Elena's Legacy. Texts written by Elena, excerpts from texts she liked, her artworks.

Monday, March 12, 2018

Management

Business and Managerial Theories

Business, commerce, administration and management studies are a popular cluster of majors across the world. Admission to the best known associated professional degree, the MBA or Master of Business Administration, usually requires both an academic and working experience-based background. The situation is similar with the many professional accreditations common in the field (accounting: CPA – Certified Public Accountant, CA – Chartered Accountant, CMA – Certified Management Accountant, CGA – Certified General Accountant; finance: CFA – Chartered Financial Analyst).

The definition is less clear-cut when it comes to managers, although theoretical constructs, such as the newcomer advantage, are abundant. Among other strategies, the newcomer advantage has been defined as a factor in attaining commercial success (making profits being the assumed goal of most businesses). Further, managerial theories often examine the growth and development of an organization through time, such as with leadership crises and related stages. Organizational behavior is a close sub-discipline bordering on industrial psychology.

While the business world is one where the environment is rapidly changing and competition is fierce, theorists advance managerial postulates, designed to minimize risk and maximize profit. By definition, a business ought to strive to remain profitable, and one aspect of survival may be to protect the firm from economic attack. As published in the notorious Harvard Business Review (HBR), utilizing useful strategies may help in this undertaking. Porter (2008) outlines the five competitive forces and proposes strategic solutions. The author first published a legendary article in the HBR about strategy in 1979. For example, businesses in some industries, like airlines, are pulled in all directions by rivals, suppliers and employees, in addition to customers. One suggested solution is effective audience targeting, a marketing concept. The anecdotal evidence in question came from luxury trucks, reminding one of the correlation between a good’s elasticity and its luxury item status.

Interestingly enough, soon after the first decade of the new millennium, few marketing Professors would omit mentioning Apple’s success in their lectures. Along these lines, the computer and software organization made a great move seizing the opportunity and introducing iTunes, linked to iPod and other Mac products, into the digital era, while many music labels remained static and collapsed.

The Harvard Business Review (HBR) is notorious for publishing articles outlining theories that become classics. For example, Porter (2008) establishes five strategic forces that impede profitability in business: overly savvy customers, powerful suppliers, market entrants, alternatives and strong rivals. The author proceeds to enumerating possible strategies to overcome these obstacles, reviewing which in more detail lies outside the scope of the present very short paper.

In conclusion, human resource management is an important process in a firm’s functioning, and Dunn & Short (2008) looked at when entrepreneurs feel they need to get external resources in the personnel management department. Functions were defined as hiring, termination, training, motivation, performance evaluation, compensation and other employment related actions. Successfully managing human resources may even bestow a competitive advantage. Interestingly, organizations of all sizes must engage in HRM (human resource management) but smaller firms tend to be more informal. In their study, the authors found that smaller businesses with less than 11 employees tend to see HRM as less of a priority than larger small businesses (those with 11 employees or more but fewer than a 100 employees).

References:

Dunn, P., Short, L. E. & Liang, K. (2008). Human resource management importance in small business. Small Business Institute Journal, 2: 1-22.

Porter, M. E. (2008). Five competitive forces that shape strategy. Harvard Business Review, January: 1-19.

Porter, M.E. (1979). How Competitive Forces Shape Strategy. Harvard Business Review,March/April: 137-45.

Drugs of Abuse and What They Do

Cocaine use is down since the mid-1980s. Marijuana use is off, too, although millions still smoke it.

Amphetamines: Often called speed or uppers. What it does: Speeds up physical and mental processes. Visible signs of use: Weight loss, dilated pupils, insomnia, irritability, trembling. Long-term effects: Paranoia, extreme weight loss, violent behavior.

Barbiturates: Often called downers. What it does: Produces extreme lethargy and drowsiness. Visible signs of use: Blurred and confused speech, lack of coordination and balance. Long-term effects: Disruption of sleeping pattern, double vision, risk of death from overdose, especially when used in conjunction with alcohol.

Cannabis: Includes marijuana and hashish, often called chronic, dope, pot, grass, hash. What it does: Relaxes mind and body, heightens perception, causes mood swings. Visible signs of use: Red eyes, dilated pupils, increased appetite, lack of physical coordination, lethargy. Long-term effects: Brain, heart, lung, reproductive system damage.

Cocaine: Often called candy, coke, blow, crack. What it does: Stimulates nervous system and produces heightened sensations and sometimes hallucinations. Visible signs of use: Dilated pupils, trembling, apparent intoxication, agitation, rapid breathing, elevated blood pressure. Long-term effects: Ulceration of nasal passages and perforated septum (area separating the nostrils) if drug is snorted. Generalized itching, which can produce open sores. Very possible heart failure.

