Corporate Social Responsibility (CSR) Vs Creating Shared Value (CSV)

Corporate Social Responsibility (CSR) is about how companies manage the business processes to produce an overall positive impact on society. CSR helps the organizations to function in such a way that benefits society and enhances the public perception. Companies can practice CSR by doing philanthropic activities like donating money to local charities and causes, and through ethical treatment of its employees.

Michael Porter and Mark Kramer introduced the concept of Creating Shared Value (CSV) in a 2006 Harvard Business Review article and explained it further in the follow-up article published in 2011. CSV is a way to grow economies, marketplaces, companies, and communities in the long-term interest of businesses and everyone else and enables a company to attain competitive advantage. It enables a company to visualize social problems as market opportunities and in turn discover innovative products and services.

The following table lists the difference between CSR and CSV (Borgonovi et all, 2011)

CSR CSV
Motivation Corporate reputation and license to operate Competitive advantage
Driver External Stakeholders Corporate Strategy
Measurement Spending Social and economic value created
Management CSR Departments Across the whole company
Social Benefit Successful projects Large-scale sustainable change
Business Benefit Risk reduction and Goodwill New Business Opportunities

 

I would like to explain my experience as a recipient of such shared value. The Chicagoland Entrepreneurial Center (CEC) is a non-profit organization that supports entrepreneurs on their path to building high-growth, sustainable businesses. Its flagship project, 1871, fulfills CEC’s vision of a central address for entrepreneurs in Chicago. 1871 is a co-working center for digital startups. Located in the Merchandise Mart, the 50,000-square-foot facility provides Chicago startups with affordable workspace and access to mentors, programming, educational resources, potential investors and a community of like-minded entrepreneurs. CEC is funded through private entities and corporations. It is also supported by numerous emerging and successful entrepreneurs, established businesses and academia that recognize the significance of entrepreneurs and the impact the CEC has on the local economy.

All these companies form a cluster and understand the importance of the need for more entrepreneurs in the society to grow the economy further. This cluster worked together to provide an amazing experience for about 120 people earlier this month at the Chicago Startup Weekend (CSW). About 60 start-up ideas were presented on a Friday evening, and 16 were selected to form teams. Each team worked together on Saturday and Sunday to create a business plan and a presentation. We four people who met just on that day and with varying backgrounds formed a team and our idea came out in the top 6. It provided a unique experience for me. The top three are about to proceed with their project and enter the market in the near future. Among the many sponsors, Google and Amazon provide products with prices specifically targeted for such startups. These companies receive the goodwill and eventually secure further business from these startups as they scale up.  This is a prime example of the creation of shared value from the initiatives of each of the participating companies.

References

Borgonovi, B., et al. (2011). Creating Shared Value in India. Retrieved February 28, 2014, from FSG: http://www.fsg.org/Portals/0/Uploads/Documents/PDF/India_CSV.pdf

Porter, M., & Kramer, M. (2011). The Big Idea: Creating Shared Value. Harvard Business Review.

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Visit to China – Videos

As part of the course International Operations / China, I could join a group of students and faculty from the University of Illinois at Springfield to visit three cities in China for 10 days starting from November 21st, 2013. This tour provided us with an opportunity to explore the Chinese culture, the economic development, the manufacturing power, and the educational system. It was a unique experience for most of us to learn about those aspects that makes China distinct in the world. As we stroll across the mainland, we could see many foreign products such as BMW, Audi, McDonalds, KFC, Starbuck’s etc. It was a clear indication that how a developing Chinese economy and its comparative advantage in manufacturing are mutually beneficial to foreign companies. As we relaxed in the G-train from Shanghai to Hefei, travelling at a speed of 225 km/hour, the prospering economy was visible through the industrial hubs in every nook and corner and construction of new infrastructure like bridges, roads, and industrial parks.

The three cities we visited were Shanghai, Hefei, and Beijing. Shanghai is the largest and most cosmopolitan city of China. We enjoyed the city tour, shopping, and the boat-cruise at night over the city shoreline. Beijing is the political capital of China and we toured the Tiananmen Square, Great Wall, Summer Palace and the Beijing Film Academy. Hefei is a much smaller city compared to the others. We had great learning experience through the Anhui University visit and the Hefei Meiling Company Limited. Here are the six videos of our visit to China starting with a two-minute snapshot.

