Strategic Analysis (PESTEL, Porter and SWOT) of BMW The WritePass Journal

Key Analysis (PESTEL, Porter and SWOT) of BMW Presentation Key Analysis (PESTEL, Porter and SWOT) of BMW IntroductionPolitical factorsEconomical factorsSocial factorsTechnological factorsEnvironmental factors Legal factorsPORTER’S FIVE FORCES ANALYSISThreats of new entrants:Threats of substitutes:Bargaining intensity of buyers:Bargaining intensity of suppliers:Competitive rivalryKEY DRIVERS OF CHANGE CYCLE OF COMPETITIONSTRATEGIC DRIFT RESOURCES Supply costEconomic scaleProduct/process designExperienceSWOT ANALYSIS OF BMWStrength:WeaknessOpportunityThreats KEY SUCCESS FACTORS OF BMWFACTORS THAT MAY CAUSE ULTIMATE DAMAGE DEMISE OF FIRMProbable techniques BMW can reestablish to divert benefits and to hold continuance for the future are: REFERENCESRelated Presentation When there wins elevated level if dubiety because of unpredictability or energetic changes, it gets hard to foresee the outside ecological that may emotional the firm’s procedures. In this way situation examination is done to assess the conceivable perspectives to foresee the associations future business condition (Heijiden, 2006). So as to arrive at this resolution PESTEL examination is done to personality the key drivers of progress that can be utilized to foresee the situations for what's to come. PESTEL represents political, affordable, social, mechanical, natural and legitimate and types of examination of the full scale condition of the association (Thomas, 2007). Political components Political elements feature the plausible governmentâ laws and guidelines, safety efforts and limitations that can apply to the business all in all. The likely factors that influence the car business are: Laws and guidelines had influenced the car business since its upheaval. These laws for the most part rotated around the natural standards that should have been satisfied by any vehicle industry. Subsequently the vehicle producers needed to deal with the ecological issues during assembling of vehicles. Charges and government international strategies are basic for the car business. The international strategies help to us choose the likelihood of accomplishment in the worldwide market. Presentation of new plans in the US and Europe vehicle industry wherein guidelines prompted produce high mileage vehicles alongside increment in car deals and creation (Hill, 2008). Practical components Prudent elements identified with the trade rates, financial development comprehensively and the business setting winning in the business. Financial variables for the business are: a)â â â â There was overabundance limit of vehicles created in this way offering ascend to high measure of income in promoting and new item plans. In this way there was part of income retained despite the fact that request was not as much as flexibly. For instance the UK auto showcase had abundance 80% limit in 2003 which freeze 1.3 billion euro of the vehicle business (autofacts, 2004). b)â â â â Total increment in the GDP all inclusive from 2.0% to 3.1% in the year 2008 (measurements, 2008). c)â â â â â Decrease in the conversion scale if euro has hampered the European vehicle creators in a major manner (Allen, 2006). d)â â â â Economic downturn in the US advertise (Copper, 2008) e)â â â â Surplus capital and purchasing power in the creating economies like India and China and their own development in the worldwide commercial center. Social elements Social components remember the progressions for societies and demo designs all around separated from change in purchasing behavior and limit of the customer. Social elements affecting the vehicle business are: Changes in the client inclination from vehicle being a superficial point of interest to eco-friendliness and low emanation vehicles. Changes in purchasing behavior of the shoppers because of downturn in develop markets. Natural issues and familiarity with the hurtful outflows through cars Innovative components Increment being used of innovation to increase a reasonable serious advertisement vantage Utilization of new and advanced structure to beat the diminished edges in the business. Alterations or limitation on innovation causing natural contamination Ecological elements Expanding impact if familiarity with worldwide notice, nursery impact and burnout among benefactors (association, 2008) Move in consumer’s tastes and inclinations towards utilization of more eco-accommodating vehicles, half breed vehicles, energy unit vehicles and so on. Harsh utilization of the EURO standards set up to check contamination in creating nations. Legitimate variables Limitations and severe contamination standards set up in European and US markets Severe ramifications of the EURO standards in creating nations e,g, development of BHARAT standards on the lines of EURO standards in India(CEN, 2006)â PORTER’S FIVE FORCES ANALYSIS Dangers of new participants: Danger of new participant is reliant onâ the difficulties faces during passage into the business or section hindrances. The danger of new participants if there should be an occurrence of car industry is less as enormous capital expense is required to set up an assembling plant and get together liner. Additionally it requires some investment for new contestants to get a spot and the notoriety in the psyches of the purchasers. Dangers of substitutes: BMW has a brand picture of being ground-breaking and sumptuous. It is situated in the selective vehicle go where there exist numerous substitutes for BMW like mercedes, GM and Toyoto. Along these lines the danger of substitutes for BMW is high. Dealing intensity of purchasers: BMW and its rivals are situated as in elite item go. Here the dealing intensity of purchasers