Tag: Theory

  • Total Quality Management (TQM) Theory Essay

    Total Quality Management (TQM) Theory Essay

    Total Quality Management (TQM) Theory, Meaning, Essay; It is an essential tool that makes an improvement reaction to firms and companies. It is a technique of managing future outcomes, and it does consist of more features than just ensuring product and service quality; as it is a technique of running people and business processes to guarantee customer satisfaction in every phase. TQM, helps organizations to do the right thing at the right time from its first attempt. Therefore, we will be introducing the principle of TQM and how it reacts with organizations along with different pros and cons that could affect using of this vital technique.

    Here is the article to explain, Total Quality Management (TQM) Theory Essay!

    Many authors have discussed TQM Standards. Samuel K. M. Ho in the article ‘Is the ISO 9000 Series for Total Quality Management?’ wrote that the philosophy of Total Quality Management is that of promoting continuous improvement in an organization and focuses primarily on total satisfaction for both the internal and external customers, within a management environment that seeks continuous improvement of all systems and processes. He added that the philosophy is based on an intense desire to achieve victory.

    Achieving victory is a challenge for today’s companies. Competition is intense and senior managers and CEOs thrive to achieve a sustainable competitive advantage over their competitors. “Though some people see TQM as something necessary to reach competitiveness and emphasize the relation between TQM and success (eg U/s GAO, 1991; Becker, 1993; Ghobadian and Gallear, 1996), others claim TQM to be merely a management fad and point out that many companies have failed to implement TQM (eg Binney, 1992; Harari, 1993; Hachman and Wageman, 1995)” (Ulrika Hellsten and Bengt Klefsjo) As Hellsten and Klefsjo mentioned in their article there are different opinions of TQM.

    TQM standards;

    The goal of this assignment is to analyze the different views of TQM and identify whether TQM standards do help companies promote quality. It also analyzes whether TQM standards vote for the satisfaction of both the internal and external customers as said by Samuel K. M. Ho, or else they are diminishing the real scope of quality by constraining innovation and creativity in today’s businesses. Studies by different authors both for and against TQM will analyze to understand whether TQM standards improve or lessen the quality of products and services.

    It is important to add that various authors discussing TQM mentioned that there exist different descriptions of TQM and also (Boon O K, Atumugam V, Hwa T S (2005) said that surprisingly, a limited amount of rigorous research has existed done towards identifying the effects of soft TQM practices on employees’ work-related attitudes”. To start with it is vital to understand what exists meant by TQM and its purpose.

    What is Total Quality Management (TQM)?

    TQM is a customer-focused approach program that focuses on customer satisfaction by delivering the best quality product at the lowest possible price. It is an organizational strategy that involves everybody for contribution. The main aspect is the prevention of defects, by working on a target of zero defects. Moreover, TQM is methodical as it depends on the information gained and it is a continuous improvement process. Throughout the years before, TQM has reached to be an important and outstanding for firm’s process capabilities improvement to lead to a fit and maintain competitive advantages.

    Definition of Total Quality Management;

    “To define quality one has to first consider who the customer is, and subsequently consider what the requirements of each different customer group are at any one time.”

    The Total Quality Management book of Leicester says that it is important to remember that when the level of quality the customer expects to perceive by him as existing exceeded by the level of quality he has received, then an opinion of “good quality” formed. Vice versa the level of quality is said to be poor when the customer’s expectations of the level of quality he should receive exceed the level of quality the customer perceives he has received. Therefore for companies to succeed it is important to understand the level of quality that the customer is expecting.

    Various definitions have stood identified by different authors such as;

    • “Fitness for purpose”
    • “Conformance to requirements”
    • “Zero Defects”

    Though the above phrases of quality all have different meanings, in general, they all have common characteristics such as; the aim of satisfying the customer, providing the best quality at the lowest possible price, and also should be a companywide strategy. A definition that gathers the meaning of TQM has existed defined in a website of Lean Manufacturing Concepts.

    “TQM is a process and philosophy of achieving best possible outcomes from the inputs, by using them effectively and efficiently to deliver the best value for the customer, while achieving long term objectives of the organization”.

    This sounds like an appropriate definition of TQM since it emphasizes the value received by the customer and in return, the organization attains its objectives.

    Definition of Quality;

    Quality in manufacturing defines as a measure of excellence or defects free that exists taken by the adherence to measurable and provable standards to reach the consistency of a specific output that will satisfy a certain customer. Also, Total Quality Management is one of the techniques used to achieve a specific standard to serve customer requirements. A frequent quality description is delighting the customer by fully achieving their desire and expectations; this could include performance, delivery of item, reliability, cost-effectiveness, and appearance.

    Therefore, the company needs to know what are these desires and expectations, as well as identify them, understand, and measure their ability to meet them. Quality commences with a detailed market investigation to determine the actual requirements of a certain product and the customer’s need. The main role of quality in organizations is the cooperation of everyone, as it is compulsory to achieve a total quality organization.

    History of TQM;

    In the present world, we hear a lot about quality control and management, which even did not exist in the eighteenth and nineteenth centuries. However, there were some quality control actions taken by individuals at a small level. Quality control and management developed and evolved during the entire twentieth century. In the early 1900s Fredrick W. Taylor presented the quality concepts, he exists known as the “father of scientific management”. In 1913, JC Penney became one of the first people to introduce the fundamentals of total quality management by bringing up ideas like “customer satisfaction”, “quality”, “value”, “training” and “rewards for performance” to the managerial bases for the business.

    The history of TQM starts through Elton Mayo’s Hawthorne experiments from 1927 to 1932. The Hawthorne experiments showed that the worker’s involvement in the decision-making process enhanced the production. In the 1930s the Western Electric Company considered lighting levels, workday lengths, and rest period length in the Hawthorne plant to maximize productivity. And the researchers found that as the lights were brighter, workers’ productivity increased and vice versa. This change of the behavior of the employees exists called the Hawthorne effect.

    More to know;

    In the 1940s US was in World War II. World War II pushed standardization, quality control, and manufacturing practices to a higher level. The idea of TQM grew very slowly in the USA even though many TQM aspects existed developed in the USA in the 1950s. Quality stood implemented in the American and European industries only in the 1980s because there was no preparedness of the business and governmental organizations to take adequate steps concerning the findings of technical and statistical work. The decision-making structures at that period were not ideal to solve the quality control problems. In the 1960s, the idea of “Zero-defects” gained favor. Philip Crosby, who was the founder of the “Zero defects” idea concentrated on employee motivation and awareness.

    In Japan, the quality before the 1940s existed limited to inspection quality. The post-war era saw dramatic progress in the Japanese quality and that happened over a small period. Quality control existed introduced to Japan by a few American experts. In the 1950s Edward Deming imparted statistical methods and Dr. Juran imparted quality management methods to the Japanese. Edward Deming knows as the “father of modern quality”. It was in the 1950s when Armand Feigenbaum wrote Total Quality Control.

    This was the first work that initiated Total Quality Management theories. The Japanese realized the need and benefits of quality management. A proper effort stood initiated in 1956. In 1962 the Japanese had innovated the concept of quality control. In 1968 they had developed their version of TQM and presented it as Company-Wide Quality Control (CWQC) and the most key features of TQM in Japan stood achieved between 1950-1965. After reading the history of TQM, also you’ll know the total quality management theory below are;

    Theory of Total Quality Management (TQM);

    Total Quality Management (TQM) is a quality improvement body of methodologies that exist customer-based and service-oriented. TQM was first developed in Japan and then spread in popularity. However, while TQM may refer to a set of customer-based practices that intend to improve quality and promote process improvement, there are several different theories of total quality management at work guiding TQM practices.

    Deming’s Theory;

    Deming’s theory of Total Quality Management rests upon fourteen points of management he identified, the system of profound knowledge, and the Stewart Cycle (Plan-Do-Check-Act). He knows for his ratio – Quality is equal to the result of work efforts over the total costs. If a company is to focus on costs, the problem is that costs rise while quality deteriorates. Deming’s system of profound knowledge consists of the following four points:

    • System Appreciation – an understanding of the way that the company’s processes and systems work
    • Variation Knowledge – an understanding of the variation occurring and the causes of the variation
    • Knowledge Theory – the understanding of what can know
    • Psychology Knowledge – the understanding of human nature

    By being aware of the different types of knowledge associated with an organization, then quality can broach as a topic. Quality involves tweaking processes using knowledge.

