ppt slides chapters one through five

7/31/2019 Ppt Slides Chapters One Through Five

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Global Risk / Global OpportunityTen Essential Tools for Tracking

Minds, Markets & Money

Shlomo Maital and D.V.R. Seshadri

RISK OPPORTUNITY 1


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What are your goals?

What are your expectations in

working through this book?

When youve finished reading it, how

will you know if your time has

been well invested?


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6 Objectives of Global Risk/Global Opportunity

To understand what it means to think and act like aglobal manager, with a true global perspective

To learn how analyze global risk and always relate toglobal risk as a form of concrete business opportunity

To build a set of useful clearly understandable tools

that will enable managers to assess and track global

risk with accuracy, systemically


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To enhance skills in analyzing a new market or

country or geography, as an initial key step in doing

business in that country

To constantly sharpen risk-analysis skills by

engaging in action-learning exercises that apply the 10

essential tools to analysis of risk in a new and perhaps

unfamiliar countryor in a familiar country where

new insights are sought.

To understand how global risk can be analyzed,

assessed and causally understood, in ways that offer

insights into likely future scenarios.


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The Structure of this Book: Chapters One To Five

Chapter One.

Global Crisis 2007-2009: Causes & Opportunities

This chapter explains the nature and origins of the global

capital market crisis that began in the United States in 2007

(as the so-called subprime mortgage crisis) and spread elsewhere.

Chapter Two

What Is Your Story? How to Build Powerful Global

Narratives

This chapter helps you understand why it is vital for

managers to acquire their own macroeconomic analytic tools

and develop their own perspective on key trends in global markets.


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Chapter Four

A Country Is a Business

This chapter helps managers perceive countries as businesses,and develop the ability to "read" a country's basic GDP data as if

it were a business profit-and-loss statement, drawing strategic

conclusions about the country's market size, saving and investment,

growth orientation, and future prospects, useful for guiding

business decisions

Chapter Three

Risk Management with Telescopes & Microscopes

This chapter explains that managers need a peculiar type of vision-- one that enables them, with one eye, to zoom out on global events

and to tracking minds markets and money all over the world

(telescope) and with another eye, to zoom in, on their own

organizations, businesses, products and clients (microscope).


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Chapter Five

Analyzing Engines of Growth

Growth is crucial for businesses and no less crucial for countries.After reading this chapter, you should know how to measure for

any country, and any period, the underlying reasons the country

did (or did not) enjoy economic growth


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Chapter One.

Global Crisis 2007-2009: Causes & Opportunities

Learning Objectives

After reading this chapter, you should understand the basics of

scenario planning, why it is important and how great organizations

used it to meet large unexpected challenges You should understand what contrarian thinking is and how it

can protect managers from herd groupthink;

You should know the difference between an analyst and a

strategist, understand which thinking predominates in your own

mind, and know why both types of mindset are crucial for meetingglobal challenges

You should grasp how Americas response to the 2000-1 dot.com

bubble directly led to the 2001-7 housing bubble, and why this

bubble ultimately collapsed.


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Learning Objectives (continued)

You should know what organizational resilience is, and whyit is of growing importance; you should be able to gauge your

own resilience and that of your organization.

You should understand what a tipping point(critical mass)is, and how it causes markets to shift quickly from bullish to

bearish and vice versa.

You should understand how and why markets are driven by

the interaction of minds (market psychology) and money

(cost and availability of credit and liquidity), and how to track

the dynamics of changing market sentiment.


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Toolbox

Tool #1: Scenario Planning: How to dispel denial by

making worst-case scenarios concrete and believable.


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DefinitionGroupthink - a type of thought exhibited by group

members who try to minimize conflict and reach

consensus without critically testing, analyzing, and

evaluating ideas.

Individual creativity, uniqueness, and independentthinking are lost in the pursuit of group cohesiveness, as

are the advantages of reasonable balance in choice and

thought that might normally be obtained by making

decisions as a group.

Groupthink may cause groups to make hasty, irrational

decisions, where individual doubts are set aside, for fear

of upsetting the groups balance.


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Action Learning: Contrarian Thinking.

Ask yourself, at the present time:

What are the prevailing common

assumptions about local and world

markets?

What are the implications, if some or

all of these assumptions are wrong by180 degrees (i.e. if the precise opposite

is true)?


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Action Learning: One Picture Is

Worth a Thousand Words:

Graphs of key variables can alert

us to looming crises.

What three graphs do you have

in front of desk, in your

workspace, that you view daily,

that serve to alert you to potentialrisks and market declines? Do

you update them regularly?


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Average House Price


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Tipping Point (critical mass): When More than X% Become Bears


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Tipping Point (critical mass): Pessimism is Self-Fulfilling


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Analyst? Or Strategist?

Ask yourself, are you primarily an analyst? Ora strategist?

