"Goal" is Vulgar

The Goal: A Process of Ongoing Improvement is a best-selling business novel about a production plant which is trying to “make money”. Authors Eliyahu Goldratt and Jeff Cox bring great insight about managing everyday business in their easy to read book. To read, people don’t need to know business terminologies; authors explained all the business jargons in layman language. Though the book was written 25 years ago, it incorporated so many contemporary topics on business in the discussion. However, I have a very disappointing memory with this book from my undergraduate studies.

What is the goal of the firm? Goldratt Answers: making money must be the goal. Nothing else work in its place. If the goal is to make money, then, an action that moves us toward making money is productive, and other actions are non-productive (P 40). Authors clarify further, and say: To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow (Goldratt 49). However, I strongly believe that the goal of “making money” is vulgar. How could we think that making money is the goal of a firm while businesses are also considered as global citizen? Businesses also do interaction with society, and thus have some responsibility towards the society rather than only making money. Today firms also spend billions to fulfill their social responsibility.

Rather than making money, maximizing stockholders wealth should be the goal of a firm because it also maximizes welfare in the society we live in. So, to maximize shareholders wealth, one more element will be in the Goldratt’s matrix, i.e., customer satisfaction. So I would say that the goal of a firm is to maximize shareholders wealth by increasing net profit, return on investment (ROI), and cash flow through providing value to the customers simultaneously.

Another factor was missed by the authors in their novel, i.e., time. In accounting, we treat that firms are also another entity just like a person on this earth. Though a person is not immortal, we assume that a business entity will survive for indefinite period of time. Authors did not define whether the goal of making money is a short term goal or a long term goal. Because if this is a “short-term” goal we would do most harm to the firm. We would do everything to make money for the business. However, if you set that making money is a “long-term” goal then managers will try to be in the business while they will also devote their resources to make money. And if a firm wants to be in business in a competitive market, it would adopt all the good practices that others are following in the marketplace. At this point, I would like to share my personal memory regarding the book, The Goal: A Process of Ongoing Improvement.

While I was doing my undergraduate studies in Ashland in University, Ohio, I had to participate in GLO-BUS business competition as a part of my Business Capstone class in my senior year. GLO-BUS (http://www.glo-bus.com/) is an international business simulation where the focus is on the competitive business strategy. In GLO-BUS, teams of students from all over the world run a digital camera company in head-to-head competition against companies run by other class members. Just as in the real-world, companies compete in a global market arena, selling digital cameras in four geographic regions—Europe-Africa, North America, Asia-Pacific, and Latin America. In the simulation, the challenge is to craft and execute a competitive strategy that results in a respected brand image, keeps your company in contention for global market leadership, and produces good financial performance as measured by earnings per share, return on investment, stock price appreciation, and credit rating.

In the competition in GLO-BUS, I did pretty well, for instance, at the end of the first week, the rate of return for my company was 245 percent while the second group had 25 percent! I was always in the top 5 in the competition. My professor was also surprised because I was the first person in Ashland University that was in the top 5 world-wide from the very beginning. What’s the secret? I have read Eliyahu Goldratt’s The Goal: A Process of Ongoing Improvement earlier, and implemented all the idea from the book. In the competition, I tried to reduce cost as much as possible. The formula to make money on the GLO-BUS was clear: I had charged huge price for a very low quality product. In the short-term, I was able to make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow by providing low quality but high-priced camera to the customers.

However, you can’t continue making money for so long by providing low-quality products for a high price to the customers. Thus, within few day market figured out my trick, and stopped buying my low quality but high priced camera. Within five weeks in the competition, I was thrown away from the “best performance”. After I was discarded from the competition, I followed all the good business practices to get back to the competition but failed to do so. Market did not like my low quality product anymore. I have learned my lesson: Market never forgives, and market never forgets. A business can’t sacrifice its quality in its service or product to do cost reduction. Cost reduction must be done while quality is either increased or at least remain the same. Furthermore, we must understand that price and quality is proportionately related.

Anyone will read the first half of the book in just one breath. However, after the first half, the book lost its flow. From this book, first time I got to know about “bottleneck” and how to manage it not only in the industrial settings but also in everyday life. The goal in the book is seriously flawed: The goal of “making money” is vulgar and misleading too. The goal of a firm should be maximizing shareholders wealth rather than making money. I would give a 4 to Eliyahu Goldratt, and Jeff Cox’s The Goal: A Process of Ongoing Improvement for teaching me a great lesson: Market never forgives, and we must make money through providing value to the customers to be in the business for forever.

Source

Goldratt, Eliyahu, Jeff Cox, The Goal: A Process of Ongoing Improvement. North River Press, Inc., 1992.

GLO-BUS (http://www.glo-bus.com/)

Why is nationalisation of the US banking systems unavoidable?