UIS-Visit to China-2013-Snapshot from Sam Kurian on Vimeo.

UIS-Visit to China-Part 1 (THE FUN PART) from Sam Kurian on Vimeo.

UIS-Visit to China-Part 2 (Meiling Co and Anhui University) from Sam Kurian on Vimeo.

UIS-Visit to China-Part 3 (Anhui University-Wendian College and School of Business) from Sam Kurian on Vimeo.

UIS-Visit to China-Part 4 (Beijing Film Academy and Summer Palace) from Sam Kurian on Vimeo.

UIS-Visit to China-Part 5 (Tiananmen Square, Forbidden City, and Great Wall of China) from Sam Kurian on Vimeo.

The visit to China provided the opportunity for each of us to think deeper into underlying factors that made it possible for this great country to achieve extra-ordinary economic growth for more than three decades. China could make it possible by opening its economy to the world at an early stage of its development through massive foreign direct investment, enormous flows of trade and subsequent membership of the World Trade Organization, and links to the knowledge and experience of the large overseas-Chinese presence (Zeng & Williamson, 2007).

 References

Zeng, M., Williamson, P. (2007). Dragons at your door: How Chinese cost innovation is disrupting global competition. Boston: Harvard Business School Publishing.

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Hefei – My Favorite Chinese City

According to the “2012 Amazing China” survey taken by expats living in China, the most appealing Chinese cities in terms of job availability are Shanghai, Beijing, Shenzhen, Suzhou, Kunming, Hangzhou, Nanjing, Tianjin, Xiamen and Qingdao (in that order) (eChinacities, 2013). Shenyang and Hefei were seen by expats as having the best “political environments”. I had the opportunity to travel to China in November 2013 as part of a study tour through the University of Illinois at Springfield. We visited the cities Shanghai, Beijing, and Hefei for 10 days and I could witness the enormous infrastructure development that is instrumental in China’s economic growth. In the years between 2001 and 2006, more investment was done on roads, tracks, airports, and other fixed assets than had been invested in the previous fifty years put together. In the high-speed G Train, we traveled 1000 kilometers from Hefei to Beijing under four hours.

Beijing is a very crowded city and travelling by road can be a nightmare at most times. Shanghai appears to be more cosmopolitan with a better metro system. Comparing to Hefei, we could feel that both Beijing and Shanghai are more polluted environmentally. With green hills nestling into each other, Hefei is one of the first three national garden cities in China. Beijing and Shanghai are the 5th and 6th most expensive Asian cities according to the latest research conducted by ECA International, a leading company in the development and provision of solutions for the management and assignment of employees around the world (2012). Beijing is now the world’s 20th most expensive city. Compared to Beijing and Shanghai, the cost of living in Hefei is much less. It is considered to be one of the Chinese cities most suitable for living. It has won various honors such as Advanced City for Afforestation, Garden City, Clean City, Excellent Tourist City, and Excellent City for Comprehensive Environment Management. The percentage of greenery coverage is 43.93%, while per capita public green area adds up to 11.44 square meters.

Many Fortune 500 companies and other internationally known big names such as Metro, Johnson, Hitachi, Sanyo, Mitsubishi, Unilever, Coca Cola, Bouygues, Carrefour, Grand Tour, Chaitai, the President, Continental, Sumitomo Chemical, Air Liquide, as well as some most famous Chinese companies including Haier, Media, Changhong, Gree, Yili, Meiling, and BOE have made investments in Hefei. The presence of nationally acclaimed universities in Hefei is another winning factor in positioning the city for the 21st century. Anhui University is one of the 100 key universities selected for the national “211 Project” on which the Chinese Government is focusing financial assistance and encouragement for academic development and expansion during the 21st Century. In addition to Anhui University (AHU), the other higher education institutes such as University of Science and Technology of China (USTC), Hefei University of Technology (HFUT), Anhui Medical University (AHMU), Anhui College of Traditional Chinese Medicine (AHTCM), Anhui Radio & Television University (AHTVU), Hefei University (HFU), and the Anhui Institute of Architecture & Industry (AIAI) provide world-class education to the next generations of Chinese citizens and contribute to the continued economic growth.

