In recent years the corporate world is facing a financial crisis severe enough. This resulted in many large companies out of business, aka bankrupt. This situation eventually forced the surviving company to be able to maintain the continuity of his life can compete with other companies. To be able to perform its activities and can compete with other companies will require either funds or capital obtained from investors and creditors. The funds would be obtained if the company gain the confidence of lenders and investors. Confidence that can be obtained if the firm is able to demonstrate good performance, which can be measured by profits from the company.
Profit is one of the company's goal than to be able to survive (going concern). Earnings quality is the profit that could reflect the continuation of future earnings (Djamaluddin, 2008: 55). Purpose financial statements is to provide information useful for decision making. To facilitate these objectives, the Financial Accounting Standards (IFRSs) set a criterion that should possess in order to use accounting information in decision making. The main criterion is relevant and reliable (Kusuma, 2006: 5). Accounting information is said to be relevant if it can influence the decision to confirm or change the expectations of decision makers, and the information is said to be reliable if it can be trusted and cause the user's information relies on such information.
Reported earnings is also the basis for tax assessment. Often there is a difference between accounting income to taxable profit. This difference is due to differences in their respective destinations in reporting earnings. The difference between accounting profit and taxable profit (book-tax differences) can provide information about earnings quality. The underlying logic is that there is little freedom is allowed in the accounting measurement of taxable profit. According Djamaluddin (2008: 56) the difference between accounting profit and taxable profit (book-tax differences) can provide information about accruals management discretion. The persistence of accounting earnings is revised in the expected accounting profit in the future (expected future earnings) are implicated by the current year's profit (Djamaluddin, 2008: 55). The magnitude of this revision shows the level of earnings persistence. The persistence of earnings is one component of value peridiktif profit, because profit persistence is an element of relevance, then some of the information in the book-tax differences that may affect the persistence of earnings, it can assist investors in determining the quality of earnings and corporate value. But there are still many opinions for and against a statement of whether the book-tax differences may reflect information about earnings persistence.
Manufacturing company is one of several types of companies listed on stock exchanges Indonesia .. Researchers chose manufacturing firms as manufacturing companies are not directly affected by government regulation, in which one component is a tax the government regulations, and to facilitate classify items disclosed.
Based on the description of the background research that has been argued previously, it is the formulation of the problem in this study is whether the difference between accounting profit and taxable profit affects the persistence of earnings coming period. Based on the formulation of the problem that exists, then the purpose of this study was to determine the effect of the difference between accounting profit and taxable profit on the persistence of earnings coming period either simultaneously or partial.
2. Reader Review.
2.1 Earnings Management.
Management as the party most responsible for the performance of the company will attempt to show good performance. The performance of an enterprise can be seen from the profits generated through the company's financial statements. In making financial statements, management sometimes use GAAP flexibility to choose methods appropriate to the company, often resulting in earnings management practices implementation.
Definitions of earnings management has been no definite. Many opinions are expressed understanding of earnings management based on the angle panadang respectively. According to Healey and Walen in Kusuma (2006: 6) is reviewed from the point of view of standard setting bodies declared
Earnings management occurs when management uses in financial reporting policies and in arranging the transaction and change the financial statements and menyesatkam stakeholders on the economic performance of the company or influence contractual outcomes that depend on reported accounting numbers.2.2 Profit Accounting and Income Tax
According to the seventh paragraph of SFAS 46 accounting profit is net profit or loss for a period before deducting tax expense. Meanwhile, the taxable income or taxable profit (taxable profit) or loss (tax loss) is the profit or loss for a period which is calculated based on tax regulations and the basis for calculating income tax.
2.3 Difference Between Accounting And Income Tax Income
In the taxation laws of Indonesia requires the calculation of taxable profit based on the method of accounting on which the calculation of accounting profit. Thus, in making financial statements do not have to do twice the books based on both objective reporting. The difference between accounting income with taxable profit marked by a fiscal correction of accounting profit. Almost all of the profit generated accounting fiscal correction should have to earn taxable income because not all provisions in the financial accounting standards and tax laws used in other words a lot of tax provisions that are not the same as the Financial Accounting Standards (Djamaluddin, 2008: 56)a. Differences Remain (Permanent Different)
Permanent differences are a consequence that must be accepted that it should be excluded from the income statement because it is based on the fiscal or tax regulations can not be charged or not an income. Permanent differences occur because the transaction - transaction revenues and expenses are recognized according to commercial accounting and not recognized by fiscal (Official, 2005: 333). Included in this is the distinction fixed bank interest income, dividends and other income that the nature of the final tax collection; dividends received by persroan limited, cooperatives, foundations, state / local enterprises, interest received by mutual fund companies, and other types of income are dikecualiakan from the object of taxation; remuneration in kind, donations, fees / expenses for the interest deduction pribaidi owners and to others who are not allowed under the fiscal (nondeductible expenses).b. While differences (Temporary Different)Temporary differences are differences between the tax base (DPP) of an asset or liability (Fiscal) with a carrying value of these assets and liabilities (Commercial), which resulted in an increase or increased profit or reduced next fiscal period earnings next fiscal period, at which time the carrying value of the asset is realized or settled. According Harnanto (2003: 113) temporary differences have resulted in the recognition of assets and deferred tax liabilities occurring or arising where:1) the income and / or expense that must be recognized for the calculation of taxable profit and accounting profit for the calculation of the different periods,2) part of the cost in a business combination, which in substance is an acquisition, is allocated to specific assets or liabilities based on fair value adjustments to the accounting and thus are not allowed by tax regulations,3) goodwill or negative goodwill arising on consolidation,2.4 Causes of Differences Between Accounting Earnings and Profits Tax
According to the Official (2005:331) the causes of differences in commercial financial report and fiscal financial report is due to the differences in the recognition principle; differences in accounting methods and procedures; differences in the recognition of income and expenses.
Broadly speaking, income tax accounting principles are as follows:a) Current income tax paid or payable is less recognized as Current Tax Liability (Tax Debt) while the more paid called Current Tax Assets (Receivables Tax),b) the future tax consequences that can be distributed taxable temporary differences are recognized Deferred Tax Liability, whereas the effects of deductible temporary differences and losses not compensated for the rest of Deferred Tax Assets are recognized,c) measurement of tax liabilities and assets based on tax rules apply.
