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    ww.cimaglobal.com June 201

    Good foodWhy globalbrands arebuying into

    air trade

    8ll measure: Diageos

    ead of global audit andk, Stephen Bolton,

    n the issues facinge drinks industry

    12CSR Ltd: why truecorporate socialresponsibilityis anorganisational state ofmind, not a department

    22One-hit wonders:the business risks ofinvesting in countrieswhose economieslackdiversifcation

    35Smarter bartering:negotiationtechniques that willhelp you to achievea win-win outcome

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    fnancial managem

    I started my presidential year

    stressing the importance of

    keeping the CIMA qualification

    relevant to business and I end my

    year on the same theme. Looking

    to the future, members must

    ensure that we become not only

    business advisers but also

    business navigators.

    During the spate of corporate

    scandals a few years ago, much

    of the blame was heaped on our

    colleagues in auditing. Today the

    blame for the financial crisis is

    usually aimed at bankers, their

    bonus culture and the regulators.

    We could consider ourselves

    lucky to have escaped censureagain, but perhaps we should

    be concerned that no one is

    asking: Where were the

    management accountants?

    We know from CIMAs

    research into the future of

    management accounting that

    many leading companies are

    already transforming their finance

    functions to be more efficient

    and provide better decision-

    making support. But it must

    not stop there. Consider what

    happened in banking as anexample. Over many years

    bankers devised innovations to

    improve their banks return on

    capital and increase the returns

    reported to shareholders. These

    >inbusiness

    CIMA is the Chartered Institute of Management Accountants, 26 Chapter Street, London SW1P 4N

    Tel: +44 (0)20 7663 5441 President Aubrey Joachim FCMA Deputy president George Glass FCMA

    Vice-president Harold Baird FCMA Chief executive Charles Tilley FCA

    GaininG influence inyour orGanisationmeans beinG up thereto be shot at, but itsa risk worth takinG

    CIMA membersare objectiveproessionalswho can supporand challengemanagers to helthem improve

    risk managemenand navigatearound the worsturbulence in anuture economicstorms

    met societys demand for credit

    and gave the banks clients

    higher returns. The banks

    reported huge profits, which

    generated value for

    shareholders, too. But was all

    this in the public interest? The

    bankers were awarded bonuses

    in line with their contribution to

    shareholder value, yet their

    activities eventually destroyed

    shareholder value and created

    huge costs for the global

    economy. So where were the

    banks corporate navigators?

    The ensuing economic crisis

    has highlighted the need for

    finance to assume a broader role:not only supporting a business

    but also using professional

    objectivity to ensure that risk

    and performance are managed

    in the long-term interests of all

    stakeholders. As the world

    emerges from recession,

    businesses need management

    accountants who can combine

    financial expertise with

    commercial knowledge. Why

    management accountants?

    Because they are the only

    professionals with a completefinancial toolkit and the business

    understanding to use it. This kit

    includes the ability to provide a

    longer-term planning framework

    to ensure strong governance at

    board level and more informative

    external reporting.

    The toolkit also enables CIMA

    members to help their firms strike

    a balance between improving

    operational efficiency and

    developing their competitive

    positions. We can also play a

    key role in assessing the data

    available and filtering information

    to inform all stakeholders. In

    short, CIMA members are

    objective professionals who can

    support and challenge managers

    to help them improve risk

    management and navigate

    around the worst turbulence

    in any future economic storms.The real challenge is for us to

    get engaged by business to play

    such a role. This would advance

    the science of management

    accounting, perhaps not in terms

    of new quantitative techniques,

    but in terms of influence, which is

    more important. Of course, with

    greater influence comes greater

    accountability. In times of crisis it

    would be much more likely that

    wed take some of the blame.

    But wed be relevant and we

    would have been guided by ourethical principles, so we should

    be able to avoid the worst of

    what might blow our way.

    This is a little food for

    thought to leave you with

    after my fascinating, enjoyable

    and enlightening term as CIMA

    president. I am hugely proud o

    the institute and its members.We have achieved a great dea

    together and I look forward to

    seeing the influence of chartere

    management accountants

    continue to grow in future.

    Aubrey JoachimCIMA president

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    4 LettersThe costs of resigning on ethicalgrounds; applying lean thinking tothe finance function.

    6 First inAll the latest news affectingaccountants in business,including regulations updates.

    12 OpinionWhy true CSR is not somethingto be departmentalised.

    29 Technicalmatters29 Cost management.32 Strategic analysis.

    35 CareerdevelopmentWin-win negotiation techniques.

    39 Study notesYour guide to entering, taking andpassing the CIMA qualification.39 Exam tips: paper F2

    Financial Management.44 Exam tips: paper F3

    Financial Strategy.46 Exam notice: essential

    information for candidates.

    49 Institute updateCIMA news and a diary ofevents, featuring the CEOsnotebook by Charles Tilley.

    55 So you wantto be financial manager in thetelecoms industry.

    56 Last outBizarre communications fromthe wonderful world of business.

    CIMA, 26 Chapter Street,

    London SW1P 4NP

    +44 (0)20 7663 5441

    www.cimaglobal.com

    Editorial and production

    Caspian Publishing

    198 Kings Road, London SW3 5XP

    T: +44 (0)20 7368 7170F: +44 (0)20 7368 7201

    E: [email protected] Ruth PrickettChief sub-editor Neil ColeCreative director Nick DixonArt editor Clare MeredithAccount manager Tina FranzHead of production Karen Gardner

    Advertising

    T: +44 (0)20 7368 7117F: +44 (0)20 7368 7112E: [email protected]

    Group advertisement managerMatthew Blore

    Advertisement managerLoris Giovinazzo

    Account manager Jonathan WoodHead of integrated solutionsNick Beaton

    Subscriptions

    E: [email protected]: +44 (0)20 7368 720045 (UK), 54 (Europe), 72 (rest ofworld). Back issues: 5.50 includingpostage, subject to availability.All payments should be in sterlingdrawn on a UK bank.

    For the USA

    FM (ISSN 1471 9185) is published tentimes a year for $60 by CaspianPublishing, 198 Kings Road, LondonSW3 5XP. Periodicals postage paid atRahway, NJ Postmaster. Send addresschanges to: Financial Management,c/o BTB Mailflight Ltd, 365 Blair Road,Avenel, NJ 07001.

    Caspian PublishingFounder and editorial directorStuart Rock

    Founder and communications directorMatthew Rock

    Finance director Kate AndrewsCommercial director Roger Beckett

    Reproduction ZebraPrinting Headley Brothers

    CIMA reserves the right to grantpermission to reproduce articles.Opinions expressed in FMare theauthors own and do not necessarilyrepresent the policies of theiremployers or CIMA council. CaspianPublishing and CIMA accept noresponsibility for views expressed bycontributors. The publisher reserves the

    right to refuse, cancel, amend orsuspend any advert or insert.No liability is accepted for loss arisingfrom non-publication, incorrect or latepublication of any item. The inclusion ofany advertising material does not implythat CIMA endorses the product,service etc advertised.

    Contents

    Jul 1, 2008 toJune 30, 2009:154,496

    8

    8 One2oneStephen Bolton,

    head o global riskand audit at Diageoexplains how therecession hasaected the drinksgroups operationsworldwide andreveals which Aricanation has adoptedGuinness as one o

    its avourite tipples.

    14 Chocs awayThe Fairtrade labelhas earned enviablinfuence overwestern consumerconcerned with howretailers treat theirsuppliers in the

    developing world. Ijoining the schemegood investment?

    22 WithoutportfolioA reporton thecountriesat mosteconomic riskbecause o theirdependence on asingle industry.

    CIMA is a gold sponsor of

    To give online feedback about

    Financial Management, join the

    FM feedback group on CIMAsphere

    at www.cimasphere.com/groups .

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    fnancial management

    Fire precautions

    I feel very proud of the

    correspondent who wrote the

    letter entitled When push

    comes to shove in Aprils issue.

    I have also been fired from an

    organisation, although for

    different reasons. With the

    same limited information I

    possessed at the time, I would

    go through it all again. But, with

    the knowledge I have today and

    the lessons I have learned from

    that experience, I would now

    take different steps. My

    circumstances were notthe same as those of your

    correspondent and I do

    miss the money.

    According to the procedure

    laid out in CIMAs code of ethics,

    the final stage in such situations

    is to resign. Quitting may be the

    bravest response, but who is

    going to pay your bills? How can

    the institute help its members to

    stand up for themselves and

    protect the professions

    reputation? If you have to resign,

    will CIMA pay your expenses

    until you find another job?

    Atala Blackman

    CIMA replies:

    Doing the right thing is not

    always easy and it can, of

    course, come at a cost. But the

    consequences of not doing so

    can be even more expensive

    both professionally and

    personally. If a member facing

    an ethical dilemma does not

    heed the warning signs andtake action, and is then called

    to account by the profession,

    this may affect their

    membership, reputation and

    employment prospects.

    Resignation is, as the code

    of ethics suggests, a last resort.

    Any member facing this kind of

    situation can access CIMAs

    ethics support package, which

    includes a legal advice line as

    well as a whistle-blowing helpline,

    to obtain free, confidential and

    independent advice.

    Gail Stirling, director of

    professional standards and

    conduct, CIMA

    Keen for lean

    I enjoyed Bill Fischers overview

    of Toyotas problems in the April

    issue (That was Kaizen; this is

    now). Many critics have rushed

    to blame the companys

    unyielding focus on the lean

    manufacturing philosophy for

    its recent troubles. I suggest

    that the opposite is the case: the

    approach has helped Toyota toaddress and tackle its quality

    problems at source.

    Few other car manufacturers

    would have acted as decisively

    as Toyota to do the right thing by

    its customers and shareholders.

    Now is the time for CIMA

    members to follow Toyotas

    example and wage a war for

    quality and against waste.

