The Marketing Orientation free essay sample

The Marketing Orientation Lay Views of Marketing Ask the average person what marketing is and a range of answers will probably be forthcoming. Typically, the answers offered tend to fall into three loose categories:- Presenting an organisation and its products to potential customers. Launching, advertising and promoting new products to support the sales force. Llaslng with advertising and sales functions to attract new customers to existing products. The problem with all of the above, however, is that they emphasise what marketers do rather than what marketing actually Is. To arrive at a more formal definition, we herefore need to consider the underlying philosophy behind the marketing function which, as we shall see, has evolved subtly over the years. Generally speaking, the marketing concept can be seen as having evolved via three distinct developmental stages:- Production Orientation (pre 1950s) Sales Orientation (1950s-80s) Marketing Orientation (1980s+) A word of caution, though. We will write a custom essay sample on The Marketing Orientation or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In each of the above, the dates provided represent only a rough guide to the dominance of particular business orientations they are not absolutes, as some text books would have us believe. The reality is that organisations ave always deviated from these general trends. Even today, for instance, we can find firms still rooted in the traditional production orientation phase, whilst Adam smith espoused the virtues of a market-led approach to management as early as the eighteenth century! tore In many ways, the production orientation phase can be seen as an inevitable consequence of mass industrialisation. Expressed simply, this phase in the development of marketing is characterised by a continual focus upon the product. Manufacturers work on the assumption that products, when produced in sufficient quantities and at the correct price, generate consumer demand. When sales fall, the response is therefore simply to lower prices further through increased productivity. It is a simple philosophy and highly effective in situations where demand far outstrips supply. The classic example of the production orientation is the Ford Motor Company. Prior to the Second World War, conditions were right for mass automotive production. Craft production techniques maintained high prices and demand was far in excess of supply mainly because very few people could actually afford a car. Within this climate, Henry Ford developed the assembly line method of production and the Model T Ford was born, the first relatively inexpensive mass-produced car. The focus was very much on minimising production costs wherever possible, hence Fords now famous assertion that consumers could have any colour, as long as its black! The Model T Ford was a resounding success, but its market dominance was actually quite short-lived. Many of the problems the company experienced are typical of an organisation adopting a production orientation in its marketing strategy. In particular, low-cost mass production is very easy to replicate by new market entrants and Ford was almost put out of business by intense competition from General Motors. As both supply levels and consumer disposable income increased, GM began to offer a greater range of colours and refinements to a more discerning new clientele. The Ford Motor Company soon began to face severe financial problems, particularly when supply eventually began to overtake demand. Supply-demand problems are not the only dangers associated with a production orientation, however. So-called marketing myopia can also be a danger, companies focused solely upon their own products and those of their immediate competitors failing to recognise threats emerging in other industries. Expansion in the dry leaning industry, for example, was halted almost overnight by developments in fabric technologies and the growth in domestic appliance ownership. On a more general level, even where a product does not become obsolete, over-refinement can lead to a widening gulf between consumer needs and product specification. The home video recorder, for instance, became increasingly complex during the 1980s and 90s, to the extent that consumers began to complain quite vocally that the product was becoming too complicated to actually use! So, the production orientation centres management of the marketing function around ass production of the product itself, continuous cost reduction and product innovation forming the basis of marketing strategy. Such an approach is very replicated by competitors and the tactic is vulnerable to marketing myopia and problems of consumer-product fit. The Sales Orientation To a certain extent, the adoption of a sales orientation can be seen as an intuitive (some would say knee-jerk! ) reaction to the problems of the production oriented phase. If demand is falling, simply go for the hard sell and persuade customers to buy through aggressive promotion. It is this philosophy which leads to the common ay view of marketing as merely being selling. The problem with this approach is that it still focuses attention firmly on the product as produced, the emphasis being upon sales rather than consumer satisfaction. This is fine where a companys market affords few opportunities for repeat