Journal of Applied Business and EconomicsThe Journal of Applied Business and is dedicated to the...

Journal of Applied Business and Economics

North American Business Press

Atlanta - Seattle – South Florida - Toronto

Journal of Applied Business and Economics

Editors Dr. Adam Davidson Dr. William Johnson

Editor-In-Chief

Dr. David Smith

NABP EDITORIAL ADVISORY BOARD

Dr. Nusrate Aziz - MULTIMEDIA UNIVERSITY, MALAYSIA Dr. Andy Bertsch - MINOT STATE UNIVERSITY Dr. Jacob Bikker - UTRECHT UNIVERSITY, NETHERLANDS Dr. Bill Bommer - CALIFORNIA STATE UNIVERSITY, FRESNO Dr. Michael Bond - UNIVERSITY OF ARIZONA Dr. Charles Butler - COLORADO STATE UNIVERSITY Dr. Jon Carrick - STETSON UNIVERSITY Dr. Min Carter – TROY UNIVERSITY Dr. Mondher Cherif - REIMS, FRANCE Dr. Daniel Condon - DOMINICAN UNIVERSITY, CHICAGO Dr. Bahram Dadgostar - LAKEHEAD UNIVERSITY, CANADA Dr. Deborah Erdos-Knapp - KENT STATE UNIVERSITY Dr. Bruce Forster - UNIVERSITY OF NEBRASKA, KEARNEY Dr. Nancy Furlow - MARYMOUNT UNIVERSITY Dr. Mark Gershon - TEMPLE UNIVERSITY Dr. Philippe Gregoire - UNIVERSITY OF LAVAL, CANADA Dr. Donald Grunewald - IONA COLLEGE Dr. Samanthala Hettihewa - UNIVERSITY OF BALLARAT, AUSTRALIA Dr. Russell Kashian - UNIVERSITY OF WISCONSIN, WHITEWATER Dr. Jeffrey Kennedy - PALM BEACH ATLANTIC UNIVERSITY Dr. Dean Koutramanis - UNIVERSITY OF TAMPA Dr. Malek Lashgari - UNIVERSITY OF HARTFORD Dr. Priscilla Liang - CALIFORNIA STATE UNIVERSITY, CHANNEL ISLANDS Dr. Tony Matias - MATIAS AND ASSOCIATES Dr. Patti Meglich - UNIVERSITY OF NEBRASKA, OMAHA Dr. Robert Metts - UNIVERSITY OF NEVADA, RENO Dr. Adil Mouhammed - UNIVERSITY OF ILLINOIS, SPRINGFIELD Dr. Shiva Nadavulakere – SAGINAW VALLEY STATE UNIVERSITY Dr. Roy Pearson - COLLEGE OF WILLIAM AND MARY Dr. Veena Prabhu - CALIFORNIA STATE UNIVERSITY, LOS ANGELES Dr. Sergiy Rakhmayil - RYERSON UNIVERSITY, CANADA Dr. Fabrizio Rossi - UNIVERSITY OF CASSINO, ITALY Dr. Robert Scherer – UNIVERSITY OF DALLAS Dr. Ira Sohn - MONTCLAIR STATE UNIVERSITY Dr. Reginal Sheppard - UNIVERSITY OF NEW BRUNSWICK, CANADA Dr. Carlos Spaht - LOUISIANA STATE UNIVERSITY, SHREVEPORT Dr. Ken Thorpe - EMORY UNIVERSITY Dr. Robert Tian – SHANTOU UNIVERSITY, CHINA Dr. Calin Valsan - BISHOP'S UNIVERSITY, CANADA Dr. Anne Walsh - LA SALLE UNIVERSITY Dr. Thomas Verney - SHIPPENSBURG STATE UNIVERSITY Dr. Christopher Wright - UNIVERSITY OF ADELAIDE, AUSTRALIA

Volume 16(6) ISSN 1499-691X Authors have granted copyright consent to allow that copies of their article may be made for personal or internal use. This does not extend to other kinds of copying, such as copying for general distribution, for advertising or promotional purposes, for creating new collective works, or for resale. Any consent for republication, other than noted, must be granted through the publisher:

North American Business Press, Inc. Atlanta - Seattle – South Florida - Toronto ©Journal of Applied Business and Economics 2014 For submission, subscription or copyright information, contact the editor at: [email protected] Subscription Price: US$ 360/yr Our journals are indexed by UMI-Proquest-ABI Inform, EBSCOHost, GoogleScholar, and listed with Cabell's Directory of Periodicals, Ulrich's Listing of Periodicals, Bowkers Publishing Resources, the Library of Congress, the National Library of Canada. Our journals have been used to support the Academically Qualified (AQ) faculty classification by all recognized business school accrediting bodies.

This Issue

Florida’s Market-based Medicaid Reform Demonstration: Cost and Quality Issues ........................ 11 Michael Bond, Emily Patch From 1975 to 2010, Medicaid costs grew 1.8 percent faster than GDP. At this pace, over the next 75 years, federal Medicaid expenditures will rise to almost 6 percent of GDP. In 2005, a reform was approved for Florida which was designed to increase beneficiaries’ access and quality of care at no greater cost than traditional Medicaid. The federal waiver allowed the state to move about 413,000 Medicaid beneficiaries in five demonstration counties into health plans run by private providers and insurers. This article details the reform area’s progress. Massive Strategic Failures in the Financial Services Industry ............................................................. 26 Joseph Gilbert Strategic management theory concentrates mostly on business success. However, much can be learned from studying business failure as well. During the Great Recession, an unusually large number of major financial institutions failed. Many books and government reports document the details of these failures and present various causal analyses. Much remains to be learned, and academic studies using the tools of strategy and other business disciplines should lead to increased understanding of these failures. If we could attain a better understanding of the failures, steps might be taken by executives and regulators to reduce the risk of their repetition. Learning Curve Setbacks: You Don’t Always Move DOWN a Learning Curve ................................ 32 Charles J Teplitz There are a number of reasons why production, continually moving down a known learning curve will suddenly retrace its steps by moving up the learning curve. The cause of such a reversal needs to be recognized and the impact determined. Knowing how to compute the degree of “forgetting” is crucial in properly estimating future production times and costs. This paper will address how to effectively determine the impact of such events on the learning curve and how to make changes to future estimates. Comparison of Three Investment Strategies for Financial Independence .......................................... 44 Carlos Spaht, Harvey Rubin This paper discusses how investors can achieve financial independence regardless of timing in the market. To do this, we study three investors referred to as the luckiest, average, and unluckiest investors in the market. Using the S&P Dividend Aristocrats Index, each selects the same stocks and then continues, each quarter for fifteen years, to invest the same amount and reinvest the dividends in each stock. But their timing is different; the lucky investor invests at the low point of the market whereas the average and unlucky investors invest at the average and high points. Amazingly, each investor achieves financial independence.

Startup Marketing: Leveraging Leverage .............................................................................................. 56 Michael J. Swenson, Gary K. Rhoads, David B. Whitlark The resource allocation task of top management has received significant attention from researchers and practitioners alike. Managers are advised to increase allocation efficiency--assign the right resources to the most promising opportunities. Much less attention has been given to the task of resource leverage (Hamel and Prahalad, 1994). Entrepreneurs quickly discover that they cannot match the resources of larger competitors. Because they must do more with less, they seek to leverage their own resources and the resources of others. We use the term "leveraging leverage" to identify entrepreneurial practices that leverage the resources of others. On the State of the American Health Care: A Discussion of the Health Care System and the Affordable Care Act ............................................................................................. 63 Yvonne Chen This research intends to identify the priorities for healthcare reform thru understanding the current challenges of the health care sector in the United States. The study identifies cost, accessibility, and sustainability as the major concerns. Next, the paper proceeds to detail the highlights from the Affordable Care Act and assess its effectiveness in managing these priorities. The research then concludes with a discussion of the variables that would continue to shape the future of the American health care. Workplace Violence: The Role of Fear in Paralyzing Modern Business/Corporate Security ..................................................................................................... 69 Nick Nykodym, Brian Anse Patrick, Sonny Ariss Workplace violence is a sad reality of the modern age. Many options exist in helping deal with workplace violence, yet fear of these options place businesses and organizations at great risk. All too often security training consists of “RUN, HIDE and CALL 911” rather than a real defense that could save a life. Currently fifty (50) out of fifty (50) states have some form of CCW (Concealed Carry) permit training, and certification. Trained organizational members / university professors are currently discouraged from protecting themselves and others by those who have Hoplophobia (Fear of Firearms). The Performance of Russian Global Depository Receipts on the London Stock Exchange .............. 75 Irina Khindanova, Innokentiy Khindanov This paper analyzes the performance of Russian Global Depository Receipts listed on the London Stock Exchange. The performance is evaluated assuming two investment strategies: daily portfolio rebalancing and buy-and-hold. Russian GDRs marginally outperform in the short-run and underperform in the long run the UK market, the US market, the Emerging Markets, and the Emerging Markets ADRs. These results resemble the performance of Initial Public Offerings. Russian GDRs outperform to some extent the Russian stock market over the first two trading years. The performance of Russian GDRs varies across industries, depends on raising capital, and is affected by issue timing.

“Trapped Cash” in the Technology Sector: Accounting Disclosures of Permanently Reinvested Foreign Earnings & Foreign Cash Levels ......................................................................... 101 Russell Engel, Bridget Lyons Permanently reinvested earnings in foreign subsidiaries and cash balances held outside the United States have increased dramatically in the technology sector over the past five years. These values, as well as related unrecognized deferred tax liabilities, are significant to investors, regulators and others. We examine disclosures of the largest technology firms over the 2007 to 2013 period and find that, as a group, the firms have increased the information provided but by fiscal 2013 only four of the ten firms disclosed both foreign held cash and an estimate of the unrecognized deferred tax liability related to permanently reinvested earnings. Global Business: A Cultural Perspective .............................................................................................. 109 William Brent Carper To assist global executives in better and more quickly ADAPTING to different cultures (avoiding culture shock), this research paper reviews a cultural orientation framework designed to do just that. Additionally, the model includes a cultural orientations indicator (COI), which is a self-reporting evaluation instrument predicated upon extensive international and transcultural training experiences, as well as international anthropological research conducted over many years. Based upon the work of noted international researchers and authors, the COI provides a useful measure of personal cultural values through a comprehensive analysis of ten major cultural orientations and sixteen related dimensions. Identifying Managers' Perceptions of 'Value' in Public Management Development Programs: An International Comparative Study ................................................................................ 119 Paul J Davis This paper explores perceptions of what constitutes 'value' in public management development programs. The paper examines the extent to which perceptions of value differ among managers and the nature of these differences with particular emphasis on the geographical home of the participating managers. Seventy-three (73) mixed-level managers from four diverse regions (Australia; Sub-Saharan Africa; Arabian Peninsula and Malaysia) participated in semi-structured interviews. A Grounded Theory research design model was adopted for the study. While there were similarities between the managers from different regions, the data revealed differences in perceptions of what constitutes value between the regions. These differences are broadly: Social (Australia); Developmental (Sub-Saharan Africa); Instructional (Arabian Peninsula) and Informational (Malaysia). There are implications for those who design and deliver public management development programs and for companies and managers investing in this development pathway in the quest for delivering and receiving value for money.

GUIDELINES FOR SUBMISSION

Journal of Applied Business and Economics (JABE)

Domain Statement

The Journal of Applied Business and Economics is dedicated to the advancement and dissemination of business and economic knowledge by publishing, through a blind, refereed process, ongoing results of research in accordance with international scientific or scholarly standards. Articles are written by business leaders, policy analysts and active researchers for an audience of specialists, practitioners and students. Articles of regional interest are welcome, especially those dealing with lessons that may be applied in other regions around the world. This would include, but not limited to areas of marketing, management, finance, accounting, management information systems, human resource management, organizational theory and behavior, operations management, economics and econometrics, or any of these disciplines in an international context.

Focus of the articles should be on applications and implications of business, management and economics. Theoretical articles are welcome as long as their focus is in keeping with JABE’s applied nature. Objectives Generate an exchange of ideas between scholars, practitioners and industry specialists Enhance the development of the Business and Economic disciplines Acknowledge and disseminate achievement in regional business and economic development thinking Provide an additional outlet for scholars and experts to contribute their ongoing work in the

area of applied cross-functional business and economic topics. Submission Format

Articles should be submitted following the American Psychological Association format. Articles should not be more than 30 double-spaced, typed pages in length including all figures, graphs, references, and appendices. Submit two hard copies of manuscript along with a disk typed in MS-Word.

Make main sections and subsections easily identifiable by inserting appropriate headings and sub-headings. Type all first-level headings flush with the left margin, bold and capitalized. Second-level headings are also typed flush with the left margin but should only be bold. Third-level headings, if any, should also be flush with the left margin and italicized.

Include a title page with manuscript which includes the full names, affiliations, address, phone, fax, and e-mail addresses of all authors and identifies one person as the Primary Contact. Put the submission date on the bottom of the title page. On a separate sheet, include the title and an abstract of 200 words or less. Do not include authors’ names on this sheet. A final page, “About the authors,” should include a brief biographical sketch of 100 words or less on each author. Include current place of employment and degrees held.

References must be written in APA style. It is the responsibility of the author(s) to ensure that the paper is thoroughly and accurately reviewed for spelling, grammar and referencing. Review Procedure

Authors will receive an acknowledgement by e-mail including a reference number shortly after receipt of the manuscript. All manuscripts within the general domain of the journal will be sent for at least two reviews, using a double blind format, from members of our Editorial Board or their designated reviewers. In the majority of cases, authors will be notified within 60 days of the result of the review. If reviewers recommend changes, authors will receive a copy of the reviews and a timetable for submitting revisions. Papers and disks will not be returned to authors. Accepted Manuscripts

When a manuscript is accepted for publication, author(s) must provide format-ready copy of the manuscripts including all graphs, charts, and tables. Specific formatting instructions will be provided to accepted authors along with copyright information. Each author will receive two copies of the issue in which his or her article is published without charge. All articles printed by JABE are copyrighted by the Journal. Permission requests for reprints should be addressed to the Editor. Questions and submissions should be addressed to:

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Florida’s Market-based Medicaid Reform Demonstration: Cost and Quality Issues

Michael Bond

University of Arizona

Emily Patch University of Arizona

From 1975 to 2010, Medicaid costs grew 1.8 percent faster than GDP. At this pace, over the next 75 years, federal Medicaid expenditures will rise to almost 6 percent of GDP. In 2005, a reform was approved for Florida which was designed to increase beneficiaries’ access and quality of care at no greater cost than traditional Medicaid. The federal waiver allowed the state to move about 413,000 Medicaid beneficiaries in five demonstration counties into health plans run by private providers and insurers. This article details the reform area’s progress. INTRODUCTION

Medicaid, the federal-state health care program for the poor, was created almost as an after-thought as

part of the Medicare Act of 1965. The federal portion of the program’s funding has grown from 0.4 percent of gross domestic product (GDP) in 1973 to 1.6 percent in 2012. Historically, states have contributed around 43 percent of costs under a formula based on average state income.

The Congressional Budget Office (CBO) projects that the federal component of Medicaid spending will rise by an average of 8 percent annually through 2023. From 1975 to 2010, Medicaid costs grew 1.8 percent faster than GDP. If this pace continues over the next 75 years, federal Medicaid expenditures will rise to almost 6 percent of GDP.1 The program is unsustainable in both federal and state budgets. THE GROWTH OF FLORIDA MEDICAID

Florida exemplifies the states’ Medicaid budget problems. From 1990 through 2010, Florida

Medicaid expenditures grew at an annual rate of 10.1 percent,2 while GDP increased only 5.4 percent, before adjusting for inflation.3 As a result, Medicaid accounted for 29 percent of state expenditures in 2010. With these growth rates, the program will consume the state’s entire budget in less than 30 years.4 Fortunately, legislators recognized the problem and developed a plan to deal with the enormous unfunded liabilities — but the legislation was enacted before the passage of the Affordable Care Act (ACA), which will potentially expand Medicaid.

Journal of Applied Business and Economics vol. 16(6) 2014 11

Access and Quality of Care Issues Compounding the program’s fiscal problems, Medicaid also suffers from serious quality and access

issues. Research has consistently shown that recipients of Medicaid experience more severe health outcomes than individuals with any other type of medical coverage. The program’s enrollees suffer worse outcomes than those with private health insurance and, in some cases, worse than those who have no insurance at all. For example, a recent study examined outcomes for almost 900,000 individuals who underwent major surgical procedures during a five-year period, from 2003 to 2007.5 The study examined patient outcomes based on the type of their insurance coverage (including private, Medicare or Medicaid), as well as the uninsured. The results were then adjusted for age, sex, income, region, procedure and existing conditions. The study found that the in-hospital death rate for surgical patients varied by type of insurance coverage. Compared to patients with private health coverage:

• Medicare, uninsured and Medicaid patients were 54 percent, 74 percent and 97 percent, respectively, more likely to die than those with private insurance.

• The average length of hospital stay was 5 percent shorter than average for the uninsured; 19 percent longer than average for Medicare patients; and 42 percent longer than average for Medicaid patients.

• Medicare patients cost 10 percent more than the privately insured, on average, and Medicaid patients cost 26 percent more.

Medicaid enrollees often experience significant difficulty finding a physician, clinic or hospital to

treat them, leading to unfavorable health outcomes. The access problem is not surprising, given that Medicaid reimbursements to physicians are more than 40 percent less than private insurance pays.6 For example, the 2008 Health Tracking Physician Survey found that internists were more than eight times as likely to refuse Medicaid patients than those with private insurance.7

Even when Medicaid patients gain access to doctors, the quality of care may rate below average. A University of California – Los Angeles study found that Medicaid patients were far more likely to be treated in low-volume surgical centers of questionable quality, whereas research suggests that high-volume centers have consistently superior outcomes.8 The most recent findings come from a controlled experiment in Oregon which concluded, astonishingly, that moving the uninsured into Medicaid coverage had no effect on physical health outcomes.9 The ACA and the accompanying expansion of Medicaid can only exacerbate these problems. FLORIDA’S MEDICAID REFORM DEMONSTRATION

In October 2005, the Centers for Medicaid and Medicare Services (CMS) approved a reform initiative

called the 1115 Research and Demonstration Waiver. Under this program, Florida’s Medicaid reform has operated as a comprehensive demonstration project. Florida’s Medicaid reform demonstration project has affected medical cost inflation, and beneficiary health and satisfaction outcomes.

Medicaid traditionally has reimbursed participating health care providers (doctors and hospitals) on a fee-for-service (FFS) basis — paying for each service providers perform — but at lower rates than Medicare pays, and much lower rates than private insurers. Any provider who was willing to accept those payment rates could participate in the program.

Due to rising treatment costs, a growing number of state Medicaid programs are moving some (or most) of their enrollees into health plans administered by private entities. These managed care programs require patients to use providers that are part of networks created by the health plan administrator. The plans promise better access to providers and coordinated care for patients treated by multiple providers, for the same average cost to taxpayers as fee-for-service medicine.

Demonstration Plans, Benefits and Complaints

Florida’s demonstration project began with a pilot effort in Broward and Duval Counties on July 1, 2006, then expanded to Baker, Clay and Nassau Counties on July 1, 2007. The 2012 fiscal year showed

12 Journal of Applied Business and Economics vol. 16(6) 2014

Medicaid enrollment in the five reform counties was around 413,000, including approximately 232,000 in Broward County and 146,000 in Duval County. The remaining 35,000 are in Nassau, Baker and Clay Counties.10 CMS has approved a waiver extension through June 30, 2014.

The demonstration’s features included comprehensive choice counseling, customized benefit packages, enhanced benefits for participating in healthy behaviors, risk-adjusted premiums based on enrollee health status and creation of a low-income health insurance pool.

Medicaid enrollees in these counties have been offered a choice of competing, privately-administered health plans. Around 52 percent of the five counties’ beneficiaries are enrolled in Health Management Organizations (HMOs) sponsored, for example, by hospital systems; 48 percent are enrolled in or Provider Service Networks (PSNs), such as those organized by private insurers. As of the end of 2012, nine HMOs and three PSNs were operating in Broward County. This is an increase of three plans since the program launched. Duval County also saw an increase of three plans from 2006 to 2012. The growth in the number of plans offered indicates that reform has succeeded in increasing consumers’ choices in these two counties.11

Because no single plan design can serve all patients, plans have some flexibility in designing benefit packages. For instance, 43 percent of the Florida plans required no copayments from Medicaid beneficiaries in the first year of the demonstration, increasing to 68 percent of plans by the end of 2012. Out of 16 categories of patient treatment, such as hospital inpatient care and mental health care, copayments declined for 11, there was no change in four, and copayments increased in only one. On balance, enrollees seem to have benefited modestly from copayment decreases.

Competition among plans has clearly led to a welcome addition of services to beneficiaries beyond the original Medicaid benefits package. The expanded services include an over-the-counter drug benefits of $25 per household per month, adult preventive dental care, circumcisions for male newborns, and additional adult vision and nutritional counseling.

Federal law requires Florida to track complaints about private Medicaid plans. In the five reform counties, the latest data, from the fourth quarter of 2012, showed 206 complaints about PSN plans and 538 complaints regarding HMO coverage. This is a decrease from 828 total complaints in the previous quarter to 744 in the fourth quarter. While there were significantly more grievances against HMOs than PSNs, complaints overall trended downward. Further, the number of complaints must be compared to the total number of enrollees. In the reform counties, 744 complaints represent just 0.2 percent of enrollees.

To assist beneficiaries with plan selection and other Medicaid issues, Florida created a Choice Counseling Program. Among other services, this program provides a call center for enrollees. The latest quarter of available data shows the center received almost 58,000 calls. According to surveys, program satisfaction ranges from a low of 76 percent for “ease of understanding information” to a high of 98 percent for “being treated respectfully.” Responses to the remaining eight survey questions ranged from 86 percent to 96 percent satisfaction.

In the latest reported quarter, more than 69 percent of enrollees made an active plan selection, a number that has remained around 70 percent since 2010. (Enrollees in reform counties who do not make a plan selection are automatically enrolled in a plan assigned by Medicaid. If enrollees are satisfied with this plan they do not need to make a selection.)

Reverse Health Savings Accounts and Healthy Behaviors.

Florida’s reform introduced an innovative new program to enhance beneficiaries’ Medicaid accounts: reverse Health Savings Accounts (HSAs) that begin with a zero balance. Beneficiaries earn credits to these accounts by engaging in “healthy activities.” (See Table I.) Thus:

• In the fourth quarter of 2012, 164,544 Florida Medicaid enrollees received $3,913,000 in credits for healthy behaviors, and a total of $62.5 million since the program’s inception.

• With these credits, beneficiaries purchased more than $33.4 million worth of goods — essentially nonfood items available at pharmacies.

• The credits are forfeited if an enrollee leaves Florida Medicaid for more than three years; however, only around $26,000 has been returned to the program thus far.


TABLE 1 “REVERSE HEALTH SAVING ACCOUNT” CREDITS FOR HEALTHY BEHAVIOR

Health Behavior Number of Enrollees Granted Credits Amount

Childhood Preventive Care 974,258 $24,256,427.50 Office Visit-Adult/Child 1,084,764 $13,236,262.50 Dental Preventive 242,587 $6,033,025.00 Prescription Compliance 459,646 $3,417,857.50 Vision Exam-Adult/Child 109,586 $2,729,165.00 Pap Smear 75,075 $1,871,972.50 Child/Adult Preventive Care 57,235 $1,041,510.00 Diabetes Management 24,732 $369,845.00 Adult Preventive Care 17,502 $261,430.00 Mammography 8,592 $211,975.00 Colorectal Screening 4,551 $112,722.50 Prostate Specific Antigen (PSA) 6,318 $94,392.50 Healthy Start 1st Trimester 3,581 $53,715.00 Hypertension Management 1,487 $36,157.50 Diabetes Management 1,064 $25,732.50 Asthma Management 817 $20,170.00 Adult BMI Assessment 749 $18,632.50 HIV/AIDS Management 465 $11,572.50 Congestive Heart Management 153 $3,712.50 Other Disease Management 141 $3,470.00 Flu Shot 11 $275.00 Dental Preventive Service-Adult 16 $237.50 Exercise Program 8 $200.00 Weight Management 3 $75.00 Weight Management 6 Months 5 $75.00 Smoking Cessation Program 2 $50.00 Exercise Program 6 Months 3 $45.00 Smoking Cessation 6 Months 2 $30.00 Alcoholics Anonymous Program 1 $25.00 Narcotics Anonymous Program 1 $25.00

The hope is that patients who participate in these activities will develop fewer serious (and expensive) health problems, and will better manage existing issues. For example, obesity is associated with an increased incidence of such chronic health problems as diabetes and cardiovascular disease. During the 1960s and 1970s, an estimated 15 percent to 17 percent of U.S. adults were obese, compared to 34 percent today. The figure is almost certainly higher for Medicaid patients. Americans are nearly twice as likely to


be obese as their counterparts in Europe. If the United States could bring its obesity rates more in line with Europe’s, health costs could decrease by $100 billion a year or more, potentially rising to more than $300 billion by 2018, according to researchers.12

Controlling Costs per Beneficiary

As with all 1115 waivers, the federal government requires that the changes it approves be “budget neutral.” That is, the reform cannot cost the federal government more than the original program for Medical Eligible Groups enrolled in the reform plans. Thus, expenditures are monitored for individuals receiving Supplemental Security Income (SSI) — the federal program for individuals who do not qualify for Social Security — or Temporary Assistance to Needy Families (TANF), the federal welfare program. As of Fiscal Year 2010, approximately 72 percent of the roughly 3.7 million Medicaid enrollees in Florida were also enrolled in TANF. (Individuals in the Low Income Pool, who receive funding from a variety of provider groups, have been excluded in this analysis.) To monitor budget neutrality, Florida compares the per capita cost per month (PCCM) under the reform program to costs without the waiver.

TABLE 2 PERCENTAGE OF STATEWIDE AVERAGE COST PER FLORIDA HEALTH PLAN ENROLLEE FOR INDIVIDUALS RECEIVING OTHER BENEFITS COMPARED TO

REGULAR MEDICAID

Year

Supplemental Security Income

Temporary Assistance to Needy Families

1 102.46% 80.32% 2 99.75% 78.84% 3 95.59% 71.76% 4 90.14% 66.42% 5 84.95% 61.56% 6 81.03% 60.80% 7 61.58% 53.22%

Table 2 shows that expenditures in the two beneficiary groups have consistently remained far below the “budget neutral” amount. Over the first seven years of reform:

• The cost for each private plan enrollee receiving Supplemental Security Income has fallen from 102 percent to 62 percent of statewide average Medicaid expenditures.

• The cost for each private plan enrollee receiving Temporary Assistance to Needy Families has fallen from 80 percent to 53 percent of statewide average Medicaid expenditures.

One way to gage whether the reform has actually produced savings is to compare per capita expenditures in the reform counties with total state per capita Medicaid expenditures. According to available CMS data, during the 2006 to 2009 period per capita Medicaid expenditures in Florida increased 5.2 percent, whereas per capita costs in the reform counties increased only 1.4 percent. While this change does not prove that reform lowered Medicaid cost inflation, the slower growth in the reform counties is encouraging. Research by the University of Florida also found relative savings from the reform:


“In conclusion, it appeared that the demonstration resulted in reductions in PMPM [Per Member Per Month] expenditures when examining all SSI and TANF enrollees. Demonstration PSNs, in particular, appeared to control expenditures better than both demonstration HMOs and Medicaid programs in control counties. Therefore, results of this analysis suggested that the key demonstration attribute of requiring all Medicaid enrollees to enroll in either an HMOs or PSNs may control PMPM expenditures better than standard FFS Medicaid or non-demonstration Medicaid HMOs (the programs being operated in the control counties).”13

Unnecessary Emergency Room Visits

A cost-controlling goal of Medicaid reform is to reduce the use of emergency rooms for nonemergency care. Emergency room treatment is the most expensive treatment setting for nonemergency care. In addition, unnecessary visits clog the ER, complicating access for patients with emergencies. Yet, Medicaid patients typically make unnecessary visits due to the difficulty of accessing nonemergency care providers. The statewide average for nonemergency care is 16.4 ER visits per 1,000 Medicaid enrollees. By contrast, according to a preliminary AHCA analysis, the unadjusted average for the reform health plans is 15.1 visits per 1,000 enrollees.14

Controlling Prescription Drug Costs

Many states are moving Medicaid enrollees to privately-administered managed care plans. In doing so, they are also reversing outdated policies that required state Medicaid programs to administer drug benefits on a fee-for-service basis separately from any health plan.15 Since 2011, the number of prescription drugs dispensed through Medicaid managed care has more than doubled nationwide.16 Nationally, just over half of Medicaid drugs are now provided under FFS; but nearly two-thirds of drugs are FFS in Florida.17

Medicaid programs that carve-out drug benefits often ignore drug therapy coordination and management, though the state essentially takes this responsibility away from health plans. Such policies could harm patients.18 For instance, the state of New Hampshire implemented an arbitrary prescription limit on psychiatric drugs in 1990 that led to an increase in the use of emergency mental health services and hospitalizations for people with schizophrenia. The additional medical costs associated with poor medication management was 17 times the savings from limiting prescriptions.19

Many states “carve-out” pharmacy benefits and administer them separately from health plans. Virtually all state Medicaid programs distribute some drugs in this way, and nearly half of the states distribute all Medicaid drugs this way. (See Figure 1) Nationwide, nearly three-fourths (73 percent) of Medicaid drug spending is reimbursed and administered separately from a health plan.20

Integrating prescription drugs benefits into managed care plans improves quality and increases efficiency. A Lewin Group study found that integrating drug benefits with privately-run health plans is more cost-effective than administering separately.21

Indeed, a Lewin analysis for Medicaid Health Plans of America, a trade association of managed care providers, found that integrating health plan and drug benefits in 14 states that currently carve-out drug benefits would collectively save nearly $12 billion over a decade.22

Drug therapies often substitute for more expensive surgical treatments, reduce the need for hospitalization, and avoid expensive emergency room visits and medical complications — especially for such chronic conditions as asthma, diabetes and schizophrenia. An analysis of Medicaid managed pharmacy benefits in a number of states by IMS Health found utilization rates for many of these therapies is higher under managed care than fee-for-service.23 For instance, use of generic versions of antipsychotic medications was 3 percent to 14 percent higher than in fee-for-service Medicaid, on average. Drug utilization for diabetes was also higher. Private health plans that provide medical care to Medicaid enrollees are the logical entities to manage drug benefits. The health plans are paid a set fee per enrollee


to provide Medicare care; thus, the health plans are liable for the cost of non-drug therapies, whereas a drug regime is often a less costly substitute for surgery or other treatment.

FIGURE 1 PERCENTAGE OF MEDICAID DRUGS DISPENSED FEE-FOR-SERVICE

(ESTIMATE FOR 2014)

Source: Joel Menges, Menges Group, “Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates,” The Menges Group, May

The Role of Drug Plans

Medicaid managed care plans frequently contract with pharmacy benefit managers (PBMs), private firms that act as third-party prescription drug plan administrators. PBMs process and reimburse claims, and negotiate drug prices and rebates with drug manufacturers. They also negotiate dispensing fees — the amount paid to pharmacies for the service of filling a prescription.24

Private health plans use a variety of techniques to control drug costs, including preferred-drug lists (PDL), formularies, required use of mail-order drug suppliers, negotiated prices with drug companies and drug distributors, and contracting with exclusive pharmacy network providers.25 Regardless of how the program is structured, Medicaid enrollees still usually purchase their drugs at a local pharmacy, which is reimbursed for each prescription filled.26


A recent analysis by the Menges Group, another consultancy, also identified ways in which state Medicaid drug programs are less efficient than privately-administered Medicaid drug benefits.27 Prices for the same drug often differ from one state to the next — sometimes from one pharmacy to the next. Rather than negotiating with pharmacy networks, state FFS Medicaid programs often arbitrarily pay much higher dispensing fees than they would in a competitive market. Utilization of generic drugs is often lower in FFS Medicaid and the number of prescriptions per members is higher.

