We are here to INSPIRE...
Inspire vision, direction, clarity of economic thought and above all the creation of an environment in which human dignity and rights are preserved, in order to give life force to the ideas of hope and prosperity, not at any cost, but at responsibly true and fair economic factor costs; so that we can encourage the growth and development of sustainable human endeavours
...the rest is just noise! (...and if you where wondering - It's Basics)
The focus on sustainability and sustainable practices is a self defeating objective. Sustainability means that business leaders take their eye off the equity holder’s value creation ideal, as it flies in the face of self-interest as promoted by Adam Smith some 234 years ago (The Wealth of Nations , 1776).
Self-interest and the pursuit therefore is being clouded by a multitude of other non value adding factors that is diluting the message and contributing to more uncertainty and risk and therefore capital flight and volatility in the financial and capital markets as we have experienced over the last 2 years.
This process and Zeitgeist will not disappear or be properly understood, unless we develop a deeper understanding and familiarity with uncertainty as a driver of the innovative spirit of human endeavour.
Risk management per se is not the answer and panacea it is held out to be, and if it promotes a more risk-averse society, then we are heading for the middle ground of mediocrity, tyranny and decline in social values and structures that have taken many hundreds of years to create.
Being part of the system with a myopic view, rather than standing outside the system with a holistic and reflective frame of mind is causing more damage than good.
Yet how are we to live and deal with the cognitive dissonance that these two views by the very nature induce?
Let’s open up to good honest debate, search and reflection, rather than to dogma and a narrow focus on defending vested interests and old world models.
We are in the midst of a major cultural, economic and world order paradigm shift and the outcome is uncertain, potentially destabilising, but we must embrace this exploration of uncertainty and chaos the will inevitably ensue.
It is one of the key ingredients of a dynamic market process, yet is competition and the potential negative consequences of short-sightedness a means or an ends in itself?
Today we argue that the unfettered aspiration of competing for competition’s sake and the shedding of what is seen as non-core processes and competencies in organisation will eventually lead to sub-optimal performance and is an unsustainable practice.
In the unrelenting search for shareholder value creation, which is the fiduciary and main responsibility of the board of any shareholder / equity owned organisation, we believe that sub-optimal decisions are being taken, both because of target operating model enhancements and short-term return of investment (ROI).
One of the underlying objectives of International Harmonisation of Financial Regulatory Standards (as currently promoted by the IASB & FASB) is the desire for greater transparency and ultimately more regular and frequent reporting cycles. The view is that the greater the frequency in reporting, the less information asymmetry will be in the market, thereby eliminating insider trading and other undesirable ‘sharp’ market practices that regulatory bodies such as the SEC, London Stock Exchange, NYSE, NASDAQ, DAX, etc., are trying to stamp out.
But if we extend this logic, or rather shorten the current reporting cycles from the regular quarterly updates to say monthly, weekly , daily or even hourly updates, the already short-sighted mentality will become even more sharply focussed. And this begs the question: “How will CEOs and other business leaders have to ‘defend’ their decisions on a minute by minute basis under this unrelenting 24 hour news and sensationalism culture”; thus leading to an even more intense short term focus on their part. Certainly, this must be the worst of all downward spirals and tyranny of information overload?
But, by logical extension, this is exactly where we are heading in a decade or two’s time.
So, if the focus is then on more short-term results and ‘core processes’ where does this leave the current wave of outsourcing, off-shoring or near-shoring of non-core processes?
We contend that the already well established trend of ‘letting go’ of all non-core processes and competencies has a negative effect on the longer-term sustainability of the organisation.
Succession planning could already be outsourced and thus not on the board’s agenda, as recruitment consultancies now fulfil the non-core ‘attraction of suitable candidates’ services, with the traditional Human Resources fulfilling a more Risk mitigation / management functions of ensure compliance with Health & Safety Executive , employment law, equality laws, etc.
Another unintended consequence is the fact that because organisations more and more frequently utilise professional specialists to deliver projects and programmes, the esprit d corps is disappearing from organisational life. It is difficult for managers to gain this motivational force of esprit de corps when they are managing ‘virtual teams’ and a cadre of temporary service providers through dysfunctional processes of ‘on-boarding’, induction, project management, quality control, motivational traps, engagement, focus, etc.
