outsourced services are in advanced economies such as Germany, the UK, and US. Labor cost arbitrage due to the differential is the main aspect influencing outsourcing from these economies. The factors that influence the outsourcing of IT and other knowledge-based services also differ significantly from manufacturing. Different industries have varied factors and roadblocks that may influence their uptake of outsourcing activities. The factors influencing outsourcing among companies in the same country or region also vary considerably compared to offshoring across regions. This means organizations in emerging economies have to be effectively apprised with information on the quality of services provided as well as other factors that influence their decisions (Fowler & Jeffs, 1998; Ketler K. & Walstrom, 1993).

Benefits of IT Outsourcing

The main reason why organizations engage in IT outsourcing is that they can derive significant benefits that increase their competitiveness and productivity. Arguments on core competencies, comparative advantage, and transaction cost economics indicate that outsourcing has a cost aspect (Lacity et al, 2009). Managers who are motivated by expectations to generate benefits such as cost reduction, flexibility, and high productivity often see it as a rational decision. Outsourcing provides a significant opportunity to control costs by enhancing flexibility. This is because they can purchase IT capacity as required by their operations. Outsourcing companies have economies of scale and scope because they specialize on particular services or areas (Janko & Koch, 2005). This enables them to provide services at significantly lower costs compared to the cost incurred by their clients in doing the same in-house.

Outsourcing provides an opportunity for organizations to improve on their productivity by focusing on core competencies. They get access to a pool of highly qualified technical skills and knowledge for augmenting organizational gaps. The management of a company that outsources its non-core activities gets access to skills that enable the organization to enhance the productivity of its resources. This provides an opportunity for enhancing competitive advantage for the organization. This is because the organization combines in-house skills with those of the outsourcing vendor (Casale, 2001). Outsourcing provides significant benefits to the overall business performance through process improvisation and customer satisfaction.

The different studies on the benefits of outsourcing indicate that it is meant to provide tactical, strategic, and business benefits. One of the main benefits is flexibility because it enables the transformation of fixed to variable costs. This presents benefits that enable organizations to focus their activities to the benefit of customers and creation of value (Fisher et al, 2008; Yang & Huang, 2000). Some of the tactical and strategic benefits of outsourcing include efficient management of organizational knowledge. Improvisation of IT, business processes, and innovation provides benefits for organizations that enable them to meet customer demands effectively.

Risks of IT Outsourcing

Outsourcing is a highly lucrative business process because of the benefits it confers to them. It is critical to consider that the high payoff associated with outsourcing also involves risks that may hinder success. The growing trend of outsourcing involves a growing practice in terms of scope and nature. This situation presents a risk that client organizations face because of their reliance on the vendors for services. The client firm may become over reliant on the vendor of outsourcing for IT or other business needs. This over reliance is negative because it leads to the client organization failing to get the benefits of outsourcing (Duhamel, 2003;). This risk is exacerbated by the inability or unwillingness to provide the level of quality required. This leads to the client organization failing to get the benefits of outsourcing because of quality inconsistency (Marin & Verdie, 2003).

Another risk of increasing IT outsourcing is that the client firm may lose core competencies in the field. Organizations outsourcing processes or IT expose themselves to the risk of losing essential internal competencies, cross-functional skills, or innovation capacity. The client organization may also lose control over the processes or the vendor thus reducing its ability to meet customer needs. Engagement in an outsourcing contract also develops problems associated with adverse selection and agency theory. Adverse selection, failure by the vendor or low quality services can increase the complexity of business management. This may defeat the rationale of outsourcing because it makes business difficult for the client. A study by Rouse and Corbitt (2003) showed that management of vendor relationships is one of the main risks associated with outsourcing. Poor management of these relationships can result in reduced realization of the expected benefits and may damage the client organization.

Banking and financial services institutions have an additional set of challenges associated with the regulatory environment (Jinnan & Hualiang, 2010; Puga & Trefler, 2002; McLaren, 2002). They have to consider the legal obligation for services and information as well as reputational risks for issues such as lost data or poor service quality. Confidentiality and data integrity issues may arise with IT outsourcing in commercial banks (Gewald & Franke, 2005). These risks may result in many financial institutions shying away from outsourcing their IT because they represent very heavy potential losses. These risks span the wave of outsourcing from ITO to BPO and KPO, but the degree of impact from each factor differs based on the type of outsourcing and the organization.

Theoretical Models Applied In Prior Research

Prior research on the factors influencing outsourcing decisions in different organizations have focused on management attitude towards outsourcing. The perceived risk theory (Peter & Micheel, (1976) has played a critical role in determining such studies. Other decision theories that have been used in assessing decision making regarding IT outsourcing include resources theories and innovation diffusion theories. Cost-risk analysis and Delphi model expert opinion have been applied in prior studies on the decision-making process involving outsourcing activities. Four theoretical constructs based on perceptions have been applied to conceptualize different factors that influence outsourcing decisions. The Jain and Natarajan (2011) study used four theoretical constructs of perceived benefits, perceived roadblocks, perceived risk, and perceived criticality.

Research Methodology

This section of the paper highlights the strategy applied in addressing the research questions by collecting and analyzing data. The research methodology shows the participants of the study as well as the data collection and analysis plans. The study is designed qualitatively because it relies on the development of a new decision-making model addressing influential factors. The qualitative study relies on in-depth interviews that seek to understand the factors influencing management decisions in commercial banks regarding IT outsourcing.

Participants

The participants for the study are Chief Information Officers (CIO) from major banks in China. The focus on CIOs is because they are involved in decisions regarding IT, which makes them appropriate for this survey. The study focuses on major banks in China because they have considerable IT operations and they would benefit the most from outsourcing. This strategy aids in assessment of the political economy in China in order to develop decision models that fit into the environment.

Data Collection Plan

The data will be collected using open-ended interviews that will be conducted on CIOs in major Chinese banks. The interviews will be conducted face to face in order to provide opportunities for getting additional information. The respondents will be selected using convenience sampling and will rely on getting qualitative data from a small sample of CIOs. The respondents selected will be given an opportunity to expound on the questions asked in order to provide qualitative information on decision-making regarding IT outsourcing.

Data Analysis Plan

The data collected from the interviews will be coded in order to prepare it for analysis. This will make it possible to assess the responses and analyze them according to the model selected. The responses will be coded to show the categorizations of perceived risk and benefits from the respondents.

Anticipated Findings

Anticipated findings from the study will be beneficial to medium-sized commercial banks in China. They can use the results of the research to evaluate their situation before making outsourcing decisions. This will aid them in developing a strategy to avoid undesirable consequences and costs. Development of a decision model for assessing outsourcing strategies will help banks to gain a competitive advantage over their competitors.

IT outsourcing vendors can also benefit from the findings of the study. Knowing what the customers need is a fundamental requirement for any business. IT outsourcing vendors will gain information how to attract the proper market segment and develop efficient products. This is especially beneficial for foreign vendors because they will gain an understanding of local preferences and risk endurance. The government and regulators can also benefit from the findings of this research by gaining insight on the deficiency of regulations implemented.

Limitations of the study include the use of a considerably small sample. This may reduce the reliability of the data and its generalizability in the population. Another limitation is that institutional information is unreliable. For instance, data from the banking industry indicates that Chinese Banks are performing brilliantly, but the market doubts the accuracy of these figures because of the institutional ineffectiveness of poor information and regulation (The economist, 2011).

Summary

This study will focus on the decision-making processes and models considered by bank managers in developing IT outsourcing strategies. This is based on the increasing use of IT outsourcing in the banking and financial services industry in order to meet customer demands. The research objectives of this study are to determine and assess the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities. It also seeks to assess the key factors that Chinese commercial banks consider in their IT outsourcing strategies. It also focuses on the strategic model, as well as the criticality of outsourcing to financial institutions and management attitudes. The study utilizes two constructs to assess decision-making models on IT outsourcing in commercial banks, in China. The constructs proposed for the study are perceived benefits and perceived risks of IT outsourcing. The study is accomplished using a qualitative study design that utilizes face-to-face interviews to collect data. The data will be coded and assessed using the two constructs of perceived risk and benefit in order to develop a new model.

