Finance & Strategic Management Essay Example for Free

Finance Strategic Management Essay Over the past decades the concept of Corporate Social Responsibility (CSR) has continued to grow in importance and significance due to external pressure of diverse stakeholders, and has thereby become more prominent on companies’ agendas (Carroll Shabana, 2010; Beurden Gossling, 2008). The concept of CSR has been subject to considerable debate, commentary, theory building and continues research (Carroll Shabana, 2010). The question, of whether CSR investments result in financial and social benefits that outweigh its costs, is intensively scrutinized in existing literature (Schreck, 2001; Carroll Shabana, 2010). Adherents of CSR argue that it is in the long-term self-interest of corporations to be socially involved (Carroll Shabana, 2010; Barnet 2007). The overall logic is that CSR increases the trustworthiness of firms and strengthens the relationships with stakeholders. CSR may further result in decreased transaction costs and thereby improved corporate financial performance (CFP), by decreasing employee turnover, reducing operating costs, as well as functioning as a buffer in disruptive events (Carroll Shabana, 2010; Barnet, 2007). Barnett (2007) and Schreck (2011) argue that, if the financial benefits of CSR meet or exceed the costs, CSR can be justified as a rational investment. According to Kurucz, Colbert and Wheeler (2008), firms may attain four distinct benefits from engaging in CSR; cost and risk reduction; gaining competitive advantage; developing reputation and legitimacy; and seeking win–win outcomes through synergistic value creation. Critics of CSR typically use classical economic arguments, articulated most forcefully by Friedman (Carroll Shabana, 2010). Traditionally, the expenditures of CSR are considered an illegitimate waste of resources, which conflict with a firm’s responsibility to its shareholders (Schreck, 2011, Barnet, 2007). According to Friedman (1970) â€Å"There is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game†¦Ã¢â‚¬ . Friedman further argued that, social issues are not the concern of business people, and â€Å"the business of business is business† (Carroll Shabana, 2010). Even though CSR have been subject to critique, an increasing number of corporations are accepting responsibilities that extend well beyond the immediate interest of the owners, by considering â€Å"non-shareholder stakeholders’ concerns† (Grant, 2010; Clegg, Carter, Kornberger Schweitzer, 2011). Although the existence, direction and strength of possible links between CSR and CFP have been the subject of several empirical analyses (Schreck, 2011), and even though CSR is almost universally practiced, the results from empirical studies are inconclusive (De Bakker, Groenewegen Hond, 2005). After more than thirty years of research, it cannot clearly be concluded, whether a one-dollar investment in social initiatives returns more or less, than one dollar in benefits to shareholders (Barnet, 2007; Surroca Tribo Waddock, 2008). The inconclusiveness of empirical studies may be due to unclear and inconsistent definitions of key terms (De Bakker, Groenewegen Hond, 2005; Barnet, 2007), methodological differences (Carrol Shabana, 2010), and diverse approaches of measuring CSR and CFP (Beurden Gossling, 2008). In existing literature, CSR activities are often entioned to reduce risk, by avoiding the various consequences of moral disapproval by numerous stakeholders (Zadek, 2000). However, CSR derived risk reductions are considered as an ex-post beneficial outcome and not as a proactive risk management instrument to control or reduce idiosyncratic risk (firm specific). Under the assumption that, shareholders are risk adverse and prefer a high expected return (Bodie, Kane Marcus, 2011; Brealey, Myers Allen, 2011), a reduction of firm specific risk must be perceived as favorably. Provided that CSR investments can be applied as a risk management tool, CSR could be seen as investments by firms on behalf of its shareholders. Taking a shareholder perspective, this paper looks beyond the socially good deed of CSR, and focuses on the value of CSR as a method to reduce idiosyncratic risk without detriment of CFP. CSR and Risk Management Since this paper hypothesizes that, CSR can be applied as a risk management instrument to preserve CFP, risk need to be defined. Risk can be defined as the uncertainty about outcomes or events, especially with respect to the future (Orlitzky Benjamin, 2001). Widely risk management is defined as a managerial tool to avoid risk, transfer risk to another party, reduce risk, or in some