Difference methods and accounting procedures according to the Official (2005: 331) is:a) method of inventory valuation. Commercial accounting allowed to choose some method of calculating the cost of inventory. Meanwhile, according to tax only allows FIFO and Average methods for inventory valuation.b) methods of depreciation and amortization. Commercial accounting depreciation method allows to choose such a straight-line method, the number of years, declining balance, method of production units and others. While based taxation recognizes only straight-line method and declining balance for the group of non-building types of tangible property, intangible property while the building can be limited using the straight-line method
2.5 The persistence of Accounting Earnings.
The persistence of accounting earnings is revised in the expected accounting profit in the future (expected future earnings) are implicated by the current year's accounting earnings (current earnings) (Pennman in Djamluddin, 2008: 57). The magnitude of this revision shows the level of earnings persistence. Innovations on current earnings is informative of future earnings ekspektasian, the future benefits earned shareholders.
Hanlon in Djamaluddin (2008) states that there are some arguments for and against a statement of whether the book-tax differences may reflect information about earnings persistence. Arguments supporting some of the literature comes from the financial analysis which states that the increase in earnings reported by management caused by the method of choice in the process of accrual accounting will cause a big difference between accounting profit and taxable profit. Djamaluddin (2008: 58) states that an increase in deferred tax debt, which reflects the accounting income is greater than the taxable profit earnings quality indicates worsening. While opposing opinion that the book-tax differences may reflect information about earnings persistence now is that there is an explanation that the book-tax differences can be generated through tax-planning strategies.
2.6 A conceptual framework.
Conceptual framework is a synthesis of review of theory and review penelitain earlier. Variable differences between accounting profit and taxable profit is moderating variables that may affect the relationship the dependent variable and independent variables to be positive or negative. Variable profit before tax at this time as the independent variable and the variable profit before tax which will come as the dependent variable. The difference between accounting profit and taxable profit as moderating variables may affect the relationship between accounting profit before tax at this time of accounting profit before tax period to come. Impact that can strengthen or weaken the relationship of independent variables to variable dependen.Persistensi profit is a measure that can describe the company's ability to maintain profits in the future now.
The relationship between accounting profit before tax at the moment and the difference between accounting profit and taxable profit against profit before tax coming period can be described as follows:
Accounting profit before tax in the future
Independent variable dependent variableThe difference between accounting profit and taxable profit
Accounting profit before tax at this time
Variable Moderation
Variable Moderation
2.7 Research Hypothesis
The hypothesis is that the answer must be verifiable while on a research carried out in order to simplify the analysis. The hypothesis of this study is the difference between accounting profit and taxable profit affects the persistence of future earnings over a period of partial amupun both simultaneously.
3. Research Methods.
In this study using design to analyze the causal relationship between a variable with another variable (Umar, 2001 63) The population in this study is the entire field of manufacturing companies listed on stock exchanges of Indonesia. In this case the researchers chose a public company engaged in manufacturing diindustri consideration the number of samples that can be obtained and the reliability of the cost (benefit) cost of deferred tax is presented. Other industries such as banking, too much influenced by government regulation. The population in the study amounted to 151 firms in manufacturing (Indonesia Capital Market Directory, 2008).
The sampling criteria used were:1. manufacturing companies listed on the Stock Exchange and publish audited financial statements are consistent and complete from 2005 to 2007.
and does not exit (delisting) of the JSE during the study period (2005-2007)2. financial statements using the currency of Indonesia and the period end financial statements as of December 31.3. company does not lose in the general financial statements and tax financial statements for the year of observation. The reason is because the losses can be compensated for reducing the cost of the future tax liabilities4. manufacturing company that provides financial company profits are reported not to have fluctuations that are too low and too high.
In the present study the independent variable that is the difference between accounting profit and taxable profit (book-tax differences) as a proxy for discretionary accruals is the difference between accounting profit and taxable profit book-tax differences variable is a variable representing moderation subsample firms with large positive difference, and the big difference the negative. All variables PTBI research PTBI t and t +1 divided by average total assets.
4. Data Analysis Methods.
4.1 Classical Assumptions Test
Methods of data analysis method used is a simple regression analysis and multiple regression with the help of SPSS software or Windows. The use of regression analysis methods in testing the hypothesis terledih first tested whether the model meets the assumptions of classical or not. The test consists of testing the assumption of normality, multicollinearity test, autocorrelation test, and test heterokedasitas.
4.1.1 Normality Test.
Data normality test aims to test whether the regression model, or residual confounding variables have a normal distribution. Based on the results of statistical tests with the model-Smirnov kolmogrov. Asymp value is known. Sig (2-tailed) for model 1 and model 2 are 0261 and 0.183. And both are greater than 0.05.
Heroes of Olympus, The, Book Two: The Son of Neptune
(see complete click the picture)
Jason is a boy who suffers from amnesia. He wakes up on a bus not remembering anything from his past, even who he is, and he was sitting next to Piper, a girl claiming to be his girlfriend, and Leo Valdez, a boy who claims to be his best friend. In a field trip to the Grand Canyon, storm spirits attack the three while their supervising teacher, Coach Gleeson Hedge, reveals himself to be a satyr, and fights for their lives. Jason surprises himself by using a sword disguised as a coin to fight off the spirits, and Coach Hedge is captured while defending them. At the height of the battle, two pegasi land next to them carrying strangers: a girl named Annabeth, a daughter of Athena and a boy with a tattoo of a rainbow named Butch, a son of Iris. Annabeth is angry because she had a vision that she would find a clue to her missing boyfriend, Percy Jackson, at the Grand Canyon. She was told to look for the "one with the missing shoe." Jason, who has lost a shoe in the battle, has no memories of his own identity, let alone Percy Jackson's whereabouts. Jason, Piper and Leo are informed that they are demigods (children of a god and a mortal) and are taken back to Camp Half-Blood where they meet other demigod children like themselves. There, Leo is revealed as a son of Hephaestus, Piper as a daughter of Aphrodite, and Jason as a son of Zeus and the brother of Thalia. He remembers his sister while seeing a picture of her in Cabin One. After scarcely a day after learning about their previously hidden identities, the three receive an urgent quest to rescue Hera, queen of the gods, who was captured by unnamed forces The three friends set off on the back of a giant robotic dragon, Festus (which in Latin means "happy") on a cross-country quest to save Hera and Piper's father from the clutches of Enceladus. Their enemies are under orders from Gaea to reawaken her and overthrow the Olympian gods by pulling up their original roots in Greece. On their way, Jason, Piper and Leo meet Boreas the North Wind (who lives in Quebec city), a trio of cyclopes, the evil enchantress Medea, King Midas, a pack of werewolves and King Lycaon (who got turned into a wolf by Zeus in Mythology) and Lord of the Winds, Aeolus who had given them something very helpful: A picture of a ship with a dragon head that Leo had drawn when he was a small child.. In the end the heroes and their friends, the Hunters of Artemis, manage to save both Piper's father and Hera, whose godly energies were being used to raise the giant Porphyrion. They temporarily stall Gaea's plans, but they will have to face the giants again. With part of his memory returned, Jason realizes that he is a hero from a Roman counterpart to Camp Half-Blood that is somewhere near San Francisco, and that Hera has switched him with the Greek hero Percy Jackson, who is now at the Roman camp with no memory of his life at Camp Half-Blood.