CRITICS claim that long-run growth of the private sector investment in Bangladesh was affected seriously during the early years of independence due to the policy of nationalization. Soon after coming to power, the then government nationalized the industrial and the financial sectors through different Presidential Ordinances in 1972. However, the main reason for nationalization was to find a better way to utilise abandoned properties by the erstwhile West Pakistanis after independence. The ruling party's ideology of nationalism, secularism, democracy and socialism was another reason. Today, the US is showing us a great magic, i.e., how nationalization can even be done under free market concept!

People, who always opposed government intervention in the market, have changed their mind, and now advocating bank nationalization. Alan Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, in an interview with the Financial Times (FT) on February 18th said that "once in a hundred years" the government needs to take over the banks, and now is the time. He also told the FT that "it may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring." Sen. Lindsey Graham, a Republican from South Carolina, has called for doing what works and said "if nationalization is what works, then we should do it." Paul Krugman, 2008 noble laureate in economics, also supported bank nationalization in his different articles in the New York Times (NYT). Though Obama team already denied that they won't nationalize banks, it became inevitable. But has why nationalization of banking system in the US become so unavoidable?

Earlier USA was bailing out banks since they were posing systematic risk through "too big to fail" strategy, but what has happened, in the process, is that these banks have become even-bigger-to-fail. For instance, J.P. Morgan took over Bear Stearns and WaMu. Bank of America (BofA) took over Countrywide and Merrill. Wells Fargo took over Wachovia. Putting two zombie banks together is like having "two drunks trying to keep each other standing".

Nationalization is an opportunity to undo all the policy mistakes that have created now an even bigger systemic problem. The only way to do it is by taking those big zombie banks over, and split the assets in parts, and then create several banks, and they're stronger!

Also, since last year, trust or "animal spirit" in the financial institutions has evaporated. Without trust and without confidence, commerce will come to a standstill. Confidence would be restored to the banks almost overnight, to their obligations and lending capabilities, if a comprehensive nationalization of the zombie banks were to be mandated by the government.

Furthermore, the government is already controlling a significant portion of the banking system. Through guarantees, liquidity support, and capitalization, the government has provided between $7.0 trillion to $9.0 trillion of help to the financial system. For instance, Citigroup has $93 billion in equity, most of which is claimed by preferred shareholders, almost all of whom are the government. BofA has a market cap of $29 billion, after the government pumped in $45 billion of capital. So supporter of nationalization is claiming that financial system including those two banks is already effectively nationalized at least to some extent. And to make those two banks more competent and clean, they should be taken over by the government at least temporarily.

Though some critics of the bank's nationalization plan say that a privately held banking system is the correct way to go, after bailing out major banks what the US banking system has now isn't private venture anymore, it's "lemon socialism", that is, shareholders and executives get all the benefits but taxpayers bear all the risks. And it's creating moral hazard and perpetuating zombie banks, thus, blocking long expected economic recovery.

Moreover, banks must be nationalized. The collapse of Lehman Brothers in last September almost destroyed the world financial system. During mid-September, TED spread went at its all time high to 465 basis points which are even now around 100 basis points. Money market dried up totally. Trust from the market evaporated in this process. So, USA can't risk letting much bigger institutions like Citigroup or Bank of America implode.

Most importantly, if market continues to fall, and there is a strong possibility of happening so, banks, for instance, Citi and BofA, will lose billions in next few months. And their capital isn't large enough to cover those potential losses. Even banks that today look solvent are going to look insolvent within few months. To end their zombiehood in the financial system, the banks need more capital. But they can't raise more capital from private investors or from the market. So, the government has to supply the necessary funds through nationalizing them, at least for a short period of time.

But how would nationalization take place? At the beginning, the Obama team was considering to do "stress test" to test banks' sustainability. If a bank fails in "stress test", it won't get taxpayers money, and instead will be given a contingent funeral. If a bank sustains the test, it will be nationalize which will wipe out or dilute current shareholders. However, some economists are suggesting following Sweden's example. In the early 1990s, Sweden took over its banks, restored them to health and a couple years later privatized them again. But President Obama replied, "… Sweden looks like a good model. Here's the problem; Sweden had like five banks. We've got thousands of banks".

Bank nationalization is nothing new in world financial history. From Bangladesh to USA, nationalization took place on different occasions. France nationalized its banking sector, and then privatized it again. Even in the US, Federal Deposit Insurance Corporation (FDIC) took over hundreds of institutions during the savings-and-loan (S&L) crisis in 1980s. FDIC aggressively sold off bad assets, and the experiment is now appreciated as a success. Though nationalization is the kind of pragmatism that leads to socialism, it is the only option left to give life to the "dying" banking sector in the US.