Therefore, to conclude this opening article in a new series around the ‘new labour market models [1][2][3]’, currently being practiced in the western free market democracies, let us ask the key question that is one of the foundations of the factors of production in achieving economic advancement:
“How do we recognise, incubate, nurture, develop and sustain talent and talent management in our organisation, when this critical activity is handed over to outside consultants who have a different business model and agenda to our corporate ambitions?”
We know that there are some ‘labour supply aggregators’ or forward thinking recruitment consultancies that realise that their own models of engagement has to change, in order for them to move into the value creation and value addition space, but there are still far too many ‘factories’ with conveyor belt mentalities out there. Not to let the corporate ‘talent managers’ off the hook, because if you don’t have people and processes in place to manage the talent anymore, you only have yourself to blame when the ‘transparency machine’ of financial regulatory reform forces you down the channel of short-term decline...
If ‘the Law’ is the codification of cultural norms and practices, does the Law then not inform culture?
Policy, social malice and engineering of social outcomes bend these laws into legislative blunt instruments designed to enforce cultural behavioural changes on a grand scale, trouncing the common law of good judgment, neighbourly relations and common sense and thus freedom in their wake?
Within the above question and assertion lies the ‘malice of the free market’; where misguided and misinformed regulation channels behaviour and economic interactions in directions and with outcomes not anticipated or foreseen. Thus unleashing the ‘law of unintended consequences’.
Take as an example the economic condition referred to as Moral Hazard.
A definition is:
Moral Hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.
Moral Hazard therefore flies in the face of the principles of personal responsibility and thus accountability for our actions to a wider stakeholder community.
Is Moral Hazard perhaps promoted and therefore amplified by the fact that business leaders are not more formally educated in their fiduciary responsibilities?
Is this a function of weak or inefficient corporate governance structures and frameworks, or merely an oversight that is readily addressed by ‘occupational licensure’ or the professionalization of directors by only allowing formally qualified persons to serve on certain corporate boards?
Would this formalisation process of understanding fiduciary responsibility hinder the spirit of free enterprise and risk-taking or enhance the governance and risk aptitudes in a controlled and more channelled and focussed practice? Would it have as a positive consequence an amplifier effect for raising the corporate governance and Enterprise-wide Risk Management practices?
The authors identified 5 key drivers affecting the business environment, namely:
1. Changing finance and capital conditions,
2. The decline of trust in business and markets,
3. A less benign macroeconomic environment,
4. Social and demographic change where the recession will have a major influence,
5. Sustainability and resource issue.
We pick up our cue from the fifth driver being Sustainability for today's post.
Our comment serves more as an aide-mémoire to return to in more detail in future articles. This post also does not serve as a commentary on the CBI's report, but rather as a general opinion on the nature of sustainability and human a nature and is therefore pure conjecture.
We believe that sustainability as understood to mean the impact we have on the planet and the resources we consume, is not a natural human phenomenon, in the face of self-interest (as per the economic definition of the term) and competition for scarce resources.
In other words sustainability flies in the face of human kind's natural tendencies to compete for resources, either by war and confiscation, or by trade and exchange for those scarce resources.
We therefore contend that as human actors interacting with and through the free market mechanism, we do not naturally possess a 'sustainability gene', but instead have to develop a new model and framework for ensuring that this objective is effectively pursued and becomes part of the underlying psyche of being in business and discharging our fiduciary responsibilities.
Linking to our previous post ‘The Markets do not need certainty’, we contend that it is structure that helps shape markets and creates the conditions conducive to the effective operation of those markets. Other factors will ultimately affect the efficiency of the markets and some of these factors include Innovation and such like.
In conclusion, let us wrap up with a few quotes on sustainability:
·You can never have an impact on society if you have not changed yourself. Nelson Mandela
·The very process of the restoring the land to health is the process through which we become attuned to Nature and, through Nature, with ourselves. Chris Maser
·We can learn whatever we need in nature because we are part of nature. Human beings are part of Creation. We live by the same laws as all of nature. Anne Wilson Schaef
And in the final quote above we possibly see a glimmer of hope for a possible answer to our ‘Sustainability Gene’ deficiency. Somehow Adam Smith’s ‘self interest’ and the modern free(ish) market system require an injection of nature law and justice.
We hear this management buzz word quite often touted in office settings, and conferences in the media, etc.
We argue today that silos are cultural norms. They are national cultural models possibly endemic of certain national cultures. We certainly have no empirical evidence for this, so this is pure opinion and conjecture on the part of theMarketSoul contributors.