    Crosby’s Theory;

    Philip Crosby is another person credited with starting the TQM movement. He made the point, much like Deming; that if you spend money on quality, also it is money that exists well spent. Crosby based on four absolutes of quality management and his list of fourteen steps to quality improvement.

    Joseph Juran’s Theory;

    Joseph Juran is responsible for what has become known as the “Quality Trilogy”. The quality trilogy is made up of quality planning, quality improvement, and quality control. If a quality improvement project is to be successful; then all quality improvement actions must be carefully planned out and controlled. Juran believed there were ten steps to quality improvement.

    The EFQM Framework;

    The European Foundation for Quality Management (EFQM) Model is based upon nine criteria for quality management. There are five enablers (criteria covering the basics of what a company does) and four results (criteria covering what a company achieves). The result is a model that refrains from prescribing any one methodology, but rather recognizes the diversity in quality management methodologies.

    Ishikawa’s Theory;

    Creator of the last theory, Dr. Kaoru Isikawa is often known for his namesake diagram, but he also developed a theory of how companies should handle their quality improvement projects. Ishikawa takes a look at quality from a human standpoint. Also, He points out that there are seven basic tools for quality improvement.

    What Should I do About the Competing Theories?

    These are a few of the many different TQM theories, and we haven’t even covered Six Sigma here. When learning about total quality methods, it is important to remember that these are guidelines. What is important is that you and your company practice consistent steps towards improving quality in your organization and processes. Use the tools that have been shown to work and make a commitment. Committed leadership means committed employees.

    Total Quality Management (TQM) Theory Essay Image
    Total Quality Management (TQM) Theory Essay; Image by knowledgetrain from Pixabay.
  • 4 Analysis of Leadership Theories Models Management Essay

    4 Analysis of Leadership Theories Models Management Essay

    4 Analysis of Leadership Theories and Models on Management Essay; This article journal is related to the analysis of Leadership Theories. In this post, four theories will discuss; there is leader-member exchange theory (LMX), path-goal theory, transactional-transformational theory, and the full-range leadership theory (FRLT).

    Here is the article to explain, the 4 Analysis of Leadership Theories and Models on Management Essay!

    Before we started to discuss the analysis of Leadership Theories and Models; the writer felt that is often difficult to separate leadership theories and models. He also informed that the reason for this study of “theory” and “model” will use interchangeably except; there is a very clear difference between them.

    Firstly, the journal discusses the leader-member exchange theory. Leader-Member Exchange Theory also called LMX or Vertical Dyad Linkage Theory; describes how leaders in groups maintain their position through a series of tacit exchange agreements with their members. A leader’s approach stands addressed by the theories to the business environment and the follower’s perception of a leader’s performance. The direct relationship between a leader and a follower and the theoretical context for their interactions is the dyadic relationship. So that, there is 3 quality of the leader-follower interaction that stood determined by the LMX; such as locus of control, need for power, and self-esteem.

    Theories and Models part 01;

    A size of how a person knows his control over his life and environment is the locus of control. A person feels a sense of control over his life and activities calls has a high internal locus of control. This type of person also positively correlated with job satisfaction. The need for power is that employees who understand that need by asking for feedback on performance; compete more visibility jobs and leadership opportunities at their work and career. Another is self-esteem, employees have a sense of their value to the company; which typically manifests as more job satisfaction and more emotional resilience.

    Besides that, the path-goal theory of leadership existed developed to describe the way that leaders encourage; and support their followers in achieving the goals; they have been set by making the path that they should take clear and easy. Path-goal theory describes a leader’s activity in leading followers within the context of the organization’s environment in a highly structured environment followers do not need a good deal of guidance to perform their works. Unless in an unstructured environment they may need more.

    Theories and Models part 02;

    Another is the core of the transactional-transformational theory revolves around the alignment of personal and organizational goals; which the theory states benefits both the leader and the follower. The transactional-transformational theory comprises four transformational components, the four I’s such as idealized influence, intellectual stimulation, individualized consideration, and inspirational motivation, and three transactional components such as contingent reward, passive management by exception, and active management by exception.

    Lastly is the full-range leadership theory (FRLT). An extension of transformational leadership theory to nine dimensions of leader behavior calls FRLT. The emotional part of leadership isolate by idealized influence and is a view of the follower’s emotional engagement with the leader. According to the writer, the full-range leadership theory is also closely associated with the multifactor leadership questionnaire.

    Theories and Models part 03;

    From this journal, the measure of the success of a theory is based on several reasons; that is all the theories are considered in a business environment where success link to measurable business criteria. Success has much meaning, but here will mean that there is a good fit between the leader’s behavior and the theory. The writer especially remembers this does not necessarily mean that a theories’ success implies a leader’s success; because some of the measures will be negatively related to leader performance.

    Each of the theories under consideration has explained modes of leader behavior, considering both the leader’s effect on followers and the interaction between leader and follower. A leader-member exchange scale assesses the degree to which leaders and followers have mutual respect for one another’s capabilities, feel a deepening sense of mutual trust, and have a strong sense of obligation to one another. Another way to analyze is the dimensions of measurement for LMX focus on the follower and his/her job satisfaction and feeling of control.

    Theories and Models part 04;

    Transformational leadership defines as a leadership approach that creates valuable; and positive change in the followers with the end goal of developing followers into leaders. A transformational leader focuses on “transforming” others to help each other, to look out for each other, to be encouraging and harmonious, and to look out for the organization as a whole. With this leadership, the leader enhances the motivation, morale, and performance of his followers through a variety of mechanisms. These include connecting the follower’s sense of identity and self to the mission and the collective identity of the organization; being a role model for followers that inspires them; challenging followers to take greater ownership for their work, and understanding the strengths and weaknesses of followers; so the leader can align followers with tasks that optimize their performance.

    An example, Sagie and Koslowski (1994) state that employees involved in tactical decision making, participation in decisions making, feel more empowered and involve in the company in future pay and assignment. A person who is practicing active management by exception calls a transactional leader; who can use a path-goal and leader-member exchange. The factor for this is the outcome, the transactional leader sees as the total output of the exchange; and, the transformational leader sees as a stage in the growth of the follower. In an action to motive a follower, the transactional leader appeals to both the follower’s intellect and emotions. He will use the best approach at his disposal to move followers forward in achieving his vision.

    Theories and Models part 05;

    In addition, a leader has a full toolkit of capabilities to control his relationship with subordinates given by the full-range leadership theory. According to this journal, the full-range leadership theory can explain most leadership activity simply; and leadership-member exchange theory directly addresses the varying relationship between leaders and their subordinates in a context. But since this happens at a higher level, the leadership-member exchange does not address the dissemination of vision. Besides, the ability of a leader to direct the activities of subordinates had been addressed by the path-goal theory.

    Based on these, the writer feels that transactional-transformational theory is more complete than the prior two theories. The reason for his feeling is it includes their activities, by implication, and expands on the basis for leader actions. Otherwise, this leader also retains the ability to function in a transactional mode in more stable situations. The superior to transactional-transformational theory is full-range leadership theory; which is an attempt to complete them with the addition of components. Humphreys (2001) found that transformational leaders were more likely to grasp the implication of technology adoption than transactional leaders.

    Theories and Models part 06;

    Leaders can grow in many ways like educational environments, extending their knowledge of leadership and the world around them. A leader can temper his decisions with wisdom although some would contend that philosophy is useless. Leadership theories are relatively recent phenomena that have been advanced by the sudden interest in historical leaders and the desire to identify the characteristics and behaviors that these leaders exhibited. By understanding the characteristics of the leader, their successes and failures, as well as the political and work environment they faced, the modern-day worker can hope to replicate this success. All lie in a multi-dimensional continuum existed considered by the leadership theories that consider the emotional, intellectual, physical, and value structure of leaders and followers.

    Charismatic leadership is leadership based on the leader’s ability to communicate and behave in ways that reach followers in a basic, emotional way, to inspire and motivate. It’s difficult to identify the characteristics that make a leader “charismatic”, but they certainly include the ability to communicate on a very powerful emotional level, and probably include some personality traits. Developing “charisma” is difficult, if not impossible for many people, but luckily charismatic leadership is not essential to be an effective leader. Many other characteristics involve leading effectively; and, there is significant evidence to indicate that it simply is not necessary to have this elusive charisma to lead others well.