Bob Marley. Photo by Elena

Opiates: Including opium, morphine, heroine, methadone, as well as synthetic painkillers. What it does: Relieves physical and mental pain and produces temporary euphoria. Visible signs of use: Weight loss, lethargy, mood swings, sweating, slurred speech, sore eyes, drowsiness. Long-term effects: Constipations, extreme risk of infection, including hepatitis and HIV, if drug is injected and needles are shared. Absence of periods in women. Possibility of death from overdose.

Psychedelic Drugs: Including lysergic acid (LSD) and mescaline, as well as “designer drugs” such as ecstasy (MDMA). What it does: Unpredictable. Usually produces hallucinations and intense introspection, which may be pleasant or extremely frightening. Visible signs of use: Dilated pupils, sweating, trembling, sometimes fever and chills. Long-term effects: Possibly irresponsible behavior.

Volatile Substances: Includes the inhaled fumes of glue or cleaning fluids. What it does: Produces hallucinations, giddiness, euphoria, unconsciousness. Visible signs of use: Obvious confusion, dilated pupils, flushed face. Long-term effects: Risk of brain, liver or kidney damage, possible suffocation from inhalation.

Bob Marley Museum. Photo by Elena.

Bob Marley Piano. Photo by Elena.

Cannabis grows in Jamaica. Photo by Elena

Sunday, March 11, 2018

What Is Finance?

Finance is everywhere, and it seems that most people in the business world adore talking about finance. But what is finance? Finance has been described as a technology, as an innovative system to approach investment banking. Finance has also often been likened to accounting, although one soon notices the mathematics behind the two fields differ greatly (financial mathematics tend to be far harder than accounting fundamentals). Also, finance is a branch of economics, the social science aiming at reconciling the unlimited amount of human wants with the limited number of resources available in the world.

Golf is an upper-class sport often associated with businesspeople. Image: Megan Jorgensen (Elena)

Furthermore, microfinance usually refers to finance in developing countries, or nation states in the developing world. Microloans, the bread and butter of microfinance, refers to small loans which allow individual entrepreneurs in developing economies to embark on a new project. For example, people in the West may underestimate how much the life of an entrepreneur in a developing country can be changed with a CAN $1000, a sum which may mean the purchase of a complete running and operating business in some places in the world.

Magic world of finance. Photo by Elena

Corporate Finance and Social Responsibility

The purpose of the present short entry is to discuss corporate social responsibility (CSR) in business as it applies to finance. Corporate social responsibility refers to companies integrating social and environmental matters into their core business model. Of course, arguments remain as to why firms choose to do so, many stemming from a more marketing-oriented approach point of view. For instance, from a neoclassical economics perspective, CSR raises costs unnecessarily, harming a firm’s competitiveness.

Caring for the environment may comprise part of CSR. Image: Megan Jorgensen (Elena)

CSR may also be defined as a luxury goods. Luxury good are distinct from convenience and necessity goods, in that they are acquired as a choice. Firms with better CSR may even face lower capital constraints, mediated through better stakeholder engagement and reduction of informational asymmetry between the firm and the market. The argument rests on the assumption that firms with better CSR have better reputations and thus attract more investors in the market.

Finance

Not unlike other industries, the world of finance is largely based on relationships. While insider trading is illegal and prohibited by the SEC, networks and relationships play important roles in who gets what and how successfully on the financial playing field. Investment banks make the bulk of their money through corporate finance, trading and asset management. The Lehman Brothers was the fifth largest investment bank in the world and collapsed on September 14, 2008 (Fernando et al., 2010).

When a firm first goes public (IPO – Initial Public Offering) actions are sold, and those acquiring them become the shareholders. Further, decisions are usually made by a Board of Directors.

By the same token, the controlling vote is customarily set at a minimum of 51% of shares or stocks. Stocks usually pay dividends and represent shares of the company. long these lines, the Board of Directors would appoint key top management positions, such as CEO (Chief Executive Officer) and CFO (Chief Financial Officer). Nonetheless, the agent-principal problem arises. Thus, while the firm’s managers ought to maximize profits for the corporation, and ultimately, investors, they may fail to do so for a variety of reasons.

Moreover, one of the fundamental theoretical constructs in this sub-field of economics, is Portfolio Theory, developed by Harry Markowitz in a 1952 paper.

Later in 1990, Markowitz received the Nobel Prize in Economics for his achievement. However, Sullivan (2006) asserts that credit for the development should also go to another economist – Andrew Donald Roy. Diversification is likewise an important principle in asset and resource allocation. Another valuable concept is the Pecking Order Theory, developed by Myers in 1984, stating that companies prefer internal rather than external financing when facing potential growth. Guo and Leinberger (2008) decided to test the postulate empirically, and found that practice seems to confirm theory, albeit to differing degrees depending on industry, organization size and other factors.