References

Aalders, R. (2012). IT Outsourcing: Making it work. White Paper. Fujjitsu.

Baldia, S. (2012). Thinking Outside the BPO: Knowledge Process Outsourcing to India.

Baldwin, L. P., Irani, Z., & Love, P. E. (2001). Outsourcing information systems: drawing lessons from a banking case study. European Journal of Information Systems, 10 (2), 15–24.

Bank of America. (2007). Bank of America and China Construction Bank to Collaborate on Credit Card Business.

Bartels, F. L., & Pass, C.L. (2000). International Business: A competitiveness Approach, Singapore: Prentice Hall.

Casale, F. (2001), “IT Index 2001”,The Outsourcing Institute/Sunguard Sourcing Report, 15 April. Conference on Information Systems: Omaha, NE

Daianu, D. (2005). Who Fears Outsourcing and Offshoring? Southeast European Times, 31 January.

Deloitte Research. (2003). The Cusp of A Revolution: How Offshoring Will Transform The Financial Services Industry. London: Deloitte Touche Tohmatsu.

Fisher, J., Hirschheim, R. & Jacobs, R. (2008). Understanding the outsourcing learning curve:a longitudinal analysis of a large Australian company. Information Systems Frontiers, 10, 165-78.

Fowler A. & Jeffs B. (1998). Examining information systems out-sourcing: A case study from the United Kingdom. Journal of Information Technology. 13(2), 111–126.

Gewald, H., & Dibbern, J. (2009). Risk and benefits of business process outsourcing: A study of transaction services in the German banking industry. Information & Management. 46 (4), 249-57.

Gewald, H., & Franke, J. (2005). A comparison of the risks in information technology. Journal of Information Technology. 22(3), 121–137.

Grossman, G. M. & Helpman, E. (2005). Outsourcing in a global economy. Review of Economic Studies, 72, 135-159.

Hawkins, J., & Mihaljek, D. (2006). The banking industry in the emerging market economies: Competition, consolidation and systemic stability- an overview.

Hirschhein, R. & Lacity, M. (2000). The myths and realities of information technology insourcing. Communications of the ACM. 43(2), 99–107

IDC. (2013). IDC: China Banking Industry IT Solution Market Size to Reach RMB 32 Billion in 2017 at a CAGR of 21.7%.

Jain, R. K., & Natarajan, R. (2011). Factors influencing the outsourcing decisions: a study of the banking sector in India. Strategic Outsourcing: An International Journal, 4 (3), 294-322.

Janko, W.H., & Koch, S. (2005). Sourcing decisions in the finance sector: Economies of scale and knowledge management. International Finance Symposium, Istanbul, 1-14.

Jinnan, L., & Hualiang, J. (2010). Legal Issues on IT Outsourcing of Financial Institutions. China Bulletin, 1-5.

Kearney, A. T. (2004). The Changing face of China: China as an Offshore Destination for IT and Business Process Outsourcing, Chicago: A. T. Kearney.

Ketler K. & Walstrom J. (1993). Outsourcing decisions. Inter-national Journal of Information Management. 13(6), 449– 459

King, W.R. (2005). Outsourcing becomes more complex. Information Systems Management, 22 (2), 89-90.

Lacity, M.C., et al. (2009). A review of the IT outsourcing literature:insights for practice. Journal of Strategic Information System, 18, 130-46.

Marin, D., & Verdie, T. (2003). Globalization and the Empowerment of Talent. Discussion Paper Number 4129. Centre for Economic Policy Research .

McLaren, J. (2000). Globalization and vertical structure. American Economic Review, 90, 1239-1254.

McLaren, J. (2002). Globalization and Vertical Structure. American Economic Review, 40 (2), 12-22.

Peter, J. P., & Michael, J.R. (1976). An investigation of perceived risk at the brand level. Journal of Marketing Research, 13 (2), 184-8.

Puga, D., & Trefler, D. (2002). Knowledge Creation and Control in Organizations. Working Paper Number 9121. National Bureau of Economic Research.

Rouse, A.C., & Corbitt, B. (2004). IT-supported business process outsourcing (BPO): The good,the bad and the ugly. Proceedings of the Eighth Pacific Asia Conference on Information Systems: Shanghai, China.

World Trade Organization. (1998). Annual Reports: 1998. Geneva. World trade Organization.

Yang C. & Huang J. B. (2000). A decision model for IS outsourcing. International Journal of Information Management, 20(1), 225–239.

Yeats, A. J. (2001). Just How Big is Global Production Sharing?, in Sven W. Arndt and Henryk Kierzkowski, Eds., Fragmentation: New Production patterns in The World Economy. Oxford: Oxford University Press

Click Here To View IT Dissertation Topics

Public Relations Dissertation

Public Relations

In society, in all platforms of work and life, the application of public relation as a job as well as a term is considerably significant. Similarly, the importance of public relations as a vital form of communication cannot be neglected. The core purpose of public relation is to generate concrete public image through a communication model. Thus, the whole country obtains a positive image as a tourist destination and this aspect of public relation is the most beneficial for the tourism industry.

The period of economic recession turns the attention of various countries towards the promotion of travel and tourism industry. A new marketing approached was devised to attract more and more tourists for a specific destination. Obviously, tourists travel to a familiar tourist destination, in this regard; the modern perspective of tourism marketing plays a vital role. Nonetheless, the application of marketing tactics, techniques, and knowledge fortify the foundation for portraying an attractive picture of a specific tourist destination, which helps to motivate tourists and develop comparative advantages.

Marketing mix is an inseparable part of promotion, which facilitates marketing for the growth of the destination. Likewise, in the promotional mix, public relation underpins the several weak spot of the tourism business. Clearly, public relation is an arresting and consistent approach depicting the product and pulls the attention of guests towards a specific destination through a gaining and competent method.

However, despite understanding the impressive importance of public relation, no mandatory attention has been put forth, at national and international level, by the present and past researchers. Moreover, in tourism about public relation very brief material is available, which is comprised of very few articles and manuals. In addition, no authentic textbook or scientific publication has been written regarding the importance of public relation in tourism. Nevertheless, more emphasis has been given to marketing in tourism; thus, public relation has been treated as a segment of promotion and marketing.

The public relation theorists and the marketing theorists have a contradiction between them regarding the status of public relation as a branch of marketing or as an individual separate subject. The public relation theorists think that owing to the public relation’s large scope it should be treated as separate subject. The American public relation researchers have given this classification of marketing tools.

The current paper has been organized in the following manners:

Introduction
Basic theoretical postulates about marketing of a tourist destination and its relation with the communication of the market
Public relations
The utilization of media in public relation for travel and tourism exposure
Conclusion

Public Relations Definitions

BIPR (The British Institute of Public Relations) describes public relations as maintaining common consideration between an organization and its publics through purposeful organized and continue endeavor for establishment is public relations. According to the definition, public relation is not a random activity instead; it is designed and structured on considerations of an organization and its publics. Thus, public relation is comprised of outcomes, analysis, expectations, considerations, attention and research.

To start just the plan is not sufficient a continued endeavor is mandatory. The purpose of plan must be achieved logically. However, when circumstances are not favorable such as poor economy, volatile politics and similar aspects the target becomes more difficult.

PRSA (The Public Relations Society of America) defines public relations, as the purpose of public relations is to develop and generate common motives among institutions and groups.

The book “Effective Public Relations” is measured the bible of public relations in America. It is written by Cutlip, Center and Broom (1985) describes public relations as, public relations is a function of management that maintains, recognizes and institutes common advantageous attachments between an organization and its publics, obviously, the success of an organization depends on publics. Conversely, most of the organizations never feel that their success depends on the common association with publics. If the organizations neglects the fact of importance of its publics they cannot grasp the real success in business.