Our delegation was hosted by Anhui University and Hefei Meiling Company at Hefei and those visits provided a unique insight in to the talent and the manufacturing potential of China. Today, Hefei is striving to make dreams come true and advancing towards its vision of building itself into a modern, emerging central city. It is turning itself into a nationally influential and regionally super-large city based on the development of the modern lakeside mega-city and in accordance with the requirements of “making new strides in scientific development and elbowing into the Top 10 in terms of major economic indicators” (Xinhuanet, 2011). At the end of my trip, Hefei turned out to be my favorite Chinese city to have a business relationship in the future.

Please refer to the following chart for a comparison of the three Chinese cities.

                                                                               References

ECA International. (2012). Retrieved December 18, 2013, from http://www.eca-international.com/news/press_releases/7677/#.UrLD7CLnaM8

eChinacities. (2013). Retrieved December 17, 2013, from http://www.echinacities.com/news/Shanghai-Beijing-and-Shenzhen-Best-Chinese-Cities-According-to-Expats

Hefei China Gov. (2013). Retrieved December 16, 2013, from http://220.178.124.16/english/zjhf.jsp?Rnd=0.7778821693156863

School of International Education Anhui University. (2013). Retrieved December 15, 2013, from http://www1.ahu.edu.cn/gjjy/main/abouthfen.asp

Xinhuanet. (2011). Retrieved December 17, 2013, from http://news.xinhuanet.com/english/special/2012-10/11/c_131899930.htm

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Disney’s MagicBands

Disney’s implementation of Radio Frequency Identification (RFID) enabled MagicBands is the right move towards improving the customer experience at its theme parks. The various features and convenience it brings by integrating with MyMagic+ vacation management system will make life easier for customers. MagicBand can be used as a room key, park ticket, Fast Pass and credit card. When I visited Disney World in 2009, the Disney hotel key card they issued during check-in could be used for all the features listed above except as a Fast Pass. We needed to swipe the card through a reader to use it. On the other hand, for MagicBands, sensors are used to extract data without any need for physical contact with a reader. This saves a lot of time for the customers as the transactions get completed very fast and they get more time to enjoy the park rides and shopping. I like the idea of other exciting user experiences Disney plans based on the RFID feature of the MagicBand such as characters address the kids with their name, and the animated characters interact with customers while in the waiting area.

Some concern in using the MagicBand is the feeling that one is always being tracked through both the hidden and visible sensors. I strongly believe that given the track record in quality and integrity at Disney in all aspects of its operations, they will implement the MagicBand and handle the resulting customer data very responsibly. Regarding the privacy concerns on children, Disney released a statement earlier this year confirming that it do not intent to use personal information to market children under age of 13 and promises that it will never share children’s personal information with any third party. Disney provides the choice to everyone for opting out of the MagicBand features. Personally, I believe that the introduction of MagicBands will make my visit to the park more enjoyable.

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Viral Marketing

Viral marketing utilizes network effect to reach its target audience quickly in a cost-effective way. It relies on a customer-to-customer communication in which both the communicator and the receiver perceives that the message they communicate is non-commercial even though they actually deal with a product or service (Palka et all, 2009).

Traditionally, marketing cost of a film using TV and print advertising constitutes a significant portion of the total budget. With the popularity of internet and social networking sites, the movie producers are extensively using the viral marketing techniques as a more cost effective approach to create excitement and in turn entice people to purchase the tickets. Internet’s ability to target high value customer groups through their search preferences is a highly effective marketing tool (Westland, 2012).