business (e. g. fitted kitchens, double glazing). Even here, though, it can be argued that dissatisfied customers can damage a companys reputation through word of mouth. Moreover, where competition intensifies, a sales orientation demands ever larger budgets in order to merely hold on to existing consumers. Quite simply, a company ends up pending more and more money on promotion Just to stand still. Take the example of the package holiday. From the mid 1960s, demand increased dramatically and the initial success of a few companies (e. g. Thomson) was soon under severe threat from intense competition. The holiday market became ever more cut-throat and the emphasis was firmly on cutting prices to drive out competitors. Low prices were often at the expense of quality and consumer satisfaction, however, and travel agents soon became as notorious as estate agents in the consumer psyche. Established companies began to resort to ever more ingenious (or often Just bizarre! methods of promotion. Thomson, for example, introduced the so-called honest holiday brochure, including negative comments about a particular hotel or resort alongside the traditional sales blurb. Initiatives such as these were, however, typically greeted with cynicism by consumers. Moreover, they completely missed the point instead of making a virtue of honesty about your products weaknesses and spending a fortune trying to persuade customers to buy a product you know doesnt quite satisfy their requirements, wouldnt it be far simpler to Just find out exactly what the consumer wanted and then provide it?!? The sales orientation, then, uses aggressive pricing and promotion to counter increasing competition and falling demand. Such a strategy can be quite effective as a short-term fix, but in the longer term organisations must strive to provide added value as price differentiation narrows and there are few further production savings to be made. Towards a Marketing Orientation interrelated sets of environmental factors:- Increasingly sophisticated and diverse consumers, with more disposable income (e. g. epending on the consumer, a car can be a mode of transport, a status symbol or even a hobby). Increasing competition and globalisation (e. g. ue to low labour costs overseas, falling trade barriers, the growth of the Web). Decreasing product differentiation (e. g. generic drugs, look-a-like products and clones, lower price differentiation, etc. ). New technologies (e. g. traditional watch-making effected by developments in electronics, printing effected by computer technologies, music CDs and cassettes by mp3s on the Web, etc. . In essence, the marketing orientation places the customers needs at the heart of business strategy and is based around a view of marketing as being the ability to create and keep profitable customers (Brown, 1987). Lets consider that definition for moment. By creating customers, Brown means that organisations should be monitoring the environment in which the business operates and acting on opportunities presented by changes in consumer needs and/or competitor activities. Similarly, keeping customers refers to the need to minimise threats to the organisations existing customer base arising from changing consumer needs and/or competitor activities. And profitable customers? The key here is the need to focus primarily upon those customers with the potential to generate revenues which exceed business costs, rather than on Just pursuing any customer at any price. In effect, then, the emergence of a marketing orientation marks a transition from an organisation having an efficiency goal (Doing the right things) to the adoption of an effectiveness goal (Doing things right). So, a more appropriate definition of the term marketing might be as follows:- Marketing is the management process responsible for identifying, anticipating and satisfying customer requirements profitably. Chartered Institute of Marketing (1999) Characteristics of the Marketing Orientation Sadly, no single definition of a marketing orientation exists on which all would agree. Some authors focus primarily upon the need for customer and competitor intelligence (e. g. Kohli Jaworski, 1990), for instance, whilst others focus more on the organisation of the business unit itself (e. . Narver Slater, 1990). In a review of the literature, however, Lafferty and Hult (1999) identify four key features of a marketing oriented firm, common to all current theoretical perspectives:- Customer Focus: All models place the importance of identifying and satisfying customer needs at the heart of the business, together with the need to strive to provide added value to the customer in the face of intense competition and the ontinual erosion in product/service differentiation. This focus is seen as pervading all areas of the organisation as a guiding principle, of equal relevance even to those functions with no direct customer contact at all. Marketing is thus seen as a business philosophy rather for all within the organisation, rather than as Just a particular person or teams Job. Information Dissemination: The second common feature is the emphasis on a need for comprehensive information about the organisations customers, competitors and operating environment. There is a recognition that successful organisations are ntelligence driven, with a thorough understanding of customer needs and motivations, together