Carina Tenaglia iClicker Questions RMI Exam 3 Class Notes Maximizing shareholder value is an optimal strategy o Answer false it is a result not a strategy the strategy is what is done to maximize Firms just need a really good single strategy to be successful for a long period of time the shareholder value o Answer false Which of the following caused the global financial crisis o Answer real estate market collapse poor risk management by financial firms and lack of regulation all of the above Module 9 Strategy Risk and the Global Financial Crisis Overview Global financial crisis was a failure of risk management But strategy or lack thereof played a role o It probably was not the primary driver of what happened in 2007 2008 Fiercening of capitalism vs corporate strategy o Wanting to make money at all costs o What is the best way to be profitable Sacrificing long term goals for short term goals What is strategy strategic risk Strategy should make companies more competitive alter to their circumstances and resilient o What should strategies of company do Maximize profit Should make a company more competitive giving an advantage against other competition Resilient ability to bounce back when something goes wrong Mistakes in strategy however can be severe strategic risk o This is how Dr Nyce defines strategic risk Was strategy thrown aside with the mortgage crises and resulting financial markets meltdown Did companies forego long term strategy for quick profits Background on Financial Crises in the global financial crisis Not asking specific questions but we should know about how the following played a role o How does the mortgage system work o What is Fannie Mae Freddie Mac o What s a conforming mortgage mortgage securitization o What are credit default swaps Example of getting a mortgage Someone has 60 000 cash assets and bank lends up to about 80 of property value conforming mortgage in this case 240 000 on 300 000 home o 60 000 240 000 300 000 assets tied up in real estate Owe 240 000 interest on the house Bank 1 000 000 cash 900 000 on demand deposits liabilities 240 000 cash for mortgage Now have 760 000 cash Now have 240 000 A R Banks can only lend out so much in mortgages b c long term liabilities The secondary mortgage market was created by Fannie Mae Freddie Mac o They bought mortgages from banks thousands of them Freddie Mae Fannie Mac They give cash back up to bank and bank has 1 000 000 cash again enough to lend more mortgages now MBS mortgage backed security Creating bond payment on bond linked to people paying their mortgages Now has 240 000 000 A R 900 000 000 debt o This system worked great up until 2006 because real estate values kept going up Early 2000 s real estate bubble real estate property values were rising higher than owning property and renting it out it was like owning stock that was not supported by its cash flow o What started it All of a sudden there was a lack of demand for housing When no one wants to buy houses set prices they have to keep going down chain reaction housing prices go down Values went down more than 20 and people couldn t pay their mortgages Ex going back to sell the house that was 300 000 now for 200 000 o Leads to short sales Banks still had all of the incentives to write off mortgages because they took no risk and still made money on the transactions o Risks passed along to Fannie Mae and Freddie Mac Other investors out there who bought MSB lost Someone discovered that MBS were risky because people were not going to pay Layman Brothers financial institutions did something called a credit default swap Guaranteed that people paid their mortgages if they didn t then Layman Brothers would pay o Cash out mortgages getting mortgages on houses for more than they were worth and using them as credit cards Did Strategy Cause this Crisis Probably not But it did nothing to avert it either Warren Buffet sphere of competence internet stocks in the 90s o Referred to things like credit default swaps as weapons of mass destruction All banks looked at was increasing revenues stock prices etc However that is not the only measure of success Financial institutions at the time did not have long term strategies Strategy did point to stock price as the only measure of success Michael Porter in the 90 s lamented that companies were sacrificing strategy for more faddish concerns o Shows that people saw this coming o He was concerned that focus was on short term v long term Is there a Problem w Strategy Competitive advantage time shortened Positional volatility of leaders o How cool is Facebook o How long can someone remain the leader Ex General Electric GE and IBM have adapted to survive and move on Need for adaptive strategy 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 Don t need one great strategy need a bunch of good strategies Need to create environment structure that allows for creation of new ideas Strategy Cannot Ignore Risk Strategy will need to incorporate risk boundaries corporate purpose environment Systemic risk is real o We face more systemic risk today then we ve ever faced o We have become more efficient global Increased interrelation causes systemic risk When everything is going great we are all made better off When something goes wrong systemic risk then we have a problem have collapsed o 2007 real possibility that our entire financial system could How to build contingencies into strategy to deal with risk how can we be resilient o To be resilient we need back up systems Need back up plans if markets fail if producers do not supply etc Not efficient to always have certain back up plans Ex not efficient to just have a second car in garage in case the first Real trade off between efficiency and redundancy excess capacity one breaks Strategy Must Define Boundaries Market definitions segments What activities should we pursue How broad should our scope be o Ex niche market toy stores like Toys R Us v Wal Mart What are your core competencies o Ex focusing on one thing instead of trying to diversify Strategy Should Define Corporate Purpose Shareholder value is a result not a strategy Stability Growth Employees o Purpose is the result of doing the right things in these areas Strategy Should Reflect Environment What type of growth is sustainable o Quizno s grew very rapidly and then closed Demographic trends Consumption trends o
View Full Document
Unlocking...