Steve Jobs
(see complete click the picture)
Steven Paul Jobs was born in San Francisco, California on February 24 1955. His biological parents, unwed college graduates Joanne Simpson and Abdulfattah Jandali, had him adopted by a lower-middle-class couple from south of the Bay Area, Paul and Clara Jobs.
Young Steve grew up in a valley of apricot orchards that was already turning into the world center of computer technology: Silicon Valley. It was not uncommon to see engineers fill their garages with all kind of electronic devices in that part of California. Steve Jobs was fascinated by these, and that’s why, in 1969, he met with a computer whiz kid who shared his interests in electronics: Stephen Wozniak — commonly known as Woz. Steve and Woz quickly became friends even though Woz was five years older.
When Steve Jobs reached college age, he decided he would go to Reed College in Oregon. It was an expensive liberal arts college, way too pricey for his modest parents; but they had to keep their promise to Steve’s biological mother, and therefore paid for the tuition. Steve only stayed at Reed for one semester though, after which he dropped out. He then spent a lot of time learning about Eastern mysticism and adopted strange diets, fasting or eating only fruits: it was his hippie period. He even traveled to India with a friend to seek enlightenment at age 19.
Apple’s early years (1975-81)
After Steve came back to the Valley, he focused on Woz’s work on a computer board. Woz was attending a group of early personal computer hobbyists called the Homebrew Computer Club, where he got the idea of designing his own computer (which consisted only of a circuit board at the time). Steve Jobs saw that many people were interested in his friend’s brilliant work: he suggested they sell the board to them. Apple Computer was born.
Apple’s first year in business consisted of assembling the boards in Steve’s garage and driving to local computer stores to try and sell them. Meanwhile, Woz worked on a new, much improved computer, the Apple II, which he basically finished in 1977. Both Woz and Steve knew the Apple II was a breakthrough computer, much more advanced than anything the market had ever seen. That’s why Steve set out to find venture capitalists to fund Apple’s expansion. After a while, he made a deal with Mike Markkula, an enthusiastic former Intel executive who invested $250,000 in their business and assured them their company would enter the Fortune 500 list in less than two years.
Mike was right. The Apple II soon became the symbol of the personal computing revolution worldwide. It crushed all competition both because of its breakthrough hardware features (including its color graphics) and its very large supply of compatible software. The key to Apple II’s success was actually VisiCalc, the first spreadsheet program ever brought to market. Thousands of people bought Apple IIs just to use it. As a result, the company grew at a very fast rate, and went public after just four years of existence, in December 1980. Steve Jobs’ net worth passed the $200 million mark on that day — he was only 25.
But Apple’s success was threatened, as industry giant IBM was planning to enter the personal computer market in 1981. Apple had to fight back or they would go out of business in a couple of years’ time. Their Apple III computer had already bombed on the marketplace. They focused all their energy on a project headed by Steve Jobs: Lisa. He had named it after his ex-girlfriend’s daughter, although he denied all paternity (that difficult situation actually caused him to miss Time Magazine’s Man of the Year 1982). The Lisa computer was a breakthrough because it used a graphical user interface instead of a command-line interface. This technology, like many others that would revolutionize computing, was invented at Xerox PARC — but Apple was the first company to bring it to market.
Macintosh (1981-85)
Yet Steve Jobs was soon thrown out of the Lisa project because he was considered too temperamental a manager. Deeply angry, he took revenge by taking over a small project called Macintosh, determined to make it a cheaper GUI computer that would cannibalize sales of Lisa. Macintosh was in development since 1979 and its concept was “a computer as easy to use as a toaster.” Steve Jobs recruited brilliant young engineers in his Mac team and invigorated them by insufflating a spirit of entrepreneurship and rebellion, calling them “pirates”, unlike the rest of the company, “the Navy.”
Even though the Mac project was controversial as it threatened both Apple II and Lisa, and because Steve Jobs antagonized it against the rest of the company, it soon became crucial to Apple’s future because Lisa proved yet another market failure. Steve was supported in his mission by John Sculley, Apple’s CEO, whom he hired in 1983 to help him run the company and groom him into a top executive. In January 1984, he introduced Macintosh in great fanfare.
Although Mac’s first months were encouraging, sales soon started to plummet. There was growing fear in the company that this third flop in a row would put Apple out of business. Besides, Steve Jobs’ continued arrogance drove everyone nuts, starting with CEO John Sculley. After a failed board coup initiated by Jobs in mid-1985, Sculley announced he and the directors had agreed on a new org chart for Apple, in which Steve had no managerial duties whatsoever. He was only to remain chairman of the board.
Steve was stunned. Apple was his life, and he was kicked out of it. He started traveling around looking for new ways to spend his energy. It was actually in that second half of 1985 that he was introduced to a small team of brilliant computer graphics experts that George Lucas was trying to sell. They all shared a common dream of making animated movies with computers. Steve was interested and he eventually bought the company for $10 million in 1986, incorporating it as Pixar.
The NeXT years (1985-95)
Yet his main passion was still to make great computers. In September 1985, he announced to the Apple board that he was going to found a new company, called NeXT, to build an advanced computer for higher education and scientific research. He was going to take with him some of the best engineers and salesmen from the Mac team. Apple disapproved and threatened to sue him. It was at that point that Steve left his company for good and sold almost all of his stock in disgust.
NeXT started work on its computer in early 1986, after Apple dropped its lawsuit. Steve aimed at the highest possible standards for his new machine: he wanted the best hardware, built in the world’s most automated factory, and running the most advanced software possible. He decided the computer’s operating system, NeXTSTEP, would be based on UNIX, the most robust and most complex system in the world — but that it would also be as easy to use as a Macintosh, thanks to its own graphical user interface. In addition, it would make software development real easy with its object-oriented programming technology. These ambitious plans put off the release date of the computer — called the NeXT Cube — to October 1988.
