Thursday 5 January 2012
To Spend
or
Not to Spend
(Recession Time Financial Management Innovations)
by
Babu Appat
Babu Appat
Pullipparambu, Chelembra, Malappuram, Kerala,
673634.
09349101071
www.youtube.com/TheTrainingclasses
www.ignouhours.blogspot.com
Prolegomena
Business is for profits.
Money wise or other benefit wise, profit generation is the most
prominent aim of any business. Business
is a planned activity which invests money and material to reap better money and
provisions.
So managing the monetary resource of any business activity is
important. Managing the money becomes
more so difficult in times of resource crunch.
A recession is a time when severe dearth of resources due to an
insufficient fund inflow or anticipatory sanctions imposed may be experienced.
Knowing the condition is the first thing we have to do. What to do to maximize the profits in the
event of the crunches and insufficiencies is the main look out of all men
involved in business activities.
Doing the things in the same old way may not help you much. It could end up in peril. To avoid that kind of a perilous culmination
of activities we should do things in a new way.
In a new way that will ensure better results.
And a change is not for the sake of a change, the change is for
bettering the prevailing conditions in its maximum possible magnitudes.
New ways for newer accomplishments.
INTRODUCTION
Innovation simply means finding out new ways; finding out new ways
to do our job in a better way. In the
arena of Finance Management also Innovations has got the same meaning.
Any technique resorted to improve our access to right information, all
the efforts in effectively utilizing those information and all the improvised
new financial products together with all its interactions with the prevailing
socioeconomic milieu is termed broadly as
Financial Innovations.
The technological advancements which facilitate access to relevant
information in real time, trading, means of payments and improvisation of new
financial products which will have better market acceptability is in its
quintessence what Innovations Management in Finance is all about.
We look for a change when we are too familiarized with the present
way of dispensing our job and when a bit of boredom is precipitated out of
continuing it or we find the tools have become blunt, or when we ardently look
forward to dispense the job in a better manner.
So it goes without saying innovations are brought in with a sure
purpose. Just to make things
better. The story is not different in
the field of Finance Management also. Ways and means are thought about to
overcome a crisis or to achieve a targeted or foreseen improvement. Let’s examine some of the recent innovative
measures some companies of the world had adopted to overcome the recession
hazards.
When we talk about Financial Innovations we must consider the facts
such as what are the benefits brought out by those innovations and at what
cost. It’s equally important that we should examine what is the change brought
out and what are the lessons learned out of these changes and measures adopted by
large business organisations in the advanced economies of the world.
There occurred phenomenal changes in the financial industry due to
the recent economic upheavals. When we
think about this, certain financial terms such as globalization, financial
market integration, securitization and innovation are widely being used. The regulatory barriers got dissolved and the
technological horizon got widened. So it
paved a way for effective innovation. It had opened up the markets and hence
competition was introduced from far and from unforeseen corners. These factors
had contributed greatly for a proliferation of new financial products and to
sustain and grow in the market innovation became imperative. Before we go deep into the subject let’s
explain some of the terms used above.
Globalization
With the technological advancement distance became an unimportant
factor. Access to more accurate
information with improved ease was possible. So, regional economies, societies
and cultures became integrated through a network spanning across the
globe. This ongoing process of
integration of small economies and cultures to the global network is termed as
globalization. Most often by globalization we refer to economic
globalization. In other words
globalization is the integration of national economies to the global economy. Globalization is a precipitated in a proper
amalgamation of factors related to technology, economy, socio-cultural,
sociopolitical, and biological factors.
Financial Market Integration
The proper bringing together of national economies and markets to a
unified bigger economic structure which have the overall control on the
economic structure and functions of the individual economies or markets with
the aim of achieving transactional ease and concerted economic growth ensuring
synergistic cooperation between the thus joined members is what in short
Financial market Integration is.
We have seen the integration of the European Union. Several
economies merged into one and formed something of the kind of a unified
nation. A Central Bank of the union was
set up- The ECB or the European Central Bank.
A new currency was designed the Euro.
Proper transference pattern from national currencies to the Euro was
established. Overall trade and commerce policies were formulated.
In general terms, integration is the
process by which segmented markets
become open and unified so that
participants enjoy the same unimpeded access. It can occur through the removal
of domestic and international controls on trade in the asset, commodity or
service under consideration, for example by implementing policies to deregulate
markets. It can occur simply by a
reduction in the effectiveness of controls in markets, for example, by
avoidance or non enforcement.
Financial openness has its own
potential benefits. Access to world
capital markets expands investors’ opportunities for portfolio diversification
and provides a potential for achieving higher risk-adjusted rates of return.