is high in light of the fact that the buyers can choose the item as indicated by the value range and purchase the items appropriately. Additionally with ecological issues floating over the business the purchasers have the last say with test substitutes accessible. Bartering intensity of providers: BMW has great flexibly chain the board framework and had involved acquaintance with providers. The dealing intensity of providers is high in this industry as the providers can devote the sticker price for the crude materials. Despite the fact that long time relationship with providers can demonstrate productive, the last word lies pretty much with the providers. Serious contention Industry has cut thoat comptetion for its items, with its items focusing on the portion and postioned along these lines. Serious contention was high in the business with the predominant US and European markets confronting solid competitionâ from the Asian market. KEY DRIVERS OF CHANGE From the PESTEL examination and the five powers investigation, the key drivers of progress are: Gigantic arrangement of framework and labor focused on car industry after the sunset of the subsequent universal war Shopper inclinations for item greatness and cost of possession Utilization of structure as a central resource Mechanical progressions Natural issues Increment in the suggestion a brand the board instead of item greatness Item LIFE CYCLE The ramifications of the five powers examination changes with the business life cycle. The components that underline the business life cycle are improvement stage, development stage, shake-out stage, development stage and decay stage. During fire up the organization is the improvement stage with high separation and development as its advantages followed by development stage where the firm encounters high development with low bartering intensity of purchasers and less danger of new contestants. In the shakeout stage the development is increasingly slow key resources for the firm are its administrative and budgetary exercises. In the development stage the development is practically stale with high passage boundaries, high rivalry yet less unit costs and higher piece of the overall industry. At long last in the decay stage the firm is probably going to confront outrageous contention with the reasonable and passionate methodology key for the firm. BMW was in the development phase of the business life cycle. The development of BMW was stale yet its items like the 1, 3, 5, 7 arrangement having enormous market shareâ and brand character in develop just as creating markets. There were high passage boundaries in examination with BMW. Be that as it may, BMW had extensive piece of the overall industry and notoriety for being a designing greatness, an advantage of BMW in the development stage. Pattern OF COMPETITION Pattern of rivalry underlines the different floats between contenders with time. BMW, the German carmaker had a predictable increment in its yearly deals and had the innovation at its command to counter its rivals in the market. BMW’s upper hand lies in its vital procedures and its structures. The utilization of logical innovation that BMW reestablishes to, can be actualized to increasing higher economies of scale. As far as rivalry BMW has Lexus, Mercedes, Toyoto, GM, Volvo bunch and so on as its opponents in the vehicle business. BMW has its item go from a MINI to a Rolls Royce. In this way its item go fluctuates from an extravagance section to a superior portion in the vehicle business. In the pattern of rivalry any center skills or upper hand is impermanent and in this situation the nearest contender or BMW is the Toyota gathering. Toyota bunch has innovation, creation limit; overall revenues and item go that can give BMW run for their cash. It is likewise a demonstrated item in juvenile market an area. Accordingly BMW can endeavor in the pattern of rivalry through its center skills and upper hand. Key DRIFT Float is attempting to go towards a bearing anyway neglect to do that. This could be fortunate or unfortunate. Vital float is the point at which an organization neglects to work in accordance with ecological changes anyway gradual advancement is confirm yet there is a solid impact of the social and chronicled factors. BMW and its accentuation on brand advancement gradually with the adjustments in nature when it outfoxed rivalry. Anyway the way reliance cleared route for the obtaining of Rover an English brand. This could be because of the organizations requirement for enormous creation and the consid

How FundsForWriters.com Taught Me to be a Successful Writer

How FundsForWriters.com Taught Me to be a Successful Writer Some time ago, there was an author. Shed had over a hundred element articles distributed in different magazines, before she found out about FundsForWriters.com. Hello, Im an essayist! I wager I could scold different authors, and acquire fifty cool ones, she thought. So she ran off an accommodation to the editorial manager, Hope Clark. It was dismissed. She attempted once more. What's more, once more. She needed to pitch multiple times before her fifth accommodation was at long last acknowledged. And still, at the end of the day, the piece appeared to be so not exactly acceptably altered, it brought forth not one but rather two furious publications, consecutive, on the significance of culminating a pitch before submitting making her the main author to have motivated such an event. Expectations words stung her. She couldve quit at that point. She couldve stuffed it all in, pronounced this market unfit for her work, broadcasted its manager insane and never thought back. Harsh grapes? Li kely. Yet, she didnt. That author was me. A year ago, an author