In his book, Frank Jefkins (1993), a British author explains public relations, to obtain goals related to common concerns public relation provides planned communication between an organization and publics inwardly and outwardly. This definition depicts a two-way communication inward and outward between publics and organization underpin through common purposes.

Variation In Public Relations

Nowadays, the approach of public relation has transformed significantly and has various functions. International Public Relations Association, which was founded in London in 1950, these Public Relations are comprised of organized, resolute and continued working through maintaining and establishing common consideration between an organization and its surroundings and the surroundings of an organization is public (www. Ipra.org).

In the language of tourism, the description and parameters of public relations and its meaning have been defined as “in tourism the perception of public relations points towards all the functions implemented a tourism offer, for generating, in the public a positive opinion regarding all the functions, services, targets of the work, and work. Thus, public relation is an organized, pre-planned and mindful function that can affect the public pertinently (Senečić and Vukonić, 1997).

Moreover, it is important to recognize public relations as a different form of communication while describing the concept of public relations.

Public relation has been often classified under marketing through marketing and marketing communications theorists (Kotler, Bowen and Makens, 2001); however, public relations theorists (Cutlip, Center and Broom, 2003) observe it as a different management category. In any circumstances, on marketing process the effect of public relations cannot be denied.

In addition, there is a wrong perception about public relation that it is always classified in the group of advertising, publicity and media relations.

According to Deuschi (2007) who defines public relations, it is a function of management, which utilizes mutual communication and works to facilitate the public with the purpose to affect the opinion of the public; moreover, its purpose is to obtain concern and recognition for the organization.

The Association Of Marketing And Public Relations

Conversely, marketing is considered as a function of management, which directs and organizes all the activities of business by engaging the evaluation of the requirements of the customers and, thus, transforming buying power into a concrete demand for a specific product. Thereby, make it possible for the consumer to have it, thence, accumulating profit and obtaining different goals of business (Weber and Boranić, 2000).

However, without public relations marketing process cannot be perceived. Both the functions are very arresting for the growth of business and only their inter-connectivity make it real excellent outcomes for business.

Mostly marketing, communication, and marketing approaches have various kinds of public relations. The only dissimilarity is the targeted public as public is communicated directly. Nonetheless, the target public can vary according to the activity.

Specifically, for the current paper the author has chosen an outline from the most common kinds of public relations regarding tourism. They have been devised and separated by Black (2003) into fundamental categories, and this is comprehensively encircling all the important detail related to the target public within tourism destination scenario. They have been mentioned below:

Internal public relations
Association with state administration and government
Domestic public relations and community associations
Consumer attachments and international public relations
Publicity and media relations

The Principles of Malvin Sharp

A deep understanding of public opinion is necessary for a public relations practitioner. The understanding helps him/her to comprehend the variation of public opinion, he/she can recognize opinion leaders who have formal and informal opinion and he/she can develop a relation with them through particular messages. For maintaining favorable public opinion, Melvin Sharp (2000) devised the following principles to guide organizations:

Although technology is accountable for the segmentation of current society, yet it can be implemented to access publics.
For both external and internal publics the management of an organization’s communication is mandatory to make sure precise and appropriate comment because transformation, adaptation and adjustment are necessary for durability.
According to law and social rights all stakeholders have the right to have all the information regarding decisions, which can affect directly or indirectly them; thus, accurate information should be provided for the welfare of all.
The opinions and attitudes of the public, in complete operational atmosphere, is the base of social and economic strength of an organization.

Critical Elements of Public Relations

Wilcox, Ault and Agee (1998) have recognized seven practical and critical elements of public relations. These are very helpful in monitoring public opinion in public relations:

Advisory committees: The committee is inclusive of prominent citizens to offer advice regarding policies, public relations programming and concepts.
Staff meetings: To impart knowledge and experience through sharing the obtained knowledge of informal research through staff meetings is a good practice.
Sampling/polling: For the organization and its policies a deliberate and organized research regarding the attitudes and interests of public is polling.
Telephone calls and letters: After tracking the patterns that might be helpful for essential changes in company policies this genuine source emerges.
Media reports: These can be obtained after monitoring the media for editorials, OP-Ed pages, and letters to the editor and through news stories.
Field reports: Sales people, customers and various patrons submit complements, suggestions, questions and complaints, which can be achieved through field reports.
Personal contact: Friends, company employees, customers, opinion leaders, consultants, and business associates are the people that can be accessed easily through a phone call or by obtaining an appointment.

Destination Marketing and Public Relations

In destination marketing and in promotion of tourism, the author of this paper has researched extensively and has discovered that public relation is a noticeable segment for promotion of tourism, which influences directly all the functions of travel and tourism. Moreover, community tourism organizations and national tourism organizations during organizations of marketing management of destination can take advantage of public relation for making an effective strategy.

Conclusively, the importance of public relation is undeniable, in this regard; the following hypotheses have been tested:

The application of public relation is not in the right direction
Public relation has a separate identity and is different from advertising
For promotion of a tourist destination regarding destination marketing it is very helpful

The clarification of the concept is necessary prior to describe the demand of public relations within the parameters of tourist destination marketing. Marketing of traditional product is considerably dissimilar from marketing in tourism. In the features of supply and demand, this vital variation is hidden. Tourism is a type of service according to Mill and Morrison (1985), “What is sold is a non-material experience, and not material goods, which may be tested before use“(Cited Moutinho, 2005).

For the application of marketing in tourism, two methods are implemented. (1) For utilizing and establishing marketing as a foundation of business guiding principle for individual companies are accumulating advantages/profits through tourism market; (2) in utilizing and establishing as supporting force to business strategy, which is at the scale of an individual unit provides a fundamental approach regarding placements of organization through tourism (Senečić and Vukonić, 1997).

Stakeholders and Public Relations

According to the association with the organization, not many efforts have been made to recognize stakeholders, specifically, in public relations literature. Nonetheless, some segmentations of stakeholders are very simple such as internal and external publics. The best efforts to recognize all stakeholders through the public relations literature were made by Grunig and Hunt (1984) in their linkage model. To recognize relationship’s of stakeholders with an organization this model has four linkages normative linkages, diffused linkages, functional linkages, and enabling linkages.

The relationship between public relations, stakeholders theory and stakeholders management provide guidance in recognizing publics and important stakeholders. However, it is critical to know how much attention should be given to each stakeholder or how much they deserve.

Moreover, usually, public and stakeholders’ terms are implied as they are same but this is a vague concept. In the public relations and different literature of mass media public is recognized according to their association with the message while stakeholders are recognizes in business literature in line with their association to an organization (Winn, 2001).

The most popular definition of stakeholders is Freeman’s definition who states that if a person or groups of persons is affected by any action of an organization or they can affect the performance of an organization are called stakeholders (Freeman, 1984).

Media, Tourism and Public Relations

According to the freedictionary mass media represents the ways of communication that can easily access to great number of people quickly. The mass media means may be radio, magazines, newspapers television etc. To observe behavior, perceptions, beliefs and values of people sociologists study mass media. For instance, mass media impart knowledge about social evils and dangers such as young people learn how and with whom to have sexual relations because it may be dangerous due to the fear of AIDS. Mass media has immense power; it can turn loyalty of people against and in favor of political leaders. Several movements in the history are the contribution of mass media (chegg).

Inventors and modern technologies have made the media of current age inseparable part of human lives. The significance of media is undeniable and the impact of media on human lives is long lasting.

Television is the most common source of media. It is an important part of every household. Children of current age cannot live without watching cartoons and their favorite programs. They watch television without tiring for hours. These impressions of television screens become their friends and dreams. When they grow up and start going to schools their eyes catch the images of magazines and popular newspapers. Some of the images remain commit to their memories for years and some efface very soon.

The topic of media is very interesting and one can read it and define it for hours. There are several hot topics that attract the audience, obviously, everybody has a different taste and interest; therefore, people choose specific newspapers and magazines for their study. The dissimilar interests of people are politics, showbiz, sports and many more. The subject of media is very intricate and it has perceptible distinctions according to country, culture and politics.