However great it was, the NeXT Cube didn’t sell. It was overpriced and missing useful software. NeXT struggled for years to sell it, expanding its target from just education to businesses, and introducing a cheaper box, the NeXT Station. Yet the number of computers they sold each month remained in the hundreds. The company was bleeding money and all its co-founders left one after the other, as well as its first outside investor, Texan billionaire Ross Perot. By 1993, NeXT had to give up its hardware business and focus only on promoting its advanced software technology. NeXT Software, far from beating Apple, had turned into a niche software development business. Steve was devastated.
In addition, his investment in Pixar also seemed to lead nowhere. The small company had tried to sell advanced graphic workstations to specialized markets since it had been founded, without success. Jobs shut down Pixar’s hardware operations in 1990, decided to focus on developing an advanced 3D language called RenderMan. He kept the animation division, headed by John Lasseter, only because its work on TV commercials were one of the company’s only source of revenues. Hope was brought by a contract with Disney to make a full feature film with computers in 1991. But by the end of 1993, the contract was canceled by Burbank. With both his ventures failing, Steve had reached the nadir of his career. He spent most of his days at home with his young son Reed and his wife Laurene, whom he had married in 1991.
Comeback (1995-97)
Fortunately, as John Lasseter came back to Disney with an improved script for the feature film, called Toy Story, the project got back on track. The movie was to be released for Thanksgiving 1995. As the date approached, Steve Jobs realized what an incredible power the Disney brand was. He decided Pixar would go public the week after the release of Toy Story, cashing in on the media hype surrounding the first computer-generated animation movie of all time. It worked wonders: Toy Story’s box-office success was only surpassed by the Pixar stock’s success on Wall Street. Steve Jobs, who owned 80% of the company, saw his net worth rise to over $1.5 billion — five times the money he had ever made at Apple in the 1980s!
Speaking of Apple, the fruit company was in the midst of his worst year ever. After the release of Windows 95, the Mac, which had turned profitable but had failed to evolve for a decade while Steve Jobs was away, started losing market share at an alarming rate. By 1996, the company’s newly appointed CEO, Gil Amelio, was looking for new software to replace the old and bloated Mac OS. He eventually chose Steve’s NeXTSTEP. Apple paid $400 million to acquire NeXT, and Steve was back to the company that had thrown him out a decade earlier. His official title was that of “informal adviser to the CEO.”
But when Amelio announced Apple’s losses of $700 million for the first quarter of 1997, the board decided it was time to get rid of this terrible manager. Steve Jobs organized a board coup and was named interim CEO of Apple in July 1997. He immediately started an extensive review of the whole company, cutting the number of projects from hundreds to a dozen. The number of hardware products would be cut down to just four. He also made a shocking announcement at Macworld Boston in August: Apple would be teaming up with its arch-rival Microsoft, in an unprecedented deal that would put an end to interminable patent disputes.
Apple back on track (1998-2001)
Steve Jobs quickly gave confidence back to the Apple community. The company launched a revolutionary marketing campaign around a new slogan: Think Different, spreading the idea that people who used Macs were dreamers who could change the world. As the Apple brand grew stronger, the company launched a couple of new successful products, the Power Mac G3 and the PowerBook. Six months after he had come back, Steve Jobs had led the company to profitability.
Yet Apple’s resurgence really came a little later, when Steve introduced a new, amazing consumer desktop computer: iMac. Introduced in May 1998, it was Apple’s first really innovative product basically since the original Macintosh in 1984. The iMac’s stunning translucent design blew away the whole personal computer industry, which had failed to produce anything but black or beige boxes for over a decade. Moreover, iMac was a hot seller, and it was essential in bringing back tons of developers to the Mac platform. Design innovations continued throughout 1998 and 1999 with the colored iMacs and iBook, Apple’s consumer notebook. After three years in charge, Steve Jobs had brought Apple back to greatness. That’s why he finally accepted to become full-time CEO of Apple in January 2000 — the first time one man became CEO of two public companies at the same time.
Still, the very reason Steve Jobs was brought back to Apple had not yet materialize — it was to bring NeXT’s software technology to the Mac platform. This eventually happened in early 2001, as Apple released the first version of its breakthrough operating system, Mac OS X. Mac OS X was really NeXTSTEP with a Mac facade. But it turned out an essential asset to Apple as the company developed breakthrough applications for its Macs as part of the digital hub strategy.
The digital hub strategy was unveiled by Steve Jobs at Macworld San Francisco in January 2001. It was a vision for the future of the personal computer. Although many analysts and self-appointed experts were proclaiming PCs would disappear within a couple of years to be replaced by Internet terminals, Apple believed they would evolve into digital centers or hubs for our new digital lifestyles. In other words, the PC would become the centerpiece of our new lives filled with digital cameras and camcorders, MP3 players, smart phones and other digital devices. The digital hub strategy led Apple to develop a suite of applications designed to manage our new lifestyle, the so-called iApps: iMovie (1999), iTunes (2001), iDVD (2001), iPhoto (2002), iCal and iSync (2002), GarageBand (2004) and finally iWeb (2006). The iApps were a strategic move in Apple’s greater plan to gain market share over the PC, as there was simply no equivalent solution on the Windows platform. Other moves included an aggressive ad campaign (Switchers) and the start of Apple’s retail operations in mid-2001.
The iPod revolution (2001-2006)
However the greatest momentum for Apple came from an unexpected source: the iPod. iPod was an integral part of the digital hub strategy. It was started in early 2001, when Steve Jobs realized that he had misplaced his enthusiasm for “desktop video”, i.e. the ability to edit movies on the computer — which was still far from mainstream. What was really hot at the turn of the century was not movies but digital music, as exemplified by the success of Napster. He focused on catching up and bought an outside hardware developer to work on Apple’s own MP3 player, which was brought to market in record time, just in time for 2001’s holiday season.
iPod’s breakthrough features — its beautiful design, its brilliant user interface and click wheel, its fast FireWire connectivity and its ability to sync with iTunes seamlessly — made it a hot seller from the start. For the first time, people were buying Macs just so they could use this little music player the size of a cigarette box. Apple cashed in on that success and went further in the following years, first by making iPod Windows-compatible in 2002, then by opening the iTunes Music Store and developing a Windows version of iTunes in 2003.