    Theories and Models final part;

    Finally, the writer’s conclusion is between these four theories it appears that none of them are counterproductive. He felt that a leader can pursue them in a balanced manner and expect reasonable results. So the full-range leadership theory is the most complete of the theories. The reason is it includes too many activities.

    4 Analysis of Leadership Theories and Models on Management Essay Image
    4 Analysis of Leadership Theories and Models on Management Essay; Image by Mohamed Hassan from Pixabay.

    References; The Analysis Of Leadership Theories Management Essay. Retrieved from https://www.ukessays.com/essays/management/the-analysis-of-leadership-theories-management-essay.php?vref=1

  • Arbitrage Pricing Theory (APT) Advantages and Disadvantages

    Arbitrage Pricing Theory (APT) Advantages and Disadvantages

    Arbitrage Pricing Theory (APT) Advantages and Disadvantages – also explain its Meaning, Importance, Benefits, Assumptions Pros, Limitations, and Cons. Arbitrage Pricing Theory (APT) Essay is a pricing model based on the concept that an asset can produce predictable results. To do this, it is necessary to analyze the relationship between assets and their risk factors as a whole. APT was first developed in 1976 by Stephen Ross to study the influence of macroeconomic factors. In this way, both the return on the portfolio and the return on a particular asset can be predicted by examining the various independent variables in the relationship.

    Here is the article to explain, Arbitrage Pricing Theory (APT) and its main points of Meaning, Importance, Benefits, Assumptions, Pros, Advantages, Cons, Limitations, and Disadvantages.

    What are the major advantages and disadvantages of APT (arbitrage pricing theory)? It is based on the idea that in a properly functioning securities market there should be no arbitrage available. This makes it possible to predict the outcome of this certainty over a longer period of time. What is meant by Arbitrage Pricing Theory (APT)? The name itself is a suggestion of theory and what it does. This is the mechanism by which investors identify specific assets. Imagine participation at the wrong price. Investors can lower share prices by knowing the value they hold. So, without a doubt, APT can be said to be one of the most important mechanisms that should be used. Why we need to know the underlying advantages, importance, benefits, assumptions, limitations, disadvantages of arbitrage pricing theory (apt) as to give below.

    Why is the importance of arbitrage pricing theory?

    It is a theory that helps investors and analysts find the right structure and multi-pricing model for asset security based on the relationship that assets have expected returns to risk (watch in youtube). In particular, the theory does its job, which states that a security’s fair market price may not be determined correctly. The main assumption of this theory is that market action is becoming less and less effective and perfect.

    Therefore, it can be said that the pricing of acquired assets was not carried out correctly. Or the asset is over-or undervalued, which can cause problems during this period. But here too, market action should ultimately be able to remedy the whole situation or problem where the asset price returns to a fair market condition.

    For arbitration, the wrongly valued property securities represent a short-term opportunity for the realization of a practical gain, and this too without any particular risk. When we talk about APT flexibility or arbitrage pricing theory, it can be said that APT flexibility is little more than the stock model or CAPM. In addition, APT is proving to be a very complex alternative to the CAPM option.

    It is a theory that provides investors and analysts with the ability to adapt any research that carries out on the market, as well as assets. However, applying this theory is a little more difficult than you can imagine, and also takes a long time. It may take some time to determine the risk factors that could affect the price of the asset in question.

    Arbitrage Pricing Theory (APT) explain its Benefits.

    Now that you know more about this theory; let’s move on to some of the other important passages that may interest you. Why do you think this model is so popular with investors? Here we will discuss why this model is so important. So you have to read it to the end to understand what we are talking about. Arbitrage pricing theory is an asset pricing theory that measures the expected return on an asset as a linear function of various factors.

    The reason APT sees this as a revolutionary idea is that users can easily adapt this model to analyze the best security. There are several other pricing models on the market to help investors decide the value of securities. Nothing works as well as this theory and pricing model. Apart from that, APT is also very useful in building portfolios because with the help of this manager you can easily test the portfolio exposure factors.

    What are the assumptions in arbitrage pricing theory?

    Arbitrage pricing theory works with a pricing model that takes into account many sources of risk and uncertainty. Unlike the Capital Asset Pricing Model (CAPM); which only takes into account one factor for the level of risk in the market as a whole; the APT model takes into account several macroeconomic factors that theoretically determine the risk and return of a particular asset.

    These factors provide a risk premium to investors that need attention; because they involve the systemic risk that diversification cannot eliminate. APT offers investors the opportunity to diversify its portfolio; but, also to select individual risk and return profiles based on premiums and sensitivity to macroeconomic risk factors. The venture investor will take advantage of the difference between the expected and actual returns on assets using arbitrage.

    To understand APT we need to study the basic assumptions of arbitrage pricing theory as given below.

    • This theory is based on the principle of capital market efficiency; and, therefore assumes that all market participants act to maximize profits.
    • It assumes that there is no arbitrage and when that occurs; participants commit to taking advantage of it and bringing the market back to equilibrium.
    • The market assumes to be smooth; H. No transaction fees, no taxes, you can short sell, and the number of shares to choose from is unlimited.

    Pros of arbitrage pricing theory.

    We need to study the main pros or advantages of arbitrage pricing theory as given below.

    • The APT model is a multi-factor model. Therefore, the expected return is calculated by taking into account the various factors and their sensitivities that can affect stock price movements. In this way, the factors that have a strong influence on the stock price can be selected.
    • The APT model is based on assumptions of arbitrary price or market equilibrium which, to some extent, leads to reasonable expectations of returns on risk-weighted assets.
    • In contrast to CAPM, the basic multi-factor model emphasizes the covariance between return on assets and exogenous factors. CAPM emphasizes the covariance between return on assets and endogenous factors.
    • The APT model works better in cases with multiple periods than the CAPM, which is only suitable for cases with one period.
    • APT can apply to capital expenditures and capital budget decisions.
    • The APT model does not require assumptions about the empirical distribution of returns on investment, unlike CAPM, which assumes that returns on equity follow a normal distribution and therefore APT is a less restrictive model.

    Cons or Drawbacks or Limitations of Arbitration Pricing Theory.

    We need to study the main disadvantages or cons or drawbacks or limitations of arbitrage pricing theory as given below.

    • The model requires a shortlist of the factors that affect the inventory in question. Finding and listing all the factors can be a difficult task and you run the risk of ignoring several others. There may also be a risk that random correlation could cause a factor to be a supplier to have a significant impact or vice versa.
    • The expected rate of return for each of these factors must achieve, which depends on the nature of the factor may or may not always be available.
    • Such a model requires calculating the sensitivity of each factor, which in turn can be a difficult and possibly impracticable task.
    • The factors that affect the stock price of a particular share can change over time. In addition, the associated sensitivity may fluctuate which must continuously monitor, which makes computation and maintenance extremely difficult.

    Advantages of APT (arbitrage pricing theory).

    We need to learn the underlying advantages of arbitrage pricing theory as gives below.

    Allow more sources of risk.

    APT allows multiple risk factors to include in the data set, rather than excluding them. That way, individual investors can gain more information about why some stock returns move in certain ways. This eliminates many of the movement problems left by other theories because the data set contains more sources of risk.

    Allows unexpected changes.

    APT is based on the idea that no surprises will happen. These are unrealistic expectations, so Ross adds equations to support the unexpected change. This makes it easier for investors to identify the asset with the greatest potential for growth or default based on the information provided by the opportunity itself.

    There are fewer restrictions.

    APT does not have the same portfolio requirements as other forecast theories. In addition, there are fewer restrictions on the types of information a prediction can fulfill. Because more information is available with less general limitations, the results with arbitrage pricing theory are more reliable than those of competitors’ models.

    No special factors give.

    Although APT, like other pricing models, does not offer specific factors, in theory, it takes into account four important factors. APT takes into account changes in inflation, changes in industrial production, changes in the risk premium, and changes in interest rate structure when factoring in long-term forecasts.

    Allows investors to find arbitrage opportunities.

    APT’s goal is to help investors spot stocks in a market that have been misjudged in some way. Once they can identify, it becomes possible to build a portfolio based on them to produce better returns than the index offers. If the portfolio undervalues, changes in pricing theory can turn opportunities into profits.

    Disadvantages of APT (arbitrage pricing theory).