cases accepting consequences of a certain risk (Froot, Scharfstein Stein, 1994). A shareholder’s perspective on risk management however, conflicts with the capital asset pricing model (CAPM) (Markowitz, 1952) and the Modigliani Miller’s theorem on capital structure (1958). CAPM theory states that, the cost of reducing idiosyncratic risks simultaneously reduces the expected return, and hence firm value (Markowitz, 1952). Risk reduction by holding a well-diversified portfolio of securities will be unattainable by risk management (Godfrey, Merrill Hansen, 2009), why a profit-maximizing investor would not prefer risk management. Total firm risk is in general the combination of systematic and unsystematic risk (Hoje Haejung, 2012). Systematic risk, often referred to as market risk or non-diversifiable risk, is usually defined as the firm’s sensitivity to changes in the market average returns, which cannot be reduced by diversification of shareholders (Weber, 2008; Luo Bhattacharya, 2009; Orlitzky Benjamin, 2001). Unsystematic risk is defined as idiosyncratic risk (Hoje Haejung, 2012; Luo Bhattacharya, 2009). Idiosyncratic risk is traditionally viewed as indifferent to the portfolio investors, since it is associated with specific companies and thereby can be reduced by diversified portfolios (Husted, 2005; Weber, 2008). Opposing idiosyncratic risk is of great relevance to the firm manager, whose very survival may depend upon taking adequate measures to reduce the idiosyncratic risk (Husted, 2005). Firms’ financial risk is often defined in terms of variability of returns (Orlitsky Benjamin 2001), or stock price volatility (Luo Bhattacharya, 2009), which is important risk measures, given that higher volatility implies greater investment risk and uncertain future cash flows (Luo Bhattacharya, 2009; Oikonomou, Brooks Pavelin, 2012). A reduction in idiosyncratic risk reflects reduced variance in the future expected cash flows, which translates into greater shareholder wealth (Luo Bhattacharya, 2009; Mishra Modi, 2012). In a strict Modigliani and Miller perspective, risk-management instruments are of no value, since these are purely financial transactions that do not affect the value of a company’s operating assets (Froot, Scharfstein Stein, 1994). The views of CAMP and Modigliani and Miller have been superseded by a postmodern view of risk management as an important strategic tool. Firms do invest in insurances even though the costs of these investments may be in excess of expected losses, which is in clear violation with the perfect market assumption (Smith Stulz, 1985; Stultz, 2002). If risk management can reduce firms’ exposure to idiosyncratic risks, it protects shareholders against the deadweight costs of severe financial distress in a way, that investors can not accomplish in the market by diversifying (Godfrey, Merrill Hansen, 2009). Review of the linkage between CSR and risk For several decades, researchers have aimed at discovering a conclusive linkage between CSR and CFP, the literature however, remains highly fragmented (Aguinis Glavas 2012). According to Orlitsky Benjamin (2001) true economic performance manifests itself in both high financial returns and low financial risk. Among financial and non-monetary benefits, risk reduction is often mentioned as a positive outcome of engaging in CSR activities. Porter and Kramer (2006) argue that, today’s pressure, of external stakeholders to hold companies accountable for social issues, learly demonstrate the potential large financial risks for any corporation. Several scholars emphasize, that the costs of CSR can be justified by reductions in risk and costs derived from engagement in social issues (Caroll Shabana, 2010). The primary argument is that the diverse demands of stakeholders represent potential threats and risks to the viability of the firm, why it is the economic interest of firms to mitigate these threats and gain legitimacy through social involvement (Caroll Shabana, 2010; Schreck, 2011; Kurucz, Colbert Wheeler 2008). Existing literature on the CSR-risk relationship is virtually unanimously agreeing upon a negative correlation between CRS and idiosyncratic risk, where empirical results show that CSR lowers idiosyncratic risk (Spicer, 1978; Orlitsky Benjamin, 2001; Godfrey, 2005; Hoje Haejung, 2012; Caroll Shabana, 2010; Godfrey, Merrill Hansen, 2009; Heal, 2005; Luo Bhattacharya, 2012; Oikonomou, Brooks Pavelin, 2012; Berman, Wicks, Kotha Jones, 1999; Hart, 1995; Shrivastava, 1995; Peloza, 2006). Several studies have also shown a significant negative relationship between CSR and systematic risk (non-diversifiable) (Hoje Haejung 