with the potential impact of competitor activities upon them. Information is disseminated throughout the firm, not Just within the marketing function, and input is encouraged from all areas and levels. Interfunctional Coordination: Following on from the above, it is not sufficient to merely disseminate intelligence if the organisational mechanisms are not in place to ensure inclusive planning. All models of the market-led firm therefore stress the need to act upon information received in a coordinated way, with strategic and actical decisions being taken interfunctionally. Taking Action: Finally, all models agree that organisations need to be continually amending strategy in light of current and anticipated market developments. This responsiveness should be corporate wide, utilising all of the firms resources to proactively ensure continuing satisfaction of customer needs. ursuit of added value at the heart of its activities, has a corporate culture which shares information and ideas across functions, and adopts a management structure which ensures maximum responsiveness to changing circumstances via inclusive tactical decision-making processes. Identifying the Business Orientation How do we know if a business is marketing-oriented? One test is simply to ask the company the deceptively simple question: What business are you in? Exercise: Ask a senior manager in your own o rganisation this question. What do you make of his or her reply? What does it tell you about the organisations approach to marketing? If you get the opportunity, try asking senior members of staff in the Business School the same question! If the organisation is production or sales oriented in its marketing philosophy, the answer given will focus firmly on the product or service offered for sale. So, seen from this perspective, a senior executive of a company such as IBM might describe the business in terms of selling computers. By contrast, a marketing oriented executive would probably define IBM as providing solutions to customers business problems. In this latter definition, the emphasis has switched from selling a product to satisfying consumer needs. Managing Marketing In a marketing-oriented organisation, successful management of the marketing function cab be divided into four key areas: analysis, planning, control and organisation. Analysis: Successful marketing begins with a thorough understanding of company, ompetitor and market activities. Information and its dissemination becomes a crucial resource, informed by marketing research and the ongoing development and refinement of marketing information systems. Planning: Following on from the above, market opportunities must be rigorously assessed and appropriate strategies developed. Through careful planning, customer needs become the focus of corporate decision-making and resources are more efficiently allocated toward their satisfaction. In effect, the marketing function acquires a crucial role in subsequent production, financial and human resource Control: Progress of the strategies developed must be continually monitored and, where necessary, amended appropriately. The marketing-oriented company sees control mechanisms as an essential failsafe, enabling corrective action to be taken as soon as possible should the need arise. Organisation: Last but not least, effective marketing management requires an organisational structure which allocates specific responsibilities to specific individuals, encourages effective communication throughout the organisation and, most importantly perhaps, encourages all those employees within the organisation ho do not have direct contact with the consumer to nevertheless remain totally focused upon satisfaction of the customers needs. We will return to all of the above in subsequent sessions, particularly the final session in the marketing block. CASE STUDY: CORUS The case study for this lecture is called Developing a stronger customer focus and concerns organisational changes made by the steel corporation Corus. The case study itself poses five basic questions to help guide your analysis:- 1 . Why is it important for business organisations today to be willing to change? 2. What external difficulties did Corus face while it was introducing the change process? 3. Why did Corus Construction and Industrial Unit create a series of account managers? 4. How did the changes that took place at Coruss Construction and Industrial Unit involve a change of culture? 5. How could you evaluate the effectiveness of the changes made at Corus? When reflecting on the case study after the session, there are a few particular issues you might want to consider in relation to these lecture notes. For instance:- Does the company now satisfy the criteria for a marketing oriented organisation in erms of its customer focus and organisational philosophy? What were the obstacles and potential pitfalls in achieving the current business orientation? What do you think a senior Corus executive might give today as an answer to the question What business are you in? Do the changes made simply involve marketing, or are there specific areas you might pick out where the interface with strategic management and operations are particularly apparent? Thinking about issues such as these after discussion of the case studies each week will help enormously when it comes to the course assignment and exam!