    We need to learn the underlying disadvantages of arbitrage pricing theory as gives below.

    Requires that the source of the risk is correct.

    Each portfolio exposes to a certain level of risk. To be of use to APTs, investors must have a clear understanding of the risks and sources of these risks. Only then can this theory consider a reasonable estimate of factor sensitivity with greater accuracy? If there is no clear definition of the source of risk, there are more potential outcomes that reduce the effectiveness of the predictive quality provided by APT.

    Requires that the portfolio view separately.

    APT is only useful when examining one element of risk. Because of this feature, it is almost impossible to examine an entire portfolio with a large number of assets. Therefore, the entire portfolio examines using arbitrage pricing theory. Since not every account but only the portfolio report, certain assumptions must make in the valuation. This can create uncertainties that reduce the accuracy of the analyzed results.

    A large amount of data generate.

    For a person unexpected with arbitrage pricing theory, the number of statistics to sort via can experience overwhelming. This information generates through a specific analysis of the various factors that cause growth or loss so that prognostic quality can be a factor in portfolio decision making. A person unfamiliar with the purpose of each data point will not understand the results APT produces, making it a useless tool for them.

    This is not a guarantee of results.

    The arbitrage pricing theory does not guarantee that a profit will be made. Currently, several securities in the market undervalue for reasons beyond APT’s scope. Some risks are not “real” risks because they instill by investors themselves in pricing mechanisms, who have certain fears of certain securities under certain market conditions.

    The pros and cons of arbitrage pricing theory aim to look at long-run average returns. Several systematic influences can affect this long-term average. By studying the assets and risks involved, it is possible to predict the expected rate of return. This is a great option for individual securities. However, when examining a portfolio of different securities, APT may not be the right tool.

    Arbitrage Pricing Theory (APT) Meaning Importance Benefits Assumptions Pros Advantages Cons Limitations Disadvantages ilearnlot Image
    Arbitrage Pricing Theory (APT) Advantages and Disadvantages; Image by Mohamed Hassan from Pixabay.
  • Personal Selling; Introduction, Meaning, Definition, and Theory

    Personal Selling; Introduction, Meaning, Definition, and Theory

    Personal Selling defines as a hand-to-hand exchange of goods and money or Face-to-face selling in which a seller attempts to persuade a buyer to make a purchase. In the competitive marketplace, the product must be communicated across to the customers. Traditionally, advertising is a tool for communication. However, as the competition has increased, the process of communication has also become more and more complex.

    Here are explain Personal Selling; Introduction, Meaning, Definition, and Theory.

    Personal selling is one of the forms of promotion or marketing communications used by organizations to communicate with the marketplace and drive purchases of their products. Along with advertising, public relations, and sales promotion – personal selling makes up the promotions mix or marketing communications mix of a company. What is the importance and process of Decision-Making?

    #Meaning:

    Meaning of Personal selling; Personal selling or salesmanship are synonymous terms; with the only difference being that the former term is of recent origin, while the latter term has been traditionally in usage, in the commercial world. Since a salesman, in persuading a prospect to buy a certain product, follows a personal approach; salesmanship, in the present-day times is often popularly called personal selling.

    It is the most traditional method, devised by manufacturers, for the promotion of the sales of their products. Before the development of the advertising technique, it used to be the only method used by manufacturers for the promotion of sales. It is, in fact, the forerunner of advertising and other sales promotion devices.

    #Definition:

    Personal selling can define as; direct person-to-person communication between sellers and potential customers, to persuade potential customers to purchase products.

    According to Philips and Duncan,

    “Salesmanship is the art of presenting an offering so that the prospect appreciates the need for it and a mutually satisfactory sale follows.”

    They often occur face-to-face, however, they can also take place through telephone conversations, online video conferencing, or online text communication. Also, Personal selling is an effective way to promote and sell high-priced and/or complex products.

    This is because the person-to-person approach allows for a detailed explanation of products and any individual questions or concerns the customer has can be immediately addressed.

    Personal selling Introduction Meaning Definition and Theory
    Personal selling; Introduction, Meaning, Definition, and Theory. Russia cotton Candy Hands #Pixabay.

    #Introduction, How to Sale?

    Introduction to Personal selling; The marketers of today cannot rely on only advertising the marketing communication mix comprises 5 modes of communication as explained herein;

    • Advertising: Any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor.
    • Sales promotion: A variety of short-term incentives to encourage the trial or purchase of a product or service.
    • Public relations and publicity: A variety of programs designed to promote or protect a company’s image or its products.
    • Personal selling: Face-to-face interaction with one or more prospective purchasers to make presentations, answer questions, and procure orders.
    • Direct marketing: Use of mail, telephone, fax, e-mail or internet to communicate directly with or solicit & a direct response from specific customers and prospects.

    The present article deals with personal selling as one of the modes for selling. The topic falls within the scope of both marketing communication and sales management. It is the most effective tool, especially in the later stages of the buying process. It is very useful in building buyer preference, convictions, and action.

    Distinctive qualities:

    Personal selling has three distinctive qualities;

    1. Personal confrontations: They involve an immediate and interactive relationship between two or more persons each party can observe the other’s reactions at close hand.
    2. Cultivation: It permits all kinds of relationships to spring up, ranging from matter-of-fact selling relationships to deep personal friendships. Also, Sales representatives usually have the customer’s best interests at heart.
    3. Response: It makes the buyer feel under some obligation for having listened to the sales talk.

    Theory of Personal selling:

    Personal selling is more of an art. Often effective salespersons have an instinct. Yet, it is realizing that proper training can enhance the skills of good salesmen. In present times, it is becoming more and more customer-oriented because no more do are have a buyer’s market.

    Theory of Personal selling - List
    Theory of Personal selling – List

    Three major aspects of personal selling are;

    1. Professionalism.
    2. Negotiations, and.
    3. Relationship marketing.

    Now, explain each;

    Professionalism:

    The belief that good sales are born is giving way to a professional approach to sales activity. As well as, the sales managers realize the importance of training the sales force and spend huge sums of money each year for the same. We find the market flooded with training aids comprising books, video and audio cassettes, CDs, and many more.

    Also, The aim of sharpening the skills of a salesman is to make him more and more effective. All sales training approaches try to convert a salesperson from a passive order taker into an order setter. An order taker is passive and stands dominated by the situation. In order Getter molds the situation in his favor and takes charge to achieve his objectives. What is the IT Professionalism in Information Technology Essay? Also, The modern professional approach to salesmanship stands customer-oriented.

    The act of selling stands projected as aimed at solving the problems of the customers. Such an approach is satisfying the customers more thereby making sales activity more and more effective. Furthermore, the sales personnel are trained to understand the situation and they formulate their reaction because no single approach works in all situations.

    Negotiation:

    Negotiation skills are one of the most important skills of a salesman. Likewise, The two parties need to reach an agreement on price and other terms of sales. A good salesman wins the order without making deep .concessions that will hurt his profitability.

    Also, he must not unduly extract the customer because such an approach will be detrimental in the long run. This process of exchange by way of negotiation is more of an art. Learned by a salesman over time. The professional approach to negotiation identifies the zone of agreement between the seller’s surplus and the buyer’s surplus.

    Such an understanding helps in reaching the agreement point where both parties feel satisfied. Negotiation involves communication that is Focused and planning. Also, A good salesman understands his customer well and then formulates a negotiation strategy.

    Relationship marketing:

    As the salesman becomes close to the customers, the Transactional nature of the selling approach gives way to the relationship approach. Furthermore, the Transactional approach is deal to deal approach centered on short-term gains. Also, The relationship approach is long-term and establishes a relationship between the buyer and the seller.

    Both understand each other and support each other. Sales managers have to realize that it is far easier to get sales from an old customer as compared to getting the same from a new customer. So, it is important to retain existing customers. As well as, Personal selling is the most effective method of building relationships.

    No other means can establish relationships as effectively as personal selling does. So modern salesmen work with a long-term perspective, establishing close customer associations. Such a practice is most evident in banking, airlines, insurance, and investment industries.

  • Understand the Spiral of Silence and explain their Theory

    Understand the Spiral of Silence and explain their Theory

    What does mean the Spiral of Silence? The spiral of silence theory is a political science and mass communication theory proposed by the German political scientist Elisabeth Noelle-Neumann, which stipulates that individuals have a fear of isolation, which results from the idea that a social group or the society, in general, might isolate, neglect, or exclude members due to the members’ opinions. Spiral of silence is the term meant to refer to the tendency of people to remain silent when they feel that their views are in opposition to the majority view on a subject.

