Module 9 1 Maximizing shareholder value is an optimal strategy False It is a result not a strategy 2 Firms just need a really good single strategy to be successful for a long period of time False they need to adapt to innovations Markets are always changing 3 Which of the following caused the global financial crisis Poor risk management by financial firms lack of regulation and the real estate market collapse 4 What is the definition of strategic risk Mistakes in strategy 5 What should the strategy of a company do 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 6 What was the global financial crisis described as A failure of risk management 7 Why is capitalism fiercening Companies are evaluated on a 3 6 month cycle and think along the lines of I need to make money today and forget about future profits 8 What played a large role in the global financial crisis but was not the only cause Strategy and the lack thereof 9 What was a common theme in the financial crisis Fiercening of capitalism versus corporate strategy 10 What is corporate strategy focused on The ultimate goal purpose and strategy both short term and long term 11 What 5 things played roles in the financial crisis besides strategic risk How the mortgage system works Fannie Mae Freddie Mac Conforming Mortgage Credit Default Swaps and Mortgage Securitization 12 What is a mortgage A loan from a bank to buy real estate Most real estate transactions involve mortgages 80 of transactions You will eventually have to pay it back 13 How much will a conforming mortgage cover of the property value 80 14 Why don t banks want to lend too much It depletes their cash quickly 15 What are loans in the eyes of the bank Long Term Assets accounts receivable 16 What are deposits in the eyes of the bank Short term liabilities 17 Why did banks make revenue on loans and mortgages Prices were rising so much and therefore qualifications did not matter and so they had no risk 18 What is an 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 19 What is Fannie Mae Freddie Mac Government sponsored secondary mortgage markets They give the cash back to the banks to encourage the banks to lend again They dealt with MBS s 20 What do Mortgage Backed Securities MBS do 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 These were actually risky 21 Why did MBS s work until 2006 Because the real estate values kept going up As long as property values don t go down by more than 20 everything was fine 22 Why did rates start going down in 2007 No one can pinpoint why but they continued to decrease 23 In response to the declining rates what were the two 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 24 Were there people that saw this coming Yes 25 What is a conforming mortgage The most that banks will lend you up to 80 of property value 26 What are Credit Default Swaps Due to the riskiness of MBS s Freddie Mae and Freddie Mac found a financial institution Lehman Brothers to do a credit default swap CDS to guarantee that people will pay their mortgages and if people do not then Lehman Brothers will pay This is a 3rd party guaranteeing payment 27 Why did Lehman Brothers go out of business Due to Credit default swaps They did not have long term strategy 28 What did the Federal Government do They stepped in due to systemic risk and started bailing financial institutions out 29 What is mortgage securitization Financial institutions such as Lehman Brothers who guaranteed payment of mortgages 30 Did strategy cause the crisis No but it did nothing to avert it either No one checked the qualifications of the people who were applying for mortgages 31 What is the sphere of competence What is your strategy and what are you going to do in areas that you know 32 In the 90s what were internet stocks evaluated on Stock values High good 33 What did strategy point to as the only measure of success Stock price 34 What did Michael Porter lament about in the 90s That companies were sacrificing long term strategy for more faddish concerns short term profits 35 What is the problem with strategy Competitive advantage time is shortened positional volatility of leaders and need for adaptive strategy 36 What is an example of the positional volatility of leaders 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 37 Why do we need an adaptive strategy Instead of developing one strategy based on analysis prediction and deduction create a set of optimal conditions for the continuous emergence of superior strategies We need a bunch of good strategies that will keep us at the forefront 38 What four things do we need to incorporate in strategy Risk boundaries corporate purpose and environment 39 Why is one strategy not good enough Things are changing rapidly today 40 According to strategic risk what can strategy not ignore Risk 41 Is systemic risk real Yes 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 42 What causes systemic risk Interrelation 43 When was systemic risk the highest It is the highest today than it has ever been 44 How do companies build contingencies into strategy in order to deal with risk aka how can they be more resilient By creating back up plans excess capacity However this is not an optimal use of resources 45 What is the trade off in relation to resilience Between efficiency and redundancy excess capacity 46 What are strategic boundaries defined by Strategy 47 What questions are asked in relation to strategic boundaries 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 48 What determines whether or not you are maximizing shareholder value How you answer the strategic boundary questions 49 What is
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