Letter E

Earnings Before Interest and Taxes: The profits earned by a company before deducting interest and taxes. It is a measure of how profitable the company is, without taking into account the impact of capital structure and tax planning.

Economic Value Added (EVA): Economic Value Added (EVA) is the present value of future cash flows, in excess of that required to service the cost of capital. EVA has become an increasingly popular way to financially evaluate both new and existing business strategies. It can also be used to identify businesses for disposal and closure and any new acquisition or alliance.

EVA is based on cash flows rather than conventional accounting profit measurement. Cash flows are a better indicator of the economic worth of a business than accounting profits which are often distorted by many non-cash adjustments. EVA also takes into account longer-term cash flows whereas accounting profit is by and large shorter term oriented. Also, using EVA, it is possible to trade off long and short term cash flows thereby avoiding short-termism in economic valuation of strategic decisions. EVA Analysis helps firms to understand how best to increase shareholder value: reinvesting in existing businesses, investing in new businesses, or returning cash to stockholders. By making the cost of capital visible to executives, EVA encourages investment in projects that increase shareholder value.

EVA Analysis consists of three steps. The income generated by a business is first determined. Then the return required by investors, i.e. the cost of capital is estimated. For some businesses, one cost of capital is sufficient. However, if business units have vastly different situations or levels of risk, separate costs of capital may need to be calculated. The EVA of each business is determined by subtracting expected return to shareholders from the value created by the firm or business unit. Firms with positive EVA generate profits above that expected by shareholders.

Economies of Scale: Refers to the cost savings that a company can achieve due to a larger scale of operations. When the volume of production increases, the average unit cost tends to decline. In other words, doubling the output results in a less than double the increase in costs, as factor inputs can be used more efficiently. The fixed costs can be spread over many units of output. A large scale of operations can also lead to job specialization and consequently higher labor productivity. Bulk buying may reduce input costs. Larger firms also enjoy a lower cost of capital. Banks may charge lower rates of interest and equity investors may be more willing to accept low dividend yields from bigger firms, if they feel a large firm is less risky.
(See Diseconomies of Scale)

Economies of Scope: Economies of scope arise when, by widening the product range, a company can reduce the average unit cost for each product. It occurs when highly specialized inputs or expensive infrastructure such as a logistics/distribution network can be shared by different goods. Firms can hire specialist computer programmers, designers and marketing experts, leverage their skills across the product range, thereby spreading their costs and lowering the average total cost of production of each of the products. FMCG companies like Hindustan Lever and ITC can generate economies of scope by pushing a wide range of products through the existing distribution network.

Emotional Intelligence: There is growing evidence that emotional balance plays a far more critical role than IQ in the success of professionals in their careers. There are five components of emotional intelligence - Self-awareness, Self-regulation, Personal Motivation, Empathy and Social Skills. Self-awareness means having a deep understanding of one's emotions, strengths, weaknesses, needs, and drives. Self-regulation means the ability to control one’s feelings. A high level of personal motivation is another trait of emotionally intelligent leaders. Empathy means thoughtfully considering the feelings of employees along with other factors in the process of making intelligent decisions. Social skills imply the ability to develop relationships with people and get the work done.

Stephen Covey has explained the relationship between Emotional Intelligence and the Seven Habits of highly effective people.

Self-awareness: An awareness of self, of the freedom and power to choose, is the core of Be Proactive. Human beings are aware of the environmental forces around them and can make wise choices.

Self-regulation: This is another way of expressing Put First Things First and Sharpen the saw. People must decide what their priorities are and live by them. They must master what they intend to do, live by their values and constantly renew themselves.

Personal Motivation: Personal motivation is the basis for choices. People must decide what their highest priorities, goals and values are. That’s essentially what Begin with the end in mind is all about.

Empathy: Empathy is the first half of Seek First to Understand, Then to Be Understood. It’s learning to understand the viewpoints and emotions of other people and becoming socially very sensitive and aware of the situation before attempting to influence others.

