Unit 1

Company Structure
Before you read
1. Answer the questions:
- What kind of organization do you want to work for? Why?
- In which department do you want to work? (e.g. production, finance, accounting,
marketing, sales, human resources)
2. Vocabulary
These are some basic words used in relation to company organization. Match them up
with the definitions on the right.
1. autonomous
2. decentralization
3. function
4. hierarchy
5. line authority
6. report to
7. subordinates

A a system of authority with different levels, one

above the other
B a specific activity in a company, e.g. production,
marketing, finance
C independent, able to take decisions without
consulting a higher authority
D people working under someone else in a
hierarchy
E dividing an organization into decision-making
units that are not centrally controlled
F the power to give instructions to people at the
level below in the chain of command
G to be responsible to someone and to take
instructions from him or her

3. Reading
Read the text below, about different companies, and then label the diagrams,
according to which of these they illustrate:
Line structure, Matrix structure, Functional structure, Staff position
A ..

B .

C .

COMPANY STRUCTURE
Most organizations have a hierarchical or pyramidal structure, with one person or a group
of people at the top, and an increasing number of people below them at each successive
level. There is a clear line or chain of command running down the pyramid. All the
people in the organization know what decisions they are able to make, who their superior
(or boss) is (to whom they report), and who their immediate subordinates are (to whom
they can give instructions).
Some people in an organization have colleagues who help them: for example, there might
be an Assistant Marketing Manager. This is known as a staff position: its holder has no
line authority, and is not integrated into the chain of command, unlike, for example, the
Assistant Marketing Manager, who is number two in the marketing department.
Yet the activities of the most companies are too complicated to be organized in a single
hierarchy. Shortly before the First World War, the French industrialist Henry Fayol
organized his coal-mining business according to functions that it had to carry out. He is
generally credited with inventing functional organization. Today, most large
manufacturing organizations have a functional structure, including (among others)
production, finance, marketing, sales, and personnel or human resources departments.
This means, for example, that the production and marketing departments cannot take
financial decisions without consulting the finance department.
Functional organization is efficient, but there are two standard criticisms. Firstly, are
usually more concerned with the success of their department than that of the company, so
there are permanent battles between , for example, finance and marketing, or marketing
and production, which have incompatible goals. Secondly, separating functions is
unlikely to encourage innovation.
Yet for a large organization manufacturing a range of products, having a single
production department is generally inefficient. Consequently, most large companies are
decentralized, following the model of Alfred Sloan, who divided General Motors into
separate operating divisions in 1920. Each division had its own engineering, production
and sales departments, made a different category of car (but with some overlap, to
encourage internal competition), and was expected to make a profit.
Businesses that cannot be divided into autonomous divisions with their own markets can
simulate decentralization, setting up divisions that deal with each other using internally
determined transfer prices. Many banks, for example, have established commercial,
corporate, private banking, international and investment divisions.
An inherent problem of hierarchies is that people at lower levels are unable to make
important decisions, but have to pass on responsibility to their boss. One solution to this
is matrix management, in which people report to more than one superior. For example, a

product manager with an idea might be able to deal directly with managers responsible
for a certain market segment and for a geographical region, as well as the managers
responsible for the traditional functions of finance, sales and production. This is one way
of keeping authority at lower levels, but it is not necessarily a very efficient one. Thomas
Peters and Robert Waterman, in their well-known book In Search of Excellence, insist on
the necessity of pushing authority and autonomy down the line, but they argue that one
element probably the product must have priority; four-dimensional matrices are far
too complex.
A further possibility is to have wholly autonomous temporary groups or teams that are
responsible for an entire project, and are split up as soon as it is successfully completed.
Teams are often not very good for decision-making, and they run the risk of relational
problems, unless they are small and have a lot of self-discipline. In fact they still require a
definite leader, on whom their success probably depends.
Reading comprehension tasks
1. Which of the following three paragraphs most accurately summarizes the text,
and why?
First summary:
Although most organizations are hierarchical, with a number of levels, and a line of
command running from the top to the bottom, hierarchies should be avoided because they
make decision-making slow and difficult. A solution to this problem is matrix
management, which allows people from the traditional functional departments of
production, finance, marketing, sales, etc. to work together in teams. Another solution is
decentralization: the separation of the organization into competing autonomous divisions.
Second summary:
Most business organizations have a hierarchy consisting of several levels and a clear line
of command. There may also be staff positions that are not integrated into the hierarchy.
The organization might also be divided into functional departments, such as production,
finance, marketing, sales and personnel. Large organizations are often further divided into
autonomous divisions, each with its own functional sections. More recent organizational
systems include matrix management and teams, both of which combine people from
different functions and keep decision-making at lower levels.
Third summary:
Most businesses are organized as hierarchies, with a clear chain of command: a boss who
has subordinates, who in turn have their own subordinates, and so on. The hierarchy
might be internally divided into functional departments. A company offering a number of
products or services might also be subdivided into autonomous divisions.
Communication among divisions can be improved by the introduction of matrix
management or teams.

2. Discussion
The text mentions the often incompatible goals of the finance, marketing and
production (or operations) departments. Classify the following strategies according
to which departments would probably favor them.
1. a factory working at full capacity
2. a large advertising budget
3. a large sales force earning high commission
4. a standard product without optional features
5. a strong cash balance
6. a strong market share for new products
7. generous credit facilities for customers
8. high profit margins
9. large inventories to make sure that products are available
10. low research and development spending
11. machines that give the possibility of making various different products
12. self-financing (using retained earnings rather than borrowing)
Exercise 1: Complete each phrase 1 10 with an ending a j.
1. Operational planning translates
general goals
2. It is usual to divide an organization
3. Some companies are organized
according
4. The Board gets involved
5. Senior managers set
6. Middle managers develop detailed
plans based
7. First-line managers implement plans
8. First-line managers are also responsible
9. A cross-functional team brings
10. Subordinates work

a. a direction for the company.

b. developed higher up the hierarchy.
c. for assigning employees to specific
job.
d. in major strategy issues.
e. into functional departments.
f. into more concrete objectives.
g. on the overall strategy.
h. to geographical regions.
i. together staff from different parts of
the company.
j. under the supervision of a first-line
manager.

Exercise2. The mix-up letters make words that describe departments or

functional areas inside a company. Put the in the right order.
1. haumn rruoeecss
2. cmoesutr scrieevs
3. qtuialy crotnol
4. rsaceerh dna

9. pdroctoiun
10. lgael
11. siihnppg
12. facnine

dvnolpmeeet
5. pbiluc rnotilaes
6. pejcrot

13. metakrnig
14. atnccous

mmeegnnaat
7. aiiisdttrnmaon
8. bniillg

15. pasuirchng

16. pcroenremut

Exercise 3. Pairs of words in bold have been switched. Put them back in their
correct places.
1. market channel
2. cost value
3. earning business
4. management loyalty
5. customer statement
6. product share

7. core growth
8. distribution research
9. mission needs
10. market portfolio
11. shareholder centre
12. brand hierarchy

Exercise 4. Which of the collocations in exercise 7 refer to:

1. Using a questionnaire to carry out a survey ..
2. The main activity of a company that generates most of its profits
3. Financial benefits (= increase in share price and dividends) for the owners of the
company
4. The whole range of products that a company sells
5. When customers are faithful to a particular product
6. A business unit that spends money but does not generate revenue
7. A continuing increase in profits ..
8. What is shown in an organization .
9. Senior managements vision for the company ..
10. How a product gets from the manufacturer to the end-user
Exercise 5. Match the verbs in the box with their definitions below.
adapt

assign
evaluate

check

control
coordinate
implement

determine
monitor

ensure

1. Make sure that everything is correct or the way you expect it

..
2. Organize people so that they work together effectively
3. Give someone a job to do .
4. Carry out; make a plan start to work
5. Have the power to make decisions; make something operate in the way that you
want
6. Make certain that something happens ..
7. Change something to fit a new situation

8. Watch or measure something carefully for a period of time to see how it changes

9. (Formal) think about or test something before deciding its value, suitability or
effectiveness
10. (Formal) control what something will be; officially decide something; find out
.
Exercise 6: Tick the one statement that is true.
1. Targets and goals tend to be more general. Objectives and aims tend to be more
specific, with aims being the most concrete and measurable. .
2. Aims and goals tend to be more general. Objectives and targets tend to be more
specific, with targets being the most concrete and measurable. .
Exercise 7: Describing company structure
The most common verbs for describing structure are:
Consist of

contains
is made up of

includes

is composed of
is divided into

Other verbs frequently used to describe company organization include:

to be in charge of,
supported by

to be responsible for,
to assist or to be assisted by,

to support or to be
to be accountable to

Now write a description of a company you know in about 100 150 words with an
organizational chart.

Unit 2

Management and Cultural Diversity

Before you read
1. Answer the questions:
-

Multinational companies can either attempt to use similar management methods in

all their foreign subsidiaries, or adapt their methods to the local culture in each
country or continent. Which procedures do you think is the most efficient?

Do you think the culture of your country is similar enough to those of neighboring
countries to have the same management techniques? Or are there countries nearby
where people have very different attitudes to work, hierarchy, organization, and so
on?

2. Reading
Read the text below and answer the questions

CROSS-CULTURAL MANAGEMENT
Managing a truly global multinational company would obviously be much simpler if
it required only one set of objectives, goals, policies, practices, products and services.
But local differences often make this impossible. The conflict between globalization
and localization has led to the invention of the word globalization. Companies that
want to be successful in foreign markets have to be aware of the local cultural
characteristics that affect the way business is done.
A fairly obvious cultural divide that has been much studied is the one between, on the
one hand, the countries of North America and north-west Europe, where management
is largely based on analysis, rationality, logic and systems, on the other, the Latin
cultures of southern Europe and South America, where personal relations, intuition,
emotion and sensitivity are of much greater importance.
The largely Protestant cultures on both sides of the North Atlantic (Canada, the USA,
Britain, the Netherlands, Germany, Scandinavia) are essentially individualist. In such
cultures, status has to be achieved. You dont automatically respect people just
because theyve been in the company for 30 years. A young, dynamic, aggressive
manager with an MBA (a master in Business Administration degree) can quickly rise
in the hierarchy. In most Latin and Asian cultures, on the contrary, status is
automatically accorded to the boss, who is more likely to be in his fifties or sixties
than in his thirties. This is particularly true in Japan, where companies traditionally
have a policy of promotion by seniority. A 50-year-old Japanese manager, or a Greek
or Italian or Chilean one, would quite simply be offended by having to negotiate with
an aggressive, well-educated, but inexperienced American or German 20 years his

junior. He would also want to take time to get to know the person with whom he was
negotiating, and would not appreciate an assertive American who wanted to sign a
deal immediately and take the next plane home.
In northern cultures, the principles of pay-for-performance often successfully
motivate sales people. The more you sell, the more you get paid. But the principle
might well be resisted in more collectivist cultures, and in countries where rewards
and promotion are accepted to come with age and experience. Trompenaars gives the
example of a sales rep in an Italian subsidiary of a US multinational company who
was given a huge quarterly bonus under a new policy imposed by head office. His
sales which had been high for years declined dramatically during the following
three months. It was later discovered that he was deliberately trying not to sell more
than any of his colleagues, so as not to reveal their inadequacies. He was also
desperate not to earn more than his boss, which he thought would be an unthinkable
humiliation that would force the boss to resign immediately.
Trompenaars also reports that Singaporean and Indonesian managers objected that
pay-for-performance caused salesmen to pressure customers into buying products they
didnt really need, which was not only bad for long term business relations, but quite
simply unfair and ethically wrong.
Another example of an American idea that doesnt work well in Latin countries is
matrix management. The task-oriented logic of matrix management conflicts with the
principle of loyalty to the all-important line superior, the functional boss. You cant
have two bosses any more than you can have two fathers. Andre Laurent, a French
researcher, has said that in his experience, French managers would rather see an
organization die than tolerate a system in which a few subordinates have to two
bosses.
In discussing peoples relationships with their boss and their colleagues and friends,
Trompenaars distinguishes between universalists and particularists. The formal
believe that rules are extremely important; the latter believe that personal relationships
and friendships should take precedence. Consequently, each group thinks that the
other is corrupt. Universalists say that particularists cannot be trusted because they
will always help their friends, while the second group says of the first you cannot
trust them; they would not even help a friends. According to Trompenaars data, there
are many more particularists in Latin and Asian countries than Australia, the USA,
Canada, or north-west Europe.
Reading comprehension tasks

1. Answer the following questions

1. How would you explain the concept of globalization?
2. Why might a 50-year-old Japanese manager be offended if he had to negotiate
with or report to a well-educated but inexperienced 30-year-old American?
3. Why was the American concept of pay-for-performance unpopular in Italy, and in
Asia, in Trompenaars example?
4. Why do universalists disapprove of particularists, and vice versa?
2. Vocabulary
Find words in the text which mean the following
1. The use of reasoning rather than emotions or beliefs
2. Understanding or knowing without consciously using reason
3. Respect, prestige or importance given to someone ..
4. Having a higher rank because one is older ..
5. To have hurt feelings because someone is being disrespectful
6. Money or something else given in recognition of good work .
7. Additional money given for better work or increased productivity ...
8. A feeling of shame and loss of dignity or self-esteem
9. To give up a job or position
10. According to accepted moral standards .
3. Discussion
A Dutch researcher, Fons Trompenaars, and his associates, have asked nearly
15,000 business people in over 50 countries a number of questions which reveal
differing cultural beliefs and attitudes to work. Here are five of them, adapted from
Riding the Waves of Culture: Understanding Cultural Diversity in Business.
They concern ways of working, individuals and groups, rules and personal
friendships, and so on. What are your answers to the questions?
1. If you had to choose, would you say that a company is (a) a system designed to
perform functions and tasks in an efficient way, using machines and people, or (b) a
group of people whose functioning depends on social relations and the way people
work together?