Florida should avoid the mistake of allowing any willing pharmacy to participate in the Medicaid drug program rather than negotiating exclusive networks of pharmacies willing to provide lower prices. Any willing pharmacy laws reduces the bargaining power of managed care to negotiate lower prices and unnecessarily facilitates waste, fraud and abuse among Medicaid drug programs. For example, having an unlimited supply of pharmacies allows unscrupulous patients to “shop” for multiple doctors willing to prescribe narcotics — avoiding detection by filling each prescription at a different pharmacy. Requiring Medicaid drug plans to reimburse large networks (with numerous small pharmacies) also makes it more difficult to detect billing fraud by pharmacy operators (or fake pharmacies).

Numerous benefits can be derived from integrating drug benefits and coordinating care. For instance:28

• About two-thirds (67 percent) of drug prescriptions in Florida’s FFS Medicaid are filled with generic drugs, whereas the national average for managed Medicaid drug benefits is about 80 percent.

• Florida FFS pays pharmacies $3.73 to dispense a prescription, whereas the average for private Medicare Part D plans is just over half as much – about $2.00.

• The number of prescriptions per Medicaid enrollee is generally higher among enrollees in the Fee-for-Service Medicaid program compared to managed care.

According to Menges, by integrating drug and health benefits in a statewide managed care program,

Florida Medicaid could save $5.1 billion over 10 years ($3 billion in lower federal spending and $2.1 billion less in state spending). Specifically (See Figure 2):

• 11 percent would come from paying market-based, competitive dispensing fees. • Nearly one-quarter (24 percent) would come from use of generic drugs where appropriate. • More than half (59 percent) would come from negotiating steep discounts with exclusive

(limited) networks.

Despite the potential savings, community pharmacists and pharmacy trade association often oppose moving from FFS Medicaid drug programs to privately-managed Medicaid drugs. Small, community pharmacies often specialize in serving Medicaid beneficiaries and depend on Medicaid dispensing fees for their livelihood. Community pharmacists cannot compete on price and efficiency without reducing profitability, so they fight to maintain the status quo. Community pharmacists are small business owners. As such, they are a sympathetic group when they lobby state legislators to protect them from competition. Trade associations for small pharmacies advocate laws that prohibit exclusive Medicaid pharmacy networks, which pharmacy benefit managers use to negotiate lower drug prices (and dispensing fees) for taxpayers. Community pharmacists also lobby lawmakers to discourage cost-efficient, mail-order drug programs commonly found under managed care.


FIGURE 2 POTENTIAL 10-YEAR SAVINGS FROM EFFICIENT MANAGEMENT OF FLORIDA

MEDICAID DRUG PROGRAM

Source: Joel Menges, “Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates,” Menges Group, May 2013.

QUALITY OF CARE AND HEALTH OUTCOMES

Medicaid reform isn’t just about controlling costs, but improving patient access to care and health

outcomes. The Florida demonstration is ongoing, but there are preliminary indicators of improvement.

Access to Specialists Access to specialists has been and remains a major issue in Medicaid.31 In the reform demonstration

counties, there has been a modest increase in specialist access, measured by the number of patients who receive those types of specialty services. The most recent analysis by ACHA measured patient access to three types of specialty care — orthopedics, neurology and dermatology — in 2009 to 2010 budget years and compared those figures to the 2010 to 2011 budget years. The number of patients in reform plans receiving dermatological care rose from about 10 per thousand beneficiaries to 13 per thousand; neurological care rose from about 21 to 27 per thousand; and orthopedic care rose from 25 to 27.


Beneficiary Health Outcomes Obviously, improvement in the overall health status of enrollees is a key goal of reform. Long-term

health improvements only appear with time, but it is known that better management of chronic health conditions reduces the number and severity of complications. Examples include control of levels of insulin, cholesterol and blood pressure.

More than 90 percent of the nation’s health plans use the Healthcare Effectiveness Data and Information Set (HEDIS) to measure performance of care and service. The latest HEDIS report consists of 75 measures across 8 domains of care. HEDIS allows the performance of health plans in the demonstration counties to be compared to the performance of conventional Medicaid in the unreformed counties, and to national averages.29 Furthermore, for each performance measure where they fall below the national average, Medicaid in the unreformed counties and the health plans in the reform counties are required to formulate improvement plans.30

The latest HEDIS data available, for 2011, show that plans in the demonstration counties improved their performance in more categories than the counties with conventional Medicaid (see the Appendix). Specifically, looking at measures for diabetic care:

• The national average for glucose testing (HbA1c) is 80.60 percent, whereas the average for the Florida five demonstration counties was 81.90 percent, and the below-average performance in the nonreform counties was 79.60 percent.

• Control of glucose levels by diabetics in the reform counties (48.60 percent) exceeded both the national average (44.90 percent) and the below-average performance in nonreform counties (42.50 percent).

Since 2008, of the 30 measures for the plans that needed to improve performance, outcomes have

improved in 24 categories and declined in five.

NEXT STEPS IN REFORM

On December 15, 2011, CMS approved Florida’s request to extend the waiver for three years, from December 16, 2011, through June 30, 2014. The state has also requested that the reform be expanded statewide, and has received tentative approval from CMS to proceed.31 In addition, CMS has approved a waiver for the creation of a managed care demonstration for long-term care recipients.32

CONCLUSION

Florida’s five-county demonstration project has shown results in three key areas: patient access to specialists, a reduction in unnecessary emergency room use and health improvement. Cost-efficient use of generic drugs has also increased. Though estimates of total cost saving are not yet available, it appears that costs have been contained.

Thus, expanding privately administered Medicaid health and drug plans statewide has the potential for substantial savings to Florida taxpayers and better care for the poor and disabled. ENDNOTES

1. Raw data from the Congressional Budget Office. 2. “Average Annual Growth in Medicaid Spending,” Kaiser Family Foundation. Available at

http://kff.org/medicaid/state-indicator/growth-in-medicaid-spending-fy90-fy10/?state=FL. 3. Raw data from Bureau of Economic Analysis. 4. “Fiscal Analysis in Brief for Fiscal Year 2010-11,” Florida Legislature. Available at

http://floridafiscalportal.state.fl.us/Documents.aspx?FY=2011&AGY=0300&EXID=86&DisplayAgy=N. 5. D.J. LaPar et al., “Primary Payer Status Affects Mortality for Major Surgical Operations,” Annals of

Surgery, Vol. 252, No. 3, September 2010, pages 544–51.


http://kff.org/medicaid/state-indicator/growth-in-medicaid-spending-fy90-fy10/?state=FL�

6. John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers,” Centers for Medicare and Medicaid Services, March 2011. Available at http://www.cms.gov/ActuarialStudies/Downloads/2011TRAlternativeScenario.pdf.

7. Ellyn Boukus et al., “A Snapshot of U.S. Physicians: Key Findings from the 2008 Health Tracking Physician Survey,” Center for Studying Health System Change, September 2009. Available at http://www.hschange.com/CONTENT/1078/1078.pdf.

8. Jerome H. Liu et al., “Disparities in the Utilization of High-Volume Hospitals for Complex Surgery,” Journal of the American Medical Association, Vol. 296, No. 16, October 25, 2006. Available at http://jama.jamanetwork.com/article.aspx?articleid=203777.

9. Katherine Baicker et al., “The Oregon Experiment — Effects of Medicaid on Clinical Outcomes,” New England Journal of Medicine, Vol. 368, No. 18, May 2, 2013. Available at http://www.ncbi.nlm.nih.gov/pubmed/23635051.

10. Florida Agency for Health Care Administration. 11. Unless otherwise stated data and information is taken from Florida Agency for Health Care Administration,

“Florida Medicaid Reform Year 6 Annual Report (July 1, 2011 – June 30, 2012) 1115 Research” and “Demonstration Waiver, Florida Medicaid Reform and 2nd Quarter Progress Report (October 1, 2012 – December 31, 2012) Demonstration Year 7,” Agency for Health Care Administration. Available at http://ahca.myflorida.com/medicaid/medicaid_reform/pdf/FL_1115_YR_6_Draft_Annual_Report_07-01-11_06-30-12.pdf and http://ahca.myflorida.com/Medicaid/medicaid_reform/pdf/FL_1115_Q2_YR_7_Report_10-1-2012_12-31-2012_final.pdf, respectively.

12. Pam Auchmutey, “A Weighty Matter,” Emory Woodruff Health Sciences Center, Spring 2010. Available at http://whsc.emory.edu/home/publications/public-health/public-health/spring2010/a-weighty-matter.html.

13. “Final Evaluation Report Florida’s Medicaid Reform Demonstration Pilot, December 15, 2011,” Florida Agency for Health Care Administration. Available at http://ahca.myflorida.com/medicaid/quality_management/mrp/contracts/med027/FL_1115_Final_UF_Eval_Report_12-15-11.pdf.

14. Provided by AHCA. 15. IMS Institute for Healthcare Informatics, “Shifting From Fee-For-Service Medicaid: An Early Review of

Rx Drug Utilization,” Health Affairs Blog, April 5, 2013. Available at: http://healthaffairs.org/blog/2013/04/05/shifting-from-fee-for-service-medicaid-an-early-review-of-rx-drug-utilization/.

16. Murray Aitken et al., “Shift from Fee-for-Service to Managed Medicaid: What is the Impact on Patient Care?” IMS, Institute for Healthcare Informatics, April 2013.

17. Joel Menges, “Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates,” Menges Group, May 2013. Available at: http://www.pcmanet.org/images/stories/uploads/2013/final percent20medicaid percent20savings percent20report percent20menges percent20group percent20may percent202013.pdf.

18. For example, see Gerome Wilson, Kirsten Axelsen and Simon Tang, “Medicaid Prescription Drug Access Restrictions: Exploring the Effect on Patient Persistence with Hypertension Medications,” American Journal of Managed Care, Vol. 11, 2005, pages SP27-P34.

19. Haiden A. Huskamp, “Managing Psychotropic Drug Costs: Will Formularies Work?” Health Affairs, Vol. 22, No. 5, September/October 2003, pages 84-96.

20. Joel Menges, “Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates,” Menges Group, May 2013.

21. Joel Menges et al., “Projected Impacts of Adopting a Pharmacy Carve-In Approach Within Medicaid Capitation Programs,” Lewin Group, February 2011. Available at http://www.lewin.com/content/publications/MHPAPaperPharmacyCarve-In.pdf.

22. The states are Connecticut, Delaware, Illinois, Indiana, Iowa, Missouri, Nebraska, New York, Ohio, Tennessee, Texas, Utah, West Virginia and Wisconsin. See Joel Menges et al., “Projected Impacts of Adopting a Pharmacy Carve-In Approach Within Medicaid Capitation Programs.”

23. Murray Aitken et al., “Shift from Fee-for-Service to Managed Medicaid: What is the Impact on Patient Care?” Institute for Healthcare Informatics, April 2013.


http://www.hschange.com/CONTENT/1078/1078.pdf�

24. Devon M. Herrick, “Increasing the Cost-Effectiveness of Medicaid Drug Programs,” National Center for Policy Analysis, Policy Backgrounder No. 164 by April 29, 2011. Available at: http://www.ncpa.org/pdfs/bg164.pdf.

25. Ibid. 26. Devon M. Herrick, “Increasing the Cost-Effectiveness of Medicaid Drug Programs,” National Center for

Policy Analysis, Policy Backgrounder No. 164 by April 29, 2011. Available at: http://www.ncpa.org/pdfs/bg164.pdf.

27. Joel Menges, “Medicaid Pharmacy Savings Opportunities: National and State-Specific Estimates,” Menges Group, May 2013. Available at: http://www.pcmanet.org/images/stories/uploads/2013/final percent20medicaid percent20savings percent20report percent20menges percent20group percent20may percent202013.pdf.

28. Ibid. 29. HEDIS and Performance Measurement,” National Committee for Quality Assurance. Available at

http://www.ncqa.org/HEDISQualityMeasurement.aspx. 30. Performance Measure Action Plan (PMAPs) are required of reform plans for each HEDIS measure where

their performance is below the national average (mean). 31. Amy Sherman, “Scott Wants to Meet with Sebelius about Medicaid Waiver,” Politifact, November 28,

2012. Available at http://www.politifact.com/florida/promises/scott-o-meter/promise/602/reform-medicaid-with-a-federal-waiver/.

32. “Statewide Medicaid Managed Care Program,” Florida Agency for Health Care Administration, 2011. Available at http://ahca.myflorida.com/Medicaid/statewide_mc/index.shtml.


http://www.ncqa.org/HEDISQualityMeasurement.aspx�

http://ahca.myflorida.com/Medicaid/statewide_mc/index.shtml�

APP

EN

DIX

Flor

ida

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lthca

re E

ffec

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ess D

ata

and

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rmat

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Set (

HE

DIS

) Per

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ount

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ette

r tha

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e na

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l mea

n

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-Ref

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m

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20

08

2009

20

10

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2011

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end

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iona

l M

ean*

* A

nnua

l Den

tal

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it n

/a

n/a

***

16.1

0%

15.2

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28.5

0%

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0%

34.0

0%

+ 45

.70%

Ado

lesc

ent W

ell-

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e 41

.90%

46

.00%

45

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49

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44

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46

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46

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46

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-

47.7

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lood

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re

52.7

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51.6

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53.0

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54.7

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46.3

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53.4

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- 55

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53

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79

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78

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48.5

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48.3

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46.8

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48.6

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- 44

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48

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g 75

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trol

29.5

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29.4

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33.8

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32.8

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29.3

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35.9

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36.1

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+ 33

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bete

s N

ephr

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77.1

0%

76.1

0%

77.1

0%

79.0

0%

79.2

0%

80.3

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ay

30.5

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37.2

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24.2

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28.4

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20.6

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25.4

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- 42

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day

47.0

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+ 60

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58.5

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52.7

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%

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44.0

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46.1

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51.4

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44.4

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49.3

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35.4

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n/a

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67.9

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71.8

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71.2

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82.2

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81.2

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81.5

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n/a

84.7

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n/

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66

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83

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84

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+

84.7

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45.6

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46.8

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47.0

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52.0

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56.3

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56.3

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flat

49.6

0%

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Med

icat

ion

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t –

Con

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tion

n/a

31.2

0%

29.2

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31.4

0%

n/a

29.8

0%

43.8

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44.0

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+ 33

.00%

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a n/

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-

88.6

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r Sc

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n/a

47.5

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50.1

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50.9

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n/a

51.4

0%

56.9

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+ 52

.40%

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n C

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2

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61.8

0%

71.4

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73.8

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n/a

63.6

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70.0

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0%

+ 74

.30%

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n C

ombo

3

n/a

52.0

0%

63.7

0%

67.9

0%

n/a

53.8

0%

62.7

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65.7

0%

+ 69

.40%


Freq

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y of

Pr

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al C

are

n/a

51.6

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54.3

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60.6

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52.6

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46.9

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44.0

0%

- 61

.60%

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Scr

eeni

ng

n/a

46.0

0%

53.1

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53.5

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54.8

0%

52.0

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54.1

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+ 66

.40%

A

dult

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t n/

a n/

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48

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a n/

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34.6

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Follo

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are

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ed A

DH

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ion

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ion

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e

n/a

n/a

37.8

0%

37.1

0%

n/a

n/a

43.6

0%

44.5

0%

+ 36

.60%

Follo

w-U

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are

for C

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ed A

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D

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icat

ion

– C

ontin

uatio

n &

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enan

ce

n/a

n/a

46.6

0%

46.7

0%

n/a

n/a

n/a

n/a

n/a

41.7

0%


Massive Strategic Failures in the Financial Services Industry

Joseph Gilbert University of Nevada Las Vegas

Strategic management theory concentrates mostly on business success. However, much can be learned from studying business failure as well. During the Great Recession, an unusually large number of major financial institutions failed. Many books and government reports document the details of these failures and present various causal analyses. Much remains to be learned, and academic studies using the tools of strategy and other business disciplines should lead to increased understanding of these failures. If we could attain a better understanding of the failures, steps might be taken by executives and regulators to reduce the risk of their repetition.

Most strategic management textbooks contain a chapter on missions, goals and values. These chapters

typically do not include avoidance of bankruptcy or sudden unplanned sale of the company as corporate goals. A strategy that results in such an event is clearly a failed strategy. Strategic management textbooks usually make it clear that success in strategy requires both selection of a strategy and execution of the strategy once selected (David 2013; Hill & Jones 2013; Hitt, Ireland & Hoskisson 2013). If bankruptcy or sudden unplanned sale of a company represents the ultimate strategic failure, then it makes sense to study cases of such failure in order to learn as much as possible about its causes and conditions.

During the financial crisis that began in 2007 a number of very large companies in the financial services industries suffered such strategic failure. A non-comprehensive sampling includes Countrywide Financial, Ameriquest Mortgage, New Century Mortgage, Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia Bank, Washington Mutual Bank, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). All of these companies operated in what can broadly be called the financial services industry. The occurrence of such a large number of failures of major competitors in one industry in a brief period of time is highly unusual. Because these failures are both recent and well-documented, and because they resulted in such widespread financial harm to customers, investors, employees and the economy as a whole, it is important to learn as much as we can from them.

In the writings on these companies and this period, there has been no shortage of explanations. Some have blamed the devil (at least metaphorically) in books with titles like The Devil’s Derivatives (Dunbar 2011); A Demon of our Own Design (Bookstaber 2007); and All the Devils Are Here (McLean & Nocera 2010). Others have blamed greed, including books titled The Age of Greed (Madrick 2011) and Fool’s Gold (Tett 2009), or the size of companies as in Too Big to Fail (Sorkin 2009) and Crash of the Titans (Farrell 2010). Still others have blamed basic failures in judgment, with titles such as A Colossal Failure of Common Sense (McDonald 2009); Reckless Endangerment (Morgensen & Rosner 2012); and In Fed We Trust (Wessel 2009). All of these and more are books published during or soon after the Great Recession. In addition to a significant number of books covering events of the period, there have been


several well-researched and well documented government investigations resulting in extensive reports available to the public. The most widely known of these is the Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Financial Crisis Inquiry Commission 2011).

These books and reports describe failures of strategic choice and of strategic execution. Selection of a strategy is typically covered under two rubrics: one is the selection of a business strategy and the other the selection of a corporate strategy. According to models first developed by Michael Porter over thirty years ago and still widely taught in current textbooks, there are three distinct strategies for competing in a single business or industry. Cost leadership involves concentrating on keeping costs low in order to compete on price and still maintain profits. Differentiation involves creating a perceived difference in a company’s product or service that generates a premium price from customers. Focus involves concentrating on one segment of a larger market, and competing on the basis of expertise in that segment. Corporate strategy deals with the question of what businesses a company should be in and, by implication, what businesses it should avoid.

Execution of a strategy, once it has been selected, constitutes a second major topic in the theory of strategic management. This topic includes such issues as corporate structure (lines of reporting and decision-making authority), control and reward systems within the organization, and resource allocation decisions. Some of the theories in this area originate in the academic discipline of organizational theory, but they have direct relevance to the area of strategy execution. Functional strategy involves the role of each major business function (marketing, finance, human resources, etc.) in executing the business and corporate levels of strategy.

Companies that originated mortgages such as Ameriquest and Countrywide chose a business level strategy of cost leadership. They chose to operate in only one rather narrow segment of the home mortgage business. They advertised to their prospective customers based on price, by featuring adjustable rate mortgages with low initial rates. They also kept their costs down by skimping on underwriting individual mortgages, often allowing low or no documentation of borrower information. They became very adept at marketing individual mortgages and at processing applications quickly and funding loans (Muolo and Padilla 2008). Unlike commercial banks, these non-bank mortgage lenders did not take deposits from customers. Their source of funds was large loans from banks, known as warehouse loans. It is interesting to note that two of the largest providers of warehouse loans to Ameriquest in the early 2000s were Bear Stearns and Lehman Brothers, both of which ceased to exist as independent companies in 2008 (Muolo and Padilla 2008). Companies in this group originated home mortgage loans, funded them with proceeds borrowed from other banks, then promptly sold off the loans to other banks.

Ameriquest, Countrywide Financial, and other non-bank mortgage lenders received their revenue by selling the loans they originated to securitizers—companies that packaged individual loans into securities and sold these securities to investors. Thus the originators of the loans were paid in full shortly after the loan was funded, and did not appear to have any financial interest in how well the loan subsequently performed. This strategy or business model involved two kinds or marketing: the first to potential borrowers who wanted to take out mortgages, and the second to securitizers who purchased the completed loans. As the market for mortgage-based securities grew rapidly, marketing them became easy. The challenge for companies following this strategy was to find enough borrowers. In their efforts to do so, they reduced the standards required for loans to individuals in ways that made it likely that many of the borrowers would be unable to continue long term repayment of their loans. As later events proved, this was a very poor long-range strategy. An executive choosing such a strategy could have reasonably foreseen what actually happened.

Commercial banks such as Washington Mutual and Wachovia took deposits from literally millions of individuals and businesses in the form of checking and savings accounts, and invested some of these funds by making mortgage loans to individuals. While these banks had other lines of business besides making individual home mortgage loans, they chose to grow this one line of business to such an extent that its failure endangered the entire bank. Washington Mutual and Wachovia are examples of companies following this strategic choice. When large losses occurred in their home mortgage lending business, the


entire bank was put at risk of failure (Grind 2012). In the case of Washington Mutual and Wachovia, these very large commercial banks were sold to healthier banks under crisis conditions and ceased to exist as independent companies. While these banks with their multiple product lines were following an accepted strategy of related diversification, their execution of this strategy led to corporate failure.

Other commercial banks, such as Wells Fargo and U.S. Bank chose to compete in multiple market segments and maintained a balance among their various lines of business in such a way that they were able to survive and even thrive in spite of losses in their individual home mortgage business. These banks also pursued a strategy of related diversification but did so successfully. One obvious question for research is to identify variables between banks that pursued the related diversification strategy successfully and those that did not.

Banks that originated individual mortgage loans, whether non-bank mortgage lenders or full-scale commercial banks, sold most of the loans they originated to securitizers. These were institutions that purchased individual mortgages from the originating banks, bundled them into securities, then sold the securities. Fannie Mae and Freddie Mac had been pursuing this strategy for more than twenty years before it became widely popular among investment banks and some commercial banks in the early 2000s. These securitizers offered a new type of financial product to a wide variety of individual and institutional investors. Some banks, such as JP Morgan Chase and Lehman Brothers, performed both functions, originating the loans which then were processed or bundled into mortgage backed securities.

One additional step in the process involved the buying and selling of credit default swaps. These instruments are financial derivatives which function in the same basic way as insurance. If a company has an outstanding loan, or owns bonds backed by loans such as individual home mortgages, there is an inherent risk that the borrower will default on the loan. A credit default swap is a contract that guarantees, in exchange for a non-refundable payment or premium, that the contracting party will make good the loss in case of default. Thus, the risk of nonpayment is swapped from the lender to the guarantor.

A number of financial service companies bought and sold these contracts. AIG, the giant insurance company, did the highest volume of business in this product. They sold (but did not buy) protection against credit default on a massive basis, but did not set aside reserves in case payment was required. This business was viewed as a minor sideline business by corporate management until widespread defaults nearly caused the bankruptcy of the entire company (Boyd 2011). AIG was saved from bankruptcy by the infusion of more than $150 billion by the U.S. government. This was by far the largest government bailout of any private company.

There were two proximate causes of strategic failure by companies pursuing one or more of the lines of business described in the preceding section. One was a failure to keep the volume of business related to home mortgages in balance with the other businesses conducted by a company as a whole; the other was a failure to conduct one or more of the lines of business related to mortgages on a sound basis (Blinder 2013, Cohen 2009, McGee 2010, Morgenson and Rosner 2012, Zandi 2009). Standard strategic theory teaches that the choice of businesses in which to operate, and the balance among these businesses, is a central concern of strategy formulation. The other major element of strategy is execution, namely, conducting the business(es) in which a company operates in such a way that they will yield sufficient profit and avoid significant losses.

While the choice of strategy (formulation) is generally considered to be the task of top managers, its implementation involves the work of a wider group of managers and employees. Nonetheless, responsibility for successful implementation ultimately rests with top management. In a financial service firm such as a bank, maintaining sufficient liquidity to survive unusual demands for withdrawal of funds is normally considered a technical matter, executed by the treasury department under the general direction of the Chief Financial Officer. Regulations prescribe minimum capital reserves against loans and under normal circumstances top management, with the exception of the Chief Financial Officer, does not concern itself with such a basic issue as liquidity. Choosing a strategy that involves large investments in risky instruments has implications for liquidity. Even the execution of a strategy once chosen might proceed with little attention paid to issues of liquidity (Paulson 2010, Wessel 2009).


From the accounts of the last days at Bear Stearns, Lehman Brothers, Washington Mutual and other institutions that failed it is clear that liquidity was the proximate cause of failure (Kelly, 2009, McDonald, 2009, Grind 2012). These large investment and commercial banks, even though they had billions of dollars of cash on their balance sheets, were unable to meet the demands for withdrawals that were presented when the bank’s creditworthiness came into question. Similarly, AIG came within one day of bankruptcy because of a liquidity crisis (Boyd 2011). In each of these cases and others, top managers made intensive and widespread efforts to raise capital and save their firms but in the final days it was as if the levers they were pushing and pulling were not connected to anything (Gilbert 2010). The strategies that they had chosen proved incapable of execution and they ultimately led to failure of the firm.

Other comparable firms in the same industry at the same time performed well enough to survive and, in some cases to prosper. Bear Stearns and Lehman Brothers failed, but Goldman Sachs and Morgan Stanley did not. Washington Mutual and Wachovia failed, but Wells Fargo and Bank of America did not. AIG required a massive government bailout that made the U.S. government its major stockholder. Travelers did not. In each of these cases and others like them, comparative studies using available data might well shed light on management choices that led to strategic failure. Many of the books describing the conduct of individual companies during the critical period of the Great Recession suggest causes for failure. The Financial Crisis Inquiry Report surveys the companies and causes involved and identifies causes of failure and suggested remedies (Financial Crisis Inquiry Commission). While this report was not unanimous, and some members of the Commission filed dissenting views suggesting alternate causes for failure, this report is the most comprehensive single review of the economic crisis and events leading up to it.

Academic studies using available data from the period and the insights of the many authors who wrote books describing one or more companies involved in the crisis would add weight to the conclusions reached by the National Commission and the various authors who detailed the events of the period. Such studies might well provide results that would add to or change some parts of strategic theory as it is currently taught to business students at both the undergraduate and graduate levels. Such a contribution to understanding of past failures and the workings of strategy in the real world would be of great value.

Some companies chose to operate in only one segment of the financial services industry, namely mortgage origination, and to do so in ways that could not be self-sustaining. Some companies chose to make the creation and selling of mortgage derivatives a new and significant line of business to complement other lines of business in which they had long competed. The mortgage derivative business then brought down the entire company. Some companies chose a reasonable strategy for competing in this industry, but then lost control of their execution and failed.

What is needed now is scholarly analysis of the wealth of information provided. From strategic management to organizational theory and behavior to finance, experts can and should work with the rich trove of reported facts. Hypotheses need to be formed, based on what has already been established in the various disciplines, and tested for validity. Quantitative data is available in many of the books and government reports that have been published. It may be difficult to operationalize the theory that the devil caused the recession, but issues of firm size, different adopted strategies, and senior management attention to such functions as risk management are testable based on the works cited in this paper and others like them.

Studies of capital and leverage ratios are within the scope of finance, as are studies of the benefits and risks of various kinds of instruments such as collateralized mortgage obligations, collateralized debt obligations, and credit default swaps. The role of risk management in the overall management of financial service companies could be studied using the tools of organizational theory as well as those of finance. The extensive reliance on risk models developed by quants (individuals with PhDs in engineering or physics but little or no knowledge of business) could be studied by organizational theorists as well as finance specialists. The relative importance given to marketing as opposed to other functions within financial services firms, particularly in the area of compensation, could be studied by human resource specialists as well as experts in organizational behavior. Strengths and weaknesses are regular grist for the strategy mill, but such topics as financial stress tests are almost wholly absent from this field.


Regulators and top executives would benefit from the insights of business faculty on such topics as appropriate capital and leverage ratios, as well as the balance between expense reduction and careful underwriting of mortgages. Many types of mortgages were offered during the years immediately preceding the great recession. Studies of the success and failure rates of such instruments would be beneficial to both senior managers and financial regulators. Derivatives have been praised and damned in the wake of the Great Recession. Experts in finance have much to offer if careful studies were conducted of various types of derivatives, their risks and returns, and the level of transparency that might be desirable in trading such derivatives. All of these studies and more could contribute to our understanding of corporate strategy.

Most of the study of strategic management is aimed at helping companies to compete more successfully. Perhaps we have not devoted enough attention to helping companies to avoid bankruptcy or sudden unplanned sale. This appears to be a rather minimalist goal, but if the companies that failed during the Great Recession had competed more successfully, much of the economic and personal devastation that occurred might have been avoided. If, by studying the recent strategic failures using the techniques of the business disciplines and the wealth of material readily available, we could help to prevent similar failures, this would be no small thing.

REFERENCES Blinder, A. (2013). After the music stopped: The financial crisis, the response, and the work ahead, New

York: Penguin Press. Bookstaber, R. (2007). A demon of our own design: Markets, hedge funds, and the perils of financial

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Doubleday David, F. (2013). Strategic management: A competitive advantage approach, 14th edition,. Upper Saddle

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Bank of America, New York: Crown Business. Financial Crisis Inquiry Commission. (2011). Final report of the National Commission on the Causes of

the Financial and Economic Crisis in the United States. New York: Public Affairs. Gilbert, J.T. (2010). The levers are not connected: Strategic management in the last days.” Journal of

Applied Business and Economics, 11:4, Spring,70-81. Grind, K. (2012). The lost bank: The story of Washington Mutual-the biggest bank failure in American

history, New York: Simon & Schuster. Hill, C. & Jones, G. (2013). Strategic management: An integrated approach, 10th edition, Mason OH:

Cengage. Hitt, M., Ireland, R. & Hoskisson, R. (2013). Strategic management: Competitiveness and globalization,

11th edition. Mason, OH: Cengage Learning. Kelly, K. (2009). Street fighters: The last 72 hours of Bear Stearns, the toughest firm on Wall Street,

New York: Penguin. Madrick, J. (2011). Age of greed, New York: Alfred A. Knopf. McDonald, L. (2009). A colossal failure of common Sense: The inside story of the collapse of Lehman

Brothers, New York: Crown Business McGee, S. (2010). Chasing Goldman Sachs. New York: Crown Business. McLean, B. and Nocera, J. (2010). All the devils are here: The hidden history of the financial crisis, New

York: Penguin.


Morgenson, G. & Rosner, J. (2012). Reckless endangerment: How outsized ambition, greed, and corruption created the worst financial crisis of our time, New York, St. Martin’s Press Hoboken NJ: John Wiley & Sons.

Muolo, P. & Padilla, M. (2008). Chain of blame: How Wall Street caused the mortgage and credit crisis, Hoboken NJ: John Wiley& Sons

Paulson, H. Jr. (2010). On the brink: Inside the race to stop the collapse of the global financial system, New York: Business Plus.

Sorkin, A. R. (2009). Too big to fail: The inside story of how Wall Street and Washington fought to save the financial system—and themselves. New York: Viking Penguin.

Tett, G. (2009). Fool’s gold. New York: Free Press. Wessel, D .(2009). In Fed we trust: Ben Bernanke’s war on the great panic, New York: Crown Business. Zandi, M. (2009). Financial shock: A 360 degree look at the subprime mortgage implosion, and how to

avoid the next financial crisis, Upper Saddle River NJ: Pearson Education.


Learning Curve Setbacks: You Don’t Always Move DOWN a Learning Curve

Charles J Teplitz

University of San Diego

There are a number of reasons why production, continually moving down a known learning curve will suddenly retrace its steps by moving up the learning curve. The cause of such a reversal needs to be recognized and the impact determined. Knowing how to compute the degree of “forgetting” is crucial in properly estimating future production times and costs. This paper will address how to effectively determine the impact of such events on the learning curve and how to make changes to future estimates. INTRODUCTION

Production efficiencies are expected to take place thanks to the learning effect which says that as a

worker or an organization gains experience, the resources needed to perform a task are reduced as the experience continues. The reduction in time or cost due to the learning effect has been well documented in the literature (see for example: Yelle, 1979). The degree of improvement has been documented to take place at a consistent rate with each doubling of experience (Wright, 1936). Being aware that such consistent improvement will continue allows estimators to better estimate the production time or cost far into the future once the appropriate learning rate is determined. (Note: for brevity, throughout the remainder of the paper, the term “cost” will be used to refer to productions costs in dollars or hours.) Such recognition comes with a caveat. The estimates will only be reliable if the production process being monitored remains unaffected by outside events. Unfortunately, events capable of derailing a process and its learning curve are not that infrequent.

The most common disruptive events to the learning curve which affect future production costs are (1) interruption to the manufacturing process, (2) changes to the design of the product being produced, and (3) changes to the manufacturing process. The first of these will usually result in an increase in future costs. The second and third could result in an increase or a decrease in future costs and perhaps changes to the slope of the learning curve. This paper will address these three events through examples, their immediate impact on the learning curve as well as their impact on future costs. Understanding the proper way of dealing with these events will ensure that future cost estimates will remain reliable. DISRUPTIONS TO THE LEARNING PROCESS

Disruptive events to the learning curve are fairly common in industry today. Some disruptions, such

as those caused by a production stoppage, can result in long-term cost increases compared to the original costs. For example, it is very possible that during a disruption, one or more of the production workers has been permanently reassigned to a different production area or is laid-off only to be unavailable later. In


either case, the worker would not be returning to their old job after the disruption, but instead would be replaced by a worker with little to no prior experience at this job. In addition, as the duration of the disruption increases, workers’ memory about the activities of their job will slowly fade resulting in slower performance times (higher costs) when production resumes. Unfortunately, many such events occur with little warning providing scant opportunity for a production manager to avoid the effects.

Other disruptions, such as those caused by redesign of the product or by the installation of improved manufacturing processes can also impact future costs. These events would be known in advance, but their impact on the learning curve and production times could still prove uncertain. Regardless of the cause of the disruption, it would be beneficial if an estimator could evaluate an upcoming disruption and postulate the degree to which it would affect future costs ex ante. However, in most cases, such foresight is usually impossible since the impact of disruptions depends on many factors – most of which cannot be evaluated until after the event takes place. Due to the uncertainty of the impact of a disruption, it is better for the estimator to measure the impact once production is restarted. The impact will be most recognizable when plotting production times on a learning curve (see Figure 1). Such a plot will provide the evidence needed to determine not only the direction of the change in costs but also the magnitude.

FIGURE 1 EFFECT OF DISRUPTIONS TO LEARNING PROCESS

If the costs of post-disruption production units are compared to the cost of pre-disruption units, the higher cost of a post-disruption unit will be observed to be equal to that of a unit previously produced (i.e., prior to the disruption). The degree of setback on the learning curve for this item will be revealed by comparing the unit number of the first post-disruption unit with that of a previously produced unit whose cost equaled this post-disruption unit’s cost, as in Figure 2. The term “setback” refers to the extent to which learning was lost, or set back, during the disruption. Setback is described in “units” indicating how many units of progress on the learning curve were lost, or unlearned. While the impact of the disruption will decrease over time, the effect will be felt by all post-disruption production for the life of the product.


FIGURE 2 SETBACKS CAUSED BY DISRUPTIONS TO LEARNING

ESTIMATING THE IMPACT OF INTERRUPTIONS TO THE MANUFACTURING PROCESS One of the most frequent disruptions to the learning process is an interruption to the manufacturing

process. The potential causes of production interruptions are numerous and naturally vary by industry. A firm might have a mandatory shutdown from Christmas through New Year’s; another firm might experience a labor dispute resulting in workers walking off the job for some period of time; at another company an unanticipated event might cause the supply chain to be negatively affected (e.g., train derailment) causing delays in receipt of necessary materials resulting in a shutdown; a severe natural event (e.g., Hurricane Katrina) might cause a temporary closure of an assembly facility or the facilities of suppliers, etc. A more detailed example should clarify the corrective actions needed by the estimator.

Example

A large aerospace company successfully bid to provide the U.S. Air Force with periodic diagnostic testing of their F-16 Fighting Falcon. In the agreement, the U.S. Air Force was to deliver one F-16 to the firm’s test facility every month for the next 24 months (the term of this contract). During the time available, the firm would perform testing of the aircraft’s electronic systems. In bidding for this contract, the firm provided the Air Force with a cost estimate based on per aircraft cost that was expected to decrease with every plane serviced following along a 90 percent learning curve. The learning effect was incorporated into the bid because of the repetitive nature of the testing process. The firm estimated the cost of servicing the first aircraft to be $40,000. The firm was awarded the contract. Two months after being awarded the contract, and right on schedule, the first F-16 arrived at the testing facility. Each month thereafter an F-16 arrived for testing on the first of the month. On the seventh month into the contract no aircraft was delivered. The eighth month came and still no aircraft. Despite numerous inquiries to the Air Force, no aircraft where delivered during the 15 month period since the last aircraft was tested. Finally, nearly two years after the first aircraft came in for service the seventh aircraft arrived: no notice, no excuses, it just arrived for servicing.

The sudden arrival of a new aircraft caught the aerospace company off guard due to lack of communication from the Air Force. The company was unable to begin testing the jet’s electronics because


several things had happened within the firm since the last aircraft was tested over 15 months ago: some of the personnel had been reassigned to other projects and were dispersed throughout the country; some had retired; and some of the test equipment had been appropriated by other departments within the company for their own projects.

The effect of the disruption was very obvious when the cost of testing the latest aircraft was graphed on the previously developed learning curve. Figure 3 shows the actual costs of the first six aircraft tested (solid line), the actual cost of the first post-disruption aircraft (circle), the estimated costs for all post-production aircraft (dashed line) and the original estimated cost of aircraft (dotted line) on a 90 percent learning curve.

FIGURE 3

COST INCREASES CAUSED BY INTERRUPTIONS TO THE MANUFACTURING PROCESS

It is quite clear that the cost of the post-disruption aircraft is notably higher than originally estimated.

The increase in costs can be traced directly to the disruption. If the original contract was for 24 aircraft, we need to be able to estimate the cost impact of the disruption on the remaining tests under the contract. Management of the company believes the Air Force’s actions caused the costs to go up and therefore is responsible for the cost overages associated with the disruption.

The size of the setback (4 units) in the aerospace example will remain constant throughout the remainder of the project (Norfleet, 2004, p. 10.5). It would be expected that the cost of Unit 8 would be equivalent to pre-disruption Unit 4 (8-4); the cost of Unit 9 would equal that of Unit 5 (9-4), etc. To properly adjust the estimates for the remainder of the contract, the unit numbers for all future units must be decreased by 4 and then each unit’s cost should be recomputed. Applying the setback in this way will allow for the proper correction of cost estimates in order to properly reflect the impact that the disruption had on all subsequent aircraft for the remainder of the contract. Table 1 shows the calculation of the expected cost overruns from the time of the disruption to the end of the contract. It is clear that this contractor incurred over $28,000 in added expenses due to the disruption caused by the Air Force.


TABLE 1 COST IMPACT OF PRODUCTION INTERRUPTIONS

Unit

Original Estimated Costs

Equivalent Unit Number after Setback

Post- Disruption Estimated Costs

Expected Cost Overruns due to the Disruption

40000(x)-.152

40000(x-4)-.152 ∆ 1 40,000 2 36,000 3 33,848 4 32,400 5 31,320 6 30,463 DISRUPTION 7 29,758 =7-4=3 33,848 4,090 8 29,160 =8-4=4 32,400 3,240 9 28,643 =9-4=5 31,320 2,677 10 28,188 =10-4=6 30,463 2,275 11 27,782 =11-4=7 29,758 1,976 12 27,417 =12-4=8 29,160 1,743 13 27,086 =13-4=9 28,643 1,557 14 26,782 =14-4=10 28,188 1,405 15 26,503 =15-4=11 27,782 1,279 16 26,244 =16-4=12 27,417 1,173 17 26,003 =17-4=13 27,086 1,082 18 25,779 =18-4=14 26,782 1,004 19 25,568 =19-4=15 26,503 935 20 25,369 =20-4=16 26,244 875 21 25,182 =21-4=17 26,003 822 22 25,004 =22-4=18 25,779 774 23 24,836 =23-4=19 25,568 732 24 24,676 =24-4=18 25,369 693 Total Project $684,011

$712,346 $28,335

When graphed (see Figure 4), the apparent impact of the setback appears to be decreasing and the rate

of learning seems to be steeper than the original curve. This is only an apparition due to two factors. First, the setback is a fixed number of units (4 in this case) being applied horizontally to a logarithmic function. Second, the plotting of the revised estimates being set back four units causes the bigger reductions taking place at earlier units to be plotted later on the learning curve (further to the right). The slope of the underlying learning curve has not changed from its original 90%, but due to the above reasons, the post-disruption learning curve becomes distorted. Rather than being a steeper learning curve, the line in Figure 4 is depicting a learning curve whose slope is changing as the time since the disruption event increases.


FIGURE 4 LESSENING OF DISRUPTION IMPACT

In learning curve theory, the rate of improvement can be determined by dividing the production time

of a particular unit by the production time of a unit produced with half the prior experience (Teplitz, pp. 58-59). To measure the changing of the slope of the curve seen in Figure 4, we can compare the revised estimate at unit 14 to that of unit 7 (where unit 14 is a doubling in experience compared to unit 7). In Table 2 we see that the ratio of the later unit’s revised estimate to that of the earlier unit ($28,188/$33,848) depicts a rate of improvement between these two points of 83.3%. This is much higher than the true 90% improvement rate in this problem. Comparing the revised estimate at unit 24 to that of unit 12 (also a doubling in experience), we see that the ratio of the later unit’s revised estimate to that of the earlier unit ($25,369/$29,160) depicts a rate of improvement between these two points of 87%, much closer to the underlying 90% curve. As the disruption event becomes further in the past, its impact on the learning rate decreases and the revised learning curve approaches the true underlying rate of 90 percent.

TABLE 2

POST-DISRUPTION LEARNING CURVE APPROACHES UNDERLYING LEARNING RATE

Unit Comparisons

Cost of Later Unit

Cost of Earlier Unit Ratio Learning

Rate

7 and 14 $28,188 $33,848 0.8328 83.3% 8 and 16 $27,417 $32,400 0.8462 84.6% 9 and 18 $26,782 $31,320 0.8551 85.5% 10 and 20 $26,244 $30,464 0.8614 86.1% 11 and 22 $25,779 $29,758 0.8663 86.6% 12 and 24 $25,369 $29,160 0.8700 87.0%


ESTIMATING THE IMPACT OF CHANGES TO THE DESIGN OF THE PRODUCT OR THE MANUFACTURING PROCESS

Changes to the design of the product or to the manufacturing process itself impact the learning

process in the same way and can impact future production costs just as interruptions to the manufacturing process did. The impact on these costs can be positive or negative depending upon how the change would affect the manufacturing of the redesigned product.

Negative Impact to the Learning Process

Some product redesigns entail adding enhancements to the original product to make the product more appealing to the potential purchaser. These enhancements often require the production team to perform more or lengthier tasks than were performed on the original product. These changes will require new learning to take place on some elements of the production process and will be demonstrated by part of the production process setting back to unit number one while the unchanged portion of the production process will continue down the original learning curve.

Example

A little over a year ago, a general contractor was chosen to build a new 100-unit housing development. While the new development would consist of 3 uniquely designed two-story homes, the second floor interior was the same for all models. This consistency meant that those construction workers (e.g.: framers and drywallers) building the interior on the second floor would gain expertise as they progressed from house to house across the housing development. Their improvement was consistently tracked along an 85 percent learning curve.

After constructing 40 of the 100 units, the developer and architect decided to modify the second floor by taking the space from a loft area at the top of the stairs and incorporating it into the master bedroom. The architect explained to the construction foreman that the design change simply meant that an existing wall would be continued further than it had been originally and the doorway within that wall would be relocated to the other end of the wall from where it was before. He assured the foreman that these simple changes would not impact the construction time because it was just more of the same wall and the effort of putting in the door was no different than it was before, except in a different location. With blueprints in hand, the foreman explained the changes to the framers and the drywall installers.

Over the course of constructing the next ten houses, the foreman noticed that the framers and drywall installers seemed to be taking more time on the second floor than in the past. The problem was that part of the second floor work was set back on the learning curve since the framers and drywall installers had no previous experience with this new design of the second floor. Their work in the rest of the second floor was not affected and the task times continued down the original learning curve. What has happened is that the while some of the tasks have continued down the original learning curve, workers have encountered tasks which need to be learned for the first time, such as where partial sheets of drywall will need to be cut compared to where this happened before.

Calculating the production cost after the disruption can be determined by tracking the old learning curve for the unaffected area and the new learning curve for the affected area. Suppose that it was determined that 75 percent of the original framing and dry wall production time would be unaffected by the redesign and would continue down the original learning curve, but that 25 percent of the original framing and drywall activity time would be replaced with a new set of tasks in which the worker time would be set back to the beginning of the curve.

The splitting of the second floor learning curve can be seen in Figure 5. In Figure 5, “B” represents the learning curve for the unaffected work on the second floor. “A” represents the learning curve for the new tasks. The new combined time for house 41 and beyond is represented by curve “C”.


FIGURE 5 SPLITTING THE LEARNING CURVE DUE TO PARTIAL REDESIGN

Table 3 shows the calculations for the second floor framing and dry wall for the remainder of the project. It will be assumed that the rate of improvement for the new tasks will be equal to that of the original tasks. The design change cost the developer 141.7 extra hours of labor for the remaining houses due to the addition of tasks not previously performed.

Positive Impact to the Learning Process

Many products are redesigned specifically to make the manufacturing process simpler in order to reduce costs. Such redesigns often eliminate some of the manufacturing operations or reduce the number of complex tasks. The learning curve for this item could show a marked reduction in the per unit cost beginning with the first unit of the redesigned product (see Figure 6a). It is also possible that a redesign would result in a manufacturing process with fewer opportunities for learning which would cause the slope of the learning curve to become flatter beyond the point at which the newly designed product would resume production (see Figure 6b). These figures are graphed using a log-log scale which results in the logarithmic learning curves being demonstrated as straight lines. As such, it becomes easier to see the effects of these positive design changes on production costs.


TABLE 3 COST IMPACT OF DESIGN CHANGE

Unit

Original Estimated Costs

A. Estimated Cost of Unaffected Work

Equivalent Unit Number after Setback

B. Estimated Cost of Newly Added Work

C. Estimated Total Cost

Expected Cost Overruns due to the Disruption

80(x)-.23447

20(x-40)-.23447 ∆

1 80.0 80.0

2 68.0 68.0

. . .

40

33.7

DESIGN CHANGE

41 33.5 25.1

1 20.0 45.1

42 33.3 25.0

2 17.0 42.0

43 33.1 24.8

3 15.5 40.3

44 32.9 24.7

4 14.4 39.2

. . .

98 27.3 20.5

58 7.7 28.2

99 27.2 20.4

59 7.7 28.1

100 27.2 20.4

60 7.7 28.0

Total Project 3500.3 hrs.

3053.7 hrs. 588.3 hrs.

141.7 hrs.


FIGURE 6A PRODUCT SIMPLIFICATION

FIGURE 6B PRODUCT SIMPLIFICATION – CHANGE IN LEARNING RATE

Example

The manufacturer of flat-screen televisions had been producing 42 inch televisions for a number of years maintaining a dependable manufacturing process that consisted of several workers interfacing with NC (numerically controlled) machines. Engineers in the firm have been working on a more efficient process that used smarter CNC (computer numerically controlled) machines but that would still require the same number of workers as the current process. Implementation of the new process was expected to result in a considerable reduction in per-unit production costs.


Upon installation of the new CNC machines and implementation of the other process changes, rather than demonstrating the anticipated manufacturing cost reductions, the costs associated with the 42 inch television increased slightly. Investigation revealed that while the new machines did reduce per unit production times, the pace of the workers interfacing with the new machines had slowed down. The slowdown was attributed to the need for the workers to learn their new role in the revised process. It was hoped that the worker related production times would come down as the workers learned their new roles. Figure 7 depicts the impact of the process change on the cost per unit of the 42 inch televisions. As in earlier examples, the exact magnitude of the cost increases or decreases and even the timing of these is best left to ex post analysis.

FIGURE 7

POST PROCESS CHANGE

CONCLUSION

In the above cases it was observed that the impact of disruptive events on a production process was

best evaluated after the fact. Despite the desire to forecast the cost implications of such events, the complex nature of the man-machine interface makes reliability of such forecasts highly unlikely. A proper analysis of the impact of disruptions, product design modifications or process improvements on the underlying manufacturing costs requires a methodical analysis utilizing the concept of the learning effect, or contrarily, the forgetting effect.

In some cases it becomes necessary to break the production process down into the underlying tasks in order to properly modify the cost of these tasks, or even their inherent rates of learning. In other cases, the entire process might regress to earlier (higher) costs due to forgetting taking place over some period of time, or due to new tasks being introduced in which the worker has had little to no experience.

Businesses often find themselves the victim of change, whether self-imposed or caused by competitive necessity. Having a proper understanding of the relationships between independent and dependent variables affecting future costs is essential. REFERENCES Andelor, G. (1969). What Production Breaks Cost. Industrial Engineering, September, 35.


Carlson, J.G. and Rowe, A.J. (1976). How Much Does Forgetting Cost? Industrial Engineering, September, 43-44.

Cochran, E.B. (1968). Planning Production Costs: Using the Improvement Curve, San Francisco: Chandler Publishing, 370-390.

Norfleet, D.A. (2004). Loss of Learning in Disruption Claims. AACE International Transactions, CDR 10.1-10.6.

Teplitz, C.J. (1991). Learning Curve Deskbook, New York: Quorum Books. Wright, T.P. (1936). Factors Affecting the Cost of Airplanes. Journal of the Aeronautical Sciences, 3,

122-128. Yelle, L. (1979). The Learning Curve – Historical Review and Comprehensive Survey. Decision

Sciences, 10, 302-324.


Comparison of Three Investment Strategies for Financial Independence

Carlos Spaht

Louisiana State University in Shreveport

Harvey Rubin Louisiana State University in Shreveport

This paper discusses how investors can achieve financial independence regardless of timing in the market. To do this, we study three investors referred to as the luckiest, average, and unluckiest investors in the market. Using the S&P Dividend Aristocrats Index, each selects the same stocks and then continues, each quarter for fifteen years, to invest the same amount and reinvest the dividends in each stock. But their timing is different; the lucky investor invests at the low point of the market whereas the average and unlucky investors invest at the average and high points. Amazingly, each investor achieves financial independence. INTRODUCTION For most individuals, investment alternatives are limited to stocks and bonds. Few individuals have the expertise necessary to invest in real estate, collectables, natural resources, precious gems, etc. Even investment in real estate on a personal level is usually limited to one’s home. And although home equity has been the major component on one’s net worth statement for decades, with the collapse of the real estate market in 2008, 2009, and 2010, it has approached zero or even gone under water for many. In his ground-breaking book, Stocks for the Long Run, Jeremy Siegel argues that, over the past 200 years, stocks have returned much more than bonds at only slightly more risk (Siegel, 2007). On an annualized basis, stocks have generated 10% over this time period. Moreover, with a steady and/or increasing dividend income, a stock’s annualized total return often increases substantially. On the other hand, bonds are fixed income financial investments that have a significant purchasing power risk. The interest rate stipulated in the bond does not increase over the lifetime of the bond. Financial independence is a necessity in today’s economic environment. Job security prior to retirement and a minimum guaranteed income stream after retirement are fast becoming obsolete. Professional positions no longer attach a large degree of job security; and professional staffs at corporations, universities, military, and civil government are continually being downsized. PERSPECTIVE The purpose of this paper is to prove how one can become financially independent by incorporating the research of previous papers (Spaht & Rubin, 2007; Rubin & Spaht, 2010; Rubin & Spaht, 2011; Spaht


& Rubin, 2012; Rubin & Spaht, 2013) dealing with dividend growth, reinvestment of dividends, and dollar cost averaging with the authors’ current research. The premise is that this type of investment strategy results in financial independence. Don Kilbride, manager of the $17 billion Vanguard Dividend Growth Fund, focuses on dividend growth as the critical factor in the success of his fund. The thesis of his strategy is the compounding of dividends. He invests in companies that are growing and returning a portion of that growth to stockholders in the form of dividends (Kapadia, 2013). Donald Yacktman, president of the $30 billion Yacktman Asset Management, has beaten 99% of his peer mutual funds in Morningstar’s large-cap blend category. His strategy utilizes the buy-and-hold strategy where he buys and then holds stocks for years (Strauss, 2013). Mark Hulbert, editor of the Hulbert Financial Digest, believes that a stock’s average dividend yield is a mark of the company’s financial quality. Such stocks have held steady in major market declines. They are usually the highest-quality blue chip stocks of large and well-established companies that pay dividends, have little debt, and have a long and consistent record of earnings growth (Hulbert, 2013). His idea is that consistent and growing dividends are a function of consistently growing earnings over a long period of time. Jason Zweig, who writes the “Intelligent Investor” column in the Wall Street Journal, believes that the investor has imperfect self-knowledge concerning when to buy and when to sell. He writes that most investors buy and sell when they have the urge, with the result that they earn lower returns than market indexes (Zweig, 2013). This paper discusses how a stock market investor can become financially independent regardless of timing in the market. To accomplish this, we analyzed three investors. We refer to them as the luckiest, average, and unluckiest investors in the market; and define them as those individuals who, for several years on a continuous basis, invest at the low, average, and high points in the market, respectively. ANALYSIS The investment strategy of our three investors described in the above paragraph involved the selection of a sample of 10 stocks for the time period from 1993 – 2007 from the S&P 500 Dividend Aristocrats Index. The sample was further limited to those stocks that had a strong buy or buy recommendation from the S&P equity analysts. The sample also included only those stocks that had a record of consistency in increasing dividends for at least the last 25 years. The 15 year period from 1993 to 2007 was selected because it contained almost equally good years and bad years in the stock market. The bad years are represented with the collapse of the tech bubble at the end of 2000 while the good years are represented with the stock market high in 2007. The investors’ initial investments are made in these stocks at their low, average, and high points. Then, on a quarterly basis for the entire select period of time, they reinvest the dividends and invest a fixed dollar amount, also at the stocks’ low, average, and high points. So let’s assume that in 1993, our lucky, average, and unlucky investors made an initial investment in the manner described above in 10 randomly selected stocks contained in the S&P 500 Dividend Aristocrats Index. The 10 stocks selected were Abbott Labs; Aflac, Inc.; Becton, D’son; Coca-Cola; Exxon Mobil; Johnson & Johnson; McDonald’s; PepsiCo, Inc.; Proctor & Gamble; and Wal-Mart Stores. The investors made an initial investment of $5,000 in each of these 10 stocks at their low, average, and high points, and then, for 15 years on a quarterly basis, they (1) reinvested the dividends at the 10 stocks’ low, average, and high points and (2) invested a fixed sum of $125 (total of $500 per year or $7,500 for the 15 year period) also in each of the stocks’ low, average, and high points. Under those assumptions, the following questions were investigated and answered. How much did the stock value of the three portfolios grow over the 15 year period? How much did their dividend income grow? Were the final values of the portfolios significantly different? Do the results indicate that investing in high-quality, dividend paying stocks provide a safe and long-term plan for financial security?


The methodology in this paper involves the derivation of a formula used to compute accumulations in stock values and dividend income of the lucky, average, and unlucky investors. The results prove that, even given the best, average, or worst case scenarios of investing and reinvesting in the manner described above, each of the individuals achieved financial independence. DCA-QDRIP FORMULA To derive the DCA-QDRIP (Dollar Cost Averaging Quarterly Dividend Reinvestment Plan) formula, the formula used to compute accumulations in stock value, consider an arbitrary stock and let:

P(n) = the price per share of stock during the nth year (P(n) is will be different for each of the investors. For the unlucky investor, P(n) will be the highest price per share during the nth year; for the average investor, it will be the average of the highest and lowest of the year; and for the lucky investor, it will be the lowest price of the year.),

D(n) = the declared dividend per share of the nth year, A(n) = the dollar amount invested to purchase additional shares of stock during the nth year (this value is assumed to be $125 per quarter or $500 per year in this paper),

S = the number of shares initially purchased, Si = the number of shares owned at the end of the ith quarter, and SPi = the number of shares purchased during the ith quarter. Two assumptions are made in the derivation of the formula. First of all, P(n) will remain constant for each of the investors and not fluctuate throughout the year. Secondly, since the dividend is normally declared annually and distributed quarterly, it also will remain constant throughout the year and not change until the first quarter of the following year. Note that since Si is the number of shares owned at the end of the ith quarter, then Si-1 represents the number of shares owned at the beginning of the ith quarter. Under the above assumptions, the amount of dividend (DIV(i)) generated by one share of stock and used to purchase additional shares of stock during the ith quarter is:

DIV(i) = .25D��i-14�+1�, (1)

where [ ] denotes the greatest integer function. Also, the price (PRICE(i)) per share of stock (which will be different for each investor) over this same time period is:

PRICE(i) = P��i-14�+1�. (2)

Thus the quotient,

DIV(i)PRICE(i)

= .25D��i-14 �+1�

P��i-14 �+1� , (3)

represents the number of shares of stock purchased from the dividends of a single share of stock during the ith quarter. This continuing process is illustrated in Table 1.


TABLE 1 SHARES PURCHASED FROM THE DIVIDENDS OF ONE SHARE OF STOCK

Quarters

Year 1 2 3 4

1 .25D ��1-1

4 �+1�

P ��1-14 �+1�

.25D ��2-1

4 �+1�

P ��2-14 �+1�

.25D ��3-1

4 �+1�

P ��3-14 �+1�

.25D ��4-1

4 �+1�

P ��4-14 �+1�

2 .25D ��5-1

4 �+1�

P ��5-14 �+1�

.25D ��6-1

4 �+1�

P ��6-14 �+1�

.25D ��7-1

4 �+1�

P ��7-14 �+1�

.25D ��8-1

4 �+1�

P ��8-14 �+1�

3 .25D ��9-1

4 �+1�

P ��9-14 �+1�

.25D ��10-1

4 �+1�

P ��10-14 �+1�

.25D ��11-1

4 �+1�

P ��11-14 �+1�

.25D ��12-1

4 �+1�

P ��12-14 �+1�

4 .25D ��13-1

4 �+1�

P ��13-14 �+1�

.25D ��14-1

4 �+1�

P ��14-14 �+1�

.25D ��15-1

4 �+1�

P ��15-14 �+1�

.25D ��16-1

4 �+1�

P ��16-14 �+1�

5 … … … …

… … … …

… … … …

… … … …

Also note that the number of shares (Si) owned at the end of the ith quarter is given by:

Si = Si-1 + SPi

= Si-1 + Si-1 • DIV(i)PRICE(i)

+ .25A��i-14 �+1�

PRICE(i)

= Si-1 + Si-1 • .25D��i-14 �+1�

P��i-14 �+1� +

.25A��i-14 �+1�

P��i-14 �+1� .

For the purpose of this paper, since $125 per quarter is used to purchase additional shares of stock, we have:

Si = Si-1 + Si-1 • .25D��i-14 �+1�

P��i-14 �+1� + 125

P��i-14 �+1� (4)

which is the DCA-QDRIP formula. Therefore, at the end of n years (or 4n quarters), the investor will have accumulated a value in stock of A dollars where:


A = P(n) • S4n

= P(n) • �S4n-1 + S4n-1 • .25D��4n-1

4 �+1�

P��4n-14 �+1�

+ 125

P��4n-14 �+1�

� .

(Before proceeding further, it should be noted that since P(n) is different for each of the three investors, the value of A will also be different for each of the investors.) RESULTS USING HIGH PRICES (UNLUCKIEST INVESTOR) In referencing Table 2, if the investor had invested an initial $5,000 in each of the 10 stocks and reinvested the dividends generated by the stocks into the same stocks while also investing an additional $125 in each stock quarterly (all investments made at the high points of stocks’ prices), then, at the end of 15 years, that portfolio would have grown in value from $50,000 to $542,081. The resulting percentage increase is 333.67% in total return which annualizes to a rate of 10.27%. In referencing Table 3, by using the above investment protocol, the dividend income would have increased from $956 to $9,111. This results in an increase of 852.14 percentage return in dividend income growth at an annualized rate of 17.46%. Thus, even if you happen to be the unluckiest investor in the market, always investing and reinvesting at the high points in the market, the total return as well as the income growth are impressive. Certainly both growth rates far exceed the rate of inflation, thereby not only preserving the purchasing power of the portfolio, but also allowing the investor to prosper. RESULTS USING AVERAGE PRICES (AVERAGE INVESTOR) In referencing Table 2A, if the investor had invested an initial $5,000 in each of the 10 stocks and reinvested the dividends generated by the stocks into the same stocks while also investing an additional $125 in each stock quarterly (all investments made at the average point of the stocks’ prices), then, at the end of 15 years, that portfolio would have grown in value from $50,000 to $553,968. The resulting percentage increase is 343.17% in total return which annualizes to a rate of 10.43%. In referencing Table 3A, by using the above investment protocol, the dividend income would have increased from $1,506 to $10,556. This results in an increase of 899.45 percentage return in dividend income growth at an annualized rate of 17.87%. It may be somewhat surprising to note that the results of the average investor are not significantly greater than those of the unlucky investor. RESULTS USING LOW PRICES (LUCKIEST INVESTOR) In referencing Table 2B, if the investor had invested an initial $5,000 in each of the 10 stocks and reinvested the dividends generated by the stocks into the same stocks while also investing an additional $125 in each stock quarterly (all investments made at the low point of the stocks’ prices), then, at the end of 15 years, that portfolio would have grown in value from $50,000 to $575,643. The resulting percentage increase is 360.51% in total return annualized at a rate of 10.72%. In referencing Table 3B, the dividend income would have increased from $1,179 to $12,668. This results in an increase of 973.95 percentage return in dividend income growth at an annualized rate of 18.48%. The authors’ most surprising finding in developing this paper is that the annualized total returns (10.27%, 10.43%, 10.72%) and the annualized dividend returns (17.46%, 17.87%, 18.46%) of the unlucky, average, and lucky investors were only slightly different. The rate of returns from the unlucky to the lucky investor increased but not significantly. All of the rates were impressive and far exceeded


inflation. In each case, not only was the purchasing power of the portfolio preserved, but this process led to financial independence for each of the investors.

TABLE 2 STOCK VALUE GROWTH WITH DCA-QDRIP PLAN USING HIGH PRICES

1993-2007

Stocks Name IIV ICS INS FCS FNS FIV % GAIN ARR

Abbott Labs 5000 14.90 335.57 59.50 695.67 41,392.30 231.14 8.31 Aflac, Inc. 5000 5.20 961.54 63.90 1,613.43 103,098.00 724.78 15.10 Becton, D’son 5000 9.00 555.56 85.9 956.40 82,154.90 557.24 13.37 Coca-Cola 5000 22.30 224.22 64.30 456.45 29,349.50 134.80 5.86 Exxon Mobil 5000 17.30 289.02 95.30 682.54 65,045.60 420.37 11.62 Johnson & Johnson 5000 11.70 427.35 68.80 795.54 54,732.80 337.86 10.35

McDonald’s Corp. 5000 14.50 344.83 63.70 690.91 44,011.10 252.09 8.75

PepsiCo, Inc. 5000 21.00 238.10 79.00 505.11 39,904.00 219.23 8.05 Procter & Gamble 5000 14.30 349.65 75.20 683.73 51,416.80 311.33 9.89

Wal-Mart Stores 5000 16.60 301.21 51.40 602.65 30,976.40 147.81 6.24 TOTAL 50,000 542,081.40 333.67 10.27 IIV = Initial investment value ICS = Initial year’s high cost per share INS = Initial number of shares purchased FCS = Final year’s high cost per share FNS = Final number of shares FIV = Final investment value % GAIN = Percentage total return (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock) ARR = Annual rate of return in accumulations of stock value (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock)


TABLE 3 DIVIDEND GROWTH WITH DCA-QDRIP PLAN USING HIGH PRICES

1993-2007

Stocks Name INS IDS IDI FNS FDS FDI % GAIN ARI

Abbott Labs 335.57 0.34 122.90 695.67 1.30 904.37 635.85 15.32 Aflac, Inc. 961.54 0.06 61.73 1,613.43 0.80 1,290.74 1,991.09 24.25 Becton, D’son 555.56 0.17 101.50 956.40 0.98 937.27 823.47 17.21 Coca-Cola 224.22 0.34 81.75 456.45 1.36 620.77 659.39 15.58 Exxon Mobil 289.02 0.72 226.70 682.54 1.37 935.07 312.47 10.65 Johnson & Johnson 427.35 0.25 114.99 795.54 1.62 1,288.77 1,020.81 18.84

McDonald’s Corp. 344.83 0.11 40.49 690.91 1.50 1,036.37 2,459.79 26.06

PepsiCo, Inc. 238.10 0.31 79.12 505.11 1.43 722.31 812.90 17.11 Procter & Gamble 349.65 0.28 105.26 683.73 1.28 875.18 731.48 16.33

Wal-Mart Stores 301.21 0.07 22.46 602.65 0.83 500.20 2,127.17 24.81 TOTAL 956.90 9,111.05 852.14 17.46 INS = Initial number of shares purchased IDS = Initial declared dividend per share IDI = Initial dividend income (beginning with end of first year) FNS = Final number of shares FDS = Final declared dividend per share FDI = Final dividend income (last year) % GAIN = Percentage return in dividend income growth (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock) ARI = Annual rate of return in dividend income growth (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock)


TABLE 2A STOCK VALUE GROWTH WITH DCA-QDRIP PLAN USING AVERAGE PRICES

1993-2007


Abbott Labs 5000 13.40 373.13 54.15 817.37 44,260.30 254.08 8.79 Aflac, Inc. 5000 4.65 1,075.27 54.55 1,867.36 101,865.00 714.92 15.01 Becton, D’son 5000 8.25 606.06 77.60 1,089.55 84,549.10 576.39 13.59 Coca-Cola 5000 20.65 242.13 54.95 519.73 28,559.10 128.47 5.66 Exxon Mobil 5000 15.90 314.47 82.15 784.06 64,410.80 415.29 11.55 Johnson & Johnson 5000 10.40 480.77 64.25 931.05 59,820.00 378.56 11.00

McDonald’s Corp. 5000 13.00 384.62 53.00 809.67 42,912.60 243.30 8.57


Wal-Mart Stores 5000 14.25 350.88 46.75 715.36 33,442.80 167.54 6.78 TOTAL 50,000 553,968.10 343.17 10.43 IIV = Initial investment value ICS = Initial year’s average cost per share ((high price – low price)/2) INS = Initial number of shares purchased FCS = Final year’s average cost per share ((high price – low price)/2) FNS = Final number of shares FIV = Final investment value % GAIN = Percentage total return (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock) ARR = Annual rate of return in accumulations of stock value (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock)


TABLE 3A DIVIDEND GROWTH WITH DCA-QDRIP PLAN USING AVERAGE PRICES

1993-2007


Abbott Labs 373.13 0.34 136.87 817.37 1.30 1,062.58 676.34 15.76 Aflac, Inc. 1,075.27 0.06 69.08 1,867.36 0.80 1,493.89 2,062.45 24.55 Becton, D’son 606.06 0.17 110.84 1,089.55 0.98 1,067.76 863.36 17.56 Coca-Cola 242.13 0.34 88.34 519.73 1.36 706.83 700.11 16.01 Exxon Mobil 314.47 0.72 247.21 784.06 1.37 1,074.17 334.52 11.06 Johnson & Johnson 480.77 0.25 129.57 931.05 1.62 1,508.30 1,064.12 19.16

McDonald’s Corp. 384.62 0.11 45.18 809.67 1.50 1,214.51 2,588.05 26.50

PepsiCo, Inc. 257.73 0.31 85.71 576.25 1.43 824.04 861.41 17.92 Procter & Gamble 389.11 0.28 117.29 789.85 1.28 1,011.00 761.99 16.63

Wal-Mart Stores 350.88 0.07 26.17 715.36 0.83 593.75 2,168.46 24.98 TOTAL 1,056.26 10,556.83 899.45 17.87 INS = Initial number of shares purchased IDS = Initial declared dividend per share IDI = Initial dividend income (beginning with end of first year) FNS = Final number of shares FDS = Final declared dividend per share FDI = Final dividend income (last year) % GAIN = Percentage return in dividend income growth (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock) ARI = Annual rate of return in dividend income growth (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock)


TABLE 2B STOCK VALUE GROWTH WITH DCA-QDRIP PLAN USING LOW PRICES

1993-2007


Abbott Labs 5000 11.90 420.17 48.80 1,001.85 48,890.30 291.12 9.52 Aflac, Inc. 5000 4.10 1,219.51 45.20 2,233.99 100,976.00 707.81 14.94 Becton, D’son 5000 7.50 666.67 69.30 1,279.69 88,682.80 609.46 13.95 Coca-Cola 5000 19.00 263.16 45.60 608.52 27,748.60 121.99 5.46 Exxon Mobil 5000 14.50 344.83 69.00 924.05 63,759.40 410.08 11.47 Johnson & Johnson 5000 9.10 549.45 59.70 1,126.84 67,272.20 438.18 11.87

McDonald’s Corp. 5000 11.50 434.78 42.30 996.88 42,168.00 237.34 8.44


Wal-Mart Stores 5000 11.90 420.17 42.10 886.04 37,302.30 198.42 7.56 TOTAL 50,000 575,643.00 360.51 10.72 IIV = Initial investment value ICS = Initial year’s low cost per share INS = Initial number of shares purchased FCS = Final year’s low cost per share FNS = Final number of shares FIV = Final investment value % GAIN = Percentage total return (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock) ARR = Annual rate of return in accumulations of stock value (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock)


TABLE 3B DIVIDEND GROWTH WITH DCA-QDRIP PLAN USING LOW PRICES

1993-2007


Abbott Labs 420.17 0.34 154.42 1,001.85 1.30 1,302.41 743.42 16.45 Aflac, Inc. 1,219.51 0.06 78.43 2,233.99 0.80 1,787.19 2,178.64 25.02 Becton, D’son 666.67 0.17 122.07 1,279.69 0.98 1,254.10 927.35 18.10 Coca-Cola 263.16 0.34 96.10 608.52 1.36 827.59 761.21 16.63 Exxon Mobil 344.83 0.72 271.79 924.05 1.37 1,265.95 365.79 11.61 Johnson & Johnson 549.45 0.25 148.38 1,126.84 1.62 1,825.48 1,130.26 19.63

McDonald’s Corp. 434.78 0.11 51.11 996.88 1.50 1,495.32 2,825.75 27.27

PepsiCo, Inc. 280.90 0.31 93.50 677.31 1.43 968.56 935.93 18.17 Procter & Gamble 438.60 0.28 132.43 942.35 1.28 1,206.20 810.85 17.09

Wal-Mart Stores 420.17 0.07 31.36 886.04 0.83 735.41 2,244.99 25.27 TOTAL 1,179.59 12,668.21 973.95 18.48 INS = Initial number of shares purchased IDS = Initial declared dividend per share IDI = Initial dividend income (beginning with end of first year) FNS = Final number of shares FDS = Final declared dividend per share FDI = Final dividend income (last year) % GAIN = Percentage return in dividend income growth (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock) ARI = Annual rate of return in dividend income growth (includes both reinvestment of dividends and investment of $125 per quarter per stock + initial $5,000 investment in each stock)

CONCLUSION Whether the investor is the luckiest (always investing and reinvesting at the low points in the marker), unluckiest (always investing and reinvesting at the high points in the market), or average (always investing and reinvesting at the mid-points in the market), the dividend growth rate far exceeds the rate of inflation. Moreover, such a growth in dividend negates the purchasing power risk which must occur if one is to reach financial independence. A strong growing dividend can supplement a salaried income and even supplant it in the later years of one’s career. This dividend growth in the above examples is much greater than most, if not all, growth in professional salaried income. Since the stocks selected by the investors are ranked 1 (highest for relative safety) and A++ (highest for company’s financial strength by “Value Line Investment Survey”), they may be thought of virtually as United States Treasury substitutes for safety, but with a much higher dividend and price appreciation rate of growth. In addition, the dividend is tax advantaged in that the maximum federal tax rate is 20% while the maximum federal tax rate on salaried income is almost 40%. This paper shows that there is no discernible difference in the dividend and capital appreciation growth rate among the lucky, unlucky, and average investors. It proves that, regardless of the type of investor, the key is combining dividend growth and the reinvestment of dividends with that of dollar cost


averaging. The efficacy of this investment strategy results in substantial total return (dividend and capital appreciation) without regard to the points of investments over a long period of time. There is an old adage about investing that states, “It’s time in the market, not the amount of money invested in the market, that matters.” This adage may be amended to “It’s time in the market, not the timing of the market, that matters.” REFERENCES Hulbert, M. (2013). Finding Stocks That Hold Up During Market Declines. The Wall Street Journal,

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B1–B2.


Startup Marketing: Leveraging Leverage

Michael J. Swenson Brigham Young University

Gary K. Rhoads

Brigham Young University

David B. Whitlark Brigham Young University

The resource allocation task of top management has received significant attention from researchers and practitioners alike. Managers are advised to increase allocation efficiency--assign the right resources to the most promising opportunities. Much less attention has been given to the task of resource leverage (Hamel and Prahalad, 1994). Entrepreneurs quickly discover that they cannot match the resources of larger competitors. Because they must do more with less, they seek to leverage their own resources and the resources of others. We use the term "leveraging leverage" to identify entrepreneurial practices that leverage the resources of others. INTRODUCTION

Entrepreneurs learn quickly that to succeed in today's competitive markets, they must do more with less. Successful entrepreneurs adopt several frameworks when pursuing a new venture. Each framework consists of a set of best practices organized around a basic concept or theme. One such framework is what we call “leveraging leverage”-- entrepreneurial practices that leverage the resources of others. Entrepreneurs often hear the saying, "If you want something done right…do it yourself." Our research suggests that for successful startups, there are two important qualifiers: (1) Do it yourself only if you can do it well, and (2) Do it yourself only if you have the bandwidth and energy to do it well. Otherwise, entrepreneurs look to leverage the abilities, skills, resources, networks, and power of others (e.g., Collinson and Shaw, 2001; Gilmore and Carson, 1999; Morris, Schindehutte, and LaForge, 2002). Indeed, one of the distinguishing characteristics of innovative entrepreneurs is their ability to network (Dyer, Gregersen, and Christensen, 2009). These networks of diverse contacts and associations provide resources and abilities that enable the entrepreneur to do more with less (Gilmore and Carson, 1999).

Using field study interviews of successful entrepreneurs, observing successful student startup companies, and reviewing the literature, we identify best practices entrepreneurs use for “leveraging leverage,” that is finding ways to tap into the skills and resources of others. We found that leveraging leverage can be achieved in five fundamental ways: by unleashing the power of product advocates, by making the most of early-adopter customers, by landing an anchor customer, by working with benefactors, and by building an advisory board. These best practices are depicted in Table 1. In the next


sections, we present five fundamental ways entrepreneurs leverage resources of others to benefit the entrepreneurial venture.

TABLE 1 LEVERAGING LEVERAGE: BEST PRACTICES

Practice Description

1. Unleash the Power of Product Advocates

Look for people who have significant influence over the target market. They have the ability and credibility to highlight, defend, introduce, and promote the new business and new products.

2. Empower Early-Adopter Customers

Use early-adopter customers, with passion for solving the problem addressed by the new product, to provide financial support to bring the product to maturity. Technology products benefit from the time and money invested by beta testers. Crowd funding resources allow the entrepreneur to get the startup running with early-adopter customers.

3. Land an Anchor Customer

Tap the credibility of anchor customers to attract potential customers and to accelerate product development. Because these customers are established, recognized, and sound, they provide instant credibility for the startup.

4. Work with Benefactors

Ask the question, "Which business partners will benefit when we succeed?" The answer will help identify investors and key strategic partners. These people have a vested interest in the success of the startup. Look up and down the value chain to find benefactors.

5. Build an Advisory Board

Build advisory boards with individuals who have "traveled the road" the startup wants to go down. Startups can leverage the experience, wisdom, creativity, and status of advisory board members to build the business.

UNLEASHING THE POWER OF PRODUCT ADVOCATES

Entrepreneurs leverage the resources of product advocates to get the business off the ground and to increase the speed to market. These product advocates have significant influence over the target market. They have the ability and credibility to highlight, defend, introduce, and promote new businesses and new products (Rhoads, Swenson, and Whitlark, 2009). In short, they are brand champions. They may be acquaintances, friends, neighbors, board members, association presidents, celebrities, or industry gurus. Brand champions can open more doors to potential customers in an hour than entrepreneurs can open through two years of cold calling on their own.

In local markets, entrepreneurs tap into local celebrities and community leaders. These brand champions can be in government, television, radio, or simply popular icons in the community. For example, in a particular local market, a startup company leveraged the visibility of a popular radio celebrity and icon for outdoor activities. Any avid outdoors enthusiast was sure to tune in to this local celebrity's radio show and try any product he recommended. Successful startups find that using local


brand champions is a good idea when demonstrating proof of concept and building initial sales before scaling the business across a region, throughout the nation, or internationally.

Of course, brand champions with a national or international audience are more powerful than local icons. New products, highlighted on Oprah, Ellen, and Rachael Ray, have quickly achieved massive sales growth. For example, two product designers with personal vision of simplifying parenthood created the product, Puj Tub. The product is a soft, foam, sink insert for bathing infants. The two designers worked tirelessly to distribute the Puj Tub, but not much happened until they contacted Rachael Ray. The uniqueness and odd look of the Puj Tub was perfect for Rachael’s “Stump the Rach” segment and her viewers provided the perfect audience for the product. Rachael Ray loved the product and featured it on her show. In addition, Ellen produced a brief segment on the product. Following the work of these brand champions, distribution quickly expanded to 18 countries and sales reached $10 million.

Brand champions help startups at every stage of the new venture. Klymit, a producer of outdoor goods and apparel, earned $1.6 million in venture capital by leveraging the interest of product ideas among community leaders and industry insiders. Scuba diving off the coast of Brazil, the founder of Klymit learned how noble gases, like argon, xenon, and krypton are used as insulators inside dry suits to keep divers warm. Building on that idea, the former snowboard instructor quickly envisioned how the “dry suit” technology could be adapted to insulate winter gear. While insulated clothing is nothing new, using thermostat-valve-controlled linings in clothing to regulate temperature is new. There is no bulk, no layering, just turn the dial up and down. If a skier is cold, add a little argon gas to the jacket lining. If a skier is hot, open the valve and release some argon to cool down. From the outset, Klymit's founder understood how to network and recruit product advocates. His biggest successes have been with a local mayor who wants to make his city the skiing Mecca of the U.S., and who has introduced Klymit to a number of leading outdoor companies and investors. One of those companies is now a primary development partner, and several of those investors helped fund the business. In addition, Klymit was introduced to a seasoned veteran and industry expert, an individual with decades of experience in the outdoor markets, who began assisting the company as a consultant. Klymit featured the industry expert whenever pitching to investors. This connection alone opened a number of previously closed doors. The team also was convinced early on that they could not bring insulation products to market on their own. They decided to identify large, well-funded “benefactor” companies that would benefit from adopting the new approach to insulation and license the technology. Within a year, the company secured letters of intent from three top outdoor brands that expressed great interest in adopting the patented technology for use in jackets, boots, snow pants, sleeping bags, and other products. MAKING THE MOST OF EARLY ADOPTERS

Early-adopter customers, with passion for the problem-solving benefits offered by the new product or service, provide initial sales, and the financial support needed to bring the new product to maturity. Technology products benefit from the time and money invested by beta testers. Crowd-funding resources through tools such as Kickstarter, Indiegogo and others now allow startup businesses to get up and running with early-adopter customers. Although sales to early adopters, or innovators, will not sustain a startup for the long run, they will provide financial resources to get the business going and moving in the right direction. Successful entrepreneurs often mine for gold with the early adopters--the customers that will get their startup out of the gate and running!

“Beta test” refers to a stage in the software development and release life cycle. Software products usually have an alpha stage, that is, a stage in which features are added; a beta stage, in which flaws are removed; and a market-ready stage, in which the product is fully groomed and broadly released to potential buyers. The beta version is the first version of a product that gets released outside the business. Beta versions help developers evaluate their products in real-world settings. Beta testers evaluate these beta-version products. Beta testers can be current or prospective customers. In the software industry, beta testers receive the beta version of a product for free or at a “bargain” price.


When experienced entrepreneurs refer to beta testers, they are of course referring to more than just the development of software and to more than just the technical development of a product. Beta testing suggests a process useful for emerging products and has important marketing as well as technical benefits. In an entrepreneurial setting, the three biggest challenges with beta testers are to get them (1) to purchase the product, (2) to use the product, and (3) to provide feedback on the product. Based on our research, overcoming the first challenge, that is, getting beta testers to purchase the product, goes a long way in solving the other two. Consequently, when looking for beta testers to transform into sources of funding, selecting customers with the most compelling reasons to adopt the new product or service is a key success factor. In other words, the pain point must be particularly painful for beta testers or, as an alternative; the need for market leadership must be particularly strong.

Crowdfunding is the newest method for entrepreneurs to build out a new venture, leveraging beta-tester funding. Since beginning in 2009, Kickstarter has funded over 135,000 projects providing over $1 billion in financial support. Kickstarter beta testers donate dollars to receive early versions of products ranging from digital-focusing LED flashlights to emergency fire-starting parachute cord to a handbag organizer for moms.

In addition, early-adopter customers enable the entrepreneur to find the right emotional connection between the product and the customer (Reynolds, Dethloff, and Westberg, 2001). Understanding the salient reasons early-adopter customer love the product or service provides powerful messages that can be used with potential customers (Rhoads, Swenson, and Whitlark, 2014). Communication efforts, such as advertising, personal selling, and social media, can leverage this information with potential customers. LANDING AN ANCHOR CUSTOMER

Anchor customers keep the startup business going and give it a platform for growing. Because these customers are established, recognized, and sound, they provide instant credibility for the startup, attract potential customers to the startup, and accelerate the startup's product development. Finding anchor customers must be a top priority. Indeed, Stokes (2000) confirmed the findings of multiple studies that the number one source of new customers for small firms is recommendations from customers, suppliers, or other referral groups.

Consider the experience of Omniture, a business that helps other businesses understand and manage their Internet marketing channels. The company's customer list includes Toyota, Cadillac, Ford, Microsoft, HP, Oracle, VISA, Ameritrade, ADP, Xerox, Siemens, Tyco, HBO, Fox, CBS, Walmart, Mary Kay, eBay, and it goes on. Omniture always had great products and talented employees, but their success story really got started with two anchor customers, Microsoft and eBay. According to the founders, before landing these anchor customers, the Omniture sales cycle was long and painful, approximately nine months. Prospective clients had many questions about Ominiture’s financial stability, technology, and service quality. With the anchor customers on board, however, most of the prospective clients’ questions were answered with two words: Microsoft and eBay. The sales cycle shrank to a manageable three months. Omniture won anchor customers by “promising the world and then delivering.” Many in the business questioned whether Omniture would make money with such a policy, but the company moved forward nonetheless. Ultimately, eBay and Microsoft did produce profits, but more importantly, these anchor customers produced high-margin, quick-turnaround sales opportunities.

The need for anchor customers is nothing new. For example, a local bakery accelerated its business to profitability by providing impossible-to-resist, giant cookies to area restaurants, cafeterias, and catering services. The serendipitous giant-cookie customers became their anchor customers. With the anchors established, the bakery had the time they needed to build a large group of repeat customers and make their brick-and-mortar retail store successful, charging premium prices for their tried-and-true products.

Successful entrepreneurs are careful to select right-sized anchors. Big anchors don’t always suit small startups. An important decision point for a startup is whether the potential anchor is more likely to foster a startup business or let it flounder and sink under the weight of their way of doing business. Unfortunately, we have seen far too many examples of the latter rather than the former. A startup the size of a dinghy


goes down fast when it takes on an anchor fit for an ocean liner. Every time an entrepreneur walks into our office to announce they have landed a big account with a national retailer such as Costco, Walmart, or Home Depot, we get nervous. Don’t get us wrong; these are wonderful companies that provide tremendous value for customers. However, these companies simply are not geared to foster most startups.

One new business signed a contract with a national retailer, but missed the deadline for delivering their product to the appointed distribution center by several hours. The national retailer declined to reschedule a pickup and told the new business to wait another year before trying again. Yet another new business shipped inventory worth hundreds of thousands of dollars to a national retailer notorious for paying vendors slowly. The entrepreneurs, having taken out second mortgages and maxed-out their credit cards, got nervous and tried to pressure the retailer into paying with aggressive, bordering on rude and unprofessional, phone calls and letters. In response, the national retailer returned the entire inventory. The entrepreneurs were then left with lots of debt, lots of inventory, and few prospects for earning any revenue. WORKING WITH BENEFACTORS

Experienced entrepreneurs ask the question, "Which business partners will benefit when we succeed?" They know that the answer to this question will help identify investors and key strategic partners. These companies and people have a vested interest in the success of the startup because when the startup succeeds, they succeed.

Products do not stand alone. Products are part of a value chain that extends from components to customers. Understanding the value chain and where the startup fits can be a powerful tool to propel the new business. To find benefactors, entrepreneurs explore the product’s value chain. They ask the following questions: Which businesses provide components as inputs to the product? Which businesses use the product as a component for their product? Which retailers sell and service the product or companion products?

DuPont Stainmaster is the world’s single bestselling brand of carpet, but not many people know that DuPont does not manufacture carpet. DuPont manufactures the nylon and stain-release formula that other manufacturers and carpet mills process to make carpeting. DuPont found benefactors to transform the carpet industry from a narrow-margin heartbreaker to a high-flying profit maker. DuPont managers fought commodity nylon prices for generations, but then decided to fight back by offering something that every player in the carpet industry wanted most. Every carpet manufacturer and retailer wanted a premium-priced carpet with a brand name that consumers would recognize and trust. Companies in the industry wanted a profitable product that would sell itself. Before Stainmaster, all carpeting looked pretty much the same to consumers. Since all carpeting looked the same, consumers bought on price--bad news for the entire value chain. Premium-priced, high-quality, easily-recognized Stainmaster brand carpet changed all that and consequently found benefactors, along the value chain, willing to promote DuPont ahead of all other brands of carpeting.

Experienced entrepreneurs have found that the same principle works in the world of startups. Ancestry.com, a leading online subscription service for providing genealogical information and collecting family photos, has grown rapidly into one of the Internet’s top ten genealogy properties. To accelerate growth, Ancestry.com raised more than $75 million in funding from benefactors. Early on, Ancestry.com looked at the value chain and asked the question, “Which business partners will benefit when we succeed?” The answers the founders came up with were Intel, Compaq, AOL, and Kodak. Intel benefited because family-history buffs want fast computer processes to digest their mountains of digital photos. Compaq benefited because family-history buffs want new computers with lots of hard drive space, up-to-date memory, and Ethernet connections to access and post online genealogical information. AOL benefited by providing a value-added service to its growing base of family-history buff Internet subscribers. Kodak benefited by repositioning itself in the digital photography sector and by building on the traditional strength of family photography. At the time, Ancestry.com increased the demand for Intel, Compaq, AOL, and Kodak products. In addition to capital raised from these investors, Ancestry.com


received publicity from their association with these companies. At no cost to Ancestry.com, one national TV spot for Intel prominently featured a shot of the Ancestry.com webpage.

Entrepreneurs seek benefactors that provide support other than funding. Agilix specializes in software programs for Tablet PCs. In this high-tech product category, Agilix needs capital to fund R&D, but also needs access to programming code and computer hardware technology. To address the first need, Agilix approached Franklin Covey, a company focused on personal planning and organizing. Franklin Covey saw Agilix as a means to move forward in the electronic planner space. Agilix obtained funding and Franklin Covey created a winning product. Reviewers refer to Agilix-developed TabletPlanner software as marvelous, brilliant, and empowering. Competing with heavyweights like Microsoft, HP, and Corel, TabletPlanner is one of the top 10 Tablet PC applications. To address needs beyond R&D capital, Agilix approached Microsoft and key computer hardware manufactures. These companies have become strategic partners with Agilix, providing access to key technologies and allowing Agilix to be on the cutting edge of this emerging field. As a result of these benefactor alliances, Agilix became one of two software companies to have their software applications ready for the launch of Windows-based operating systems for Tablet PCs. This window of opportunity provided Agilix with market access and a tremendous amount of publicity. BUILDING AN ADVISORY BOARD

A crucial part of a successful startup is to use a well-connected advisory board. An advisory board can extend an entrepreneur’s social network of influence to increase its effectiveness in attracting investors, customers, and top employees. No new venture is too small or too large to benefit from an advisory board. Leveraging advisory board experience, expertise, credibility, and connections is a powerful way to succeed in today’s competitive markets. A startup gains a big boost from building a national or at least a regional reputation. Perhaps one of the best-kept secrets of successful ventures is they know that reputation and experience counts, but that it does not have to be their own reputation and experience. We cannot emphasize enough what we stated earlier about finding and leveraging product advocates. Successful entrepreneurs know that hard work rarely leads to a successful new venture. It is the entrepreneur's smart work and the work, experience, and reputation of others, especially a credible and supportive advisory board, which leads to new-venture success.

Many startups make the mistake of developing their board of directors instead of beginning with an advisory board. Advisory boards have two key advantages over a board of directors. First, advisory boards often receive little or no compensation. Covering business expenses and providing nominal shares or options, such as .05 percent to.10 percent of outstanding shares, are acceptable. Often, advice may be obtained for the price of just asking. Thus, advisory boards can be a low-cost and high-value alternative for startups. Second, advisory board members cannot be sued for their advice because they do not have any fiduciary responsibility to stockholders, as do members of the board of directors. Thus, advisory boards are usually made up of nonpolitical, experienced, and creative professionals who have a genuine interest and sincere desire to see the startup succeed.

Advisory board members can save an entrepreneur years of painful and costly mistakes as described by Lusk and Harrison (2002): "If you're starting a company, find company advisors as soon as possible. The opportunity to run our initial strategies by a seasoned veteran would have saved us time, frustration, and headaches in the early stages."

Advisory board members who are willing to use their own time, influence, and contacts to promote the startup are truly priceless. Successful entrepreneurs look for advisory board members who are motivated to help grow the business because they love the product and love to be associated with up-and-coming new ventures. Furthermore, they look for advisory board members who have walked the path their startup is now treading. Building a connected advisory network is much more effective than setting out to create a unique social network from the ground up.


DISCUSSION

Identifying people and businesses with the ability, willingness, and clout to help promote an idea or product is the sine qua non of startup marketing. Our research suggests that leveraging leverage, entrepreneurial practices that leverage the resources of others, is a key success factor for entrepreneurs. We believe these five best practices provide a framework that is amenable to systematic evaluation by researchers and purposeful application by entrepreneurs. REFERENCES Collinson, E. & Shaw, E. (2001). Entrepreneurial Marketing: A Historical Perspective on Development

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(12), 61-67. Gilmore, A. & Carson, D. (1999). Entrepreneurial Marketing by Networking. New England Journal of

Entrepreneurship, 2 (2), 31-38. Hamel, G. & Prahalad, C.K. (1994). Competing for the Future, Boston, MA: Harvard Business Press

Books. Lusk, J. & Harrison, K. (2002). The Mouse Driver Chronicles, Cambridge, MA: Pereus Publishing. Morris, M., Schindehutte, M., & LaForge, R. (2002). Entrepreneurial Marketing: A Construct for

Integrating Emerging Entrepreneurship and Marketing Perspectives. Journal of Marketing Theory and Practice, 10, 1-19.

Reynolds, T., Dethloff, C., & Westberg, S. (2001). Advances in Laddering. In T. J. Reynolds and J. C. Olson (Eds.), Understanding Consumer Decision Making: The Means-End Approach to Marketing and Advertising Strategy, (pp. 91-118). Mahwah, NJ: Lawrence Erlbaum Associates.

Rhoads, G., Swenson, M., & Whitlark, D. (2014). Startup Marketing Essentials, Orem, UT: MyEducator. Rhoads, G., Swenson, M., & Whitlark, D. (2009). Boom Start: Principles of Entrepreneurial Marketing,

Dubuque, IA: Kendall Hunt. Stokes, D. (2000). Entrepreneurial Marketing: A Conceptualisation from Qualitative Research.

Qualitative Market Research: An International Journal, 3 (1), 47-54 Swenson, M., Rhoads, G., and Whitlark, D. (2012). Entrepreneurial Marketing: A Framework for

Creating Opportunity with Competitive Angles. Journal of Applied Business and Economics, 13, (1), 47-52.


On the State of the American Health Care: A Discussion of the Health Care System and the Affordable Care Act

Yvonne Chen

Shenandoah University

This research intends to identify the priorities for healthcare reform thru understanding the current challenges of the health care sector in the United States. The study identifies cost, accessibility, and sustainability as the major concerns. Next, the paper proceeds to detail the highlights from the Affordable Care Act and assess its effectiveness in managing these priorities. The research then concludes with a discussion of the variables that would continue to shape the future of the American health care. THE STATE OF HEALTH CARE

The current state of the American health care can be described in several terms. In terms of rising

cost and spending, healthcare is adding pressure to the economy. In terms of the healthcare insurance system, it is becoming more complex and it increasingly shifts more and more burden to the individuals. Lastly, in terms of social insurances there are ballooning costs and inefficiencies. All of these conditions are adding tremendous fiscal pressure to the American economy, while simultaneously leaving upwards of 50 million citizens out in the cold, without health care coverage.