As of 2006, after Apple had continually pushed innovation in its music business by introducing iPod mini in 2004, iPod shuffle then iPod nano in 2005, and expanded its Music Store internationally, it had become the undisputed leader of the new digital music era. A significant landmark was passed in 2006 when Apple’s revenues from iPod equaled those made on computers. For the first time in its history, the firm from Cupertino had left its niche markets to become as influential a player in consumer electronics as Microsoft was in the PC space. iPod’s market share was close to 75%!
The Pixar-Disney merger (2003-2006)
Interestingly enough, iPod also played a critical role in setting Pixar’s future. After having released success after success (A Bug’s Life (1998), Toy Story 2 (1999), Monsters Inc. (2001) and Finding Nemo (2003)), the animation studio had decided to let go of its distribution deal with Disney, mainly because of increasing tensions between Steve Jobs and Disney CEO Michael Eisner. Steve Jobs openly said he would not make another deal with the Magic Kingdom until Eisner was out. Turns out his opinion was shared by many an executive at Disney — including Walt’s own nephew, Roy Disney, who started a public campaign to oust the company’s CEO. This led to the nomination of Bob Iger as new CEO in March 2005.
Steve Jobs and Bob Iger started working together because Apple decided to sell TV shows on its iTunes store. In October 2005, in front of an audience of stunned journalists, Steve Jobs shook hands (as Apple’s boss) with the new CEO of Disney — implying a renewed cooperation with Pixar in the near future. This eventually led to no less than the merger of both companies, announced in January 2006. Steve Jobs, who still owned half of Pixar’s stock, became Disney’s largest individual shareholder (owning 7% of the company’s stock). As for Pixar executives Ed Catmull and John Lasseter, they were given critical roles in the new studio.
Apple Inc. (2006-today)
2006 was a critical year for Apple in three respects.
The first was the success of the Mac. Mac sales were finally taking off, and after years of struggle to gain market share, its growth rate was exceeding that of the PC. Several factors accounted for this historic change: the success of iPod of course, and the positive side effect it had on the Apple brand. The move to Intel as well: after years of fighting the so-called Wintel monopoly, Steve had announced in 2005 that the company would start using Intel processors in their Macs form then on. The entire product line was transitioned over in less than a year. Intel Macs were faster and cheaper, but their main advantage was their ability to run Windows — which was a key argument in making Windows users switch, afraid as they were not to find their favorite software on the Mac. Finally, Apple was encountering unexpected success with its chain of retail stores, the fastest growing in the US.
The second crucial development from 2006 was the full acceptance by Apple of its new status of consumer electronics powerhouse, thanks to the success of iPod, the walkman of the digital age. It became obvious in February 2006, when the company released iPod hi-fi, a boom-box designed to work only with iPod (which was discontinued the following year), and Apple TV less than a year later. But the biggest move of course came in January 2007, when Steve Jobs introduced iPhone at Macworld. iPhone was arguably the ultimate Apple product. Its beautiful hardware ran no less than Apple’s full operating system, OS X. Its multi-touch technology, Web surfing and iPod capabilities, easy-to-use interface, and more, made it a smartphone “light-years ahead of its competition”, as Steve Jobs said. It shook the phone industry to its core, down to the exclusive deal that Apple cut with AT&T for subscription plans. Three years after it was introduced, it is already fair to say that iPhone will go down in history as the first digital convergence device, equivalent to putting a computer, an iPod and a phone in your pocket. It was such an obvious part of Apple’s move outside the PC business that Steve announced at the end of Macworld 2007 that the company’s name would be changed from Apple Computer Inc. to Apple Inc.
Finally, the third major event of 2006 for Steve was the so-called backdating scandal. Backdating consists of picking a date in the past, when a stock's value is lower, to assign the exercise price of options. It is an illegal practice that was commonplace in Silicon Valley until it was exposed by a Wall Street Journal article in 2006. Apple swiftly hired lawyers to lead an internal investigation of its own records. They did find irregularities, which were confirmed by the SEC in mid-2007. Two big frauds were unveiled that took place in 2000 and 2001, under Steve Jobs’ leadership. However he was cleared the following year as the SEC found out he had no idea of the legal or accounting implications of the matter. The SEC only charged Apple’s former CFO and legal counsel with fraud. The scandal was significant in the sense that it raised the issue of Apple’s future without Steve Jobs... But the main occasion this issue was raised was not the SEC investigation, it was unfortunately after Steve’s health problems.
In late 2003, Steve was diagnosed with pancreatic cancer. Fortunately, his tumor was not of the deadly type: Steve would be saved if he agreed to have surgery. But he didn’t, and for nine long months, followed a special type of diet that he thought would cure him from the disease. It was only in August 2004 that he agreed to have the surgery. Everybody thought the troubles were over, as he claimed he was “cured”. Of course there is no such thing as being cured from cancer, and in 2008, people started commenting heavily on Steve’s being increasingly thinner. Although he and Apple kept on denying any serious problem, in December 2008, they announced to everyone’s surprise that the CEO would not go on stage for the last Macworld keynote in history in January 2009. Steve Jobs took six months off (the first half of 2009), as he was awaiting a liver transplant — which he got in April 2009. The whole story of Steve’s cancer raised many a discussion about a public company’s necessary transparency regarding its CEO’s health, especially when that CEO is as essential to its market value as Steve Jobs is to Apple’s.
2010 has seen the incredible rebirth of Steve Jobs as a very active CEO. In sharp contrast with 2009, he came back on stage for many Apple events that year, and surprised the world many times over with insanely great new Apple products. The biggest announcement of all was undeniably iPad, Apple’s iOS-based tablet, which Steve unveiled on January 27, 2010. At the industry conference D8 in June 2010, Steve Jobs clearly stated that in his opinion, iPad had started the post-PC era, and that PCs would eventually become “like trucks”, a marginal part of a market dominated by portable tablets... If this comes true, this one man Steve Jobs will have played a crucial part in both giving birth and putting an end to the personal computer industry.
Conclusion
Steve Jobs is undeniably an extraordinary man by any standard. He has left his mark on no less than five industries: personal computers with Apple II and Macintosh, music with iPod and iTunes, phone with iPhone, and animation with Pixar. The middle-class hippie kid with no college education that he was built a computer empire and became a multi-millionaire in a few years, was fired from his own company before coming back a decade later to save it and turn it into one of the world’s most influential corporations, with millions of fans around the world. He has also contributed to the creation of the new leader in animated movies for decades to come. He has been called a fluke for years, but is now widely acknowledged as one the world’s most eminent business executives and an unrivaled visionary. He has changed millions of lives by making technology easy-to-use, exciting and beautiful.… And you know what the best part is? He’s not done yet.