2. What is the main reason for having an organizational structure in a company? (a)
So that everyone knows who has authority over whom, or (b) so that everyone knows
how functions are allocated and coordinated?
3. Will (a) the quality of an individuals life improve if he or she has as much freedom
as possible and the maximum opportunity to develop personally, or (b) the quality of
life for everyone improve if individuals are continuously taking care of their fellow
human beings, even if this limits individual freedom and development?
4. A defect is discovered in a production facility. It was caused by negligence by one
of the members of a team. Would you say that (a) the person causing the defect by
negligence is the one responsible, or (b) because he or she is working in a team the
responsibility should be carried by the whole group?
5. Imagine that you are a passenger in a car driven by a close friend who hits and
quite seriously injures a pedestrian while driving at least 25 kilometers an hour too
fast in town. There are no other witnesses. Your friends lawyer says that it will help
him a lot if you testify that he was driving within the speed limit. Should your friend
expect you to do this?
Exercise1: Rewrite each of the groups of sentences as one sentence. Do not use
and, but, because or so, but make any other necessary changes.
1. We have just bought the Parkland guide. Now we can find out what Europeans
think of each other.
2. His employees turned up late every morning. He was furious with them. He
decided to have a serious talk with them.
3. I have two Swiss people staying at my house. I do not consider either of them to
be money-minded. I do not find them excessively serious.
4. Some Europeans consider the Italians to be dishonest. I recently visited Italy. I
found them completely trustworthy.
5. The British have their faults. They also have their qualities. They have an excellent
sense of humor. They are famous for this throughout the world.
6. I worked for a multinational based in Holland. I learned to admire the Dutch. I like
their good nature and tolerance.

7. We generalize about nationalities. When we do this, we often show prejudices.

These are deeply-rooted in us. Their origins are obscure.
8. We tried to pick nationalities for each post. We were obviously unfair to those we
omitted. We were probably generous to some we selected.
Exercise 2. Complete these sentences with suitable prepositions.
1. The Germans have a reputation .. making good beer and the French are
famous .. their wine.
2. The English take pleasure .. talking their bad weather. Indeed,
they almost take pride .. it.
3. The Japanese show great respect .. old people and are sensitive
.. their needs.
4. Some people accuse the British . feeling superior .. other
nationalities.
5. Many people are prejudiced . minority groups in their country.
6. Some people are envious .. the North Americans standard of living.
7. The Italians are said to be experts .. making ice-cream.
8. The Japanese are fond eating raw fish and the French are mad
snails.
9. The Italians are universally admired . their rich artistic tradition.
10. A sense of humor is not peculiar the British.
11. A passionate temperament is characteristic . Mediterranean people.
12. Ernest Hemingway, the American writer, believed the Spanish are obsessed
. death.
Exercise 3. You and your influences
1. Which of the following do you think have been the most important influences
on you? Do you think the same is true of most people?
*nature: your genes or DNA, the characteristics you inherited from your parents and were
born with, your emotional and physical make-up
*your family environment in early life
*your friends and social life, the things you do in your free time
*primary or secondary school, teachers, and what you learnt
*higher education: college, university, teachers, colleagues, the subjects you studied (or
are studying)
*your job
*the culture of your particular company

*your colleagues: the people in your team or department

*your colleagues: the kind of people who work in your specific area of work
*the characteristics that are considered typical of people from your geographical region
*the characteristics that are considered typical of people from your country, arising from
geography, climate, history, religion, the political, social and economic system, and so on
2. Do you believe that it is possible to sum up national characteristics in a few words?
Is there usually some (or a lot of) truth in such stereotypes? Or, on the contrary, do you
find such stereotyping dangerous?

Unit 3

Marketing
Before you read
Discuss these questions:
-

What is a definition of marketing?

Can selling really become superflous, even if the customer is ready to buy?

The Centrality of Marketing

Most management and marketing writers now distinguish between selling and
marketing. The selling concept assumes that resisting consumers have to be
persuaded by vigorous hard-selling techniques to buy non-essential goods or
services. Products are sold rather than bought. The marketing concept, on the
contrary, assumes that the producers task is to find wants and fill them. In other
words, you dont sell what you make, you make what will be bought. As well as
satisfying existing needs, marketers can also anticipate and create new ones. The
markets for the Walkman, video recorders, video game consoles, CD players,
personal computers, the internet, mobile phones, mountain bikes, snowboard, and
genetic engineering, to choose some recent examples, were largely created rather
than identified.
Marketers are consequently always looking for market opportunities- profitable
possibilities of filling unsatisfied needs or creating new ones in areas in which the
company is likely to enjoy a differential advantage due to its distinctive
competencies (the things it does particularly well). Market opportunities are
generally isolated by market segmentation. Once a target market has been
identified, a company has to decide what goods or service to offer. This means that
much of the work of marketing has been done before the final product or service
comes into existence. It also means that the marketing concept has to be
understood throughout the company as much as in the marketing department itself.
The company must also take account of the existence of competitors who always
have to be identified, monitored and defeated in the research for loyal customers.
Rather than risk launching a product or service solely on the basis of intuition or
guesswork, most companies undertake market research (GB) or marketing
research (US). They collect and analyze information about the size of potential

market, about consumers reactions to particular products or service features, and

so on. Sale representatives, who also talk to customers, are another source of
information.
Once the basic offer, e.g. a product concept, has been established, the company has
to think about the marketing mix, i.e. all the various elements of a marketing
program, their integration, and the amount of effort that a company can expend on
them in order to influence the target market. The best-known classification of
these elements is the Four ps: product, place, promotion and price. Aspects to be
considered in marketing products include quality, features (standard and optional),
style, brand name, size, packaging, services and guarantee. Place in a marketing
mix includes such factors as distribution channels, locations of point of sale,
transport, inventory size, etc. Promotion groups together advertising, publicity,
sales promotion, and personal selling, while price includes the basic list price,
discounts, the length of the payment period, possible credit terms, and so on. It is
the job of product manager to look for ways to increase sales by changing the
marketing mix.
It must be remembered that quite apart from consumer markets (in which people
buy products for direct consumption) there exists an enormous producer or
industrial or business market, consisting of all the individuals and organizations
that acquire goods and services that are used in the production of other goods, or
in the supply of services to others. Few consumers realize that the producer market
is actually larger than consumer market, since it contains all the raw materials,
manufactured parts and components that go into consumer goods, plus capital
equipment such as buildings and machines, supplies such as energy and pens and
paper, and services ranging from cleaning to management consulting, all of which
have to be marketed. There is consequently more industrial than consumer
marketing, even though ordinary consumers are seldom exposed to it.
Reading comprehension tasks
1. Which of the following three paragraphs most accurately summarizes the text and
why?
First summary:
Marketing means that you dont have to worry about selling your product, because
you know it satisfies a need. Companies have identified market opportunities by
market segmentation: doing market research, finding a target market, and
introducing the right product. Once a product concept has been established,
marketers regularly have to change the marketing mix the products features, its
distribution, the way it is promoted, and its price in order to increase sales.

Industrial goods components and equipment for producers of other goods have
to be marketed as well as consumer goods.
Second summary:
The marketing concept has now completely replaced the old-fashioned selling
concept. Companies have to identify and satisfy the needs of particular market
segments. A products features are often changed, as are its price, the places in
which it is sold, and the way in which it is promoted. More important than the
marketing of consumer goods is the marketing of industrial or producer goods.
Third summary:
The marketing concept is that a companys choice of what goods and services to
offer should be based on the goal of satisfying consumers needs. Many companies
limit themselves to attempting to satisfy the needs of particular market segments.
Their choice of action is often the result of market research. A products features,
the methods of distributing and promoting it, and its price, can all be changed
during the course of its life, if necessary. Quite apart from the marketing of
consumer products, with which everybody is familiar, there is a great deal of
marketing of industrial goods.
2. Look at the following diagrams from Marketing Management by Philip Kotler.
According to text, which of these diagrams best illustrates a company that has
adopted the marketing concept?

Exercise 1: Match the terms with their definition:

1. Distribution channel

A. All the companies or individuals involved in

2. To launch a product
3. Market opportunities
4. Market research
5. Market segmentation
6. Packaging
7. Points of sale
8. Product concept
9. Product feature
10. Sales representative

moving a particular good or service from the

producer to the consumer
B. An idea for a new product, which is tested with
target consumers before the actual product is
developed
C. Attributes or characteristics of a product:
quality, price, reliability, etc.
D. Dividing a market into instinct group of buyers
who have different requirements or buying
habit
E. Places where goods are sold to the publicshops, stores, kioshks, market, stalls, etc.
F. Possibilities of filling unsatisfied needs in
sectors in which a company can profitably
produce goods or services
G. Someone who contacts existing and potential
customers and tries to persuade them to buy
goods or services
H. Collecting, analysing and reporting data
relevant to a specific market situation ( such as
a proposed new product)
I. To intro duce a new product onto the market
Wrappers and containers in which product are sold

Exercise 2: Categorize the following aspects of marketing according to the wellknown 4Ps classification of the marketing mix product, price, promotion and
place.
Advertising
Commercials
Franchising
Inventory
Market coverage
Optional features
Point of sales
Public relations
retailing
transportation

After-sale service
Credit terms
Free sample
Line-filling
Market penetration
Packaging
Poster
Publicity
Sizes
Vending machines

Brand name
Characteristics
going-rate
List price
Market skimming
Payment period
Prestige pricing
Quality
Sponsorship
Warehousing

Cash discount
Distribution channels
Guarantee
Mailings
Media plan
Personal selling
Production costs
Quantity discounts
Style
Wholesaling

Exercise 3: Complete the eight sentences below, by adding an example from the
second box:

1. Conversional marketing is the difficult task of reversing negative demand,

2. Stimulational marketing is necessary where theres no demand,
3. Developmental marketing involves developing a product or service for which
there is clearly a talent demand,
4. Remarketing involves revitalizing falling demand,
5. Synchromarketing involves altering the times pattern of irregular demand,
6. Maintenance marketing is a matter of retaining a current (may be full) level of
demand
7. Demarketing is the attempt (by governments rather than private businesses) to
reduce overfull demand, permanently or temporarily.
8. Countermarkeing is the attempt to destroy unwholesome demand for products that
are considered undesirable.
a.
b.
c.
d.
e.
f.
g.
h.

eg. a non-polluting and fuel-efficient car.

eg. cigarettes, drugs, handguns, or extremist political parties.
eg. for churches, inner city areas, or ageing film stars.
eg. for some roads and bridges during rush hours.
eg. for public transport between rush hours, or for ski resorts in the summer.
eg. for dental work, or hiring disable people.
in the face of competition or changing tastes.
which often happens with new products and services.

Exercise 4: Match up these marketing actions with the eight tasks described above:
i. Alter the pattern of demand through flexible pricing, promotion, and other
incentives.
j. Connect the benefits of the product with peoples needs and interests.
k. Find new target markets, change product features, develop more effective
communication.
l. Find out why people dislike the product, and redesign it, lower prices, and use
more positive promotion.
m. Increase prices, reduce availability, make people scared.
n. Keep up or improve quality and continually measure consumer satisfaction.
o. Measure the size of the potential market and develop the goods and services that
will satisfy it.
p. Raise prices, reduce promotion and the level of service.
Exercise 5: Complete the text with the words in the box:
Advertising budgets
Early adopters
Similar offerings

consumer tastes
differentiate products
making a loss
reaches saturation
withdrawn from the market

The classic product life cycle is Introduction, Growth, Maturity and Decline. In the
introduction stage the product is promoted to create awareness. It has low sales and will
still be 1.making a loss. If the product has few competitors, a skimming price strategy can
be used (a high price for 2....advertising budgets........ which is then gradually lowered).
In the Growth phase sales are rising rapidly and profits are high. However, competitors
are attracted to the market with 3.....similar offering........ The market is characterized by
alliances, joint ventures and takeovers. 4....Reaches satuation . are large and focus on
building the brand.
In the Maturity phase sales growth slows and then stabilizes. Producers attempt to 5 .
differentiate product.. ......... and brands are key to this. Price wars and competition occur
as the market 6 .early adopters... In the Decline phase there is a downturn in the market.
The product is starting to look old-fashioned or 7 ....consumer taste................ have
changed. There is intense price-cutting and many products are 8 .....withdrawn from the
market ..

Exercise 6: Boston Matrix

How useful do you think the Boston Matrix is?

Can you think of a potential star product or service that your company doesnt
make or offer?

