Archive for April, 2009
Wednesday, April 29th, 2009
Monday, April 27th, 2009
As the number of people killed by swine flu in Mexico continues to climb, the health commissioner for the European Union has warned against non-essential travel to the United States and Mexico. Fariborz Ghadar, director of the Center for Global Business Studies at Penn State’s Smeal College of Business, says pandemics such as this will continue to present formidable challenges to world leaders in an age of globalization.
It is estimated that it took 18 years for the bubonic plague to reach the shores of Europe from its origin in China and another 30 months to reach England from Venice. A couple years ago, when SARS hit Asia, it could have reached Canada in 72 hours. Now, swine flu from Mexico is discovered in New Zealand before anyone knows what’s going on.
Some developed countries have systems to track, identify, and quarantine outbreaks such as this, but many developing countries simply cannot do it. Compounding the problem is the fact that very few national entities talk to one another. The current infrastructure leaves much to be desired. To manage potential pandemics, we need global mechanisms in place beforehand to handle situations like this as they arise, not after.
Ghadar is the co-author of “Global Tectonics: Underlying Trends Shaping the Future of Business.” The book identifies the 12 trends in technology, nature, and society that will present the most formidable challenges in the next 30 years.
Thursday, April 23rd, 2009
Prabhu Dayal, India’s consul general in New York, visited Penn State’s Smeal College of Business this week as part of the college’s increasing focus on international affairs. Throughout the day on Wednesday, Dayal met with students, faculty, and administrators at Smeal and Penn State to discuss developments in India and around the globe. He believes that relations between India and the U.S. are historically strong due in large part to the recent civilian nuclear agreement between the two countries and a variety of other shared interests.
During a session in the afternoon with more than 25 Smeal MBA students, Dayal addressed a range of economic topics, including perceptions of outsourcing in the U.S.:
U.S. companies are outsourcing to stay competitive. Costs are lower in Bangalore and Hyderabad. While some jobs are being lost, at the same time more and more Indian companies are setting up manufacturing facilities here in the U.S. With its growth, India has begun to look outward, and it would be a shame if our partners move toward protectionism.
Duyal, whose career in the Indian diplomatic service spans 32 years and has included posts in Morocco, Kuwait, Dubai, Iran, Switzerland, Pakistan, and Egypt, also spoke at length about foreign investment in India vs. China:
No one is going to put more money in India than in China if the returns are higher in China. If we can match returns, certainly investment will come. But China has had a head start. Its infrastructure has been upgraded to much higher levels. We must catch up. We need 20 times more ports, airports, and road networks. Everytime you return to India, you can see the change. We are going in a positive direction.
Thursday, April 16th, 2009
NPR’s Morning Edition reported this morning on the federal HOPE for Homeowners Act, which designated $300 billion to help an estimated 400,000 homeowners refinance into more affordable mortgages. However, in the six months since that the program has been in existence, it has helped exactly one homeowner refinance, despite receiving 752 applications.
Smeal’s Austin Jaffe says: “Do not worry. In the new bankruptcy-reform bill in Congress, an updated version of HOPE is included and largely unchanged.”
More from Jaffe:
Although Rep. Michael Castle from Delaware has called HOPE “one of the most failed programs we’ve had in a long time,” it lives on in Washington. Another more recent plan allocates $75 billion more to help allegedly up to 9 million households stay in their homes.
Apparently housing is thought to be sufficiently different from other assets as numerous politicians claim that mortgage foreclosure moratoria are now needed, or, more likely, mortgage bailouts are required to save our system. These bailouts are often unpopular as only some folks are recipients and others wish they were so selected.
Still, expect to see politicians continue to push for these mortgage bailouts on newspaper front pages as much as possible. The devil, however, is in the details—and the results.
Wednesday, April 15th, 2009
Washington regulators have justified several recent interventions in the financial realm by warning that firms like Bear Stearns and AIG are too big to fail (TBTF). However, according to new research by Smeal’s Jean Helwege, the U.S. economy would be better served by letting failing firms file for bankruptcy. She argues that the two most often cited consequences of allowing TBTF firms to fail—domino effects and fire sales—are unlikely to pose major risks to the financial system.
Tuesday, April 14th, 2009
As the recession continues, many companies are trimming their marketing budgets as part of their cutbacks to surivive the economic downturn. But according to research by Smeal professors Gary Lilien and Arvind Rangaswamy, companies experienced in marketing should increase their efforts during a recession to strengthen their competitive advantage.
In their 2005 paper, “Turning Adversity Into Advantage: Does Proactive Marketing During a Recession Pay Off?” Lilien, Rangaswamy, and Raji Srinivasan of the University of Texas find that firms with a pre-established strategic emphasis on marketing; an entrepreneurial culture; and a sufficient reserve of under-utilized workers, cash, and spare production capacity are best suited to approach recessions as opportunities rather than obstacles.
Comparing these businesses to the best-trained athletes, the authors write that “athletes often choose times of stress to mount attacks: Strong runners and bicycle racers may increase their pace on hills or under other challenging conditions” to beat out weaker opponents during the most difficult leg of their race.
“In a similar vein,” they write, “proactive marketing includes both the sensing of the existence of the opportunity (a tough hill and fatigued opponents) and an aggressive response (possessing the necessary strength or nerve) to the opportunity.”