‘Toy Story 3’ launched a video campaign with a fake commercial for the toy Lots o’ Huggin Bear in YouTube. Also they created internet only videos for the Ken doll with his interviews and a series on his dating tips. When people ‘like’ a YouTube video, the message gets communicated among their friends that in turn quickly get propagated through various social networking mediums such as Facebook or Twitter like a virus. A special Facebook application was created to sell the movie tickets in advance for Toy Story 3. As soon as someone purchases the ticket, it gets communicated to his/her friends.  When this message is conveyed through a friend, it seems more real and encouraging for others to follow unlike just watching a TV commercial and forget about it. Eventually, all these extra creative work really paid off for Disney with a total revenue exceeding $1 billion for this movie. Thus the Web 2.0 technology has contributed greatly towards the effectiveness of the viral marketing campaigns. Its scope is expected to increase tremendously once Web 3.0 takes on us with features on customer mobility and location.

Personally, I am a very casual and occasional user of social media as I still need to decide how much privacy I should compromise and how effectively I can use all the features. When comparing myself with teenagers I feel that I am not using the social media that much and the viral marketing campaign do not have an effect on me. I usually see these videos after the fact when the story finally appears in a news media. But according to the latest Pew Research Studies, 72% of adults and 81% of teens are active users of social media in USA. Out of this 67% of adults and 94% of teens are Facebook users. I could not get specific number for the YouTube users. This suggests that the adult’s interest in social media is quite impressive and it will definitely be translated into an increase in participation in viral marketing campaigns. Actually, the generation gap is decreasing.

References

Davis, K. The real generation gap: How adults and teens use social media differently (Infographic). Retrieved October 10, 2013 from http://www.entrepreneur.com/article/228029

Palka, W., Pousttchi, K., Wiedemann, D. (2009). Mobile word-of-mouth – A grounded theory of mobile viral marketing. Journal of Information Technology (Palgrave Macmillan), 24 (2), 172-185

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“Long Tail”

Chris Anderson popularized the term ‘long tail’ by pointing out the economic significance of the long tail in a typical power law (Pareto) graph. In the retail front, the usual business strategy is to maximize revenues by selling large number of a few select items. The long tail concept supports selling a few number of a large pool of items. It will collectively result in achieving a larger market share than that obtained through the traditional strategy. Customers will be delighted to see the vast variety of products available to them as well as the opportunity to demand the features that they like the most. For the company, it needs to modify its business and operational procedures to match with the customer requirements and facilitate the mass customization. Each product can be distinct and serves the purpose of the customer who ordered it. Let us look into the two companies that have utilized this strategy through the extensive use of Information Technology (IT).

Amazon is the prime example of a company that capitalized on the use of IT to reach the long tail. Unlike in brick and mortar bookstore where the shelf space is limited, Amazon can carry a vast amount of rare books. Its customers are everywhere and it does not have to worry about wasting the shelf space with books that are of less demand in the typical market. The use of technology made it possible for Amazon to develop a recommendation engine to compare its customers’ buying patterns and recommend a rare book that is most suitable for them. They also implement the concept of affiliate marketing whereby Amazon Associates can direct the web traffic to Amazon for a possible sale and earn a commission; all possible using the Information Technology.

Netflix is another company that exploits the long tail using IT. Customers are no more required to go out to a physical store to rent movies; instead they can sit at the comfort of their home and order movies or other video materials as needed. Netflix does not have to worry about the physical space for the inventory for obscure movies that a physical store never carry. It implements a recommendation engine to recommend to users based on their previous buying experience. Thus the technology can entice a customer to buy an obscure movie that he or she would not bother to check at a physical store.

I have not yet used Netflix to its full extent as I would like to do my video shopping in the ‘old fashioned’ way by going to Family Video. At the same time I wanted to support the Family video as it is reasonably priced and is the only video renting shop remaining in our town after the burst of Blockbuster. Within the next 10 years, I expect that the internet bandwidth will be so high that all of our cable and dish channels will be streamed live via internet to our smart televisions without any interruption. The Netflix or similar movie renting will continue to increase their market share and there are possibilities of Family Video and similar brick and mortar stores go out of business unless they change their business strategy. There will be room for more than Netflix in the new online market for video rentals. I believe Family Video and similar video rental companies might collaborate and start an online presence right away if they really want to survive.

