Global Financial Crisis - An analysis of the “fundamentals”

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(Free-Press-Release.com) December 5, 2008 --

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Global Financial Crisis - An analysis of the “fundamentals”

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The global financial crisis has created a total mayhem worldwide in the past few months. There is a good amount of material available that explains the current situation very lucidly. We are pretty sure that this problem would get resolved in the short term with the commendable response from the international community. What is being done right now will give symptomatic relief to the problems. We hear so much being talked about “fundamentals” in the news channels around the world. The term “fundamentals” as commonly used in the business community and the media means, the potential of an organization to meet expected turnover, profits, return on investments and growth. Now, let us highlight our perspective of the term and how it might have a bearing on this hot topic.

A crisis arises when one or more of the following occurs:

1. Desire becomes greed (Growth, Growth, Growth…..)
It is alright to desire to be strong, healthy and prosperous. Problem starts when this desire becomes insatiable. Everything in this planet keeps growing till it reaches its optimal level. If growth doesn’t halt at its optimal level, then it becomes an aberration and starts having destructive effects.

Why would it be different in the case of business houses? The present problems have been created by organizations that have grown beyond their optimal levels and have become toxic. The primary cause is not the organization or their executives alone. It is the public at large that has given excessive weight-age to growth thereby making it wanton and indiscriminate.

2. Confidence becomes arrogance ( I can do it - I do it)
It is not the brand, processes and goodwill alone that make up an organization. People are the most important resources. Don’t we tend to judge a bank based on our first interaction with a branch manager?

Why do more than 100 year old organizations collapse? A single incapable person can damage its brand, processes and goodwill in a jiffy. When an organization is formed, it normally comprises of extremely talented individuals with strong value systems. With growth, orientation of new joiners to align with the organizational culture and values becomes a challenge. It is achievable mainly due to the quality of recruits and their adaptability. The successful orientation gives an impression that anybody can be molded with the help of effective orientation programs. This in turn results in sidelining the quality and qualification of the recruits. With indiscriminate growth, the orientation itself takes a back seat as it is assumed that the strong value system on its own will have the desired effects. This is the point at which unknowingly things start falling apart.

3. Knowledge Stagnates
Well, then comes a stage of stagnation in knowledge assimilation. It is deemed that everything that ought to be known is known. All of knowledge is documented in the form of rules, regulations, policies and procedures.

Experiences are unique and can be hardly captured in documents. There is a lot of difference between understanding and realizing. Let us say, I document a statement “Candy is sweet”. It can be read and understood by people based on their own experiences. Unless the specific candy is tasted, the real experience is not fully realized.
Any innovation or change could render an earlier understanding redundant.

There are typical cases of “form” taking over “matter”. The more formats we create, the more we emphasize on adherence, the lesser is the chance for objectivity, creativity and enhancement of assessing capabilities. It is just not enough to tick the questionnaire. One has to go beyond questionnaires, formats and manuals to assess the situation objectively and take an informed decision. Every situation, organization and every individual is different. A rule applicable in one situation may be inappropriate to another.
You may ask at this juncture, that if there is no standardization, how are we to run businesses and conduct audits? Yes, standardization is required, but, flexibility should be allowed. Encouragement should be given to individuals in decision making capacities to use some amount of judgment before striking the hammer as per the rule books.

Perhaps there is something wrong with the rule books. Not to mention there are some regressive, ineffective, inappropriate and meaningless statutes and regulations that we keep debating and analyzing. Their contribution weighs heavily on productivity.

4. Paradigms become stubborn
A closed mind is a high security prison which is impregnable. It holds in shackles virtues like creativity, objectiveness and learning.
Paradigms become robotic commands under which mind functions and rigidity of paradigms blur clarity of mind, thereby rendering it nothing but a prison.

One of the paradigms is to typecast capability of a person with their basic academic qualifications. It is generally expected and accepted that a technical expert cannot understand business nuances, a finance professional would not understand human resource aspects, a doctor cannot be a singer and vice versa.
Similarly, the subprime crisis has been a side effect of one such paradigm. Housing loans had been given assuming that the value of assets would go up endlessly. This assumption has been driven by past statistics and accepted beliefs. The real worth of the properties, the potential for appreciation and ability of people to pay the asking prices have not been given due consideration. Not that some people wouldn’t have thought about them, but their views didn’t merit consideration due to rigid and well set paradigms.

5. Passion becomes Obsession (I love this - I can think of nothing else!)

Passion is essential for achieving anything but obsession is dangerous. Professionals in the financial sectors have a passion for numbers as it makes meaningful analysis possible. However, the moment every aspect of business is attempted to be quantified through numeric representation it starts bordering on obsession. Facts are then attempted to be converted through arithmetic and complicated algorithms to create awesome metrics. Interpretations based on these complexities are bound to give confusing and inconclusive results. Sometimes, the numbers are meaningless or are just not required. Similarly, one could be passionate about using technology, but the moment it becomes an obsession, you start making your life complicated. You start using technology for even the simplest things which could be done by using common sense. And, you stop noticing any flaws that may be associated with it.
In fact, truths are simple and common for all to see and not really as complicated as it is made out to be. A simple thing that a child can understand is not acceptable to us because grown-ups are supposed to know more!

6. Selfishness turning to self-centeredness and leading to micro management (I, me and myself)

Some amount of selfishness is required for any individual or organization. But, when it turns to self-centeredness and leads to micro-management, it proves disastrous. A micro-manager always fails to see the bigger picture. The concept of “macroeconomics” or the Keynesian theory came into picture only after the great depression of 1930s. Till then microeconomics was ruling the roost. Compartmentalized thinking and concentrating on a single area or limitation may not be enough for survival in the long run. It is important to see the impact of any action on the overall business and global environment. There is a famous saying in English which says “penny-wise; pound-foolish”!
One can see classic examples of segmental and departmentalized thinking and functioning in big organizations. Though, a few would agree with the above, the fact remains that the real culprit in these instances is the faulty performance evaluation and incentive schemes.
Corporate citizenship can only be found in policy books and procedure manuals. We do not suggest that selfishness should be totally eliminated. But we believe that incentive plans should not trigger the self-centeredness.

7. Competitiveness becomes aggression (I want it - I want it at any cost)

Competition is healthy. It is a great leveler. It eliminates monopolistic tendencies, brings out options, offers choices to consumers, enhances quality of goods and services offered and instigates innovation and creativity. But, when competitiveness turns to aggression, it fails to achieve its true purpose. In our opinion true competitiveness should be in the quality of goods and services. Unfortunately, competitiveness is being understood to mean only cost advantage. As a result price war and under-cutting begins.
New entrants or the growth seekers in an industry undercut the existing players to get market share. The strategy is that once the market share is captured the initial subsidy can be made good through price corrections two years down the line. The projected NPV calculation and break even analysis look fantastic on the white board.

In reality, it becomes impossible to achieve. The penetrating price becomes the standard and customers refuse to pay more. To compound the problem existing players also reduce prices to keep up with the market. Eventually, survival becomes difficult for everyone, as organizations start surviving on highly leveraged positions rather than cash profits.

Conclusion: In conclusion, the present crisis is a collective failure on the part of all stakeholders which includes senior management, regulators, governments and general public worldwide.
However bitter, unless, these fundamental truths are discussed, understood, and corrected we are bound to have more of such crisis in different spheres of our advancing world.

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Global Financial crisis