RMI 2302 Exam 3 Module 9 I Clicker Questions Q Maximizing shareholder value is an optimal strategy A False It is a result not a strategy Q Firms just need a really good single strategy to be successful for a long period of time A False they need to adapt to innovations Markets are always changing Q Which of the following caused the global financial crisis A Poor risk management by financial firms lack of regulation and the real estate market collapse Strategy Strategic Risk Strategy should make companies more competitive alert to their circumstances and resilient Definition of strategic risk mistakes in strategy Mistakes in strategy however can be severe strategic risk Was strategy thrown aside with the mortgage crises and resulting financial markets meltdown Did companies forgo long term strategy for quick profits Q What should the strategy of a company do A It should make you more competitive give you an advantage over your competition should make you more alert to circumstances and make you more resilient Financial Crisis The global financial crisis was a failure of risk management Strategy and the lack thereof played a large role Strategic risk played a role but was not the primary driver of the crisis The Fiercening of capitalism vs corporate strategy How can I be profitable Do I sacrifice long term profits or goals What do I do if I see a competitor succeeding Companies are evaluated on a 3 6 month short term cycle and that is why capitalism is fiercening I need to make money today and forget about future profits Corporate strategy What is my ultimate goal purpose and strategy both short term and long term The following things played a role in the financial crisis How does our mortgage system work a mortgage is a loan from a bank to buy real estate Most real estate transactions involve mortgages 80 of transactions You go to a bank apply for a mortgage and they give you a conforming mortgage which will cover RMI 2302 Exam 3 80 of the property value that you are trying to purchase But eventually you will have to pay it back on account account receivable debit cash credit in they eyes of the bank Banks do not want to lend too much because it depletes their cash quickly Loans are long term assets to the bank but deposits are short term liabilities to the bank Banks had no risk and made revenue due the fact that prices were rising so much that qualifications did not matter On demand deposit I can walk into the bank anytime and demand my money back This is shown as a liability in the eyes of the bank They take your money and invest it Fannie Mae Freddie Mac government sponsored secondary mortgage markets They buy a lot of mortgages They give the cash back to the banks to encourage the banks to lend again MBS mortgage backed security they take the thousands of mortgages and create a bond where the payment on the bond is linked to the person who bought the mortgage The MBS is put onto the market It worked up until 2006 because the real estate values kept going up As long as property values don t go down by more than 20 everything is fine No one can pinpoint why the rates started going down but they did in 2007 The rates continued to decrease Options Short sale convincing banks to let you pay back less money than your borrowed Walk away stop paying the mortgage and let the banks foreclose on you and make you file for bankruptcy A lot of people did this There were people that saw this coming Conforming mortgage the most that banks will lend you up to 80 of property value Credit default swaps MBS were actually risky Freddie Mae and Freddie Mac found a financial institution Laymen Brothers to do a credit default swap CDS to guarantee that people will pay their mortgages and if people do not then Laymen Brothers will pay This is a 3rd party guaranteeing payment Laymen Brothers went out of business due to this The Federal Government stepped in due to systemic risk and started bailing financial institutions out Mortgage securitization Financial institutions such as Laymen Brothers They did not have long term strategy Did strategy cause the crisis those applying for mortgages Warren Buffet Probably not but it did nothing to avert it either They did not check qualifications of Sphere of competence what is your strategy and what are you going to do in areas that you know Internet stocks in the 90 s were evaluated based on stock values high good Strategy did point to stock price as the only measure of success RMI 2302 Exam 3 Michael Porter in the 90 s lamented that companies were sacrificing long term strategy for more faddish concerns short term profits Is there a problem with strategy Competitive advantage time shortened Positional volatility of leaders how long can I stay as the leader Need for adaptive strategy o Best Buy is going to be gone due to the internet unless they adapt because they are selling a commodity that can be price checked o GE does a good job at adapting and staying current in order to survive o Instead of developing one strategy based on analysis prediction and deduction o Create a set of optimal conditions for the continuous emergence of superior strategies o Need a bunch of good strategies that will keep me at the forefront Strategy will need to incorporate risk boundaries corporate purpose environment Things are changing rapidly today and one strategy is not good enough 1 Strategic Risk strategy cannot ignore risk Systemic risk is real this happened in the mortgage crisis when one financial institution falls it has a domino effect and many others will fall as well If the Federal government didn t step in it would have been worse o Interrelation causes systemic risk o Systemic risk is the highest today than it has ever been How to build contingencies into strategy to deal with risk how can we be more resilient o We need backup plans excess capacity but it is not an optimal use of our resources Real trade off between efficiency and redundancy excess capacity 2 Strategic Boundaries these must be defined by strategy Market definitions segments What activities should we pursue How broad should our scope be What are your core competencies How are you going to stay relevant How you answer these questions will determine whether or not you are maximizing shareholder value 3 Corporate Purpose strategy should define corporate purpose 1 Stability 2 Growth 3 Employees Shareholder value is a result not a strategy RMI 2302 Exam 3 4 Strategic Environment strategy should reflect
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