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Sources of Business Startup Ideas

Listed below are the three sources of business startup ideas.

Think of a ‘pain’ that you can relieve

If interested in making the lives of people easier through your products/services, you can observe and identify the areas in the specific industry where customers experience issues and are unhappy. The thinking on how you can resolve the issues and make the customers’ lives happy, can lead into exciting new ideas. As an example consider the difficulties for an employee who is always on the move in attending the company meetings. Joining the conference calls sometimes turns out to be a tedious process especially if we need to call through the mobile phone. The company Mobileday developed an iPhone application that makes phone conferencing so easy with one-click.

Recognize a hot trend and ride the wave

In any industry, it will be great to look for the latest trend. If you are passionate enough in that specific area, you can come out with a great business idea to exploit that trend. This may lead to a better online experience for the customers. The energy drink market has grown into a multi-billion industry with products from Red Bull, Monster, and 5-Hour Energy. Riding along the wave was the advent of new food products including the energy bars. The company YouBar provides customizable and healthy energy bars.

Study an existing product or service and explore ways to improve its function.

There is always room for improvement in every product/service. Certain features of the product might not have been implemented correctly. A new idea can be developed based on a better implementation plan of those features. When hamburgers were getting popularized in USA in the 1930s, White Castle was the first company to market both the hamburger and the ‘to go’ carry-out style to the customers. When McDonald’s entered the same market, they invented the fast-food production system to prepare the food very quickly without using a skilled cook. As in an automobile assembly line, multiple unskilled workers were employed and each one does a specific step in the food preparation process. This resulted in faster response time, lesser costs and happy customers.

References

Longenecker, J., et al. (2012). Small Business Management: Launching & Growing Entrepreneurial Ventures. Mason:South-Western Cengage Learning.

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Lean Software Development

Lean is a business improvement methodology. Lean thinking encompasses creating the most value while consuming the fewest resources, defining value from customers’ perspective, and identifying which process steps create value and which are only waste. It consists of a set of principles that accelerates the speed of all processes across the whole enterprise by promoting the use of minimal amounts of resources to produce high volume of high quality products. Its success in the manufacturing and service industries resulted out of focused efforts of all employees of an organization along with strong support from the leadership. We can apply the lean concepts of 5S of lean, waste management, pull systems, just-in-time, and the theory of constraints in software development projects in order to reduce waste and speed up the time-to-market.

Five Principles (5S) of Lean

The five principles of lean are thoroughly applied, worked, and verified in the manufacturing and service processes. For the effective application in software development, we need to interpret and execute these principles in a slightly different way as explained below.

      1. Sort (Prioritize & Minimize)

The primary purpose of Sort is to specify value from the perspective of the customer. Special care should be taken to build nothing more than the customer requires. The user requirements can be broken down into Minimum Marketable Features (MMFs). Each project team member should make sure not to engage in activities that result in zero value to the product or the customer. Also eliminate overheads related to dealing with redundant, duplicate, and scattered information and tools.

    2. Storage (Organize)

The Storage specifies organizing of the team and projects to optimize flow of work and minimize the duration of work in process. It enables making decisions as late as possible. Involvement of all team members in all major decisions is needed. Visual cues such as physical task boards can be used to signal the progress of project components and to trigger subsequent actions. Orderliness in terms of right protocols to communicate, right locations and structure to store information, and guidelines should be readily available so that project team does not spend time searching for information.

    3. Shine (Cleanup)

Shine promotes archiving and removing of unused or partially completed systems, features, and components. It includes dropping obsolete database tables, foreign keys, removal of depreciated software code, and cleaning up of build and test scripts. The development and production environments should not contain anything that does not add to the current value.

    4. Standardize

Standardize stresses the need to ascertain that the development processes and practices reinforce the three Ss listed above. Moreover, it should be flexible enough to deal with frequently occurring issues. These processes should also be understood and reinforced by team members.

    5. Sustain

All the four Ss listed above should be repeatable. Monitor and measure process outcomes and pursue perfection through continuous improvement. Empower team members to suggest process improvements and provide dashboards so that team members can monitor project/process performance.