Tourism is fragmented and intricate industry; it has several dimensions, which perform their roles in hotel chains, tour operators and air carriers. Therefore, smaller organizations at regional and local standards and national organizations have to solve their issues regarding planning, promotion and research at the national standards (Moutinho, 2005).

Certainly, the tourist destination marketing as an activity of business and philosophy of modern business attach the destination product to the market and, which occurs at two occasions: at the level of the organizer’s offer and at the destination altitude. In the present paper, the stress will be given on the destination altitude as the activities of marketing are, usually performed, at a lower level, by tourism organizations and by national tourism organizations.

In the marketing process, the most significant aspects are communication with the market. Kesic (2003) there are two fundamental approaches of communication:

Mass communication
Mutual communication

Mass communication is related to the media just as a liaison within the process of communication and it is generally points towards mass communication. According to Meler (1999), the promotional activities can be segregated into classified large groups.

Fundamental promotional activities such as publicity, public relations, personal selling, sales promotions, and advertising.
Derivative promotional activities such as “word of mouth” advertising, customer services, packaging, and designing.

The most liable bodies are community tourism organizations when at the destination level the communication/promotional mix and its function is considered. However, when the promotional activities are related to other countries, it would becomes the liability of the regional organizations and national tourism organizations along with local organizations because they are familiarized the domestic market and community.

In practice, the tourism workers implement all type of the communication or promotional mix. Nevertheless, most of the researchers and authors suggest that the utilization of public relations, promotions, personal selling and advertising are the fundamental of promotional mix and they are enough for the purpose.

When an organization utilizes editorial, stories, interviews and different kinds of writing material to promote a specific service or product to inform the public; it implements publicity. Through media coverage a product or service is highlighted. Definitely, this is the most vital and cost curtailing method to attract public.

The implication of publicity in travel and tourism is very common. It guides and motivates travelers and provokes them to choose one travel destination over another travel destination. Moreover, it is not just like paid advertisement instead it is an unpaid proposal. The characteristics of publicity are to provide information regarding a specific product or service. An effective publicity leads the customer to bookings and enquires.

The word media has countless meanings. It covers a variety of niches such as radio, television, internet, newspapers, magazines etc. Apart from common media after the arrival of Web 2, which is known as social media that is also an effective media for publicity? However, to select right media for the product promotion requires research and understanding of the market. It is the first important step to promote any product among customers. The organization or related staff has to identify the most popular media for the promotion of their product.

After the launching of the product publicity thorough any medium, the organization has to view the advertisement and judge its audience reaction regarding the product. This approach helps to recognize any flaw in the ad because mistakes can be made. Moreover, the organization recognizes the uniqueness or commonness of their product and it also identifies whether the selected medium can reach to the targeted audience or not.

During a survey regarding the assessment of the impact of social and other medium of publicity that are being implemented in the practices of public relations it was revealed that each year the medium are increasing. For some businesses, Facebook is considered the most significant social media in all public relations and communication endeavors apart from video sharing sites such as podcasts, electronic forums, blogs, YouTube, search engine marketing and Twitter. For organizing and managing an organization’s social media communication and blogs, public relations or communication is consistently the most important function of an organization.

In this regard, marketing is considered second, obviously. In addition, according to the practitioners of social media and other types of medium of publicity are incessantly improving their precision in truth telling, honesty, trust and credibility. Furthermore, the practitioners have observed that the new media serving effectively as a regulator regarding traditional news media and is influencing organizational and corporate culture clearness, which is enhancing a ethical and translucent culture. In addition, the people of public relations are spending more time in social media and blogging in an average workday. They are spending almost 35% of their working time in social media activities.

Social Media

Some people still define the social media and other medium of communication similarly, though they are transforming into new approach. For any person social media is a method to include changes or improvement, assessment and commentary, via online provide and get real-time feedback, and publish digital creative content (Mark Dykeman, 2008). According to Joe Marchese (2007), there is a visible difference between traditional media per se television, radio, magazines, newspapers and social media. Although social media is not the media itself, yet it provides surrounding of conversation, consumption, distribution and discovery of the media. However, both the media have the capability to access to small as well as large audience. Nonetheless, a significant difference is cost difference of both the media, the traditional medium’s production cost is higher than the social media production cost. The social media only requires access to computer and the art of selecting and communicating with the audience.

According to the Pew Research Center (2005, 2008 & 2012), in 2008, for the first time in history people started to read news through online sources instead of traditional mass media. The American tendency of viewing information online exhibits that the trend is transforming; however, it is not surprising, for instance, now Americans subscribe newspapers only on Sunday and all other days of the week they read online.

In 1995, only 10% adult Americans were utilizing the web service; however, in 2009, 80% Americans are taking advantage of internet (Pew, 2005, 2008, 2012). In addition, the University of Southern California and its Center for the Digital Future state that the figures of Americans who are using internet are 82% (2010).According to the search results of Pew 57% of Americans have laptops and 88% have cell phones. Nevertheless, income, education, and age are the provoking factors for the utilization of internet. Moreover, in the mentioned demographic classification, recently, great increase of utilization of internet has been observed. For instance, Americans over the age of 65 almost half of them are utilizing internet 86% of them are very active and have contacts through email and 34% of them have social networks interactions. Furthermore, the younger generation is more active regarding the implementation of new technologies as compare to the older generation. The new generation use internet for specific purposes such as downloading movies, songs and books (Pew, 2005, 2008, 2012).

The most significant advantage in the internet promotion is its easy measurement because websites record the data of visitors’ quantity, their staying duration and can calculate the clicking rates. This specific feature helps the companies to assess the efficiency of the advertising campaign and what further improvement can be done for enhancement (Arkantos, 2007).

Another advantage of online promotion and marketing is its limitless boundaries; obviously, the geography cannot affect its strength and the organization can reach every customer globally. Moreover, the cost of local publicity would be greater than global publicity (UNWTO, 2005 p. 54). Thus, even local companies can reach global customers.

However, Akantos (2007) considers that online marketing has some disadvantages. Though small companies have advantage in promotion of their products through online, yet with low budget, they cannot imagine to invest in huge expensive online advertising campaigns, for instance, they cannot invest in cost per click campaign.

Moreover, the remoteness between consumers and companies makes things suspicious and worse. It is difficult to believe a product or a service, specifically, which has virtual existence. Thus, first to find reliable consumers and companies is necessary. Arkantos (2007) also considers geographical distance between seller and buyer a problem for business. Furthermore, due to countless offers and limitless information the consumer becomes reluctant in making decisions because he/she becomes confuse (UNWTO, 2005 p. 54).

Moreover, not all the people have access to internet; likewise, some of them do not have even computers. Thereby, to reach them through internet is not possible. In addition, there are people who do not use internet, for instance, the population of France is 60 million, yet juts 29 million people utilize the facility of internet (Veille info Tourism, 2007). Kotler and Bliemel (2001 p. 1212) claim that not for all products and services the online marketing is feasible. There are numerous services and products, which may not be promoted or sold through web.

However, Solis, (2011 p. 21) does not agree with other researchers. According to him, any service or device, which gets the help of internet to take advantages of conversation, is social media. Similarly, Wright and Hinson (2012) in their annual studies have observed the utilization of social media. They reveal in their findings that for public relations social media has brought positive changes, the new transforming technology has provided the power to organized communication with inner and outer audiences and, thus, facilitates the professionals. Therefore, social media has become important for various organizations and for public relations its significance cannot be neglected.

The Role of Engagement in Public Relations and Social Media

The word engagement has various meanings; however, its relation with public relations is obvious. The public relations practitioners convey engagement as a contact with any organization or conversation that helps in developing associations. The core focus of Solis’s book is engagement he thinks that one way communication is less important than two-way communication or dialogue; moreover, he emphasis the engagement of organization otherwise he suggests the organization should wind up its business (Solis, 2011, p. 2). Li and Bernoff (2008) also mentioned in their research about engagement and its relation with “conversation” and “talk.” However, Paine who wrote a book about measurement could not mention engagement in detail. Nonetheless, she accepts its significance and she describes the term of management as a number of retweets, number of comments in a blog, and numbers of visits of a visitor on a specific site.