Case Study of Apple Inc: “Think Different”
Steve Jobs and Steve Wozniak founded Apple on April 1, 1976. The two Steves, Jobs and Woz (as he is commonly referred to – see woz.org), have personalities that persist throughout Apple’s products, even today. Jobs was the consummate salesperson and visionary while Woz was the inquisitive technical genius. Woz developed his own homemade computer and Jobs saw its commercial potential. After selling 50 Apple I computer kits to Paul Terrell’s Byte Shop in Mountain View, CA, Jobs and Woz sought financing to sell their improved version, the Apple II.
They found their financier in Mike Markkula, who in turn hired Michael Scott to be CEO. The company introduced the Apple II on April 17, 1977, at the same time Commodore released their PET computer. Once the Apple II came with Visicalc, the progenitor of the modern spreadsheet program, sales increased dramatically. In 1979, Apple initiated three projects in order to stay ahead of the competition: 1) the Apple III – their business oriented machine, 2) the Lisa – the planned successor to the Apple III, and 3) Macintosh.
In 1980, the company released the Apple III to the public and was a commercial flop. It was too expensive and had several design flaws that made for less-than-stellar quality. One design flaw was a lack of cooling fans, which allowed chips to overheat. In late 1980, Apple went public, making the two Steves and Markkula wealthy – to the tune of nine figures. By 1981, the Apple III was not selling well and Scott infamously fired 40 people on Feb 25 (“Black Wednesday”). Scott’s direct management style conflicted with the culture Jobs and Markkula preferred, and Scott resigned in July. Markkula stepped into his position as CEO. In August 1981, IBM released their PC. Unimpressed and unafraid, Apple welcomed IBM to the PC market with a slightly smug full-page ad in the Wall Street Journal. It would not be long before IBM’s PC dominated the market.
The Xerox Alto was the inspiration for Apple’s Lisa. Apple employees were able to examine the Alto in exchange for allowing Xerox to invest in Apple before Apple’s initial public offering (IPO). Apple released the Lisa in January 1983 and was notable for being the first computer sold to the public that utilized a Graphic User Interface (GUI). Unfortunately, the Lisa was not compatible with existing computers, and therefore came bundled “with everything and a list price to match.” At $9,995 (over $21,000 in 2005 dollars), the Lisa missed its target market by a wide margin.
Jobs attempted to control the Lisa project. Scott, unimpressed with the performance of Jobs on the Apple III project, had Jobs head up the dog-and-pony show for the pending IPO. Jobs, looking for a project to lead, inserted himself into the Macintosh development team. Using his considerable influence, Jobs was able to procure the resources to produce a computer that was faster than Lisa, used a GUI, had a mouse, and sold for ¼th of Lisa’s price. Apple introduced the Macintosh with great fanfare during the 1984 Super Bowl. The Orwellian-themed commercial (directed by Ridley Scott, of ‘Alien’ fame) portrayed IBM as Big Brother and embodied Macintosh and Apple as freedom-seeking individuals breaking away from this oppressive regime.The commercial was largely successful and sales for the Mac started strong. However, Mac sales later faded. John Sculley left PepsiCo to join Apple in April 1983. He was famous for engineering the “Pepsi Challenge”, in which blinded testers tasted both Coke and Pepsi to unveil the ‘truth’ of the taste of Pepsi. In response to lagging Mac sales, Sculley contrived the ‘Test Drive a Macintosh’ campaign. In this promotion, prospective users could take home a Macintosh with only a refundable deposit on their credit card. While lauded by the public and the advertising industry, this campaign was a burden on dealers and significantly impeded the availability of Macs to serious buyers. In 1985, Apple tried to have lightening strike twice with their ‘Lemmings’ commercial during the Super Bowl. In what was becoming Apple’s typical patronizing fashion, this commercial insulted current PC users by portraying them as witless lemmings, unthinkingly doing harm to themselves. Although Jobs attempted to overthrow Sculley, the board backed Sculley. Jobs left Apple to form NeXT computer. After Jobs left in 1985, sales of the Mac “exploded when Apple’s LaserWriter met Aldus PageMaker.” Apple dominated the desktop publishing market for years to come. Under Sculley, Apple grew from $600 million in annual sales to $8 billion in annual sales by 1993. Apple introduced Mac Portables in 1989 and the first PowerBooks in 1991. By 1992, PC competition ate into Apple’s margins and earnings were falling. Sculley was under pressure to have Apple produce another breakout product. He focused his energy on the Newton – Apple’s introduction of the Personal Digital Assistant (PDA). Despite Sculley generating substantial demand for Newton, it did not live up to the hype due to it being severely underdeveloped. Sculley resigned in 1993 and Michael Spindler replaced him.
Spindler spent most of his time and energies on regaining profitability, with the end goal of finding a buyer for Apple. Over the next several years, Spindler shopped Apple to Sun Microsystems, Eastman Kodak, AT&T, and IBM. Meanwhile, Apple was unable to meet the growing demand for its products due to supplier problems and faulty demand predictions. To add insult to injury, Microsoft released Windows 95 with great fanfare in 1995. After significant quarterly losses in 1996, the board replaced Spindler with Dr. Gil Amelio, CEO of National Semiconductor. Dr. Amelio tried to bring Apple back to basics, simplifying the product lines and restructuring the company. One of Apple’s most pressing issues at the time was releasing their next generation operating system (code named “Copland”) to compete with Windows 95. Amelio and his technology officers found that Copland was so behind schedule that they looked outside the company to purchase a new OS. Ultimately, and somewhat ironically, they decided to purchase NeXT computer from Jobs. Naturally, Apple welcomed Jobs back into the fold. The board became increasingly impatient with Amelio due to sales not rebounding quickly enough. Apple bought out Amelio’s contract after just 1 ½ years on the job. Jobs eventually claimed the CEO position. Then, he cleaned house by revamping the board of directors and even replacing Mike Markkula (who had been with the company since the beginning). Jobs simultaneously put an end to the fledgling clone licensing agreements (which created a few Mac clones) and entered into cross-licensing agreements with Microsoft. On May 6, 1998, Apple introduced the new iMac, a product so secret that most Apple employees had never heard of it. The new iMac was a runaway success with its translucent case, all-in-one architecture, and ease of use. It brought Apple to a new market of users – those who had never owned a computer before. Jobs further simplified the product lines into four quadrants along two axes: Desktop and Portable on one, Professional and Consumer on the other. Apple completed the matrix with the introduction of the consumer-based iBook in 1999.