had five articles distributed with FundsForWriters.com. Which means almost once every couple of months, you read her name in the pamphlet. She verged on handling a 3-in-3: three acknowledgments in three days. She got one of just two individuals to ever have two component articles distributed in the pamphlet around the same time, a record. That essayist was additionally me. This is my story. Heres how I went from 0 to 5 FFW credits in under a year: 1. I figured out how to alter. I am normally verbose. On the off chance that a thing can be said in four words, I utilize ten. So when requested to incorporate voice, flavor, tales and down to earth tips, all in less than 600 words, I reviled and shook my head. Incomprehensible! In any case, at that point I did it. Multiple times. I coarseness my teeth, solidified my heart against my trademark expressive writing and took a blade to the verbiage. As the word tally dropped, my bank balance climbed. 2. I considered the market. It assisted with buying in to the bulletin for a little while, to perceive an example to the highlights introduced. The rules themselves said all that needed to be said, they couldnt have spread it out any more clear. I observed. 3. I didnt burden myself. Ive composed on differing themes from child rearing to portable upgraded sites. I drew upon my advantage and experience from different fields to apply to composing. No one disclosed to me it couldnt be done, so I didnt let it stop me. I was intense. I faced challenges. Of course, theres a possibility of disappointment, yet in any event I wont lament not attempting. 4. I didnt spread myself excessively far, either. Im online internet based life modest. The sum total of what I have is a blog to exhibit my

Why People With ADHD Have Shame

Why People With ADHD Have Shame ADHD Adult ADD/ADHD Print Dealing With Shame When You Have ADHD By Jacqueline Sinfield facebook twitter Jacqueline Sinfield is an ADHD coach, and the author of Untapped Brilliance, How to Reach Your Full Potential As An Adult With ADHD. Learn about our editorial policy Jacqueline Sinfield Updated on January 03, 2020 ADHD Overview Symptoms Causes Diagnosis Treatment Living With In Children Mirjana Seba / EyeEm / Getty Images Shame  is an emotion that plays a big part in the lives of people with ADHD. When you feel  shame,  you feel a huge sense of embarrassment and humiliation about who you are.  Shame  and guilt are closely connected;  although subtly different. Feeling ashamed can lead to many problems,  including depression, anxiety, drug and alcohol problems. Here are some common reasons why people with ADHD feel shame. The Shame  of  Having  ADHD Many people feel  shame  for having ADHD. Do you? When you feel ashamed of having ADHD,  you are ashamed of  a  part of yourself.  You try to keep up a facade,  so people wont know your struggles behind the scenes. This can be exhausting and lonely;  because you can’t get the support you need or feel close to the people in your life. It would be great if you could be as comfortable with having ADHD as you are with your eye color. Shame  of Feeling  Different A  lot of people feel  shame  about being different from their peers. Children can feel this more acutely than adults. Children desperately want to fit in with their friends and they dislike things that make them stand out or draw attention to themselves.  Aside from  the behavioral differences that ADHD can bring,  such as hyperactivity, there are other differences  with  having ADHD;  such as having doctor’s appointments or extra help at school. Shame  About  Having  ADHD  Behaviors Having ADHD can affect your behavior in all sorts of ways; such as:  acting impulsively and doing something you feel embarrassed about, not being able to follow a conversation and then feeling ‘stupid’. You might feel ashamed of your home because it is cluttered or because you  may be  always forgetting things. ADHD affects everyone’s behavior differently, but feeling ashamed of it is a common theme. Shame  About  Your  History Do you often think about past failures and feel full of  shame?  - How things didn’t work out with your ex, or the time when your credit card didn’t work, or when you ran out of gas on the highway?  You might find your mind often goes back to those memories and each time,  you relive that  shame. Shame  About  Where You Are Now A common theme I hear from adults with ADHD,  is they don’t like where they are in life. They didn’t reach the milestones they thought  they  would at this age. Perhaps you see your friends reaching life goals that you want too and that causes you  shame  and resentment because you know you are  just  as smart and capable as them. Ways to Heal  Shame Acknowledge that ADHD is a neurological condition and many of the things causing you  shame  are a direct result of having ADHD. When you do this,  it lifts the blame and  shame  you have been inflicting on yourself. Learn as much as you can about ADHD  through support groups, books, podcasts, and blogs. This knowledge and support will help you to know it isn’t just you. Other people with ADHD experience similar things. This can be very empowering to shake the  shame  away. Work with a therapist who is experienced in working with  shame. They can help you process the  shame you feel in your life. Change how you speak to yourself. Compassion neutralizes  shame. Self-compassion in the form of kind self-talk (the way you would to a child or friend) has a positive effect on the body. This step alone will change your life. Write a list of the practical things you can do to reduce the  shame  in your life. For example,  if you feel ashamed every time you arrive late at work, develop a strategy so that you arrive on time.

