Archive for December 13th, 2012

Should Wall Street be occupied?

December 13, 2012

It seems so. An interesting paper by Maya Eden of WB.

She says absence of financial intermediation people will rely on internal funds. When we introduce fin intermediation, it allows excessive borrowing. So to balance the two situations some resctriction on fin intermediation is needed:

 

Does an unregulated financial system absorb too many productive inputs? This paper studies this question in the context of a dynamic model with heterogeneous producers. In the absence of a financial system, the only way to purchase inputs is using internal funds. Producers are subject to idiosyncratic productivity shocks, and will decide to produce only if their productivity is high enough. Otherwise, they will hold money. A financial intermediation technology allows producers to purchase inputs in excess of their internal funds, by borrowing from unproductive agents. However, intermediation requires the use of costly monitoring services. In equilibrium, intermediation increases the money in circulation and raises nominal prices, thereby reducing the value of internal funds and making producers increasingly reliant on costly monitoring services. For this reason, society is better off when intermediation is restricted.

One would ask what is new? This is all know. Well, the paper is on technical side and helps you think through the modelling bit of this (though must admit did not understand the model bit much)..

 

Estimating Current Account Deficit from GDP – India’s Case

December 13, 2012

A short note on the topic by yours truly. Comments/Suggestions are welcome..

Why Monitor Consulting failed?

December 13, 2012

Monitor consulting (found by the strategy guru – Michael Porter) filed for bankruptcy recently.

Steve Denning reflects on why  the once famed consulting firm  failed. The main reason was focus on top-down strategy and not understanding the role of consumers in business:

Eventually even attractive illusions come to an end: people see through them. Ceremonial rain dances come to be viewed for what they are. The financial crisis of 2008 was a wake-up call that reminded even entrenched firms how vulnerable they were. Today, large firms have little interest in paying large fees to strategists to find sustainable competitive advantage just from studying the numbers.

Monitor eventually learned the hardest lesson of all: strategy, business and business education are not about pursuing the chimera of sustainable competitive advantage.

Monitor wasn’t killed by any of the five forces of competitive rivalry. Ultimately what killed Monitor was the fact that its customers were no longer willing to buy what Monitor was selling. Monitor was crushed by the single dominant force in today’s marketplace: the customer.

An interesting bit on Michael Porter:

The answers to these intriguing questions are strange and troubling. We can find some of them in the work of consulting insider, Matthew Stewart, and his enlightening, but misleadingly-titled, book, The Management Myth (Norton, 2009). In his book, Stewart tells how in 1969, when Michael Porter graduated from Harvard Business School and went across the river to get a PhD in Harvard’s Department of Economics, he learned that excess profits were real and persistent in some companies and industries, because of barriers to competition. To the public-spirited economists, the excess profits of these comfortable low-competition situations were a problem to be solved.

Porter saw that what was a problem for the economists was, from a certain business perspective, a solution to be enthusiastically pursued. It was even a silver bullet. An El Dorado of unending above-average profits? That was exactly what executives were looking for—a veritable shortcut to fat city! 

Why go through the hassle of actually designing and making better products and services, and offering steadily more value to customers and society, when the firm could simply position its business so that structural barriers ensured endless above-average profits? Why not call this trick “the discipline of strategy”? Why not announce that a company occupying a position within a sector that is well protected by structural barriers would have a “sustainable competitive advantage”?

Why not proclaim that finding these El Dorados of unending excess profits would follow, as day follows night, by having highly paid strategy analysts doing large amounts of rigorous analysis? Which CEO would not want to know how to reliably generate endless excess profits? Why not set up consulting a firm that could satisfy that want?

Superb this.

So Monitor was all about strategy which was to be developed by CEOs/Corporate Boards:

Porter’s theory thus played to the image of the CEO as a kind of superior being. As Stewart notes, “For all the strategy pioneers, strategy achieves its most perfect embodiment in the person at the top of management: the CEO. Embedded in strategic planning are the assumptions, first, that strategy is a decision-making sport involving the selection of markets and products; second, that the decisions are responsible for all of the value creation of a firm (or at least the “excess profits,” in Porter’s model); and, third, that the decider is the CEO. Strategy, says Porter, speaking for all the strategists, is thus ‘the ultimate act of choice.’ ‘The chief strategist of an organization has to be the leader— the CEO.”

Strategy leads to “the division of the world of management into two classes: “top management” and “middle management.” Top management takes responsibility for deciding on the mix of businesses a corporation ought to pursue and for judging the performance of business unit managers. Middle management is merely responsible for the execution of activities within specific lines of business.

It ignored the developments in the emerging world where focus was moving to customers and to value creation/addition..

Quite a read..


%d bloggers like this: