Why I’m not a fan of business strategy

Business strategy theories, that is.

This comes from my assigned reading:

According to Porter (1987) entering into another business (by acquisition or internal growth) can only result in increased shareholder value if three essential tests are passed:

 

The attractiveness test. The business must be structurally attractive, or capable of being made attractive. In other words, firms should only enter businesses where there is a possibility to build up a profitable competitive position.

 

The cost-of entry test. The cost of entry must not capitalize all the future profits. In other words, firms should only enter new businesses if it is possible to recoup the investments made.

 

The better-off test. Either the new unit must gain competitive advantage from its link with the corporation or vice versa. In other words, firms should only enter new businesses if it is possible to create significant synergies.

 

My point of contention: it’s hard to think of a business you would want to enter if it (1) isn’t attractive, (2) isn’t profitable, and (3) doesn’t offer any potential synergies. In other words, it’s obvious.

 

S&P downgrades US

I particularly like Paul Krugman’s comment on S&P

More broadly, the rating agencies have never given us any reason to take their judgments about national solvency seriously. It’s true that defaulting nations were generally downgraded before the event. But in such cases the rating agencies were just following the markets, which had already turned on these problem debtors.

And in those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. Consider, in particular, the case of Japan, which S.& P. downgraded back in 2002. Well, nine years later Japan is still able to borrow freely and cheaply. As of Friday, in fact, the interest rate on Japanese 10-year bonds was just 1 percent.

So there is no reason to take Friday’s downgrade of America seriously. These are the last people whose judgment we should trust.

Superfreakonomics

Tidbits from Superfreakonomics that illustrate the unifying theme of the book: People respond to incentives.

César Martinelli and Susan W. Parker, two economists who analyzed the data from more than 100,000 Oportunidades clients, found that applicants routinely underreported certain items, including cars, trucks, video recorders, satellite TVs, and washing machines. This shouldn’t surprise anyone. People hoping to get welfare benefits have an incentive to make it sound like they are poorer than they truly are. But as Martinelli and Parker discovered, applicants overreported other items: indoor plumbing, running water, a gas stove, and a concrete floor. Why on earth would welfare applicants say they had these essentials when they didn’t? Martinelli and Parker attribute it to embarrassment. Even people who are poor enough to need welfare apparently don’t want to admit to a welfare clerk that they have a dirt floor or live without a toilet.

 

 

Holding off death by even a single day can sometimes be worth millions of dollars. Consider the estate tax, which is imposed on the taxable estate of a person upon his or her death. In the United States, the rate in recent years was 45 percent, with an exemption for the first $2 million. In 2009, however, the exemption jumped to $3.5 million—which meant that the heirs of a rich, dying parent had about 1.5 million reasons to console themselves if said parent died on the first day of 2009 rather than the last day of 2008. With this incentive, it’s not hard to imagine such heirs giving their parent the best medical care money could buy, at least through the end of the year. Indeed, two Australian scholars found that when their nation abolished its inheritance tax in 1979, a disproportionately high number of people died in the week after the abolition as compared with the week before.

 

Sobering, isn’t it?