To begin with, healthcare in the United States is among the most expensive in the world. At double the OECD average, U.S. healthcare spending is approaching nearly one-fifth of GDP. Since the 1960s healthcare expenditures have more than tripled from 5 percent of GDP to 17 percent. Per capita healthcare spending is roughly 50 times what it was 50 years ago ($149 in 1960 vs. $8,402 in 2010). Despite all this investment in healthcare, quality of care fails to measure up to the cost. Not only is the spending ballooning, but so is per unit cost, especially in hospital care. The inflation rate over the past 50 years for the Consumer Price Index (CPI) has risen to 7 times what it was in the 1960s, while health care has increased to 20 times that of the same era, and physician’s fees have grown to 17 times the rate 50 years ago. All of these pale in comparison to hospital fees which have skyrocketed to 60 times the rate in the 1960s (Phelps, 2013).

Overall the trend for the last 50 years has been a rapid increase in healthcare spending and costs. Increased spending and escalating costs of healthcare can be linked to a change in demographics due to an aging population and rising obesity, innovations in medical technology, and insurance-led consumption.

An aging population of the baby boomer generation is putting a strain on Medicare. More Americans are age 65 or older than ever before with 40.3 million individuals age 65+ in 2010, compared to 12 million in 1950. More baby boomers are moving into retirement everyday and adding to the millions enrolled in Medicare. In 2010, 47 million Americans were enrolled in Medicare. By 2020 that number is expected to rise to 61 million. In average, individuals age 75 and over incur 5 times the healthcare expenditures that individuals age 22-45 do.


Rising obesity also contributes to costly health problems. As a nation, obesity among American adults has risen from 15 percent of the population in 1960 to 38 percent in 2010. Obesity among children has also grown from 4 percent in the mid-60s to 17 percent in 2010. Growing obesity contributes to health problems both directly and indirectly. Its direct costs include hospital care, physician services, and medications. Some indirect costs of obesity are loss of output due to lost productivity, and lower moral among others.

Innovations in medical technology contribute to anywhere between 27 and 65 percent of growth in healthcare spending since 1960. Innovation and cost are intricately linked (Smith, Newhouse and Freeland, 2009). Although medical technology increases cost in the short-term, it provides better quality of care in the long-term. It is important to note that innovations often lead to less invasive procedures, reducing the possibility of complications down the road. For example, angioplasty is considered to be a superior alternative to open heart surgery. As a result of better technology, however, demand for quality care will increase. Availability of insurance would fuel more demand, creating moral hazard. With the implementation of the Affordable Care Act more patients could have access to the latest medical technology, which would increase spending in the short term, but also may lead to more innovations.

The role of insurance and its contribution to higher and costlier healthcare spending and the challenges this growing burden place on individuals and the persistently uninsured cannot be overlooked. Different kinds of insurance are currently available to individuals based on the type of provider, private (employer-sponsored), or public (government) entity. Private insurers provide individual or group sponsored plans. Group insurance in particular takes advantage of economies of scale in the form of loading fees and coordinating care. Risk pooling also reduces cost by pooling together young, healthy employees with health risk employees. Therefore, private insurers are able to offer lower premiums due to the low risk involved with insuring the young, healthy employees. In this situation adverse selection is not an issue. On the other hand, non-group insurance carries higher risk and administrative cost, which leads to higher premiums.

Private insurance through employers peaked in 2000 with 68% of individuals enrolled in employer- sponsored health insurance, but has since fallen to 50 percent in 2012 (Kaiser/HRET, 2013). Facing declining coverage and rising premiums, most insurers took to not covering pre-existing conditions as part of pre-existing condition clauses. One of the major accomplishments of the ACA was to address pre-existing conditions and fallen coverage. An affordability crisis now occurs as health care costs continue to rise. Insurance has become even less affordable for small employers due to a lack of economies of scale. The decline of employment-based coverage systems has put more pressure on public systems to fill in the gap. Medicaid and rising unemployment due to recession have put even more burden on public insurance. To address this issue the ACA looks to expand coverage to at least 60 percent of the currently uninsured.

Looking past affordability a more pressing issue lies in access to healthcare, which uninsured and underinsured individuals must face. Currently there are 53 million uninsured individuals in the United States. This situation stems from the slow economic growth between 2001 and 2010, which resulted in increased poverty rates and number of uninsured. The uninsured individuals consume $86 billion worth of healthcare annually, of which $56 billion is uncompensated, and for which the government must be responsible. Underinsured individuals account for 25 million Americans, many belong to the middle income class, and this group has steadily increased. All these factors worsened during the economic recession. The ACA intends to internalize the costs of uninsured and underinsured individuals by expanding coverage or collecting penalties. By 2020 roughly half of these respective groups would be covered, leaving 30 million uninsured.

All these problems add to the urgency of healthcare overhaul. The goals for the health care reforms should focus on four priorities: procedures for cost containment, provision of a safety net, choices for patients and providers, and an ease in administration (Folland, 2013). The following section is dedicated to analyze the effectiveness of the ACA in addressing these priorities.


ENTERING THE AFFORDABLE CARE ACT

Signed into law on March 23, 2010, the Patient Protection and Affordable Care Act, later on augmented and renamed as the Affordable Care Act (ACA), eliminated underwriting policies that exclude pre-existing conditions, created an individual mandate, and expanded Medicaid. Individuals can now purchase health insurance at Health Insurance Exchange (HIX), which subsidizes those with income up to 400% of the federal poverty line (FPL). The ACA also established “pay or play” for employers of 50 or more employees, which states that employers can either pay $2000 per each employee not covered in an employer sponsored insurance plan, or play meaning offer coverage. Employers of 200 or more employees are required to take the play option. Finally the ACA establishes Small Business Health Options Program (SHOP) for small businesses (less than 100 employees) to purchase coverage.

One of the most critical challenges to the viability of the Medicare program and the public insurance system in general is its fiscal sustainability. Medicare is funded through the Medicare payroll tax (38 percent) and general revenue gathered through the federal payroll (42 percent). In 2000 Medicare had 40 million beneficiaries and 160 million workers supporting those beneficiaries, a ratio of 4 workers per beneficiary. Today there are just 2.9 workers per beneficiary. By 2030 it is estimated that Medicare will have 80 million beneficiaries and 184 million workers to support them, a ratio of 2.3 workers to every beneficiary. There will be more beneficiaries, but fewer payers. Will this rising trend be fiscally feasible? The program was stable when there were more than three workers per beneficiary.

Medicare covers 95 percent of the aged population and those with disabilities, a total of close to 50 million enrollees. The four parts of Medicare cover hospital insurance, supplementary medical insurance, the medical advantage program and prescription drug insurance. Options not covered include long-term nursing care, custodial care, dentures and dental care, glasses, and hearing aids. The ACA attempts to address these issues. In addition, the “donut hole” in Medicare part D leaves a gap for those with medium-level (ranging from $2,840-$6,000) prescription expenses. Starting year 2010, the ACA has begun to close this coverage gap via addition benefits and a 50 percent brand drug discount, and by 2020 enrollees will be entitled to a 75 percent discount.

Medicaid is a federal entitlement that pays for those with low-incomes and now covers more than 60 million people. Included in this group are low-income women and children, families, unpaid Medicare for low-income elderly, low-income disabled, and nursing home care for the elderly. States define their own eligibility requirements and scope of services, set rates, and administer their own programs. Costs are shared between federal and state governments with the federal sharing between 50 and 80 percent. Enrollment is distributed as 50 percent disabled, 22 percent elderly, and 20 percent children. The major criticism on Medicaid is quality and access of care. One reason is that Medicaid rates for physicians are 65 percent of the Medicare rate for comparable treatments, which lead to reduction of treatment time (length of visit) with doctors. Medicaid also offers notoriously low reimbursement to hospitals, and less than 40 percent of doctors accept Medicaid patients. As a result, patients face more access problems than those of Medicare. With the implementation of the ACA, this access shortage is to become more pronounced.

The ACA has expanded Medicaid coverage to all individuals, not just women and children, with income at 133 percent of the FPL starting in 2014 and adding drug and mental health services later. The ACA also intends to improve the coordination between Medicare and Medicaid through creating agencies such as Coordinated Health Care Offices (CHCO) and Children’s Health Insurance Program (CHIP). By 2020 Medicaid is expected to exceed Medicare.

Other than the runaway cost of healthcare expenses, the other critical piece of the healthcare reform is its funding. The ACA raises revenues mainly through taxes. A 3.8 percent tax (hospital insurance) from investment income for those earning over $200,000 in gross income is estimated to generate $318 billion, making it the largest contributor of the ACA. A tax penalty paid by those individuals, employees, and employers who do not purchase coverage generates between $55 and $106 billion over the course of a decade and totals $161 billion. An excise tax on Cadillac insurance plans generates $111 billion, fees from health insurance providers will bring in $102 billion, and some smaller contributors are tanning


salons, medical device makers, and pharmaceuticals companies. Expected savings from the positive results of insurance expansion from reductions in uncompensated care consumed by uninsured will total $216 billion. However, the cost of the ACA is believed to exceed $1 trillion from 2013 to 2022, which would surpass the revenues collected.

DISCUSSION

Cost of health care in the short-term will continue its expansion as coverage, demographics, and

technology costs continue to rise, while IT, medical research and breakthrough and alternative treatment options such as medical tourism may help to slow down growth in the long-term. The immediate short-term impact on the labor market and employment brings to the forefront urgent concerns about the shortage of healthcare providers, especially the specialists to which there are limited substitutes.

It has already been established that the ACA expands Medicaid and institutes an individual mandate. Employers will face the “pay or play” scenarios in which, depending on the number of individuals they employ, employers will need to pay penalty fees or offer coverage. Most of the debate over the ACA has focused on the individual mandates and its effect on the businesses or employers. Regardless, it is important to note that the cost eventually falls on the employees and the taxpayers. As for overall employment, the ACA is not expected to have significant impact on the medium and large employers; most (91%-99%) have already offered coverage. For the small businesses, it is a different story.

Two new Medicare taxes will reduce earnings for small business owners, especially the 75 percent of employers who report business income on their personal tax returns. The 0.9 percent payroll surtax hits wages and salary income over $200,000 for single filings, or $250,000 for joint filings. The 3.8 percent investment income tax pulls from any rents, dividends, interest, royalties, or capital gains. Together these taxes total an average of $600 or more per person. Although small business owners are exempt from the ACA, tax incentives show potential to save money if coverage is offered. This is especially true for very small businesses. The maximum benefit employers may receive is a 50 percent tax credit (35 percent for nonprofit) for employer contribution toward workers’ health insurance. Despite tax incentives we could see a decrease in employment due to higher costs, stemming from costs of documentation and proliferation of paperwork. These costs also imply businesses have an incentive to stay away from small vendors that lack economies of scale.

Even before the establishment of the ACA, there was a shortage of primary care providers (PCPs) due to income disparity in comparison to other medical professions and unfavorable lifestyle for PCPs. Before the ACA there were 256 million insured in the U.S. and around 470,000 PCPs, a ratio of 541 people per PCP (AHRQ, 2011). This problem is expected to exacerbate with the implementation of the ACA: the number of insured is expected to be 291 million, leading to a ratio of 651 people per PCP. There is also a decline in individuals seeking medical school training, partly due to the high cost of education and lengthy training. For example, thoracic surgery residencies have been filled less than 50 percent since 2007. With reduced reimbursements, deteriorating working conditions and rising malpractice costs, physicians may find less incentive to stay in their profession.

Demand is expected to expand significantly as a result of changes in health care, and it will further exacerbate the shortage problem of PCPs and other health professionals. Medical tourism, which involves cross-national transfer of technology, expertise and services, has provided some short-term relief. Medical tourism is growing rapidly at 20% annually, and 25% of the physicians in the U.S. are from abroad. However, severe shortages and marked mal-distribution of health professionals is a global crisis not unique to the United States (Crisp and Chen, 2014). Each country will have to respond to its own challenges and global pressures eventually.

The nationwide health plan enrollment at HIX has been successful, with more than seven million individuals signed up for health insurance policies (Cheney, 2014). However, the demographic composition of the enrollees misses the federal target of 40-60; i.e., 40 percent of enrollees in the age cohort of 18 to 34. Instead, only about 28 percent of 2014 exchange enrollees belong to this age group.


The majority of the enrollees are older, and more than half are between 45 and 65 years old. This discrepancy serves as a cautionary note on the long-term fiscal sustainability of HIX.

CONCLUDING REMARKS

Revisiting the objectives of a health care overhaul, the ACA has succeeded in providing a safety net

for individuals without coverage as the robust enrollment at HIX has indicated. However, the impact on the net uninsured rate is mixed (CPS, 2014), suggesting the positive effect of acquiring coverage through HIX may be offset by the loss of existing coverage for other individuals. According to the Center for Disease Control (CDC), the uninsured rate declined from 14.4% in 2013 to 13.1% as of March, 2014. Meanwhile, the U.S. Census Bureau’s Current Population Survey, which uses a sample 2.5 times the size of CDC’s survey, reported that the uninsured rate for U.S. adults has increased to 13.8% as of April, 2014, from 13.3% in 2013. Regardless of this data discrepancy, the challenge remains as to how to achieve the ACA’s goal of reducing the uninsured rate to 11%.

The ACA also introduces and encourages cost-management practices and procedures of the health professionals under the guidance of IABP (Independent Advisory Board). However, the pending shortage of health professionals implies that cost containment will be limited, unless healthcare rationing is practiced. In terms of the third objective on administrative efficiency, the ACA has yet to make substantive progress to ease policy administration. The last objective for an effective health care overhaul is the availability of choices for patients and providers. The ACA has received a mixed review on this objective. Will the private insurance industry eventually collapse? Will there be more or less flexibility in treatment plans? Will patients have access to a variety of healthcare services? These are some of the concerns remained to be addressed.

A group of researchers conducted a twenty-five years of research on global health care systems (Balabanova, 2013). Their historical study examined the contribution of the health care system to improved health. The recently published paper identified several characteristics shared by successful health systems (See Table 1), notably the importance of building consensus at a societal level, allowing flexibility and autonomy, and soliciting support from the broader governance and socioeconomic context. The healthcare policy makers may want to take note of these findings.

TABLE 1

MAIN CHARACTERISTICS OF SUCCESSFUL HEALTH SYSTEMS

Have vision and long-term strategies Take into account the constraints imposed by history and previous decisions Build consensus in the society Allow flexibility and autonomy in decision-making Facilitate collaboration between public and private sectors Receive support from the broader governance and socioeconomic context and are in

harmony with the culture and population preferences REFERENCES AHRQ. (2011). The Number of Practicing Primary Care Physicians in the United States: Primary care

workforce facts and stats. No. 1. Agency for Healthcare Research and Quality (AHRQ), October, 2011 http://www.ahrq.gov/research/findings/factsheets/primary/pcwork1/index.html

Balabanova D., Mills A., Conteh L., et al. (2013). Building Good Health at Low Cost 25 Years on: Lessons for the future of health systems strengthening. Lancet 381:2118-33.


http://www.ahrq.gov/research/findings/factsheets/primary/pcwork1/index.html�

Cheney, Christopher. (2014). HIX Enrollment Data Shows Wide Variances Among States. HealthLeaders Media, May 5, 2014. http://www.healthleadersmedia.com/print/HEP-304135/HIX-Enrollment-Data-Shows-Wide-Variances-Among-States

CPS (2014). Comparison of the Prevalence of Uninsured Persons from the National Health Interview Survey and the Current Population Survey, January-April 2014. National Center for Health Statistics, U.S. Census Bureau. September 2014.

Crisp, N. and Chen, L. (2014). Global supply of health professionals. The New England Journal of Medicine 370, (10).

Folland, S., Goodman, A.C., and Stano, M. (2013). The Economics of Health and Health Care. 7e, Upper Saddle River: Prentice Hall.

Kaiser/HRET. (2013). 2013 Employer Health Benefits Survey. The Kaiser Family Foundation/Health Research and Educational Trust (HRET).

Mills, A. (2014). Global health: Health care systems in low- and middle-income countries. The New England Journal of Medicine 370, (6).

Phelps, Charles E. (2013). Health Economics. 5e, Upper Saddle River: Pearson. Smith, S., Newhouse J.P., and Freeland, M.S. (2009). Income, Insurance and Technology: Why does

health spending outpace economic growth. Health Affairs, 28, (5), 1276-1284.


Workplace Violence: The Role of Fear in Paralyzing Modern Business/Corporate Security

Nick Nykodym

The University of Toledo

Brian Anse Patrick The University of Toledo

Sonny Ariss

The University of Toledo

Workplace violence is a sad reality of the modern age. Many options exist in helping deal with workplace violence, yet fear of these options place businesses and organizations at great risk. All too often security training consists of “RUN, HIDE and CALL 911” rather than a real defense that could save a life. Currently fifty (50) out of fifty (50) states have some form of CCW (Concealed Carry) permit training, and certification. Trained organizational members / university professors are currently discouraged from protecting themselves and others by those who have Hoplophobia (Fear of Firearms). WORKPLACE VIOLENCE: THE ROLE OF FEAR IN PARALYZING MODERN BUSINESS / CORPORATE SECURITY

Workplace violence and the modern need for corporate security are well documented phenomena

(Nykodym, Ariss, Patrick, & Holman 2013). The recession, combined with job layoffs, prison closings and the added dynamic of a decreased police presence have added to this problem (Nykodym, Patrick & Toussaint, 2010). Violence extends to elementary schools, high schools and universities, where it has been dramatically noted that “blood has been mixed with books” (Nykodym, Patrick, & Mendoza, 2011). Recently, such violence has even targeted public events such as the Boston Marathon.

Two of the most publicized and significant threats to modern corporate activities are terrorism and gun violence, either from lone individuals, organized terror groups or independent sleeper cells. Accordingly, virtually every large university and corporation nowadays has an “action plan” for what has come to be called an “active shooter” situation. Powerful, reassuring words such as “lockdown” are used in workshops conducted by human resource personnel. Employees are instructed in flight and hiding. The most common advice, however, gleaned by observation of these workshops, can be summarized as “run, hide and call 911.” But is this really effective?

Human resources managers (included in this category are security and university public safety department personnel) have additionally been advising employees to resist in any way possible. This includes throwing chairs, or the use of other improvised devices to attack or resist armed gunmen. But is this truly sensible advice, or is it merely a way for corporation management to reassure, placate and to


otherwise seem as if they are reacting responsibly to a situation over which they have no control? Then again, are they acting responsibly, or are they dodging the main issue? No one has ever stopped a shooter by throwing a chalkboard eraser at him, a traditional means that professors and teachers have used in classrooms to target unruly students. Avoided, or cavalierly dismissed, from these training sessions is the proposal that certain employees or university students should be able to legally carry guns concealed for their own protection, as well as the protection of others, following proper training and certification from national training organizations.

Certainly, from a pure cost benefit viewpoint, corporate managers are acting responsibly, according to traditional wisdom. This might even be good practice from the public relations aspect of things as well since murdered innocent employees garner sympathy at minimal costs to the organization. There are fairly standard, predictable payouts of known dimensions, as based on legal precedents. Medical insurance picks up the costs of injuries at predictable, known rates. Moreover, corporate CEO and human relations functionaries can issue pious and concerned statements that win public sympathy and show themselves as concerned corporate citizens. If it happened, however, that an armed employee or student injured someone in the course of one of these armed shooter events, even if that person injured were the armed transgressor, the costs to the corporation/university might be limitless. It’s cheaper (albeit heartless) to have employees die. How ethical and socially responsible is this?

Effective communication has been suggested as a vital tool to combat crime (Nykodym & Taylor, 2007), and one would imagine that these “active shooter” workshops constitute an essential step in that direction. The common thread tying organizational/corporation security and these workshops is, of course, fear. Fear, however, manifests at various levels, some of which are reasonable and others not so reasonable. It is reasonable to prepare for the worst. It is reasonable to scan the environment. It is reasonable to form action plans. But at some point fear-preparations and security displace the real business of life and become too costly to maintain over time. An open society is efficient and productive precisely because the energies of society are not burnt up in the heat and friction of internal or external security fears, e.g., the garrison state, but can be expended creatively to achieve individual and social good.

But all the same, neither individuals nor organizations can function very long in a Pollyanna dream world that ignores real threats. It is thought that employee training that remedies the fear of guns actually interferes with effective ethical corporate actions.

Fear, paranoia or phobia is an extreme, irrational, overwhelming and disabling fear of an activity situation, place, item or object (Eimer & Korwin, 2013). One of the most wide spread fears is “Glossophobia or fear of communication. Glossophobia can be characterized by avoidance of communication events, physical distress, nausea, and feelings of panic (www.glossophobia.com). Possible reactions may include increased heart rate, increased blood pressure, dilated pupils, increased perspiration, increased oxygen intake, stiffening of neck/upper back muscles and dry mouth (Hamilton, 2008).

Phobias (fear) have been proven to decrease business and organizational effectiveness (Nykodym, Nielsen & Christen (1985). Fears (phobias) stretch over age groups and include the young in the organizational / business world as well and decrease effective decision-making (Nykodym, Simonetti & Christen, 1988).

OPTIONS FOR BUSINESS/ ORGANIZATIONAL SECURITY

Possible options are to do nothing, create additional alert systems / surveillance cameras, train and

implement S.W.A.T. teams, as well as to train and allow trained/ certified organizational members to carry concealed firearms (Nykodym, Patrick, & Mendoza, 2011) .

Hoplophobia (fear of firearms ) is listed as a phobia by The Encyclopedia of Phobias, Fears, and Anxieties, Third Edition (Doctor, Kahn, & Adamec , 2009) and is also listed as a phobia in the Oxford Dictionary of Psychology (Coleman, 2009) published by Oxford University Press. Hoplophobia is also


http://www.glossophobia.com/�

included as a phobia in Concise Dictionary of Modern Medicine (Segen, 2006). Kopel (2005) defined Hoplophobia as “fear of armed citizens.“

However, researcher Bruce N. Eimer, PHD (Eimer & Korwin, 2013) suggests that HOPLOPHOBIA (fear of firearms) is the most dangerous of all phobias! Patrick (2013) defines hoplophobics as people with hysterical, unwarranted, irrational fears of guns, usually derived from media stereotypes. Eimer & Korwin (Eimer & Korwin, 2013) detail that it is NOT just a dislike or even HATE of firearms, it is FEAR of firearms that drives some “anti gun” advocates. The dynamics given above for fear/ phobia applies. Reactions can include avoidance, physical distress, nausea, feelings of panic, increased heart rate, increased blood pressure, dilated pupils, increased perspiration, increased oxygen intake, stiffening of muscles and dry mouth (Hamilton, 2008 & Rothwell, 2004). Eimer & Korwin (Eimer & Korwin, 2013) posit that hoplophobia is real, widespread and clinically recognizable and a specific phobia. They further advance that hoplophobia is more dangerous than any of the other phobias. Patrick (2013) also notes that Hoplophobes seem to imagine that firearms just simply “go off”. Hoplophobes equate firearms with mayhem. Mainstream mass media, both news and entertainment, teach and constantly reinforce such frightful notions.

People with other phobias do not appear to take their fears (phobias) into the social and political arena (Eimer & Korwin, 2013). Hoplophobics attempt by law, legislation and court action to FORCE their fears on others by gun ban legislation, and other court actions (Eimer & Korwin, 2013). Continued evidence of the harm of Hoplophobia is the result of information from cities where the “Guns Kill People” concept has prevailed. The United States of America is third in murders throughout the world, but if the high gun control cities of Chicago, Detroit & Washington, D.C. (cities with some of the most intense anti gun laws in the USA) are removed from the data, the USA ranks toward the bottom of murders in the world (Hill, 2013). PEOPLE KILL PEOPLE, guns just make it easier.

While Hoplophobia is REAL to those who have the condition, vast qualities of evidence exist that proves that that gun violence is greatly exaggerated (Patrick & Hart, 2011). Patrick & Hart (Patrick & Hart, 2011) document via extensive quantitative data collection and analysis, that people who receive their information via the public media have an exaggerated perception of VIOLENCE associated with firearms vs. people who receive their information on firearms from other sources. Additionally, extensive quantitative data are available to prove that populations who have attempted to remove firearms from their culture have NOT resulted in decreased crime rates, and in some cases have NOT decreased suicides either. Some of these locations include New Zealand (Forsyth, 2011), Canada (Mauser, 2011), England (Malcom, 2011), and Australia (McPhedran & Baker, 2011).

Ohio’s Buckeye Firearms offers a thirty hour training workshop, with continued training and certification for teachers and administrators (Patrick, 2013). This “armed teacher“ program has been called FASTER i.e. Faculty Administrator Safety Training and Emergency Response (Armed Teacher Training Program, 2013). No running and hiding, and throwing chalk here. The teachers/school administrators receive extensive training by police and emergency personnel. This training was conducted with classes being performed simultaneously at locations in southern and northern portions of the state of Ohio. Twenty-four teachers and administrators from public and private schools attended each class, selected from hundreds of applicants, thus 96 individuals were trained in two sessions, and the program was successful, it has continued (Patrick, 2013). The program has been so successful that a FASTER II program has been added for even more advanced scenario training.

This creative effort is financed entirely by a non-profit voluntary association, and it is virtually the only serious effort in the state intended to realistically prevent or stop future school shootings. Accordingly, training and instruction were quite thorough. Participants were required to certify at a higher level than police officers on the Ohio Peace Officer Training Academy pistol qualification course, firing 93 percent proficiency or better on a course that police officers are only required to score 71 percent. This higher standard is probably as it should be considering the environment.

The justification for the program is practical and empirical. Cho, the Virginia Tech shooter, killed seven to eight persons per minute of his rampage. No police agency can possibly respond to such an event in time to save lives. An armed teacher, administrator or school facilities worker possibly can. These are


very quick events, and experience shows that such shooters tend to kill themselves at the first show of serious armed resistance. Current police doctrine is to respond, immediately, not to wait or surround the school as was done at Columbine, for even single officers armed and acting aggressively can defeat killers who tend to be disorganized and untrained. Hence the armed teacher, who is already there on the scene, knows the environment, and is well trained with a concealed pistol. If anyone will have a chance to respond and save lives, this hidden human asset thus becomes the first and perhaps the only true line of defense. Everybody else arrives later and writes reports on what they saw—a case of the true IMMEDIATE RESPONDERS vs. so-called First Responders who really arrive too late.

Let no one think that anyone is advocating that teachers in general be armed. These are a select few, well trained and certified at high levels of performance. The average teacher is possibly not capable of this.

Training also included emergency medical first aid, e.g., treating a sucking chest wound, tourniquet and compression techniques that would keep someone alive long enough to make it to a medical facility. Special training and emphasis on gunshot wounds, and knife wounds is central to the emergency medical training. Training includes how to stop the bleeding and how to stabilize victims until EMT’s (Emergency Medical Technicians) arrive and transport victims to a medical facility.

SWAT team instructors and other law enforcement experts convey a great deal of marksmanship training and related tactics. Teachers and school administrators shoot approximately 1,000 rounds of ammunition during the training, a number that seems incredible. But, trainees confirm that they did in fact shoot 1,000 rounds of ammo in this training program (Patrick, 2013). In addition to qualifying on the OPOTA (Ohio Police Officer’s Training Academy) pistol range, the last day of the class was spent in simulations at a nearby school that was scheduled for demolition. These involved active shooter scenarios that were, to say the least, intense. The teachers acted responsibly and well. They were a highly motivated group. Many will go back to their districts, where responsible local school boards and administrators under Ohio law, have exercised the option of allowing them to carry under their concealed pistol permits while teaching. A voluntary citizen association has stepped in where many government officials fear to tread. Colleges, universities, and businesses, in time, will follow. Creative social action by horizontal interpretive communities. i.e., voluntary association of citizens who have developed their own media of communication, trumps the empty, self-serving rhetoric of bureaucratic inertia (Patrick, 2013).

The positive response has been overwhelming with over 650 Ohio Teachers and Administrators volunteered for training (See appendix chart: Armed Teacher Training Program, 2013). So far, the Armed Teacher Training Program has attracted, in addition to the 650 Ohio teacher/administrator applicants, interest in taking training from several other states, including Arizona, California, Florida, Illinois, Indiana, Kentucky, Michigan, Nevada, New Jersey, Pennsylvania, Tennessee, Texas, Washington, and West Virginia (Armed Teacher Training Program , 2013).

Many school zones have signs warning “NO FIREARMS” which are seen as an “open hunting” invitation to any would be killers. However, an Arkansas Christian school, has a sign stating “WARNING - STAFF IS ARMED AND TRAINED ANY ATTEMPT TO HARM CHILDREN WILL BE MET WITH DEADLY FORCE”. (See Attachments for sign, & Starnes, 2013 ). News stories state “TRY TO HARM OUR CHILDREN --- BE PREPARED TO MEET YOUR MAKER.” When asked if his school was showing a “Christian Spirit,” Pastor Perry Black responded by saying “we are ministers as shepherds of God’s sheep.” He went on to say “we would prefer to limit our activities to just loving and caring for people in our care, but occasionally there are predators outside who would like to harm the little sheep in our care (Starnes, 2013).” When asked for examples from Jewish-Christian living that would justify killing, Pastor Black responded, “David is a great example. He took out a lion. He took out a bear to protect his flock, and ultimately David had to take out a giant (Starnes, 2013).”

Basically, the institutional fear of firearms is unfounded and media driven. As John Lott discovered, firearms are used to prevent crime and to save lives more than as tools to destroy (1998).


CONCLUSION The reality of organizational/business security is that executives who are in a position of power may

be hoplophobic. The destructive power of phobias has been well documented. Indecision and bad decisions flowing from phobias by people in power and who make decisions over the life and death of others decrease the security of organizations. Decision makers who have the power yet are filled with fear and disinformation will place many organizational members at risk.

Companies and organizations need to evaluate the fear level of those in power as they make decisions on the welfare of others. First responders (Police and SWAT teams) take minutes to arrive, however immediate responders (firearm carriers & emergency medically trained and licensed employees, managers, teachers, administrators) are already on the scene of the crime. The Immediate Responders are trained not only in firearms, but also in life saving emergency medical first aid. For the hoplophobic, run, hide, throw chalk, and call 911 are their only options, which could result in countless losses of life compared to actually taking a stand against aggressors.