Unit 4
Pricing
Nothing you buy is priced too high.
Before you read
Discuss these questions.
1 What is the difference between price and pricing?
2 Give a situation in which predatory pricing is applied.
Companies pricing decisions depend on one or more of three basic factors: production
and distribution costs, the level of demand, and the prices (or probable prices) of current
and potential competitors. Companies also consider their overall objectives and their
consequent profit or sales targets, such as seeking maximum revenue, or maximum
market share, etc. Price strategy must also consider market positioning; quality products

generally require prestige pricing and will probably not sell if their price is thought to
be too low.
Obviously, firms with excess production capacity, a large inventory, or a falling market
share, tend to cut prices. Firms experiencing cost inflation, or in urgent need of cash, tend
to raise prices. A company faced with demand that exceeds its possibility to supply is also
likely to raise its prices.
When sales respond directly to price variations, demand is said to be elastic. If sales
remain stable after a change in price, demand is inelastic. Although it is and elementary
law of economics that the lower the price, the greater the sales, there are numerous
exceptions. For example, price cuts can have unpredictable psychological effects: buyers
may believe that the product is faulty or of lower quality, or will soon be replaced, or that
the firm is going bankrupt, etc. Similarly, price rises convince some customers that
product must be of high quality, or will soon become very hard to get hold of, and so on!
A psychological effect that many retailers count on is that a potential customer seeing a
price of $499 registers the $400 price range rather than the $500. This technique is known
as odd pricing.
Obviously most customers consider elements other than price when buying something:
the total cost of a product can include operating and servicing costs, and so on. Since
price is only one element of the marketing mix, a company can respond to a competitors
price cut by modifying other elements: improving its product, service, communications,
etc. Reciprocal price cuts may only lead to a price war, good for customers but disastrous
for producers who merely end up losing money.
Whatever pricing strategies a marketing department selects, a products selling price
generally represents its total cost (unit cost plus over heads) plus profit or risk reward.
Overheads are the various expenses of operating a plant that cannot be charged to any one
product, process or department, which have to be added to prime cost or direct cost which
covers material and labor. Cost accountants have to decide how to allocate or assign fixed
and variable costs to individual products, processes or departments.
Micro economists argue that in a fully competitive industry, price equals marginal cost
equals minimum average costs equals breakeven point (including a competitive return on
capital), and that a companys maximum-profit equilibrium is where extra costs are
balanced by extra revenue, in other words, where the marginal cost curve intersects the
marginal revenue curve. In reality, many companies have little idea what optimal price or
production volume is, while most micro economists are happier with their models than
actually talking to production managers, marketers or cost accountants!
Reading comprehension tasks
1. Understanding main points
The prices
charge
for their products
on many
factors: their
costs, the the
levelmain
of demand,
Which
ofcompanies
these three
summaries
mostdepend
fully and
accurately
expresses
ideas of
competitors prices, financial targets, marketing strategies, market positioning, production capacity,
the text on pricing?
inventory size, inflation, and so on. Yet pricing strategies are often unsuccessfully because of the
First
summary
unpredictable psychological reactions of customers. Consequently companies often concentrate instead on
other elements of the marketing mix: production improvement, service, communications, etc. Even so,
companies have to make sure they cover direct costs and overheads. This usually results in a price that
equals both marginal cost and breakeven points.

Second summary
The most important factors in pricing decisions are production costs (including overheads), the level of
demand, and the going market price. Yet broader company objectives, and profit or sales targets, and
market positioning, are also important. There are also lots of circumstances that might cause companies to
change their prices: excess production capacity, large inventories, or a falling market share on the one
hand, or cost inflation, an urgent need of cash, or demand that exceeds supply, on the other. Yet perfectly
logical decisions regarding prices thought to be elastic can have unpredictable psychological effects. It is
also clear that customers are influenced by elements other than price, so companies can equally modify
other elements of the marketing mix. In a competitive industry, price is generally not much greater than
marginal cost and breakeven point.

Third summary
Companies pricing decisions generally depend on factors such as production and distribution costs,
consumer demand, and competitors prices. Yet a companys overall objectives and profit or sales targets
are also important. Of course there are situations in which a company will raise its prices (e.g. excess
production capacity, a large inventory, or a falling market share) or lower them (e.g. excessive demand,
cost inflation, a cash shortage). In general, the lower the price, the greater the sales. Companies take
account of psychological effects and use techniques such as odd pricing. Companies can also change other
elements of the marketing mix, especially if this allows them to avoid a damaging price war. Whatever
happens, companies generally have to cover a products total cost and make a profit. This is difficult in a
competitive industry, as here price will only equal breakeven point.

2. Understanding details
Decide whether the following statements are True or False. Tick the correct answers.
Statements
True
False
1. There are three basic factors potentially involved in all pricing
x
decisions
2. When pricing a product, companies have to think of potential as well x
as existing competitors.
3. You are unlikely to sell high quality products at a low price.
x
4. When demand exceeds supply, a company nearly always increases its x
price.

5. A company faced with rising costs has to increase its prices.

6. A company can only change a price if it is inelastic.
7. Pricing is often strongly influenced by psychological factors.
8. A company can respond to competitors price cuts by changing
different elements of the marketing mix.
9. Prices generally take into account both direct and indirect costs.
10. In theory, a products price should equal its marginal cost and the
companys breakeven point.

x
x
x
x
x

3. Complete the following word partnerships from the text:

1. Breakeven point.: im ha vn
2. production.. capacity:
3. Distribution costs
4. financial targets
5. market positioning : v th th trng
6. market share :th phn
7. Odd pricing
8. Prime cost: chi ph trc tip
9. cost. Accountant
10. Variable .
Vocabulary tasks
Exercise 1: All the words below can be combined with price in a two- word partnership:
e.g. price war, retail price. Add the word price either before or after each of the words
below:
1.

control

14.

market

2.

cost

3.

cut

4.

discrimination

5.

6.

15.

mechanism .

16.

minimum

..

17.

range

elasticity

...

18.

recommended .

exercise

19.

reduction

7.

fixing .

20.

retail

8.

freeze

21.

rise

9.

going ..

22.

selling

10.

historical

...

23.

sensitivity

11.

index

24.

strike .........

12.

list

25.

war

13.

maintenance

26.

wholesale

...

..

.........

...

..........

...
.........

..........

Exercise 2: Match up the remarks below with the names of different pricing
strategies in the box:

a.
b.
c.
d.
e.
f.
g.
h.

1. market penetration
pricing
2. market skimming
3. current revenue pricing
4. loss-leader pricing
5. mark-up or cost-plus
pricing
6. going-rate pricing
7. demand- deferential
pricing ( or price
Firstly we need cash, and discrimination)
secondly, we dont think the product will last very
perceived-value
pricing
long its really just 8.
a gimmick
so were
trying to maximize our sales
income now.
Like all supermarkets, we offer half a dozen or more different items at a really
low price each week. We lose on those, but customers come in and buy lots of
other stuff as well.
Since our product is indistinguishable from those of all our competitors, and
weve only got a tiny park of the market, we charge the same as the rest of
them.
They just worked out the unit cost and added a percentage, without even
considering demand elasticity or anything like that.
We charge an extremely high price because we know people will pay it. Our
brand name is so famous for quality we can make huge profits.
We charge lots of different prices for what is really almost the same thing. Of
course, in First Class you get better food, and in Economy theres hardly any
legroom, but its still a flight from A to B
We decided to launch the product at a very low price, almost at direct cost,
hoping to get a big market share. Then we can make profits later because of
economies of scale.
Were going to charge a really high price to start with. We can always lower it
later to reach price-elastic market segments.
1

Exercise 3: Which of these two-word nouns refers to?

1. A basic price before discounts and special offers are made?
2. Aggressive competition between rival?
3. A price at which retailers buy goods?
4. A price recorded in a companys accounts?
5. The governments measure of inflation?
6. The price at which a producer makes no profit?
7. The relationship between a products price and the quantity bought?

Which two of these two- word nouns refer to

8. A price-limit imposed by government?
9. Arrangements between competitors not to lower prices?
10. The price of options?
Exercise 4: Complete the text with suitable words. The first letters are provided.
The price of a product should logically cover its production costs, including a proportion
of the companys fixed costs or o. such as rent and interest payments, and leave a
small profit. But prices are also influenced by the level of demand, the prices of s.
products, and the prices charged by competitors.
High quality products made with expensive c. and requiring a lot of craftsmanship
are obviously expensive. They also generally require prestige pricing as the consumers
in their t. market would not buy them if they thought the price was too low. The
markets for most other goods are generally price s. , i.e. the lower price, the
greater the sales.
But for new products for which there is a sufficiently high demand, companies may
choose to set the highest possible price so as to maximize profits. This is known as
market- skimming. The price can later be reduced in order to reach further m.
s. The opposite strategy is market-penetration, which means setting as low a
price as possible so as to increase sales volume and m. s.,leading to
lower unit production and distribution costs and higher long-run profit. The low price will
also discourage competitors.
Companies with overcapacity, intensive competition, a large inventory, or a declining
market are likely to cut the prices of established products. They are more concerned with
keeping the p. going and staying in business than making a current profit. On the
contrary, firms facing rising costs, or in need of cash in the short term, tend to raise
prices. A company faced with demand that exceeds supply is also likely to raise its prices,
like a m.
Firms in perfectly c. markets, or homogeneous-product markets, or small firms in
an industry with a strong m., are likely to use going-rate pricing, i.e. they will
charge more or less the same price as everyone else, rather than set a price based on
estimates of costs or projected demand.
But of course, all prices can be adapted. Most companies offer cash discounts to
customers who pay immediately, and quantity discounts to buyers of large v.
Many products and services are sold at a lower price during an off-season. Retailers often
offer some loss- leader prices: they cut the prices of selected products to cost price or
below in order to attract customers who also buy other goods. Companies are also often
obliged to react to price changes by competitors. They might try to avoid a price war by
modifying other elements of the marketing mix. Similarly, they have to anticipate
competitors reactions if they change their own prices.
Now translate the highlighted expressions in the text into Vietnamese.

Unit 5: Torts
Tort law is the body of law that deals with civil wrongs, except those that arise from contract
problems. The purpose of torts is to compensate an injured party through the award of
damages for the injuries incurred during a tortuous act. In general, the law of tort is
concerned really with a persons responsibility to others. It applies to both individuals and
companies.

Essential Terms
Tortfeasor: person who is guilty of tortuous conduct
Trespass: an unlawful interfering with the property or property rights of another
Intentional infliction of emotional distress: causation of severe mental suffering or
physical injury through highly aggravated acts or words. The acts or words must be
done with (1) intent to cause an injury or (2) a reasonable certainty that those acts or
words will result in the injury
False imprisonment: interference with the freedom of or restraining the movements of
an individual. There must be the intent to detain, and the detention must be without
privilege or consent.
Defamation: interference with one's interest in his or her good reputation and name;
defamation encompasses two torts, slander (spoken) and libel (written)
Wrongful death action: suit brought by the beneficiaries of a decedent against a person
who allegedly caused the decedent's death through negligence
Battery: the unlawful interference with another's person, such as hitting someone on the
arm with a handbag
Negligence: failure to use such care as a reasonably prudent and careful person would
use under similar circumstances; applies to either an act or an omission

Putting the Terms to Use

Read the story, and indicate the appropriate tort in the blank spaces provided.

__________

Jennifer and Giorgio were classmates at Cleghorn

Community College in Pocahontas, Arkansas. Though
Giorgio, a male student from Greece, thought he and
Jennifer, a female student from Michigan, were only
friends, unbeknown to him, she had become obsessed
and determined to marry him at all costs. She began to
slip into his yard every night and watch him sleeping
through an open window. She never hurt or disturbed
anything in the yard; she merely watched him.

__________

Unfortunately, Jennifer did not know that Giorgio and his

fiancee, Mary, whom he met while an exchange student
in North Dakota, had already decided to marry but had
not announced their engagement. Because Mary was
completing her studies at the University of Texas, Jennifer
never saw Marythat is, until the holiday break, when
her midnight vigil revealed that Giorgio was not alone
anymore. Jennifer was distraughther dreams dashed.
Then she decided if she could make Mary see reason, all
was not lost. She cornered Mary in the ladies' room at the
local movie theater, locked her in a toilet stall, and would
not let her out, all the while making a plea for Giorgio's
affection. After twenty minutes or so, Mary agreed to give up
Giorgio, and Jennifer released her. Mary had lied, as
Jennifer's moonlight vigil soon revealed.

__________

Jennifer became incensed and stopped Giorgio and Mary

at church the next day. She shouted terrible insults at
Mary, calling her vile names and calling on the minister
to impose religious sanctions on Mary. Mary was so
distressed that she experienced severe panic attacks,
developed hives, and lost her beautiful blonde hair.

__________

Not satisfied with that, Jennifer typed up a scornful

letter about Mary, complete with picture, and stuck a
copy on every car in a department store parking lot.

__________

Finally, Jennifer began following Mary and bumping,

shoving, or tripping her whenever possible, though it
always appeared to be an accident on Jennifer's part.

Legal Thumbnail
Tort law has developed over the centuries and lacks statutory organization; consequently,
it is helpful to discuss torts by categorizing them in terms of the degree of fault inherent in
the tortuous conduct/liability.
1. Intentional torts require fault in the form of intent; it must be shown that
the actor knew that there was a substantial certainty of harm.
1. Negligent torts require that the act create an unreasonable risk of harm.
2. Strict liability requires no showing of intent/negligence or fault by the actor.
The doctrine was developed to cover situations in which a party was engaged in
ultra-hazardous situations, such as use of explosives or dealing with wild
animals.