Solis describes the arresting position of engagement. With stakeholders, it is a two-way conversation where, simultaneously, listening and engagement work together through conversation by social media platforms and this process is the responsibility of all the stakeholders. Moreover, he decries completely the obsolete conception that only one department has the responsibility of organizing and looking after the social media. However, in his book, Solis only focused Facebook and Twitter while he completely unnoticed the podcasts, blogs and Flickr. The important parts of engagement are conversation between an organization and community (Solis, 2011).

He considers that without helpful exchange, collaboration, insight and substance conversation is useless because it does not offer mutual satisfaction (Solis, 2011, p. 23). Interestingly, this important aspect is usually infringed in social media. For the benefit of engagement beyond keeping in view common satisfaction or helpfulness of their stakeholders, organizations usually take in worthless posts on their social media. In the chapter of “Rules of Engagement” Solis (2011) describes the method for engagement. Moreover, to guide foster engagement he highlights the significance of developing policies.

The meanings of public relations are diversifying and have various shades such as recruitment campaign, political communication, propaganda, publicity etc. The Association of American Railroads first implemented the term of public relations, in 1897 (Cameron, Wilcox, Reber and Shin 2008, p.66). Nonetheless, in the scenario of communication activities the term is older than 1897 (Cameron al., 2008, p. 63). However, Newsom, Turk and Kruckberg (2007, p. 25) state that in the United States, public relations began in 1600-1799.

According to Newsom et al. (2007, p.25), states that from the beginning of civilized history some of public relations’ functions have been experienced. The experience was felt through different form of mass media such as newspaper in the 19^th century, through radio in the early 20^th century, and through television in the 1950s and for public relations campaigns it improved the opportunities. Moreover, different approaches of communication were practiced before the arrival and growth of the media market and for the conductions of public relations campaigns, the early practitioners of public relations have implemented these.

The most influential methods to develop a brand is public relations. During 2012, for the amplification of regional marketing campaigns of Tourism Calgary public relations have been implemented powerfully.

In communicating of the refreshed brand, public relations activities are vital because they enhance awareness and finally improve the sales. To have people listen the specific message through the positive headlines is the most reliable and quickest approach. In creative campaign finishing the key to understand behaviors through public relations is important as it recognizes the actual drivers of behavioral transformation.

Conclusion

In the current study, the impact of public relations and media has been studied extensively. Moreover, the contrast of mass media and social medai has been conducted. The importance of public relations and media is undeniable for the development of travel and tourism. Organizations related to travel and tourism can take advantages of such studies, which guide them to identify correct medium for publicity.

References

Arkantos Consulting, (2007). Le marketing d’affiliation ou Google AdSense ?

British Institute of Public relations (BIPR)

Cameron G, Wilcox D, Reber B and Shin J-H, (2008), Public relations today –managing competition and conflict, Pearson, Boston.

Cutlip, S.M., Center, A.H. and Broom, G.M. (1985), Effective Public Relations, 6th ed., Englewood Cliffs, NJ

Charlene Li and Josh Bernoff (2008): Groundswell: Harvard Business Press

Dykeman, M. (2008). How do you define social media?”

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

Grunig, J. & Hunt, T . (1984) Managing Public Relations. New York: Holt, Rinehart and Winston.

IFIA: Dr. Farag Moussa: Role of Mass Media and Communication in Improving the General Environment for inventive and Creative Activity

Jefkins, F. (1993). Planned Press and Public Relations. London: Blackie Academic and Professional.

Kesić, T. (2003) Integrirana marketinška komunikacija. Zagreb.

Kotler, P. And Bliemel F., 2001. Marketing Management 10th. edition, Stuttgart: Schäffer- Poesvhel Verlag

Marchese, J. (2007). Defining social media. Viewed from:

Meler, M. (1999). Marketing. Osijek: Sveučilište Josipa Jurja Strossmayera u Osijeku, Ekonomski fakultet.

Moutinho, L. (2005). Strateški menadžment u turizmu. Zagreb: Masmedia.

MILL, R.C. And A.M. MORRISON (1985), The Tourism System: an introductory text, Englewood Cliffs, New Jersey: Prentice Hall.

Melvin L. Sharpe (2000) Developing a behavioral paradigm for the performance of public relations, PRR 26(3), 345-362.

Newsom D, Turk V J, and Kruckberg D, (2007), This is PR – the realities of publicrelations,9^th ed Thomson, Belmont, CA

Pew Research Center (2005). Internet and American life project.

Pew Research Center (2008). Key news audiences now blend online and traditional sources.

Pew Research Center (2012). Digital Differences: A Report of the Pew Internet & American Life Project.

Senečić, J., B. Vukonić. (1997). Marketing u turizmu. Zagreb: Mikrorad d.o.o.

Solis Brian (2011): The End of Business as Usual: Rewire the Way You Work to Succeed in the Consumer Revolution.

University of Southern California (2011). 2011 Digital future report.

UNWTO, (2005) World overview and tourism topics. Madrid: UNWTO.

UNWTO 1999, Marketing tourism destinations online: strategies for the information age. Madrid: UNWTO.

Veille Info Tourisme Canada, 2007. – Web 2.0, vous n’avez pas fini d’en entendre parler!

Wilcox, D., Ault, P. and Agee, W. (1998). Public Relations: Strategies and Tactics. New York: Addison – Wesley Educational Publishers

Winn, M.I. 2001. “Building Stakeholder Theory with a Decision Modeling Methodology,” Business & Society, 40: 133-166.

Wright, Donald K. & Hinson, Michelle D. (2012). Examining how social and emerging media have been used in public relations between 2006 and 2012: A longitudinal analysis. Public Relations Journal, 6(4), 1-42.

Click Here To View Marketing Dissertation Topics

Legal Contract Law

The most common definition of a contract stipulates that it is a legal binding form of an agreement; in other words a contract is an agreement that is enforceable by law (John A. Willes, 2009). On the other hand, under the sherman act an agreement defined as a fundamental ingredient or component of a contract (Turner, 1962). Thus, from these definitions, similarity between a contract and an agreement can be concluded. However, there are few elements separate between them, and identify the term contract as inclusive and legally binding form of agreement (Humphries, 2004). In order to form a contract an agreement must be reached between the involved parties. Thus, an agreement is the most essential component of a formal contract; consequently in that sense, any contract is basically an agreement between specific involved parties (Turner, 1962). On the contrary, individuals may reach agreements between them every day, but not in all circumstances these agreement can be considered as legal contracts enforced by law. To be regarded as a contract, an agreement must fulfil the requirements and conditions necessary to form a legal contract (John A. Willes, 2009).

In order to critically analyse the statement “all Contracts are agreement but not all agreements are contracts,” it must be discussed in the light of the main elements of a valid contract. The essential elements of a valid contract respectively are: offer, acceptance, consideration, intention to contract, capacity to contract, consent to contract, legality of form and legality of purpose (John A. Willes, 2009). An offer is a proposal presented by one party to buy or sell goods or provide a service. In more general terms it is a proposal to do or to give something. To be regarded as an agreement, an offer must be accepted by the second party; consequently the second element of a valid contract is acceptance. Acceptance is agreement of the second party or the offeree to the specific terms of the offer (John A. Willes, 2009). Once the offer is accepted it can be considered as an agreement; however to be considered as a contract, it must fulfil the remaining conditions of a legally binding contract which will be discussed respectively.

While offer and acceptance might be inferred from the conduct or the words of the involved parties, the conduct or words must conform to particular rules that have been formed before acceptance could be considered as legally valid (John A. Willes, 2009). These rules have been formed by the courts over time, and they are the remaining elements of a valid contract which must be fulfilled for an agreement to be considered as a contract. These are: consideration, intention to contract, capacity to contract, consent to contract, legality of form and legality of purpose (John A. Willes, 2009).