Duty of care-negligence - Free Essay Example

Sample details Pages: 4 Words: 1329 Downloads: 5 Date added: 2017/06/26 Category Law Essay Type Narrative essay Tags: Duty Essay Did you like this example? Under the duty of care, there is another test used by the court in determining whether there is negligence in carrying out the duty of care which lead to the other person suffering from the damage as a consequences of the act. The test said in the above is called the Caparo( composite) test. This test is based on the principle established in the case of Caparo Industries plc V Dickman. Don’t waste time! Our writers will create an original "Duty of care-negligence" essay for you Create order In the case, Lord Bridge acknowledged that the lawà ¢Ã¢â€š ¬Ã¢â€ž ¢s tendency had been reverted to the traditional categories of recognizable situations in the imposition of a duty of care. In accordance to this principle, instead of the plaintiff needing to establish a duty, proving that his situation falls squarely into any of the recognized categories, the plaintiff only needs to established that the duty of care arises in his situation because it accords with existing policy and decisions in other comparable cases.[1] The general rule of this principle is that a plaintiff who suffers physical damage to his property will not have difficulty in establishing a duty of care. This situation is seen in the case of Marc Rich Co AG V British Rock Marine Co Ltd. In the case, it involve a vessel belonging to the first defendant carrying the plaintiffà ¢Ã¢â€š ¬Ã¢â€ž ¢s cargo. In the mid of the voyage, the ship had developed a crack. The first defendant called in the marine classificat ion society, the third defendant, which then surveyed the ship and eventually gave the ship a certified proof to continue its voyage. Unfortunately, after a several days, the ship sank, in consequence the plaintiffà ¢Ã¢â€š ¬Ã¢â€ž ¢s cargo which worth about six million pound was lost. Part of the sum was recovered from the first defendant, the balance is claimed from the third defendant.[2] In the case above, it is not difficult to see that the surveyor had acted in negligent while inspecting the ship before giving the green light for the ship to continue its voyage. It is also foreseeable in the case that the said act could possibly cause the ship to sink, causing physical damage suffered by the plaintiff after his goods was lost. But in this case, the House of Lord, in a majority judgment founded that the third defendant did not owe any duty of care, this decision is according to policy factors, primarily insurance plays a bigger role. As a result from the case, the principl e was established in the development, from its establishment the English court are more cautious when faced with cases involving facts showing duty of care and facts not showing the duty of care. By referring to the case of March Rich, it is decided that in cases like this there are three factors that must be fulfilled to established a duty of care. First is the damage is reasonably foreseeable. Second, is there a close and direct relationship of proximity between the plaintiff and the defendant and third, the circumstances as a whole must be such that it is fair, just and reasonable for the imposition of a duty of care. Under the principle, it uses the foreseeable concept to measure, the court will determine whether or not the plaintiff is a foreseeable victim or not. This concept also involve the use of proximity between the parties, is it close enough to satisfy the proximity that is needed to establish the duty of care. In Malaysia, the application of this test is straight forward, in ascertaining the existence of the duty of care. For the first element, an early example of its usage in Malaysia is in the case of Sathu V Hawthornden Rubber Estate Co Ltd. In this case, it involve nineteen heads of cattle which belonged to the plaintiff strayed onto the estate of the defendant while grazing. The estate had been sprayed with sodium arsenate a few days before and resulting in the death of the plaintiffà ¢Ã¢â€š ¬Ã¢â€ž ¢s cattle grazing in the area of the estate. In this case, the plaintiff alleged the breach of common law duty to a à ¢Ã¢â€š ¬Ã‹Å"neighbourà ¢Ã¢â€š ¬Ã¢â€ž ¢ committed by the defendant under the principle from the case of Donoghue V Stevenson. It was held that the principle cannot be apply in this case because the death of the cattle was not foreseeable because the defendant does not know that the plaintiffà ¢Ã¢â€š ¬Ã¢â€ž ¢s cattle would stray into the estate.[3] The above case is used in the test that the circumstances must be just an d reasonable, it is the same as in the case of Lok Kwan Moi Ors V Ramli B. Jamil Ors Government of Malaysia. The case involve the arrest of fisherman who are gambling, they all jumped into the river but was arrested in upon reaching the land, but one particular fisherman having difficulty swimming was drown. It was alleged that before the drowning another fisherman was trying to help but was chased off by the police, in the circumstances it was thought to be foreseeable for any reasonable man to foreseen that the fisherman would likely drown. It was held that the policeman and the Government were liable to the death of the fisherman. [4] For the second element, it involve the use of the neighbor principle as used in the case of Donoghue V Stevenson and used in the case of Sathu