Definition:

Analyst: An employee of a brokerage or fund

management firm who studies companies and makes

buy and sell recommendations on stocks of these

companies. Strategist: Those who weigh broad market

sentiment and macroeconomic factors in order to

assess the overall business environment , as an aid

to those building buy and sell recommendations.


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Understanding 2007-9: Six Key Principles1. In capital markets, it is not stocks, bonds and other paper

assets that are bought and sold. It is RISK!

2. In global capital markets, one form of risk is consistently

underestimated. It is called perfect storm risk.

3. Be sure you understand the dynamics of the industry in

which you do business.

4. Capital markets will regularly have major crises, every

five years or so.

5. In the contest between Wall St. and regulatory bodies,

Wall St. will always win.

6. In a perfect storm, one domino topples another, amplifying the

impact by a thousand times.


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U.S. Year-to-year % change in corp. net income, 19622008.

---- Incl. financial sector

----Excl. financial sector


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Toolbox

Tool #1: Scenario Planning

A scenario is simply a story, describing vividly what may happen and

how it will come about. Because it is vivid, it is believable, even though

improbable.

Scenario analysis: a) describes perceived current realities

as a mental map (which may differ widely among members of the

group constructing them); b) defines several alternative images of the

future, in tangible, concrete form; and c) describes paths that could be

followed that generate these scenarios.


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In any industry, when the rules of the game are beingradically rewritten, there are huge opportunities for

persons with energy, wisdom and creativity. The financial

services industry is a vital and integral part of the global

economy. Global business and trade is dependent on asmoothly-operating global capital market. Hence, the

financial services industry will be reinvented and reborn.

Those who lead this processleaders with courage and

visionwill do both good for society and do well for

themselves. We urge all those who seek careers in financial

services not to abandom them, while cautioning that the

road ahead may well be rocky for several years.

From Risk to Opportunities


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Learning Objectives:

After reading this chapter you should understand why

it is vital for managers to acquire their own

macroeconomic analytic tools and develop their ownperspective on key trends in global markets.

You should understand precisely what a global manager

is, and how a global manager thinks and acts on that

thinking. You should know what 'teleology' (the study of cause

and effect) means and why becoming good at

understanding teleology in global markets is important

Chapter TwoWhat Is Your Story?

How to Build Powerful Global Narratives

L i Obj ti ( ti d)


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Learning Objectives (continued):

You should also understand how a systems thinker uses

dynamic feedback loops to understand fundamental

causality as it unfolds in world markets. You should beable to construct feedback loops that identify the key

dynamic processes occurring in global markets.

You should be able to use the GELT model (geopolitics,economics, lifestyle, technology) to identify key global

trends and build a narrative from them that leads to

global strategies.

You should be familiar with the recent history of global

markets and have in your mind a teleological account of

events as they unfolded from Nov. 9, 1989 to the present.


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The featured tool in this chapter is:

Tool #1 GELTGeopolitics, Economics, Lifestyle,

Technology.


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Teleology: Global Cause and Effect

Definition:Tel-e-ol-o-gy. n. Gr. telos, an end; -logia,study of; the quality of being directed toward a

definite end, or of having an ultimate purpose.-Webster's New World Dictionary


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The Teleology That Created A Market Leader

Jorma Olilla, while vacationing in southern Francein Nov. 1989, observed the Fall of the Berlin Wall.He reasoned: the fall of the Wall will quickly cause the two

Germanys to unite,

this, in turn, will hasten European unification, andthe single European Market

in turn, the European Single Market will need,above, all, communication,communication will require mobile phones,because of difficulties in integrating national

land-line systems.


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Fall of the

Berlin Wall

9.11.1989

Unification of

East and West

Germany

Creation of

European

Single Market

Need for Europe-

wide communication

Establish

Nokia Mobile

Mobile speeds

Single Market


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GELTGeopolitics, Economics, Lifestyle, Technology.

G - Geopolitics: Instabilities and changes resulting from politicaltrends, in various regions and countries in the world.

E - Economics: Economic trends, including exchange rates,economic

growth, trade, exports, finance, interest rates, capital flows.

L - Lifestyle: Sociology, the way people live, social trends, cohorteffects (differing values across age groups.

Ttechnology: Technology trends, new technologies, new basicscience that can lead to new technologies.


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G - GeopoliticsInstabilities and changes resulting from political trends invarious regions and countries in the world. Example: TheIranian ayatollahs, the war in Georgia, the new FrenchPresident, the American 2008 Presidential elections.E - Economics

Economic trends, including exchange rates, economic growth,trade, exports, finance, interest rates, capital flows.

T - Technology

Technology trends, new technologies, new basic science that canlead to new technologies (new ways to produce semiconductors,new ways to test and evaluate them, new technologies for

increasing transistor density on microprocessors, etc.).

L - Lifestyle

Sociology, the way people live, social trends, cohort effects

(differing values across age groups). Ipod, Iphone, are lifestyleproducts.