Consideration means that the goods or services exchanged between the involved parties must be real, adequate and legal (John A. Willes, 2009). Intention to contract refers to involved parties’ willingness to be a part of a legal contract. Therefore, involved parties must know that they are about to form legal relations which cannot be broken or violated (John A. Willes, 2012). Capacity to contract condition states the cases and conditions required for a specific person to be entitled to enter a legal contract. These conditions include but aren’t limited to sanity and maturity (John A. Willes, 2009). A person who is under the age of eighteen is not allowed to be involved into a legal relation (John A. Willes, 2009). For, example, an agreement can be reached between two parties which both or one of them is a minor, but in this case a legal contract doesn’t exist. In this circumstance, the statement under discussion is explicitly applicable. Consent to contract means that a person cannot be enforced to enter a contract, and it should be subject the free will of involved parties. For instance, if a marriage contract is created by forcing or threatening the groom to marry the pregnant pride, it is not considered as a valid contract (Humphries, 2004).

The last two elements are legality of form and legality of purpose; Legality of form means that a valid contract must be formed in accordance with specific legal roles. For instance, Rules specify that a valid house buying contract must be written and cannot be oral. Legality of purpose means that the contact would only be considered as valid and legally binding if it only was made for legal transactions specified by law (John A. Willes, 2012). To illustrate, an agreement could be reached between two parties for the exchange of illegal product; however, a legal contract cannot be established because legality of purpose rule was not fulfilled. Under the previous circumstances, the statement “all Contracts are agreement but not all agreements are contracts,” is valid.

Bibliography

Humphries, A. (2004) Essential Features of a Valid Contract.

John A. Willes, J. H. (2012) Contemporary Canadian Business Law-10th Edition. Mcgrow-Hill.

John A. Willes, J. H. (2009) Fundamentals of Canadian Business Law-2nd Edition. Mcgrow-Hill.

Turner, D. F. (1962) Definition of Agreement under the Sherman Act: Conscious Parallelism and Refusals to Deal.

Click Here To View Law Dissertations

Merleau-Ponty

Merleau-Ponty’s Work Philosophy of Perception

This philosophical essay intends to identify and explore the key features of Maurice Merleau-Ponty’s approach to the question of perception in “Phenomenology of Perception” by him and discusses the problems or weaknesses if there are any. This philosophy essay expresses argued position on a subject. It presents consideration to be good reasons for the claims that are made and the views defended in this literary piece of work. Furthermore, the essay intends to clearly, distinguishes the philosophical problems addressed in it, and strictly sticks to the reflections upon the issues that are raised by this topic. In order to clarify and develop a point to examine more precisely the common background in the theory of perception in Merleau-Ponty’s work the essay discusses views of others who also have written on the topic (perception).

Analysis

“Phenomenology of Perception” (1945) is the major work of philosopher Maurice Merleau-Ponty, one of the founders of phenomenology. The author criticized in this book design Cartesian mentalist and the language, which would make the simple words representations of concepts mentally or objects outside (Merleau-Ponty, 2004, pp.01-589).

Perception is a faculty biophysical or phenomenon physio-sychological and cultural links to the action of living worlds and the environment through the senses and ideologies individual or collective. In humans, perception is also related to the mechanisms of cognition by the abstraction inherent in the idea and concepts learned in thought. The word therefore means perception or sensory ability (the instinct for example), is the process of collecting and processing the information or sensitive sensory (in cognitive psychology, for example), or awareness resulting. In experimental psychology, in the human being, there are scales of perception conscious perception and unconscious, also known as implicit or subliminal (Baldwin, 2007, 33-41). This distinction has been extended to other animals insofar as it is known, or in another measure, can be trained and conditioned to give or not they have received or not a stimulus. The perception of a situation involves senses, the mind, and the ideas at the moment and time.

Fortunately, a close analysis of the overlap between “Phenomenology of Perception” by Merleau-Ponty not only allows us to understand the benefit of hindsight but also to assess the consistency of the analysis of perception. In “Phenomenology of Perception”, Merleau-Ponty (1962, pp.01-589) develops more fully theories of perception, he tries to describe our first experience of living and the world as it is given before any interpretation and scientific knowledge.

Author rejects both empiricism to its choice of atomization and failures to report in general terms of structural models of our experience and rationalism (01-589). Because it separates conscience of the world and proposes an existential perspective that can establish dialectical relationship between the subject and the world, it recognizes the nature of consciousness, mainly due to the situation and the life of the body. Consciousness is consciousness of something and is directed toward the world. “Phenomenology of Perception” “goes further by seeking to discover intentionality operative or pre-reflexive links and predicative that underlie our existence in the world. The first examination of the relationship between man and intentional and the world is through reductions phenomenological method and the first is to put all preconceived outstanding about reality and the natural attitude of everyday life that is “bracketed” and examined in a philosophical or transcendental perspective for understanding the essential dialogue between consciousness and the world.

The precise description of pre-reflective experiences, such as especial articulation, movement, time perception, sensation and sexuality, are one approach. The analysis of pathological cases in which the normal conditions of being in the world are suspended and intentionality weakened and it allows further research. Correspondingly, the human mind has not a pure perceptual function. It is inseparable from the physical data that put thoughts into motion, thus this is the novel form, and more concretely in a modern world, it introduces relativity, which can best grasp this entry in a situation. In short, as the work of Merleau-Ponty keep a referential dimension intrinsic, it is characterized by an effort unrewarding to realism but by the manner of reporting a particular phenomenological point of view (Merleau-Ponty, 1962, pp. 01-589).

Perception is what gives the material concept of the understanding, the “union” forming the sensible object. Perception is reality, which is external, and it is not even given in perception. This perception is a sensation that applies to an object general and not to a specific object. In this sense, the “perceptual judgment” remains purely subjective, opposes “judgment of experience” that is subject to the conditions of necessity and universality. If perception is subjective, so you do not consider as true or as false as it is the understanding that one is able to make a judgment that will have a truth value. When we speak of illusion or appearance is therefore refers not to despise but to perceptions of the mind that makes the mistake of taking subjective mode of representation, perception, an objective mode. The perception, whether sharp or not, shows the registration of rights in a “horizon” which cannot escape, in a space where it is enclosed. The view is thus limited to a certain distance, as well as hearing and touch has their own limitations.

Perception is always wrong because it is too human. Until then, it had always been regarded either as an image or as a sign of external things. In all cases, it was thought as a representation of the thing. I believe that the perception gives something “in the flesh” in his bodily presence unlike the experiences of consciousness (e.g., imagination) that represent things missing. This design is based on the intentionality of consciousness shows that it is by no means a receptacle containing a set of images, but acts of sight. For example, the perception of a cube has nothing to do with the imagination of the same cube, as it is a case of the other “targeted” different kind though their object is the same. Perception is never isolated. We have a perceptual field in which ordered a series of perceptions, what is called perceptual sketches that complement each other in building activity of the meaning of things (Webster, Werner & Field, 2005, pp.241–277).

Based on the reflections of Husserl, Merleau-Ponty (1962, pp.01-589) seeks to demonstrate the first perception. This, he says, is by no means the result of an arrangement of sensations but rather an activity of s open to the world of life. He wants to show that the distinction Husserl between the act of sight and the target object is not primitive and that below it there is a reciprocal implication of subject and object. The experience of perception is the location of this co-belonging of consciousness and the world and that is why perception is a primary experience and precedes speech (301-315).

The suspension of classes and hierarchies that we submit our impressions are often accompanied by a relaxation of the functional perspective on individual objects of our world and a higher prevalence of incongruous detail in the perception of our environment. Such a bet is pending is seen more strongly in times of crisis, when the loss of conscious control over the body and the environment produces a hypersensitivity impressions we reflect normally as trivial and irrelevant. It draws our attention to the operation of pre-reflective and overwhelming our senses, independent of an individual’s personal trauma (LaRock, 2002, pp.231–258).