Impressive List of Topics for Speech Competition Which Wont Bore Your Audience

Impressive List of Topics for Speech Competition Which Wont Bore Your Audience Impressive List of Topics for Speech Competition Which Won’t Bore Your Audience If you’re looking for speech competition topics, it means that you take part in a contest in your college, national tournament or you’re just a member of Toastmasters! Anyway, if you have no idea what to talk about in front of the audience, you’ve come to the right place. We will provide you with a list of topics for speech competition where you will be able to find a suitable subject for your performance or at least get inspired to come up with your own one. But before that we would like to remind you the most important rules and requirements that you have to remember while giving a speech: Keep to the formal structure – introduction, main body, and conclusion. Make sure your style of language is appropriate to your speech theme. Avoid plagiarism at all costs. The speech must be polite and shouldn’t offend people on racial, gender, religious or any other basis. Control your movements: you are allowed to use slight natural gestures and keep them to a minimum. Match your look with the topic of your speech (within reasonable limits). These aspects are very important to consider while choosing the subject because you need to understand which topic you will be able to meet the rules as well as do your best. So, keep them in mind while having a look at our 20 sample topics for a speech competition. White Supremacists and Statues of Confederates: to Take Down or Not to Take Down? Mandatory Minimums as a Legal Display of Racism on the Governmental Level in Matters of Drug Abuse and Drug Trade Lack of Trust in Mass Media as an Instrument of Propaganda The Future of Pilotless Airliners with Autopilot Controls A New Economic Bubble: Do Governments Have to Regulate the Blockchain Markets? Donald Trump and Big Data: a Winning Combination Sophia – the First Robot in the World to Get a Citizenship and Other Privileges The Role of Ireland in the Brexit Process Recent Hurricanes and the Prospects of Geoengineering AIDS Epidemic Among Children What Will Happen When the US Acknowledges Jerusalem as the Capital of Israel? Slobodan Praljak’s Suicide During the Trial: What Does It Tell Us about Bosnia-Herzegovina? The Lack of Child Psychiatrists in Ireland and Its Consequences Who Are the Rohingya People and Why Did Pope Publicly Address Them? The Problem of Fake News on Facebook How Police Use Facebook to Catch Criminals Sexual Harassment Revelations of 2017: What Was the Trigger? Accelerated Bachelor’s Degrees: Their Advantages and Dangers The Premises for Banning College and School Beauty Contests Consequences of Revealing Your Life on Social Media Go through this list and while choosing the final topic to remember – it is important that the subject you’ll settle with would be interesting for you as well as for your audience. That’s one of the most significant criteria that you should always stake into account. At writing company you can buy speeches online which will impress your professor.

Change On Food Production Environmental Sciences Essay

Change On Food Production Environmental Sciences Essay Agriculture is highly dependent on specific climate conditions. Moderate warming and appropriate carbon dioxide in the atmosphere may help plants to grow faster. But more severe climate change such as global warming, floods, drought, and hail may reduce yields. According the survey, from 1981 to 1990, the average global temperature has increased 0.48  °C than 100 years ago. If greenhouse gas emissions continue the warming will also continue, with temperatures projected to increase by 1.4  °C to 5.8  °C between 1990 and 2100. (Richardson et al. 2011) Increases in temperature and carbon dioxide (CO2) can be beneficial for some crops in some places. But to realize these benefits, nutrient levels, soil moisture, water availability, and other conditions must also be met. Higher CO2 levels can increase yields. The yields for some crops, like wheat and soybeans, could increase by 30% or more under a doubling of CO2 concentrations. The yields for other crops, such as corn, exhibit a m uch smaller response (less than 10% increase). However, some factors may counteract these potential increases in yield. For example, if temperature exceeds a crop’s optimal level or if sufficient water and nutrients are not available, yield increases may be reduced or reversed. Crops grown in the United States are critical for the food supply here and around the world. U.S. exports supply more than 30% of all wheat, corn, and rice on the global market. Changes in temperature, amount of carbon dioxide (CO2), and the frequency and intensity of extreme weather could have significant impacts on crop yields. Warmer temperatures may make many crops grow more quickly, but warmer temperatures could also reduce yields. Crops tend to grow faster in warmer conditions. However, for some crops (such as grains), faster growth reduces the amount of time that seeds have to grow and mature. This can reduce yields (i.e., the amount of crop produced from a given amount of land). (EPA 2012) All the problem need to have fast and effective ways to be solve well. In the text will talk other country use what solution to decrease the damage and to protect the crop. Global warming has a serious impact on agricultural production, according to the Consultative Group on International Agricultural Research (CGIAR) research report pointed out the vulnerability of agriculture to climate warming performance of consumption in the world’s largest of several major varieties of grain, wheat, cereal, corn and rice are particularly sensitive to high temperature, decreased production will cause food shortages. (CGIAR 2012) World Agro forestry Centre chief ecologist Dr. Lewis à ¢Ã¢â€š ¬Ã‚ ¢ Will Carter report pointed out that the impact of climate change on agriculture in developing countries, for example, China’s agricultural production, the main crops are rice, wheat and corn, warming irrigated and rain-fed spring wheat production decreased by 17.7% and 31.4%, respectively, th e average corn production will cut 3% -7%; (Chiras 2012) warming will accelerate microbial decomposition of soil organic matter, resulting in the decline of soil fertility, implementation of the pesticide will increase and extend the crop growing season, so that not only increase agricultural costs, and affect the safety of the food. (Cline 2007)