Real estate is likewise part of finance. Indeed, courses on real estate are often taught in university programs with a major in finance. Interestingly enough, transaction=based rather than appraisal-based research may be more fruitful to a greater understanding on the residential and commercial properties field, accordng to Geltner & Ling (2006). The researchers wrote a paper on the subject, which allows scientists and non-scientists alike to understand the subject matter.

Finance Students

Finance is a field of economics, the social science studying the production, distribution and consumption of resources. Naturally, like with all academic or scholarly endeavours, many theories attempt to explain and predict phenomena. Finance is no different and one of the most often cited arguments or theories, is the efficient market hypothesis. Further, economics is built on assumptions, such as the Latin phrase ‘ceteris paribus’ meaning all other factors being held constant. In a similar way, the efficient market hypothesis assumes that inviduals are rational agents seeking to maximize capital gain.

Many people see finance as a sort of gambling, because no matter what your investment strategy is, you cannot be right one hundred percent (100%) of the time. Thus, the sentence ridiculing financial theory, stating that a bunch of blindfolded monkeys throwing darts at a screen could outperform, or at least not underperform professional money managers and investors may hold some truth, at least to some people from a certain perspective. Furthermore, in certain financial calculations, the nature of the subject matter is such that even a genius would be right only fifty-one percent (51%) of the time. Quite discouraging for finance students, indeed.

Today, finance is among the most popular majors in undergraduate programs, such as Bachelor of Commerce or Bcomm. Indeed, many hopeful students choose to major in finance, dreaming of Wall Street glamour and perhaps of ways to get rich quick. But the truth of the matter is that higher education is not as bulletproof as it used to be. Indeed, BAs or Bachelor of Arts degrees are deemed almost completely useless by many employers. For instance, psychology, one of the most popular majors in the United States of America, leaves students with few alternatives aside from graduate school or working in completely unrelated fields, often at entry level jobs alongside individuals who have not completed any post secondary education. However, BComm degrees usually enjoy a better reputation.

Theoretical Finance

An important topic in financial theory is, unsurprisingly, financial theory itself. For example, countless books and academic articles have been written on the subject, yet history shows that some finance professors are poorer than some obscure billionaire magnates who have yet to graduate from high school… Indeed, theory does not necessarily correspond to practice and the smart investors know their successful strategies not from books but from proven results.

Let’s admit that behavioral finance theory does marry finance to psychology. For example, behavioral and social science such as psychology, predicts that people will see the world in certain ways, and sometimes even imagine sense and connections where none exist. For example, a behavioral finance anecdote tells the story of the human factor playing its part in probability theory.

Thus, when participants were described a woman in her early thirties, artistic, with various musical and literary interests, a liberal with a slight feminist penchant; and then, asked to guess her profession from a multiple choice question, most chose artist over bank teller, while the latter is certainly more statistically probable than the former. The statement goes back to the deplored fallacy that a blindfolded monkey could pick stocks by throwing darts on Wall Street just as well as some of the best traders, brokers, investors and venture capitalists out there, because the stock market remains in economic equilibrium and is so unquestionably well priced.

However, while fatalistic minds would tend to agree that no one can actually beat the market, finance is a systematic, scientific inquiry and one needs only to pick up an entry in an academic journal on corporate finance to notice the rigorous and complex methodology. Thus, highly mathematical, financial theory fails to present itself to easy reading such as psychology would, to illustrate. However, this cannot be said with conviction of all social sciences. For instance, economics (of which finance happens to be a subdivision) is a social science also, but unlike psychology economics presents many more opportunities for calculations and equations, than psychology, quantitative or computational psychology aside, of course.

References:

Guo, E. and Leinberger, G. (2008). Firm growth rates and financial choices in Pennsylvania firms – An empirical study about the Pecking Order Theory. In Eds. Belloit, J. D. and Johns, T. R. (2008). Northeastern Association of Business, Economics and Technology Proceedings of the 30th Annual Meeting October 30th and 31st: 87-94.
Markowitz, H. M. (1952). Portfolio selection. Journal of Finance, 12: 71-91.
Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39 (3): 575-92.
Sullivan, E. J. (2008). A. D. Roy: The forgotten father of portfolio theory. In Eds. Belloit, J. D. and Johns, T. R. (2008) Northeastern Association of Business, Economics and Technology Proceedings of the 30th Annual Meeting October 30th and 31st: 263-8.
Fernando, C. S., May, A. D. & Megginson, W. L. (2010). The value of investment banking relationships: Evidence from the Collapse of Lehman Brothers: 1-55.
Geltner, D. & Ling, D. C. (2006). Considerations in the design and construction of investment real estate research indices. JRER, 28 (4): 1-34.