Hopolophobia; Hoplophobic; Fear of Firearms; Workplace Violence; Economic Downturn;

Recession; Prison closings; Layoffs of Police/Law Enforcement Officers; College Campus Security; CCW (Carry Concealed Weapons); CHL (Carry Handgun License); Students/faculty/staff CCW (Carry Concealed Weapons) CCWCC (Carry Concealed Weapons on college campuses); SCCC (Students for Carry Concealed on Campus); RTC (Right-to-Carry); Gun Violence; 2nd Amendment Rights; 2nd Amendment Constructionism. REFERENCES Armed Teacher Training Program (2013). www.buckeyefirearms.org FASTER (Faculty Administrator

Safety Training and Emergency Response). Coleman, Andrew M. (2009). Oxford Dictionary of Psychology, Oxford University Press: Oxford,

England. Doctor, Ronald M., Kahn, Ada P, & Adamec, Christine (2009). The Encyclopedia of Phobias,

Fears, and Anxieties, Third Edition, InfoBase Publishing: NY, NY. Eimer & Korwin (2013). HOPLOPHOBIA: Gun Fear --The Most Dangerous of all Phobias

[email protected] Accessed 29 April 2013. Forsyth, C. D. (2011). The New Zealand Firearm Control Laws Impact upon Firearm Misuse and upon

Firearm use? Journal of Firearms & Public Policy, Vol. 23, 7- 59. Hamilton, C. (2008). Communicating for Results: A Guide for Business & the Professions. Belmont, CA:

Thomson Wadsworth. Hill, D. (2013). http://www.successories.com/iquote/author/3648/david-hill-quotes/1 Accessed 29 July

2013 Monday Kopel, David (2005). “The licensing of concealed handguns for lawful protection: support from five

(5) state Supreme Courts” Albany Law Review, 68 (20) 205+ Lott, J.R. (1998). More Guns Less Crime Understanding Crime and Guns, Chicago: University of

Chicago Press. Malcolm, J. L. (2011). Self-Defense in England: Not Quite Dead, Journal of Firearms & Public Policy,

Vol. 23, 60-74. Mauser, G. (2011). Ten Myths about Firearms Violence in Canada, Journal of Firearms & Public Policy,

Vol. 23, 75- 95. McPhedran, S. & Baker, J. (2011). An Econmetric Evaluation of the Impact of Method Restriction of

Suicide Rates among Australians aged 45 and over. Journal of Firearms & Public Policy, Vol. 23, 96- 113.

Nykodym, N., Ariss, A., Patrick, B.A., & Holman, C. (2013). Workplace Violence and Cyber Crime Prevention, Journal of Applied Business & Economics. Vol. 3 (4), 20- 29.


http://www.buckeyefirearms.org/�

http://[email protected]/�

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Nykodym, Nielsen & Christen (1985). Technological advances can create worker apprehension (Phobia) Personnel Administrator, Vol. 34, 54- 56.

Nykodym, N. Patrick, B.A., & Mendoza, J., (2011). “Mixing Blood and Books-- Killings at Universities: Campus Violence - What Are The Options?” Journal of Management Policy and Practice, Vol. 12 (6), 20- 29.

Nykodym, Simonetti, & Christen (1988). Compustress © : The Fear of computer usage among College of Business Administration Students, The Journal of Applied Business Research, Vol. 4, 84- 87.

Nykodym & Taylor (2007). Communication: A Vital Tool to Combat Cyber Crime, Journal of International Commercial Law & Technology, Vol. 2, Issue 3.

Nykodym, N., Patrick, B.A. & Toussaint, T. (2010). “Recession and Business Security: An Analysis of the Combined Effects of Law Enforcement Layoffs and Second Amendment Constructionism.” Proceedings of the NBES (National Business & Economics Society) International Meeting of 2010.

Patrick, Brian Anse (2010). Rise of the anti-media: In-forming America’s concealed weapon carry movement. Lanham, MD: Lexington Books.

Patrick, Brian Anse (2013). Rise of the Anti-Media: In-forming America’s Concealed Weapon Carry Movement (2nd Edition) London: Arktos Media

Patrick, Brian Anse, & Hart, KPR, (2011) The Gun as symbol of Evil: Exaggerated perceptions of firearms violence as a media artifact, Journal of Firearms & Public Policy, of Vol. 23, 114—129.

Rothwell, J D. (2004). In the Company of others: An introduction to Communication. NY: McGraw-Hill. Segen, Joseph (2006). Concise Dictionary of Modern Medicine, NY: McGraw Hill Publishers. Starnes, Todd (21 August 2013). Pistol- Packing Private School Takes Aim at Bad Guys,

http://radio.foxnews.com/toddstarnes/top-stories/pistol-packing-private-school-takes-aim-at-bad-guys.html Access: 21 August 2013

www.glossophobia.com Accessed 29 April, 2013


http://radio.foxnews.com/toddstarnes/top-stories/pistol-packing-private-school-takes-aim-at-bad-guys.html�

http://radio.foxnews.com/toddstarnes/top-stories/pistol-packing-private-school-takes-aim-at-bad-guys.html�

http://www.glossophobia.com/�

The Performance of Russian Global Depository Receipts on the London Stock Exchange

Irina Khindanova

University of Denver

Innokentiy Khindanov AUNIKPLUS

This paper analyzes the performance of Russian Global Depository Receipts listed on the London Stock Exchange. The performance is evaluated assuming two investment strategies: daily portfolio rebalancing and buy-and-hold. Russian GDRs marginally outperform in the short-run and underperform in the long run the UK market, the US market, the Emerging Markets, and the Emerging Markets ADRs. These results resemble the performance of Initial Public Offerings. Russian GDRs outperform to some extent the Russian stock market over the first two trading years. The performance of Russian GDRs varies across industries, depends on raising capital, and is affected by issue timing. INTRODUCTION

This paper analyzes the performance of Russian Global Depository Receipts (GDRs) listed on the London Stock Exchange (LSE) between 2005 and 2011. GDRs are certificates that represent a certain number of foreign shares remaining on deposit with a custodian bank in the company’s home country. GDRs are issued by depository banks and traded in markets outside the company’s home market. The DRs issued by a U.S. depository bank and traded in the U.S. exchanges or in the OTC market are called American Depository Receipts (ADRs). Majority of research on the performance of DRs is focused on ADRs. This paper expands geography of analyzed DRs and examines the performance of Russian DRs on the LSE, the dominant market in Russian securities outside Russia. At the end of 2013, 36 Russian DRs were traded on LSE (LSE, 2014). This study sample includes 31 Russian GDRs issued between 2005 and 2011.

Between 1995 and 2005, the Russian stock market grew at the average annual rate of 50% (Goriaev and Zabotkin, 2006). By 2012, its market capitalization achieved about $875 billion, placing it as the 6th largest emerging market and 15th largest stock market worldwide (World Bank, 2014). A large share of turnover comes from the Depository Receipts trading. In 2005, DRs accounted for 45% of the Russian stock market combined turnover (Goriaev and Zabotkin, 2006). An increased significance of the Russian DRs prompts the analysis of their performance.

Studies of the DRs performance show mixed results. For example, Callaghan, Kleiman, and Tahu (1999) determined that ADRs have positive market-adjusted returns in both short- and long-run investment periods. Whereas Foester and Karolyi (2000) concluded that the ADRs underperform local


comparable firms in the first three trading years. A detailed description of the works on DRs performance is provided in the third section.

A few works study Russian DRs. Smirnova (2004) examined how listing of Russian ADRs impacts prices of underlying shares. The study sample comprised 16 Russian ADRs issued in 1995-2001. She found that the Russian stock market has a negative average abnormal return of -1.045% on the ADR listing day. Companies which listed ADRs in the OTC market had smaller negative stock reaction. More than half of companies exhibited increased local returns volatility after the issuance of ADRs. Jithendranathan (2005) looked at the price links between Russian DRs and the underlying shares. The sample includes 16 DRs traded in 1995-2004. The author did not find any premium/discount between the DRs and the shares. The study results suggest that the host markets do not have a significant influence on the returns of Russian ADRs. Korczak and Bohl (2005) analyzed the cross-listing implications for 33 companies from the Czech Republic, Hungary, Poland, Russia, Slovakia, and Slovenia. The authors reported a market value increase around the cross-listing date. Stock prices significantly increase before listing and hold on afterwards. The average cumulative abnormal return over the 300-day window around the listing was about 26%. Korczak and Bohl found that cross-listing improves the liquidity and pricing efficiency of the home stock market. The trading volume rises and the returns autocorrelations decline after the cross-listing. Smirnova (2008) studied the cross-listing impact on company value and underlying factors for cross-listing decisions. She considered 43 ADRs from the Czech Republic, Hungary, Poland, and Russia, traded in 2000-2003. Smirnova reported an average cross-listing premium of 27.3%, relatively to a set of 123 matching companies that did not issue DRs. Wojcik and Burger (2010) examined geographic patterns of cross-listings from Brazil, Russia, India, and China (BRIC). The authors showed cross-listing companies are relatively big-sized, represent capital-intensive, exporting, and rapidly growing industries. Another finding of the paper was that trading relationships and industrial specialization of the host markets are important factors for choosing the listing markets. Wojcik and Burger determined that cross-listing companies are concentrated in countries’ financial centers, especially in Russia and Brazil.

To our best knowledge, there are no published papers which analyze the performance of the Russian DRs on the London Stock Exchange. The paper fills this gap.

The performance of Russian GDRs is evaluated considering two investment strategies: daily portfolio rebalancing and a buy-and-hold strategy. The evaluation is conducted for both short- and long-term investments periods. The short-term exploration focuses on the performance of GDRs in the first trading month, and the long-term exploration examines the performance over the two first trading years.

The paper is structured as follows. The second section describes the data. The third section provides a literature review. It is followed by a section on a research methodology. The next section analyzes the performance of Russian GDRs. Then the paper examines variations in the performance of Russian GDRs. The last section summarizes findings of the paper. DATA

The study sample includes 31 Russian GDRs issued between 2005 and 2011 and traded on the LSE as Registered Shares. The sample cutoff of 2011 was chosen to have the 2-year trading data for the DR issues. The GDRs were identified using the Bank of New York Mellon directory of Depository Receipts (Bank of New York Mellon, 2013) and cross-referenced with the Thompson Reuters Datastream (Datastream) list of Russian GDRs traded in London (Thompson Reuters Datastream, 2013). The information on prices, trading dates, market values, and size of issues was obtained from the Datastream.

First listings of Russian DRs on the LSE took place in 2005: Novolipetsk Steel (an Industrial Metals & Mining company, DR symbol: NLMK), Sistema (a Mobile Telecom company, DR symbol: SSA), and X5 Retail Group (a Food & Drug Retailer, DR symbol: FIVE). The exchange had the largest volume of Russian GDR issues in 2007: 11 issues. There were no Russian GDR issues in 2009 – the immediate aftermath of the 2007-2008 global financial crisis. The number of new Russian GDRs rebounded to seven in 2011. The analyzed GDRs represent shares of companies from 14 industries (Bank of New York


Mellon, 2013). The best represented industries (with four GDR listings) are Real Estate Investment and Service, Industrial Metals and Mining, and Industrial Transportation. The market values of Russian GDR issues on the first trading day vary from $8.20 million (Sistema, issue year: 2005) to $81.50 billion (Sberbank of Russia, issue year: 2011). 24 Russian companies raised capital with the GDR issues, while seven companies did not raise capital (Bank of New York Mellon, 2013). A list of the considered Russian GDRs is provided in Appendix A.

The performance of Russian GDRs is compared to the performance of five stock markets: (i) a home market - the Russian Federation market; (ii) a host market - the UK market; (iii) a global market indicator - the US market; (iv) peer markets - the Emerging Markets; and (v) peer securities - the Emerging Markets American Depository Receipts. The paper measures stock markets dynamics using the following market indices: Morgan Stanley Capital International (MSCI) index of the Russian stock market, MSCI index of the UK stock market, S&P 500 index, MSCI index of the Emerging Markets, and the Bank of New York Mellon index of the Emerging Markets ADRs. The MSCI Emerging Markets index includes more than 800 securities from 21 markets, which account for about 11 percent of the world equity market capitalization (MSCI, 2014)1. The price levels of the indices were downloaded from the Datastream. REVIEW OF LITERATURE ON THE PERFORMANCE OF DEPOSITORY RECEIPTS

Most of research on the performance of DRs is focused on ADRs. Their findings are mixed. Some researchers find that ADRs outperform host markets while others suggest that ADRs underperform local markets or comparable firms. Several works point at the diversification benefits of ADRs.

Samant and Korth (1998) analyzed the performance of 36 ADRs from the Asia-Pacific region. They found that the systematic risk of the Asia-Pacific ADRs is low relatively to the U.S. and world market indices. Adding the Asia-Pacific ADRs to the U.S. stocks might offer diversification benefits. Callaghan at al. (1999) determined that ADRs have positive market-adjusted returns in both short- and long-run investment periods, and ADRs from emerging markets outperform ADRs from developed countries. Their sample included 66 ADRs listed between1986 and 1993. The authors assumed that one year after the issuance constitutes the long-run. Foester and Karolyi (2000) examined the long-run performance of 333 ADRs traded in 1982-1996. They concluded that the ADRs underperform local comparable firms by 8%-15% over the first three trading years. The authors found that private placement DRs tend to underperform their benchmarks while issues listed on exchanges slightly outperform their benchmarks. The equity offerings from emerging markets with soft accounting rules substantially outperform the benchmarks. Aybar (2002) determined that privatization ADRs issued in 1984-1999 outperform their home country markets but underperform the U.S. market. Another finding of the paper was that privatization ADRs from developed countries do better than the emerging markets privatization ADRs. Shaub (2003) analyzed the investment performance of 179 ADRs traded on the NYSE in 1987-1998. He found that the Initial Public Offering (IPO) ADRs outperform Seasoned Equity Offerings (SEO) in the short run, whereas the IPOs underperform SEOs in the long run (in two and three years after the issuance). The combined sample of ADRs underperformed the S&P 500 index over both short- and long-run periods. The emerging markets ADRs underperformed the S&P 500 index by about 28% during the first three trading years. The developed markets ADRs did relatively better. They underperformed the S&P 500 index by 12%. Boye (2007) compared the performance of Mexican ADRs to the U.S. stock market. His sample included 24 Mexican ADRs listed on the NYSE and the NASDAQ in 1992-2001. The author compared Mexican ADRs to a portfolio of four U.S. stocks from the same industry and close by market capitalization. He found that the volatility of Mexican ADRs is might be higher than for the compared U.S. companies. Only three Mexican ADRs exhibited higher returns. Boye (2007) concluded that returns of Mexican ADRs are low compared to their risks. Elliott and Schaub (2009) also analyzed the performance of Mexican ADRs on the NYSE. Their sample comprises 27 Mexican ADRs listed on NYSE in 1990-2002. The authors estimated that the Mexican ADRs underperform the S&P 500 index by about 21% over the three years following the issuance date. The segmentation of the Mexican ADRs by the issue type revealed that IPOs underperformed the market by about 27%, while SEOs behave similarly


to the U.S. market. The authors highlighted that issue timing impacts the performance of the Mexican ADRs. The issues traded during the bull market (before January 1, 1998) underperformed the S&P 500 index by about 32%, whereas during the bear market (after January 1, 1998) the Mexican ADRs outperformed the S&P 500 index by more than 27%. This countercyclical pattern suggests diversification benefits of Mexican ADRs. Schaub (2010) also pointed at the diversification benefits of the Chinese ADRs. The DRs traded during the bull market (before January 1, 1998) underperformed the S&P 500 index by nearly 26%, while during the bear market (after January 1, 1998) the Chinese ADRs outperformed the S&P 500 index by more than 40%. The sample covered 19 Chinese ADRs listed on the NYSE from January 1, 1990 till December 31, 2002. The combined sample performed similarly to the S&P 500 index. The author reported regional performance variations. The ADRs from Hong Kong underperformed the market, the ADRs from other parts of China outperformed. Schaub (2011) again emphasized the market timing impact on the DR performance. He considered the UK ADRs traded on the NASDAQ in 1990-2002. ADRs traded before 1998 exhibited returns similar to the NASDAQ index, but ADRs traded after January 1, 1998, outperformed the NASDAQ over the three-year period by about 39%. The combined sample outperformed the NASDAQ in the first trading month by 8.81%, at the end of the first three trading years – by about 20%. PERFORMANCE STUDY METHODOLOGY

The paper evaluates the performance of Russian GDRs considering two investment strategies: daily portfolio rebalancing and a buy-and-hold strategy. A comparison of the daily portfolio rebalancing is based on a common stocks and ADRs performance measure - cumulative average daily adjusted returns (Ritter, 1991; Callaghan at al., 1999; Schaub, 2003, 2010, 2011; Elliot and Schaub, 2009). The buy-and-hold strategy is evaluated employing a wealth relative measure following Ritter (1991). He used wealth relatives to analyze the performance of Initial Public Offerings (IPOs).

The two investment strategies are analyzed over both short- and long-term investments periods. The work assumes that the first trading month comprises a short-run period and two first trading years constitute a long-run period. The closing price of the first trading day is counted as the initial price. The paper’s trading start dates are the Datastream base dates for Russian GDRs2. The first month horizon covers 21 trading days after the issuance date, from day 2 to day 22. The two first trading years include 504 (21days*24months) trading days, from day 2 to day 505.

The empirical analysis begins with calculating daily raw returns for Russian GDRs and for five benchmark market indices for the entire two-year period. The daily returns on GDRs and indices are used to derive the daily benchmark-adjusted returns:

𝑥𝑟𝑖𝑚𝑡 = 𝑟𝑖𝑡 − 𝑟𝑖𝑚𝑡 , (1) where 𝑥𝑟𝑖𝑚𝑡 is the benchmark-adjusted return for Depository Receipt (DR) i relatively to the benchmark market index m for day t; 𝑟𝑖𝑡 is the daily raw return for DR i on day t; 𝑟𝑖𝑚𝑡 is the daily return on the market index m on day t of DR i; i = 1, …, 31; m = MSCIRU, MSCIUK, SP500, MSCIEM, BNYEMKT; t = 1, …, 504. MSCIRU denotes the MSCI index of the Russian stock market, MSCIUK is the MSCI index of the UK stock market, SP500 means the S&P 500 index, MSCIEM stands for the MSCI index of the Emerging Markets, and BNYEMKT implies the Bank of New York Mellon index of the Emerging Markets ADRs.

The daily average benchmark-adjusted returns are computed as arithmetic averages of the daily adjusted returns:

𝐴𝑅𝑚𝑡 = ∑ 𝑥𝑟𝑖𝑚𝑡31𝑖=131

, (2)


where 𝐴𝑅𝑚𝑡 is the average benchmark-adjusted return relatively to index m on day t, 𝑥𝑟𝑖𝑚𝑡 is the daily benchmark-adjusted return for Depository Receipt (DR) i relatively to the benchmark market index m on day t, m = MSCIRU, MSCIUK, SP500, MSCIEM, BNYEMKT; t = 1, …, 504.

In order to assess the Russian GDRs performance under the daily portfolio rebalancing strategy, the paper estimates daily cumulative benchmark-adjusted returns:

𝐶𝐴𝑅𝑚𝑡 = ∑ 𝐴𝑅𝑚𝑗𝑡𝑗=1 , (3)

where 𝐶𝐴𝑅𝑚𝑡 is the daily cumulative benchmark-adjusted return relatively to index m on day t; 𝐴𝑅𝑚𝑗 is average benchmark-adjusted return relatively to index m on day j; m = MSCIRU, MSCIUK, SP500, MSCIEM, BNYEMKT; t = 1, …, 504. The positive cumulative adjusted return 𝐶𝐴𝑅𝑚𝑡 indicates that the Russian GDRs outperformed market m over the t-day period assuming the daily portfolio rebalancing. Whereas the negative cumulative adjusted return 𝐶𝐴𝑅𝑚𝑡 means that the Russian GDRs underperformed market m over the t-day period. Detailed interpretation of derived cumulative adjusted returns is provided in the next section.

The buy-and-hold strategy analysis requires calculating the holding period returns on Russian GDRs and on benchmark market indices. The paper calculates the total returns over two investment periods: short-term (first trading month) and long-term (two first trading years):

𝑅𝑖,1𝑚𝑜𝑛𝑡ℎ = (𝑃𝑖,21 − 𝑃𝑖,0)/𝑃𝑖,0, (4) 𝑅𝑖𝑚,1𝑚𝑜𝑛𝑡ℎ = (𝑃𝑖𝑚,21 − 𝑃𝑖𝑚,0)/𝑃𝑖𝑚,0, (5) 𝑅𝑖,2𝑦𝑒𝑎𝑟 = (𝑃𝑖,504 − 𝑃𝑖,0)/𝑃𝑖,0, (6) 𝑅𝑖𝑚,2𝑦𝑒𝑎𝑟 = (𝑃𝑖𝑚,504 − 𝑃𝑖𝑚,0)/𝑃𝑖𝑚,0, (7)

where 𝑅𝑖,1𝑚𝑜𝑛𝑡ℎ is the total return on DR i over the first trading month; 𝑃𝑖,0 is the closing price on the issue day of DR i; 𝑃𝑖,21 is the closing price on the 21st day from the issuance date (the last day of the first trading month) for DR i; 𝑅𝑖𝑚,1𝑚𝑜𝑛𝑡ℎ is the total return for index m over the first trading month of DR i; 𝑃𝑖𝑚,0 is the closing price level for index m on the first trading day of DR i; 𝑃𝑖𝑚,21 is the closing price level for index m on the 21st day from the issuance date for DR i; 𝑅𝑖,2𝑦𝑒𝑎𝑟 is the 2-year total return on DR i; 𝑃𝑖,504 is the closing price on the last day of the 2-year trading period for DR i; 𝑅𝑖𝑚,2𝑦𝑒𝑎𝑟 is the total return for index m over the first two years of trading DR i; 𝑃𝑖𝑚,504 is the closing price level for index m on the last day of the 2-year trading period for DR i; i = 1, …, 31; m = MSCIRU, MSCIUK, SP500, MSCIEM, BNYEMKT.

The average holding period total returns on DRs and indices are computed as arithmetic averages of the individual holding period total returns:

𝑅�1𝑚𝑜𝑛𝑡ℎ = ∑ 𝑅𝑖,1𝑚𝑜𝑛𝑡ℎ31𝑖=1

31 , (8)

𝑅�𝑚,1𝑚𝑜𝑛𝑡ℎ = ∑ 𝑅𝑖𝑚,1𝑚𝑜𝑛𝑡ℎ31𝑖=1

31, (9)

𝑅�2𝑦𝑒𝑎𝑟 = ∑ 𝑅𝑖,2𝑦𝑒𝑎𝑟31𝑖=1

31 , (10)

𝑅�𝑚,2𝑦𝑒𝑎𝑟 = ∑ 𝑅𝑖𝑚,2𝑦𝑒𝑎𝑟31𝑖=1

31, (11)


where 𝑅�1𝑚𝑜𝑛𝑡ℎis the average first month total return on Russian GDRs; 𝑅𝑖,1𝑚𝑜𝑛𝑡ℎ is the first month return for DR i; 𝑅�𝑚,1𝑚𝑜𝑛𝑡ℎis the average first month total return on benchmark index m; 𝑅𝑖𝑚,1𝑚𝑜𝑛𝑡ℎ is the total return for index m over the first trading month of DR i; 𝑅�2𝑦𝑒𝑎𝑟 is the average 2-year total return on Russian GDRs; 𝑅𝑖,2𝑦𝑒𝑎𝑟 is the 2-year total return on DR i; 𝑅�𝑚,2𝑦𝑒𝑎𝑟 is the average 2-year total return on benchmark index m; 𝑅𝑖𝑚,2𝑦𝑒𝑎𝑟 is the total return for index m over the first two years of trading DR i; m = MSCIRU, MSCIUK, SP500, MSCIEM, BNYEMKT.

The performance of Russian GDRs under the buy-and-hold strategy is compared using the wealth relative measures following Ritter (1991):

𝑊𝑅𝑚,1𝑚𝑜𝑛𝑡ℎ = 1+𝑅�1𝑚𝑜𝑛𝑡ℎ1+𝑅�𝑚,1𝑚𝑜𝑛𝑡ℎ

, (12)

𝑊𝑅𝑚,2𝑦𝑒𝑎𝑟 = 1+𝑅�2𝑦𝑒𝑎𝑟

1+𝑅�𝑚,2𝑦𝑒𝑎𝑟 , (13)

where 𝑊𝑅𝑚,1𝑚𝑜𝑛𝑡ℎ is the first trading month wealth relative associated with the benchmark market m, 𝑅�1𝑚𝑜𝑛𝑡ℎ is the average first month total return on Russian GDRs, 𝑅�𝑚,1𝑚𝑜𝑛𝑡ℎ is the average first month total return on benchmark index m, 𝑊𝑅𝑚,2𝑦𝑒𝑎𝑟 is the 2-year wealth relative associated with the benchmark market m, 𝑅�2𝑦𝑒𝑎𝑟 is the average 2-year total return on Russian GDRs, 𝑅�𝑚,2𝑦𝑒𝑎𝑟 is the average 2-year total return on benchmark index m. If the wealth relative 𝑊𝑅𝑚 is more than 1, that implies that the Russian GDRs outperformed market m under the buy-and-hold strategy. While the wealth relative 𝑊𝑅𝑚 below 1 means that the Russian GDRs underperformed market m. PERFORMANCE OF RUSSIAN GDRS

This section analyzes the performance of Russian GDRs under two alternative strategies: daily portfolio rebalancing and a buy-and-hold strategy. The daily portfolio rebalancing strategy is evaluated using daily cumulative adjusted returns. As described in the previous section, the process of computing the cumulative adjusted returns begins with finding raw returns. Table 1 reports statistics of the daily raw returns on Russian GDRs and on benchmark indices over the first two trading years. The daily raw returns of Russian GDRs during the initial 2-year trading period vary significantly: between -97.48% and +53.57%, with the average of -0.01% and the standard deviation of 4.78%. All five compared markets fluctuate less over the 2-year periods, corresponding to the first two trading years of Russian GDRs.

TABLE 1 STATISTICS OF DAILY RAW RETURNS ON RUSSIAN GDRS AND

BENCHMARK INDICES OVER THE FIRST TWO TRADING YEARS

GDR/Index Average Min Max Range Standard raw return

deviation

Russian GDRs -0.0010 -0.9748 0.5357 1.5105 0.0478 MSCIRU -0.0006 -0.2559 0.2398 0.4957 0.0296 MSCIUK -0.0004 -0.1043 0.1216 0.2259 0.0183 SP500 -0.0002 -0.0947 0.1096 0.2043 0.0160 MSCIEM -0.0002 -0.0968 0.1072 0.2040 0.0166 BNYEMKT -0.0002 -0.1611 0.1905 0.3515 0.0238


The markets have narrower ranges of daily returns and lower standard deviations. Two most volatile markets are the Russian stock market and the ADRs from emerging markets. The returns on their indices change in the following ranges: (i) MSCIRU: -25.59% to +23.98%, (ii) BNYEMKT: -16.11% to 19.05%. Other three indices (MSCIUK, SP500, MSCIEM) have close statistics. Their daily returns change from about -10% to about +11%.

Daily raw returns on GDRs and indices are used to find the daily benchmark-adjusted returns (xrimt), see formula (1) in the previous section. The daily average benchmark-adjusted returns (ARt) are computed as arithmetic averages of the daily adjusted returns, following formula (2). The cumulative average adjusted returns (CARt) with respect to five benchmark indices are calculated using formula (3). Tables B.1 - B.10 in Appendix B provide daily average benchmark-adjusted returns, standard deviations, cumulative average adjusted returns, and their t-statistics. Tables B.1 - B.5 show the daily adjusted returns in the first trading month (short-term investment period), while Tables B.6 – B.10 include the daily adjusted returns at the end of months over the first two trading years (the long-term investment period).

In order to assess the performance of Russian GDRs in the short-run, we examine the first month adjusted returns. Daily average adjusted returns do not differ much across indices. They vary between 0.07% and 1.3%, see Table 2. The lowest average return was for the SP500-adjusted values: -1.17%. The highest average return was for the MSCIUK-adjusted values: 1.52%. The first month cumulative adjusted returns are positive, with an exception of the marginally negative MSCIRU- and SP500- adjusted returns on Day 16 (-0.01% and -0.03%, respectively), see Figure 1 and Table 2. The magnitudes of the cumulative adjusted returns are small: between -0.03% and 2.97%. At the end of the first trading month, the cumulative adjusted returns with respect to all five markets vary between 1.53% and 2.81%.

TABLE 2 STATISTICS OF DAILY ADJUSTED RETURNS IN THE FIRST TRADING MONTH

Index Daily average adjusted return Cumulative adjusted return

Average Min Max Average Min Max On day 21

MSCIRU 0.0007 -0.0061 0.0150 0.0137 -0.0001 0.0211 0.0153 MSCIUK 0.0013 -0.0093 0.0152 0.0173 0.0061 0.0297 0.0281 SP500 0.0009 -0.0117 0.0150 0.0132 -0.0003 0.0214 0.0183 MSCIEM 0.0010 -0.0076 0.0126 0.0163 0.0042 0.0253 0.0216 BNYEMKT 0.0009 -0.0096 0.0133 0.0144 0.0014 0.0241 0.0194

The standard deviations of daily adjusted returns in Tables B.1 – B.5 are large comparing to the daily

average adjusted returns. Only a few t-statistics have absolute values above 1.697 (the critical value at the 10% significance level for the degree of freedom of 30), what means that daily average adjusted returns and cumulative adjusted returns are statistically insignificant in the first month3. Hence, the short-term investment performance of Russian GDRs does not differ statistically from the market’s performance assuming the daily portfolio rebalancing.

Figure 2 illustrates the 2-year period cumulative adjusted returns relatively to five markets. The cumulative adjusted returns are positive in initial trading months, become negative, and exhibit a declining trend in later months, suggesting that the Russian GDRs underperform the considered markets in the long-run. The cumulative adjusted returns relatively to the MSCIRU index are insignificant as their t-statistics have absolute values below 1.697, see Table B.6. Although the MSCIRU-adjusted cumulative returns become negative from the 98th trading day, we cannot claim the Russian GDRs underperform the Russian stock market. The t-statistics of cumulative adjusted returns with respect to the MSCIUK, SP500, MSCIEM, and BNYEMKT indices in Tables B.7 – B.10 have absolute values above 1.697 in later months of the 2-year period, what means that daily cumulative adjusted returns are statistically significant. Hence, we can say that the Russian GDRs underperform the UK, US, Emerging stock markets


FIGURE 1 CUMULATIVE ADJUSTED RETURNS OVER THE FIRST TRADING MONTH

FIGURE 2 CUMULATIVE ADJUSTED RETURNS OVER THE FIRST TWO TRADING YEARS


and ADRs from Emerging Markets under the daily portfolio rebalancing strategy. The Russian GDRs began to consistently underperform these markets on the following days: the UK stock market – on the 101st day, the US stock market – on the 66th day, the Emerging Markets – on the 84th day, the ADRs from Emerging Markets – on the 81st day. By the end of the 2-year trading period, Russian GDRs underperform the UK stock market by 30.46%, the US stock market – by 42.86%, the Emerging Markets – by 43.82%, the ADRs from Emerging Markets – by 43.40%. The underperformance of Russian GDRs is similar to underperformance of Initial Public Offerings in the long-run (Ritter, 1991). The performance of Russian GDRs under the buy-and-hold strategy is evaluated using the wealth relative measures. They are calculated using formulas 4-13 in the fourth section. Tables 3 and 4 report the total returns and wealth relatives over the first month and 2-year investment periods, respectively.

TABLE 3 TOTAL RETURNS AND WEALTH RELATIVES FOR RUSSIAN GDRS

OVER THE FIRST TRADING MONTH

GDR/Index One-month total return Wealth Average Min Max Range Relative* Russian GDRs 0.0271 -0.3105 0.3235 0.6341

MSCIRU 0.0069 -0.2224 0.1424 0.3649 1.0201 MSCIUK -0.0093 -0.1338 0.0668 0.2005 1.0368 SP500 0.0002 -0.1468 0.0556 0.2025 1.0269 MSCIEM -0.0016 -0.2031 0.0886 0.2917 1.0288 BNYEMKT 0.0009 -0.1961 0.0757 0.2718 1.0262 *A wealth relative is calculated with respect to an index, see formula (12).