2012; Orlitzky Benjamin, 2001; Mcguire, Sungren Scneewies, 1988; Luo Bhattacharya, 2009). CSR reduces idiosyncratic risk by reducing the probabilities of expected financial, social, or environmental crisis that could adversely influence firms’ cash flows (Hoje Haejung, 2012). Firms perceived as socially responsible may be able to increase interpersonal trust among stakeholders, build social capital, lower transaction costs, and therefore ultimately reduce uncertainty about future financial performance (Orlitzky Benjamin, 2001). Luo and Bhattacharya (2009) present the view of CSR, as helping the firm build a bulwark of defense against future losses of economic value by reducing firm specific risk and vulnerability of future cash flows. Firms with high social responsibility may have lower financial risk, since these are less sensitive to certain negative external events, like regulatory governmental intervention, undesirable publicity, probability of civil- and criminal legal proceedings or consumer boycotts, why risk reduction can be seen as a monetary benefit of CSR (Mcguire, Sungren Scneewies, 1988; Oikonomou, Brooks Pavelin, 2012; Weber, 2008; Orlitzky Benjamin, 2001; Mcguire, Sungren Scneewies, 1988). Participation in specific types of CSR, those aimed at a firm’s secondary stakeholders or society as a whole, is argued to create a form of goodwill or positive â€Å"philanthropic moral reputational capital†, which functions as an insurance-like protection, when negative events occur (Godfrey, 2005; Peloza, 2006). When business activity creates negative impact on society, stakeholders respond by sanctioning the firm (Godfrey, Merrill Hansen, 2009). It is argued that the goodwill, derived from engagement in CSR, reduces the overall severity of the sanctions, by encouraging stakeholders to give the firm ‘the benefit of the doubt‘(Godfrey, 2005; Uzzi, 1997; Peloza, 2006; Godfrey, Merrill Hansen, 2009). The resultant moral capital gained from social engagement has little to do with generating financial value, but the insurance-like protection contributes with preserving shareholder value and thereby financial performance (Godfrey, Merrill Hansen, 2009). Mishra and Modi (2012) fund a significant effect on idiosyncratic risk, when CSR is applied, the authors however enhanced this result by finding that, positive CSR reduces idiosyncratic risk, while negative CSR increases idiosyncratic risk. Literature has, according to Mishra and Modi (2012), often a singular focus on positive CSR, and overlooks that firms also occasionally engage in activities that qualifies as negative CSR. Luo and Bhattacharya (2009) and Porter and Kramer (2006) argue that CSR is not beneficial in all situations, but is rather advantageous in some contexts and disadvantageous in others and can even lead to additional risk. This is in line with Barnet (2007), who argues that stakeholders’ perception of firms’ CSR engagement are path-dependent (Barnet, 2007; Luo Bhattacharya, 2009; Hoje Haejung, 2012). For firms with social negative impact or prior bad reputation, CSR may be perceived as â€Å"blood money† to mitigate past sins, omissions or shortcomings (Luo Bhattacharya, 2009; Barnet 2007). CSR can thereby lead to reduced idiosyncratic risk, but can also expose a firm to additional risk (Weber, 2008; Barnet, 2007). Discussion Even though the CSR-risk relationship have received much attention in the existing literature, managing risk as the predominantly basic for engaging in CSR has not received specific attention. Focus within the field is on ex-post measures of risk-related benefits, where CSR is not valued as a proactive tool to reduce idiosyncratic risk. Existing research does not seem to provide any practical guidance to managerial proactive evaluations of the risk reductions derived from CSR involvement. It further lacks a practical framework to ex-ante quantify the risk related benefits of CSR (Weber, 2008). The above review demonstrates the focus on risk, solely as valuable side-effect of engaging in CSR activities. The authors of the paper posit a research gap exists within the existing literature of CSR and risk: CSR is not considered as a proactive ex-ante risk management instrument to control and reduce firm risk. Given the risk reducing benefits of CSR, the authors suggest that investments in CSR can be used as a proactive risk management instrument to reduce idiosyncratic risk. Such an approach could strengthen the overall CSR involvement and support rational ex-ante decision-making in this area (Weber, 2008). The aim is to draw a much-need attention to the risk-reduction potential of CSR by viewing