World War 1 Research Paper Example | Topics and Well Written Essays - 3000 words

World War 1 - Research Paper Example Nations had normally used their armed forces to protect their territorial integrity and also to gain domination over other nations by annexing their territories. Among these two objectives, the wish to gain dominance over other nations has pushed many countries on the path of war. When many nations of the world have this objective and the other group of nations tries to protect their territory from these nations, it would result in World Wars. Along with these two objectives, many other factors have also pushed nations to align among themselves, so to fight against other alliances. Thus, when many nations grouped among themselves to fight other groups, it resulted in World Wars. Our world got shaped both geographically and historically by two global conflicts that happened in twentieth century. This paper will first discuss and analyze the factors which contributed to the outbreak of the First World War, then will discuss how it happened, and how various countries got involved, endin g with how the interests of these countries were impacted, and how the war came to an end. Overview World War I or the Great War, as it was predominantly called till the start of the Second World War, was the first global war as many nations got involved. It started off on 28 July 1914 and continued till 11 November 1918, with the participating nations siding with either one of the two alliances. The war was propagated by two major alliances, the Entente Powers and the Central powers. The Entente Powers were mainly comprised of United Kingdom, France, Russia, along with other associated countries or empires. The Central powers consisted of Germany, Austria-Hungary and other associated empires like the Ottoman Empire. It took place mainly in the continent of Europe, between the European countries, although other fronts were opened in other continents of Asia, Africa, Australia, etc. Early Causes: Formation of Alliances (1850’s to 1907) Central Powers or Triple Alliance With ma jor European territories getting evolved and actualizing into nations in the 19th Century, there begin various political and military machinations to garner more territories and importantly strengthen each nation’s existing territories. The key thing the major European nations did was to enter into various political and military alliances within other European nations and territories, so that a balance of power can be maintained throughout Europe. This process was first initiated by Germany. In October 1873, then German Chancellor Bismarck tried to form a League of the Three Emperors uniting the kingdoms of Austria–Hungary and Russia with Germany. However, Germany could not actualize that alliance because Austria–Hungary and Russia had differences of opinion regarding the Balkan policy. So, leaving out Russia, Germany and Austria–Hungary formed a grouping called the Dual Alliance in 1879. This alliance became a Triple alliance, when Italy became part of i t in 1882. To further strengthen this alliance, and to remove Russia out of the equation particularly in relation to the Balkan region, Germany’s new Chancellor Wilhelm II in 1890 avoided renewing the Reinsurance Treaty, which Germany signed with Russia. Entente Powers or Triple Entente With Germany strengthening his position, other major European powers of Russia, France and Britain became threatened and initiated alliances among themselves. Firstly in 1892, two years after the breakdown of its relations with Germany, Russia entered into an alliance with France. â€Å"Germany's western and eastern neighbours, France and Russia, signed an alliance in 1894 united by fear and resentment of Berlin.† (Sheffield). Russia and France’s aim to counter the German led Triple Alliance, got a major boost when United Kingdom became part of

Technical Report Essay Example | Topics and Well Written Essays - 1000 words

Technical Report - Essay Example This study utilized six variables. The first two were ethnicity and education both being measured in a scale of 1 to 6. MOMs specific variables were, physical health motive sub-scaled into health orientation and weight concern, achievement motive sub-scaled into goal achievement, and competition. Recognition and affiliation were sub-scales of social motives. Psychological coping, life meaning, and self-esteem measured psychological motive. All the specific MOMs variables were nominal variables measured in a scale of 1 to 7. A mean score for each variable was computed across the items for the subscale and a mean of 3.5 and above was considered important motivators. The variables included in this analysis-included gender measured as a categorical variable. The variable gender was taken from a forced-choice question where participants were required to state whether they were male or female. Weight, BMI, age and height were all continuous variables. Weight of the participants was measured in pounds, and height was measured in inches. Marital status and ethnicity were forced-choice questions where the participants were required to choose any of the five categories for marital status and six categories for ethnicity. Marital status was categorized into single, married/partnered, divorced, separated, and widowed and ethnicity was categorized into Asian/Pacific Islander, black, multiracial, white, other, and prefer not to answer. The rest of the variables measured MOMs motivators in health orientation, weight concern, goal achievement, competition, recognition, affiliation, psychological coping, life meaning, and self -esteem. Health orientation and weight concern measured physical health motive. Goal achievement and competition measured achievement motive. Sample descriptive statistics were conducted on Gender, Weight (lbs.), BMI, height (inches), Marital status, age, ethnicity, and education. The frequency was to