    The Spiral of Silence Theory:

    Elisabeth Noelle-Neumann, the German political scientist contributes the famous model called “Spiral of Silence”. In 1947 Neumann and her husband found “Public Opinion Organization” in German and also she was a President of “World Association for Public Opinion Research” from 1978 to 1980. Through this Spiral of Silence theory Neumann indirectly explains the Jews status during World War II under the Nazi’s control. Here, Adolf Hitler dominated the whole society and the minority Jews became silent due to the fear of isolation or separation.

    What is the Theory of Elisabeth Noelle-Neumann?

    The one view dominated the public scene and others disappeared from the public awareness as its adherents became silent. In other words, the people fear of separation or isolation those around them, they tend to keep their attitudes to themselves when they think they are in the minority. This process calls “Spiral of Silence”.

    This theory states that in elections certain views seem to get more play than others. Sometimes people mute their opinions rather than talk about them. It occurs when individuals express when they perceive that their opinion is popular and those who think otherwise remain quiet. This process occurs in a spiral so that one side of an issue ends up with much publicity and the other side with little.

    This expression/non-expression rests on two premises. The first is that people know which opinions are popular. The second is that people adjust their expression of opinion to these perceptions. Psychologists believe that this “Spiral of Silence” is caused by fear of isolation as the ‘Spiral of Silence’ is not just a matter of wanting to be on winning side but is an attempt to avoid being isolated from one’s social group. Threats of criticism are also powerful forces in silencing individuals. This process affects public opinion but these are exceptions as some groups and individuals do not fear isolation and express their opinion irrespective of the outcome.

    For example:

    In a company the managing director decides to increase their working hour from 8 to 10 and send the e-mail to all employees. Majority of them accept this time changes and few employees are not satisfied with his decision. But they cannot or ready to express their thought publicly, because of the following reasons; they may feel unsupported by the other employees, “Fear of isolation” like transfer, “Fear of Rejection” By rejecting their personal opinion from the public will help to avoid fight or they may try to save their job by suppressing or avoid personal statement in public.

    The best way to study public opinion in regards to the spiral of silence theory is to look at the theory in two different categories: mass media and interpersonal communication. Mass media can very easily make someone feel that. Their contradictions to a major issue are not welcomed and thus be afraid to speak out. The vast amount of mass media that individual deals with every day feed largely the same information on issues and politics.

    Extra things:

    Noelle-Neumann states that most media is consonant and that even though there are different sources of news through the mass media. Most of the news is very similar and makes most people form the same opinion on an issue. Although public opinion is formed by both personal observation and media utterings/exposure, individuals mix the two and confuse. What learns through the media? with, What learns through the interpersonal channels? Noelle-Newmann has observed – “The longer one has studied the question, the clearer it becomes that fathoming the effects of the mass media is very hard”.

    These effects do not come into being as a result of a single stimulus; they are as a rule cumulative, following the principle that water dripping constantly wears away the stone. Further discussions among people spread the media’s messages further, and. Before long no difference can perceive between the point of media perception and points far removed from it. The media’s effects are predominantly unconscious; people cannot provide an account of what has happened.

    Rather, they mix their direct perceptions and the perceptions filtered through the eyes of the media into an indivisible whole. That seems to derive from their thoughts and experiences. Therefore ‘Spiral of Silence’ is a phenomenon which involves personal and media channels of communication. The media publicize public opinion, making evident which opinions predominate. Whether individuals express their opinions or not depending upon the predominant points of view, the media, in turn, attend to the expressed opinion, and the spiral continues.

    Understand the Spiral of Silence and explain their Theory
    Understand the Spiral of Silence and explain their Theory, #Pixabay.

    Assumptions:

    The framework based on a few assumptions;

    • Spiral of silence theory describes as a dynamic process, the prediction about public opinion in mass media. Which gives more coverage for the majorities in society and gives very less coverage for minorities.
    • In this social environment, People have a fear of rejection to express. Their opinion or views and they have known well what behaviors will make a better likelihood. It calls “fear of Isolation”.
    • Being the part of Minority. People lose their confidence and silent or mute to express. Their views because of the fear of isolation or they feel alone or unsupported.
    • Sometimes the minorities withdraw their expressed opinion from public debates to secure themselves from the majority.
    • Maximum numbers get more vocal space in the society and lesser number become less vocal space or become silent.

    Advantages and Disadvantages of her theory:

    • Spiral of Silence theory has both micro level and macro level explanatory process.
    • It works well during the public campaign, Senate and Parliament.
    • Spiral of silence theory – which helps to raise the question about considering the role and responsibility of media in the society.
    • The theory which is not considering the other explanation of silencing. In some cases, the person may feel the majority’s ideas or opinion is much better than his view.
  • Understand the Modigliani Miller Proposition with the Capital Structure Theory!

    Understand the Modigliani Miller Proposition with the Capital Structure Theory!

    What is the Modigliani Miller? The Modigliani–Miller theorem is an influential element of economic theory; it forms the basis for modern thinking on capital structure. Modigliani and Miller approach to capital theory, devised in the 1950s advocates capital structure irrelevancy theory. This suggests that the valuation of a firm is irrelevant to the capital structure of a company. So, what is the topic we are going to discuss; Understand the Modigliani Miller Proposition with the Capital Structure Theory!

    Here are explained formula of the Modigliani Miller Proposition for the Capital Structure Theory!

    The capital structure of a company is the way a company finances its assets. A company can finance its operations by either equity or different combinations of debt and equity. The capital structure of a company can have a majority of the debt component or a majority of equity or a mix of both debt and equity. Modigliani and Miller, two professors in the 1950s, studied capital-structure theory intensely. From their analysis, they developed the capital-structure irrelevance proposition.

    Essentially, they hypothesized that in perfect markets, it does not matter what capital structure a company uses to finance its operations. They theorized that the market value of a firm is determined by its earning power and by the risk of its underlying assets and that its value is independent of the way it chooses to finance its investments or distribute dividends.

    Modigliani and Miller’s Capital Structure Irrelevance Proposition:

    The M&M capital-structure irrelevance proposition assumes no taxes and no bankruptcy costs. In this simplified view, the weighted average cost of capital (WACC) should remain constant with changes in the company’s capital structure. For example, no matter how the firm borrows, there will be no tax benefit from interest payments and thus no changes or benefits to the WACC.

    Additionally, since there are no changes or benefits from increases in debt, the capital structure does not influence a company’s stock price, and the capital structure is therefore irrelevant to a company’s stock price. However, as we have stated, taxes and bankruptcy costs do significantly affect a company’s stock price. In additional papers, Modigliani and Miller included both the effect of taxes and bankruptcy costs.

    Modigliani Miller Proposition:

    The following Proposition is two types below are:

    Proposition-I

    The Modigliani-Miller Proposition-I Theory (MM-I) states that under a certain market price process, in the absence of taxes, no transaction costs, no asymmetric information and in a perfect market, the cost of capital and the value of the firm are not affected by the change in capital structure. The firm’s value is determined by its real assets, not by the securities it issues. In other words, capital structure decisions are irrelevant as long as the firm’s investment decisions are taken as given.

    The Modigliani and Miller explained the theorem was originally proven under the assumption of no taxes. It is made up of two propositions that are (i) the overall cost of capital and the value of the firm are independent of the capital structure. The total market value of the firm is given by capitalizing the expected net operating income by the rate appropriate for that risk class. (ii) The financial risk increase with more debt content in the capital structure. As a result, the cost of equity increases in a manner to offset exactly the low-cost advantage of debt. Hence, the overall cost of capital remains the same.

    The assumptions of the MM theory are:

    1. There is a perfect capital market. Capital markets are perfect when: 1) Investors are free to buy and sell securities. 2) Investors can trade without restrictions and can borrow or lend funds on the same terms as the firms do. 3) Investors behave rationally. 4) Investors have equal access to all relevant information. 5) Capital markets are efficient. 6) No costs of financial distress and liquidation, and 7) There are no taxes.
    2. Firms can be classified into homogeneous business risk classes. All the firms in the same risk class will have the same degree of financial risk.
    3. All investors have the same view for the investment, profits, and dividends in the future; they have the same expectation of a firm’s net operating income.
    4. The dividend payout ratio is 100%, which means there are no retained earnings.