Economics

Ceteris paribus – prevalent stated assumption, from Latin – all other things being equal

Aside from being the social science grappling with the dilemma of satisfying an unlimited number of wants given a finite amount of resources, economics sheds light on such topics as choice and opportunity cost. Indeed, given that resources are limited, individuals must often make choices.

The decision making process often centers on utility theory or how many utils, or satisfaction units, one gains from outcome A vs. B. Utilitarianism is an economic and political ideology, hedonistic in nature and aiming to achieve the greatest amount of good for the greatest number of people (popularized by John Stuart Mill, who wrote On Liberty). Precisely, the event, outcome or good one gives up when making a choice is called 'opportunity cost'. After all, every action "has a tendency to produce some definite result if nothing occurs to hinder it” (Marshall, 1890).

Furthermore, according to Matziorinis (2008), cost may be overt and covert. Overt cost would refer to the money paid in exchange of a good or service. Conversely, covert cost represents satisfaction forgone from alternative goods and/or services. Thus, the covert cost corresponds to the opportunity cost.

Making a decision is often stressful, even worse could be the potential negative consequences of taking the wrong path. Further, the author outlines conditions under which the right choice is most likely made: one must be aware of one’s needs and aspirations, know one’s options, as well as, the pros and cons of each option. The writer also points out that every national economy is composed of five sectors: government, household, business, financial and foreign (sector).

Pink brain. Abstract art is open to interpretation, so are normative economics. Unlike factual or objective economics, normative economic statements assess the 'ought' part of the discussion. Image: © Megan Jorgensen (Elena)

While the above is true at the micro (firm or individual) level, the statement remains correct at the macro level (or involving governments, large corporations and the economy as a whole). Consequently, the PPB (Production Possibilities Boundary) illustrates this phenomenon for a country’s economic activity. As production efficiency increases with progress in science and technology, the PPB shifts to the right. Points outside the curve mark production combinations as yet unattainable, while points below the curve designate unemployed or underemployed resources.

Economies of scale and of scope reduce production cost, thus enhancing efficiency. Also, the competition fostered by a free market economy is conducive to innovation, technological breakthroughs and constant, relentless pursuit of excellence. Nonetheless, some regulations are fundamental to a society’s long-term well-being, which helps understand why most of today’s nations are mixed economies (coordinating Adam Smith’s invisible hand and laissez-faire postulates with governmental intervention).

Demand and supply need both: a desire and an ability to buy and sell, respectively. As usual, when demand equals supply, the market is in equilibrium, otherwise there appear surpluses and shortages.

References:

Matziorinis, K. N. (2008). Business Economics: In Theory and Practice, 5th ed. Canbek Publications: Quebec, Canada.
Marshall, A. (1890). The principles of economics. Retrieved January 21, 2012 at socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/marshall/prin/index.html

Management and Business Studies

One of the most important areas in one’s life is one’s employment status. Aside from the obvious – making a living – employment bestows one other benefits, such as social, medical and dental benefits, and a sense of purpose. For instance, even after reaching the age of retirement or comfortable financial stability, some individuals continue working because it keeps them occupied or because they simply enjoy what they do.

Of course, professions and occupations vary almost as much as people themselves. Psychology textbooks will often name 16 to 24 years old as formative years for youngsters, likewise indicating that college and university years are among the major life stressors in a person’s life. Also, psychologists often notice that most changes are perceived as stressfull by the living organism desiring to maintain the status quo (homeostasis not to be confused with osmosis; biology).

Romantic redhead. Woman with bright red hair, smiling. Image: Copyright Megan Jorgensen (Elena)

Still, a question arises: Is is worth it to spend all that time and money on higher education? After all, sociological theory states that while the manifest function of higher learning institutions is to educate the new generation, their latent functions constitute keeping youth out of the job market, and aiding in matchmaking or finding a suitable life partner. Furthermore, news articles have at times showcased interviews with CEOs and other high-ranking officials as maintaining that degrees are not the most important factors to them when making a hiring decision.

Still, the value of degrees, diplomas, certificates, certifications, designations and other academic and professional accreditation can hardly be overestimated. For example, many practice licenses and occupational curricula require a college or university degree. Notwithstanding, relevant experience is also often taken into consideration and at times may even replace the academic criteria.

La douleur. Employees often complain of how demanding their superiors can be. Also, it has been said in irony that the key to success is to find someone else to blame for one’s own mistakes. Image: Copyright Megan Jorgensen (Elena)

Finally, a trend one often notices when looking for jobs, is that business administration qualifications seem in demand. Thus, it is understandable that when asked, most academic advisers will agree that a BCom (Bachelor of Commerce) or BBA (Bachelor of Business Administration) likely lead to gainful working positions. Also, the professional degree most often associated with the field is the MBA or Master of Business Administration, consists of a graduate credential requiring both scholar and practical (work experience) backgrounds for admission.