Russian GDRs have a higher average total return over the first-month investment period (2.71%) comparing to five markets, see Table 3. The first-month total returns of Russian GDRs vary between -31.05% and 32.35%, while the home market total returns fluctuate between -22.24% and 14.24%. The wealth relatives in Table 3 are slightly above one, what indicates that, under the buy-and-hold strategy, the Russian GDRs marginally outperform in the short run the matching markets: the home market – the Russian stock market, the host market – the UK stock market, the US stock market, the peer Emerging Markets, and the peer securities – ADRs from Emerging Markets.

TABLE 4 TOTAL RETURNS AND WEALTH RELATIVES

OVER THE FIRST TWO TRADING YEARS

GDR/Index Two-year total return Wealth Average Min Max Range Relative* Russian GDRs -0.1564 -0.9439 1.6559 2.5998

MSCIRU -0.1674 -0.6350 1.4451 2.0801 1.0132 MSCIUK -0.1447 -0.5756 0.3678 0.9433 0.9863 SP500 -0.0482 -0.4548 0.4018 0.8566 0.8863 MSCIEM -0.0393 -0.3666 0.8413 1.2079 0.8781 BNYEMKT -0.0352 -0.3158 0.9125 1.2283 0.8743 *A wealth relative is calculated with respect to an index, see formula (13).


The 2-year total returns of Russian GDRs change between -94.39% and 165.59%, with the average of -15.64%, see Table 4. The home market total returns fluctuate between -63.50% and 144.51%. The wealth relative with respect to the Russian stock market in Table 4 is marginally above one. Thus, the Russian GDRs outperform to some extent the home market in the long run under the buy-and-hold strategy. The wealth relatives with respect to other four markets in Table 4 are below one, indicating that, in the long-run, Russian GDRs underperform the UK stock market, the US stock market, the Emerging Markets, and the Emerging Markets ADRs. The underperformance relatively to the UK stock market is marginal. The wealth relative is the lowest with respect to the Bank of New York Mellon index of the Emerging Markets ADRs. Thus, the Russian GDRs performed the worst with respect to the peer securities. VARIATIONS IN THE PERFORMANCE OF RUSSIAN GDRS

High standard deviations and wide ranges of the Russian GDRs returns suggest that the performance across them varies significantly. This hypothesis is supported by Fedorov and Sarkissian’s (2000) observations of the substantial cross-industry and market capitalization variations in the Russian stock market. Goriaev and Zabotkin (2006) state a significant part of the cross-sectional variance in the Russian stocks returns is explained by the variance in returns between industries. This section analyzes how the investment returns of the GDRs are associated with industries, raising capital, and issue timing (in 2007-2008, before 2007 and after 2008). The analysis is based on a comparison of wealth relative measures with respect to three markets: the Russian stock market (represented by the MSCIRU index), the UK stock markets (represented by the MSCIUK index), and the Bank of New York Mellon index of ADRs from the Emerging Markets (BNYEMKT).

The Russian GDRs listed on the London Stock Exchange are from 14 industries. The best represented industries (with four GDR listings) are Real Estate Investment and Service, Industrial Metals and Mining, and Industrial Transportation. The analysis focuses on industries with at least two GDRs traded for at least two years. Nine industries meet these conditions. Table 5 shows the first month total returns for Russian GDRs by industries and the indices returns corresponding to GDRs trading times. The Food & Drug Retailers GDRs have the highest first month average total return of 16.72%, followed by the Industrial Transportation GDRs with the average of 14.97%. The Chemicals and Electricity GDRs have lowest average returns: -11.43% and -10.44%, respectively. Note that the markets returns are also low during the Chemicals trading times, MSCIRU: -10.23%, MSCIUK: -9.73, BNYEMKT: -11.90%.

TABLE 5 INDUSTRIES FIRST MONTH TOTAL RETURNS

Industry Number of First month average total returns

GDRs GDRs MSCIRU MSCIUK BNYEMKT

Chemicals 3 -0.1143 -0.1023 -0.0973 -0.1199 Real Estate Investment & Service 4 -0.0167 0.0095 0.0068 0.0263 Industrial Metals & Mining 4 0.0576 0.0377 0.0180 0.0630 Food Producers 2 -0.0039 -0.1494 -0.0490 -0.1253 Food & Drug Retailers 3 0.1672 0.0376 -0.0143 0.0258 Oil & Gas Producers 2 0.0346 0.0834 -0.0014 0.0106 Electricity 2 -0.1044 -0.0122 0.0225 0.0064 Industrial Transportation 4 0.1497 0.0759 -0.0004 0.0052 Banks 3 -0.0077 -0.0297 -0.0127 -0.0047


Table 6 reports the first month wealth relatives for Russian GDRs by industries. The Electricity GDRs exhibit lowest wealth relatives, MSCIRU: 0.9067, MSCIUK: 0.8759, BNYEMKT: 0.8899. Since the Electricity wealth relatives are below one, we can say that the Electricity GDRs underperform the home and host markets and the peer securities in the short run assuming the buy-and-hold strategy. The Real Estate Investment and Service GDRs underperform the three markets too. The Chemicals GDRs marginally underperform the Russian and UK stock market and outperform to some extent the ADRs from Emerging Markets. The Food & Drug Retailers, Industrial Transportation, and the Food Producers have highest wealth relatives. These three industries outperform the markets in the short-term.

TABLE 6 INDUSTRIES FIRST MONTH WEALTH RELATIVES

Industry Wealth relatives

MSCIRU MSCIUK BNYEMKT

Chemicals 0.9866 0.9812 1.0063 Real Estate Investment & Service 0.9740 0.9766 0.9581 Industrial Metals & Mining 1.0192 1.0389 0.9949 Food Producers 1.1710 1.0474 1.1387 Food & Drug Retailers 1.1248 1.1841 1.1379 Oil & Gas Producers 0.9550 1.0361 1.0237 Electricity 0.9067 0.8759 0.8899 Industrial Transportation 1.0686 1.1502 1.1438 Banks 1.0227 1.0051 0.9970

In order to evaluate the long-run performance of the industries under the buy-and-hold strategy, the

paper examines the industries average total returns and wealth relatives over the first two trading years. The total returns are given in Table 7, and the wealth relatives are provided in Table 8. The industries average long-run total returns vary from -76.18% (Real Estate Investment & Service GDRs) to 70.76% (Food & Drug Retailers GDRs). The Electricity and Banks GDRs exhibit the second and third lowest average returns of -60.48% and -44.00%, respectively.

TABLE 7 INDUSTRIES FIRST TWO YEARS TOTAL RETURNS

Industry First two years average total returns

GDRs MSCIRU MSCIUK BNYEMKT

Chemicals -0.3081 -0.3705 -0.1898 -0.1842 Real Estate Investment & Service -0.7618 -0.4803 -0.3540 -0.2213 Industrial Metals & Mining 0.0756 -0.1719 -0.2084 0.1281 Food Producers -0.2545 -0.0617 0.0019 0.1093 Food & Drug Retailers 0.7076 0.3306 0.0441 0.1955 Oil & Gas Producers 0.0939 0.0089 -0.1777 0.2473 Electricity -0.6048 -0.1183 0.1233 -0.1088 Industrial Transportation 0.0178 -0.2941 -0.1475 -0.1769 Banks -0.4400 -0.3733 -0.1670 -0.2231


The two-year wealth relatives for industries fluctuate between 0.3059 and 1.6355, see Table 8. This wide range of wealth relatives indicates considerable variations in the industries long-run performance. The GDRs from the Real Estate Investment & Service, Electricity, Food Producers, and Banks industries have wealth relatives below one, what means that they underperform the markets. The Industrial Transportation and Food & Drug Retailers GDRs outperform all three markets. The Industrial Metals & Mining and Oil & Gas Producers GDRs outperform the Russian and UK stocks markets but underperform the ADRs from Emerging Markets.

TABLE 8 INDUSTRIES FIRST TWO YEARS WEALTH RELATIVES

Industry Wealth relatives


Chemicals 1.0991 0.8540 0.8482 Real Estate Investment & Service 0.4584 0.3688 0.3059 Industrial Metals & Mining 1.2989 1.3588 0.9535 Food Producers 0.7946 0.7441 0.6721 Food & Drug Retailers 1.2834 1.6355 1.4283 Oil & Gas Producers 1.0843 1.3303 0.8770 Electricity 0.4482 0.3518 0.4435 Industrial Transportation 1.4417 1.1939 1.2365 Banks 0.8936 0.6723 0.7209

This study also checks whether the performance of the Russian GDRs is associated with raising

capital at the GDR issue time. 24 Russian companies from our sample raised capital, and seven companies did not raise capital. Tables 9 and 10 report the first month total returns and wealth relatives for the raised-capital and no-capital-raised GDRs. From Table 9, the Russian GDRs, which raised capital, have a first month average total return of 4.26%, while the no-capital-raised GDRs have an average return of -2.59%. The wealth relatives in Table 10 indicate that the capital-raised GDRs outperform the markets, whereas the no-capital-raised GDRs underperform the markets in the short-run.

TABLE 9 THE FIRST MONTH TOTAL RETURNS FOR THE CAPITAL /NO-CAPITAL RUSSIAN GDRS

GDRs First month average total returns*


Capital raised GDRs 0.0426 0.0055 -0.0125 -0.0004 No capital raised GDRs -0.0259 0.0117 0.0015 0.0053

The performance patterns of the Capital /No-Capital GDRs alter in the long-run. The capital-raised

GDRs have lower 2-year average return (-18.60%), while the no-capital-raised GDRs occur the average return of -5.53%, see Table 11. Both groups have wealth relatives below one with respect to the UK stock market and ADRs from Emerging Markets, Table 12. Thus, both groups underperform the UK stock market and ADRs from Emerging Markets in the long run. Since wealth relatives of the no-capital-raised GDRs are higher, we can conclude that the no-capital-raised GDRs perform better in the long-term.


TABLE 10 THE FIRST MONTH WEALTH RELATIVES FOR

THE CAPITAL /NO-CAPITAL RUSSIAN GDRS

GDRs The first month wealth relatives


Capital raised GDRs 1.0369 1.0558 1.0430 No capital raised GDRs 0.9628 0.9726 0.9690

TABLE 11

THE FIRST TWO YEARS TOTAL RETURNS FOR THE CAPITAL /NO-CAPITAL RUSSIAN GDRS

GDRs First two years average total returns*


Capital raised GDRs -0.1860 -0.1763 -0.1709 -0.0470 No capital raised GDRs -0.0553 -0.1370 -0.0550 0.0055 * Indices returns correspond to GDRs trading times

TABLE 12

THE FIRST TWO YEARS WEALTH RELATIVES FOR THE CAPITAL /NO-CAPITAL RUSSIAN GDRS

GDRs Wealth relatives


Capital raised GDRs 0.9883 0.9819 0.8542 No capital raised GDRs 1.0947 0.9997 0.9395

The paper analyzed whether the performance of the Russian GDRs is affected by issue timing. The

analysis considered two time periods: (i) 2007-2008 (the financial CRISIS period), (ii) 2005-2006 and 2008-2011 (the NO-CRISIS period). 14 Russian companies from our sample issued DRs during the first period and remaining 17 companies – during the second period. Tables 13 and 14 show the first month and two years wealth relatives for the CRISIS and no-CRISIS issues. The wealth relatives in Table 13 are above one, what suggests that both groups of DRs outperform the markets in the short run. Though, wealth relatives of the NO-CRISIS issues are slightly higher than wealth relatives of the CRISIS issues. It appears that, in the short-term, the NO-CRISIS issues perform better to some extent than the CRISIS issues.

TABLE 13 THE FIRST MONTH WEALTH RELATIVES FOR

THE CRISIS/NO-CRISIS RUSSIAN GDRS

GDRs The first month wealth relatives


Issued in 2007 and 2008 (CRISIS) 1.0101 1.0304 1.0130 Issued before 2007 or after 2008 (NO-CRISIS) 1.0283 1.0420 1.0371


The performance patterns of the CRISIS/NO-CRISIS GDRs are not consistent across markets in the long-run. The wealth relatives in Table 14 indicate that the CRISIS Russian GDRs outperform the Russian stock market in the long-run, whereas the NO-CRISIS GDRs underperform. In contrast, the CRISIS Russian GDRs underperform the UK stock market in the long-term, and the NO-CRISIS GDRs outperform. Both groups of Russian GDR issues underperform ADRs from Emerging Markets. Notice that the NO-CRISIS Russian GDRs perform better than the CRISIS GDRs when compared to the UK stock market and ADRs from Emerging Markets.

TABLE 14 THE FIRST TWO YEARS WEALTH RELATIVES FOR

THE CRISIS/NO-CRISIS RUSSIAN GDRS

GDRs Wealth relatives


Issued in 2007 and 2008 (CRISIS) 1.1060 0.9299 0.7587 Issued before 2007 or after 2008 (NO-CRISIS) 0.9752 1.0149 0.9408

CONCLUSIONS

This paper analyzes the performance of Russian Global Depository Receipts (GDRs) listed on the London Stock Exchange between 2005 and 2011. The performance is evaluated assuming two alternative investment strategies: daily portfolio rebalancing and buy-and-hold. Assuming the daily portfolio rebalancing: (i) the short-term investment performance of Russian GDRs does not differ statistically from the market’s performance; (ii) the Russian GDRs underperform the UK, US, Emerging stock markets and ADRs from Emerging Markets in the long-term. Under the buy-and-hold strategy, Russian GDRs marginally outperform in the short-run and underperform in the long run four equity markets: the UK market, the US market, the Emerging Markets, and the Emerging Markets ADRs. These results resemble the performance of Initial Public Offerings. Russian GDRs outperform to some extent the Russian stock market over the first two trading years.

The performance of Russian GDRs varies across industries, depends on raising capital, and is affected by issue timing. The Electricity and the Real Estate Investment & Service GDRs underperform the home and host markets and the peer securities over both short- and long- term investment horizons. In contrast, the Food & Drug Retailers and Industrial Transportation GDRs outperform the markets in both short- and long-runs. The capital-raised GDRs outperform the markets, whereas the no-capital-raised GDRs underperform the markets in the short-run. The no-capital-raised GDRs perform better in the long-term. Both CRISIS and NO-CRISIS issues of Russian GDRs outperform the markets in the short run. Interestingly, the CRISIS GDRs outperform and the NO-CRISIS GDRs underperform the Russian stock market in the long-run. The CRISIS Russian GDRs underperform the UK stock market in the long-term, and the NO-CRISIS GDRs outperform. Russian GDR issues underperform ADRs from Emerging Markets in the long run. ENDNOTES

1. The Russian stock market is included in the MSCI Emerging Markets index. 2. The Bank of New York Mellon effective dates for Russian GDRs are a few days off the Datastream base

dates. 3. The low levels of t-statistics are explained by a small sample size (31 GDRs) and by large volatility of

returns across Russian GDRs.


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http://www.adrbnymellon.com/dr_directory.jsp�

http://www.londonstockexchange.com/products-and-services/trading-services/international-order-book/iob-factsheet.pdf�

http://www.londonstockexchange.com/products-and-services/trading-services/international-order-book/iob-factsheet.pdf�

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APPENDIX A. RUSSIAN GLOBAL DEPOSITORY RECEIPTS TRADED ON THE LONDON STOCK EXCHANGE

Russian GDR, Regular Shares Symbol Industry Acron AKRN Chemicals AFI Development AFID Real Estate Investment & Service Cherkizovo CHE Food Producers Etalon ETLN Real Estate Investment & Service Eurasia Drilling Company EDCL Oil & Gas Producers Federal Grid Company FEES Electricity Global Ports GLPR Industrial Transportation GlobalTrans Investment GLTR Industrial Transportation Hals-Development HALS Real Estate Investment & Service Hydraulic Machines & Systems HMSG Industrial Engineering JSC Russian Grids MRSK Electricity JSC Transcontainer TRCN Industrial Transportation LSR Group LSRG Construction & Materials Magnitogorsk Iron & Steel Works MMK Industrial Metals & Mining Neftynaya Companiya-Rosneft ROSN Oil & Gas Producers Nomos Bank NMOS Banks Novolipetsk Steel NLMK Industrial Metals & Mining Novorossiysk NCSP Industrial Transportation O'Key Group OKEY Food & Drug Retailers OJSC Magnit MGNT Food & Drug Retailers Pharmstandard PHST Pharmacy & Biotechnology PhosAgro PHOR Chemicals PIK Group PIK Real Estate Investment & Service Ros Agro AGRO Food Producers Sberbank of Russia SBER Banks Severstal SVST Industrial Metals & Mining Sistema SSA Mobile Telecom. TMK TMKS Industrial Metals & Mining Uralkali URKA Chemicals VTB Bank VTBR Banks X5 Retail Group FIVE Food & Drug Retailers

Source: Bank of New York Mellon. The complete DR directory


APPENDIX B. ADJUSTED RETURNS FOR RUSSIAN GDRS

TABLE B.1 ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY TO THE MSCI INDEX OF THE RUSSIAN STOCK MARKET (MSCIRU) IN THE FIRST TRADING MONTH

Sample Average Standard t-stat Cumulative t-stat

trading day adjusted deviation

adjusted

return of adjusted

return

(t) ARt returns

CARt 1 0.0073 0.0499 0.8171 0.0073 0.9055

2 0.0053 0.0194 1.5281 0.0126 1.1061 3 0.0067 0.0245 1.5123 0.0193 1.3792 4 0.0015 0.0170 0.4871 0.0208 1.2867 5 -0.0019 0.0174 -0.6022 0.0189 1.0469 6 0.0013 0.0205 0.3610 0.0203 1.0230 7 -0.0061 0.0403 -0.8425 0.0142 0.6618 8 0.0031 0.0187 0.9075 0.0172 0.7526 9 0.0014 0.0272 0.2959 0.0186 0.7691 10 -0.0002 0.0233 -0.0379 0.0185 0.7235 11 0.0026 0.0213 0.6718 0.0211 0.7858 12 -0.0054 0.0180 -1.6863 0.0156 0.5579 13 -0.0035 0.0176 -1.1011 0.0121 0.4168 14 -0.0020 0.0167 -0.6822 0.0101 0.3341 15 -0.0060 0.0269 -1.2396 0.0041 0.1317 16 -0.0042 0.0190 -1.2382 -0.0001 -0.0035 17 0.0084 0.0362 1.2946 0.0083 0.2491 18 0.0010 0.0176 0.3160 0.0093 0.2712 19 -0.0043 0.0186 -1.3005 0.0050 0.1408 20 0.0150 0.0334 2.5063 0.0200 0.5536 21 -0.0047 0.0414 -0.6333 0.0153 0.4131


TABLE B.2 ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY TO THE MSCI INDEX

OF THE UK STOCK MARKET (MSCIUK) IN THE FIRST TRADING MONTH

Sample Average Standard t-stat Cumulative t-stat trading day adjusted deviation

adjusted

return of adjusted

return (t) ARt returns

CARt

1 0.0118 0.0505 1.3037 0.0118 1.4556 2 0.0005 0.0243 0.1115 0.0123 1.0716 3 0.0049 0.0269 1.0143 0.0172 1.2237 4 0.0047 0.0176 1.4990 0.0220 1.3519 5 -0.0016 0.0184 -0.4774 0.0204 1.1222 6 0.0027 0.0205 0.7401 0.0231 1.1612 7 -0.0093 0.0421 -1.2290 0.0138 0.6428 8 -0.0010 0.0215 -0.2463 0.0129 0.5599 9 0.0021 0.0207 0.5686 0.0150 0.6145

10 0.0039 0.0233 0.9351 0.0189 0.7355 11 0.0049 0.0230 1.1861 0.0238 0.8829 12 -0.0041 0.0192 -1.1915 0.0197 0.6993 13 -0.0054 0.0187 -1.5997 0.0143 0.4884 14 -0.0022 0.0133 -0.9076 0.0121 0.3996 15 -0.0054 0.0298 -1.0073 0.0067 0.2144 16 -0.0007 0.0199 -0.1934 0.0061 0.1864 17 0.0132 0.0319 2.3104 0.0193 0.5754 18 0.0022 0.0175 0.6986 0.0215 0.6229 19 -0.0069 0.0185 -2.0858 0.0145 0.4103 20 0.0152 0.0371 2.2773 0.0297 0.8178 21 -0.0016 0.0419 -0.2079 0.0281 0.7560


TABLE B.3 ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY TO THE S&P 500 INDEX

OF THE US STOCK MARKET IN THE FIRST TRADING MONTH


adjusted

return of adjusted


CARt

1 0.0147 0.0511 1.6047 0.0147 1.7195 2 -0.0038 0.0291 -0.7216 0.0110 0.9049 3 0.0050 0.0247 1.1213 0.0159 1.0754 4 0.0052 0.0188 1.5270 0.0211 1.2326 5 -0.0019 0.0160 -0.6678 0.0192 1.0023 6 0.0022 0.0195 0.6328 0.0214 1.0206 7 -0.0117 0.0430 -1.5113 0.0097 0.4292 8 -0.0010 0.0223 -0.2536 0.0087 0.3596 9 0.0041 0.0228 1.0061 0.0128 0.4996 10 0.0036 0.0239 0.8282 0.0164 0.6056 11 0.0024 0.0258 0.5232 0.0188 0.6631 12 -0.0072 0.0183 -2.1875 0.0116 0.3919 13 -0.0021 0.0160 -0.7201 0.0095 0.3093 14 -0.0026 0.0126 -1.1255 0.0070 0.2182 15 -0.0065 0.0274 -1.3268 0.0004 0.0135 16 -0.0007 0.0233 -0.1705 -0.0003 -0.0078 17 0.0150 0.0347 2.3962 0.0147 0.4165 18 0.0012 0.0189 0.3632 0.0159 0.4388 19 -0.0065 0.0194 -1.8714 0.0094 0.2518 20 0.0112 0.0400 1.5540 0.0206 0.5377 21 -0.0023 0.0405 -0.3135 0.0183 0.4665


TABLE B.4 ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY TO THE MSCI INDEX

OF THE EMERGING MARKETS (MSCIEM) IN THE FIRST TRADING MONTH


adjusted

return of adjusted


CARt

1 0.0126 0.0510 1.3752 0.0126 1.5778 2 0.0019 0.0222 0.4649 0.0145 1.2801 3 0.0060 0.0240 1.3991 0.0205 1.4813 4 0.0021 0.0167 0.7008 0.0226 1.4142 5 -0.0035 0.0162 -1.2223 0.0190 1.0663 6 0.0034 0.0194 0.9766 0.0225 1.1478 7 -0.0076 0.0434 -0.9724 0.0149 0.7041 8 0.0010 0.0178 0.3214 0.0159 0.7042 9 0.0016 0.0219 0.4039 0.0175 0.7302 10 0.0005 0.0227 0.1230 0.0180 0.7126 11 0.0032 0.0250 0.7077 0.0212 0.7994 12 -0.0053 0.0178 -1.6765 0.0158 0.5721 13 -0.0031 0.0147 -1.1597 0.0128 0.4432 14 -0.0023 0.0150 -0.8571 0.0105 0.3498 15 -0.0062 0.0272 -1.2744 0.0042 0.1366 16 0.0009 0.0192 0.2485 0.0051 0.1591 17 0.0098 0.0347 1.5814 0.0149 0.4534 18 0.0034 0.0175 1.0807 0.0183 0.5407 19 -0.0045 0.0168 -1.5051 0.0138 0.3960 20 0.0115 0.0353 1.8073 0.0253 0.7069 21 -0.0036 0.0410 -0.4930 0.0216 0.5907


TABLE B.5 ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY TO THE BANK OF NEW YORK INDEX OF EMERGING MARKETS ADRS (BNYEMKT) IN THE FIRST TRADING MONTH

Sample Average Standard t-stat Cumulative t-stat

trading day adjusted deviation

adjusted

return of adjusted

return

(t) ARt returns

CARt 1 0.0133 0.0498 1.4914 0.0133 1.5246

2 -0.0006 0.0312 -0.0986 0.0128 1.0350 3 0.0044 0.0237 1.0315 0.0172 1.1364 4 0.0044 0.0205 1.1968 0.0216 1.2369 5 -0.0021 0.0210 -0.5556 0.0195 0.9992 6 0.0047 0.0222 1.1727 0.0241 1.1307 7 -0.0096 0.0448 -1.1884 0.0146 0.6327 8 -0.0005 0.0250 -0.1031 0.0141 0.5731 9 0.0014 0.0251 0.3081 0.0155 0.5935 10 0.0038 0.0230 0.9224 0.0193 0.7013 11 -0.0010 0.0246 -0.2200 0.0184 0.6351 12 -0.0052 0.0192 -1.4950 0.0132 0.4369 13 -0.0043 0.0194 -1.2512 0.0088 0.2814 14 0.0001 0.0160 0.0205 0.0089 0.2729 15 -0.0068 0.0299 -1.2591 0.0021 0.0632 16 -0.0007 0.0230 -0.1812 0.0014 0.0397 17 0.0132 0.0353 2.0750 0.0146 0.4051 18 0.0010 0.0208 0.2805 0.0156 0.4221 19 -0.0074 0.0241 -1.7018 0.0082 0.2170 20 0.0121 0.0398 1.6980 0.0204 0.5229 21 -0.0010 0.0412 -0.1366 0.0194 0.4850


TABLE B.6 ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY TO

THE MSCI INDEX OF THE RUSSIAN STOCK MARKET

Sample Trading Average t-stat Cumulative t-stat trading day month adjusted

adjusted

return return (t)

ARt

CARt

21 1 -0.0047 -0.6333 0.0153 0.4131 42 2 0.0051 1.2706 0.0201 0.3845 63 3 -0.0005 -0.1024 0.0016 0.0252 84 4 -0.0076 -2.1177 0.0027 0.0363

105 5 -0.0031 -0.7440 -0.0242 -0.2919 126 6 -0.0240 -1.2591 -0.0399 -0.4402 147 7 0.0061 1.0477 -0.0484 -0.4937 168 8 0.0100 1.8115 -0.0527 -0.5033 189 9 -0.0066 -0.9823 -0.0722 -0.6498 210 10 0.0035 0.7462 -0.0754 -0.6436 231 11 -0.0107 -0.7995 -0.0993 -0.8081 252 12 -0.0119 -1.0332 -0.1305 -1.0171 273 13 0.0027 0.4325 -0.1275 -0.9546 294 14 0.0075 1.2189 -0.1758 -1.2686 315 15 0.0083 1.2822 -0.1484 -1.0348 336 16 0.0114 1.4779 -0.1533 -1.0347 357 17 -0.0084 -1.4682 -0.2297 -1.5045 378 18 0.0132 1.1115 -0.1619 -1.0305 399 19 0.0042 0.7397 -0.1846 -1.1433 420 20 -0.0102 -0.8087 -0.1823 -1.1006 441 21 -0.0041 -1.1256 -0.1611 -0.9493 462 22 -0.0045 -0.8988 -0.1888 -1.0871 483 23 -0.0068 -0.7961 -0.1404 -0.7907 504 24 -0.0141 -1.4562 -0.1997 -1.1008


TABLE B.7 DAILY ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY

TO THE MSCI INDEX OF THE UK STOCK MARKET

Sample Trading Average t-stat Cumulative t-stat trading day month adjusted

adjusted

return return (t)

ARt

CARt

21 1 -0.0016 -0.2079 0.0281 0.7560 42 2 0.0025 0.7706 0.0523 0.9941 63 3 0.0003 0.0464 0.0205 0.3172 84 4 -0.0068 -1.7442 0.0049 0.0653

105 5 -0.0082 -1.8454 -0.0152 -0.1824 126 6 -0.0276 -1.3718 -0.0864 -0.9469 147 7 0.0062 1.1727 -0.0565 -0.5734 168 8 0.0050 1.3307 -0.0301 -0.2858 189 9 -0.0111 -1.7530 -0.0596 -0.5332 210 10 0.0013 0.2273 -0.0756 -0.6422 231 11 0.0002 0.0234 -0.1207 -0.9771 252 12 -0.0070 -0.7235 -0.1741 -1.3496 273 13 0.0042 0.7558 -0.1594 -1.1872 294 14 0.0085 1.6236 -0.1950 -1.3996 315 15 0.0024 0.3984 -0.1881 -1.3045 336 16 0.0096 1.2298 -0.2264 -1.5203 357 17 -0.0164 -2.2538 -0.3138 -2.0444 378 18 0.0110 0.8534 -0.2430 -1.5383 399 19 -0.0002 -0.0388 -0.2653 -1.6350 420 20 -0.0097 -0.7975 -0.2621 -1.5744 441 21 -0.0081 -2.1612 -0.2799 -1.6408 462 22 -0.0012 -0.2596 -0.3128 -1.7912 483 23 -0.0019 -0.2563 -0.2443 -1.3684 504 24 -0.0215 -1.6303 -0.3046 -1.6698


TABLE B.8 DAILY ADJUSTED RETURNS FOR RUSSIAN GDRS RELATIVELY TO

THE S&P 500 INDEX OF THE US STOCK MARKET

Sample Trading ARt t-stat Cumulative t-stat trading day month adjusted

adjusted

return

return (t)

ARt

CARt

21 1 -0.0023 -0.3135 0.0183 0.4665 42 2 0.0075 2.0485 0.0479 0.8652 63 3 0.0020 0.2897 0.0030 0.0446 84 4 -0.0065 -1.3826 -0.0179 -0.2289

105 5 -0.0053 -0.9807 -0.0392 -0.4472 126 6 -0.0307 -1.4511 -0.1147 -1.1952 147 7 0.0077 1.3728 -0.0835 -0.8055 168 8 0.0010 0.2102 -0.0757 -0.6828 189 9 -0.0107 -1.8206 -0.1063 -0.9042 210 10 0.0023 0.3624 -0.1324 -1.0684 231 11 0.0014 0.1639 -0.1881 -1.4477 252 12 -0.0080 -0.7290 -0.2421 -1.7839 273 13 0.0123 1.5470 -0.2211 -1.5652 294 14 0.0084 1.2823 -0.2709 -1.8477 315 15 0.0072 1.2281 -0.2677 -1.7643 336 16 0.0113 1.3703 -0.3125 -1.9942 357 17 -0.0152 -2.0187 -0.4048 -2.5060 378 18 0.0133 0.9703 -0.3387 -2.0376 399 19 -0.0013 -0.1973 -0.3604 -2.1103 420 20 -0.0048 -0.3926 -0.3524 -2.0112 441 21 -0.0082 -2.1268 -0.3801 -2.1174 462 22 -0.0036 -0.7380 -0.4208 -2.2897 483 23 -0.0012 -0.1524 -0.3576 -1.9031 504 24 -0.0230 -1.5962 -0.4281 -2.2303



THE MSCI INDEX OF THE EMERGING MARKETS


adjusted

return

return (t)

ARt

CARt

21 1 -0.0036 -0.4930 0.0216 0.5907 42 2 0.0036 1.1548 0.0356 0.6881 63 3 -0.0012 -0.2183 0.0092 0.1445 84 4 -0.0058 -1.3272 -0.0041 -0.0557

105 5 -0.0045 -0.9585 -0.0408 -0.4979 126 6 -0.0274 -1.3833 -0.0984 -1.0973 147 7 0.0032 0.6357 -0.0815 -0.8420 168 8 0.0036 0.7705 -0.0750 -0.7245 189 9 -0.0115 -2.0331 -0.1060 -0.9648 210 10 -0.0002 -0.0392 -0.1306 -1.1285 231 11 -0.0018 -0.2136 -0.1754 -1.4450 252 12 -0.0064 -0.6456 -0.2353 -1.8559 273 13 0.0112 1.6760 -0.2171 -1.6447 294 14 0.0050 1.0038 -0.2641 -1.9286 315 15 0.0065 1.0519 -0.2624 -1.8512 336 16 0.0109 1.4214 -0.2986 -2.0397 357 17 -0.0162 -2.2629 -0.3867 -2.5623 378 18 0.0108 0.8299 -0.3339 -2.1499 399 19 -0.0030 -0.5069 -0.3576 -2.2411 420 20 -0.0121 -0.8561 -0.3617 -2.2093 441 21 -0.0088 -1.9071 -0.3801 -2.2661 462 22 -0.0046 -0.9869 -0.4268 -2.4858 483 23 -0.0008 -0.1066 -0.3642 -2.0748 504 24 -0.0190 -1.6113 -0.4382 -2.4434



THE BANK OF NEW YORK MELLON OF EMERGING MARKETS ADRS


adjusted

return

return (t)

ARt

CARt

21 1 -0.001 -0.137 0.019 0.485 42 2 0.006 1.614 0.032 0.573 63 3 0.003 0.420 0.005 0.071 84 4 -0.007 -1.412 -0.016 -0.198

105 5 -0.005 -1.009 -0.054 -0.608 126 6 -0.027 -1.288 -0.116 -1.188 147 7 0.006 1.166 -0.101 -0.956 168 8 0.003 0.606 -0.101 -0.894 189 9 -0.010 -1.694 -0.129 -1.075 210 10 0.002 0.311 -0.154 -1.218 231 11 -0.004 -0.421 -0.203 -1.536 252 12 -0.014 -1.137 -0.263 -1.901 273 13 0.010 1.389 -0.238 -1.651 294 14 0.007 0.958 -0.289 -1.934 315 15 0.008 1.255 -0.283 -1.827 336 16 0.012 1.511 -0.321 -2.012 357 17 -0.015 -1.669 -0.406 -2.466 378 18 0.015 1.129 -0.342 -2.018 399 19 0.000 0.058 -0.363 -2.088 420 20 -0.009 -0.735 -0.368 -2.062 441 21 -0.010 -2.633 -0.388 -2.122 462 22 -0.003 -0.640 -0.435 -2.325 483 23 -0.001 -0.155 -0.371 -1.939 504 24 -0.024 -1.499 -0.434 -2.220


“Trapped Cash” in the Technology Sector: Accounting Disclosures of Permanently Reinvested Foreign

Earnings & Foreign Cash Levels

Russell Engel Southern Connecticut State University

Bridget Lyons

Sacred Heart University

Permanently reinvested earnings in foreign subsidiaries and cash balances held outside the United States have increased dramatically in the technology sector over the past five years. These values, as well as related unrecognized deferred tax liabilities, are significant to investors, regulators and others. We examine disclosures of the largest technology firms over the 2007 to 2013 period and find that, as a group, the firms have increased the information provided but by fiscal 2013 only four of the ten firms disclosed both foreign held cash and an estimate of the unrecognized deferred tax liability related to permanently reinvested earnings. INTRODUCTION

Over the past five years, as revenue growth has slowed, the combination of fairly stable earnings and

fewer investment opportunities has resulted in increasingly large cash balances at prominent U.S. based technology firms. At these firms, a significant portion of earnings generated relate to the operations of foreign subsidiaries. As overseas earnings have grown, so have foreign held cash balances. At 12/31/2013 Apple, Microsoft, Google, Cisco and Oracle had a combined $386 billion in cash; almost $310 billion of this was held outside the U.S. For perspective, note that combined net income reported by these five firms totaled $92 billion in 2013.