Intentional Torts
Proof of an intentional tort requires showing that a protected right has been
intentionally breached. Obviously, the difficulty here lies in proving another's state of
mind, since for obvious reasons the statements of the defendant regarding his or her
own intent are questionable. Therefore, intent is most often proved through
circumstantial evidence: the defendant's conduct, in the context of his or her surroundings and what he or she presumably knew and perceived. The law makes
presumptions regarding the defendant's intent in light of these considerations,
assuming that the defendant intends the natural and probable consequences of his or her
acts.
Intentional torts include actions that the layperson often associates with criminal law
but are actually also covered by tort law. Two major types of intentional torts are:

1. personal torts such as assault, battery, and false imprisonment [unlawful

confinement] and
2. property torts such as trespass to land [unlawful entry on property of
another] and trespass to chattels [interference with or damage to the
belongings of another]
Since it is beyond the scope of this text to deal thoroughly with all of these torts, one
example from each category, beginning with the personal tort of false imprisonment, will
be examined

False Imprisonment
The tort of false imprisonment involves cases in which the plaintiff has allegedly been
unlawfully confined by the defendant. For false imprisonment to be proven, these
elements must be present:
1. intent to confine a person within a certain area;
2. actual confinement;
3. awareness of plaintiff of the confinement or injury to plaintiff due to confinement;
4. Prevention of exit or no safe exit possible by plaintiff.
Consider the case of Big Town Nursing Home, Inc. v. Newman, 461 S.W.2d 195 (Tex.
Civ. App. 1970). The plaintiff, Newman, was confined in a nursing home without a
commitment order [court order requiring placement in an institution] after his nephew
took him to the nursing home and paid for a one-month stay. Newman had health
problems, including Parkinson's disease and alcoholism. Shortly after his placement in
the home, Newman tried to leave; however, he was stopped by employees of the nursing
home, who placed him in the section of the nursing home reserved for senile patients.
Apprehended several times during several escape attempts, Newman was taped to a chair
to prevent his further escape attempts. Approximately seven weeks after being placed in
the home, Newman successfully escaped. He then sued the nursing home for false
imprisonment and won actual (compensatory) [the losses that are readily provable and
actually sustained] and exemplary (punitive) [damages designed to punish the
wrongdoer] damages. Although the nursing home appealed the case, the trial court's
decision was upheld on appeal; the appellate court held that a nursing home cannot force a
patient to stay when there is no legal justification.
If the plaintiff agrees to the detention, obviously there is no false imprisonment. What
happens, however, if the plaintiff has no knowledge of the confinement at all? The majority
of the jurisdictions hold that the plaintiff must have been aware of the confinement in order

for there to have been a false imprisonment. In Newman's case, he was obviously aware of
the confinement despite his illness, so that argument (lack of awareness) could not be raised
by the nursing home.
Exercise 1: Case Hypotheticals and Discussion
In groups of three, look at these scenarios, determine whether or not there has been false
imprisonment in these scenarios, and give reasons for your decisions. Be prepared to
defend your answers in class.
Fact Situations
1. The captain of a fishing boat agreed to let one of his crew leave the trawler at the
next port of call. However, once they reached port, the captain refused to allow the
crew member to use the rowboat to get ashore. Since it was the only way ashore,
the crew member had to remain with the fishing boat for two more months until the
fishing season ended and the home port was reached.
2. Jane, who was clearly under the influence of alcohol or drugs, was
found wandering around the city streets at 2 AM one morning by a security
guard. He drove her to a beach area outside of town and left her there in
an abandoned hut. Jane went to sleep. When she awoke the next morning,
she had no recollection of what had happened the night before. However,
after being told the story by an acquaintance who knew both the security
guard and Jane, she sued the security guard for false imprisonment. During
the trial it was unclear whether Jane had gone willingly to the beach hut
or had requested that the guard let her out elsewhere.

Trespass
Trespass, the most familiar of the property torts, prohibits the unauthorized entry of a
person or thing onto the property of another. The right to exclusive possession of the
land is the basis for this tort, a right that had its origin in feudal times and was most
fiercely defended. Unlike in other countries where citizens may have the right to
temporary access to all undeveloped lands (such as allemansratt in Sweden), U.S. law
allows landowners to close off land completely to others.
A prima facie [basics that must be proven] case of trespass must include an act,
coupled with the intent to cause entry by the defendant, and an invasion of the
plaintiff's land. In other words, the person must have intended to enter another's land.

Damages are not required to be proven for intentional trespass. Only when the
entry onto another's land is negligent (and then falls under negligent torts) is there any
requirement for showing actual damages.
The intent to cause entry does not mean that the defendant must have knowledge
that the land he or she enters belongs to another but only that he or she intends the act
that would effect an entry. In most U.S. jurisdictions, it does not matter whether a
defendant's presence on another's land is a mistake caused by ignorance of the
ownership or the boundaries, or even that the trespass may have benefited the land. In all
cases, it has been held to be trespass. For example, if Jan builds a small lake to attract
migrating ducks and the pond extends over onto Alfred's property, Jan has trespassed
even though Alfred has a benefit because he can use the lake water to irrigate one of
his fields. It's of no matter that Jan thought he was building the lake only on his own
property; Jan has committed trespass.
Property interests are such that failure to remove something from the land can be
considered a trespass. If, for example, you had been given permission to leave your car
parked on your neighbor's property for six months and you didn't remove it at the
end of six months, that could be considered a trespass. Trespass can even be remaining
on another's land after a privilege (either the owner's consent or a legal privilege
irrespective of consent) expires; for example, because the privilege to be on the campus in
a classroom building generally expires when the university closes for the night, it might
be possible in some states to charge a student who is studying in an otherwise empty
classroom building with trespass. Causing another to enter plaintiff's land may also be
held a trespass. It is also interesting to note that the rights inherent in the possession of
land extend above and below the surface.

Negligence
The central factor in negligence is determining what the standard of care imposed upon
the public should be, as a general rule, all persons are under a duty to conduct
themselves in such a manner as not to create unreasonable risks of physical harm to
others. During a trial, the conduct of the defendant is reviewed to determine if he or she
has met the reasonable person standard. That is, would a reasonable person have acted
similarly under similar circumstances? For the court to impose liability for negligence, the
following elements must be proven:
1. that the defendant had a duty of care;
2. that there was a breach of that duty by negligent conduct (act or omission);
3. that the act or omission caused injury (proximate cause); and

4. that the act or omission is not subject to the defenses of assumption of the
risk or contributory negligence.
Although the elements are isolated for discussion, they are interrelated to the extent
that it is almost misleading to speak of them separately.

Standard of Care
The standard of care that must be exercised is that which a reasonable person would use
under similar circumstances. It is important to note that this standard is an external,
objective one in which all people are deemed to use certain minimal levels of care in all of
their activities.

Proximate Cause
Proximate cause is one of the most difficult and elusive of the concepts associated with tort
law. Proximate cause is related to the concept of duty. If the defendant is found to have
had a duty to protect the plaintiff from the consequences of the harmful act, and
breached that duty, then there is proximate cause. Determinations of proximate cause by
courts are true exercises in the use of precedent and legal reasoning; case law, public
policy arguments, and common sense all play a part in the court's decision.
However, a person does not have the same duty of care to all persons. Basically, a
person only has a duty of care to someone with whom that person logically would be
likely to interact. In other words, we are obligated only to those people or that property
that our actions or inactions would foreseeably have an effect on. This issue of
foreseeability is enormously complex since the courts have held that the duty of care is
owed only to a plaintiff who is reasonably foreseeable. The question then becomes, who
is foreseeable? A landmark case on foreseeability is Palsgraf v. Long Island R.R., 248 N.Y.
339, 162 N.E. 99 (1928). The facts of the case were set forth by Chief Justice Cardozo, a
distinguished American jurist, in his opinion.

Plaintiff was standing on a platform of defendant's railroad after

buying a ticket to go to Rockaway Beach. A train stopped at the station,
bound for another place. Two men ran forward to catch it. One of the
men reached the platform of the car without mishap, though the train
was already moving. The other man, carrying a package, jumped aboard

the car but seemed unsteady as if about to fall. A guard on the car; who
had held the door open, reached forward to help him in, and another
guard on the platform pushed him from behind. In this act, the package
was dislodged, and fell upon the rails. It was a package of small size,
about fifteen inches long, and was covered by a newspaper. In fact it
contained fireworks, but there was nothing in its appearance to give
notice of its contents. The fireworks when they fell exploded. The
shock of the explosion threw down some scales at the other end of the
platform many feet away. The scales struck the plaintiff, causing injuries
for which she [Palsgraf] sues.

Cardozo resolved the issue of foreseeability as follows.

The conduct of the defendant's guard, if a wrong in its relation to the

holder of the package, was not a wrong in its relation to the plaintiff,
standing far away. Relatively to her it was not negligence at all. Nothing
in the situation gave notice that the falling package had in it the potency
of peril to persons thus removed. Negligence is not actionable unless it
involves the invasion of a legally protected interest, the violation of a
right.

In simple terms since the plaintiff was not foreseeable, the railroad owed her no duty and
therefore did not act negligently.
Another area that causes problems in determining proximate cause is the issue of
intervening causes. The courts have to determine if another act, either by a person or a
natural force, comes between the tortious act committed by the defendant and the plaintiff.
Foreseeability is also an issue in making this determination. If the defendant should have
foreseen the intervening act, then lack of foreseeability is not a defense. For example, Tracy
lights a campfire in windy weather in the Sierra Nevada mountains after a four-month dry
spell. She leaves the fire burning and goes off to take a short hike. The wind spreads the fire,
and Martina's house is destroyed by the resulting forest fire. Tracy will not be allowed to rely
on intervening forces (the strong wind and dry conditions) as a defense because it was
foreseeable that strong winds in dry woods could cause a forest fire. She was negligent in
leaving the fire burning when she left the campsite.

Strict Liability
Strict liability is liability without faultit is based on the policy of law that under certain
circumstances a plaintiff may be allowed recovery even though there is no fault on the
part of the defendant. It should be noted here that a finding of no legal fault is not the
same as a finding of no moral blame. You can be legally innocent but morally guilty. Legal
fault stems from a deviation from a standard of conduct needed to protect society and its
citizens. Historically, strict liability covered situations in which activitiesblasting,
storing inherently dangerous substances, keeping wild animalswere abnormally
dangerous ones. These activities were and are still allowable as long as no harm occurs; in
other words, the activities may be carried on but only if the actor is willing to insure the
public against harm.
Sellers and manufacturers can be held responsible under strict liability even if the
seller or manufacturer exercised all reasonable care in production and sale of the
product and even if there is no privity of contract [contractual relationship between
the parties].
Exercise 2: Analysis and Collaboration
1. Divide into groups. Read the scenarios and reach a group consensus as to
whether the cause of action should be based on intent, negligence, or strict
liability. The causes of action are not mutually exclusive. For example,
you can file a suit based both on negligence and strict liability.
2. List the reasons for your decisions. Select one group member to present your
list.
Scenarios
a. Fletcher owned coal mines on property next to Rylands's property.
Rylands had a reservoir built on his property. During construction
of
the reservoir, workers discovered old mining shafts that weakened the
reservoir structure. The reservoir, once filled with water, burst and
flooded Fletcher's coal mines. Fletcher sued. Fletcher v. Rylands, L.R.
1 Exch. 265 (1866).
b. The Arizona Public Service Company hung copper wire along poles
that were irregularly placed. In the autumn, Brittain flew his
helicopter into the wire because the copper color blended with
the landscape. Britain's wife sued for wrongful death. Arizona
Public Service Co. v. Brittain, 107 Ariz. 278, 486 P.2d 176 (1971).

c. Sutherland, from property not belonging to Herrin, repeatedly shot at

ducks and other game birds. The shots were fired over Herrin's
property and disturbed his cattle and his peace and quiet. Herrin
sued. Herrin v. Sutherland, 74 Mont. 587, 241 P. 328 (1925).
d. Connie Francis Garzilli, a well-known singer, was criminally assaulted
in her motel room at Howard Johnson's Motor Lodge in Westbury,
New York, when the attacker came in through a sliding glass door.
Proof was offered at the trial that the door could be easily forced open
from the outside. Francis and her husband sued the motel chain for,
inter alia, mental suffering and deprivation of companionship.
Garzilli
v.

Howard Johnson's
(E.D.N.Y.1976).

Motor

Lodges,

Inc.,

419F.

Supp.1210

Unit 6: International Trade

Before you read
1. Discussion
Consider the clothes and shoes you are wearing, and those you wore last week. Where
were they made? Try to recall the meals youve eaten in the last 24 hours. How much of
the food came from abroad? If you have them, where do your car, television, stereo,
cameras, watches, and so on come from? Where was the last DVD or CD you bought
manufactured? Can you even imagine living in a country that did not import anything,
where only locally produced food and textiles and products were available?
2. Vocabulary: Match up these words and expressions with the definitions below
1.
2.
3.
4.
5.
6.
7.
8.

trade in goods
trade in services (banking, insurance, tourism, and so on)
direct exchanges of goods, without the use of money
the difference between what a country receives and pays for
its exports and imports of goods
the difference between a countrys total earnings from
exports and its total expenditure on imports
the (impossible) situation in which a country is completely
self sufficient and has no foreign trade
a positive balance of trade or payments
a negative balance of trade or payments

A. autarky
B. deficit
C. quotas
D. balance of payments
E. dumping
F. surplus

9. selling goods abroad at (or below) cost price

10. imposing trade barriers in order to restrict imports
11. taxes charged on imports
12. quantitative limits on the import of particular products or
commodities

G. balance of trade
H. invisible imports and
exports
I. tariffs
K. visible trade (GB) or
merchandise trade (US)
L. barter or countertrade
M. protectionism

3. Reading
Read the text and answer the following questions
-

Why do most economists oppose protectionism?