    I have been working for some

    time with clients and staff of a

    large consultancys finance

    transformation team to see how

    lean concepts can be applied to

    the finance function to improve

    its performance. Despite the

    dramatic improvements that lean

    thinking can achieve on the

    factory floor, many companies

    fail to harness its potential

    benefits for their support

    functions. The big difference

    between manufacturing and

    administrative processes is

    that people inherently introduce

    variability into the latter. In

    my experience, this presents

    challenges that are quite distinctfrom those posed in the

    manufacturing environment.

    Typically, the greatest source of

    waste from a lean perspective is

    the flow of information among

    people and departments.

    The application of lean

    thinking to back-office

    operations finance in particular

    can lead rapidly to both cost

    and quality improvements by

    doing the following four things

    n Reducing processing errors

    and work that does not add

    value for the customer.

    n Eliminating unnecessary an

    conflicting controls.

    n Speeding up finance

    processes by reducing lead

    times and complexity.

    n Ensuring a constant focus

    on identifying improvement

    that customers want.

    Management accountants

    are uniquely placed to advise

    corporate leaders on how

    finance can be a trailblazer in

    the organisation and show how

    lean thinking can reduce costand waste while at the same

    time improving customer and

    employee satisfaction.

    Toyotas manufacturing

    operations have led the way

    across the world on lean thinkin

    Now its time for every CIMA

    member to take the war on

    waste to their own organisation

    Noel Cullen FCMA

    >letters

    fnancial management

    Please send letters to: Financial Management, Caspian Publishing,198 Kings Road, London SW3 5XP. E-mail: [email protected]

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    >frstin

    All the latest news aecting accountantsin business, including regulations updates

    IASB seeks eedback onfnancial liabilities planThe International Accounting Standards

    Board (IASB) is inviting comments on its

    proposed changes to accounting for financ

    liabilities. These follow work already done o

    the classification and measurement of financ

    assets (IFRS9, Financial instruments).

    The IASB is proposing limited changes

    accounting for liabilities with amendments

    to the fair-value option. These are a respon

    to criticisms that volatility in profit or loss

    resulting from changes in the credit risk of

    liabilities that an entity chooses to measure

    at fair value is counterintuitive and does no

    provide useful information to investors.

    The proposals will affect only those entitiesthat choose to apply the fair-value option.

    A summary of proposals is available free

    at www.snipurl.com/w76uu.The exposure

    draft is open for comment until July 16 and

    can be accessed at www.snipurl.com/w53

    The 2010 CIMA annual awards are now

    open for nominations and this year there

    are four extra categories. The competition

    honours outstanding performers

    individuals, teams and organisations

    that have demonstrated excellence in

    management accounting and led the way

    for the profession. If you know a person orteam that has achieved considerable and

    measurable success this year, CIMA would

    like to hear from you.

    The existing categories

    n Case Study success award.

    n Tutor of the year.

    n Part-qualified of the year (sponsored

    by BPP).

    n Finance team of the year public

    sector/not-for-profit.

    n Finance team of the year private sector.

    n Recruitment consultancy of the year.

    n Responsible business.

    n Innovation in business.

    n Unlocking business intelligence.

    n Medium-sized employer of the year:

    under 5,000 employees (sponsored by

    Robert Half).

    n Large employer of the year: over

    5,000 employees (sponsored by Hays

    Senior Finance).

    n Outstanding contribution to business

    performance by a CIMA member.

    The new categories

    n Consultant of the year: the individual

    consultant or consultancy firm that has

    demonstrated commitment to the long-

    term success of its client.

    n Best annual report of the year: the

    organisation that has most clearly

    described its strategy in the narrativesection of the report.

    n Distance-learning student of the year

    (sponsored by BPP Professional

    Education): the CIMA distance-learning

    student who has demonstrated

    outstanding commitment, motivation

    and discipline in their studies.

    n Business partner of the year: the finance

    team providing the best example of

    what business partnering really means.

    All nominations will be reviewed and

    selected by an expert judging panel. The

    shortlist will be available to view online

    from September. The winners will be

    announced at a

    prestigious awards

    dinner at the Royal

    Lancaster Hotel,

    London, on the evening of

    November 22.

    Visit www.cimaglobal.com/

    awards for nomination

    details, the judging criteria

    and the shortlist.

    CIMA study shortlistedor sustainability NobelA CIMA research project entitled

    Accounting for climate change was one o

    five nominated projects at the prestigious

    Globe Forum and awards ceremony in

    Stockholm. The event featured the best

    organisations and

    innovators who share

    experiences with their

    sustainable solutions.

    Visit CIMAsphere

    (www.cimasphere.com/blogs ) to

    read a blog entry on the event by

    the institutes R&D manager,

    Sandra Rapacioli, or visit www.

    cimaglobal.com/sustainability

    for a copy of the research repo

    fnancial management

    Institute expands its awards

    Students oered tailored lielong learning supportThe CIMA Business School has been launched as a pilot, initially offering extra support to students whowish to make a sideways move as they progress through the qualification or take a study break.

    Members of the school can take advantage of three stepping-off points: the certificate in business

    accounting (a complete qualification); the diploma in management accounting; and the advanced diplom

    in management accounting (professional recognition levels in the main qualification). In return for a

    subscription (similar to the student fee), members of the school gain the following benefits:

    n A CIMA Professional Development toolkit that can be adapted to meet individual needs.

    n The right to use designatory letters after their names as active CIMA Business School members.

    n Careers and job advice, plus dynamic networking opportunities via CIMAsphere.

    Visit www.cimaglobal.com/businessschool for further information.

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    Malaysia and Sri LankaCIMA has launched its first survey of business

    confidence among medium-sized businesses in

    Malaysia and Sri Lanka. This involved members

    students in 55 firms and was finished in March.

    In Malaysia 52 per cent of respondent

    thought that their national economy

    was in recession, compared with

    35 per cent in Sri Lanka.

    Although 69 per cent of Sri

    Lankan businesses were

    confident about their

    performance, 75 per cent

    believed that their busine

    would survive in the long

    term. This was a contrast

    with Malaysia, where only

    29 per cent were confident

    about their current performanc

    but 72 per cent believed that their

    business would survive the downturn.

    Transport and fuel were the costs that Sri

    Lankan businesses considered most likely to

    increase next quarter. Their Malaysian counterpa

    cited supplier prices. More Sri Lankan companie

    were securing extra finance (59 per cent) than

    those in Malaysia (50 per cent).

    The most challenging issues for Malaysian

    companies included: competition; the ability to

    expand into new markets; the availability of

    financial management skills; changing governme

    policies; and recruitment and retention. In Sri La

    the key issues were how to innovate and add va

    the availability of non-management skills; the ab

    to expand into new markets; and the availability

    strategic management skills.

    Poll fnds green shoots

    Further fndings: IrelanIn the Republic of Ireland 55 per cent of CIMA

    members and students believe that the recession

    will last another 13 to 24 months, according to the

    institutes fourth Mid-size business confidence

    monitor survey of the country. But, while 48 per

    cent were confident about their businesss

    performance in the current economy, only 42 per

    cent were confident that it would survive.

    Respondents believed that most performanc

    factors would stay the same; many thought net

    profits would increase in the next quarter; and h

    expected overhead costs and supplier prices to

    fall. Only 23 per cent said they were securing ex

    finance (down from 35 per cent on the previous

    quarter). More than half believed that foreign-

    owned banks are important to the economy.

    CIMA members and students in medium-sized UK businesses

    believe that the country is still in recession, according to the institutes

    fifth UK mid-size business confidence monitor survey. But they were

    marginally more optimistic than in the preceding quarter, with 25 per

    cent expecting the downturn to continue for another 13 to 24

    months down from 33 per cent in the fourth quarter of 2009.

    The survey, which covered 333 medium-sized companies

    nationwide, also showed that 59 per cent were confident about their

    current business performance (eight percentage points higher than the

    figure 12 months ago). In the longer term, just under half were confident

    that their business would survive the recession, but almost six out of ten

    were worried that an increase in VAT to 20 per cent would harm their business.

    Most indicators suggested that businesses were maintaining their performance,

    but there was evidence of increasing company turnover, net profit and domestic sales

    turnover. Looking ahead to the next quarter, most respondents were expecting increased

    overhead costs and supplier prices. This situation has changed since the third quarter of

    2009, when they were falling. Respondents also expected basic salaries for full-time staff toincrease by up to five per cent, along with transport and fuel costs.

    Most firms are still focusing on efficiency: almost half said they had changed suppliers

    since the previous quarter. Value for money and price remained the principal reasons for this

    cited by 55 per cent and 70 per cent of those changing respectively but 17 per cent said

    that theyd had to act because a supplier had ceased trading or gone into administration.

    Fewer mid-size businesses are seeking additional finance from a bank (a fall of 15 per cent

    on the previous quarter) and 77 per cent of respondents are not seeking extra finance. Those

    that were doing so cited business acquisitions, working capital and cash flow as reasons.

    The next survey will take place this month. The 2009 annual report on the monitor is

    available at www.cimaglobal.com/midsize.

    www.cimaglobal.com

    fnancial managem

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    that our cost base increased b 60 per cen

    while consumer demand, which had been

    rising b eight per cent a ear, went flat.

    We had to adjust our strateg and focus

    on getting our margins back to pre-crisis

    levels within a ear. We grew our market

    share b responding to changes in consumrequirements b, for example, producing

    smaller packets and a more mass-market

    shampoo range. I learned a lot from this.

    We actuall based our response in Malas

    on Unilevers previous experience in Latin

    American countries that had gone through

    man economic problems. We see similar

    issues here at Diageo, but the ke is to kee

    in touch with consumers, wherever the ar

    and respond to their circumstances.

    Corporate governance regulations

    have been tightened since the recessio

    but are you also affected by licensing

    laws and anti-drinking campaigns?

    All alcohol companies need to be responsi

    about the wa the promote their products

    and were plaing a leading role here at

    Diageo. Its not onl the right thing to do;

    its also critical to the future of the industr.

    This is wh we invest heavil in promoting

    responsible drinking activit. For example,

    we have a tough marketing code that we

    are diligentl implementing worldwide.