The year 2001 was an important year for consumers of Apple products. Apple opened their first 25 retail stores (totaling 163 stores in 4 countries as of May 2006). In September 2001, Apple introduced the new iMac featuring a screen on a swivel.The new iPods (portable music players) were a tremendous success. Apple sold so many that Apple’s dependence on Mac sales was significantly less. This was no small feat considering that the 2001 iMac became Apple’s best-selling product “by a long shot”. Apple offered iTunes (a free application) to help their consumers organize music on iPods and Macs.
In 2003, Apple expanded iTunes by 1) opening the iTunes music store to allow Mac users to purchase music online and 2) expanding iTunes to Windows users. Sales of iPods skyrocketed and currently provide the bulk of product sales to Apple. In 2005, Apple announced that it would start using Intel-based chips to run Macintosh computers. In April 2006, Apple announced Boot Camp, which allows users of Intel-based Macs to boot either Mac or Windows OS. This functionality allows users who may need both OSs to own just one machine to run both, albeit not simultaneously.
The three major competitors of Apple are Dell, Hewlett-Packard and IBM, however Apple also competes with Microsoft in software industry. Dell is the largest computer manufacturer with extremely low cost production strategy. Dell has entered the in the line of music against Apple by its Jukebox. Hewlett Packard is a big brand name and leading provider of technology. Apple combined with IBM enjoyed profit jointly but now Lenovo took over IBM and become a competitor of Apple.
Apple’s new products like speech recognition program will help take industry into a new age of computers and is according to the company’s motto and it is hoped that it will double the profit margin in the near future. Overall, Apple is continuously growing and its future seems bright. With the slight change in their strategies, they can become giants in technology industry.
Case Study of Dell: Driving for Industry Leadership
In 1984, at the age of 19, Michael Dell founded Dell Computer with a simple vision and business concept—that personal computers could be built to order and sold directly to customers. Michael Dell believed his approach to the PC business had two advantages: (1) bypassing distributors and retail dealers eliminated the markups of resellers and (2) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components, and finished goods. While the company sometimes struggled during the 1986-1993 period trying to refine its strategy, build an adequate infrastructure, and establish market credibility against better-known rivals, Dell’s strategy started to click into full gear in the late 1990s. Going into 2003, Dell’s sell-direct and build-to-order business model and strategy had provided the company with the most efficient procurement, manufacturing, and distribution capabilities in the global PC industry and given Dell a substantial cost and profit margin advantage over rival PC vendors. Dell’s operating costs ran about 10 percent of revenues in 2002, compared to 21 percent of revenues at Hewlett Packard, 25 percent at Gateway, and 46 percent at Cisco Systems (considered the world’s most efficient producer of networking equipment). Dell’s low-cost provider status was powering its drive for market leadership in a growing number of product categories.
Dell Computer was solidly entrenched as the market leader in PC sales in the U.S., with nearly a 28 percent market share in 2002, comfortably ahead of Hewlett Packard with 16.8 percent and Gateway with 5.7 percent. Dell had moved ahead of IBM into second place during 1998 and then overtaken Compaq Computer as the U.S. sales leader in the third quarter of 1999. Its market share leadership in the U.S. had widened every year since 2000. Worldwide, Dell Computer was in a neck-and-neck race with Hewlett Packard (which acquired second-ranked Compaq Computer in May 2002) for global market leadership—Dell was the world leader in unit sales in the first and third quarters of 2002 and HP was the sales leader in the second and fourth quarters. Dell had overtaken Compaq as the global market leader in 2001. But when HP, the third ranking PC seller in the world, acquired Compaq, the second-ranking PC vendor, Dell found itself in a tight battle with HP for the top spot globally.
Since the late 1990s, Dell had also been driving for industry leadership in servers. In 2002 Dell was the No.1 domestic seller of entry-level servers and high performance workstations (used for applications with demanding graphics). It was No. 2 in the world in server shipments and in striking distance of taking over the global market lead. In the mid- and late-1990s, a big fraction of the servers sold were proprietary machines running on customized Unix operating systems and carrying price tags ranging from $30,000 to $1 million or more. But a seismic shift in server technology, coupled with growing cost-consciousness on the part of server users, produced a radically new server market during 1999-2002. In 2003 about 8 out of 10 servers sold were expected to carry prices tags below $10,000 and to run on either Windows or the free Linux operating system rather than more costly Unix systems. The overall share of Unix-based servers shipped in 2003 was expected to be about 10 percent, down from about 18 percent in 1997. Dell’s domestic and global market share in low-priced and mid-range servers was climbing rapidly. Dell had over a 30 percent share of the 2002 world market for servers, up from 2 percent in 1995.
In addition, Dell was making market inroads in other product categories. Its sales of data storage devices were growing rapidly, aided by a strategic alliance with EMC, a leader in the data storage. In 2001-2002, Dell began selling low-cost, data-routing switches—a product category where Cisco Systems was the dominant global leader. In late 2002 Dell introduced a new line of handheld PCs—the Axim X5 to compete against the higher-priced products of Palm, HP, and others; the Axim offered a solid but not trendsetting design, was packed with features, and was priced roughly 50 percent below the best-selling models of rivals. Starting in 2003, Dell planned to begin marketing Dell-branded printers and printer cartridges, product categories where Hewlett Packard was the global leader and a category that provided HP with the lion’s share of its profits. In January 2003, Dell announced that it would begin selling retail-store systems, including electronic cash registers, specialized software, services, and peripherals required to link retail-store checkout lanes to corporate information systems. Since the late 1990s, Dell had been marketing CD and DVD drives, printers, scanners, modems, monitors, digital cameras, memory cards, ZIP drives, and speakers made by a variety of manufacturers.
In a February 2003 article in Business 2.0, Michael Dell said, “The best way to describe us now is as a broad computer systems and services company. We have a pretty simple system. The most important thing is to satisfy our customers. The second most important thing is to be profitable. If we don’t do the first one well, the second one won’t happen.” For the most part, Michael Dell was not particularly concerned about the efforts of competitors to copy many aspects of Dell’s build-to-order and sell direct strategy. He explained why:
The competition started copying us seven years ago. That’s when we were a $1 billion business. Now we’re $36 billion. And they haven’t made much progress to be honest with you. The learning curve for them is difficult. It’s like going from baseball to soccer.