Why do most governments impose import tariffs and/ or quotas?
Why were many developing countries for a long time opposed to GATT?
Why have many developing countries recently reduced protectionism and
increased their international trade?
PROTECTIONISM AND FREE TRADE

The majority of economists believe in the comparative cost principle, which proposes
that all nations will raise their living standards and real income if they specialize in the
production of those goods and services in which they have the highest relative
productivity. Nations may have an absolute or a comparative advantage in producing
goods and services because of factors of production (notably raw materials), climate,
division of labour, economies of scale, and so forth.
This theory explains why there is international trade between North and South, e.g.
semiconductors going from the USA to Brazil, and coffee going in the opposite direction.
But it does not explain the fact that over 75% of the exports of the advanced industrial
countries go to other similar advanced nations, with similar resources, wage rates, and
levels of technology, education, and capital. It is more a historical accident than a result
of natural resources that the US leads in building aircraft, semiconductors, computers and
software, while Germany makes luxury automobiles, machine tools and cameras.
However, the economists who recommend free trade do not face elections every four or
five years. Democratic governments do, which often encourages them to impose tariffs
and quotas in order to protect what they see as strategic industries- notably agriculturewithout which the country would be in danger if there was a war, as well as other jobs.

Abandoning all sectors in which a country does not have a comparative advantage is
likely to lead to structural unemployment in the short (and sometimes medium and long)
term.
Other reasons for imposing tariffs include the following:
to make imports more expensive than home-produced substitutes, and thereby
reduce a balance of payments deficit;
as a protection against dumping (the selling of goods abroad at below cost price in
order to destroy or weaken competitors or to earn foreign currency to pay for
necessary imports);
to retaliate against restrictions imposed by other countries;
to protect infant industries until they are large enough to achieve economies of
scale and strong enough to compete internationally.
With tariffs, it is impossible to know the quantity that will be imported, because
prices might be elastic. With quotas, governments can set a limit to imports. Yet
unlike tariffs, quotas provide no revenue for the government. Other non tariff
barriers that some countries use include so-called safety norms, and the deliberate
creation of customs, difficulties and delays.
The General Agreement on Tariffs and Trade (GATT), an international organization set up
in 1947, had the objectives of encouraging international trade, of making tariffs the only
form of protectionism, and of reducing these as much as possible. The most favored
nation clause of the Gatt agreement specified that countries could not have favored
trading partners, but had to grant equally favorable conditions to all trading partners. The
final Gatt agreement- including services, copyright, and investment, as well as trade in
goods- was signed in Marrakech in 1994, and the organization was superseded by the
World Trade Organization.
It took nearly 50 years to arrive at the final Gatt agreement because until the 1980s, most
developing countries opposed free trade. They wanted to industrialize in order to
counteract what they rightly saw as an inevitable fall in commodity prices. They practised
import substitution (producing and protecting goods that cost more than those made
abroad), and imposed high tariff barriers to protect their infant industries.
Nowadays, however, many developing countries have huge debts with Western
commercial banks on which they are unable to pay the interest, let alone repay the
principal. Thus they need to rollover (or renew) the loans, to reschedule ( or postpone)
repayments, or to borrow further money from the International Monetary Fund, often just
to pay the interest on existing loans. Under these circumstances, the IMF imposes severe
conditions, usually including the obligation to export as much as possible.

Quite apart from IMF pressure, Third World governments are aware of the export
successes of the East Asian Tiger economies ( Hong Kong, Singapore, South Korea and
Taiwan), and of the collapse of the Soviet economic model. They were afraid of being
excluded from the work trading system by the development of trading blocks such as the
European Union, finalized by the Maastricht Treaty, and the North American Free Trade
Agreement (NAFTA), both signed in the early 1990s. So they tended to liberalize their
economies, lowering trade barriers and opening up to international trade.
Reading comprehension tasks: Write questions, relating to the text, to which these
could be the answer.
A. Factors of production, most importantly raw materials, but also labor and
capital, climate, economies of scale, and so on.
B. Because it doesnt explain why the majority of the exports of advanced
industrialized country go to other very similar countries.
C.A recently developed one that has not yet grown to the point where it benefits
from economies of scale, and can be internationally completive.
D. Unlike quotas, they produce revenue.
E. Unlike tariffs, you know the maximum quantity of goods that will e imported.
Exercise 1: Replace the underlined words and expressions in the text with the words
and expressions below
Balance of payments

balance of trade

Climate

division of labor

commodities

Factors of production

nations

barter pr counter-trade
economies of scale

protectionism quotas

tariffs

(1)Countries import some goods and services from abroad, and export others to the rest
of the world. Trade in (2) raw materials and goods is called visible trade in Britain and
merchandise trade in the US. Services, such as banking, insurance, tourism, and technical
expertise, are invisible imports and exports. A country can have a surplus or a deficit in
its (3) difference between total earnings from visible exports and total expenditure on
visible imports, and in its (4) difference between total earnings from all exports and total
expenditure on all imports. Most countries have to pay their deficits with foreign
currencies from their reserves, although of course the USA can usually pay in dollars, the
unofficial world trading currency. Countries without the currency reserves can attempt to
do international trade by way of (5) direct exchanges of goods without the use of money.

The (imaginary) situation which a country is completely self sufficient and has no foreign
trade is called autarky

The General Agreement on Tariffs and Trade (GATT), concluded in 1940, aims to
maximize international trade and to minimize (6) the favouring of domestic industries.
GATT is based on the comparative cost principle, which is that all nations will raise their
income if they specialize in producing the commodities in which they have the highest
relative productivity. Countries may have an absolute or a comparative advantage in
producing particular goods or services, because of (7) inputs (raw materials, cheap or
skilled labour, capital, etc), (8) weather conditions, (9) specialization of work into
different jobs, (10) savings in unit costs arising from large-scale production, and so forth.
Yet most governments still pursue protectionist policies, establishing trade barriers such
as (11) taxes charged on imports, (12) restrictions on the quality of imports,
administrative difficulties, and so on.
Exercise 2: There is a logical connection among three of the four words in each of the
following groups. Which is the odd one out, and why?
1.
2.
3.
4.
5.
6.
7.
8.
9.

absolute advantage- barriers- comparative advantage- free trade

autarky- counter trade- invisible trade- visible trade
balance- deficit- dumping- surplus
banking- insurance- merchandise- tourism
comparative advantage- protectionism- quotas- tariffs
non tariff barriers- norms- quotas- taxes
barter- import substitution- infant industries- tariff barriers
debt- reschedule- protect- subsidize- substitute
liberalize- protect- subsidize- substitute

Exercise 3: Complete the summary using the list of words, A-K, below.
THE TRANSPORT REVOLUTION
Modern cargo-handling methods have had a significant effect on 1 .................... as the
business of moving freight around the world becomes increasingly streamlined.
Manufacturers of computers, for instance, are able to import 2 .................... from
overseas, rather than having to rely on a local supplier. The introduction of 3 ....................
has meant that bulk cargo can be safely and efficiently moved over long distances. While
international shipping is now efficient, there is still a need for governments to reduce
4.................... in order to free up the domestic cargo sector
A tariffs

B components

C container ships D output

E employees

F insurance costs G trade

I fares

H software

H freight

H international standards

Exercise 4: DELIVERING THE GOODS

The vast expansion in international trade owes much to a revolution in the business
of moving freight
A

International trade is growing at a startling pace. While the global economy has
been expanding at a bit over 3% a year, the volume of trade has been rising at a
compound annual rate of about twice that. Foreign products, from meat to
machinery, play a more important role in almost every economy in the world, and
foreign markets now tempt businesses that never much worried about sales beyond
their nation's borders.

What lies behind this explosion in international commerce? The general worldwide
decline in trade barriers, such as customs duties and import quotas, is surely one
explanation. The economic opening of countries that have traditionally been minor
players is another. But one force behind the import-export boom has passed all but
unnoticed: the rapidly falling cost of getting goods to market. Theoretically, in the
world of trade, shipping costs do not matter. Goods, once they have been made, are
assumed to move instantly and at no cost from place to place. The real world,
however, is full of frictions. Cheap labour may make Chinese clothing competitive
in America, but if delays in shipment tie up working capital and cause winter coats
to arrive in spring, trade may lose its advantages.

At the turn of the 20th century, agriculture and manufacturing were the two most
important sectors almost everywhere, accounting for about 70% of total output in
Germany, Italy and France, and 40-50% in America, Britain and Japan.
International commerce was therefore dominated by raw materials, such as wheat,
wood and iron ore, or processed commodities, such as meat and steel. But these
sorts of products are heavy and bulky and the cost of transporting them relatively
high.

Countries still trade disproportionately with their geographic neighbours. Over

time, however, world output has shifted into goods whose worth is unrelated to
their size and weight. Today, it is finished manufactured products that dominate the
flow of trade, and, thanks to technological advances such as lightweight
components, manufactured goods themselves have tended to become lighter and
less bulky. As a result, less transportation is required for every dollar's worth of
imports or exports.

To see how this influences trade, consider the business of making disk drives for
computers. Most of the world's disk-drive manufacturing is concentrated in Southeast Asia. This is possible only because disk drives, while valuable, are small and
light and so cost little to ship. Computer manufacturers in Japan or Texas will not
face hugely bigger freight bills if they import drives from Singapore rather than
purchasing them on the domestic market. Distance therefore poses no obstacle to
the globalisation of the disk-drive industry.

This is even more true of the fast-growing information industries. Films and
compact discs cost little to transport, even by aeroplane. Computer software can be
'exported' without ever loading it onto a ship, simply by transmitting it over
telephone lines from one country to another, so freight rates and cargo-handling
schedules become insignificant factors in deciding where to make the product.
Businesses can locate based on other considerations, such as the availability of
labour, while worrying less about the cost of delivering their output.

In many countries deregulation has helped to drive the process along. But, behind
the scenes, a series of technological innovations known broadly as containerisation
and inter-modal transportation has led to swift productivity improvements in cargohandling. Forty years ago, the process of exporting or importing involved a great
many stages of handling, which risked portions of the shipment being damaged or
stolen along the way. The invention of the container crane made it possible to load
and unload containers without capsizing the ship and the adoption of standard
container sizes allowed almost any box to be transported on any ship. By 1967,
dual-purpose ships, carrying loose cargo in the hold* and containers on the deck,
were giving way to all-container vessels that moved thousands of boxes at a time.

The shipping container transformed ocean shipping into a highly efficient,

intensely competitive business. But getting the cargo to and from the dock was a
different story. National governments, by and large, kept a much firmer hand on
truck and railroad tariffs than on charges for ocean freight. This started changing,
however, in the mid-1970s, when America began to deregulate its transportation
industry. First airlines, then road hauliers and railways, were freed from restrictions
on what they could carry, where they could haul it and se what price they could
charge. Big productivity gains resulted. Between 1985 and 1996, for example,
America's freight railways dramatically reduced their employment, trackage, and
their fleets of locomotives - while increasing the amount of cargo they hauled.
Europe's railways have also shown marked, albeit smaller, productivity
improvements.

In America the period of huge productivity gains in transportation may be almost

over, but in most countries the process still has far to go. State ownership of
railways and airlines, regulation of freight rates and toleration of anti-competitive
practices, such as cargo-handling monopolies, all keep the cost of shipping
unnecessarily high and deter international trade. Bringing these barriers down
would help the world's economies grow even closer.

Which paragraph contains the following information?

1. a suggestion for improving trade in the future
2. the effects of the introduction of electronic delivery
3. the similar cost involved in transporting a product from abroad or from a local
supplier
4. the weakening relationship between the value of goods and the cost of their
delivery
Decide if these statements are true (T) or false (F) or not given (NG)
1.
2.
3.
4.
5.

International trade is increasing at a greater rate than the world economy.

Cheap labor guarantees effective trade conditions.
Japan imports more meat and steel than France.
Most countries continue to prefer to trade with nearby nations.
Small computer components are manufactured in Germany

Unit 7: Banking
Vocabulary
Match up the terms with the definitions:
Cash card cash dispenser or ATM
credit card
home banking
Loan
mortgage
overdraft
standing order or direct debit
Current account or checking account
Deposit account or time or notice
account
1 an agreement by which a customer can withdraw more form a bank account
2 a card which guarantees payment for goods and services purchased by the cardholder,
who pays back the bank or finance company at a later date
3 a computerized machine that allows bank customers to withdraw money, check their
balance and so on
4 a fixed sum of money on which interest is paid, lent for a fixed period, and usually for a
specific purpose
5 an instruction to a bank to pay fixed sums of money to certain people or organization at
stated times
6 a loan, usually to buy property, which serves as a security for the loan
7 a plastic card issued to bank customers for use in cash dispensers
8 doing banking transactions by telephone or from ones own personal computer
9 one that generally pays little or no interest, but allows the holder to withdraw his or her
cash without any restrictions
10 one that pays interest, but usually cannot be used for paying cheques or checks, and on
which notice is often required to withdraw money
Discussion
1.
2.
3.
4.

Which of the banking facilities do you use?