CSR investments as a proactive risk management tool, where managing risk is the main purpose for engaging in CSR. Empirical resolving the research gap and verifying the hypothesis is beyond the scope of this paper. The authors however, suggest that a potential solution is to apply real option theory as a basis for proactive CSR risk management decision-making. CSR as a real option Attributable to the aforementioned arguments, the function of CSR as a risk management tool can be considered as a real option. Regular options are based on securities (financial instruments), whereas real options are based on hedging against uncertainties in real investment projects (Mun, 2002). An analysis of the costs and benefits of CSR projects, using traditional NPV models, often leads to a rejection, as these fail to contribute to maximizing shareholder value (Friedman, 1962). This is, nevertheless, not always the right decision, as the NPV approach fails to incorporate the main advantage of real options (Husted, 2005). Compared to the traditional NPV approach, real options offer management flexibility through multiple decision-making in situations with high uncertainty. Managers have the option, but not the obligation, to engage in, modifying or end strategies, as new information becomes available (Mun, 2002). A CSR option offers the choice of deferring, abandoning, expanding, or staging an investment project (Amram Howe, 2003). Due to the theoretical and mathematical complexity of option theory, which is beyond the scope of this scientific paper, option theory will be described on an incomprehensive level. In brief option pricing is a function of five variables: the value of the underlying asset, the exercise price, time to exercise, the risk-free interest rate, and the volatility of the underlying asset (Black Scholes, 1973). The value of the underlying asset is the resources resulted from the CSR option, such as qualified employees, PR and cost avoiding’s etc. Husted, 2005). The exercise price refers to the required additional investments needed for receiving the value created by the CSR option. The timing of the exercise is an essential variable, as it has great effect on the value of CSR options. The risk-free interest rate does not play an important role in most real options (Mun, 2002). The volatility or the uncertainty of the underlying asset has a significant impact on the value of CSR options (Mun, 2002). The variance of the expected value can both be higher or lower than the expected return. Black and Scholes is the most widely used regular option pricing model, however, also one of the most complicated models (Mun, 2002). A Binomial lattice approach is applied in most real option pricing, as it provides a more transparent and intuitive appeal compared with Black and Scholes’ theoretical and mathematical approach (Mun, 2002). However, since the aim is solely to clarify the value of real options in a CSR context, the choice of approach is of less relevance. Real options provide an important framework for firms to manage risk by reducing the risk of future investments, and can thus be an essential tool in corporate risk management (Husted, 2005). Finally, a real CSR option explicitly includes a time dimension. This ex-ante perspective is clearly different from the focus on risk in most CSR-risk research, which is ex post in nature. CSR as a risk management instrument – The Toyota example A few decades ago, car manufacturers did not focus so intensively on a green profiling as they do today. The increased oil prices in 1973 and 1979 were influential for the entry of Japanese car manufacturers in USA, who were producing smaller and more gas efficient cars (Andrews, Simon, Tian Zhao, 2011). The gas efficient cars of Japanese manufactures were causative to the car industry as a whole subsequently invested massively in green technology projects. These investments have met consumers’ need and have generated positive branding values. Toyota’s Prius has reached â€Å"cult status†, as it is one of the most gas efficient and green cars on the market. However, more interestingly is the security, that the green profile of the Prius has offered Toyota, which includes protection against the bad publicity of car manufacturers’ contribution to pollution and factors such as Middle Eastern conflicts that influence oil prices and hence sales of cars. At first glance, it appears as Toyota has been skilled at forecasting future trends and meeting customer’s needs without using CSR as management instrument. As the following example however illustrates, Toyota’s management could have benefitted from considering