If knowledge was based entirely on the sensation then it should share the properties of the latter. However, the sensation is a snapshot, not a state but an event that remains vanishes (Merleau-Ponty, 2004, pp.88-136). Sensation is more “mobile” unstable and always singular, it is the result of the encounter between an external object and the ability of sensitive man; meeting takes a different form each time. Thus, knowledge is nothing more than a cluster of sensations that it would be impossible to organize because its elements are incomparable with each other. It is in this sense that we must break away from sense perception to reach true knowledge (Casarett, 1999, pp.125–139).

I agree that sensation is equal to knowledge but it seeks to demonstrate the utility value it for life. For life, it does not mean only that of man but that of any organization. Sensation and movement are the two properties shared by all living beings. The feeling gives access to the outside world and its changes and allows the body to adapt to it and thus to ensure its own survival. Merleau-Ponty (1962, pp. 01-589) gives rise to a true science of sensitive, distinguishing the “sensitive clean” which refers to one of the five senses and not others, and “common sensible” seized all the senses (e.g. movement). He hangs up the existence of a sixth sense, “common sense” that allows the unification of sensitive data from the various sensory organs. In a way, we can say that sensation becomes a real object of knowledge even if it is still not the subject in the sense that it would be knowledge.

I believe sensation is not a reliable source of knowledge. For this, I use the famous example of the “piece of wax.” Initially it presents a set of sensible qualities: it is hard, cold, smells of flowers makes a particular sound when hit etc… Suppose we approach this piece of wax fire, then all of these qualities disappear and replaced by others. However, it does not say much for this thing, which is come before me, is something that I perceived the wax before. This is the same wax that before and after exposure is to fire so this is not what I perceived with the senses that can explain what the wax. However, the imagination, which conceives of something changes, cannot do more because these variations are endless. Only the mind can. Thus, I come to consider the perception rather than as a “vision” but as “an inspection of the mind.” Perception is an act of intellection, producing an idea that can be “imperfect and confused” or “clear and distinct”. In the latter case, there is identification of perception and truth. It is found again in the early 20th century with Alain, which makes perception a “function of understanding.”

The problem of perception has been a central concern of classical philosophy about the origin of knowledge, as evidenced by the famous “Molyneux problem” that looks like this: Suppose a man born blind who has been learned to distinguish by touch a cube and a sphere of the same metal and of equivalent size, find the sense of sight. However, it is noted that the response was generally negative (Webster, Werner & Field, 2005, pp.241–277). Note further that the issue was the assessment of the powers of the senses of sight, often seen as primordial sense, compared to the other senses. The outside world is a construction from sense impressions. One thing, it is the meeting by intelligence, various sensations under the same name, so there is nothing that exists outside of what is perceived. Somehow, the chair I am sitting over there as soon as I left the room. This doctrine is called immaterialism (Casarett, 1999, pp.125–139).

We can also mention the skeptics who do not have little involvement in the devaluation of “knowledge” sensitive. Indeed, a compiled list of cases demonstrates that the perception is sometimes an illusion, an error and in that sense, we should not be proud. Let two of their examples: a square tower we look from a distant point seems round, and a stick dipped in part in water seems twisted (LaRock, 2002, pp.231–258). The list of examples, however, does not answer the question of whether these errors are due to a perception that is itself misleading or judgment that accompanies it. Note finally that the Epicurean Lucretius says it is impossible to demonstrate that the senses deceive us and more importantly, the state would condemn this reason (LaRock, 2002, pp.231–258).

The feeling does not correspond to the coincidence between the subject and the feeling quality (e.g. red) collected. Consciousness is perceptual consciousness. On the contrary, the feeling is embodied in a “horizon of meaning” and is from the perceived meaning that there may be associations with similar experiences (and not vice versa). Printing cannot “wake others”: the perception is not made of sensitive data supplemented by a “projection of memories “in effect, seek to memories presupposes precisely that sensitive data will be formatted and have acquired a sense, then that is what meaning the “projection of memories” was supposed to return (Casarett, 1999, pp.125–139).

Merleau-Ponty (1962, pp. 101-622) explicitly rejects then design Cartesian or mentalist language, which would make the simple phrase of representations mental. The words are not, for him, a reflection of the thought: “the word is not the” sign “of thought”. It cannot be severed from the speech and thought: both are “wrapped in one another, meaning is made in the word and the word is the existence of external sign. He focuses on a conception of the word and the word, which does not reduce to simple signs of thought or the external object, but become the presence of this idea in the sensible world, not the garment (22). He discovered in the conceptual meaning of words an existential meaning emotional (33).

The expression does not that translate well meaning, but realizes or actualizes. The language implies an activity first intentional, which passes through the body itself. Thought is nothing inside; it does not exist outside the world and out of words. There is therefore no thought precedes speech thought is already language (“this inner life is an inner language”) and the language is already thinking.

Conclusion

This philosophy essay explored the key features of Merleau-Ponty’s approach to the question of perception in Phenomenology of Perception problems or weaknesses in of the topic and it found that the body is not a potential object of study for science and an inherence of consciousness and body with the analysis of perception must consider. The primacy of perception signifies a primacy of experience, insofar as perception assumes an active constituent. Maurice Merleau-Ponty analyzes the notion of sensation, despite apparent evidence in the natural attitude and rejects the notion of pure sensation. He then refutes and prejudices the objective world because the perception is rooted in subjectivity that actually produces the indeterminate and confusion. We can conclude with following words that psychology has failed to define the sensation, but the physiology has not been more capable, as the problem of “objective world” arises again and enters in contradiction with the experience to understand what it means to “feel”, we must return to the pre-objective internal experience.

References

Casarett, D.J., 1999 Moral perception and the pursuit of medical philosophy. Theoretical Medicine and Bioethics, 20(2), pp.125–139

LaRock, E.F., 2002 Against the Functionalist Reading of Aristotle’s Philosophy of Perception and Emotion. International Philosophical Quarterly, 42(2), pp.231–258

Merleau-Ponty, M., 2004 The World of Perception O. Davis, ed., Routledge

Merleau-Ponty, M., 1962 The Phenomenology of Perception, Routledge

Webster, M.A., Werner, J.S. & Field, D.J., 2005 Adaptation and the phenomenology of perception. In C. Clifford & G. Rhodes, eds. Fitting the Mind to the World Adaptation and Aftereffects in High-level Vision Advances in Visual Cognition. Oxford University Press, pp.241–277

Baldwin, T., 2007 Reading Merleau-Ponty : on Phenomenology of perception, Routledge

Maurice Merleau-Ponty Wiki Page

Financial Investment Essay

Basics of Investment

Financial Investment – To know how to invest, first it is necessary to understand the basics of investment. To learn an investment art is more like to study a new language. A fundamental thing any successful investor needs to do is to allow his earnings to run on for a long time. Before consideration of some advance theories and practical investment, there is a need to understand the fundamental concepts and terms of investment. Money Investing is a complex thing; moreover, people often feel themselves confused due to sufficient knowledge and poor experience in this field. In this article, we will try to make main basic investment theories clear. Moreover, people should thoroughly study the investment concepts before their attempt to understand the mechanism of investment.

Risk and Return

Risk and return are the most fundamental concepts of investment. Risk and return are directly proportional data. It means, taking a high risk, investors will receive a high return and the vice versa. There is an example for comparison. Some people use to dive in the water knowing nothing about its depth. Others prefer first to measure water depth, to calculate its indicators, and then to find out about diving safety. This example proves extremely high benefits for investors to predict a possible investing risk and to imagine its future effect.

In some books on the investing theme, they consider a risk as “a chance to the actual rate of Return on Investment can differ from expected”. In other books, the risk refers to “probability of negative outcome on your investment.” Thus, people use a risk concept to calculate the level of uncertainty. To take a low risk means to expect low return, and the vice versa.