V Hawthornden Rubber Estate Co Ltd. This can be seen also on the case of Abdul Malik bin Idrus Ors V Tan Jee Han. This case uses the neighbor principles in proving the duty of care of the first appella nt towards the respondent had been breached. This can also be seen in the case of Syarizan bin Sudirman Ors V Abdul Rahman bin Bukit Anor. In this case, it involve the plaintiff receiving injury caused by a pursuing policeman, kicking his motorcycle in order to force him to stop, which caused him to crash and sustain serious injury. The question before the court was whether the policeman had breach his duty of care towards the plaintiff when he kicked the motorcycle, the court in this case found in favor of the plaintiff that the policeman did not exercise care and skill as was reasonable in all circumstances.[5] In the two cases of Abdul Malik bin Idrus Ors V Tan Jee Han and Syarizan bin Sudirman Ors V Abdul Rahman bin Bukit Anor it could also be used in determining the existence of the third element, which is whether the circumstances as whole must be such that it is fair, just and reasonable for the imposition of a duty of care. For example in the two cases, the court established in what situation is the policeman is liable to have breach their duty of care and when do the duty of care is impose on them. There is also questions raised, whether in using this principle does it apply in cases involving damages which is purely economic in nature. In the case of Arab-Malaysian Finance Bhd V Steven Phoa Cheng Loon Ors, it involves the collapse of several block after a continuos rainfall for ten days many lost their lives as a consequence to the collapse. There were three blocks of apartment involve in this litigation, the 2nd and 3rd block brought an action against ten defendants because the first block caused the collapse of the two blocks. Some defendant was dismissed, there is only a few defendant left the local authority, the owner, the engineer, another owner of the adjacent land and the person who provides management services. In this case it did not refer to the case of Uniphone Sdn Bhd V Chin Boon Lit Anor in determining the duty where the loss occasionally was purely economic, in this case it was thought that the foreseeability test and neighbor principle was sufficient in proving the duty of care towards the plaintiffs.[6] [1] [1990] 1 All ER 568, HL [2] [1995] 3 All ER 307, HL [3] [1961] MLJ 318 [4] [1984] 1 MLJ 46 [5] [2010] 8 MLJ 530 [6] [2003] 2 AMR 6, CA

A Formalist Analysis Of Williams Othello - 880 Words

A Formalist Analysis of Williams Shakespeare s Othello, reveals a central theme of friendship and loyalty that veils the truth of envy and betrayal. The main antagonist of the play, Iago, appears to have the trust and friendship of every character,as the are unaware of his grim intentions. Iago is described as kind, good, wise and compassionate, as well as loyal and trustworthy. He masks his evil and is able to display innocence as pure as an angel, resulting in easy manipulation. To our main character, Othello, he is an adviser and a most devoted soldier. To the lieutenant, Michael Cassio, Iago is a wise comrade. To his wife, Emilia and the fair Desdemona he is a scoundrel, but as a man, should be respected. And to Roderigo, Iago is a partner in crime. The relationships and faithfulness of each character to another are dependent on how the play unfolds dramatically in each Act. Act I of the play begins with Roderigo and Iago trying to inform Desdemona s father, Brabantio, that she has married the Moor, Othello against his wishes and they were doing unspeakable things. While Roderigo and Iago would not be exactly defined as friends, they are working together for a benefit. Roderigo is in love with Desdemona but her father has refused her and has shared no feelings of the same interest. Iago wants to be Othello s right-hand man instead of his ancient, and it can be inferred that he sees the relationship as a threat or he just wishes Othello no happiness. Iago uses his

Chapter 8 Mishkin Notes Free Essays

An Economic Analysis of Financial Structure Why do Financial Institutions Exist? (Why is Indirect Finance so Important? ) Chapter 8 Chapter Preview W e take a closer look at why financial institutions exist and how they promote economic efficiency. Topics include: †¢ A Few Basic Facts About Financial Structure †¢ Transaction Costs †¢ Asymmetric Information: Adverse Selection and Moral Hazard Chapter Preview (cont. ) †¢ The Lemons Problem: How Adverse Selection Influences Financial Structure †¢ How Moral Hazard Affects the Choice Between Debt and Equity Contracts †¢ How Moral Hazard Influences Financial Structure in Debt Markets 1 Basic Facts About Financial Structure Throughout the World †¢ The chart on the next slide shows how non-financial business get external funding in the U. We will write a custom essay sample on Chapter 8 Mishkin Notes or any similar topic only for you Order Now S. , Germany, Japan, and Canada. †¢ Notice that, although many aspects of these countries are quite different, the sources of financing are somewhat consistent, with the U. S. being different in its focus on debt. Sources of External Finance Copyright  © 2007 Pearson Addison-Wesley. All rights reserved. 