investments in CSR as real options to control idiosyncratic risk and thereby preserve CFP. In 2009 repeated accidents occurred, which were accused to be caused by flaws in floor mats and accelerator pedals in Toyota’s vehicles. This resulted in a recall of more than 5 million vehicles, alone in the North American market (Andrews, Simon, Tian Zhao, 2011). Before a product is recalled, companies have to make severe considerations. A product-recall can have great financial impact in terms of losses in brand value, consumer goodwill, decreasing sales and a negative effect on stock prices (Kumara Schmitza, 2011), which in this case is the value of the underlying asset of the CSR option. The decision to recall the cars is the price of the option. The recall option could have generated strategic flexibility, which however, meanwhile was eliminated, as Toyota’s management failed to exercise the option, before it was too late. The leisurely recall decision resulted in losses in brand value, consumer goodwill, decreased stock price, lower sales, a fine of $16 million and more than 130 potential class-action lawsuits (Andrews, Simon, Tian Zhao, 2011). The negative outcome of the late recall is considered as high volatility of the underlying asset. A faster recalling could have had a avoiding, a limited or opposite effect on product brand, consumer goodwill and the massive media coverage (Husted, 2005). Provided that Toyota’s management had viewed the recall decision as a valuable option rather than severe costs, strategic flexibility could have been obtained, why the negative outcome may have been avoided. A faster exercise of the recall option might have resulted in goodwill or trust, which could have been exploited by Toyota to limit the negative publicity caused by the repeated accidents. Toyota however, failed to exercise the recall option in acute time, why the result was lost flexibility to respond to the unexpected event of the accidents. The value of the real option foregone by Toyota was a function of inter alia lost sales, brand value and reputation. Toyota’s management failed to exploit the advantages of CSR as a risk management tool.

recruits :: essays research papers

The Army announced yesterday that it missed its recruiting goal for the fourth consecutive month, a deepening manpower crisis that officials said would require a dramatic summer push for recruits if the service is to avoid missing its annual enlistment target for the first time since 1999. The Army will make a "monumental effort" to bring in the average 10,000 recruits a month required this summer, said Maj. Gen. Michael D. Rochelle, head of the Army's recruiting command. An additional 500 active-duty recruiters will be added in the next two months -- on top of an increase of 1,000 earlier this year. The Pentagon is also considering asking Congress to double the enlistment bonus it can offer to the most-prized recruits -- from $20,000 to $40,000 -- and to raise the age limit for Army active-duty service from 35 to 40, he said. "The challenge is one of historic proportions," Rochelle said, acknowledging that he is not sure whether the traditional summer surge in Army recruits will take place, or how large it might be. Violent, long deployments to Iraq and a sound job market at home have combined to reduce what the Army calls the "propensity to enlist" -- the percentage of young Americans willing to consider Army service -- which dropped from 11 percent last year to about 7 percent this year. "What I don't know, in all candor, is how the reduced propensity will dampen" the recruiting prospects of summer, Rochelle said in an interview. "I wish the summer period were about twice as long." The Army's recruiting difficulties are only expected to grow. "Next year promises quite frankly, given the size of our entry pool, to be an even tougher fight," he said. "God forbid a downward trend" in the willingness to serve, he added. The Army missed its May active-duty recruiting goal of 6,700 by 1,661 recruits, pushing the shortfall for fiscal 2005 to 8,321 -- or more than a month's worth of recruits. The shortfall would have been 37 percent if the Army had not lowered its May goal. Overall, the Army has sent 40,964 enlistees to boot camp, and has four months to nearly double that figure to reach the 80,000 goal for this fiscal year. Army, Navy and Marine Corps reserve forces also missed their goals for May. Army National Guard enlistments for the month fell short by 29 percent, Army Reserves by 18 percent, Marine Corps Reserves by 12 percent and Navy Reserves by 4 percent, according to figures released yesterday by the Pentagon.