    We never promote irresponsible drinking

    eg, among those below the legal purchase

    age. We tr to engage with all the groups thsee the issue differentl from us. Rather tha

    viewing this pressure as unfair, were being

    positive and responsible, but its clearl a r i

    Diageo owns famous brands

    worldwide. Does this reduce

    or increase risk?

    We produce and sell our drinks

    around the globe Guinness is

    hugel popular in Nigeria, for

    Stephen Bolton FCMAHead o global audit and risk, DiageoDiageo has an enviable reputation for

    building global brands. To what extent

    have the downturn and shifts in official

    attitudes to alcohol consumption dented

    the companys growth?

    The recession and changes to the regulator

    framework are the biggest challenges for us.Of these two, its the regulator framework

    that we know will become increasingl

    important. Our industr is fairl resilient,

    but the recession has changed our

    assessment of the most important risks and

    made us review our strateg. It has slowed

    our growth, of course, but this sector hasnt

    been affected dramaticall. Having said that,

    it has made us focus far more on cash and

    working capital, and on ensuring that the

    necessar organisational restructuring didnt

    increase our risk exposure or compromise

    compliance and corporate governance. We

    had to assure ourselves that the overhead

    cost base was appropriate, although our

    main focus has still been on growing market

    share and winning approval from customers.

    The US and Europe have been

    particularly strapped for cash. Is this

    why youre attempting the biggest

    multinational buy-out to date in China?

    We need to ensure that were well placed to

    build on our strengths when the recover

    happens. This is wh its so important to

    focus on emerging markets such as the Bric

    nations (Brazil, Russia, India and China) andAfrica. Part of this involves the bid to increase

    our stake in Shui Jing Fang, a premium

    Chinese white spirit. Well continue to invest

    in our European and North American

    businesses, but significant opportunities lie in

    developing and emerging markets.

    Isnt this a headache for risk analysis?

    Were highl conscious of the risks of trading

    in such regions, so we invest disproportionate

    amounts, compared with the sales we

    generate there, in putting exemplar control

    and compliance frameworks in place. We

    need to work to the same standards

    wherever we do business and we do this b

    having a clear code of conduct and policies.

    We train our staff to understand Diageoscore values and then follow this up with audits

    to ensure that its having the right effect.

    We have to be clear about our values to new

    recruits right from the start and reinforce

    them b rewarding people who adhere to

    them and showing the consequences if the

    dont. Its the onl wa to achieve the

    conditions under which ou can deliver to

    international standards globall and rel on

    people to use their own judgment.

    Your policy is to build up your premium

    brands. Is this tricky in a downturn?

    We believe that this is the right approach.

    In the long term consumers will continue to

    aspire to premium brands its human

    nature. Last ear we launched a $3,000-per-

    bottle brand of Scotch in Asia and it sold out.

    We are seeing changes in some regions.

    More people are entertaining at home in

    Spain, for example, and in Russia weve

    responded to a change in consumer

    spending power b marketing more

    affordable whiskies. But over time we believe

    that people will migrate back to these

    brands when the can afford to and the

    richest will continue to bu them.

    Youve been through this kind of crash

    before, havent you?

    The job that prepared me best for this

    situation was being FD of Unilever in

    Malasia. It gave me a chance to work in a

    ver different culture and I was also part of a

    board that had to respond to the Asian

    financial crisis of 1997, when the currenc

    devalued b 60 per cent over night. It meantPHOTOGRAPHS:TONyFRENCH

    fnancial management

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    O n e

    2 O n e

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    This is wh weve increased investment in this

    area b about 50 per cent in the past two ear

    mostl in staff costs. Beond this, all organisatio

    are coming under increasing scrutin b the

    authorities and the public, so anone whoaspires to be an FD must have a good grasp o

    the principles of control and governance.

    Its good to hear that youre investing in

    finance people despite the downturn.

    Weve been implementing a whole developme

    programme across our global finance function

    about 2,000 people called Keep learning.

    We introduced a tool to help people assess th

    development needs and our first global training

    programme was designed to hone the teams

    control and compliance skills. Were delighted

    that we were awarded global trainingaccreditation from CIMA in March. I see this as

    a great wa to help us attract the best talent

    because it recognises the qualit of our training

    There are 150 CIMA members working across

    the compan, all of whom will benefit from the

    wa this accreditation supports their CPD.

    What made you move to Diageo after a

    quarter of a century with Unilever?

    It was for famil reasons. We lived in Malasia

    for three ears and then returned to the UK an

    although m wife is Malasian Chinese, she wa

    keen that we should sta in one countr for the

    rest of our sons education, so when the Diage

    job came along I went for it. It was important t

    me that this compan has similar values to

    Unilevers but doesnt compete with it and is a

    leading plaer in its industr.

    Do you have a dream job?

    Ive never had one in mind I just know that I

    want to enjo m career and stretch mself

    until I retire. I tend to assess each opportunit

    as it arises. I do need to know that I can alwa

    make a difference and its good to be able to

    appl m overseas experience.

    Its important to think about how ou canbroaden our impact, and Im in discussions

    about taking up a non-executive role. Its also

    important to put something back into societ,

    so Im looking into what I can do for a charit

    for children who are brain-damaged at birth.

    M brother has cerebral pals and hes

    become a successful CIMA member. I seem to

    know a lot of CIMA accountants: m wife and

    m best friend since I was a child are both

    CIMA-qualified, too.

    instance but we have some limitations. For

    example, b definition Scotch whisk can be

    produced onl in Scotland and is matured for

    an average of seven ears before its bottled.

    We have 30 distilleries in Scotland, eachproducing a different tpe, so we need to predict

    demand man ears ahead. It also means that

    we will alwas have a global suppl-chain

    challenge because we cant move distillation

    nearer to ke markets.

    How important are environmental risks?

    This area is important to us and we set out

    our environmental policies in our corporate

    citizenship report. While were not one of the

    biggest energ users, our target is to cut our

    total greenhouse gas emissions b half between

    2007 and 2015. To this end, our suppl businessin Scotland has achieved a Carbon Trust award

    for its bio-energ investments in our

    Cameronbridge and Roseisle distilleries.

    Audit hasnt traditionally been the sexiest

    part of accountancy. Has the recession

    changed this perception?

    I had no background in audit when I took this

    job two ears ago, but I grew up in Unilever,

    where audit is seen as a fundamental route

    for developing finance talent. Ive been

    benchmarking our performance here against

    other great companies that use audit and risk

    as a source of the best talent.

    I feel strongl that we must promote audit as

    the best place in an organisation to develop our

    career in finance, ir respective of whether theres

    a recession or not. If the function is seen as the

    corporate policeman, whos responsible onl for

    ticking, bashing and checking pett cash, then

    its not sex. But, if it involves identifing ke risks

    and assessing how our actions have mitigated

    them, this leads to a broad range of activities

    that are engaging and enjoable.

    Why is audit so vital for a finance career?

    Its a great place for people to start out in financebecause it gives ou licence to hunt and fish

    across the business. you get to see different

    markets, functions and aspects of the suppl

    chain. It allows ou to observe how products

    are sold and strateg is executed.

    Experience in audit and risk also teaches skills

    that are vital to ever finance professional.

    Regardless of their qualification, all accountants

    must understand the wa their business works,

    the risks it faces and how it can manage them.

    0

    Quick CV

    1981-2006Bolton joins Unilever as a CIMA

    trainee in BOCM Silcock, its

    animal feeds business, in 1981.

    He becomes finance manager for

    BOCMs Scottish operations in

    1985 and two ears later he takes

    up the same role for the north-

    west of England.

    In 1988 he moves to Unilevers

    head office as management

    group accountant for agribusiness,

    medical products and packaging.

    Within three ears he is vice-

    president of mergers

    and acquisitions.

    In 1993 he is appointed FD of

    Lipton Soft Drinks and four ears

    later he takes up the post of suppl

    chain and finance director of

    Unilever in Malasia. His next role,

    starting in 2000, is vice-president

    of investor relations for Unilever.In 2003 he becomes finance

    director at Unilever UK.

    2006-Bolton moves to Diageo as

    finance director, global suppl

    and procurement. In 2008 he is

    appointed head of audit and risk.

    fnancial management

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    fnancial management2

    Some years ago a friend of mine was

    offered the job of corporate social

    responsibility manager at a big multinational

    company, which threw him into a state of

    mild panic. We met after work for a couple of

    soothing pints to discuss his dilemma.

    At first I couldnt understand why he was

    worried. The job involved a double

    promotion, he would be reporting to a main

    board director and hed been promised a

    budget sufficient to provoke serious envy

    among his colleagues. This was also acompletely new position, so he could largely

    set his own agenda and would have few

    hard targets to meet. To me this seemed the

    perfect opportunity for him to make his mark.

    The trouble is that Im not really ready to

    be a good person, he explained. Ive spent

    the past 20 years in sales and Im rather

    good at it. Im aggressive and competitive by

    nature I love stealing customers from the

    opposition. Some of my competitors hate me

    for the way that Ive undercut their prices and

    rubbished their products. I even drove a

    couple of them out of business. All of that

    required some really creative nastiness, I can

    tell you. And now I have to become Mr Nice

    Guy and make the world love this company.

    Im not sure I can do that.

    After several days of agonising he decided

    that he could just about bring himself to do

    it. And, over the next few years, he devoted

    his considerable skills to building a highly

    successful CSR activity for his company. But

    I think he always saw CSR as an activity ie,

    something to be done in addition to business

    as usual, rather than something that would

    change the way things were done.

    I began to think again about CSR andhow companies actually put it into practice.

    >opinion

    It became clear that I could put firms into two

    categories: those for whom its principally an

    activity and those for whom its an attitude.

    Some have set up a substantial CSR team

    similar to the one run by my friend while

    others have embraced CSR in a more subtle

    and pervasive way. The latter have changed

    their values as a result and require all

    activities to reflect these new values.