8-5 Eight Basic Facts of Financial Structure 1. Stocks are not the most important source of external financing for businesses [Direct Finance] 2. Issuing marketable debt and equity ecurities is not the primary way in which businesses finance their operations [Direct Finance] 2 Eight Basic Facts of Financial Structure 3. Indirect finance, which involves the activities of financial intermediaries, is m any times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 4. Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses. Eight Basic Facts of Financial Str ucture 5. The financial system is among the most heavily regulated sectors of economy. 6. Only large, well -established corporations ave easy access to securities markets to finance their activities. Eight Basic Facts of Financial Structure 7. Collateral is a prevalent feature of debt contracts for both households and businesses. 8. Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrowers. 3 W hy is Indirect Finance so Important? †¢ Transactions Cost †¢ Information Cost Transaction Costs †¢ Financial intermediaries to reduce transaction costs (and make profits) through – †¢ Economies of scale †¢ Expertise †¢ Read the municipal bond article. Transaction Costs †¢ Transactions costs ? ? ? E. g. a $5,000 investment only allows you to purchase 100 shares @ $50 / share (equity) No diversification Bonds even worse—most have a $1,000 size 4 Transaction Costs †¢ Financial intermediaries make profits by reducing transactions costs – Take advantage of economies of scale (example: mutual funds) – Develop expertise to lower transactions costs – provide investors with liquidity and diversification Information Costs – Asymmetric Information †¢ symmetric information—the case where all parties to a transaction or contract have the same information. †¢ In many situations, this is not the case. We refer to this as asymmetric information. Asymmetric Information: Adverse Selection and Moral Hazard †¢ We will focus on two specific forms of asymmetric information: ? Adverse selection ? Moral hazard 5 Asymmetric Information: Adverse Selection and Moral Hazard †¢ Adverse Selection 1. Occurs when one party in a transaction has better information than the other party 2. Before transaction occurs 3. Potential borrowers most likely to produce adverse outcome are ones most likely to seek loan The Lemons Problem: How Adverse Selection Influences Financial Structure †¢ If quality cannot be assessed, the buyer is willing to pay at m ost a price that reflects the average quality Sellers of good quality items will not want to sell at the price for average quality †¢ The buyer will decide not to buy at all because all that is left in the market is poor quality items †¢ This result, when bad quality pushes good quality from the m arket because of an information gap, is known as â€Å"adverse selection† †¢ This problem explains fact 2 and partially explains fact 1 Asymmetric Information: Adverse Selection and Moral Hazard †¢ Moral Hazard 1. Occurs when one party has an incentive to behave differently once an agreement is made between parties 2. After transaction occurs 3. Hazard that borrower has incentives to ngage in undesirable (immoral) activities making it more likely that won’t pay loan back 6 Health Insurance †¢ Symmetric Information: Suppose, if you get sick, drugs cost $10,000/year †¢ Everyone has a 1/10 chance of getting sick †¢ Solution – Insurance will be offered at $1,000 per year Health Insurance – Symmetric Information continued †¢ Suppose 10% of the population (2 out of 20) is sickly and has a 50%(1/2) chance of getting sick – independent. †¢ Other 90% (18 people) only has 1/18 chance of getting sick. †¢ This information in known to everyone. †¢ How do you price the insurance? Health Insurance – Symmetric Information ontinued †¢ Sickly types pay? †¢ Healthy types pay? 7 Health Insurance – Asymmetric Information Adverse Selection †¢ Same as previous example, but one’s type (sick or healthy) is private information. Suppose insurance company offers policy at $1,000 per year? Suppose insurance company offers policy at $1,000 per year? †¢ Sickly type happy to save $4,000. †¢ Healthy drop out and go without insurance. †¢ Adverse selection: Bad quality pushes good quality from the market because of an information gap. 8 How about charging less say $555. 56 to everyone? How about charging less say $555. 56 to everyone? Break even on the healthy type, but lose on sickly type. †¢ Only way for insurance company in this case to break even is to charge $5,000 ? Healthy will go without insurance. Adverse Selection and Financial Structure Lemons Problem in Securities Markets †¢ Suppose investors cannot distinguish between good and bad securities, willing to pay only the average of the good and bad securities’ values. †¢ Result: Good securities undervalued and firms won’t issue them; bad securities overvalued, so too many issued. 