In our previous article titled Increased Friction Costs we briefly touched on the issue of processes being back to front in Britain. Processes are very much driven by the national ‘Carrot & Stick’ approach, rather than an enablement, ‘build and they will come’ approach where solutions are found and embedded then suitable and profitable markets are found for those solutions.
Now we can argue that in a very narrowly defined risk management culture and faced with the reality of reduced opportunity to obtain and procure financing to ‘build solutions on speculation’, we just cannot afford to change our exiting disastrous management and control processes.
But this is exactly where we have to stop the train as quickly as possible and change direction to ‘climb the hill ahead’ so that we can experience the potential and opportunity to ‘see the view from another mountain top vantage spot’…
We are in a tight spot. That is a fact. However, we are being held to ransom at the moment by a ‘political’ system and governing party trying to string out the last days of their tenure in power. [This article was initially written before the General Election in Britain].
There is hope, there is a sliver of light and opportunity on the horizon. However, we will need to learn to deal with some pain, as we readjust the ‘crowding out’ of growth by the public sector and debt burden. However, we need to recognise that we will have to apply a bit more ‘market discipline’ to finding, scoping, building and implementing solutions to our problems.
Small and localism are in fact parts of (but not the entire) solution, where small providers (entrepreneurs) are incentivised and tasked with coming together to experiment and create solutions, that hopefully mitigates the risk of large scale failure, but at the same time find scalable solutions that can rapidly be deployed to solve some of the challenges we currently face.
In IT deployment and development projects they call this kind of rapid, ‘low hanging fruits’ approach to development work Agile Development or AD for short. Maybe this together with the professional service chains and clustering we will touch on in subsequent articles is the way forward.
There has again been a short period of drift and volatility in 'the markets' recently.
And yet again we have hears the old refrain:
"Markets hate uncertainty".
This we assert is yet again a misplaced turn of phrase. It is not uncertainty that markets hate, because inherent within market processes and market operations is the principle of uncertainty. This is the also known as -Information Asymmetry.
So, if it is not uncertainty that markets hate, then what is the missing ingredient that delivers these periods of volatility?
We believe what markets require above all else is:
Structure.
Yes, structure and clear operating parameters, in other words a framework within which to operate is the key.
Whether that structure and framework is delivered via regulatory mechanisms or liquidity or a political landscape that sets the parameters in terms of policy guidelines and fiscal and monetary controls, it does not matters.
Remove the nebulous shifting and drifting borders and put in place a framework that sets the framework and outline of the playing fields and markets respond positively to these signals.
Refrain from doing the work of 'framework establishment processes' and markets and their participants become 'restless souls' aimlessly drifting within the 'nebulous fog' of uncertainty, clearly waiting and anticipating the regularity that structure delivers to the 'Market'
We had some very rewarding conversations recently with business partners and peers regarding the Value of Synthesis versus Analysis.
Synthesis we believe to be a ‘higher level’ skill and experience set than traditional analysis. Synthesis requires a natural ‘incubation period’. Very few people are natural ‘synthesists’. You grow and mature into a ‘natural Synthisist’.
Analysts can be taught. In fact a very lucrative business education industrial complex has been built on the back of ‘creating a production line of analysts’. We call them Business Schools churning out master’s level analysts with the three letter MBA title behind their names.
Don’t get us wrong on this one. We are not criticising MBAs or the Business Schools that produce them. Far from it; because we believe that part of the ‘evolutionary process’ of ‘incubating a mature synthesist’ is having a deep and fundamental understanding of analysis and the factors that contribute to making a good analyst.
Two of the key words we used in the above paragraphs were:
1.Incubate
2.Mature
We pause to reflect on these two words, because they are part of a natural evolutionary cycle.
Synthesis is a development process. It doesn’t just occur overnight. The process takes many years, many forms, much frustration, heart-ache, high failure rates, desperation, etc. We hope you understand the philosophical underpinnings of the argument.
The drivers that help define and shape good synthesists are many fold, however, two of the more basic building blocks include:
1.The Tyranny of the Status Quo
2.The Language of the Artist
What do we mean by these two concepts?
The Tyranny of the Status Quo
Mediocrity, lack of risk taking and proper risk management, a ‘level playing field’, universal access, no economic ladder to climb and a social ideology that creates an amorphous mass of despair is what drives the tyranny of the status quo. It is the antithesis of Innovation and Creative Thought. It is the Socialist ideology that drags us all down to the lowest common denominator.