In India
Securitization
Securitization is a structured
financial tool that is often resorted to sort out the risk factors of
investments while seeking assistance of various debt instruments by placing
them in a pool and selecting the most suitable on the basis of the risks
envisaged.
Saying these as an introduction
let’s move on to the subject of discussion for the day “Recession Time Financial Management
Innovations”
Research
Modalities
For most part of this research work
secondary data available has been resorted to. Great care has been taken to
ensure the authenticity and relevance of information collected and the analysis
of the data has been done through proper procedures. Care has also been taken to avoid personal
biases on the basis of national or religious feelings or on the basis of
commercial interests or company apathies.
The sources selected for collecting information has been ensure of its
authenticity and do have world acclaimed reputation for providing accurate,
timely socio-economical and socio-political information. Many periodicals such
as The New York Times, The BBCworld, The
Sun, The Daily Mirror, The Guardian, Economic Times, Business line etc has been
researched into for collecting relevant updated information on the
subject. Articles by many famous
authors, especially Capital One Financial Corporation
CEO Rich Fairbank, Michael Stern, CEO of executive coaching firm Michael Stern
Associates in Toronto, Adrian Slywotzky, a managing director with consulting
firm Oliver Wyman in Boston etc. has been utilized in this
The various information provided in
this research paper are authentic and relevant as far as the topic of
discussion is concerned.
Information from all available
sources has been collected, classified and correlated for compliance with the
intuitively arrived at conclusions on the subject of discussion. The relevance according to the findings from
the published papers has been then amalgamated to arrive at the new conclusions
stated in this paper.
So the conclusions arrived at and
mentioned in this paper are sound and adaptable, for similar occasions. It hold good for the present time of economic
affairs of the world.
Recession Time Financial Management
Innovations
“A grain for the winter”. The old adage holds good for the modern times
too. We must be prepared for a bad
winter all the time, well in happier times itself. All our financial plans must include
allowances allocated for hard times. It may strike at any time. Our past experiences must be examined and learned
in detail to make us prepared for future hard times.
What is illustrated in these lines
is an increasingly uncertain economic outlook means a strategy shift is in
order or the urgency of planning for an economic downturn. To get prepared for worst case scenarios is
the need of the hour. May many yearlong
economic progress might have made some corporations complacent. Some of you the present day managers might
not have managed an organization through a recession or might have done so some
seven or so years back. It’s not the kind of thing people get too much practice
with.
Whether you win or lose the war, the
facts remains that a mistake during the recession will be more costly and
detrimental to the organizational growth than otherwise. A reception time is not a time for relaxing
and do business keeping your fingers crossed.
You should be on the vigil always to keep away from getting sunk. Recession is not a time to restrict all
activities in the name cost reduction and hibernate till finer times comes. For
a well managed company, recession can be an opportunity. It offers a unique opportunity to improve
your position in terms of your competitors. Extensive planning, after collecting and
analyzing all the available information is the only way to make use of the
opportunity, recession is
offering.
Customer
Relation
For example let’s take the
customers. Customers are most important
for any business organization. To every
company some customers are highly profitable and some others are not. Recession is a time when a company has to
focus on highly profitable customers.
Any effort to appease the most profitable customers can have huge
payoff. It’ll help the company to build
up strong relation with its worthy customers.
Cost saving efforts across many accounts is to be initiated, but not at
the cost of vital business opportunities.
Let’s elucidate this fact further with
the example of Singapore Airlines. Business and First class travelers along the
transcontinental routes were the main profit generating point of Singapore
Airlines. They analyzed the situation
and realized this fact. The innovative
measures they have adopted a decade or so ago was really appreciable. The
management took a decision to cut all short-haul routes and added some
strategic long-haul routes. Then they
have taken an audacious step. They have
gone for an additional investment of US$ 300 million to improve the business
and first class services. When East Asia fell
into a recession during 1997 due to the currency crisis Singapore Airlines
remained strong and financially healthy. Experts are of the opinion that
perhaps Singapore Airlines is the sole Asian Airline company to be successful
like this. Think of the pathetic plight
of a giant airline company like Indian Airlines.
Companies operating in the business to
business (B2B) space must be really careful that their customers also are
fighting the same recession. So any
product which provides financial ease in their operations will get better
acceptance. This doesn’t mean that you
should come out with cheap substitutes, but should offer financial ease and
value for money. The post recession
period must also be taken into consideration while working in the B2B sector.
The relationship established during the recession will have huge payoffs in the
post recession time also. Companies have
to be well prepared well before the onset of the recession because whatever not
practiced before the recession cannot be done during the recession. Planning as
I said before is very important.