Culture and Diversity in Decision Making Essay

The definition of the mission and goals of the enterprise is the foundation for any business. Mission – is the answer to the question, what is the activity of the company is and what it intends to do. Procter & Gamble has a pretty clear statement: â€Å"We are there to improve your life† After the mission, the organization needs to define the purpose. In this case, the goal – to produce goods and services of the highest quality and customer value that improve the lives of today’s and future generations around the world. Consumers help to take a leading position in terms of sales, to ensure the prosperity of the business that contributes to the well-being of employees and shareholders, as well as those areas where employees live and work. The goal unites workers for the common cause of the growth strategy. It has great potential due to a simple idea to improve on daily lives of consumers around the world. It is this setting allows P ; G to achieve maximum f ull growth. So, from the above we can highlight the important goals of the company: A. Providing quality products, customer focus; B. Creating a stable, growing company. 3. About the P;G company’s culture signs. The company provides a certain amount of self – dependence divisional governance structure that provides greater flexibility and faster response to changes in the business environment compared to the linear and linear- staff. Managerial responsibility for the activities of the company both in the domestic and foreign market is shared between them. This type of structure combines centralized coordination and control of centrally managed. Key figures in the management of an organization with a divisional structure – not heads of functional units, and the managers in charge of the production department, the so-called divisions. The company groups are formed by categories, each of which includes experts in marketing, sales and advertising. These narrow specialists provide each its part under the direct control of the manager category. The level of the manager is very high. 4. Factors that caused the organization to embody this particular culture. P;G company has been working toward keeping its reputation and standards in all field. Since it was established, P;G has built rich heritage of touching consumers’ lives with brands that make life a little better every day. Here is to motto says â€Å"Do the Right Thing – For each other† The culture of the company is based on the basic moral and ethical values – leadership, striving for the victory, the host’s respect, honesty and trust. These values are not something abstract – they define the actions of the company. 5. What type of leader would be the best? In my opinion there are many reasons that this leader structure will be effective. First, as part of a huge company it managed to create an environment where every employee is interesting to work with. The responsibility of each employee, including the manager is the main driving force effectiveness. And this is the result of the constructed system of management, whose main task is to create conditions for the moral and material interests of each employee. Second, the complexity of management and collective management style in this company is proposed to use a single control method. The management system is structured in a complex of  functional subsystems. That is, they include highlights key subsystems within each of which formed goals, measurable indicators are introduced, developed a system for calculating them are formalized standards, business processes and organizational procedures. Disconnected from the management of the business functions of the company’s managers are moving to a collective system of integrated management of business functions. 6. Imagine that there is a decline in the demand of products. What the change in culture would be need to be in response to this situation. I think company’s CEO should work with the sale’s department. Look up their regular planning and control of the department and its employees, hiring, selection and adaptation of staff; employee motivation, training, exchange of experience, the general debriefing, evaluation of the department, the calculation of cost of sales, cost of sales regulation, evaluation of individual performance of employees. In one word they have to find out their mistake and fix it, because without a reason demand not decreasing itself. References CNBC television channel – Documentary film about Procter ; Gamble company. Retrieved from http://www.hulu.com/watch/286095 Charan, R. (2008, August 26). P;G’s innovation culture: How we built the world-class organic growth engine by investing in people. Retrieved from http://www.strategy-business.com/article/08304?pg=all Procter and Gamble. (2013). Our worldwide business conduct manual. Retrieved from http://www.pg.com/en_US/downloads/company/governance/Policy_Worldwide_Business Conduct_Manual.pdf Schermerhorn, J. R. (2012). Organizational behavior (12th ed.). Danvers, MA: John Wiley ; Sons, Inc

Fascinating Facts About Caterpillars