The Language of the Artists
We believe it was Peter Block who claimed in that business life has become ‘infected’ with the language of the Engineer and Scientist. We ‘Business Process Reengineer’ this and that; we ‘Reverse Engineer’ this or that process. We contain, seal and measures finite risks and processes, much like a scientist would work in a ‘Controlled Laboratory Environment’.
But what we really need is the language of the artist and philosopher. We require poetry, motion, flow and creativity in order to establish the correct environment for innovation to ‘spring forth’ naturally and spontaneously.
Even though you would think this to be a natural phenomenon, it is very difficult to achieve in the ‘controlled environment’ of Shareholder Value Creation, due to the narrow focus on hard facts and cool numbers, underpinned by the ‘negative risk management cycle’.
In an article we recently published in a boutique Risk Management Training and Consultancy’s Quarterly Risk Update, we referred to both the positive and negative risk management perspectives.
Negative risk management is “[the] approach in an organisation that is designed to prevent the downside consequences of a transaction, such as (1) mitigating a potential loss or (2) the cost of not complying with regulatory requirements”, whereas in positive risk management “the upside is managed in conjunction with a risk based approach to general management. This is the starting point of Enterprise Risk Management”.
Financial Controllers and CFOs have to ensure that shareholder value is continuously created and then as measured and reported within the framework of Internationally Accepted Financial Reporting Standards and the generally ‘rules based approach’ to compiling those Financial Reports.
This is not a simple task and should we ‘interfere’ here with the language of the artist and philosopher in this process, we are certainly dead set on the course that will lead to ‘confusion, value destruction and financial ruin’. But aren’t we there already?
Has the most recent ‘crisis of confidence’ in the financial system as practiced by the ‘Financial Engineers’ and ‘Quant-type’ mathematicians and scientists not just proved that the old paradigm does not create value, but is still subject to ‘deep-rooted and fundamental’ long-term business cycles?
And yet what do we do? We blame the ‘selfish and selfless’ market capitalists for the problem, rather than address the basic condition that drive the imbalance, namely the ‘imperfect market’ that we create with over burdensome regulation, control and ‘dare we mention the term again ‘financial and business process (re-)engineering’.
We continuously oscillate on the pendulum between the free and ‘planned or controlled’ market forces.
Until we recognise the fact that our policy interventions, ill conceived regulatory frameworks and processes and the financial reporting and ‘engineering’ standards help drive the market mechanism to points of ‘disequilibrium’ where the natural ‘clearing mechanism’ of matched supply and demand cannot function normally; then we will just have to accept the consequences of the natural ‘boom and bust’ economic cycles.
To have ever utter the immortal, nay, ‘notorious’ phrase “we have abolished boom and bust” was not just arrogant but utterly naive and demonstrated a lack of a basic understanding of market forces in the ‘planned and controlled’ market economy camp.
Therefore, to conclude this brief post on the Value of Synthesis, we challenge mature ‘incubated’ professionals to step up to the challenge of redefining the new economic landscape by utilising the language of the artist and philosopher and to practice just a little bit of ‘Loony Intelligence’ in the process.
For further information and more in depth discussion on this subject, please contact us by clicking this link:
Comparative advantageis attributed toDavid Ricardoand is an economic law which states that a market actor (individual, firm, region or country) has the ability to produce goods and services at a loweropportunity costthan another actor or market participant. This is a relative term as even if a market participant has a higher opportunity cost than another participant, by concentrating its efforts in the area where it has the least opportunity cost disadvantage it can still compete and produce output that would benefit its wealth creation possibilities.
Competitive advantageon the other hand is the theory of concentrating one’s efforts on producing the highest quality goods and selling them at the highest possible price. It has a purely price maximising focus with the hope of resulting in wealth creation. Therefore, note the subtle difference in approach where comparative advantage tries to maximise wealth creation, competitive advantage has wealth creation as a by-product of focusing on maximising price.
One can argue that comparative advantage has value creation at its centre, whereas competitive advantage has a more short-term profit driver motive behind it. Competitive advantage is attributed to Michael Porter in the 1990’s whereas comparative advantage has its roots in early 19thCentury economic philosophy.