    Often, the more embedded CSR is, the

    less apparent it is to outsiders. Companies

    are entitled to be proud of their achievements

    in this area, of course, but theres little doubt

    that some do CSR so that they can have

    something to shout about and see this as a

    legitimate part of their public relations

    activities. Others do it because they want

    their economic activities to benefit more

    people than their traditional stakeholders.

    You could argue that it doesnt really

    matter whether firms adopt CSR in order tocreate a favourable impression or because

    they believe they have a duty to society.

    As long as it happens, its a good thing.

    And it would clearly be a foolish company

    that spent large sums on projects that didn

    directly improve its profits and then failed t

    ensure that such laudable activities gained

    wider recognition.

    For an organisation and its top manage

    the question is: what is our attitude to CSR

    Do we simply approach it in the same way

    that we tackle, say, tax compliance, or is it

    corporate state of mind that guides

    everything we do? And, if the former is true

    do we want to change? What would be the

    advantages of doing so?

    Those firms that have embedded CSR

    can argue that their big advantage is that

    they dont have to consider the societal

    effects of every proposed change in their

    business separately these aspects are

    considered part of the normal process.CSR cannot be neglected because it is

    hardwired into the thinking of everyone

    concerned. Once you have put CSR at the

    heart of your organisation in this way, there

    usually no going back. Its not just for this

    years chairmans speech its for life.

    Mike Brooks FCMA is a business writer

    and consultant. He can be contacted at

    [email protected]

    Authentic CSR is an attitude that pervades everybusiness decision, rather than a stand-alone activity

    to be departmentalised, argues Mike Brooks.

    Incorporated social responsibility

    Theres little doubt thatsome frms do CSR sothat they can have

    something to shout about

    GeTTY

    IMAGeS

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    fnancial management

    Global sales o Fairtrade goods increased by 22 percent in 2008, despite the recession. Neil Hodgeexplains the pros and cons o joining the initiative.

    gettyimages

    As regulators, investors

    nd conur dnd vror urnc bou howcopn n hruppl chn, nbun r wondrn

    whhr h lf-pnnd no on hr hclbhvour n h nnul rpor rllnouh. a rul h r condrnwhhr o k o for of ndpndn,nrnonll rcond ccrdon.On of h b-known l of pprovl h Frrd mrk, n -cchn loo h

    could nf frr holdn up hr produc, hoppr rchn for hr purch or cpnr fhn for juc n lobl rd.

    th loo rrd rdrk ofFrrd Lblln Ornzon inrnonl(FLO), h ndpndn lobl bod hrponbl for n Frrd ndrd.alnd wh 20 fllow nv round hworld, h Frrd Foundon h UK-bd bod h lcn h u of hcrfcon rk on ood h h

    ndrd. th lbl ppr on produc urn h h rlr vnddvnd producr br dl ,n rd nu prc lhouh non ndorn of ll h rlr prcc.

    th ch h nd n nvblfollown on conur. sl ofFrrd ood wr worh n d799 n h UK l r, rchd 2.5bnworldwd nd r xpcd o ncr.a globscn poll coond b hFrrd Foundon bfor World Fr trdD (m 8) found h ffh of conur

    pnld ocll rrponbl copnhrouh hr hoppn choc, whl nrl hrd wr lkl o rwrd copn forbn ocll rponbl. th Frrd mrkw hr o rud crfcon lbl nd64 pr cn of rpondn lnkd o frp for producr nd hr workr. a lrnubr wr lkl o rcond Frrdproduc o ohr conur.

    Frrd clrl no lonr frncor n rl, Chrl slon, rkn

    drcor h Frrd Foundon.Copn hould k no h hopprr prprd o nd ron oh bou hr lobl ccounbl.

    th rk h won o hh-profl rupporr nc w nroducd n h Uh r o. th Co-oprv group wh fr uprrk chn o wch ll of own-brnd chocol o Frrd n 2002,followd b coff n 2004 nd n 2008th Co-op l of Frrd produc,whch ccoun for bou wo pr cn of ol food rvnu, olld 61 n 2009

    25 pr cn ncr on 2008. th rouphop o nn l h r ofl rowh nd kn furhr Frrdproduc o ock.

    i copor r rporn prvn, oo. sl of rn d froFrrd-crfd coon tco lp fro500,000 un n 2007 o fv llon n 2008for nnc. and n Fbrur snburnnouncd h w lln h lrrn of Frrd produc of n rlr

    ChoCs away

    4 fnancial management

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    fnancial managem

    Firtrde cil develpment tndrdFor ll frr, FLO ndrd rqur h:n a non-dcrnor, docrc ornonl rucur up h nbl

    frr o brn produc o h rk.n th ornon u b up n rnprn w.n i u no dcrn n n prculr br or ocl roup.

    For hrd lbour, FLO ndrd rqur:n

    th copn nvolvd o brn ocl rh nd cur o workr.n trnn opporun .n Non-dcrnor plon prcc.n No forcd or chld lbour.nacc o collcv brnn proc.n Frdo of ocon.n Condon of plon xcdn ll nu rqurn.n adqu occuponl f nd hlh condon.n suffcn fcl for h workforc o n h Frrd pru.sourc: www.frrd.or.uk

    h world, rporn n pr cn r-on-r ncr n Frrd produc rvnu o218, lhouh h fur w dwrfd b ol nnul l of 19bn.

    Ohr b n hv rcnl nd upo h ch. L Jul Cdbur Dr mlkbc h fr -rk chocol bro o Frrd. th fr h conurwll no n ncr n prc (h nd oprcv ll Frrd ood or colhn hr rvl, lhouh h n ncrlru). th chocol n h four-fnrdvr of Nl flhp confcon K K

    now hcll ourcd, o h produccrr h Frrd loo. i h UKb-lln chocol bcu nrl onbllon un r producd vr r.

    J mxon, pokn for Nl, h h copn pln o hv ll of K K vr crfd Frrd, bu h currnl unbl o do o bcu hrrn nouh ccrdd coco rowr n chon ourc r prdonnl h ivorCo, whr hr r onl vn crfd

    fnancial manage

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    fnancial managem

    Cc cnneln Nubr of popl who dpnd upon coco for hr lvlhood worldwd: 45 llon.nannul coco producon worldwd: hr llon on.n incr n dnd for coco: hr pr cn pr r for h p cnur.n Currn lobl rk vlu of nnul coco crop: 3.5bn.n Proporon of coco h co fro w afrc: 70 pr cn.n Lnh of rqurd for coco r o produc fr pod: fv r.n Duron of pk rown prod for h vr r: n r.sourc: www.worldcocofoundon.or

    co-oprv. i k bou 4,000 onn ococo bn o produc h four-fnr rnof h bcu. to uppl ll of our K K rnw would nd bou 20,000 onn, whch

    ju no pobl h on, h .Whl mxon d h hr lh

    pru n wchn o Frrd upplrh h h bun won p on h conur. Ju bcu wv opd u Frrd producr, don n hh co of our produc wll ncr rul, dp h conoc cl. Our KK co h now h dd on o, dp bn Frrd nd lhl oxpnv o produc.

    Copn wh dvrfd uppl chnprculrl n dvlopn counr, ofn prccl bnf whn h o Frrd.thr cn b lo of brbr, corrupon nohr opqu prcc n h counrwhr cood uch coco nd coffr producd, on xpr, whodclnd o b nd. th Frrd mrkn p o cu ou uch bu, no onlfor wrn copn bun h rlbu on h producr h nd hcrfcon o urn hr nuprc nd h Frrd pru, whcho owrd hlpn h wdr coun

    No ll bun r convncd h hnd lbl o how how hcl h r, ofcour. mn copn uppor h concof fr rd, bu fr fwr r wlln o o h roubl of nn Frrd crfcon,ccordn o rrch roup Ornc monoWhl h food nd drnk ndur h lrlbrcd ccrdon, h cocndur o k on xpl h rnloof nd h nubr of brnd brn hloo rn rlvl low. arj sho,drcor of Ornc monor, hhlh dcrpnc bwn brnd h u hphr fr rd n hr rkn rnd ho h r cull nd nFrrd prcc rcond b h FLO

    Copn do no lw dnuhbwn Frrd nd fr rd. Onl h fconcp ndpndnl udd ndnrnonll rcond, h . thohr bun d h nvolvn of h prcc bodd n hFrrd mrk, bu whch cn b jufdonl b h copn whou n ohrubnon. Fr h u h lr rrn ncrl rn o dcvconur. i pl hrd o dnuhg

    ettyimages

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    fnancial management

    Ct cffeeCoff w nroducd h fr crfdfrl rdd produc n 1988 undr hmx Hvlr brnd n h Nhrlnd.mx Hvlr nd ohr nonlcrfcon ch wr lr roupdundr h ubrll bod Frrd LbllnOrnzon inrnonl (FLO). th hbco h lr nd o wdlrcond crfcon , bu hrr ohr ch, ncludn Uz Kph

    Uz Crfd lbl; h Rnfor allnc; srbuck CaFe lbl; Nl aaaudln; h lbl of h Fr trd Fdron (www.frrdfdron.or); nd hCoon Cod for h Coff Coun aocon.

    Coff h Frrd produc wh h hh l volu, bu h rk hr ofFrrd-crfd coff d onl on pr cn. abou 78 pr cn of llcrfd coff producd n Ln arc, wh mxco, Pru, gul, Colobnd Ncru bn h lr upplr. snc Jun 2008 h FLO hurnd nu prc of $1.01 o $1.45 pr lb, dpndn on h p of coff.th Frrd pru, n xr u h o no counl fund for workr ndfrr, $0.10 pr lb.

    tn r fr nroducon n h Us, coff rn h o coon Frrdproduc n h counr, ccounn for 64 pr cn of ol Frrd por n 2008.ipor of Frrd coff o h Us hv rown nnull b 40 pr cn on vr ovrh p dcd. th chr blow copr Frrd nd Nw york prc for arbccoff n 1989-2009. th Frrd provd hhl ffcv durn h prc cr oh l Nn. Whl world rk prc fll o 30-r low of $0.45 pr pound, hFrrd urnd nu prc h w 180 pr cn hhr.