Social Skills: Think win-win, Seek First to Understand, then to be Understood help build social skills.
(See Leadership, Personal Effectiveness)

End-game Strategies: They are plans for dealing with the decline phase of the product or industry life cycle. It is wrongly believed that the only way to respond to declining sales is to cut prices or prune marketing spending. But other options may be available to reverse the decline phase and create a new growth trajectory. For example, products can be repositioned or new market segments identified.
(See Product Life Cycle)

Enterprise Resource Planning: Enterprise resource planning (ERP) systems are information systems that integrate and automate many of the business processes across the various functions of an organization like manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting. ERP facilitates better control of many business activities, like sales, delivery, billing, production, inventory management, quality management, and human resources management by providing real time information. ERP systems are often called back office systems indicating that customers and the general public are not directly involved, unlike front office systems eg., customer relationship management (CRM) systems that deal directly with the customers.
(See Customer Relationship Management)

Enterprise Risk Management: In a fast changing environment, risks are many and diverse. So risk management is becoming an increasingly important discipline. Enterprise Risk Management (ERM) involves the identification, measurement and control of various risks an organization faces, in a systematic and integrated way. By considering the interrelationships that exist among different risks and all the risk mitigation mechanisms available, risk can be managed more effectively.

The essence of ERM is changing the way decisions are made, by systematically collecting and processing information. ERM should not be viewed as a defensive tool. Rather, it is about creating conditions which encourage managers to achieve the right balance between minimizing risks and exploiting new opportunities. Indeed, the ultimate aim of ERM is to make available a steady stream of cash flows that can be utilized to maximize shareholders’ wealth.
(See Risk)
Entrepreneurship: In simple terms, entrepreneurship is the practice of starting a new business. Since many new businesses fail, it is widely believed that entrepreneurship is risky. However, if the risks involved are carefully understood and managed well, there is no reason, an entrepreneurial venture cannot succeed. Another point to be noted is that entrepreneurship can also be displayed by professional managers in the way they identify and pursue opportunities.
Our understanding of entrepreneurship owes a lot to the work of the famous economist, Joseph Schumpeter. Schumpeter (1950) viewed an entrepreneur as a person, willing and able to convert a new idea or invention into a successful innovation. According to Schumpeter, entrepreneurship forces "creative destruction" across markets and industries, creating new products and business models while eliminating others. Creative destruction is largely responsible for the dynamism of industries and long-run economic growth.
There are different views of entrepreneurship. Entrepreneurs are persons who are willing to put their career and financial security on the line for an idea, spending their time and capital, working on it in an uncertain venture. An entrepreneur can also be described as a person who excels in discovering, evaluating and exploiting opportunities. Another way of viewing an entrepreneur is as "someone who acts without regard to the resources currently under his control in relentless pursuit of opportunity". (Jeffry A Timmons).
Environmental Scanning: Understanding the environment is the starting point of strategic planning. Various environmental factors have an impact on the business. These include:

Political Political parties in power, Anti-trust legislation, Regulatory framework, etc.
Economic Availability of credit, interest rates, inflation, GNP growth rate, etc.
Social Beliefs, attitudes, values, opinions, lifestyles of customers, etc.

Technological Degree of obsolescence, speed of innovation, etc.
Competitive position Market share, Breadth of product line, Distribution network, Raw material costs, Operational efficiency, R & D capabilities, etc.
Customer profile Geographic, demographic, psychographic segmentation, consumer behavior, etc.

Environmental scanning involves systematically collecting information about all these factors to identify threats and opportunities and formulate appropriate responses.

There are three ways of scanning the business environment. Ad-hoc Scanning involves short term, infrequent examinations, often in response to a crisis. Regular scanning involves studies done according to a regular schedule. Continuous scanning involves structured data collection on an ongoing basis and processing with respect to a wide range of environmental factors. In today's turbulent business environment, continuous scanning is necessary to enable firms to act quickly, take advantage of opportunities before competitors do, and respond to threats effectively.
(See SWOT Analysis)

Experience Curve: As companies accumulate experience, people learn to do their jobs more efficiently and effectively because of accumulated learning. So costs come down significantly over time. That puts the firm in a position to cut the price and expand the market further. One strategy which firms can pursue is to start with a relatively high price and bring down the price progressively over time.
(See Barriers to Entry)