Now that we have the definitions out of the why, we can focus on the question of competitive advantage in UK plc. We are specifically interested in this aspect as a short-term approach is potentially needed to drag us back to the growth path we abandoned a few decades ago. Yes, it is our contention that growth and wealth creation is linked to underlying fundamental economic output and not monetary economics and financial engineering driven.
For a clue we might look at some of the major ‘Industrial Complexes’ dominating economic activity in the UK at the moment.
The usual suspects tend to be theMilitary Industrial Complex, but there are others include the Financial, Prison, Sports or Healthcare Industrial Complexes.
The phrase ‘Industrial Complex’ refers to all the organizations involved in the construction, operation, and promotion of that specific industrial complex.
In the UK the NHS alone as part of the total Healthcare Industrial Complex current employees around1.2 millionpeople, excluding all the pharmaceutical and other medical devices and facilities construction services and accounts for over £108bn or around between 8 – 10% of annual GDP (Gross Domestic Product), up from3.5% of GDPback in 1949, when the National Health Services started. Putting this in ‘constant prices’ terms the NHS in 2006/2007 accounted for 9.6 times more in expenditure as it did back in 1949. Up to 1999/2000 the NHS total healthcare cost had risen by 582% versus 1949, but between 1997/98 and 2007/08, real-terms expenditure rose by 82%.
The question we beg to ask is if the total NHS cost in 1997/1998 was below £53bn and in 2006/2007 it was£104.7bn, have we experienced a doubling in “Value For Money” over that 7 year period?
This question is off course open to debate and interpretation and more importantly political expediency.
However, we believe that there are many advantages to be gained from revitalising the Healthcare Industrial Complex, by applying innovation and an outward looking market driven focus and mentality to this important economic activity driver.
In future series of this introductory article we will explore some of the Innovations and opportunities the Healthcare Industrial Complex offers UK plc in driving both growth and wealth creation in Britain.
It is true. This is not a playground, kinder-garden experience...
As we don’t live a purely Command and Control or 100% Free Market environment we have to constantly adjust our actions and interactions with the market around us based on factors such as:
• Geography
• Jurisdiction and cultural norms
• Experiences
• Sophistication levels
• Access points
• Openness
There are many other factors to add to the list above, but we are referring to the behavioural aspects inherent in any market interaction.
One of the greatest challenges facing the political class in the UK at the moment is the Truth or Dare conundrum.
We are specifically referring to the urgent need to cut public sector spending, yet the painful reality that it is:
a) Very difficult and not politically expedient to admit the ‘Truth as seen by any politician’ (see the ‘Force of Hell’ reference uttered by Alistair Darling on trying to speak the truth
b) People cost money (and a lot of money)
c) Efficiency savings are akin to an admission of guilt and proof of mismanagement
Most public sector jobs are not subject to ‘market-forces’ at the best of times, therefore the automatic adjustment mechanism and signal that ‘price’ sends is not a factor in the equation.
What do we mean by this?
In a free market driven environment, price is the single most important signal and measure against which both suppliers and ‘demanders’ (consumers) measure value. In the absence of all other qualitative factors, price has a very important role to play in ‘clearing the mismatch between supply and demand.
So when we experience either a supply or demand shock, as the Credit Quake of 2008 – 2009 has proved; we need to face harsh realities and make serious behavioural changes.
We are still not able to face up to the difficult ‘adjustment phase’ that both ‘deleveraging’ and the new economic reality, post election 2010 has in store for UK plc.
Many a household across the length and breadth of the UK (and beyond) has had to come to terms with the stark realities of the ‘market mechanism’ and adjusted their behaviours and ‘prices’ to move towards a new economic equilibrium, yet the public sector has not had to face this tough reality.
Maybe because the Public Sector in Britain now accounts for between 52.1% - 53.4% (depending on which economic Think Tank’s research you believe), the crowding out of the private sector and ‘loss of touch’ with the economic reality of market mechanisms has been softened.
However, irrespective of who governs Britain and runs UK plc after the ‘expected’ elections in May 2010, the winner will have to make a few very hard choices:
1. How to reduce the dependency on and of the Public Sector and bring the percentage that the Public Sector ‘consumes’ of GDP to below 40%
2. How to ‘financially engineer’ the public debt and bank guarantees the current administration dished out in 2008 – 2009 (Anywhere between £200 - £350 Billion)
3. Run the country along more traditional market disciplines,
Therefore managing the country along market principles as opposed to a ‘socially engineered’ artificial egalitarian level playing field.