    Frrd coff l n n eU counr rrd doubl-d rowh n 2001-06,nd rn h f-rown n of h europn coff rk. Frrd coffnow ccoun for 20 pr cn of h UK coff rk nd bou four pr cn of irlndsourc: ud for n FaO projc b elln P, Food nd arculur Ornzon of h UN, 2009 ( www.fo.or )

    bwn fr rd concp nd Frrd for of ccrdon, h .

    sho c h xpl of avd, on ofh fr coc fr o how roncon o nvronnl unbl:h copn produc hould no bcondrd Frrd bcu h do noconn crfd nrdn, h .

    th Bod shop, coc brnd wllknown for hcl nc, upporCoun trd, n ndpndnovn h w ornll lunchd b hfr lf trd no ad. throuh h, hBod shop cod o rdn frl ndrponbl wh upplr. th copn h cvl k ou ll-clfrr, rdonl crfpopl nd rurlco-oprv nd vn rbl vll o fordp, lon-ln rlonhp, rwrdnour upplr wh ood rdn prcc nd rlbl, ndpndnc-buldn w.alhouh clol rbl ho ofFrrd, h fr h no offcl crfcon.

    Ohr ornon r unchl nh Frrd ovn nd crc nfor of rk ubd. to Clouhr,xcuv drcor conoc hnk-nkh ad sh inu, ru h hconcp n fc fr fro fr.

    i offr onl vr ll nubr of

    frr hhr, fxd prc for hr ood.th hhr prc co h xpn ofh r jor of frr, who unblo qulf for Frrd crfcon r lfvn wor off, h .

    Clouhr cl h 80 pr cn of hproduc old b Frrd frr nd up nnon-Frrd produc nd dd h pobl h n rkd Frrd h no b nhn of h or.H lo ru h onl n pr cn of h

    8

    Coffee and othercommodity prices depressed

    by global financial crisis,September 2008

    320

    280

    240

    200

    160

    120

    80

    40

    0

    Oct

    1989

    Sep

    1992

    Aug

    1994

    May

    1997

    Dec

    1999

    Nov

    2002

    Sep

    2005

    May

    2009

    Collapse of internationalcoffee agreement, 1989

    Frost damagein Brazil, 1994

    Drought inBrazil, 1997

    Drought inBrazil, 1999

    Ten-year high of 164 cents (highnessof coffee supply), February 2008

    30-year low of 45cents (oversupplyof coffee), 2001New York price

    Fairtrade price

    Ne yrk nd Firtrde price fr arbic cffee, 1989-2009 (in cent per pund)

    sourc: Frrd Foundon

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    fnancial managem

    pru h conur p for Frrdood cull o bck o h producr.Rlr pock h r, h .

    Frrd do hv l, of cour.Whl h nv focu on chvn frr for producr, h no nvolvn nhow produc r old. suprrk ndohr b rlr n nfcn conoof cl n ourcn nd rkn hrood. th purch n lr volu low prc nd hr own-brnd producnl fw rkn co. Bcu own-brnd ood hv f hrouhpu, hor l h rvnu r pr unof hlf pc nd cn b old lowr

    prc. mn fr h rk Frrdproduc r n coprd wh hrnr copor nd hv uch lpurchn powr. th lo nrll hvuch hhr un co, whch hv brn on h rcondd rl prc.

    suprrk purchn prcc lorun counr o o of Frrd corprncpl. a h pcll bu on ju-n- b o l or co, cn nh hr purch ordr cn chn vrhor noc. th n h rk nd cor pd down o upplr. For xpl,o Frrd fru producr hv nddup hvn o offlod hr produc on oconvnonl rk blow hnu prc hvn lrd hppd whn uprrk h dcdd h lon o cncl h ordr.

    th prcn chn cn lo cuprobl, co of producon cn dffrubnll on counr nd bwnll nd lr producr. Whl for producuch coff h FLO prc floor h for ll produc n h cl, forohr , frh fru h nu vrb counr. and, or upplr crfd o rn dnd, uprrkbur wh no con o pcfcproducr roup could wll k o cu hrco b ourcn fro lowr-co ron.

    a k probl h uprrk rnbound b FLO rulon, hr norqurd o b lcnc vn for hr own-brnd Frrd produc, nc h donpu h lbl on h ood hlv, sll sh, rrch offcr n h inu of

    Dvlopn sud h Unvrof sux. ind, hr upplr

    hold h lcnc nd rrponbl for nurn

    coplnc wh FLO

    ndrd. th cn b hrd for h o dowhn uprrk r ffcvl n r of rd. i chncl loophol houh o b clod, nc n copnocd wh h FLO rk hould brqurd o bd b h ndrd h dfwh n o b Frrd.

    th Frrd Foundon vw h, lon ndrd r , h w hfnhd produc old h rponblof h rdn prnr. th dcd whconur u p nd w hv noconrol ovr h, e sund, hfoundon bun dvlopn nsuprrk nd hr upplr noh rl prc of ch produc nduprrk obvoul hv h uppr hNo rlr wll nvolvd n Frrd unl corcll vbl for . Our rol onur h lo full vbl propoonfor h producr.

    sund dd h h Frrd mrk nqu boo for ll concrnd. i lwbn bou powrn conur w workr n dvlopn counr. gvn rn l of Frrd produc vn nh wor rcon o popl hv vrn conur dnd pl ronr rol n how h produc rrkd. th crfcon cn onl ppconur, rhr hn urn h w.

    Neil Hodge is a freelance writer

    specialising in business and regulation.

    sa8000 volunr prv workplc crfcon ch h hbn dvlopd b h non-ovrnnl ornon socl

    accounbl inrnonl (sai) wh h of crn brcondon for workr. th crfcon nu ndrd onur f nd hlh workn nvronn, frdo ofocon nd collcv brnn. thr r lo rul for worknhour, p nd h prvnon of chld or forcd lbour.

    so of h lr copn xporn bnn, pnppl,obcco, wn, cnnd fru nd procd coff r sa8000-crfd. in Dcbr 2006 hr wr lo 500 sa8000-crfd

    fcl n a, of whch hr wr 190 n ind, 140 n Chn nd58 n Pkn.

    enrpr h opr producon fcl cn ppl for sa800crfcon b on of h nc pprovd b sai. afr h nnpcon nd crfcon, fr onord o nur connucoplnc. th crfcon f covr h ud nd n corrcvco. th crfcon rk no ud on produc lblln, bu copn u n prooonl cv. thr no pcfcprc pru or rk for sa8000-crfd produc.sourc: www.fo.or

    Visitwww.snipurl.com/w1so3to read a research report onthe impact o Fairtrade in theten years to 2009.

    Further information

    Bnn brednth bnn h o populr fru

    n h world: hoppr pnd orhn 10bn r on h fru lobll.

    n Frrd bnn ccoun fornrl wo pr cn of h olworld rd n frh bnn. in 2008on n vr four bnn old n hUK w Frrd.

    n th UK bnn ndur whol worh 580 nnull. in 2008h Frrd hr of h rkw 150.

    nBnn r h hrd o vlubl old n UK uprrk. Onlprol nd lor ck oull h.

    n in 2000-08 Frrd-crfdproducr roup nd hrcoun rcvd 19 nFrrd pru fro hUK l of Frrdbnn lon.

    sourc: www.frrd.or.uk

    sa8000: te ain vritin

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    fnancial managem

    Would you invest in a nation thats heavilyreliant on one industry? Scott Paytondiscovers which economies are mostexposed to the risks o low diversifcation.

    Toyota entered 2010 as the undisputed global

    leader f te autmtive industry. Te Japanesecmpany ad made mre sales tan any terveicle manufacturer in te previus year, earningan unrivalled reputatin fr quality. Ten it all wentwrng: in January a safety recall f millins f itscars wrldwide culd, by Tytas wn estimates,cst te business $2bn in lst utput and sales.Te same mnt, sales f Japanese cars inte US drpped 4.3 per cent year n year, witte Tyta recalls widely blamed fr te decline.By February, Tkys Daiwa Researc Institutewas predicting tat te knck-n effects f tedebacle culd pus dwn Japans GDP by asmuc as 0.12 percentage pints.

    Its nt nly single ig-flying cmpanies tatcan fall frm grace wit dire ecnmiccnsequences: wle sectrs can cras, t. In

    te UK te financial services industry grew fastertan any ter part f te ecnmy between 1996and 2006. By 2007 financial cmpanies weredirectly cntributing 12bn in UK tax revenues,wit teir emplyees paying 15bn inincme tax, accrding t te BritisBankers Assciatin. In all, tesectr accunted fr mretan 100bn f GDP a year.Ten te glbal recessinstruck, and te UK was

    te last f te G20 t recver frm it. Smeecnmists believe tat tis was because tecuntry ad grwn t reliant n financial services.

    The importance of diversification

    Altug te Icarus-like falls f Tyta and teUKs financial services industry ave gged teeadlines, ecnmists are mre cncerned abutte risks assciated wit an unealtydependence n vulnerable sectrs in emergingmarkets, rater tan develped nes.

    If I were ging t cmpile a srtlist fnatins at igest risk wing t a lack fdiversificatin, I wuld put African states at tetp and Middle Eastern states secnd, saysPeter Zeian, vice-president f analysis at Stratfr,a US-based geplitical intelligence cnsultancy.Tis is because many cuntries in tese regins

    are verwelmingly dependent n exprting asingle agricultural cmmdity r natural resurcesuc as il, e explains.

    Detlef Ktte, a macrecnmic anddevelpment plicy expert at te United

    Natins Cnference n Trade andDevelpment (Unctad), agrees

    tat cuntries reliant nexprting ne cmmdity

    are te mst ecnmicallyvulnerable. Prices fr

    Withoutportfolio

    CoRBIS,PAPhoToS

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    fnancial managem

    tese prducts are determined in internatinalmarkets and are subject t large fluctuatins muc mre tan is te case fr manufacturedgds, e says.