Saving
on Costs
Cost saving is good, and it doesn’t mean
cutting of all costs. It simply means
more careful and intelligent spending.
Financial experts often say “cut two, invest one”. Indiscriminate cost cutting during recession
will have dire results. In response to the 1998
Russian financial crisis and the blowup of hedge fund Long-Term Capital
Management, Merrill Lynch cut 3,400 staff, mostly in its fixed-income and
emerging-market groups. Huge costs were
saved by this activity and an immediate surplus in the financial statements of
the company was perceptible. But it
caused degradation in the goodwill both among the employees and among the
general public. A retrenchment often
brings in a lot of dissatisfactions even in the minds of the retained
employees. It’s often believed that this can reduce overall productivity of the
company.
During the bond
trading period, job cut helped Merrill Lynch but the investment bank was caught
off guard and short-staffed when the rebound came sooner than expected.
Let’s listen to what
Raymond O’ Hare of Microsoft Corporation has got to say about job cut.
The
director of Microsoft in Scotland
Mr.
O'Hare, who is Chairman of the Institute
of Directors in Scotland
He urged businesses to invest in workers
for the long term and not to cut back on training even if there were financial
pressures. Mr. O'Hare said: "Good leadership is essential if a business is
to survive; failing to share goals and lack of transparency would be a
mistake."
Job
Cuts
Losing jobs is quite an integral part of
any economic slump. Managers must be prepared to manage the emotional upsurge
both within their minds and from the people working under them. Examine carefully the profile of each
employee, and arrive at a clear-cut decision whom the company can’t afford to
lose. A proper appraisal of each person’s caliber achievements and present
worth is important. The companies’ outlook of course is important and so is the
expectation of the company from each employee.
Employees with in-demand skills are
viewed separately. Keeping employees in positions with steep learning curves
may also be crucial. It’s ideal that
managers try to collect as much information as possible on all the above
mentioned HR related factors well in advance, well before the recession sets
in. In consultation with the Human
Resource department managers should arrive at a proper decision on all these
matters. Random checking of the
trustworthiness of the report given by the HR department also should be
given. Personal biases could creep in to
any of the personnel related decisions and conscientious efforts should be used
to eliminate the possibility of that.
If you adopt these measures and formulate
an innovative strategy in accordance with the findings, you are prepared for
any economic bottlenecks.
Innovations
in Human Resource Management
Too much dependence on talented employees also is not a healthy
behavior. The people who don’t have a lot of options before them will stick on
their job. The persons you want to keep
may jump overboard at their next opportunity. Given
the increasingly mobile nature of work, many people feel there are plenty of
other opportunities around the world. The emotional nature of employees
also makes them stick on to the employer.
We must be able to distinguish between the two. Loyalty to the
organization is an important aspect.
We have to do anything that’s possible within the limits to retain
talented employees. Monetary rewards
alone are not the only motivator, though it’s one of the best. When it’s an economic downturn monetary
rewards cannot be the best option or it will have to be used with extra care. There could be sanctions imposed on it.
Discussing some of the policies and foreseen courses of action with
the targeted employees will be ideal.
Listening to their suggestions can sometime spur innovative thought in
the managers. Transparency should be
maintained. Some employees will be ready to adjust with the sanctions imposed
on them in wake of the recession.
Checking them out should be the last resort. Intelligent manager will be able to keep them
without compromising the profitability of the organization. Human Resource it’s called or the personnel
wealth, so it’s too precious to be lost.
Recession can cause unprecedented shifts in roles of employees,
sometimes new career opportunities may pop up. These things should be discussed
with the employees, so that an acceptable innovative idea evolves out.
Most managers won’t realize that everybody will be watching every
activity of theirs. Employees will be looking to their superiors to provide
leadership and instill confidence in them. Breaking down into a heap of
uncontrollable tears is not advisable. But prepare a plan to deal with a
downturn now, and the only ones left crying will be your competitors.
To Spend or
Not to Spend
Some people spend more during recession
too. The silicon titan Intel Corporation
did so. They have proved that spending more during the recession is an
intelligent innovation.
With the global economy reeling, businesses
and consumers had pulled way back on their typical technology spending, and
sales of personal computers had started to decline at their steepest rates in
history. The major two-year investment was a matter of faith — in an economic
recovery and in the Internet continuing to drive a long-term increase in demand
for computers, Smartphone and other devices with chips inside.
During the 2001 recession Intel
management increased their investments on R&D and production of cheaper,
smaller and faster computer chips. Intel
was able to launch the envisaged products months prior to the scheduled time
when recovery came a year later. And
when the products hit the market in the Q3 of 2003, Intel registered the
highest growth rate since 1996.