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Economy Lifestyle

Geopolitics

Technology


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Step 2: Categorize

Beside each trend, write a letter: G, E, L or T. Depending on itscategory. Some trends may be hard to categorize: if so, thenwrite down two letters, e.g. G and T.

Step 1: The Shopping ListList the major trends, over the coming 3-5 years, that youbelieve will impact the world. Put them down quickly. Eachindividual should take 10 minutes to write a 'shopping list, thenthe team should together build a single list based on the lists of

its members. Write down the key trends irregardless of theirGELT category. Write them on a flip chart page.


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Step 3: Prioritize

Of the entire list, select the major trends that the team believeswill be most important for ..'s industry. There should be 10-20of them.

Step 4: Quantify

For each trend, assign two numbers on a scale of 1 to 10. First:IMPACT: the impact of the trend on the industry, from 1 (verylow) to 10 (very high). Second: TIMING: WHEN the trend will

fully be felt.1 = right now, immediate. 10 = not for 5 years. There can be arange: e.g. 3-5 from 18 months to 2 1/2 yrs.


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Impact

Timing (years)

0 1 2 3 4 5

G

Berlin Wall Falls;

Germany reunited

E

European Single Market

hastened

L

Need for Europe-wide

Communication

TBuild Cellular

Technology


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Tool: Feedback Loops


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Housing prices

fall

Mortages widely

exceed house value;

Net equity is negative

Mortgage owners

default; banks foreclose

Banks sell

foreclosed properties


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Understanding History: Teleology, Feedback and Dominos


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Nanyang Business SchoolMBA 2008 S. Maital 38

Teleology: from Mexico to Argentina

1. Mexico: borrowed Dollars.. High interest rates2. flight of capital.sale of pesos.sell $...3. Crisis: peso is devalued3.50 to 7.004. Emergency loan: IMF $50 b. (lenient)5. Mexico recovers6. Washington: strengthen the dollar..raise interest rates7. Asian countries in BIG BIG trouble8. Thailand: flight of capitalbaht collapses9. IMF loan

10. Other Asian currencies fall rapidly: 1997/9811. oil prices fall rapidly Russia loses revenues12. BRAZIL


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Global Risk: Taxonomy or Ecology?

Taxonomy shopping list of kinds of risk

Ecology global analysis of systemic risk

Chapter Three


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Chapter Three

Risk Management with Telescopes & Microscopes

This chapter explains that managers need a peculiar type of vision

-- one that enables them, with one eye, to zoom out on global events

and to tracking minds markets and money all over the world

(telescope) and with another eye, to zoom in, on their own

organizations, businesses, products and clients (microscope).


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Microscope:

On a scale of 1 to 10: How 'sharp' is your zoom-inmicroscope (i.e. how well do you understand the products,

strategies, operations, and business design of your

organization?) (1 is 'poor'; 10 is 'excellent' or superior).

1________________________ 10Business Design

1________________________ 10

Products

1________________________ 10

Operations

1________________________ 10

Strategies

Average score / 10: X = _____


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Telescope:

On a scale of 1 to 10: How 'sharp' is your zoom-out

telescope (i.e. how well do you track and understand globaltrends and markets ?) (1 is 'poor'; 10 is 'excellent' or

superior).

1 ____________________10

Global economics1 ____________________10

Global finance

1 ____________________10

Global technology

1 ____________________10Global social trends

Average score / 10: Y = _____


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Place yourself in the 2 x 2 diagram below, by plotting the (X,Y) coordinate.

What action items emerge from this analysis? How can you increase the resolution of your

microscope? Of your telescope?

Telescope

Microscope

1

10

1 10


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Case study:

Bankers Trust: When value-at-risk

risk management models collapsed

Case Study:

Goldman Sachs Heads forHarbor

Who and What Caused the Crash of 2007-9?


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Who and What Caused the Crash of 2007 9?

The Three Streets: Wall St., Main St., Massachusetts Ave

Wall Street (capital markets):

Exotic securities that were complex, risky, and largely

unregulated; Compensation: bonus systems that encouraged

bankers and traders to accept undue risks, because rewards were

based on returns but not on risk Leverage: Investment banks gotthe American Securities Exchange Commission to relax their capital

requirements and vastly increase leverage (ratio of debt to capital);

Main Street (ordinary people)

Americans lived well beyond their means, overspent and

overborrowed; small and midsized banks overlent to builders;

greedy homeowners used inflated home prices to borrow and

spend;

M h A (F d l )


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Massachusetts Ave. (Federal government)

Gramm-Leach Act let commercial, investment banks recombine;

Alan Greenspan (Fed Chair) lowered interest rates drastically andexcessively, fueling the housing bubble; Community

Reinvestment Act: forced lending to people with bad or no credit

rating.


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Assetprices rise

Profitsfuel more

leverage

Borrowmoney,buy assets

Assetprices fall

Lossesfuel morede-leveraging

Sell assetsto reducedebt

Bubble

Collapse

ppt slides chapters one through five

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