The ‘ladder’ exists for a reason in the true market environment, to help set aspiration and make the system work in order to ensure progress, growth (over the long-term) and advancement.
This all favours innovation as a driver for feeding the need for progress, growth and advancement.
In our next article we will continue our theme of Innovation, with part 6 of the series.
Let’s keep on ‘following the money’ on this occasion
We start today’s article with a cry for a return to common sense and a reduction in the unnecessary Friction Cost in the economic system (especially here in Britain).
What we will be focussing on today is the ‘hidden cost’ element of Friction Costs. As in definition 2 above, it is the Total Cost, including the economist’s ‘Opportunity Cost’ than needs to be considered in this discussion:
We start of the debate with a quote from Dean LeBaron:
“Market inefficiency exists because we do not root out their basic causes. These causes are easy enough to identify, if one looks with enough dispassion and rigor.”
As we are entering a politically charged season, we want to remind everyone of the key word in the above quotation:
Dispassion
We believe that too many decisions and arguments are framed in the ‘emotionally charged world’ and that too few dispassionate thinking and analysis is applied to the really big questions and problems facing us today...
Let us briefly focus on an example of what we mean by ‘hidden costs’:
This is a criticism of British legislative fervour and spurious targeted ‘efficiency’ gains. This leads to sub-optimal solutions.
Our actual real life example:
By April 2011, most businesses and individual subject to the ‘Self-Assessment’ tax regime must file online, irrespective of size or individual circumstance. Nothing wrong with these facts so far. However, we are still embroiled and faced with legacy Information Technology systems that cannot cope with the 21st Century IT revolution and government collection tax collection regime aspirations.
A typical example is where certain legal entities (Limited Liability Partnerships) are forced to file online, not with the HMRC’s system and software, but have to purchase additional commercial software to file (An example of a friction cost, that is not very clearly recognised).
Further to this, should the entity actually comply and file their tax return online and in time, the legacy systems at the HMRC, does not automatically recognise this fact, even though an acknowledgement of receipt has been issued by the HMRC’s system.
The actual Tax Return submission is acknowledged, but not the physical filing of the data. The consequence is that a penalty notice is sent to each partner (another friction cost) and has two consequences:
HMRC and The Treasury has made a false penalty determination, but the revenue gets recognised in the HMRC’s accounts, therefore falsely inflating the tax takes
The business has to incur another Friction Cost as they have to respond to the penalty determination and dispute the claim.
Therefore a compliance costs has escalated into an opportunity cost as the individuals in the firm have to allocate time and resources in dealing with more unnecessary compliance mitigation work by refuting the spurious penalty determinations.
When will we recognise in this country that the process should not be:
Create a target
Legislate the target
Then build the solution process
Beat up the citizens for not being able to comply
But Should be:
Build the solution
Integrate the solution
Test the solution
Create the target
Legislate the target...
This way we will create a new culture of efficiency, compliance and citizenship that respects and endures the necessity of tax regimes to deliver wealth creating opportunities for all willing and able participants in the system.
We will interrupt our series of articles on ‘The Trouble with Innovation’ and begin to weave in between those conversations, a more fundamental argument to help enlighten the debate and understanding around the differences between ‘Monetary Economics’ and ‘Real Economics’.
The basic themes of this series of articles will be around growth and shrinking in the economy, value and money measurements.
This will be a layman’s guide to understanding the differences and principles of Monetary Economics. We realise that in casual conversations with finance and business professionals, there is a basic misunderstanding of what Monetary Economics is and how it impacts on the broader or ‘Real Economy’.
Our quick and ready definition of Monetary Economics is this: Money and currency is only a temporary measure of value.
Another definition is: “An economic theory, the proponents of which argue that economic variations, such as changes in prices and output, are primarily the result of changes in the money supply. (Thus, the Federal Reserve Board is the most important economic policymaker in the country.) Proponents of monetarism believe that changes in the money supply precede changes in other economic variables, including stock prices, and that a rational policy calls for moderate, steady increases in the money supply.” (See the link monetarism).
Now we can get bogged down in definitions and we realise the dangerous of always taking the top two or three definitions offered by Google search at face value.
An example of a textbook definition of monetarism is: “a range of views which emphasise the role of money in the operation of the economy system”. At this point we need to mention that it is a contrast to Keynesian economics, which is being applied in various degrees in most Western governments at the moment, in order to support the Economic System as a whole.