    Measuring te risks assciated wit a lackf ecnmic diversificatin is imprtant frcmpanies as well as plicy-makers especially fr businesses sizing up a newptential market, verseas acquisitin rjint venture, r fr tse cnducting a lng-term risk assessment in an existing lcatin.After all, te level f diversificatin in aparticular market will ave a direct impact nfuture grwt acrss te wider ecnmy, aswell as affecting tat markets sensitivity tinternatinal vlatility.

    S were can financial managers find acuntry-by-cuntry analysis f diversificatin?Te Wrld Cmpetitiveness Centerat Switzerlands IMD business sclprduces suc an assessment as part f itsannual ranking f cuntries lng-termcmpetitiveness. Te mst ecnmicallydiversified cuntries tend t be tse tatlack a bunty f natural resurces, saysSuzanne Rsselet-McCauley, deputy directrf te centre, w cites te tp tree Austria, Denmark and Switzerland asexamples (see panel, next page).

    Cnversely, resurce-ric cuntries lmlarge amng te least diversified ecnmies:Venezuela and Russia lie at te bttm fIMDs league table. Tese natins ave avery ig dependency n external marketsand are extremely expsed t canges in il

    and ter cmmdity prices, Rsselet-McCauley says.Wy dnt gvernments d smeting

    abut tis? Sme Middle Easternecnmies ave tended tpursue interesting refrm agendaswen te il price is declining,se says. But, as sn aste price begins t recver,teir refrms are ntperceived as s imprtant.

    Zeian agrees tat Russia is iglyvulnerable because f its lack f ecnmicdiversificatin. Rugly alf f tegvernments revenues cme frm energytariffs in sme way, e says. It used tbe nly 30 per cent and will prbably be60 per cent by te end f next year, witmst f te rest f Russias ecnmy relatedt sme frm f raw material prductin.

    Cratia and Spain als suffer especiallyfrm a lack f diversificatin, accrding t teIMD researc, but tis is nting t d witteir reliance n natural resurces. Tesetw cuntries ave been igly dependentn revenues frm turism; tey avefcused t muc in te past few years ncnstructin and real estate; and tey avebeen verly reliant n inward freign directinvestment, Rsselet-McCauley says.

    Specialisation versus diversification

    Ecnmic diversificatin may elp t edgea cuntrys bets in te glbal markets, butsuldnt yu als seek t specialise inareas in wic yu can realistically maintaina cmpetitive edge? And w can tesetw imperatives be recnciled?

    Rsselet-McCauley agrees tat cuntriessuld play t teir strengts, but cautinstem against ging t far. If yu becmes specialised tat yur entire ecnmydepends n ne sectr fr its jbs, exprts,and grwt, ten yur cmpetitive advantagewill turn int a cmpetitive disadvantage if

    smeting like te financialcrisis appens, seargues, citing Icelandsbanking crisis as a

    perfect example fte dangers fverspecialisatin. Tekey is aving a certaindegree f specialisatin inrder t be tp f teinnvatin game, but at tesame time ensur ing tat teresenug diversificatin s tat, ifsmeting disastrus appens in nesectr, tere wnt be t muc f an effecn te entire ecnmy.

    Wic cuntries ave successfullymastered te balancing act? Te Asian tigecnmies ave really understd te ideaf diversificatin and f mving up te valuecain, Rsselet-McCauley says. Taiwan aSut Krea, fr instance, realised tat teculd n lnger maintain teir grwt bybeing lw-cst manufacturers. Sut Kreais nw te wrld leader in wireless telecmprducts, fr instance.

    Ktte is als an admirer f wat Taiwanand Sut Krea ave acieved. Tey avsucceeded in building industrial sectrs andtereby reduced teir dependence n primexprts, e says.

    Ecnmists pinins are split n wette UK tk specialisatin t far in tefinancial services industry. Te sectr as awle accunted fr nly abut eigt percent f GDP, Zeian pints ut. S its nall tat verexpsed.

    Ian Stewart, cief ecnmist at Delitte,is als sceptical abut te idea tat teUKs financial services sectr grew t largTe prblem was mre abut unsustainabcredit grwt and asset prices tan abut tsize f te industry, e says.

    But Rsselet-McCauley pints t figurestat tell a different stry: In te past ten r

    15 years te financial sectr cntributedclse t a quarter f all f te UKs grwt;represented 12 per cent f GDP wen y

    include all f te industries supprting and accunted fr nearly 20 per cen

    f all UK jbs.Stepen overell, assciate

    directr at te Wrk Fundatia nt-fr-prfit UK researccnsultancy, agrees tat tisgrwt went t far. Te

    Roughly hal o theRussian governmentsrevenues come rom

    energy taris in some way

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    fnancial management6

    gvernment t intervene and elp certainsectrs fr instance, t prvide funding ffuture ig-grwt areas suc as green jbe says.

    Yet te imprtance f encuragingdiversificatin is muc greater in tedevelping wrld, stresses Ktte at UnctadTe prblem in mst emerging ecnmiestat te sare f natinal incme ging intte creatin f new prductive capacity is tsmall. Te imprtant ting is t createincentives fr glbal private investrs t cin, e says. In many prer cuntries tisentails creating a stable and transparent legenvirnment and lwering interest rates frinvestment prjects.

    Wat abut te il-reliant ecnmies fte Middle East? A 2008 reprt frm Bz Cmpany, Ecnmic diversificatin: terad t sustainable develpment, fcusesn te imprtance f diversificatin t teGulf C-peratin Cuncil (GCC) cuntriesIt argues tat Nrway and Canada ffer prtat il-ric natins are nt destined tsuffer frm pr diversificatin, and it urgesGCC gvernments t invest in educatin antecnlgical innvatin t stimulate grwt

    in ter sectrs.Nrway started wit te areas in wicit was strng and ten slwly but surelydiversified, says Cadi Mujaes, ne f teautrs f te reprt. S cuntries need tbuild n te cre sectrs tey ave andsteadily build a prtfli f ecnmic activityIts always a prcess tat takes time.

    Scott Payton is a freelance business

    journalist and editor.

    Te tp five ecnmies in IMDs 2009league table f diversificatin:

    1 Denmark.2 Austria.3 Switzerland.4 Germany.5 India And te bttm five frm te researcsample f 57 cuntries:53 Argentina.54 Cratia.55 Spain.56 Russia.57 Venezuela.

    Variety performance

    scale f te UKs financial centre and urreputatin fr financial flexibility were s greattat tey destabilised te entire basis f urcmpetitiveness. oter sectrs ave beentrwn t te wind. Manufacturing, frexample, as plunged in imprtance as anemplyer, yet tat industry remains crucial tur ability t innvate.

    Corporate collapses

    Altug n develped ecnmy dependsdirectly n a single cmpany fr itsprsperity, te failure f ne r tw big namescan still ave far-reacing cnsequences,Rsselet-McCauley pints ut. Te crisissurrunding Tyta as ad a uge impactn Japans reputatin fr manufacturingexcellence. In Switzerland te prblems atSwissair and UBS ave als ad a widerreputatinal impact. And in te US tecllapses f Leman Brters and AIGave affected cnfidence, t. All f tesefailures ave cntributed t a negative imagef te cuntry in questin tat as scaredinvestrs away, se says.

    Individual cllapses and te sectr-widecrisis suc as te ne experienced by te

    City f Lndn during te recessin can als lead t panic and anger in teme market. Senir bankers became publicate figures in te UK wen tey acceptedbig bnuses even after tegvernment ad t pumpbillins f punds inthBoS, Llyds TSB,Ryal Bank fSctland and terst keep tem in

    business. Te cst t te banks f restringcustmers trust will be massive.

    Reputatinal damage aside, te dwnfallf a single cmpany is unlikely t ave alasting negative impact n a develpednatins ecnmy, argues Gerben Bakker,lecturer in ecnmic istry and managementat te Lndn Scl f Ecnmics. he citeste bankruptcy f Dutc aircraft makerFkker in 1996 as an example.

    It ad been a majr cmpany in teeart f te Neterlands wit lts fsuppliers. Wen it went bankrupt tere was agreat deal f glm and talk f te decline findustry and manufacturing in te cuntry,Bakker says. But te cllapse actually madeter Dutc cmpanies realise tat teyculdnt rely n te gvernment t prtecttem frm bankruptcy. It frced tem tget teir act tgeter. Since Fkker wentbust, te Neterlands as enjyed amngte lwest rates f unemplyment in teEurpean Unin, e adds.

    Encouraging diversification

    Gvernments in develped markets arerelatively pwerless t stimulate ecnmic

    diversificatin, accrding t Bakker. If yulk at te istry f many cuntries, yuften ave eras in wic grwt is dminatedby ne industry and als eras were it is

    mre equally distributed acrsssectrs. Im nt sure wat a

    gvernment culd dabut tis, e says.

    But overelldisagrees. Tere

    is a case fr aGETTYIMAGES

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    fnancial managem

    The company that Im writing about no

    longer exists: a victim of the recession.

    Based in the Midlands of England, it

    assembled electrical components to order.

    It was a small subsidiary of a large

    international group and its cost performance

    was erratic. All employees were salaried, so

    profitability varied according to sales, which

    were driven by an international sales team

    that often seemed to overlook the interests

    of the minnow. When the recession struck,

    the group decided to move some of its

    production to Europe and outsource the

    rest to save fixed costs.

    I never worked with the firm and dont

    know the underlying reasons for its closure,

    but business decisions are too often driven

    by cost alone, with no appreciation that

    performance drives cost, not vice versa.

    To make effective decisions we must first

    understand performance and how it affects

    cost. To reduce the cost of a process you

    should not arbitrarily slash budgets or cut

    jobs. You should study the performance of,

    and then improve, the process to maintain

    or improve customer service for less.