Companies lacking all three strategic marketing resources are better served by putting off marketing spending increases until conditions improve.
Thursday, April 9th, 2009
Are college towns recession proof? Several media outlets have addressed this question lately, and for good reason: “Of the six metropolitan areas with unemployment below 4 percent as of January, three of them are considered college towns,” according to The Wall Street Journal.
“Recession proof” is probably pushing it, says Smeal’s Fred Hurvitz, “But college towns do seem to be somewhat insulated from the devastating effects of recessions and economic downturns, and some are even able to prosper despite what happens to the national economy.” Hurvitz, who spent 20 years operating a number of small businesses in a college town—State College, Pa.—before joining the Smeal faculty full time, says there are two major factors that help contribute to this ability to be recession resistant:
The first and perhaps most important factor is the university as employer. Typically, the largest employers in many of these communities are their universities. Even though many of these colleges have instituted freezes on hiring and pay raises, the threat of massive layoffs is practically nonexistent. As a result, unemployment rates for college towns are typically among the lowest nationally. Although unemployment nationally is approximately 8.5 percent, many college towns are experiencing rates in the range of 4 percent or less. Job security with a minimal threat of massive job loss fosters consumer confidence and continued spending. Local consumers may be a little more cautious with regard to their spending, but they don’t tend to make drastic cutbacks. As a result there is a greater degree of economic stability in these communities.
The second major factor has to do with family dynamics. While many parents will sacrifice as far as their own needs are concerned, they often resist allowing their children to suffer. As a result, many college students come to school with budgets that haven’t been too harshly depleted. Students still need to rent housing, purchase textbooks, buy food, and of course occasionally indulge in some after-hours entertainment and partying. It is not surprising that some of the local bars and restaurants in State College are reporting sales decreases, but these decreases have been minimal. The continued need of students to spend on necessities as well as discretionary items helps stabilize these local economies.
As of now, we haven’t experienced a prolonged recession. If this recession should continue for several years, college towns will eventually feel the pressure. Tuition increases and lack of student financing could start to drain universities of applicants. If that happens, then of course college towns may join the rest of the communities that are being severely effected by the recession. However, as long as universities are able to maintain their enrollment levels, the college towns they reside in will continue to be somewhat recession resistant.
Wednesday, April 8th, 2009
Alcoa kicked off earnings season yesterday announcing a loss of 61 cents per share. Analysts surveyed by FactSet Research had forecasted a loss of only 51 cents a share, while a Reuters Estimates poll predicted a 54-cent loss. Both forecasts were relatively close, but still on the rosy side for Alcoa.
This comes as no surprise to Smeal’s J. Randall Woolridge, who found in a study that Wall Street analysts forecast earnings per share (EPS) growth two times the level of historic GDP growth on average.
In fact, in the 20-year period examined in the study, actual EPS growth surpassed forecasted long-term growth in only two instances—both during periods of recovery after a recession.
Woolridge and co-author Patrick Cusatis examined analysts’ long-term (three to five years) and one-year ahead annual growth rate estimates for all companies from 1988 to 2007. Over the entire time period, analysts’ long-term forecasted EPS growth averaged 14.7 percent, but companies only averaged actual long-term EPS growth of 9.1 percent. The average forecasted one-year EPS growth rate was 13.8 percent compared to the actual rate of 9.8 percent.
More on Woolridge’s study can be found here.
Tuesday, April 7th, 2009
Nokia recently launched an online forum called IdeasProject, which is ”an entirely new way to connect with some of the most visionary and influential thought leaders in communications technology and their disruptive ideas.” The site features video clips, articles, podcasts, and other media that address issues and forecast coming trends in communications technology.
One of the most recent “big thinkers” to be featured is Smeal’s John Jordan, executive director of the Center for Digital Transformation. In the video below, Jordan explains how the value of Web sites like Facebook and eBay depends on the number of users that they have. As the number of users increases, so does the usefulness of the site—to a certain point.
Monday, April 6th, 2009
It’s opening day of the 2009 Major League Baseball season, and prognosticators are already predicting who will and will not compete in this year’s World Series. But the best way to determine the teams most likely to succeed might be to look at their pitching and catching staffs, according to recent research by Smeal’s Stephen Humphrey.
In his study “Developing a Theory of the Strategic Core of Teams: A Role Composition Model of Team Performance,” Humphrey and his coauthors examine the performance and team composition of MLB teams from 1974 to 2002, along with salary data beginning in 1985, the first year that all salary figures were released. The data show that teams with more experienced and highly skilled pitchers won more games than teams with the same amount of skill and experience in other positions. Additionally, they found that teams that paid higher salaries to their pitchers and catchers significantly outperformed other teams.
So what does this mean for business?
“Our results suggest that resource allocation in many organizations may be inefficient, suggesting that firms may benefit from a reallocation of investments toward strategic core roles,” Humphrey and his coauthors write. “Investing more heavily in the core roles of teams results in significantly higher performance than investing resources in non-core roles.”
The research also provides guidance for managers who are staffing teams. The findings indicate that “it is particularly important to take into account role composition issues when making placement decisions in teams” and that priority should be “placed on the strategically core roles when building or changing teams.”