However, Michael Foot, an ex Labour Opposition leader in 1983 made unhelpful comments such as: “monetarism is a worldwide disease” (The Economics of Taxation, Prentice Hall, 7th Edition, we linked to the 9th Edition).
Turning to an analysis of the Wikipedia definition we focus on the key phrases of ‘measure of value’, ‘store of value’ and ‘unit of account’.
Nowhere in this definition does it mention measurement of output or production, the key building block of the real economy.
Therefore, we conclude this first introductory article by making the clear distinction between money as a measurement tool and unit of account and real output or production being the building blocks of economic activity.
In the next instalment of this article we will define output, activity and production and then start making the stark contrasts between what monetary and real economics really are.
Let’s get the basics of economic language right and move on towards a better appreciation and understanding of the intricacies and interplays of economic discourse and activity.
As CeBIT 2010 ended this series of articles will move forward from the baseline discussed do far. In the last article Part 4 we alluded to Risk and the positive Risk Management strategy of Value Based Principles. In order to conclude the next two steps into Value Creation Chain, we need to focus on ‘Value Management’ and ‘Value Measurement’. Firstly then, value management:
Managing the Value
We highlighted the seven Value Drivers in the previous article and below we elaborate on what lies behind the logic of each:
1. Sale Growth Rate
As the starting point profit and growth planning must set a solid platform to help drive the organisation forward. Whether the approach is to focus on product or market development, or a combination of both, we help identify the resource allocation pressure and decision points, in order to maximise the return on effort invested. As a top line focus point Sales Growth helps galvanise the organisational management and employees to identify suitable market opportunities to pursue to overall sales or set-off objectives.
2. Operating Margin
Operating margin becomes the focal point for operational efficiency and cost management strategies. During the recession most organisations have looked long and hard at this particular area, partly because sales growth have suffered quite severely, but also because they have realised that in any growth cycle such as we experienced between 2003 – 2007, ‘organisational operational padding’ have added unwarranted inefficiencies to their operating processes. The conundrum at the moment facing most organisations is the question of how to drive sales forward and upward, with the reduced operational cost base in place. The two major levers of Sales Growth and Operational Cost need to be manipulated with the utmost delicacy and ‘a very steady hand on the tiller’.
3. Cash Tax Rates
It is a given that the focus of most western governments will be on maximising Treasury tax takes over the next few years, in order to manage the huge fiscal stimulus packages introduced to support the economies. We expect quite a militant and aggressive approach in this area and a deluge of mitigation and profit extraction strategies to drive this ‘opportunity cost’ of business (your licence to operate fee) down. This is an area best left to the specialist is the area, however, it is still a value investment of your time to keep a beady eye on this ‘hidden value driver’.
4. Fixed Capital Investment
Financing and timing are the two major factors to consider in Fixed Capital Investment area of your business. A creative off balance sheet financing strategy might assist in extracting value in this area; however, the key issue is to have the capital infrastructure in place to support your organisational objectives. Taking advantage of distressed assets values might will set up and gear the organisation towards supporting the initial Sales Growth driver.
5. Working Capital Investment
Liquidity and liquidity risk management are the key focus areas in maximising value in your working capital management processes.
6. Cost of Capital
A one-off opportunity to positively manage the organisational cost of capital down has emerged at the end of this recessionary cycle; however, it is up to the astute organisational leadership to take advantage of the opportunity. We recognise that a multitude of factors currently exist which might make taking advantage of this unique opportunity quite challenging, however, if the platform and measurement dashboards, combined with the organisational structure and resources are in place to take advantage of the historically low cost of capital rates, we encourage every organisation to take advantage of this potential opportunity.
7. Planning horizon
Clearly understanding that a longer term timeframe is genuinely beneficial, combined with regulatory factors encouraging the long view at the moment, will help the organisational leadership grasp both drivers of value in this factor, namely the current departure point and value calculation and the ultimate exist strategy value or Terminal Value of the organisation.
Measuring the Value
Graphical Key Performance and Risk Indicators combined with Short Interval Cycles (SICs) focus management effort on taking corrective action very quickly. The unique pro-active dashboards help turn around the reactive Management Information Systems and becomes a vital and integral part of the overall strategic management philosophy underpinning the Risk Based Value Management practice be have developed. In the next article we will focus on measuring the value in more detail and on Entropy, an articleposted by a fellow blogger at Cheap Seats. We will draw our inspiration from those thoughts.