Fallen Souls In the Inferno :: essays research papers fc

Fallen Souls in "The Inferno" Thesis Statement: In each Circle and Canto there are different penalties to pay but it is for sure that each forbidden soul in the Inferno will live forever in eternal suffering. I. Introduction II. Medea and Jason A. Jason's love affair. B. Medea and the three children exiled. C. Medea's slaying of the three children and Glauce. D. Jason's penalties. III. O. J. Simpson A. His Crime. B. His Penalties in the Inferno and in life. IV. Benedict Arnold A. His Crime. B. His Penalties in Hell. V. Conclusion Cantos III, V, and XXXIV are only three of the Cantos of the fallen souls of the Inferno. The Inferno is the place we call Hell. It reeks with bad smells and bugs and fire along with the many other hideous things. The Inferno has many Cantos and Circles, each for a different sin or wrong doing towards another. In each circle and Canto there are different penalties to pay but it is for sure that each forbidden soul in the Inferno will live forever in eternal suffering. Our first soul to discuss is eternally locked in Canto V, Circle Two: The Carnal. This man, Jason, became king of Cornith by committing adultery against his wife, Medea, with the king of Cornith's daughter, Glauce. Jason returns to Medea and tells her that she and their three children are to leave his home immediately so he and Glauce can move in. The following day Medea sends Glauce a poisoned robe which kills her. This causes Jason to come to Medea for revenge, where he finds his three children murdered by their mother's hand. Jason grief stricken falls upon his own sword and dies there with his sons. Jason is reputed to the Carnal a place where souls who give up there own life for passion â€Å"are swept forever in the tempest of Hell, forever denied the light of reason and of God,† (Literature 635). He is forever with the judge of Hell, Minos. The Caina is â€Å"the first ring of the last circle where those who performed acts of treachery against their kin,† (Literature 638). One destined for the Caina is O. J. Simpson. This man committed a sin that would send him to Canto XXXII. Simpson killed his wife Nicole Brown Simpson and her friend Ronald Goldman in a jealous rage. Simpson will surely be judged by Minos to go to Caina were his soul will forever have to live in retribution and think about what he had done against his wife, Nicole. O. J. will also have to live the rest of his life on earth and pay cash sums to the Brown's and Goldman's.