    The flow time of a business process

    sometimes called the lead time, although

    its not always the same is how long it takes

    a product (or service) to move from start to

    completion. But only part of this time is spent

    actually working on the product. The rest isspent waiting, checking, reworking,

    transporting etc. The productive time is

    often 25 per cent or less of the total flow

    time. The rest adds no value and generates

    no revenue. If you cut the flow time, you

    increase productive work from the same

    resources. Assuming that you can sell the

    extra products, this means you could

    increase profitability, improve efficiency and

    boost customer satisfaction simply by

    >technicalmattersCost managementRoss Maynard ponders lessons rom a frmthat orgot to link its costs to perormance.

    32 Business strategy

    reducing delays and waste without puttin

    pressure on people to work faster.

    So how do you measure performance

    to work out where theres room for

    improvement? Taking our late company as

    an example, the data in the table on the ne

    page covers ten weeks of activity in summe

    2008, at least nine months before its closur

    This is real data, so trends arent always cle

    and fluctuations caused by the product mix

    and other events do cloud matters, but we

    can use it to identify the main cost drivers

    and work out some other solutions that the

    group might have considered.

    First we need to measure the flow time:

    its clear from the table that efforts to impro

    the process are having an effect the

    number of days it takes falls from 6.5 to 3.5

    over the ten weeks and this is also reduc

    inventory. But the data indicates that the m

    of products sold varies from week to week

    (illustrated by the revenue per unit indicator

    The number of units produced per

    employee doesnt seem to be linked to the

    value of each unit. You might expect higher

    value goods to take longer to assemble and

    test, but this doesnt seem to be the case.

    The profitability of the process depends on

    the sales mix, so the first priority should be

    to work with the sales team to review the

    market and plan how to target customers

    who want higher-value products and alsotry to understand the weekly fluctuation in

    orders. Making the demand side of the

    process more stable would help other

    improvement activities significantly.

    The data does not give us a measure of

    productive time, but there are proxies we

    can use: productive time differs from flow

    time because of delays, checking, reworkin

    downtime etc, and we can measure these

    interruptions. Inventory turns are improving

    For more articles on management

    accounting, careers and development,

    see www.cimaglobal.com/insight.

    A new CIMA Mastercourseentitled Understanding andimproving business processes

    will be held on June 17 andNovember 8 in London andon August 4 in Glasgow. Visit

    www.cimamastercourses.comor more details.

    Furhr ifri

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    fnancial management0

    slightly, but this is hardly significant. In

    addition, first time through quality is 91

    per cent at best. This is costly and affects

    customer satisfaction measured in the

    on time to request line, which shows an

    improvement, but is still variable. Stabilising

    quality in the process should help the

    company to improve throughput and delivery

    performance. This may stabilise material

    costs and in turn help to reduce inventory.

    Training to improve quality in the process

    should be the second priority.

    The throughput of the process (units

    per employee) doesnt link clearly to the

    product mix. But the weeks with the

    highest throughput (27, 31 and 32) are

    generally the most profitable ones, although

    this isnt true in weeks 25 and 34, which

    are highly profitable but with a much lowerthroughput. Again, the level of demand and

    the product mix affects the profitability of

    the process and the employees cant

    necessarily influence these factors.

    Nevertheless, identifying best practice and

    training employees in it would increase

    throughput per person and help to reduce

    the number of days between order entry

    and delivery, thereby reducing inventory

    and improving customer service.

    We need to know more about the process

    and a longer period of data to establish full

    links between performance measures and

    finances. Even so, a small number of

    indicators, measured frequently, provide a

    good picture of how well a process works

    and the potential to bring total flow time

    nearer to productive time. If we connect this

    data with the financial performance of the

    process, we start to see how performance

    drives cost and which improvements will

    deliver financial benefits.

    This combination of measures and cost

    data for the process gives us more to work

    with than costs alone. In this case it allows us

    to predict the impact our actions might have

    had. First, working with the sales team to

    stabilise demand and focus on higher-value

    customers and products could have helpedto smooth out the workflow and the number

    of employees required. Improving quality

    would have brought greater control to

    material costs and helped to improve

    performance (on time to request). Working

    out best practice and training people in it

    would have helped to improve quality and

    should have reduced flow time. This would

    push stock levels down, benefiting cash flow.

    Perhaps together these actions could have

    stabilised the process with a value stream

    profit of 45 per cent or more. Would it have

    saved the company? I dont know perhap

    the group simply didnt want such a small

    subsidiary any more. But I do know that its

    failure was disastrous for its staff and I

    wonder how many other companies have

    gone the same way because managers hav

    focused too closely on costs without

    adequately understanding what drove them

    We need to stop focusing on costs alon

    and strive to understand performance.

    Management accountants in every busines

    must take more interest in linking the costs

    processes with performance. A better gras

    of the connections will lead to better

    decisions. When you next make a costing

    decision about a process, look at the flow

    time for the product or service in questionand see how it differs from the productive

    time. Ask yourself whether you can reduce

    costs by cutting the flow time of the proces

    and so increase its capacity to do profitable

    work. It must be worth thinking about.

    Ross Maynard FCMA is senior consultan

    with BMA Europe, specialising in value-

    stream management accounting, pricing

    and lean transformation.

    >technicalmatters

    Ky prc d fr wk f prduci

    Week 25 26 27 28 29 30 31 32 33 34

    Output (units) 1,943 1,856 2,523 1,988 1,827 2,016 2,340 2,050 1,225 1,470

    Employees 29 29 29 28 29 28 26 25 25 21

    Units per employee 67 64 87 71 63 72 90 82 49 70

    Revenue per unit () 24.46 22.23 29.82 15.20 22.03 12.26 20.03 18.28 25.83 31.29

    Material cost per unit () 6.07 5.51 7.39 3.31 4.80 2.67 4.37 3.46 4.88 5.91

    Revenue per head () 1,656 1,411 2,595 1,091 1,374 881 1,796 1,492 1,268 2,141

    On time to request (%) 71 87 86 65 65 72 88 88 92 79

    Flow time (days) 6.5 5.5 7.0 7.0 8.0 5.5 4.0 3.0 3.0 3.5

    First time through (%) 74 88 77 73 91 79 83 85 88 91

    Inventory turns 10.71 10.71 10.71 10.94 10.94 10.94 10.94 11.11 11.11 11.11

    Sales revenue () 47,520 41,262 75,227 30,221 40,224 24,711 46,862 37,479 31,643 45,994

    Materials purchased () 11,785 10,223 18,656 6,588 8,773 5,387 10,216 7,084 5,981 8,693

    Conversion labour () 9,274 9,274 9,274 9,245 9,245 9,245 9,245 9,610 9,610 9,610

    Other costs () 5,184 5,184 5,184 5,135 5,135 5,135 5,135 4,008 4,008 4,008

    Value stream profit () 26,243 24,691 33,114 20,968 23,153 19,767 24,596 20,702 19,599 22,311

    Value stream profit (%) 45 40 56 31 42 20 48 45 38 51

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    fnancial management

    Indias cultural and linguistic diversity

    make the county unique in many ways, so

    can geneal management theoies be tailoed

    to suit Indian business? I decided to apply

    the famous five foces model, which was

    designed by Michael Pote, pofesso of

    stategy and competitiveness at Havad

    Univesity, to give a company insights into

    the potential pofitability of a maket and help

    it fom its stategy accodingly.

    The fist foce coveed by the analysisfamewok is the theat of new competition.

    Unless the baies to you maket ae

    fomidable, new playes can ente and poach

    you shae of it. If you wish to ente a new

    maket, you want these baies to be low, of

    couse. If Pote wee Indian, he would

    ecognise that factos such as state

    potectionism and a lack of infastuctue ae

    a geate baie to enty in India than they

    ae in moe developed nations, whee maket

    foces ae moe poweful. This is because

    govenments of emeging economies ae

    usually eluctant to open the doos to new

    playes in many sectos. Even if they do, its

    likely that they will adopt moe inteventionist

    policies at a late stage. Fo example, Indias

    ailine secto is poised fo gowth, but the

    fact that it has ecently been deegulated

    makes it moe difficult fo competitos to

    develop long-tem stategies, because all

    such stategies will collapse if the

    govenment feels that new entants ae

    theatening its home maket.

    One facto that could play a cucial ole in

    India is public opinion, which exets a

    consideable influence on the govenment.

    A good example of this is the campaign bylocal etailes, which feel that the aival of

    US etail giant Walmat could put them out

    of business. Walmat has made huge

    investments in India, but is having to

    find ways ound stingent egulations that

    pevent it fom doing things as basic as

    putting its band name on stoes.

    The psychological pofile of stakeholdes

    can be cucial to you competitive stategy,

    because it means that you have to handle

    Business strategy

    Srikant Parthasarathyapplies Michael Porters classic fve orcesmodel o competitive analysis to Indias singular business environment.

    the egulatos befoe you deal with you

    competitos. This is not so tue in developed

    economies, whee egulatos ae moe

    pepaed to let the maket pevail. They dont

    ely entiely on maket foces to detemine

    competition, of couse, and thee can be

    opposition to takeove bids fo household

    names, which is what happened in the UK

    when Kaft acquied Cadbuy, fo example,

    but developing nations tend to be fa moe

    consevative and teat such M&A deals withgeat scepticism. Fo example, even in

    telecoms, which is aguably Indias most

    sophisticated industy, Bhati, one of its big

    playes, is still expeiencing poblems

    concening its poposed mege with South

    Aficas MTN Goup. Its foeign suito

    continues to be viewed with suspicion and

    the on-off deal has been smotheed in

    bueaucacy. While innovation is seen to

    contibute to the economy in the west, in

    India it is still seen moe as a theat.

    Potes second foce is the bagaining

    powe of supplies. The model assumes that

    they can exet significant influence ove a

    copoate custome. Companies in

    developed counties geneally have a bigge

    pool of high-quality supplies and fewe

    concens about thei ability to honou thei

    contacts, but this is a big issue in India.