What services do commercial banks offer in your country?
What changes have there been in personal banking recently?
What future changes do you foresee in the future?
The banking industry

Reading
Read the text below and write short headings for each paragraph
Types of bank
1............................................
Commercial or retail banks are businesses that trade in money. They receive and hold
deposits, pay money according to customers instructions, lend money, offer investment
advice, exchange foreign currencies, and so on. They make a profit from the difference
(known as a spread or a margin) between the interest rates they pay to lenders or
depositors and those they charge to borrowers. Banks also create credit, because the
money they lend , from their deposits, is generally spent (either on goods or services, or
to settle debts), and in this way transferred to another bank account often by way of a
bank transfer or a cheque (check) rather than the use of notes and coins - from where it
can be lent to another borrower, and so on. When lending money, bankers have to find a
balance between yield and risk, and between liquidity and different maturities.
2.............................................
Investment banks, often called merchant banks in Britain, raise funds for industry on the
various financial markets, finance international trade, issue and underwrite securities,
deal with takeover and mergers, and issue government bonds. They also generally offer
stock broking and portfolio management services to rich corporate and individual client.
Investment banks make their profits from the fees and commissions they charge for their
services.
3...............................................
In some European countries (notably Germany, Switzerland and Austria) there have
always been universal banks combining deposit and loan banking with share and bond
dealing and investment services, but for much of the 20 th century, American legislation
enforced a strict separation between commercial and investment banks. The GlassSteagall Act, passed during the Depression in 1934, prevented commercial banks from
underwriting securities. This act was repealed in 1999. The Japanese equivalent was
abolished the previous year, and the banking industry in Britain was also deregulated in
1990s, and financial conglomerates now combine the services previously offered by
banks, stockbrokers, and insurance companies.
4...............................................
A countrys minimum interest rate is usually fixed by the central bank. This is the
discount rate, at which the central bank makes secured loans to commercial banks. Banks

lend to blue chip borrowers (very safe large companies) at the base rate or the prime rate;
all other borrowers pay more, depending on their credit standing (or credit rating, or
credit worthiness): the lenders estimation of their present and future solvency. Borrowers
can usually get a lower interest rate if the loan is secured or guaranteed by some kind of
asset, known as collateral.
5.................................................
In most financial centers, there are also branches of lots of foreign banks, largely dong
Eurocurrency business, A Eurocurrency is any currency held outside its country of origin.
The first significant Eurocurrency market was for US dollars in Europe, but the name is
now used for foreign currencies held anywhere in the world (e.g. yen in the US, euros in
Japan). Since the US$ is the worlds most important trading currency and because the
US for the many years had a huge trade deficit there is a market of many billions of
Eurodollars, including the oil-exporting countries petrodollars. Although a central bank
can determine the minimum lending rate for its national currency it has no control over
foreign currencies. Furthermore, banks are not obliged to deposit any of their
Eurocurrency assets at 0% interest with the central bank, which means that they can
usually offer better rates to borrowers and depositors than in the home country.
Reading comprehension tasks
1. Summarize the text
2. Find the words or expressions in the text which mean the following
A To place money in a bank; or money placed in a bank
B The money used in countries other than ones own
C How much money a loan pays, expressed as a percentage
D Available cash, and how easily other assets can be turn into cash
E The date when a loan becomes repayable
F To guarantee to buys all the new shares that a company issues, if they can not
be sold to the public
G When a company buys or acquires another one
H When a company combines with another one
I Buying and selling stocks or shares for clients
J Taking care of all a clients investments
K The ending or relaxing of legal restrictions
L A group of companies, operating in different fields that have joined together
M A company considered to be without risk
N Ability to pay liabilities when they become due
O Anything that acts as a security or guarantee for a loan
3. Match up the verbs and nouns below to make common collocations
Charge

Advice

Do
Exchange
Issue
Make
Offer
Pay
Raise
Receive
Underwrite

Bonds
Business
Currencies
Deposits
Funds
Interest
Loans
Profits
Security issues

Exercises
Exercise 1
This exercise defines the most important kinds of bank. Fill in the blank the
name of each type of bank:
(1)............................................. supervise the banking system; fix the minimum interest
rate; issue bank notes, control the money supply; influence exchange rates; and act as
lender of last resort.
(2)............................................. are businesses that trade in money. They receive and hold
deposits in current account and saving accounts, pay money according to customers
instructions, lend money, and offer investment advice, foreign exchange facilities and so
on. In some countries such as England these banks have branches in all major towns, in
other countries there are smaller regional banks. Under American law, for example, banks
can operate in only one state. Some countries have banks that were originally confined to
a single industry, e.g. the Credit Agricole in France, but these now usually have a far
wider customer base.
In some European countries, notably Germany, Austria, and Switzerland, there are
(3)............................................. which combine deposit and loan banking with share and
bond dealing, investment advice, etc. yet even universal banks usually from a subsidiary,
known as a (4)............................................., to lend money at several per cent over the
base lending rate for hire purchase or installment credit, that is, loans to consumers that
are repaid in regular, equal monthly amounts.
In Britain, the USA and Japan, however, there is, or used to be, a strict separation
between commercial banks and banks that do stockbroking or bond dealing. Thus in
Britain, (5)............................................. specialize in raising funds for industry on the
various financial markets, financing international trade, issuing and underwriting
securities, dealing with takeovers and mergers, issuing government bonds, and so on.

They also offer stockbroking and portfolio management services to rich corporate and
individual clients. (6)............................................. in the USA are similar, but they can
only act as intermediaries offering advisory services, and do not offer loans themselves.
Yet despite the Glass-Steagall Act in the USA, and Article 65, imposed by the Americans
in Japan in 1945, which enforce this separation, the distinction between commercial and
merchant or investment banks has become less clear in recent years. Deregulations in the
US and Britain is leading to the creation of financial supermarkets conglomerates
combining the services previously offered by stockbrokers, banks, insurance companies,
etc.
In Britain there are also (7)............................................. that provide mortgages, i.e. they
lend money to home-buyers on the security of house and flats, and attract savers by
paying higher interest than the banks. The saving and loan associations in the United
States served a similar function, until most of them went spectacular bankrupt at the end
of the 1980s.
There are also (8)............................................. such as the World Bank or the European
Bank for Reconstruction and Development, which are generally concerned with
economic development.
Exercise 2
Complete the text using these words:
accounts
current account
lend
overdraft
return

bank loan
debt
liabilities
salary
transfer

cheque
depositors
liquidity
spread
wages

customers
deposits
optimize
standing order
withdraw

Commercial banks are businesses that trade in money. They receive and hold
(1).............................., pay money according to (2).............................. instructions,
(3).............................. money etc.
There are still many people in Britain who do not have bank (4)...............................
Traditionally, factory workers were paid (5).............................. in cash on Fridays. Nonmanual workers, however, usually receive a monthly (6).............................. in the form of
cheque or a (7).............................. paid directly into their bank account.
A (8).............................. usually pays little or no interest, but allows the holder to
(9).............................. his or her cash with no restrictions. Deposit accounts pay interest.

They do not usually provide (10).............................. facilities, and notice is often required
to withdraw money. (11).............................. and direct debits are ways of paying regular
bills at regular intervals.
Banks offer both loans and overdrafts. A (12).............................. is a fixed sum of money,
lent for a fixed period, on which interest is paid, bank usually require some form of
security or guarantee before lending. An (13).............................. is an arrangement by
which a customers can overdraw an account, i.e. run up a debt to an agreed limit; interest
on the (14).............................. is calculated daily.
Banks make a profit from the (15).............................. or differential between the interest
rates they pay on deposits and those they charge on loans. They are also able to lend more
money than they receive in deposits because (16).............................. rarely withdraw all
their money at the same time. In order to (17).............................. the return on their assets
(loans), bankers have to find a balance between yield and risk, and
(18).............................. and different maturities, and to match these with their
(19).............................. (deposits). The maturity of a loan is how long it will last; the yield
of the loan is its annual (20).............................. how much money it pays expressed as
a percentage.
Exercise 3
Match the words with the correct definitions:
1 dispenser
2 teller
3 cashier
4 withdrawal
5 balance
6 deposit
7 cheque
8 credit
9 debit
10 cash
11 statement

A The remaining amount of money in an account

B Money paid into a bank
C A record of the financial transactions of a person or
business
D An amount of money in an account
E Note to a bank asking it to pay money from your account
to a named person or business
F Money in the form of bank notes and coins
G An amount of money deducted from an account
H The removal of money from an account
I A machine or person who count out money
J A container designed to give out money in regulated
amounts
K A clerk who pays out and receive cash at a bank

Match the verbs with the correct explainations:

1 honour
2 present
3 draw

A pass the cheque through the clearing system

B write a cheque
C make two account agree

4 clear
5 cross
6 reconcile
7 adjust
8 circulate

D change an account
E move around the country
F draw two lines down the middle of a cheque
G show and ask for payment
H pay

Exercise 4
Put the correct prepositions to complete each sentence:
1. A cheque is simply an order to your bank to pay money ....................... your
account ....................... someone else.
2. A customer an pay ....................... cheque ....................... goods and services
3. With a bank card, the customers bank guarantees payment ....................... a limit,
say $500
4. When an account holder pays a cheque ....................... her bank, the bank credits
the amount of the cheque ....................... her account and sends the cheque to be
presented ....................... the drawers bank.
5. In Britain the clearing system is operated ....................... the Clearing House in
London.
6. The Clearing House adds up the total each bank owes to each other bank and
reconciles the difference ....................... the banks accounts ....................... the
Bank of England.
7. This process, from the time when the payee pays the cheque ....................... her
bank until the cheque is debited ....................... the drawers bank account, takes
three days.

Unit 8
Financing International Trade
Reading 1
Before you read
Discuss these questions.
1.
2.
3.

What are some of the risks involved in trading internationally?

What payment methods do you know that are used when exporting or importing goods?
What is the role of the banks in international trade?

Open Account

The goods, and relevant documents, are sent by the exporter directly to the overseas buyer, who will have agreed to
remit payment of the invoice back to the exporter upon arrival of the documents or within a certain period after the
invoice date. The exporter loses all control of the goods, trusting that payment will be made by the importer in
accordance with the original sales contract.
Documentary Credit
Documentary Credit is often referred to as a Letter of Credit. This is an undertaking issued by an overseas bank to a
UK exporter through a bank in the UK, to pay for the goods provided that the exporter complies fully with the
conditions established by the Documentary Credit.
Additional security can be obtained by obtaining the confirmation of a UK bank 1 to the transaction, thereby
transferring the responsibility from the importers bank overseas to a more familiar bank in the country of the
exporter.
Very few risks arise for the exporter because the potential problem areas of the buyer risk and country risk can be
eliminated. However, the exporter must present the correct documents and comply fully with the terms and
conditions of the credit. Failure to do so could result in the exporter losing the protection of the credit.
Bills for Collection
Trade collections are initiated when an exporter draws a bill of exchange on an overseas buyer. This is forwarded by
the exporters bank in the importers country.
Such collections may be either documentary or clean 2. A documentary collection is one in which the commercial
documents and, if appropriate, the documents of title to the goods are enclosed with the bill of exchange. These are
sent by the exporters bank to a bank in the importers country together with instructions to release the
documentation against either payment or acceptance of the bill.
The risks that the exporter has to face are that the importer fails to accept the bill of exchange or dishonors an
accepted bill3 upon maturity. This means that the exporter may have to consider shipping the goods back to the UK,
finding an alternative buyer or even abandoning the consignment, all of which could be expensive.
In many areas of the world it is common practice to defer presentation 4, payment or acceptance until arrival of the
carrying vessel. Collection and remittance charges can also be relatively high.
If the exporter retains control over the goods by remitting a full set of Bills of Lading 5 through the intermediary of
the banking system, control of the goods will be handed over to the importer only against payment or acceptance of
the bill by the importer. If the documents are released against the importers acceptance of the bill, control of the
goods is lost and the accepted bill of exchange may be dishonoured at maturity.
Advance Payment
Exporters receive payment from an overseas buyer in full, or in part, before the goods are dispatched. This means
that the exporter has no risks associated with non-payment.
1

This bank is then known as the confirming bank.

Clean means that no documents are involved.

The importer does not pay, although he had previously agreed to pay.

This means to delay passing the bill to the importer.

This means sending all the necessary shipping documents.

Reading tasks

A Understanding main points

Read the above text about payment methods for exporters and write the four methods in the correct positions
according to their risks for the exporter.
Least secure

Payment method:

Most secure

1.
2.
3.
4.

.open account......
.
.
.

B Understanding details
Mark these statements T (true) or F (false) according to the information in the text. Find the part of the text that
gives the correct information.
Open account
1.
2.
3.

The importer pays for the goods after receiving the documents. T
There is no contract involved.
The exporter must be able to trust the buyer.

Documentary credit
4.
5.

If a letter of credit is issued, the importers bank agrees to pay for the goods without conditions.
If a letter of credit is confirmed, the exporters bank takes responsibility for payment.

Bills for collection

6.
7.
8.
9.

Commercial documents and the document of title are always enclosed with a bill of exchange.
Importers may not accept the bill of exchange until the goods arrive.
Exporters can keep control of goods by sending bills of lading through the banking system.
Exporters reduce risk if documents are released against acceptance of the bill rather than payment.

Advance payment
10. This means that the importer has to pay before any goods are dispatched.
a) document that shows details of goods being transported; it entitles the receiver to collect
C Information search

the goods on arrival

b) list of goods sold as a request for payment
Match the risks (a-g) with the payment methods.
c) bank that issues a letter of credit (i.e. the importers bank)
1. Open account
Exporters
must comply
the conditions
of the
credit documents.
d) a) bank
that receives
paymentwith
of bills,
etc. for their
customers
account (i.e. the exporters
2. Documentary credit
b) Importers may delay payment.
bank)
3. Bills for collection
c) Importers may not pay at all.
e) document allowing someone to claim ownership of goods
4. Advance payment
d) It takes a long time to process payment in some countries.
f) payment by bill of exchange to which documents are not attached
e) Importers may not accept the bill of exchange.
g) signed document that orders a person or organization to pay a fixed sum of money on
f) Bank charges may be high.
g) demand
Exporters
take caredate
to present the correct documents.
or onmust
a specified
h) bank that confirms they will pay the exporter on evidence of shipment of goods
i) method of financing overseas trade where payment is made by a bank in return for
delivery of commercial documents, provided that the terms and conditions of the contract

Vocabulary Tasks

1. invoice
A
2. Key
cleanterms
collection
3. documentary collection
Match
terms with
4. bill these
of exchange
5. bill of lading
6. document of title
7. issuing bank
8. collecting bank
9. confirming bank
10. letter of credit

j)

are met
payment by bill of exchange to which commercial documents (and sometimes a document
of title) are attached

their definitions. Example: 1 b

B Word search
Find a word or phrase in the text that has a similar meaning.
1. promise or guarantee given to or by a bank (para 2)
u..
2. load of goods sent to a customer (para 7)
c
3. person or company that acts as a middleman in a transaction (para 9)
i
4. date when a bill of exchange is due for payment (para 9)
m
C Complete the sentence
Use an appropriate form of the words in the box to complete the sentences which describe the
procedure for documentary collection.
Draw

accept

dishonour

release

remit

forward

dispatch

present

present

1. The first step the exporter takes is to ask his bank to .draw.. a bill of exchange on
the overseas buyer.
2. The exporters bank . the bill of exchange, together with the commercial
documents, to the importers bank.
3. At the same time, the exporter. the goods.
4. The exporter must take care to .the correct documents to the bank.
5. When the importer.the bill of exchange, the bank will.the
documents of title to the goods.