Indiana Building Supplies

Indiana Building Supplies – Comment An analysis of these ratios shows that both Clemens and Willis are right. All of the profitability ratios for IBS are higher than the industry average. Thus, IBS seems to have done well. And indeed, it was done well for its shareholders in 2005. Note, however, that the current and quick ratios have generally been trending downward and are significantly lower than the industry averages as well as the stipulations in the loan covenants. Thus, liquidity is poor. Moreover, inventory is turning over very slowly and the average collection period has increased significantly.These figures are manifestations of IBS’s policy of raising prices and focusing almost exclusively on Indiana customers who are relatively price-insensitive but have a more uncertain demand. It seems like IBS is charging a sufficiently high price to overcome a sales level that is significantly lower than it was in 2004. In fact, it has probably been lucky to encounter a r obust demand from its Indiana customers (it is reasonable to assume negligible demand from Ohio and Missouri), so that it did not experience a more precipitous decline in sales relative to its 2004 sales.In addition to this, IBS has also experienced very high volatility in its liquidity and inventory turnover ratios during 2005, another development that is consistent with its pricing strategy. The lengthening of the collection period seems to indicate that Indiana customers are more risky in the sense that they don’t pay as promptly as the average customer. What does this mean for the bank? Peter Willis is correct in being concerned. What IBS seems to be doing is to adopt a strategy of increasing risk for the possibility of higher profit.Raising the prices of its outputs is equivalent to concentrating on the Indiana market and excluding the Ohio and Missouri markets. This means changing its market in such a way that IBS now faces a riskier demand schedule for its products, bu t one that yields it higher profits if it is â€Å"lucky†. Since the bank is simply repaid what it is owed, it does not benefit from this higher profit-higher risk strategy. If IBS is successful in selling off all that it produces (i. e. , if the Indiana customers exhibit sufficiently high demand), then all of the extra profits go to IBS.On the other hand, if demand is poor and IBS cannot unload its finished goods inventory, the bank may not be repaid and could be left holding a mix of finished goods, work-in-progress and raw materials inventory. So, the bank absorbs much of the risk associated with IBS’s pricing strategy. This is a classic example of moral hazard related to risky debt. Note also that IBS’s debt ratio has been increasing since 2000, and now it is well above the industry average as well as what is permitted in the loan covenants. This also hurts IBS’s creditors since their risk exposure is increased.Moreover, as we saw in our discussion of capital in this chapter, a decline in equity capital relative to total assets increases the firm’s incentive to take more risk at the creditors’ expense. So, Clemens’ willingness to go along with Klinghoffer’s suggestion now is not that surprising. Note that the benefits of increased profitability are skewed more in favor of IBS’s shareholders; for 2005 the return on the net worth of IBS is 299 basis points above the industry average, whereas its return on total assets is 70 basis points above the industry average.Let us now see if IBS could generate enough cash internally to repay FNBB its old loan as well as the new loan. As we saw in our earlier discussion, there are three sources of internal cash generation: (i)net income and depreciation, (ii)reduction of accounts receivables, and (iii)reduction of inventory. Now, suppose that we can get IBS to bring its ratios in line with industry averages. How much cash will this generate? (i) Net income a nd depreciation: Assuming cash flows from earnings and deprecation in 2006 remain the same as in 2005, we have cash flows from earnings plus deprecation = $202,500 + $72,000 = $274,500. ii)Reduction of accounts receivables: In 2005, IBS’s average collection period was 49 days, whereas the industry average was 37 days. Current accounts receivable = $600,000 (Average collection period = 49 days) Projected accounts receivable = (Sales / day) * 37 days = ($4,500,000/365) * 37 days = $456,164 where ($4,500,000/365) is sales/day for 2005. If IBS could reduce its average collection period by 12 days, it could generate $600,000 – $456,164 = $143,836 (iii)Inventory: In 2005, IBS’s inventory turnover ratio was 5, whereas the industry average was 8. 5.If IBS could increase its ratio to the industry average by reducing its inventory, then this would generate $900,000 – $529,412 = $370,588, where $900,000 is the actual 2005 inventory and $529,412 = year 2005 IBS sales / 8. 5. Adding up these three sources gives us $788,924 (=$274,500 + $143,836 + $370,588). If a new loan were to be extended, IBS would owe FNBB $473,000 + $220,000 = $693,000, assuming a 10% interest on the new loan and no new interest accumulation on the old loan. Thus, if sufficient preventive measures could be taken, IBS could generate enough cash internally to pay off the bank. A word of caution, though.The $788,924 is a very optimistic estimate since it assumes that IBS can bring its ratios in line with industry averages without affecting its profit margin. This is unlikely. We would recommend not calling the old loan and extending the new loan, but asking IBS to do the following: 1. Reduce sales prices so as to be competitive with sellers in Ohio and Missouri. 2. Pursue a more aggressive marketing strategy to reduce inventories and accounts receivables. 3. Cut back on production to ensure inventory does not get stockpiled. 4. Get tough in collecting old accounts from Indiana customers even if it means sacrificing some future business. .Provide some augmentation of equity by cutting back on dividends and possibly issuing some more new equity at an appropriate time. Get the debt ratio down. 6. Do not take on new debt to replace the $200,000 that will be paid off with the bank loan. 7. Secure the bank loan with specific (inside) collateral if not already done so. 8. Design a realistic periodic loan repayment plan. 9. Consider the possibility of asking for a personal loan guarantee from Bob Clemens. We have assumed that the accounting practices of other firms in the industry are comparable to IBS’s, so that a comparative ratio analysis like this is meaningful.