Managing Waste in Lean

There should be a shared understanding among the team members regarding what constitutes waste. Lean identifies the following eight types of wastes in software development: extra features (overproduction), partially done work (inventory), defects, non-value added processing, waiting, excess effort, and underutilized people. All the project team members should be aware of these wastes and must take proactive measures to avoid those. Otherwise, these wastes will lead to poor product quality and high project costs.

Overproduction in software development is a significant contributor to waste of time. According to Pareto rule, 80% of the product’s use can be attributed to 20% of its features. Extra care should be taken to avoid the ‘nice to have’ features. Inventory includes the development of features or enhancements that are never deployed, incomplete code due to schedule constraints, and requirement documents that contain undelivered features. Excess effort refers to effort that delivers no value such as non-productive meetings, artifacts that are created as per the methodology, but lacks direction and coordination, and emails without clarity. Transitions between project phases can add to the wasted time if the Quality Control team just concentrates on the submission of the design and development of deliverables without any detailed plan for themselves. Their testing should not wait until the end of the development cycle; instead it should be done as soon as each feature is coded.

Pull Systems and Just-in-Time (JIT)

The concept of Pull is very important in the implementation of lean systems where work flows in response to demand from the next stage in the process. The features specified by the customer can be pulled through the various phases of Software Development Life Cycle (SDLC). These requirements should not enter the development phase until all development on current requirements is complete. No features will move onto the validation team until the current testing is completed. The chain continues until the production implementation. By using the Pull systems, the project team will be able to concentrate on completing the highest priority features much faster. This happens only after the customer conveys the need for the specific features and the development work begins just-in-time. Pull and JIT approach enables efficient use of the resources. A tracking board can be setup in the wall to indicate the flow of the features of the product through the various development phases.

The Theory of Constraints (TOC)

The Theory of Constraints states that the entire process is subject to its biggest constraint. So it is important to identify the process constraints and enhance the process by either improving the constraint or by eliminating it. A clear understanding of the constraints can provide the project team how many features it can develop at any point in time. In software development projects, critical path is identified as the main constraint/bottleneck.

Lean Implementation 

We can begin adopting lean principles to the current project by mainly focusing on its ability to identify and manage wastes and constraints. Concurrently, with the understanding that no new initiatives can sustain without the management support, plan to introduce the lean concepts to the leadership team as well. The overall strategy is to create a lean culture in the systems department with the help of a management support system. Constant attention and support from the entire organization will be essential for achieving sustainable advantages and benefits of lean.

References

Dobson, P. (2009). Lean Software Development. Retrieved from http://leansoftwarepractices.com/

Poppendieck, M., Poppendieck, T. (2003). Lean Software Development: An Agile Toolkit. Addison-Wesley Professional.

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Mass Customization

Mass customization is the production and distribution of customized goods and services on a mass basis. In the Harvard Business Review article ‘Making Mass Customization Work’, the authors Pine, Victor and Boynton point out the failures, qualities, and implementation of mass customization in the manufacturing and service organizations. The article began with the details of failure of this concept at Toyota. A reason for failure was that Toyota could not distinguish between mass customization and continuous improvement. The attempt for mass customization compromised the product quality when it was implemented in the form of an extension of continuous improvement. At the same time, continuous improvement is a pre-requisite for mass customization as it helps the company to achieve higher product quality, improved employee skills, and lower cost of production.  Once the company reaches the peak of continuous improvement, the organizational structure and management thinking should be changed in order for mass customization to be implemented effectively.

Mass customization is not suitable for all markets or products. The companies that have markets with changing customer needs and technological advances will be right for the mass customization of their products. The Dell experience is a prime example of its benefits. The market for computers is very large and each customer segment has unique requirements. We can choose from a variety of components with each selection priced individually. Dell utilized mass customization as well as the advances in internet and e-commerce technology to directly reach out to their customers and won the market. It was truly amazing.