6. If the importer..the bill, the exporter may have to find an alternative

buyer or ship the goods back again.
7. In some parts of the world, banks may be slow to ..payment to the
exporters bank.
D Further Discussion.
1. The above reading describes the risks of each payment method from the exporters point
of view. What are the risks for the importer? Which methods will be secure and why?
2. Imagine you are a banker talking to one of your customers who has never exported
before. Explain how documentary credit works.
3. Prepare a list of recommendations for either exporters or importers.

Reading 2: How a letter of credit works

1 Read about the first four steps in a transaction involving a letter of credit, and number
the steps 1 to 4, using the diagram below to help you.
The advising bank authenticates the letter of credit and sends the beneficiary (the seller)
the details. The seller examines the details of the letter of credit to make sure that he or
she can meet all the conditions. If necessary, he or she contacts the buyer and asks for
amendments to be made.
The applicant (the buyer) completes a contract with the seller.
The issuing bank (the buyers bank) approves the application and sends the letter of credit
details to the sellers bank (the advising bank).
The buyer fills in a letter of credit application form and sends it to his or her bank for
approval.

2 Now read about the next six steps, and number them 5 to 10 using the diagram below.
If the documents are in order, the advising bank sends them to the issuing bank for
payment or acceptance. If the details are not correct, the advising bank tells the seller and
waits for corrected documents or further instructions.

 The advising/confirming bank pays the seller and notifies him or her that the payment has
been made.
The issuing bank advises the advising (or confirming) bank that the payment has been
made.
The issuing bank (the buyers bank) examines the documents from the advising bank. If
they are in order, the bank releases the documents to the buyer, pays the money promised
or agrees to pay it in the future, and advises the buyer about the payment. (If the details
are not correct, the issuing bank contacts the buyer for authorization to pay or accept the
documents.) The buyer collects the goods.
The seller presents the documents to his or her bankers (the advising bank). The advising
bank examines these documents against the details of the letter of credit and the
International Chamber of Commerce rules.
When the seller (beneficiary) is satisfied with the conditions of the letter of credit, he or
she ships the goods.

Unit 9: Accounting and

Financial Statement
Remind people that profit is the difference between revenue and expense. This makes you
look smart Scott Adams (1957-), creator of the Dilbert comic strip.
Preparation of the accounts
The accounting process starts with inputs, and these are things such as sales
documents (e.g. invoices), purchasing documents (e.g. receipts), payroll records, bank
records, travel and entertainment records. The data in these inputs is then processed by
specialized software:
1. Entries are recorded chronologically into 'journals'.
2. Information from the journals is posted (= transferred) into 'ledgers', where it
accumulates in specific categories (eg cash account, sales account, or account for
one particular customer)
3. A 'trial balance' is prepared at the end of each accounting period: this is a
summary of the ledger information to check whether the figures are accurate. It
is used directly to prepare the main financial statements (income statement,
balance sheet and cash flow statement).
The financial statements of large companies have to be checked by an external firm of
auditors, who 'sign off on the accounts' (= officially declare the accounts are correct).
They are publicly available, and appear in the company's annual report. Users of
financial statements include: shareholders, potential shareholders, creditors (lenders, eg
banks), customers, suppliers, journalists, financial analysts, government agencies, etc.
Profit and Loss Account

The profit and loss account (= income statement, or just 'the P&L') summarizes business
activity over a period of time. It begins with total sales (= revenue) generated during a
month, quarter or year. Subsequent lines then deduct (= subtract) all of the costs
related to producing that revenue.
Balance Sheet
The balance sheet reports the company's financial condition on a specific date. The
basic equation that has to balance is: Assets = Liabilities + Shareholders' equity.
An 'asset' is anything of value owned by a business.
A 'liability' is any amount owed to a creditor.
Shareholders' equity (= owners' equity) is what remains from the assets after all
creditors have theoretically been paid. It is made up of two elements: share
capital (representing the original investment in the business when shares were
first issued) plus any retained profit (= reserves) that has accumulated over
time.
Note the order in which items are listed:
Assets are listed according to how easily they can be turned into cash, with
'current assets' being more liquid than 'fixed assets'.
Liabilities are listed according to how quickly creditors have to be paid, with
'current liabilities' (= bank debt, money owed to suppliers, unpaid salaries and
bills) being paid before 'long-term liabilities'.
Figures for 'current assets' and 'current liabilities' are particularly important to a
business. The amount by which the former exceeds the latter is called 'working
capital'. This gives a quick measure of whether there is enough cash freely available to
keep the business running.
Cash Flow Statement
Companies need a separate record of cash receipts and cash payments. Why is this?
Firstly for the reason given above -it shows the real cash that is available to keep the
business running day to day (profits are only on paper until the money actually comes
in). Secondly, there are many sophisticated techniques that accountants can use to
manipulate profit, whereas cash is real money. It's cash that pays the bills, not profits.
There are many reasons why companies can have a problem with cash flow, even if
the business is doing well. Amongst them are:

 Unexpected late payments, and non-payments (bad debts).

Unforeseen costs: a larger than expected tax bill, a strike, etc.
An unexpected drop in demand.
Investing too much in fixed assets.
Solutions might include:
Credit control: chasing overdue accounts.
Stock control: keeping low levels of stock, minimizing work-in-progress,
delivering to customers more quickly.
Expenditure control: delaying spending on capital equipment.
A sales promotion to generate cash quickly.
Using an outside company to recover a debt (called 'factoring').

Accounting and Financial Statements

Study the simplified financial statements for an imaginary retail store. All figures are in
OOOs. The convention in accounting is that a negative figure is shown by a bracket. To
understand the figures, work from the right:
the right-hand column shows totals for each major category
the central column shows information that is used in producing the figures to the
right
the left-hand column shows details of the calculations in the central column.
Vocabulary in financial statements is surprisingly non-standard, with many companies
using a mixture of US and European terms. See the right-hand column for alternatives,
more detail, etc.
Profit and Loss Account (Income Statement)
Revenue (= income / turnover / sales / the top line)
'Cost of goods sold' (= direct costs) includes manufacturing costs, salaries of manual (=
blue-collar) workers etc.
'Operating expenses' (= indirect costs / overhead) include salaries of sales and office
staff, marketing costs, utility bills etc.

'Non-operating income' includes profits from investments in other companies.

'EBITDA' stands for Earnings Before Interest, Tax, Depreciation and Amortization.
'Earnings' (= profit / the bottom line)
'Depreciation' and 'Amortization' are very similar, and are often used in the same way.
However, 'depreciation' can refer to the loss in value of a tangible asset (e.g. a vehicle),
and 'amortization' to the loss in value of an intangible asset (e.g. the purchase of a licence
or trademark). This loss over time is treated as a cost and written off (= subtracted from the
profit) over several years.
'Interest' refers to money paid to the bank for loans (or received from the bank for
cash balances).
'Dividends' is money paid to shareholders.
'Retained profit' is transferred to the Balance Sheet, where it joins the amounts from
previous years.
Profit and Loss Account (Income Statement)
For the Year Ended December 31, 20XX
Revenues
Gross sales
Less: Sales returns
Less: Sales discount

640
6
4
(10)

Net sales
Cost of goods sold
Purchases
Salaries of manual workers
Transport costs
Cost of goods sold

290
30
30

Gross profit
Operating expenses
Selling expenses
Salaries for sales staff

630

(350
)
280

82

Advertising
Total

18
selling

expenses
General expenses
Salaries for admin staff
Insurance
Rent
Light, heat and power
Office supplies
Miscellaneous
Total
general
expenses
Total operating expenses

100

52
6
18
10
2
2

Operating profit
Non-operating income
EBITDA
Depreciation
EBIT
Interest paid on bank loans
Net income before taxes
Less: Income tax
Net income (or loss) after tax
Dividends
Retained profit

90

5
(10)
(6)
(19)
(13)

(190
)
90
95
85
79
60
47

Balance Sheet, December 31, 20XX

Technical terms
'Accounts receivable' is the amount owed to the business by customers (= creditors).
'Inventory' is the value of raw materials & stock.
'Current assets' may also include 'marketable securities' (= shares intended for disposal within
one year).
'Fixtures' are part of a building that cannot be moved, such as lights.
'Fixed assets' may also include long-term financial investments.
'Intangible assets' include patents, trademarks & 'goodwill' (reputation, contacts and
expertise of companies that have been bought).

ASSETS
Current assets
Cash at bank
Accounts receivable
Inventory
Total current assets
Fixed assets
Building and improvements
Less:
accumulated
depreciation

15
200
180
395
300
(90)
210

Equipment and vehicles

Less:
accumulated
depreciation

120
(80)

Furniture and fixtures

Less:
accumulated
depreciation

20
(8)

40

12

Total fixed assets

262

Intangible assets
Total intangible assets
Total assets

20
677

'Bank debt' (= loan capital) also includes any overdraft (= temporary negative balance).
'Accounts payable' is the money owed to suppliers.
'Accrued' items are those where an expense has been incurred, but the money is not yet paid.
'Accrued salaries' typically includes future bonuses.
Another item, 'provisions', can appear under current liabilities. These are amounts set aside
for anticipated one-time payments that are not part of regular operations - perhaps a lawsuit, or
a compensation package for employees being laid off.

A 'mortgage' is a long-term bank loan to buy a property. With bonds, the'principal' (=

amount raised by issuing the bonds) is repayable to the bond holders at 'maturity'.
'Share capital' (=common stock, Am.E.) is amount raised at initial flotation on the stock
market.
'Retained profit' (= Reserves / Retained earnings). The figure showing here is more than the
47,000 transferred from the income statement because it is an amount accumulated over
several years.
LIABILITIES AND EQUITY
Current liabilities
Bank debt
Accounts payable
Accrued taxes
Accrued salaries
Total current liabilities
Long-term liabilities
Mortgage
Bonds payable (due mar 2018)
Total long-term liabilities
Total liabilities
Shareholders equity
Shared
capital
(300,000
shares @ 1)
Retained profit
Total owners equity
Total liabilities &
equity

20
30
22
45
117
100
20

120
237

300
140

440
677

Exercise 1: Fill in the missing letters

1. On a balance sheet, assets are what you ow_ and liabilities are what you ow_.
2. The loss in value of a tangible asset over time is called d_ _ _ _ _ _ _ _ _ _n. this
loss is w_ _ _ _en o_ _ in the accounts over several years. The loss in value of an
intangible asset is called am_ _ _ _ _ _ _ _ _n.
3. The term debtor is now often replaced with accounts rec_ _ _ _ _le. Similarly,
creditor is often replaced with account p_ _ _ _ le.