I think a lot of people have analyzed our business model, a lot of people have written about it and tried to understand it. This is an 18½ year process…..it comes from many, many cycles of learning…..It’s very, very different than designing products to be built to stock…..Our whole company is oriented around a very different way of operating……I don’t, for any second, believe that they are not trying to catch up. But it is also safe to assume that Dell is not staying in the same place.
As Dell Computer battled Hewlett-Packard for leadership in the global PC market in 2003, Michael Dell believed the opportunities in front of Dell were tremendous:
…..when technologies begin to standardize or commoditize, the game starts to change. Markets open up to be volume markets and this is very much where Dell has made its mark—first in the PC market in desktops and notebooks and then in the server market and the storage market and services and data networking.
The way we think about it is that there are all of these various technologies out there…..What we have been able to do is build a business system that takes those technological ingredients, translates them into products and services and gets them to the customer more efficiently than any company around.
We only have about a 3 percent market share in the $800 billion-plus IT market, so we think…. we have got a lot more opportunity going forward…. it’s a pretty exciting time to be in our industry and the opportunities are pretty awesome.
Questions:
1. What is your evaluation of Michael Dell as CEO? How well has he performed the tasks of strategic management discussed in Chapter 1?
2. What are the elements of Dell’s strategy? How well do the pieces fit together? Is the strategy evolving?
3. Does Dell’s expansion into other IT products and services make good strategic sense? Why or why not?
4. What does a SWOT analysis reveal about the attractiveness of Dell Computer’s situation?
5. What does a competitive strength assessment reveal about Dell, as compared to IBM, Hewlett-Packard, and Gateway? Among these competitors, who enjoys the strongest competitive position? Who is in the weakest overall competitive position?
6. Has Dell’s strategy resulted in a substantial competitive advantage over its rivals? What is the basis for whatever competitive advantage it has?
7. What is your assessment of the company’s financial performance the past five years?
8. Is Dell’s strategy potent enough to beat out Hewlett-Packard? What are Dell’s chances for becoming the dominant leader in the global PC market?
What is Financial Leverage?
The use of fixed-charges sources of funds, such as debt and preference capital along with owner’s equity in the capital structure described as financial leverage gearing or trading on equity. The use of the term trading on equity is derived from the fact that is the owner’s equity that is used to raise debt; that is, the equity that is traded upon.
Financial leverage is defined as the ability of a firm to use fixed financial charges to magnify the effect of change in E.B.I.T on the firm’s earning per share. The financial leverage occurs when a firm’s Capital Structure contain obligation of fixed financial charges. For instance, interest on debentures, dividend on preference share etc., along with owner’s equity to enhance earning of equity shareholder’s. The fixed financial charges do not vary with the operating profit. They are fixed and are to be paid irrespective of level of operating profit. The ordinary shareholders of firm are entitled to residual income i.e. earning after fixed financial charges.
The financial leverage employed by a company is intended to earn more on the fixed charges funds than their costs. The surplus (or deficit) will increase (or decrease) the return on the owner’s equity. The rate of return on the owner’s equity is levered above or below the rate of return on the owner’s equity.
Favourable and Unfavourable Financial Leverage
Financial leverage may be favourable or unfavourable depending upon whether the earning made by the use of fixed interest or dividend bearing securities exceeds the explicit fixed cost, the firm has to pay for the employment of such funds or not. The leverage will be considered to be favourable so long the firm earns more on assets purchased with the funds than the fixed cost of their use. Unfavourable leverage occurs when the firm does not earn as the funds cost.
Significance of Financial Leverage
Financial leverage helps in deciding the appropriate Capital Structure. One of the objectives of planning an appropriate Capital Structure is to maximize the return on equity shareholders funds or maximize the earning per share.
Financial leverage is double-edged sword. On one hand, it increases the earning per share and on the other hand it increases the financial risks. High financial leverage means high fixed financial cost and high financial risk i.e., as the debt content in Capital Structure increases, the financial leverage increases and at the same time the financial risk also increases i.e., risk of insolvency increases. The finance manager is required to trade-off between risk and return for determining the appropriate amount of debt.
Case Study: Citibank’s Indian Business Model
Products and Offerings
The Citibank India offers a varied range of financial assistance to its customers like:Deposit Accounts – Savings Accounts, Current Accounts, and Term deposits.
Loans – Personal Loans, Home Loans, Loan against property, Auto Loan, Ready Credit
Credit Cards – Citibank Gold Card, Jet Airways Citibank Gold Card, Hutch Citibank Card, IndianOil Citibank Card, Shoppers’ Stop Citibank Card, MTV Citibank Card,Citibank Silver International Card, CRY Card, WWF Card, Times Card, Citibank Cricket Visa Card
Investments – Mutual Funds, Demat
Insurance – Life Insurance Solutions, Credit Insurance, Health Insurance, Travel Insurance
Banking – Suvidha Account, Debit Cards, Citibanking, CitiGold Wealth Management
CitiBusiness – Current Account, Loans, CitiBusiness Card
NRI Services – Rupee Checking Account, India Deposits
Online Services – Internet Banking, Bill Payment, Statement on E-mail, E-Commerce, CitiAlert
Cash Management services
Citi integrated receivables and payables solutions with diverse ERP systems in India, and implemented host-to-host mode of data processing with our customer back-office systems. Citibank, India has implemented payment gateway solutions (CitiConnect) which fulfil the financial settlement and e-credit needs of customers. Worldlink and CitiDirect @Online Banking ensure the completeness of solution by incorporating cross-border CM needs. In India, Citibank has pioneered the development of automated self-service kiosks (Citibank Easy Payment Centers) which facilitates bill collections on a “24/7/365” basis. It is an unique solution that offers consumers the flexibility of multiple payment options including cash and cheque and more importantly provides a “receipt” as proof of payment.
Credit Risk Management Practices
Like most of the banking industry during the late 1980s and the early 1990s, the high concentration of leveraged buyout and commercial real estate loan defaults that besieged Citibank provoked former CEO and Chairman John Reed to take an active role in reassessing the bank’s credit risk management practices. Citibank began to restructure the corporate lending and credit functions to incorporate a credit portfolio management strategy. Citibank began to emphasize the development of credit risk measurement techniques for loans similar to an options valuation model that would support the mark-to-market analysis and portfolio credit risk for the entire bank’s portfolio. Although the focus was mainly on large corporate and middle market facilities, it eventually led to the development of Citibank Loan Index (CLI). The index was designed to function like a equity or bond portfolio through which loans are bought and sold based on performance objectives. Loans that did not meet the performance objectives were sold off or transferred according to the index objectives.
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