In order for the mass customization to work, the production operation processes should be converted into modules. These process modules are then coordinated through a linkage system that is instantaneous, costless, seamless, and frictionless. I believe that in order for this process module to work effectively, a company should support a modular product design with standardized components. This will result in reducing the total cost of production, a high quality product and a satisfied customer. At a leading insurance company where I work as a consultant, continuous improvement is part of the organizational culture. That explains the fact that it continues to be the number one Auto insurer in USA for more than half a century. It has not yet announced a mass customization initiative where the insurance products are tailored for each customer separately. But, a new multi-year initiative has just started resulting in a drastic change in the operations and systems departments with the purpose of improving the customer experience. Even though it can be considered as a continuous improvement strategy, in the long run I believe it will pave the way for mass customization as the technology is being improved, the organizational structure is being modified, and the operational processes are being reviewed in order to better serve the customers.

In order for a company to be ready for mass customization, the following need to be done. First of all, the company should have processes in place for continuous integration. It needs to perfect the art of quality in its products and in every interaction with the stakeholders. Then the company should determine whether its industry and product is suitable for mass customization. It should ask the question whether it really needs to achieve such a customization without a heavy toll in production cost to stay viable. The company should be ready to accomplish low production costs through economies of scope rather than scale. Economies of scope are realized by the application of a single process to produce a greater variety of products and services more cheaply and more quickly.  Finally, it should decide whether it is ready to change the organizational structure to better service the customers. It should not forget to communicate its intentions with all the stakeholders and get their confidence. Once the company has all these items taken care of, it can make the executive decision to go for mass customization.

References

Pine, B. J., Bart, V., & Boynton, A.C. (1993). Making mass customization work. Harvard Business Review, 71(5), 108-118.

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Covered Options

There are two types of options as listed in the table below. The most basic and risky forms of option transactions are the buying and selling the call or put options as a holder. In the bullish market, call options can yield good returns whereas put options work good in a bearish market.

Holder
(Buyer)

Writer
(Seller)

Call Option

Right to Buy

Obligation to Sell

Put Option

Right to Sell

Obligation to Buy

The main advantage of playing with options is that the initial investment is much lower for options than buying the corresponding underlying stocks. Also, if played well, the percentage of return on investment is higher than the corresponding stock transactions. The risk is that the options become worthless beyond its expiry date.

The seller of an option is called the option writer. An investor who ‘writes’ call options against stock held in his/her portfolio is said to be selling covered options. The advantage of covered option is that it is a very conservative and safe way to have additional income in our stock portfolio.

Here is an example of the use of covered call for the 100 Sapient Corporation (SAPE) stocks in my portfolio. The purchase price for the Sapient stock was $10.50 per share. As an option writer, I initiated the transaction ‘sell to open’ for one call option contract of Sapient with a strike price of $12.50 and an expiration date of 07/16/2011 at a cost of $75 per contract. This means that I was obliged to sell 100 stocks of Sapient at the strike price of $12.50 per share if assigned. The net transaction amount $69 got credited to my account. This is like an additional dividend. If the actual stock price does not reach the strike price, we would never get the assignment to sell the stock. We originally bought the Sapient shares for $10.50 per share. So, even if we get assigned, the stock will be sold at the strike price of $12.50 that will give us a profit of $2 (16%) per share. In either case, we can keep the covered option transaction amount of $69. This option was eventually assigned and resulted in a total return of 25% as shown below.

Txn Date Txn Type Qty Symbol Name Price Fees Grand Total
3/17/2011 BUY 100 SAPE Sapient Corporation $10.50 $4.95 -$1,054.95
3/25/2011 SOLD To OPEN -1 SAPE Call SAPE Jul 16 2011 12.50 Call $0.75 $5.62 $69.38
7/15/2011 SOLD (Assigned) -100 SAPE Sapient Corporation $12.50 $4.99 $1,245.01
Total Profit $259.44
Return on investment 24.59%

We need to select not-so-fast moving stock for the covered call transactions. If the stock is very volatile like Apple or Google, the probability of the stock price to reach the option strike price is very high and it may get assigned to the writer to sell the corresponding underlying stocks. The strike price should be set high enough to get a profit in case it gets assigned to sell the stock.

 

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