    In the absence of the tax world, base on MM Proposition-I, the value of the firm is unaffected by its capital structure. In other words, regardless of whether a company has liabilities, the total risk of its securities holders will not change even the capital structure is changed. As the weighted average cost of capital unchanged, so must the same as the total value of the company.  That is VL = VU = EBIT/equity, where VL is the value of a levered firm = price of buying a firm that is composed of some mix of debt and equity, VU is the value of an unlevered firm = the price of buying a firm composed only of equity and EBIT is earnings before interest and tax. Whether or not the company has loans or the loans for high or low, investors are all accessible through the following two kinds of investment on their own to create the desired type of earning.

    1. Direct investments in the company’s stock borrowing
    2. If shares of levered firms are priced too high, investors will try to take advantage of borrowing on their own and use the money to buy shares in unlevered firms. The use of debt by the investors is known as homemade leverage.

    The investors of homemade leverage can obtain the same return as the levered firms, therefore, for investors; the value of the firm is not affected by the debt-equity mix.

    The MM Proposition I assumptions are quite unrealistic, there have some implications,

    1. Capital structure is irrelevant to shareholder wealth maximization.
    2. The value of the firm is determined by the firm’s capital budgeting decisions.
    3. Increasing the extent to which a firm relies on debt increases both the risk and the expected return to equity – but not the price per share.

    Based on the inadequate of MM Proposition-I, Franco Modigliani and Merton H.Miller revised their theory in 1963, which is MM Proposition-II.

    Proposition-II

    The Modigliani-Miller Proposition II Theory (MM II) defines the cost of equity is a linear function of the firm’s debt/equity ratio. According to them, for any firm in a given risk class, the cost of equity is equal to the constant average cost of capital plus a premium for the financial risk, which is equal to debt/equity ratio times the spread between average cost and cost of debt. Also, Modigliani and Miller recognized the importance of the existence of corporate taxes.

    Accordingly, they agreed that the value of the firm will increase or the cost of capital will decrease with the use of debt due to tax deductibility of interest charges. Thus, the value of the corporation can be achieved by maximizing debt component in the capital structure. This theory of capital structure for the study provided an important and analytical framework. According to this approach, value of a firm is VL = VU = EBIT (1-T) / equity + TD where TD is tax savings. MM Proposition II is assuming that the tax shield effect of each is the same, and continued insight.

    Leverage firms are increased in interest expense due to reduced tax liability, has also increased the allocation to the shareholders and creditors of the cash flow. The above formula can be deduced from the company debt the more the greater the tax saving benefits, the greater the value of the company. The revised capital structure of the MM Proposition-II pointed out that the existence of tax shield in a perfect capital market conditions cannot be reached, in an imperfect financial market, the capital structure changes will affect the company’s value.

    Therefore, the value and cost of capital of the corporation with the capital structure changes in different leverage, the value of the levered firm will exceed the value of the unlevered firm. MM Proposition theory suggests that the higher the debt ratio is more favorable to corporate, but through borrowing adds an interest tax shield it may lead to costs of financial distress. Financial distress occurs when promises to creditors are broken or honored with difficulty.

    Financial distress may lead to bankruptcy. The trade-off theory of capital structure theory in MM based on the added risk of bankruptcy and further improves the capital structure theory, to make it more practical significance. A firm that follows the trade-off theory sets a target debt to value ratio and then gradually moves towards the target. The target is determined by balancing the tax benefits of using debt against the costs of financial distress that rise at an increasing rate with the use of leverage.

    It so predicts the moderate amount of debt as optimal. But there is evidence that the most profitable firm in an industry tend to borrow the least, while their probability of entering in financial distress seems to be very low. This fact contradicts the theory because if the distress risk is low, an increase in debt has a favorable tax effect. Under the trade-off theory, high profits should mean more debt-servicing capacity and more taxable income to shield and therefore should result in a higher debt ratio.

    Understand the Modigliani Miller Proposition with the Capital Structure Theory
    Understand the Modigliani Miller Proposition with the Capital Structure Theory! Image credit from #Pixabay.

    Understand the Capital Structure Decision in Corporate Finance:

    Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analysis used to make these decisions. The discipline as a whole may be divided among long-term and short-term decisions and techniques with the primary goal being maximizing corporate value while managing the firm’s financial risks. Capital investment decisions are long-term choices that investment with equity or debt, and the short-term decisions deal with the balance of current assets and current liabilities which is managing cash, inventories, and short-term borrowing and lending.

    Corporate finance can be defined as the theory, process, and techniques that corporations use to make the investment, financing and dividend decisions that ultimately contribute to maximizing corporate value. Thus, a corporation will first decide in which projects to invest, then it will figure out how to finance them, and finally, it will decide how much money, if any, to give back to the owners. All these three dimensions which are investing, financing and distributing dividends are interrelated and mutually dependent. The capital structure decision is one of the most fundamental issues in corporate finance.

    The capital structure of a company refers to a combination of debt, preferred stock, and common stock of finance that it uses to fund its long-term financing. Equity and debt capital are the two major sources of long-term funds for a firm. The theory of capital structure is closely related to the firm’s cost of capital. As the enterprises to obtain funds need to pay some costs, the cost of capital in the investment activities is also the main consideration of the rate of return.

    The weighted average cost of capital (WACC) is the expected rate of return on the market value of all of the firm’s securities. WACC depends on the mix of different securities in the capital structure; a change in the mix of different securities in the capital structure will cause a change in the WACC. Thus, there will be a mix of different securities in the capital structure at which WACC will be the least.

    The decision regarding the capital structure is based on the objective of achieving the maximization of shareholders wealth. With regard to the capital structure of the theoretical basis, the most well-known theory is Modigliani-Miller theorem of Franco Modigliani and Merton H.Miller. Yet the seemingly simple question as to how firms should best finance their fixed assets remains a contentious issue.

    The Designing an Optimal Capital Structure:

    The optimal capital structure refers to a proportion of debt and equity at which the marginal real cost of each available source of financing is the same. This is also viewed as a capital structure that maximizes the market price of shares and minimizes the overall cost of capital of the firm. Theoretically, the concept of optimal capital structure can easily be explained, but in operational terms, it is difficult to design an optimal capital structure because of a number of factors, both quantitative and qualitative, that influence the optimum capital structure. Moreover, the subjective judgment of the finance manager of the firm is also an influencing factor in designing the optimum capital structure of a firm. Designing the capital structure is also known as capital structure planning and capital structure decision.

  • What is Arbitrage Pricing Theory (APT)? Meaning and Definition

    What is Arbitrage Pricing Theory (APT)? Meaning and Definition

    Meaning of Arbitrage Pricing Theory (APT) is one of the tools used by investors and portfolio managers who explain the return of severity based on their respective beta. This theory was developed by Stephen Ross. In finance, the APT is a general theory of property pricing that believes that the expected return of financial assets can model as a linear function of various factors or theoretical market index, wherein each of the factors The sensitivity of change is represented by a factor-specific beta coefficient. So, what is the question; What is Arbitrage Pricing Theory (APT)? Meaning and Definition.

    Here are explains What is Arbitrage Pricing Theory (APT)? with Meaning and Definition.

    APT is a multi-factor property pricing model based on the idea that calculating asset returns can be done using linear relationships between the expected return of assets and many macroeconomic variables that hold systematic risk. Also, This theory was created in 1976 by economist Stephen Ross. The arbitrage pricing principle provides a multi-factor pricing model for securities based on the relation between the expected return of financial assets and their risk to analysts and investors. This is a useful tool to analyze the portfolio from a price investment perspective, to temporarily identify the securities incorrectly.

    APT is a more flexible and complicated option for the Capital Asset Pricing Model (CAPM). The theory provides investors and analysts with the opportunity to customize their research. As well, the model-derived rate of return will use to correctly assess the property; Also, the asset value should be equal to the expected end of the discount period at the rate mentioned by the model. If the price goes away, then arbitrage will bring it back to the line.

    What is Arbitrage Pricing Theory (APT) Meaning and Definition
    Women Get Shopping; What is Arbitrage Pricing Theory (APT)? Meaning and Definition. Image credit from ilearnlot.com.

    What does mean the Arbitrage Pricing Theory (APT)?