4. The total value of raw materials + work-in-progress + unsold stock is called in_ _ _ _
_ _y.
5. Expenses that have been incurred but are not yet paid are called acc_ _ _d expenses.
6. The extent to which a firm relies on debt financing rather than equity financing is
called its lev_ _age.
Exercise 2: Underline the correct words from those in italics
The terms 'direct costs' and variable costs' are close synonyms. They both refer to
things like raw materials costs and the wages of manual (= blue collar) workers. But:
to emphasize costs which increase in proportion to any rise in output, say (1)
direct costs/ variable costs
to emphasize costs which can be identified with one particular product, say (2)
direct costs / variable costs.
Similarly, the terms 'fixed costs', 'indirect costs' and 'operating costs' are close
synonyms. They all refer to things like advertising, rent and the salaries of office staff.
But:
to emphasize costs which stay the same at all levels of output in the short term,
say (3) fixed costs / operating costs
to emphasize costs which result from the whole business (rent, utilities, etc), not
any particular products, say (4) indirect costs / operating costs. A synonym
here is 'overhead' (BrE overheads).
to emphasize costs resulting from the day-to-day activities of the business
(products and processes), say (5) fixed costs / operating costs.
There are many other types of 'costs' referred to in finance and accounting. Two of the
most important are:
(6) capital expenditure / capitalism expenditure - the costs of buying or
upgrading physical assets like buildings and machinery; often referred to in
business as 'capex'
(7) mark-up costs / marginal costs - the costs of increasing output by one more
unit.
Exercise 3: Put the words into the correct column.
Accounts payable
Shareholders equity
EBITDA
Trial balance
Current assets

Cost of goods sold

Invoices

Ledger

Operating expenses

Preparation of
accounts

Profit and loss

account

Balance sheet

Exercise 4: Read the passage and answer the questions that follow
Companies are required by law to give their shareholders certain financial
information. Most companies include three financial statements in their annual
reports.
The profit and loss account shows revenue and expenditure. It gives figures for total
sales or turnover (the amount of business done by the company during the year), and
for costs and overheads. The first figure should be greater than the second: there should
generally be a profit - an excess of income over expenditure. Part of the profit is paid
to the government in taxation, part is usually distributed to shareholders as a
dividend, and part is retained by the company to finance further growth, to repay
debts, to allow for future losses, and so on.
The balance sheet shows the financial situation of the company on a particular date,
generally the last day of its financial year. It lists the company's assets, its liabilities,
and shareholders' funds. A business's assets consist of its cash investments and property
(buildings, machines, and so on), and debtors - amounts of money owed by customers
for goods or services purchased on credit. Liabilities consist of all the money that a
company will have to pay to someone else, such as taxes, debts, interest and mortgage
payments, as well as money owed to suppliers for purchases made on credit, which are
grouped together on the balance sheet as creditors. Negative items on financial
statements such as creditors, taxation, and dividends paid are usually printed in
brackets thus: (5200).
The basic accounting equation, in accordance with the principle of double-entry
bookkeeping, is that Assets = Liabilities + Owners' (or Shareholders') Equity. This can,
of course, also be written as Assets - Liabilities = Equity. An alternative term for
Shareholders' Equity is Net Assets. This includes share capital (money received from the
issue of shares), sometimes share premium (money realized by selling shares at above
their nominal value), and the company's reserves, including the year's retained profits.
A company's market capitalization - the total value of its shares at any given moment,

equal to the number of shares times their market price - is generally higher than
shareholders' equity or net assets, because items such as goodwill are not recorded under
net assets.
A third financial statement has several names: the source and application of funds
statement, the sources and uses of funds statement, the funds flow statement, the cash
flow statement, the movements of funds statement, or in the USA the statement of
changes in financial position. As all these alternative names suggest, this statement
shows the flow of cash in and out of the business between balance sheet dates. Sources
of funds include trading profits, depreciation provisions, borrowing, the sale of assets,
and the issuing of shares. Applications of funds include the purchase of fixed or financial
assets, the payment of dividends and the repayment of loans, and, in a bad year, trading
losses.
If a company has a majority interest in other companies, the balance sheets and profit
and loss accounts of the parent company and the subsidiaries are normally combined in
consolidated accounts.
According to the text, are the following TRUE or FALSE?
1. Company profits are generally divided three ways.
2. Balance sheets show a company's financial situation on 31 Dec.
1. The totals in balance sheets generally include sums of money that have not yet been
paid.
4. Assets are what you own; liabilities are what you owe.
5. Ideally, managers would like financial statements to contain no items
in brackets.
6. Limited companies cannot make a loss because assets always equal
shareholders' equity.
7. A company's shares are often worth more than its assets.
8. The two sides of a funds flow statement show trading profits and losses.
9. Depreciation is a source rather than a use of funds.
10. A consolidated account is a combination of a balance sheet and a profit and loss
account.
The text above contains various British terms that are not used in the USA.
Match up the following British and American terms:

British

American

1. Creditors

a. Accounts payable

2. Debtors

b.
receivable

3. Overheads

c. income statement

4. Profit
and
account

loss

accounts

d. overhead

5. Shareholder

e. paid-in surplus

6. Share premium

f. stockholder.

Unit 10
Mergers and acquisitions
1 + 1 = 3???
Before you read
Discuss these questions.
3 What is a merger?
4 What is a takeover?
5 Why do companies merge?
6 Why do companies buy other companies?
7 Think of recent merger or takeover that was reported in the press: what were the
reasons behind it?
A

Successful companies generally want to diversify; to introduce new products or

services, and enter new markets. Yet entering new markets with new brands is
usually a slow, expensive and risky process, so buying another company with
existing products and customers is often cheaper and safer. If a company is too big
to acquire, another possibility is to merge with it, forming a new company out of the
tow old ones. Apart from diversifying, reasons for acquiring companies include
getting stronger position in a market and a larger market share, reducing
competition, benefiting from economies of scale, and making use of plant and
equipment.
There are two ways to acquire a company: a raid or a takeover bid. A raid simply
involves buying as many of a companys stocks as possible on the stock market. Of
course if there is more demand for stock than there are sellers, this increases the
stock price. A takeover bid is a public offer to a companys stockholders to buy their
stocks at a certain price (higher than the current market price) during a limited

period of time. This can be much more expensive than a raid, because if all the
stockholders accept the bid, the buyer has to purchase 100% of the companys
stocks, even though they only need 50% plus one to gain control of a company. (In
fact they often need much less, a many stockholders do not vote at stockholders
meetings.) If stockholders accept a bid, but receive stocks in the other company
instead of cash, it is not always clear if the operation is a takeover or a merger
journalists sometimes use both terms.
C

Companies are sometimes encouraged to take over other ones by investment banks,
if researchers in their Mergers and Acquisitions departments consider that the target
companies are undervalued. Banks can earn high fees for advising on takeovers.

Yet there are also a number of good arguments against takeovers. Diversification
can damage a companys image, goodwill and shared values (e.g. quality, good
service, innovation). After a hostile takeovers (where the managers of a company do
not want it to be taken over), the top executives of the newly acquired company are
often replaced or choose to leave. This is a problem if what made the company
special was its staff (or human capital) rather than its products and customer base.
Furthermore, a companys optimum size or market share can be quite small, and
large conglomerates can become unmanageable an inefficient. Takeovers do not
always result in synergy. In fact, statistics show that most mergers and acquisitions
reduce rather than increase the companys value.

Consequently, corporate raider and private equity companies look for large
conglomerates (formed by a serious of takeovers) which have become inefficient,
and so are undervalued. In other words, their market capitalization (the price of all
their stocks) is less than the value of their total assets, including land, buildings and
unfortunately pension funds. Raiders can borrow money, usually by issuing
bond, and buy the companies. They then split them up or sell off the assets, and then
pay back the bonds while making a large profit. Until the law was changed, they
were also able to appropriate the pension funds. This is known as asset-stripping,
and such takeovers are called leveraged buyouts or LBOs. If a companys own
managers buy its stocks, this is a management buyout of MBO.

Reading comprehension tasks

4. Understanding main points
Read the text and match the titles (1- 5) to the paragraphs (A-E).
1
Disadvantages of takeovers
2
Raiders and assets-stripping
3
Raids and bids
4
The make-or-buy decision
5
The role of banks
5. Understanding details
Find words or phrases in the text that mean the following:

1
2
3
4
5
6
7
8
9
10

Adding new and different products or services

A companys sales expressed as a percentage of the total
sales in a market
Reductions in costs resulting from increased production
Money paid to investment banks for work done
All the individuals or organizations that regularly or
occasionally purchase goods or services from a
company
Best, perfect or idea (adjective)
Combined production or productivity that is greater
than the sum of the separate parts
People or companies that try to buy and sell other
companies to make a profit
Large corporation or groups of companies offering a
number of different products or services
Buying a company in order to sell its most valuable
assets at a profit

TYPES OF MERGERS

More Exercises
Background
Horizontal
Two companies making the same product combined. Aims:
- To reduce completion and increase market share
- To gain access to new markets
- To acquire additional plants and equipment
- To achieve synergy and economies of scale.
Vertical
A company either acquires or merges with another company in an immediatelyrelated stage of production and distribution. This may be a supplier or immediate
customer. Aims:
- To guarantee the supply and cost of raw materials and components.
- To be closer to the customer, by cutting out the wholesaler for example,
and dealing directly with the retail trade.
Diversification
A company acquires another company in an entirely different sphere. Aim:
- To move into a sector which promises greater growth or profits.
You are going to read about the merger between Daimler-Benz and the American
car manufacturer Chrysler

MERGER MOST FOUL

Mega-mergers are the celebrity weddings of the corporate world, and all too often the
shareholders are left heartbroken.
Last week another marriage appeared to be in trouble when Daimler-Chrysler
announced thousands of job costs. Will it join the 83% of corporate tie-ups that end in
failure? According to work by consultancy KPMG they should have known it was
unlikely they would be able to deliver on their promises.
It found that 83% of mergers failed to produce any benefits or shareholders and more
than half actually destroyed value. The seeds of a mergers destruction are often sown
before it is even completed, with management too optimistic about prospects for the
enlarged group and too confident they can overcome cultural barriers. Both accusations
can be made at the 25 billion merger of US car group Chrysler with German giant
Daimler-Benz.
John Thorp, head of finance and accounting at European Business School in London
said, There was a total clash of cultures and they were not good at communicating their
strategy. The clashes led to many of the US executives quitting after cashing in millions
of share options. More damaging to shareholders were over confident financial targets
that were not met and which resulted in a steady decline in the share price. The result is
that the company is now worth less than Daimler-Benz alone was worth before the deal.
Jobs are being cut and there numerous of a takeover bid.
Investment strategist James Montier said that over-optimism by management was a
major reason why merged companies failed to perform well. John Kelly, UK head of
KPMGs Merger and Acquisition Integration said, About 75% of mergers failed because
of the ways the companies were integrated.
Daimler-Chrysler enjoyed about six months of improved share price before the problems
started. This is common for mergers where shareholders give companies a short
breathing space to prove themselves. With the evidence so strong against mergers
succeeding, it is astounding that last year; corporation worldwide spent more than 2
billion on mergers and acquisitions.
If everyone knows the marriage is doomed why do they have the nuptials? According to
Thorp, It is about survival. Businesses cannot afford to be static these days. In the car
industry, for example, economies of scale are vital as is access to an increased number of
markets. Daimler-Benz believed its link with Chrysler would allow it to sell more
Mercedes in the US. KPMGs Kelly said, The key strategic rationale at the moment for
mergers is What happens if we dont?. A lot of mergers are defensive in nature. He
added that companies are worried that if they do not get together for mutual protection,
they would either be taken over or lose customers to more powerful rivals.

A less justifiable reason is management egos and the endless desire of advisers to earn
fees. KPMG is about to publish research following its initial study of 700 cross-border
deals. It will show that the 17% of mergers it had found had succeeded did so
spectacularly and shares in the new groups began to outperform the stock market and
their peers. Montier says, Successful mergers tend to between companies with similar
businesses that can produce ongoing cost efficiencies rather than one-off savings. One
glowing example has been BP. Its share price has grown from strength to strength
following its merger with US rival Amoco two years ago. Though successes are rare, the
few that prosper prove that not all corporate celebrity marriages are doomed at the altar.
Financial Mail on Sunday
Exercise 1: Reading comprehension
Read the first two paragraphs of the article. According to the Consultancy KPMGs
research about mergers:
a. How many are successful/
b. What effect do they have on the value of a company?
c. What are two key reasons for their failure?
Read the rest of the article. Who believes:
d. That mergers fail because of:
- The way the two companies are combined?
- Differences in culture?
- Unrealistic expectations about the future success of the new company?
e. That companies merger essentially:
- From fear of competition?
- To ensure their survival in a global market place?
Read the text again and answer the questions.
f. Why is the writer so surprised at the money spent on mergers?
g. What motivated Daimler- Benz to merge with Chrysler?
h. What were the direct consequences of the culture clash?
i. How important are individual personalities in mergers?
j. Why has the BP Amoco merger succeed when others have failed?
Exercise 2: Vocabulary
The writer uses idiomatic language throughout the text.
1. Find examples of words and expressions which are related to marriage. Why do
you think the writer uses this metaphor?
2. Take a word from box A and combine it with word from box B to form
collocations.
A
cost

share
financial

B
options
efficiency

job

stock
share

cuts

target
strategy

investment
takeover
market

price
bid

Exercise 3: Summary and Presentation

Make a few notes under each heading to summarize the article:
- Reasons for mergers
-

Problems with mergers

Types of mergers

Exercise 4: Internet searching

Now use the notes to present a brief summary answering these questions:
- What problems can occur with mergers?
- If the risks are so great, why do companies merge?
Support your ideas with specific examples from Internet.
Exercise 5: Language focus
Here are some linking words and expressions that can be used to describe cause and
effect:
so
to bring about
to lead to
CAUSE
to result in
EFFECT
to cause
to mean

EFFECT

as a result of
because
to result from
to arise from
to be due to
to be caused by

CAUSE

Examples:
I was offered a better job in a bank so I left the insurance company.
Deregulation brought about major changes in the financial industry.
Major changes have arisen from the deregulation of the financial industry.
Look at the sentences about Procter and Gamble and Gillette, and make new sentences
describing cause and effect.
28 January 2005: Procter and Gamble announces that it is going to buy Gillette for $57
billion.

28 January 2005: Gillette rises nearly 13% on Wall Street, while P&G drop 2.1%.
P&G predicts cost savings of between $14 billion and $16 billion from economies of
scale and restructuring of the two companies. The combined companies sales will be
over $60 billion a year.
10 April 2005: The US Federal Trade Commission (FTC) approves the acquisition, as
long as the companies divest some overlapping product lines, so as to restore competition
in the market.
July 2005: Shareholders of both companies approve the proposed merger.
July 2005: The European Union approves the merger, as long as P&G sells its line of
battery-operated toothbrushes.
1 October 2005: The purchase is finalized. P&G exchanges its common stock for Gillette
stock. Gillette shareholders get an 18% premium on the closing share prices of 27
January 2005.
The Gillette Company ceases to exist and its stocks are no longer traded.
P&G becomes the worlds biggest household goods maker.
6,000 people, 4% of the combined workforce of 140,000, lose their jobs because of
overlaps in management and business support functions.
January 2006: P&G announces a 27% increase in sales and a 29% in net earnings.