    Most companies hee have a plan B ie,

    they have aleady selected a supplie that w

    be chosen if the fist choice fails to delive.

    Most companies in the developed wold

    have leaned the had way that any system

    that aims only to educe costs is flawed an

    that they also need to conside quality. In

    India buyes ae less likely to demand qualso etailes ae lethagic when it comes to

    seeking it. Indian companies tend to

    expeience two extemes: they eithe have

    no supplies at all fo pospective poducts

    they have too many uneliable supplies

    ovecowding the industy. This is because

    the bandwagon effect: any fim that mak

    a pofit quickly attacts ivals into its make

    These new competitos may not have the

    infastuctue o the quality pocesses to

    outpefom the oiginal playe, but they

    ceate pessue on it to delive quickly at th

    lowest cost. This is diffeent fom westen

    Japanese business cultues, in which few

    companies would conside supplies wok

    below a benchmak standad of quality.

    >technicalmatters

    2

    COrBIS

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    fnancial managem

    The thid foce is the bagaining powe

    of buyes. As an Indian consume myself,

    I know that getting a company to educe

    the pice of a poduct would be a big

    achievement, but the eal question is how

    many of us it would take to manage it.

    Although customes can be influential, the

    tuth is that most accept the pice of the

    poduct, eithe because they feel they cannot

    affect its pice o because they lack

    knowledge about its tue cost and value.

    The bagaining powe of buyes is also

    moe disguised by taiff egulations in India

    than it is in developed counties. Take the

    countys gowing mobile telephony maket,

    fo instance: the cost to the opeato of a

    text message does not exceed rs0.01,

    while the nomal chage to the use fo each

    text is rs0.50 to rs1.00. Customes pay this

    eithe because they dont know that the taiff

    is at least 50 times the cost o because they

    want the sevices too much to complain and

    cant find an altenative. The concept of pay

    pe second athe than pe minute came late

    to India because buyes wee ignoant of the

    global situation.

    The fouth foce is the availability of

    substitute goods. A substitute is geneally

    undestood to be the closest equivalent, but

    the definition can be diffeent in India fom

    that in moe developed makets. Fo

    example, most Indian consumes view a

    Mas ba as the same thing as a ba of

    Cadbuys Daiy Milk. While these ae piced

    similaly in the UK, they ae piced diffeently

    in India, whee Cadbuy has pusued an

    aggessive stategy. A pice wa has meant

    that a chocolate ba called Munch now

    etails fo rs2, which has taken competition

    to a new level: Cadbuy now chages rs5 fo

    a Daiy Milk ba, while Mas bas cost rs25.

    Its clea that the sales teams fo Munch and

    Daiy Milk ae seeking high volumes of salesat the cost of pofitability. As long as thei

    desie fo chocolate of any kind is sated,

    Indian consumes will tend to go fo the

    cheapest option. Hee, consume choice is

    influenced moe by pice than by quality.

    The same applies to business schools in

    India. An MBA is consideed to be a

    pemium qualification, but most students

    dont seem to woy about what the degee

    offes, as long as they can put those thee

    designatoy lettes afte thei names. Its

    difficult, theefoe, to diffeentiate you ban

    in India by anything except pice unless yo

    adopt the stategy of pojecting you podu

    as being a completely diffeent maco

    element. Fo example, maketing a Mas

    Ba as something with a much highe statu

    than mee chocolate could have the desie

    effect on Indian consumes.

    The fifth foce competition within

    industies is often moe vitual than eal inIndia. Most industies ae dominated by tw

    o thee top playes, even when the secto

    seems to be flooded with competitos.

    While this can also be tue in moe

    developed counties, the gap between the

    top playes and the second tie in India is

    often much wide. Lowe-level playes may

    have the desie to compete, but they tend

    lack the expeience o size to gain taction

    against the stongest companies.

    Lack of competition at the top affects

    how the othe fou foces apply. The leadin

    company has to compete against only a fe

    smalle ivals and always wins. As the

    competition flows down the pyamid to the

    second tie, it intensifies until it becomes

    most intense at the lowest level. New

    entants can easily set up shops by copyin

    a few pofitable companies, but many of

    these have no chance of gowing and they

    exist meely to make as much pofit as

    possible at the lowest cost. In this way the

    dag down othe smalle companies by

    ceating constant vitual theats.

    Companies in India spend much of thei

    time and esouces dealing with lowe-tie

    ivals athe than with playes at the samelevel. The govenment suppots the small

    entants with its tax egime, but it has yet t

    povide the infastuctue they need in ode

    to develop and become seious competito

    futhe up the scale.

    Srikant Parthasarathy is head of

    Chakra Consulting and also visiting

    professor of strategy at Christ Universit

    in Bangalore.

    As long as their desireor chocolate o anykind is sated, Indian

    consumers will tend togo or the cheapest option

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    nancial managem

    ConneCtive bargaining

    >careerdevelopmen

    Its easy to see negotiations as a war o attrition, but thats a mistake,writes Pete Belsey. He oers a guide to achieving a win-win result.

    A week may be a long time in politics, but

    most financial tams hav bn accustomd

    to bing abl to forcast and plan for th long

    trm, making gradual adjustmnts as thy

    masur thir prdictions against stadily

    dvloping trnds. Th financial crisis

    changd all this, causing rapid and dramatic

    fluctuations in most markts. On invitabl

    rsult was that supplirs immdiatly facd

    prssur from thir corporat customrs to

    cut prics. Many hav bn told that thiroffrings ar too costly and that thir rivals

    ar charging lss. Although most conomis

    ar mrging from rcssion, this prssur is

    likly to rmain strong for som tim.

    Similarly, many financial managrs ar

    likly to fac far toughr ngotiations with

    othr dpartmnts within, as wll as outsid,

    thir companis. You may not b comfortabl

    with this, spcially if you think your position

    is wakr than that of th othr party, but

    somon with a firm grasp of th financs

    whos abl to ngotiat ffctivly and

    produc a win-win situation is likly to add

    valu for thir organisation and put

    thmslvs in a strong position for promotion.

    Of cours, buyrs wont always b trying

    to stablish a tough ngotiating position to

    s if a pric cut is on th agnda. Thy may

    simply b ltting th supplir down gntly

    bcaus thy hav alrady dcidd to plac

    thir businss lswhr. But, if thy ar

    hoping to gain concssions from a longr

    ngotiation, youll hav to know th bst way

    to countr thir argumnts and salvag a

    dal that still works for both of you. You nd

    to start by xamining som of th ky

    challngs inhrnt in th customr-supplirrlationship and thn considr th

    tchniqus that good ngotiators us to

    achiv a mutually bnficial outcom.

    A downturn oftn puts a strain on th

    win-win goal as th basis of long-trm

    partnrships btwn customrs and

    supplirs. Indd, rcivd wisdom stats

    that such an aim is no longr ralistic in such

    conditions: customrs ar typically sn to

    hold most of th cards and th powr

    th rality is always complx, fast-changing

    and challnging. Supplirs, spcially in

    manufacturing, ar having thir margins

    squzd: not only ar buyrs driving dow

    prics of thir finishd goods, but also high

    nrgy costs ar fding through to cost o

    manufactur, togthr with th incrasd

    cost of capital. Dspit this, a supplir can

    hop to rid out a short conomic storm b

    say, agring unprofitabl dals to kp it

    afloat on th basis that thy ar contributin

    to ovrhads. Whatvr stratgy it adoptsmust b sustainabl and work on th basis

    that th ffcts of th downturn ar likly to

    b with us for som tim to com.

    Its too asy to bliv that buyrs hold

    th cards. It is tru that corporat custom

    facing similar prssurs will try to protct

    margins by striking a tough bargain with

    supplirs and that this is likly to b

    xacrbatd by an ovrriding focus on sho

    trm cost-cutting. But, as rcssionary

    imbalanc closly rsmbls W C Filds

    adag: Nvr giv a suckr an vn brak.

    If tru, this thory is fatally short-sightd

    th rsult of a win-los outcom in th long

    trm rmains th sam as vr: los-los.

    Ifth dal nds up so unprofitabl for th

    supplir that it cant afford to provid th

    srvic th customr nds, nithr party

    gts th outcom it wants. Yt this factor is

    oftn forgottn. Som supplirs and buyrs

    say that thy aim for win-win and do rally

    practis what thy prach. Yt it is asyfor buyrs to b affctd by th lur of

    short-trm gains and prssur from thir

    bosss, so thy nd up abusing thir powr.

    But supplirs must also shar th blam for

    th consquncs if thy cav in bcaus

    thy misundrstand thir own position.

    Th ky to succssful ngotiation is to

    know how to plan for a win-win outcom and

    how to rcognis and handl somon who

    is playing win-los. This may sound asy, butGeTTYIMAGeS

  • 7/27/2019 06 Fm - June 2010 Webmag

    24/36

    nancial management6

    prssurs as, wr likly to s anothr

    shift back to th supplirs and thy may

    wll rtaliat with similarly short-trm policis

    that will abus thir nw powr. Howvr

    tmpting this advrsarial approach may b, it

    crats a countrproductiv long-

    trm rlationship. Th bst

    ngotiator sks an

    atmosphr in which th two

    partis co-oprat to solv a

    mutual problm. So,

    whrvr th balanc of

    powr lis at th momnt,

    xrcising rstraint and

    acknowldging that your inth sam conomic boat is far

    mor likly to lad to a mutually

    bnficial rlationship in th longr trm.

    All this is asy to say, yt much hardr to

    achiv if th othr party is dad st on a

    win-los outcom. No mattr whthr you

    ar th supplir or th buyr, thrfor, whn

    you fac mounting costs, vanishing margins

    and an awkward businss partnr, th only

    tools lft at your disposal ar your

    intrprsonal ngotiation skills.

    Ngotiation is th crucial part of any

    commrcial rlationship. It concluds all big

    contractual agrmnts, dtrmining thir

    ultimat profitability for ach party, and its

    also th procss by which, through

    rngotiation, com


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