    Arbitrage Pricing Theory (APT) is an extension of CAPM. The pricing model given by APT is the same as CAPM. It is a model under equilibrium. The difference is that APT is based on a multi-factor model. Also, the Arbitrage pricing theory holds that arbitrage behavior is a decisive factor in the formation of modern efficient markets (that is, market equilibrium prices).

    If the market does not reach equilibrium, there will be risk-free arbitrage opportunities in the market. And multiple factors uses to explain the return of risk assets, and according to the principle of no-arbitrage; there is an (approximate) linear relationship between the balanced return of risk assets and multiple factors. Also, The previous CAPM model predicts that there is a linear relationship between the returns of all securities; and, the return of a unique public factor (market portfolio).

    Significance of Arbitrage Pricing Theory (APT):

    Arbitrage pricing theory derives a market relationship similar to the capital asset pricing model. The arbitrage pricing theory base on the multi-factor model of the rate of the return formation process. Also, It believes that the rate of return of securities linearly relates to a set of factors; which represent some basic factors of the rate of return of securities.

    When the rate of return form by a single factor (market combination), you will find that the arbitrage pricing theory forms a relationship with the capital asset pricing model. Therefore, the arbitrage pricing theory can consider as a generalized capital asset pricing model, providing investors with an alternative method to understand the equilibrium relationship between risk and return in the market. Also, Arbitrage pricing theory and modern asset portfolio theory, capital asset pricing model, option pricing model, etc. constitute the theoretical basis of modern finance.

    Difference between APT and CAPM:

    In 1976, American scholar Stephen Rose published the classic paper “Arbitrage Theory of Capital Asset Pricing” in the Journal of Economic Theory; and, proposed a new asset pricing model, which is the arbitrage pricing theory (APT theory). Also, Arbitrage pricing theory uses the concept of arbitrage to define equilibrium, does not require the existence of market portfolios, and requires fewer assumptions than the capital asset pricing model (CAPM model), and more reasonable.

    Like the capital asset pricing model, the arbitrage pricing theory assumes:

    • Investors have the same investment philosophy;
    • The investor is unsatisfied and wants to maximize utility;
    • Also, The market is complete.

    Unlike the capital asset pricing model, arbitrage pricing theory does not have the following assumptions:

    • Single investment period;
    • There is no tax;
    • Also, Investors can borrow freely at a risk-free rate;
    • Investors choose investment portfolios based on the mean and variance of returns.

    The relationship between the arbitrage pricing theory and capital asset pricing model:

    • Both assume that there are no transaction costs or transaction taxes in the capital market; or both believe that if there are transaction costs or transaction taxes, they are the same for all investors.
    • Both of them divide the existing risks into systemic and non-systemic risks, that is, market risk and the company’s own risk. Moreover, both models believe that through the diversified portfolio of investments and the rational optimization of the investment structure by investors; the company ’s risks can be largely or even eliminated. Therefore, when calculating the expected return of the investment portfolio; the mathematical expressions of both models believe that the capital market will not compensate investors; because, they have assumed this part of the risk, so they not include in the calculation.
    • Capital asset pricing theory can regard as a special case of arbitrage pricing theory under stricter assumptions.

    The role of the arbitrage pricing theory and capital asset pricing model:

    The proposal of CAPM and APT has had a huge impact on financial theory research and practice all over the world. Its main performances are:

    • Most institutional investors evaluate their investment performance according to the relationship between expected return and β coefficient (or unit risk-reward);
    • The regulatory authorities of most countries take the relationship between the expected rate of return; and, the β coefficient together with the prediction of the market index rate of return as an important factor when determining the capital cost of the regulated object;
    • The court often uses the relationship between the expected rate of return and β coefficient to determine the discount rate when measuring the amount of compensation for future loss of income
    • Many companies also use the relationship between the expected rate of return and the β coefficient to determine the minimum required rate of return when making capital budget decisions. As well as it can see that the combination of the two can make more accurate predictions than pure APT; and, can make more extensive analysis than CAPM, to provide more adequate guidance for investment decisions.
  • The Theory of Human Relationship Management!

    The Theory of Human Relationship Management!

    Learned, The Theory of Human Relationship Management!

    It is important to separate the theory of human relations management from the broad concept of human resource management. The second word is different in every context in which it is using because it is difficult to explain. On the other hand, the principle of human relations is particularly focusing on the quality of relations between managers and subordinates in an organization. Also learn, The Objectives of Human Resource Management, The Theory of Human Relationship Management!

    Change the style of Management!

    Principles of Human Relations Management Today’s business organizations include important evidence of changing the style of management. Employees in the 21st century who are not managers occupy the important role. Also, they have more rights than line workers and non-managers of the past and because the number of managerial layers in one organization has decreased in this new century and also because the machines and computers used workers to perform. The performance part of consultation managers Without making decisions, to perform. Risk Management Definition!

    Management Theory!

    This principle is also a principle of management in itself. It is an organization, just paying attention to human dimensions of employees, rather than. Their benefits as human capital, or property. Managers value their relationships to their direct reports and place a high value on how they feel about their membership in organizational culture. To make a commitment to staff achievement, and to get a high level of worker morale for managers, the concern is concerned.

    Investment!

    Investment in human relations management staff is involving. Workers do not enjoy a high level of decision-making, empowerment and indulging in strong worker morale. They also get to improve as a professional and increase their value for the organization. Also, in the future – an employee in the form of managerial and technical expert roles – enough financial investment in employee training and professional development, the preparation of the staff makes it assume big roles. What are the Features of Sole Proprietorship?

    Stakeholders!

    Every employee is seen as an important stakeholder in the firm. The managers have to buy into the success of the firm. Because it focuses on getting the employees and employees as the entire organization. Every change that will affect employees will study for its effect on human relations. Therefore, managers will work with the staff, their support is getting so that in implementing the changes. Also, in order for the employees to become a part of every change in the organization. It is necessary to experience success.

    The Theory of Human Relationship Management - ilearnlot
    Photo Credit to Pixaby, More free Images, Also, Thanks!

  • What are Managerial Skills?

    What are Managerial Skills?

    Managerial Skills; A skill is an individual’s ability to translate knowledge into action. Hence, it is manifested in an individual’s performance. Skill is not necessarily inborn. It can be developed through practice and through relating learning to one’s own personal experience and background. In order to be able to successfully discharge his roles, a manager should possess three major skills. These are conceptual skill, human relations skill and technical skill. Conceptual skill deals with ideas, technical skill with things and human skill with people. While both conceptual and technical skills are needed for good decision-making, human skill in necessary for a good leader.

    The conceptual skill refers to the ability of a manager to take a broad and farsighted view of the organization and its future, his ability to think in abstract, his ability to analyze the forces working in a situation, his creative and innovative ability and his ability to assess the environment and the changes taking place in it. It short, it is his ability to conceptualize the environment, the organization, and his own job, so that he can set appropriate goals for his organization, for himself and for his team. This skill seems to increase in importance as manager moves up to higher positions of responsibility in the organization.

    The technical skill is the manager’s understanding of the nature of the job that people under him have to perform. It refers to a person’s knowledge and proficiency in any type of process or technique. In a production department, this would mean an understanding of the technicalities of the process of production. Whereas this type of skill and competence seems to be more important at the lower levels of management, its relative importance as a part of the managerial role diminishes as the manager moves to higher positions. In higher functional positions, such as the position of a marketing manager or production manager, the conceptual component, related to these functional areas becomes more important and the technical component becomes less important.

    Human relations skill is the ability to interact effectively with people at all levels. This skill develops in the manager sufficient ability (A) to recognize the feelings and sentiments of others; (B) to judge the possible actions to, and outcomes of various courses of action he may undertake; and (C) to examine his own concepts and values which may enable him to develop more useful attitudes about himself. This type of skill remains consistently important for managers at all levels.

    A table gives an idea about the required change in the skill-mix of a manager with the change in his level. At the top level, technical skill becomes least important. That is why people at the top shift with great ease from one industry to another without an apparent fall in their efficiency. Their human and conceptual skills seem to make up for their unfamiliarity with the new job’s technical aspects.

    A Table of Skill-Mix of different Management levels and Managerial Skills

    Different Management levels

    Explanation of Managerial Skills

    (I) Conceptual skills: Conceptual skills are skills that allow a person to think creatively while also understanding abstract ideas and complicated processes. A person who has conceptual skills will be able to solve problems, formulate processes and understand the relationship between ideas, concepts, patterns and symbols.