9 Lemons Problem in Securities Markets †¢ Investors won’t want to buy bad securities, so m arket won’t function well. ? Explains Facts 1 and 2 ? Also explains Fact 6: only large well established firms have access to securities m arkets †¢ Bad quality pushes good quality from the m arket because of an information gap. Tools to Help Solve Adverse Selection Problems †¢ Private Production and Sale of Information ? Free-rider problem interferes with this solution †¢ Government Regulation to Increase Information (explains Fact # 5) Tools to Help Solve Adverse Selection Problems †¢ Financial Intermediation ? Analogy to solution to lemons problem provided by used car dealers ? Avoid free-rider problem by making private loans (explains Fact # 3 and # 4) ? Also explains fact #6—large firms are more likely to use direct instead of indirect financing 10 Tools to Help Solve Adverse Selection Problems †¢ Collateral and Net Worth ? Explains Fact # 7 How Moral Hazard Affects the Choice Between Debt and Equity Contracts †¢ Called the Principal -Agent Problem ? Principal: less information (stockholder) ? Agent: more information (manager) †¢ Separation of ownership and control of the firm ? Managers pursue personal benefits and power rather than the profitability of the firm Tools to help solve the Principal-Agent Problem: †¢ Monitoring ? Expensive †¢ Government regulation to increase information Fact 5 †¢ Financial Intermediation ? Venture capital firms provides the equity and place there own people in management †¢ Debt Contracts ? Reduces the need to monitor as long as borrower is performing. Explains Fact 1, why debt is used more than equity 11 How Moral Hazard Influences Financial Structure in Debt Markets †¢ Even with the advantages just described, debt is still subject to moral hazard. ? Debt may create an incentive to take on very risky projects. How Moral Hazard Influences Financial Structure in Debt Markets †¢ Most debt contracts require the borrower to pay a fixed amount (interest) and keep any ash flow above this amount. †¢ For example, suppose a firm owes $100 in interest, but only has $90? It is essentially bankrupt. The firm â€Å"has nothing to lose† by looking for â€Å"risky† projects to raise the needed cash. Tools to Help Solve Moral Hazard in Debt Contracts Lenders need to find ways ensure that borrower’s do not take on too much risk. ? A good legal contract ? Bonds and loans often carry restrictive covenants †¢ Restrict how funds are used Require minimum net worth, collateral, bank balance, credit rating. †¢ Financial Intermediaries have special advantages in monitoring[Facts 3 and 4] ? 12 STOP HERE!! 13 How to cite Chapter 8 Mishkin Notes, Essay examples

Chapter 8 Mishkin Notes Free Essays

An Economic Analysis of Financial Structure Why do Financial Institutions Exist? (Why is Indirect Finance so Important? ) Chapter 8 Chapter Preview W e take a closer look at why financial institutions exist and how they promote economic efficiency. Topics include: †¢ A Few Basic Facts About Financial Structure †¢ Transaction Costs †¢ Asymmetric Information: Adverse Selection and Moral Hazard Chapter Preview (cont. ) †¢ The Lemons Problem: How Adverse Selection Influences Financial Structure †¢ How Moral Hazard Affects the Choice Between Debt and Equity Contracts †¢ How Moral Hazard Influences Financial Structure in Debt Markets 1 Basic Facts About Financial Structure Throughout the World †¢ The chart on the next slide shows how non-financial business get external funding in the U. We will write a custom essay sample on Chapter 8 Mishkin Notes or any similar topic only for you Order Now S. , Germany, Japan, and Canada. †¢ Notice that, although many aspects of these countries are quite different, the sources of financing are somewhat consistent, with the U. S. being different in its focus on debt. Sources of External Finance Copyright  © 2007 Pearson Addison-Wesley. All rights reserved. 8-5 Eight Basic Facts of Financial Structure 1. Stocks are not the most important source of external financing for businesses [Direct Finance] 2. Issuing marketable debt and equity ecurities is not the primary way in which businesses finance their operations [Direct Finance] 2 Eight Basic Facts of Financial Structure 3. Indirect finance, which involves the activities of financial intermediaries, is m any times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 4. Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses. Eight Basic Facts of Financial Str ucture 5. The financial system is among the most heavily regulated sectors of economy. 6. Only large, well -established corporations ave easy access to securities markets to finance their activities. Eight Basic Facts of Financial Structure 7. Collateral is a prevalent feature of debt contracts for both households and businesses. 8. Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrowers. 3 W hy is Indirect Finance so Important? †¢ Transactions Cost †¢ Information Cost Transaction Costs †¢ Financial intermediaries to reduce transaction costs (and make profits) through – †¢ Economies of scale †¢ Expertise †¢ Read the municipal bond article. Transaction Costs †¢ Transactions costs ? ? ? E. g. a $5,000 investment only allows you to purchase 100 shares @ $50 / share (equity) No diversification Bonds even worse—most have a $1,000 size 4 Transaction Costs †¢ Financial intermediaries make profits by reducing transactions costs – Take advantage of economies of scale (example: mutual funds) – Develop expertise to lower transactions costs – provide investors with liquidity and diversification Information Costs – Asymmetric Information †¢ symmetric information—the case where all parties to a transaction or contract have the same information. †¢ In many situations, this is not the case. We refer to this as asymmetric information. Asymmetric Information: Adverse Selection and Moral Hazard †¢ We will focus on two specific forms of asymmetric information: ? Adverse selection ? Moral hazard 5 Asymmetric Information: Adverse Selection and Moral Hazard †¢ Adverse Selection 1. Occurs when one party in a transaction