Surely youve seen a caterpillar in your lifetime, and youve probably even handled one, but how much do you know about Lepidopteran larvae? These cool facts about caterpillars will give you new respect for what remarkable creatures they are. A Caterpillar Has Just One Job -- to Eat During the larval stage, the caterpillar must consume enough to sustain itself through its pupal stage and into adulthood. Without proper nutrition, it may not have the energy to complete its metamorphosis. Malnourished caterpillars may reach adulthood, but be unable to produce eggs. Caterpillars can eat an enormous amount during a life cycle stage that typically lasts several weeks. Some consume 27,000 times their body weight during this life phase. Caterpillars Increase Their Body Mass by as Much as 1,000 Times or More The larval stage of the life cycle is all about growth. Within the span of a few weeks, the caterpillar will grow exponentially. Because its cuticle, or skin, is only so pliable, the caterpillar will molt multiple times as it gains size and mass. The stage between molts is called an instar, and most caterpillars go through 5 to 6 instars before pupating. No wonder caterpillars consume so much food! A Caterpillars First Meal Is Usually Its Eggshell In most cases, when a caterpillar ecloses (hatches) from its egg, it will consume the remainder of the shell. The outer layer of the egg, called the chorion, is rich in protein and provides the new larva  with a nutritious start. A Caterpillar Has as Many as 4,000 Muscles in Its Body Thats one seriously muscle-bound insect! By comparison, humans have just 629 muscles in a considerably larger body. The caterpillars head capsule alone consists of 248 individual muscles, and about 70 muscles control each body segment. Remarkably, each of the 4,000 muscles is innervated by one or two neurons.   Caterpillars Have 12 Eyes On each side of its head, a caterpillar has 6 tiny eyelets, called stemmata, arranged in a semi-circle. One of the 6 eyelets is usually offset a bit and located closer to the antennae. You would think an insect with 12 eyes would have excellent eyesight, but thats not the case. The stemmata serve merely to help the caterpillar differentiate between light and dark. If you watch a caterpillar, youll notice it sometimes moves its head from side to side. This most likely helps it judge depth  and distance as it navigates somewhat blindly. Caterpillars Produce Silk Using modified salivary glands along the sides of their mouth, caterpillars can produce silk as needed. Some caterpillars, like gypsy moths, disperse by ballooning from the treetops on a silken thread. Others, such as eastern tent caterpillars or webworms, construct silk tents in which they live communally. Bagworms use silk to join dead foliage together into a shelter. Caterpillars also use silk when they pupate, either to suspend a chrysalis or to construct a cocoon. Caterpillars Have 6 Legs, Just as Adult Butterflies or Moths Do There are way more than 6 legs on most caterpillars youve seen, but most of those legs are false legs, called prolegs, which help the caterpillar hold onto plant surfaces and allow it to climb. The 3 pairs of legs on the caterpillars thoracic segments are the true legs, which it will retain in adulthood. A caterpillar may have up to 5 pairs of prolegs on its abdominal segments, usually including a terminal pair on the hind end.   Caterpillars Move in a Wavelike Motion, From Back to Front Caterpillars with a full complement of prolegs move in a fairly predictable motion. Usually, the caterpillar will first anchor itself using the terminal pair of prolegs and then reach forward with one pair of legs at a time, starting from the hind end. Theres more going on than just leg action, though. The caterpillars blood pressure changes as it moves forward, and its gut, which is basically a cylinder suspended inside its body, advances in sync with the head and rear end. Inchworms and loopers, which have fewer prolegs, move by pulling their hind ends forward in contact with the thorax and then extending their front half. Caterpillars Get Creative When It Comes to Self Defense Life at the bottom of the food chain can be tough, so caterpillars employ all kinds of strategies to avoid becoming a bird snack. Some caterpillars, such as the early instars of black swallowtails, look like bird droppings. Certain inchworms in the family Geometridae mimic twigs, and bear markings that resemble leaf scars or bark. Other caterpillars use the opposite strategy, making themselves visible with bright colors to advertise their toxicity. A few caterpillars, like the spicebush swallowtail, display large eyespots to deter birds from eating them. If youve ever tried to take a caterpillar from its host plant, only to have it fall to the ground, youve observed it using thanatosis to thwart your efforts to collect it. A swallowtail caterpillar can be identified by its smelly osmeterium, a special defensive stink gland just behind the head. Many Caterpillars Use the Toxins From Their Host Plants to Their Own Advantage Caterpillars and plants co-evolve. Some host plants produce toxic or foul-tasting compounds meant to dissuade herbivores from munching their foliage. But many caterpillars can sequester the toxins in their bodies, effectively using these compounds to protect themselves from predators. The classic example of this is the monarch caterpillar and its host plant, milkweed. The monarch caterpillar ingests glycosides produced by the milkweed plant. These toxins remain within the monarch through adulthood, making the butterfly unpalatable to birds and other predators. Sources Caterpillar locomotion: A new model for soft-bodied climbing and burrowing robots, Barry A. Trimmer, Ann E. Takesian, and Brian M. Sweet, Tufts University, 2006.Unique Means of Animal Locomotion Reported for First Time, Tufts University media release, July 22, 2010.Caterpillars of Eastern North America, David L. Wagner.Encyclopedia of Insects, 2nd Edition, edited by Vincent H. Resh and Ring T. Cardà ©, 2009.Borror and Delongs Introduction to the Study of Insects, 7th Edition, by Charles A. Triplehorn and Norman F. Johnson, 2005.