    Conceptual skills are used frequently in the business world where managers can use their ability to conceptualize to view and visualize the entire company that they work for in order to develop the best plans for the business’s success. Most companies consider conceptual skills to be a requirement for their management staff.

    Conceptual Skills
    Conceptual Skills

    Some people are born with conceptual skills and have an intuitive sense while others must acquire the skill through learning. Other common skills valued with conceptual thinking include critical thinking, implementation thinking, innovative thinking and intuitive thinking.

    For those individuals who are not born with an innate sense of these skills, there are ways to develop the skill set. In an individual’s personal life and professional life, these skills can be developed by first taking the time to look around. Observing the way that other people and other businesses implement strategies as well as reading related publications (in the individual’s field or hobby area) can help increase the range of possibilities a person sees. Then, an individual must be willing to change direction and to pursue new goals whenever an opportunity arises that makes sense. If a problem occurs, do not look for the simple and fast fix. Look for a lasting solution instead that is a best-case scenario.

    (II) Human Relations Skills: Human Relations Skills is Interpersonal skills, Interpersonal skills are often called “people skills” because they describe a person’s ability to interact with other people in a positive and cooperative manner. Unlike technical skills that people attend school for, interpersonal skills are considered soft skills that are typically developed over time through interactions.

    Interpersonal Skills
    Human Relations Skills or Interpersonal Skills

    Having good interpersonal skills is desired in most careers. The best members of a team often have strong skills that help them communicate and problem solve with other people in an organization. There is a long list of interpersonal skills, but among the most important for working in a team or workplace are conflict resolution, communication, problem solving and patience.

    (III) Technical Skills: Technical skills are a person’s abilities that contribute directly to the performance of a given job, such as the computer, engineering, language and electrical skills. Someone with excellent abilities in any of these technical areas has the potential to secure a career in a related field.

    Technical Skills
    Technical Skills

    A person with technical writing abilities may get a job creating instruction manuals for complex products and equipment. A data expert may get a specialized job in database management or data analysis. A person with crafting abilities may get a job assembling fabrics or other products. Someone with excellent skills in automobile mechanics may get a position in an automobile repair shop.

    Other Managerial Skills also Important

    Communication Skills: Communication skills are required equally at all three levels of management. A manager must be able to communicate the plans and policies to the workers. Similarly, he must listen and solve the problems of the workers. He must encourage a free-flow of communication in the organization.

    Administrative Skills: Administrative skills are required at the top-level management. The top-level managers should know how to make plans and policies. They should also know how to get the work done. They should be able to coordinate different activities of the organization. They should also be able to control the full organization.

    Leadership Skills: Leadership skill is the ability to influence human behavior. A manager requires leadership skills to motivate the workers. These skills help the Manager to get the work done through the workers.

    Problem Solving Skills: Problem-solving skills are also called as Design skills. A manager should know how to identify a problem. He should also possess an ability to find the best solution for solving any specific problem. This requires intelligence, experience and up-to-date knowledge of the latest developments.

    Decision Making Skills: Decision-making skills are required at all levels of management. However, it is required more at the top-level of management. A manager must be able to take quick and correct decisions. He must also be able to implement his decision wisely. The success or failure of a manager depends upon the correctness of his decisions.

  • What are Managerial Roles and His Job?

    What are Managerial Roles and His Job?

    Management performs the functions of planning, organizing, staffing, directing and controlling for the accomplishment of organizational goals. Any person who performs these functions is a manager. The first line manager or supervisor or foreman is also a manager because he performs these functions. The difference between the functions of top, middle and lowest level management is that of degree. For instance, top management concentrates more on long-range planning and organization, middle-level management concentrates more on coordination and control and lowest level management concentrates more on direction function to get the things done from the workers.

    Every manager is concerned with ideas, things, and people. Management is a creative process for integrating the use of resources to accomplish certain goals. In this process, ideas, things, and people are vital inputs which are to be transformed into output consistent with the goals.

    Management of ideas implies the use of conceptual skills. It has three connotations. First, it refers to the need for the practical philosophy of management to regard management as a distinct and scientific process. Second, management of ideas refers to the planning phase of the management process. Lastly, management of ideas refers to distinction and innovation. Creativity refers to a generation of new ideas, and innovation refers to transforming ideas into viable relations and utilities. A manager must be imaginative to plan ahead and to create new Ideas.

    Management of things (non-human resources) deal with the design of production system, and acquisition, allocation, and conversion of physical resources to achieve certain goals. Management of people is concerned with procurement, development, maintenance and integration of human resources in the organization. Every manager has to direct his subordinates to put the organizational plans into practice.

    The greater part of every manager’s time is spent in communicating and dealing with people. His efforts are directed towards obtaining information and evaluating progress towards objectives set by him and then taking corrective action. Thus, a manager’s job primarily consists of management of people. Though it is his duty to handle all the productive resources, but the human factor is more important. A manager cannot convert the raw materials into finished products himself; he has to take the help of others to do this. The greatest problem before any manager is how to manage the personnel to get the best possible results. The manager in the present age has to deal efficiently with the people who are to contribute to the achievement of organizational goals.

    Peter F. Drucker has advocated that the managerial approach to handling workers and work should be pragmatic and dynamic. Every job should be designed as an integrated set of operations. The workers should be given a sufficient measure of freedom to organize and control their work environment. It is the duty of every manager to educate, train and develop people below him so that they may use their potentialities and abilities to perform the work allotted to them. He has also to help them in satisfying their needs and working under him, he must provide them with the proper environment. A manager must create a climate which brings in and maintains satisfaction and discipline among the people. This will increase organizational effectiveness.

    Recently, it has been questioned whether planning, organizing, directing and controlling provides an adequate description of the management process. After an intensive observation of what five top executives actually did during the course of a few days at work, Henry Mintzberg concluded that these labels do not adequately capture the reality of what managers do. He suggested instead that the manager should be regarded as playing some ten different roles, in no particular order.

    Role Performed by Managers

    What is Role Performed by Managers? Mostly manager has used three types roles on company or business: 1) Interpersonal Roles as used by heart, 2) Informational Roles also used by talking, and 3) Decisional Roles is mostly used by the brain. Following roles are explained here;

    Managerial Roles
    Managerial Role is three types of company or business; 1) Interpersonal Roles as used by heart, 2) Informational Roles also used by talking, and 3) Decisional Roles is mostly used by the brain.

    1. Interpersonal Roles

    Figurehead: In this role, every manager has to perform some duties of a ceremonial nature, such as greeting the touring dignitaries, attending the wedding of an employee, taking an important customer to lunch and so on.

    Leader: As a leader, every manager must motivate and encourage his employees. He must also try to reconcile their individual needs with the goals of the organization.

    Liaison: In this role of liaison, every manager must cultivate contacts outside his vertical chain of command to collect information useful for his organization.

    1. Informational Roles

    Monitor: As the monitor, the manager has to perpetually scan his environment for information, interrogate his liaison contacts and his subordinates, and receive unsolicited information, much of it as result of the network of personal contacts he has developed.

    Disseminator: In the role of a disseminator, the manager passes some of his privileged information directly to his subordinates who would otherwise have no access to it.

    Spokesman: In this role, the manager informs and satisfies various groups and people who influence his organization. Thus, he advises shareholders about financial performance, assures consumer groups that the organization is fulfilling its social responsibilities and satisfies the government that the origination is abiding by the law.

    1. Decisional Roles

    Entrepreneur: In this role, the manager constantly looks out for new ideas and seeks to improve his unit by adapting it to changing conditions in the environment.

    Disturbance Handler: In this role, the manager has to work like a firefighter. He must seek solutions to various unanticipated problems – a strike may loom large a major customer may go bankrupt; a supplier may renege on his contract, and so on.

    Resource Allocator: In this role, the manager must divide work and delegate authority among his subordinates. He must decide who will get what.

    Negotiator: The manager has to spend considerable time in negotiations. Thus, the chairman of a company may negotiate with the union leaders a new strike issue, the foreman may negotiate with the workers a grievance problem, and so on.

    In addition, managers in any organization work with each other to establish the organization’s long-range goals and to plan how to achieve them. They also work together to provide one another with the accurate information needed to perform tasks. Thus, managers act as channels of communication with the organization.