Mergers
and Acquisitions
As an innovative measure to overcome the
pressure of a recession, going for acquisitions or mergers too is not a
taboo. The fact is that, of course, the firms
have to have a lot of cash squirreled away.
One aspect of the recession is that the asset values fall making the
potential targets available to you at rates lesser than its prior offer. So buying properties can be a wise
decision. The weakening of the primary
market demands have prompted Du Pont to assess well in advance, as far back in
1999 itself, a slow down was in the offing. Du Pont the chemical giant was thus
able to intelligently slash down capital expenditures by about US$ 5 billion
during 2000 and 2001, just in time. This saving was utilized in acquiring seven
companies in the immediate future.
Advertising
Normally companies cut advertisement
expenses, during recession to cut costs.
It’s presumed that the advertising dollars drop in recession. But don’t take it for granted that, always
it’s wise to cut all your mass media promotional expenses. Recession sometimes
creates a favorable condition to advertise.
Don’t you think the reduced cacophony in the market place is an ideal
opportunity to make your voice heard vividly?
The “Intel Inside” campaign was launched
during the 1991 recession. As you know a
microprocessor occupies the most important position inside any personal
computing machine. And Intel supplies 80% of the microprocessor chips used in
PCs worldwide.
The
Intel Corporation is the leading maker of semiconductor chips and is known for
its quest to make computer chips ever smaller, faster and cheaper. It also makes
circuit boards and other semiconductor products, which are the building blocks
of computers, servers, consumer electronics and other such communications
devices.
As
part of this campaign Intel even launched new logo and slogan to create a stronger
brand identity. That too at a time when
competition was not much of a problem as far Intel was concerned.
A
big brand like Intel has used the recession time silence to make their voice
heard over others. It was proved to be a
right decision afterwards. This clearly
shows how intelligent innovations can work wonders.
Another computer major Dell Inc. also had done the same thing. Computer maker Dell Inc. increased its marketing budget by
more than 300% during the same recession, which helped to boost its market
share.
Capital
Intensive Projects
It’s not favored by experts to enter into capital intensive ventures
during a recession or just when a major economic downturn is expected to
happen. The wild swings in the market are never a healthy atmosphere for
embarking on capital intensive projects.
Managing for a downturn is a slightly more
distant challenge than the immediate threat: managing through volatility. “You
don’t want to make big, bold decisions that are going to potentially tie you
down”. Companies should strive to be agile if attempting to undertake large
investments, and look at outsourcing or joint ventures.
Bailout of the US
Even after the establishment of the European
Economic Union (EEU) the US Japan Japan
The US U.S. U.S.
In September 2008,
as US stock markets plunged and credit markets around the globe seized up,
Treasury Secretary Henry M. Paulson and the chairman of the Federal Reserve,
Ben S. Bernanke, came up with a proposal for a sweeping $700 billion bailout of
the nation's financial institutions
The Triple Auto
bailout was an important innovative move in bringing back the nation’s economy
back into normalcy. The American
Insurance Group bailout also is another case
which became globally noticed.
Bailout is Federal
Support extended to put the big manufacturers like GM, Ford, Chrysler and thus
to prevent job losses and economy erosion. This has been a really innovative financial
measure adopted by the US
Analysis of
the Financial Position
Managers should carefully look through the
financial papers of their companies; asses the actual worth and present
position of the company in respect to their competition. Determining the cash
position of the company is very important in preparing his company to face the
downturn. If the balance sheet is in
poor shape managers should renegotiate lending terms and refinancing, or figure
out other ways to acquire new capital. Don’t wait until you absolutely need to
before doing something to your balance sheet.
Finance is a most crucial resource. Recession is a time when a severe resource
crunch especially monetary crunch is felt.
Collect information, analyze, think creatively and bring out a feasible
solution to bring in a bettered business.
Innovate and be successful.
SUMMARY
In this article titled “Recession
Time Financial Management Innovations”
an earnest attempt is made to find how effective innovative
Financial measures help to achieve sustainable results in business during
trying times citing examples of innovative spending, investment, cost saving and
Personnel management measures adopted by some world famous companies operating
in various fields like Air Transport (Singapore Airlines) finance (Merrill
Lynch) Computer Software production (Microsoft Corporation) Computer Hardware
manufacturing (Dell Inc.) Processor and semiconductor industry (Intel
Corporation) etc.
The bailout situation of the US Economy also is briefly mentioned to
have an idea of bailout as a financial innovation.
It’s concluded that proper knowledge of the prevailing business
atmosphere, prior planning, strategizing and implementation proper innovative
measures alone can make and maintain a company really successful.
Some suitable individual cases are quoted to elucidate the arguments.
Subscribe to:
Posts (Atom)