The investors stay always in a search for a right solution that will help them to achieve the best high return with the best low risk. This is an ideal situation, hard-to-finding in the current uncertain economic environment. As discussed, high risks lead investors to high returns, whereas low risk normally leads them to low returns. The rate of return on investment mainly depends on the level of risk associated with investment. It is easy graphically to explain the relation between risk and return as the figure below illustrates.

Often people misunderstand the risk concept because of assuming that the high-risk level leads the high-return rate in any case. A high risk actually means only a possibility to provide an investor a high return, but there are no guaranties. Analogically, low-risk taking does not always lead to low return-earnings, because it is just a possibility to get low returns. Another concept necessary to understand is a risk-free rate. The risk-free rate is the rate of return on investment, achieved by investors through taking no risk.

As an example, it could be a rate of return on United States Government Bond. If the U.S. Government provided an 8% return on its bond investment, the risk-free rate would be 8%. Afterwards, the question arises: “Does investor aim to earn more than 8%?” The more he aims to benefit from the investment, the higher risk involved. Taking into account an acceptable scope of investing risk, the investor can accept a reasonable decision about his interest in the investment process. Benefits from investments can extremely vary investor to investor. There are a number of factors, affecting investors’ decisions, for example, an objective, personal situation, income level, etc.

Financial Investment Diversification

Diversification is one of vital investment basics. It is important to understand this concept to get to know why investors diversify their portfolio. Most investors cannot resist the short-term economic fluctuations, increasing as well as decreasing earnings from investments. To avoid a negative effect from economy uncertainty, investors need to diversify their investments. Diversification means managing and minimizing the risk by investing money in different sectors. As a complex concept, diversification needs its explanation through the example below.

There are two companies in a coastal area. One company sells sunscreen creams, and the other one sells umbrellas. As you can find out, the economic situation both of them depends on a season. If there were a rainy season, the umbrella company would operate with higher financial result. It is because of increase in demand for umbrellas. However, in sunny weather, the umbrella company most likely would have nothing to earn. In this situation, we have to invest a part of your investment in both the companies so that we are able to survive in both seasons.”

Diversifying investments Investors should abide by two main rules described below.

It is necessary to invest money in different sectors allocating savings to stocks, cash, bonds, and in real estate. To avoid industry related risks, it is better to invest in different industrial sectors.
It is necessary to invest money in companies with a variable risk. Before that, investor should choose an entity with different risk levels; moreover, blue chip shares should be not always preferred.

Diversification helps to achieve the long-term goals and makes us able to stand in short-term fluctuations. Diversifying their investment portfolios investors only minimizes the risk; however, there is no guarantee of high earnings. There is always a certain amount of risk involved no matter how much investor diversifies his investment.

Often investors wonder how many items they should use to achieve an optimum level of diversification. Experts suggest that 20 different stocks added in the portfolio are the most reasonable decision to avoid all individual risks attached with investment. Diversification means to buy the shares of the companies, variable in a size and type of industry.

Dollar Cost Averaging

The most difficult task while understanding the investment basics is picking the tops and bottoms of the stock market. Every investor aims to buy the stock at the lowest level and sell at record high level. Dollar cost averaging is a concept of buying shares for a particular amount regardless of their price. If an investor wants to buy the stocks of XYZ Company for $500 every week, we will buy the shares regardless of their price. If the price is higher, it is rather reasonable to buy fewer shares, and vice versa. The cost of the shares will be average out in the end. This technique helps to reduce the level of risk involved by purchasing shares at different prices.

Asset Allocation

Asset allocation is primarily decision about where to invest money. People, which want to invest their savings for a longer term, should invest in stocks. However, if people wish to invest for a short or medium term they should put their money in securities of different sectors and industries. Asset allocation is a technique that provides a balance in your investment and helps to diversify investments in a safe way. In asset management, it is actually necessary to divide the investment between cash, bonds, real estate, and stocks. Each of these investing directions provides its own level of risks and returns; therefore, the behavior of each sector is mainly different.

The asset allocation concept has a relation to an age of a person. Investing their money, the older people prefer to take lower risk. It is because of their savings, which in retirement generally come from the only source of income. To preserve their assets, it is safer for retirees to invest money in more conservative manner.

Another important aspect of asset allocation is to choose proper portfolio items for investment. The question arises: “How much money should we put on stocks and other securities such as bonds, securities?” Older and retired persons need more to invest in the items in which less risk is involved such as bonds and securities.

Random Walk Theory and Financial Investment

In 1973, Burton Malkiel first developed Random Walk Theory. The book titled “A Random Walk Down Wall Street” is now considered a classic investment theory. This theory states that the previous performance of any company in the stock market cannot be used to predict with precision its future performance. In 1953, this theory was first examined by Maurice Kendall stated that the fluctuations of stock prices were independent of each other.

Random Walk Theory says that the stock market always takes a random walk. People are able precisely to predict almost nothing about stock changes in the future. The chances of going the stock prices both upward and downward are equal. The followers of this theory assume a possibility to achieve high returns due to the correct calculations. Burton Malkiel stated that all types of analysis worked out to predict volatility of stock prices in the future make investors just waste their time. Malkiel supposed that only the long-term shareholding allows achieving high returns on your investment.

There are many followers of the Random Walk Theory. The others consider Investment a complex science, and they cannot invest their money based on a book written 40 years back. Today, investment basics changed as compare to 1973; moreover, nowadays people have a great access to the market news and ways to exchange views.

Hypothesis of Efficient Market

In 1960s, Eugene Fama first developed the idea of Efficient Market Hypothesis This theory states that it is not possible to beat the market as prices reflect all information. Disputed theory creates many controversies. Followers of this theory suggest futility of all types of technical and fundamental analysis.

In Efficient Market Hypothesis, investor can buy and sell shares anytime he wants. The return on investment mainly depends on a chance rather than investor’s skills. According this theory, if the stock market is efficient, the prices always go up. That is why it is useless to look for low-price shares.

Technical analysts always resist this theory due to their assumption that there is no logic in that old theory of financial investment. There are many arguments against the Efficient Market Hypothesis. As an instance, people invest their money because of the expectations, based on analysis of the company’s past performance and logical assumption about future prices.

Optimal Portfolio

The Optimal Portfolio concept is based on Modern Portfolio Theory. Harry Markowitz first introduced this concept. He stated that different portfolios provide different levels of risks as well as return. The investors should accept a right decision about how much high risk they can manage. Then, on a base of that decision, they diversify their portfolios. The figure below explains what the optimal portfolio means.

If we look at the figure, we can see the optimal portfolio is always in the middle of the curve. Going up the straight line, portfolio reaches higher risk involved. Investors also have to think how volatile portfolio he should choose. Certainly, volatile financial investment is the one that provides investors with high returns; however, at the same time, risk involved is also higher.

Capital Asset Pricing Model

In 1952, Harry Markowitz developed Capital Asset Pricing Model, known also as a model for risky securities pricing. Some others have overhauled this concept during 60s. The model reflects the relation between risk and return. Its main idea manifests that expected return on security is equal to a sum of the security’s risk-free rate and a risk premium. If the result is lower than the required return, then it is not reasonable to invest in that option. The formula below describes Capital Asset Pricing Model.

Expected market Return = Risk Free rate +

+ Beta × (Market Return – Risk Free Rate)

Note: Market Return – Risk Free Rate = Equity market premium

In formula above, the result largely depends on the Beta value of the security. Stock’s beta measures the sensitivity of a stock relative to the overall market or an index. The trend is that the higher Beta’s value the higher expected market return. The sensitivity of stock usually is compared to the S&P 500 Index. However, this is just a theory, and there is no guarantee that this theory gives us 100% results in a practice case.

This article is aimed to help people to understand the basic concepts of investment and give readers some ideas about how the investment theories work.

Financial Investment Relevant Posts

Investment Pension Management

View Finance Dissertation Topics Here