has better information than the other party 2. Before transaction occurs 3. Potential borrowers most likely to produce adverse outcome are ones most likely to seek loan The Lemons Problem: How Adverse Selection Influences Financial Structure †¢ If quality cannot be assessed, the buyer is willing to pay at m ost a price that reflects the average quality Sellers of good quality items will not want to sell at the price for average quality †¢ The buyer will decide not to buy at all because all that is left in the market is poor quality items †¢ This result, when bad quality pushes good quality from the m arket because of an information gap, is known as â€Å"adverse selection† †¢ This problem explains fact 2 and partially explains fact 1 Asymmetric Information: Adverse Selection and Moral Hazard †¢ Moral Hazard 1. Occurs when one party has an incentive to behave differently once an agreement is made between parties 2. After transaction occurs 3. Hazard that borrower has incentives to ngage in undesirable (immoral) activities making it more likely that won’t pay loan back 6 Health Insurance †¢ Symmetric Information: Suppose, if you get sick, drugs cost $10,000/year †¢ Everyone has a 1/10 chance of getting sick †¢ Solution – Insurance will be offered at $1,000 per year Health Insurance – Symmetric Information continued †¢ Suppose 10% of the population (2 out of 20) is sickly and has a 50%(1/2) chance of getting sick – independent. †¢ Other 90% (18 people) only has 1/18 chance of getting sick. †¢ This information in known to everyone. †¢ How do you price the insurance? Health Insurance – Symmetric Information ontinued †¢ Sickly types pay? †¢ Healthy types pay? 7 Health Insurance – Asymmetric Information Adverse Selection †¢ Same as previous example, but one’s type (sick or healthy) is private information. Suppose insurance company offers policy at $1,000 per year? Suppose insurance company offers policy at $1,000 per year? †¢ Sickly type happy to save $4,000. †¢ Healthy drop out and go without insurance. †¢ Adverse selection: Bad quality pushes good quality from the market because of an information gap. 8 How about charging less say $555. 56 to everyone? How about charging less say $555. 56 to everyone? Break even on the healthy type, but lose on sickly type. †¢ Only way for insurance company in this case to break even is to charge $5,000 ? Healthy will go without insurance. Adverse Selection and Financial Structure Lemons Problem in Securities Markets †¢ Suppose investors cannot distinguish between good and bad securities, willing to pay only the average of the good and bad securities’ values. †¢ Result: Good securities undervalued and firms won’t issue them; bad securities overvalued, so too many issued. 9 Lemons Problem in Securities Markets †¢ Investors won’t want to buy bad securities, so m arket won’t function well. ? Explains Facts 1 and 2 ? Also explains Fact 6: only large well established firms have access to securities m arkets †¢ Bad quality pushes good quality from the m arket because of an information gap. Tools to Help Solve Adverse Selection Problems †¢ Private Production and Sale of Information ? Free-rider problem interferes with this solution †¢ Government Regulation to Increase Information (explains Fact # 5) Tools to Help Solve Adverse Selection Problems †¢ Financial Intermediation ? Analogy to solution to lemons problem provided by used car dealers ? Avoid free-rider problem by making private loans (explains Fact # 3 and # 4) ? Also explains fact #6—large firms are more likely to use direct instead of indirect financing 10 Tools to Help Solve Adverse Selection Problems †¢ Collateral and Net Worth ? Explains Fact # 7 How Moral Hazard Affects the Choice Between Debt and Equity Contracts †¢ Called the Principal -Agent Problem ? Principal: less information (stockholder) ? Agent: more information (manager) †¢ Separation of ownership and control of the firm ? Managers pursue personal benefits and power rather than the profitability of the firm Tools to help solve the Principal-Agent Problem: †¢ Monitoring ? Expensive †¢ Government regulation to increase information Fact 5 †¢ Financial Intermediation ? Venture capital firms provides the equity and place there own people in management †¢ Debt Contracts ? Reduces the need to monitor as long as borrower is performing. Explains Fact 1, why debt is used more than equity 11 How Moral Hazard Influences Financial Structure in Debt Markets †¢ Even with the advantages just described, debt is still subject to moral hazard. ? Debt may create an incentive to take on very risky projects. How Moral Hazard Influences Financial Structure in Debt Markets †¢ Most debt contracts require the borrower to pay a fixed amount (interest) and keep any ash flow above this amount. †¢ For example, suppose a firm owes $100 in interest, but only has $90? It is essentially bankrupt. The firm â€Å"has nothing to lose† by looking for â€Å"risky† projects to raise the needed cash. Tools to Help Solve Moral Hazard in Debt Contracts Lenders need to find ways ensure that borrower’s do not take on too much risk. ? A good legal contract ? Bonds and loans often carry restrictive covenants †¢ Restrict how funds are used Require minimum net worth, collateral, bank balance, credit rating. †¢ Financial Intermediaries have special advantages in monitoring[Facts 3 and 4] ? 12 STOP HERE!! 13 How to cite Chapter 8 Mishkin Notes, Essay examples