So called “trapped cash” refers to cash and liquid investments held by subsidiaries located outside the United States. The cash is “trapped” overseas because repatriation of the cash would subject it to US Corporate taxes. As explained by the Financial Accounting Standards Board (FASB) in FASB Accounting Standards Codification (ASC) Topic 740, Income taxes: It shall be presumed that all undistributed earnings of a subsidiary will be transferred to the parent entity (740-30-25-3) unless sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely (740-30-25-17).

The implication is that if a firm reports that cash is staying overseas, it is not subject to US Corporate Tax. Repatriation of the cash would subject it to US corporate tax rate of 35% less credit for foreign income taxes paid.


SIGNIFICANCE OF THE INFORMATION The ability to readily identify foreign earnings, cash balances and levels of cash held outside the US

is of interest to three distinct groups: 1. Investors 2. Regulators 3. Politicians and others debating U.S. corporate tax policy

The level of cash held outside the U.S. is of interest to equity investors since if the cash is repatriated

to the U.S. an additional tax would be due. Thus when valuing firms with significant foreign cash holdings it may make sense to apply a discount to the value of the cash. Such investors may also want to estimate the unrecognized deferred tax liability associated with permanently reinvested earnings since the additional tax due upon repatriation is a function of the difference between the U.S. rate and the rate in the foreign country in which the income was earned.

For the same reasons, regulators such as the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) have an interest in ensuring that financial statements provide sufficient transparency have an interest in disclosure of both potential tax liability and related liquidity issues. For example, if a firm maintains substantially all its cash outside of the U.S. this may be relevant to creditors and others interested in assessing the liquidity of domestic operations.

Legislators and others have vigorously debated corporate tax policy as the levels of foreign earnings and cash balances have risen. The House ways and Means Committee held hearings in June 2013 to examine corporate profit shifting by multinationals. This followed hearings by the Senate Permanent Subcommittee on Investigations in May 2013 which focused on tax strategies at Apple and earlier hearings in September 2012 which focused on Microsoft and Hewlett-Packard. On one side of the corporate tax debate are those pushing tax reform to secure additional tax revenues from firms they argue are manipulating where earnings are recognized and leaving cash overseas in a strategy to avoid paying U.S. taxes. On the other side, are legislators who argue that current US corporate tax rates, among the highest in the world, should be reduced to provide incentives for firms to increase earnings recognized and cash maintained in the U.S.

Despite fairly widespread interest in this information, the financial reporting requirements in the U.S. allow for flexibility on what is reported related to foreign earnings and cash held outside the U.S.

While this issue is relevant for all sectors, it is particularly relevant in the technology sector since a relatively large portion of earnings are recognized outside of the U.S. and foreign cash balances have skyrocketed over the past five years. In this paper we examine the information provided by ten major technology firms in SEC disclosures of foreign earnings and cash balances held outside the U.S. We examine the period 2007 through 2013. We find that the level and detail of information on permanently reinvested foreign earnings, related deferred tax liabilities and cash held outside of the U.S. has increased over this period.

REPORTING REQUIREMENTS

The FASB and SEC are both involved in disclosure requirements. The FASB has required the

reporting of information on permanently reinvested earnings (PRE) since 1993. Since the financial crisis it has also encouraged (see: Proposed ASU, Financial Instruments (Topic 825), Disclosures about Liquidity Risk and Interest Rate Risk) discussion of liquidity and capital resources. More recently the SEC has begun encouraging increased transparency on foreign earnings and cash holdings and has questioned some firms about the liquidity implications of permanently reinvested earnings. Certainly investors are also interested in enhanced disclosure particularly at firms with significant earnings in foreign subsidiaries. Correspondingly, there have been significant changes in what is reported in annual reports and 10Ks related to PREs and foreign held cash balances. At a number of firms, the reporting has changed over the 2007 to 2013 period. As required, all firms report PRE, some also report cash held


outside of the US and some attempt to quantify the, albeit difficult to estimate, deferred tax liability associated with the PREs. This has led to confusion and some published reports and online financial news sources have mistaken undistributed earnings for cash. The PRE disclosures can be found in the tax note where the firm may also opt to provide an estimate of associated deferred tax liability should the funds be repatriated. Firms may choose to disclose the level of foreign cash and, when provided, this is typically found in the discussion of liquidity and capital resources in the Management Discussion & Analysis. For example, Apple has been fairly transparent about foreign cash balances and estimates of the related deferred tax liability reporting foreign cash as early as 2002 while Microsoft began disclosing cash held by foreign subsidiaries only in 2011. IBM was still not disclosing this information in 2011, leading to the SEC to suggest to IBM that it consider providing enhanced disclosure on this topic. Despite the request, as of 2013, IBM has not disclosed foreign cash in its annual reports or 10K filings. DISCLOSURE LANGUAGE

To show the range of disclosures on the topic consider the information provided below by IBM and Apple in 2013 10K filings. Management Discussion of Liquidity from Page 66 of IBM’s 2013 10K

“The company does earn a significant amount of its pre-tax income outside the U.S. The company’s policy is to indefinitely reinvest the undistributed earnings of its foreign subsidiaries, and accordingly, no provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries. The company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable. While the company currently does not have a need to repatriate funds held by its foreign subsidiaries, if these funds are needed for operations and obligations in the U.S., the company could elect to repatriate these funds which could result in a reassessment of the company’s policy and increased tax expense.”

Tax Note from Page 123

“The company has not provided deferred taxes on $52.3 billion of undistributed earnings of non-U.S. subsidiaries at December 31, 2013, as it is the company’s policy to indefinitely reinvest these earnings in non-U.S. operations. However, the company periodically repatriates a portion of these earnings to the extent that it does not incur an additional U.S. tax liability. Quantification of the deferred tax liability, if any, associated with indefinitely reinvested earnings is not practicable.”

Management Discussion from Page 35 of Apple 2013 10k

As of September 28, 2013 and September 29, 2012, $111.3 billion and $82.6 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.

Tax Note from Page 64 The foreign provision for income taxes is based on foreign pre-tax earnings of $30.5 billion, $36.8 billion and $24.0 billion in 2013, 2012 and 2011, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. Substantially all of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by


subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of September 28, 2013, U.S. income taxes have not been provided on a cumulative total of $54.4 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $18.4 billion.

Disclosures of Cash, Cash Held Outside the U.S. & Accumulated Foreign Earnings The different disclosures and a general lack of familiarity with related reporting requirements have

led to confusion. In fact some published reports in print and online financial news sources have confused undistributed earnings and cash. See for example, the following from CNBC.

“Correction: An earlier version of this story stated that undistributed foreign earnings were a reliable indicator of the amount of cash U.S. corporations hold in their foreign subsidiaries. However, the JPMorgan report points out that some investors use undistributed foreign earnings balances as a proxy for foreign cash. Furthermore, there is a weak relationship between foreign earnings and foreign cash balances.” http://www.cnbc.com/id/43152232

Perhaps because of this and the importance of foreign earnings and cash levels on valuation, the SEC has taken steps to encourage fuller disclosure. Blouin, Krull & Robinson (2014) provide the following example of a 2011 SEC request to IBM and IBM’s response.

From the SEC to IBM

“While we note that you intend to permanently reinvest such funds outside of the U.S. and that these funds are not considered a main source of liquidity for funding U.S. operations, we believe you should consider providing enhanced liquidity to disclose the amount of cash held by foreign subsidiaries that would be subject to the potential tax impact associated with the repatriation of undistributed earnings of foreign subsidiaries. In this respect, this disclosure would illustrate that some cash is not presently available to fund domestic operations such as the payment of dividends, corporate expenditures or acquisitions without paying a significant amount of taxes upon their repatriation. As part of your response, please quantify the amount of cash and cash equivalents held in foreign subsidiaries to which you intend to permanently reinvest earnings” (Correspondence between SEC and IBM, September 7, 2011, File No. 001-02360).

From IBM to the SEC

“As indicated in the company’s June 28, 2011 response, the company discloses on page 108 of its 2010 Form 10-K that its policy is to indefinitely reinvest the earnings of its foreign subsidiaries, and that it periodically repatriates a portion of these earnings only to the extent that it does not incur an additional U.S. tax liability. It is important to note that the undistributed accumulated foreign earnings of the company’s foreign subsidiaries do not necessarily represent cash and marketable securities. At December 31, 2010, total cash and marketable securities was $11,651 million, of which $7,677 million was held in the U.S. and $3,974 million was held by the company’s foreign subsidiaries. As stated in our prior response, in addition to dividend repatriation, the company has several liquidity options available when the company may have additional cash requirements in the U.S. These options include the ability to borrow funds at reasonable rates, utilizing the company’s committed global credit facility, repatriating high-taxed foreign earnings and recalling intercompany loans that are in place with certain foreign subsidiaries” (Correspondence between SEC and IBM, September 7, 2011, File No. 001-02360).

Disclosures in the Technology Sector 2007 Through 2013

We examined 10K filings for the largest ten technology firms in 2007, 2010 and 2013. We selected 2007 to begin our analysis since this was pre financial crisis and liquidity concerns were significantly different in the post crisis period; our results follow.


http://www.cnbc.com/id/43152232�

http://www.cnbc.com/id/43152232�

TABLE 1 RELEVANT DISCLOSURES FOR FISCAL YEAR 2007

Firm Cash

Equivalents & Investments

Cash Outside the U.S.

Permanently Reinvested Earnings

(PRE)

Unrecognized Deferred Tax Losses (DTL) related to PRE

Auditor

Apple 15.4 6.5 2.4 not disclosed KPMG

Cisco 22.3 17.5 16.3 not disclosed PWC

Dell 12.4 7.9 2.4 2.4 PWC

Ebay 4.2 4.0 3.8 not disclosed PWC

Google 14.2 not disclosed 3.9 not disclosed Ernst & Young

Hewlett Packard

11.3 not disclosed 7.7 not disclosed Ernst & Young

IBM 16.1 not disclosed 18.8 not disclosed PWC

Intel 19.3 not disclosed 6.3 not disclosed Ernst & Young

Microsoft 23.4 not disclosed 6.1 0.001 Deloitte & Touche

Oracle 7.0 5.0 5.7 1.4 Ernst & Young



Firm Cash




(PRE)


Auditor

Apple 51.0 30.8 12.3 4.0 KPMG


Dell 15.1 10-20% 11.3 3.7 PWC


Google 35.0 16.7 17.5 not disclosed Ernst & Young

Hewlett Packard



Intel 21.5 not disclosed 11.8 not disclosed Ernst & Young

Microsoft 36.8 not disclosed 29.5 9.2 Deloitte & Touche




Firm Cash




(PRE)


Auditor

Apple 146.8 111.3 54.4 18.4 Ernst & Young


Dell 15.3 100% 19.0 6.2 PWC


Google 58.7 33.6 38.9 not disclosed Ernst & Young

Hewlett Packard



Intel 20.1 11.3 20.0 not disclosed Ernst & Young

Microsoft 77.0 69.6 76.4 24.4 Deloitte & Touche


CONCLUSION

Permanently reinvested earnings in foreign subsidiaries and cash balances held outside the United

States have increased dramatically in the technology sector over the past five years. Overall, cash held by the ten technology firms examined, increased over 200% between 2007 and 2013. At December 2013, Apple alone held more cash than all ten firms combined had in 2007. Permanently reinvested earnings have increased by 427.8% over the 2007-2013 period. We find that as a group, the firms have increased the information provided but by fiscal 2013 only four of the ten firms disclosed both foreign held cash and an estimate of the unrecognized deferred tax liability related to permanently reinvested earnings. Since these values are significant to investors, regulators and others, we recommend that the SEC and FASB continue to work to promote greater transparency and more consistent disclosure.


APPENDIX The following example has been provided by Ernst & Young in Young “Financial reporting

developments: A comprehensive guide Income taxes”, Revised September 2013 to demonstrate disclosure.

REFERENCES

Blouin, Krull & Robinson (2014). The Location, Composition, and Investment Implications of Permanently Reinvested Earnings. Working paper available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154662


http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154662�

Global Business: A Cultural Perspective

William Brent Carper Gordon State College

To assist global executives in better and more quickly ADAPTING to different cultures (avoiding culture shock), this research paper reviews a cultural orientation framework designed to do just that. Additionally, the model includes a cultural orientations indicator (COI), which is a self-reporting evaluation instrument predicated upon extensive international and transcultural training experiences, as well as international anthropological research conducted over many years. Based upon the work of noted international researchers and authors, the COI provides a useful measure of personal cultural values through a comprehensive analysis of ten major cultural orientations and sixteen related dimensions.1

Culture is a learned, shared, compelling, interrelated set of symbols whose meanings provide a set of orientations for members of a society. These orientations, taken together, provide solutions to problems that all societies must solve if they are to remain viable.2

Vern Terpstra and Kenneth David The Cultural Environment of International Business EXECUTIVE SUMMARY

Successful chief executive officers of multinational enterprises (MNEs) invariably have two overriding objectives as relates to the long-range success of their respective firms: (1) add value to stakeholders of the firm; and (2) create and maintain a competitive economic advantage. Neither is an easy task to accomplish. Given at times their conflicting natures, the two objectives taken together are even more difficult to simultaneously accomplish.

Regarding accomplishment, ask a business leader the following question. Which type of capital, financial or human (intellectual) is more crucial to the accomplishment of the aforementioned MNE long-range objectives, and he/she invariably will almost always respond that human capital is much more important. Top MNE executives all seem to agree that ultimately what sets their firms apart from other firms in the increasingly competitive global marketplace is their people—their ideas, expertise, ability to solve problems creatively, and flexibility. Further, nowhere are these attributes more important than in today’s global marketplace.

Consequently, it is imperative that senior executives of MNEs, as they constantly move from subsidiary to subsidiary around the globe in quest of continued accomplishment of MNEs’ overriding objectives, possess the necessary cross-cultural interpersonal skills to successfully relate to other firm personnel and be able to size-up situations quickly. Put simply, senior executives, working across cultures, must be able to earn the respect and trust of others quickly in order to acquire timely information that is valid and reliable for decision-making purposes. Thus, it is imperative that global executives readily ADAPT to other cultures—not ADOPT them.


ADAPTING TO DIFFERENT CULTURES (CULTURE SHOCK)

Cross-cultural competence is no longer a “nice” skill to have; it has become and economic necessity if MNEs are to survive and prosper. Companies continue to be quite successful in developing the technical “hardware” associated with increased globalization; e.g., computer and communications technologies, transportation methods, and flexible manufacturing systems, including plant and equipment. Unfortunately, almost to a firm, the major weakness continues to be the development of personnel at all levels within the firm that possess the required flexibility and knowledge necessary to optimize the value of capital (intellectual capital) available to the organization.

The cultural competence needed by many employees within an MNE, especially at the managerial level, is based upon four interrelated levels as set forth in EXHIBIT ONE.

EXHIBIT ONE FOUR LEVELS OF CULTURAL COMPETENCE

Source: Training Management Corporation (TMC), Doing Business Internationally: The Cross Cultural Challenges, Seminar and Coursebook (Princeton, NJ, 1992)3

Level 1: Open Attitudes Objective

The primary objective is to develop the desire and acceptance by managers and key employees to participate in cross-cultural learning. Questions which key managers/employees must continuously ask themselves include the following.

• Am I open to recognizing cultural differences by not assuming that “we are all the same?” • Am I open to examining my own cultural orientations in an honest and objective fashion and

unlearning cultural habits that might be counterproductive? • Am I open to receiving information about other cultures (information that may conflict with my

existing thoughts and feelings about what is real, efficient, effective, appropriate, proper, etc.)? • Am I open to experiencing other cultures without rushing into evaluations, becoming trapped in

stereotypes, or falling into ethnocentric behaviors? • Am I able to emphasize and see from different viewpoints while still being secure in myself,

resilient, and able to act?4


Observation Based upon experience, maintenance of an open attitude can be a whole lot more difficult to

accomplish “under fire,” given the typical everyday pressures that one tends to encounter in the real world as opposed to reading and meditating about it as part of some esoteric theoretical construct. Plainly stated, maintenance of an open attitude regarding the attainment of cross-cultural competence on a day-to-day basis can be difficult indeed, given particular facts and circumstances. Level 2: Self and Other Awareness Objective

One must be able to recognize key differences and similarities between one’s self and others. Self-Awareness

• What are my primary cultural orientations? How do they affect how I do business? • How do I differ from my mainstream culture and mainstream business culture? • How adaptable am I? How can I increase my capacity for intellectual learning?

Other-Awareness

• What are their primary cultural orientations? How do these orientations affect the way they do business?

• What is the mainstream culture and their business culture? What are the significant variations among their cultures?

• How adaptable are they? How willing are they to learn more about me and my style of working? • What common ground exists? How can we build on our shared understanding?5

Observation

Several points are in order; (1) It is imperative that the “guest” in a foreign cultural first know who he/she is including the extent of one’s capacity and willingness to adapt. Tolerance and flexibility are crucial. (2) It is important to understand that it is the “perception of the truth that counts, not the truth.” Thus, one needs to be extremely careful not to generalize about others’ cultures from “random samples of one.” Level 3: Cultural Knowledge Objective

One should ground his/her cultural awareness in a “solid basis” of general cultural knowledge; e.g., a valid and reliable general cultural model that is applicable to all specific cultures—not just a few. Questions one might raise include the following.

• What do I need to know about all cultures? Specific cultures? • What resources will help me find the knowledge I need, when I need it? • How can I continue to build a practical knowledge base of cultural information that will serve me

over the long-term?6 Observation

It is the opinion of the authors that to successfully accomplish the foregoing objective, that one’s research methodology needs to be deductive as opposed to inductive. The primary reason being that it appears to be both easier and less painful to assimilate information about a specific culture as relates to one or more valid and reliable general cultural models that visa-versa.


Level 4: Cross-Cultural Skills Objective

It is important to develop behaviors that maximize cross-cultural effectiveness. Several questions that need asking include the following.

• How do I translate my awareness and knowledge into functional skills? • What skills will help me minimize cross-cultural conflict and maximize productivity and

effectiveness? • How can I continue to refine my skills and develop my level of cultural competence and

adaptability? • How can I use my cross-cultural skills to further enhance my openness to cross-cultural

learning?7 Observation

It is important that one possess extremely good communication, negotiation and mediation skills including the art of listening, if one expects to maximize his/her cross-cultural effectiveness. Once again, in the “heat of battle,” this can be a lot easier said than done.”

Overall, it takes an open, receptive attitude, based on both an insatiable curiosity and desire to learn about others to form the foundation for developing cross-cultural competence. Interestingly enough, this same attitude tends to facilitate the development of self and other awareness. In order to be useful, however, this awareness needs to be well grounded in both knowledge and experience as relate to both general and specific cultural models. Further, that knowledge and experience must be translated into the appropriate skills required for success when one is working across cultures. Hopefully, by continually developing at all four levels of cultural competence, a manager/employee will continue to build confidence and ability to successfully integrate acceptable cultural differences into new and rewarding ways of doing business. CULTURE EXPLORED: FINDING ONE’S FEET

The inability to “find our feet” is an appropriate description for the feeling of intense disorientation (culture shock) that can accompany contact with and/or submersion into a new culture. The simple question that a business person working across cultures must ask oneself time and again, as one moves from culture to culture, is the following. “What will help me find my feet in other cultures so that I can do business effectively?”

Historically, the traditional and popular answer to such a question, was found in “Dos and don’ts around the World: A Guide to Business Etiquette or Doing Business in… cookbooks,” designed primarily for persons preparing to work within a specific new country or region. However, in the increasingly global marketplace, managers/employees are finding themselves being required to move quickly from place to place, culture to culture—specifically wherever they can add value quickly and efficiently. Consequently, such individuals need a general cultural model (mental model) designed to capture and assimilate data quickly in order to make valid and reliable decisions that are timely. Culture

When one hears the word “culture,” what normally comes to mind? Most people tend to think about such things as types of music, art, literature, laws, customs, rituals, gestures, dress and fashion, diet, methods of greeting and saying good-bye, etc. Certainly all of these items make up part of a specific culture, but in reality they are just the “tip of the iceberg!” (See EXHIBIT TWO.)


EXHIBIT TWO THE ICEBERG MODEL OF CULTURE

Source: Training Management Corporation (TMC), Doing Business Internationally: The Cross Cultural Challenges, Seminar and Coursebook (Princeton, NJ, 1992)8

As illustrated in EXHIBIT TWO, the most powerful elements of culture are those that lie beneath the surface of everyday interaction. These are called value orientations. Value orientations are preferences for certain outcomes over others; e.g., private space over public space, deductive thinking over inductive thinking, and so on. These patterns of value orientations tend to be manifested in peoples’ behaviors, beliefs, attitudes, and patterns of thinking. All of these are key components in our individual and national identities.

Plainly stated, culture significantly influences peoples’ actions, decisions, methodologies, feelings, thoughts, shapes their experiences, their interrelationships with others, their institutions, as well as the world around them. Culture further tends to define peoples’ fundamental beliefs as to how the world actually works, as well as providing them with both the form and substance with which to cope with everyday life, space, and communication.

Furthermore, is believed that these powerful, underlying (implicit) elements are the relatively static patterns of value that individuals learn as they grow and develop in their respective social groups. Even


though, we may dress similarly to another person, and possibly even speak the same language, the cultural differences “hidden below the surface,” may be monumental. These differences may manifest themselves in all sorts of ways such as when one shows up late for a previously scheduled meeting, demeanor of the meeting once it starts (people coming and going, interrupting the flow of the session and creating chaos), reluctance of people in meetings to identify sources of conflict and deal with them accordingly. Thus, each society tends to have its own unique set of value orientations. However, extensive empirical research over time indicates that the cultural variables, to which the value orientations (attributes) attach, are the same across cultures.

A MODEL OF KEY CULTURAL ORIENTATIONS

The feeling of disorientation that can develop as one moves from culture to culture (culture shock)

can manifest itself in many ways including feelings of depression, aggression, resentment, superiority, inferiority, curiosity, excitement, loneliness, fear, frustration, and so on. Thus, it is imperative that a businessperson find his/her “cultural feet” quickly when moving around the globe doing business. In nautical terms, one needs to be able to get his/her “navigational bearings” quickly. One way to do this, is by paying attention to a number of key features, specifically, the dominant value orientations of the culture.

A key question, however, is a value orientation towards what? Based upon the valid and reliable research findings of numerous anthropologists, psychologists, communications experts and business consultants, including their own experiences from having taught cross-cultural seminars to thousands of executives and managers throughout the world, Brake, Walker and Walker have chosen ten (10) variables and thirty-six (36) relevant orientations attaching to those variables, that have been of practical value to international business people in distinguishing between cultures and guiding key decisions. [See EXHIBIT THREE for a detailed illustration of the cultural orientations framework including the ten (10) variables and thirty-six (36) attributes.9

EXHIBIT THREE

CULTURAL ORIENTATIONS FRAMEWORK


A SUMMARY OF CULTURAL ORIENTATIONS The following summary is provided regarding the Cultural Orientations Framework set forth in EXHIBIT THREE. Variable Attribute Description of Different Value Orientations for Each Variable 1. Environment Control: People can dominate their environment; it can be changed to fit human needs. Harmony: People should live in harmony with the

world around them. Constraint: People are constrained by the world around them. Fate, luck, and change play a significant role. 2. Time Single-Focus: Concentration on one task at a time; high commitment to schedules. Multi-Focus: Emphasis on multiple tasks and relationships rather than deadlines. Fixed: Punctuality defined precisely. Fluid: Punctuality defined somewhat loosely. Past: High value placed on continuance of

traditions. Present: Short-term orientation aimed at quick

results. Future: Willingness to trade short-term gain for

long term results. 3. Action Doing: Task centered. Stress placed on

productive activity in goal accomplishment and achievement.

Being: Relationship-centered. Stress placed on working for the moment, experience rather than accomplishment. 4. Communication High context: Shared experience makes certain things

understood without them needing to be stated explicitly. Rules for speaking and behaving are implicit in the context.

Low context: Exchange of facts and information is


stressed. Information is given primarily in words, and meaning is expressed explicitly. Direct: Preference for explicit one- or two-way communication, including identification, diagnosis, and management of conflict. Indirect: Preference for implicit communication and conflict avoidance. Expressive: Emotive and personal communication style with high degree of subjectivity. Stress on relationships. Instrumental: Unemotional and impersonal communication style with high degree of objectivity. Stress on task achievement. Formal: High emphasis on following protocol and social customs. Informal: Stress on dispensing with ceremony and rigid protocol. 5. Space Private: Individual orientation to the use of physical space. Preference for distance between individuals. Public: Group orientation to the use of physical space. Preference for close proximity. 6. Power Hierarchy: Value placed on power differences between individuals and groups. Equality: Value placed on the minimization of

levels of power. 7. Individualism Individualistic: The “I” predominates over the ‘we.” Independence is highly valued. Collectivist: Individual interests are subordinate to group interests. Identity is based on the social network. Loyalty is highly valued. Universalistic: Focus is placed on abstract rules before relationships. What is true, correct, and appropriate can be identified and applied to everyone. Societal obligations are emphasized.


Particularistic: Focus is placed on relationships before abstract rules. Weight is given to changing circumstances and personal obligations. 8. Competitiveness Competitive: Achievement, assertiveness, and material success are reinforced. Cooperative: Stress is placed on the quality of life, interdependence, and relationships. 9. Structure Order: High need for predictability and rules, written and unwritten. Conflict is threatening. Flexibility: Tolerance of unpredictable situations and ambiguity. Dissent is acceptable. 10. Thinking Inductive: Reasoning based on experience and experimentation. Deductive: Reasoning based on theory and logic. Linear: Preference for analytical thinking, which

breaks problems into small chunks. Systemic: Preference for holistic thinking, which focuses on the big picture and the interrelationships between components.10

SOME OTHER CULTURAL ISSUES

Prior to concluding, it is important that there are still other cultural issues that must be considered. These include, but are not necessarily limited to the following. • Cultures are clusters of related values. In the case of the aforementioned model, the ten (10)

variables and thirty-six (36) cultural orientations for the sake of presentation, are treated as if they are mutually exclusive. They are not. Culture is both fluid and extremely complex. For instance, analytical boundaries like control vs. doing orientation are not as separate and distinct as portrayed in the model. They tend to relate to each other quite closely as do a number of the other attributes. However, real life experience with the model indicates that the model continues to possess significant explanatory and predictive powers for global managers and executives working in different cultures.

• Cultural differences tend to dictate changes in managerial style. For instance, a participative managerial style may be successful in one culture but not another, because of different cultural mores as relate to such variables as power, individualism, competitiveness, and so on.

• Culture is complex. The primary cultural emphasis in this article is at the national or regional level. However, an individual’s cultural profile is also influenced by many other factors; thus, each individual, to some extent, is culturally unique. The factors that affect an individual’s cultural profile include such things as family, geographical region, neighborhood, education, corporate culture, religion profession, social class, gender, race, and generation. Additionally, the importance of each of these variables from time to time, tends to change dependent on the situation, facts and circumstances, etc.


• Cultures tend to operate in dynamic equilibrium. Core value orientations tend to change very slowly, such as accepted and expected behaviors, which are passed on from generation to generation, through such institutions as families and schools. However, the wider cultural environment including such things as, economic, political, demographic, social and technological changes are always impacting on the culture: thus, both individuals as well as entire cultures may need to adapt to change.

• Cultural ADAPTATION is not cultural ADOPTION. Culture is not an abstraction; it is real. It is a powerful human reality that is an integral part of what it means to be a human being in a specific place at a given point in time. People cannot escape from being cultural creatures and having favored value orientations embedded into their ways of doing and thinking.

• It is not only important that people understand their differences with others and try to adapt accordingly; it is also important for people to recognize their boundaries. Although it is important to attempt to pursue open lines of communication including mutual understanding, it does not follow that one should adopt the value orientations of the other person. Sometime, there are situations in which it is easy to adapt and even adopt a cultural practice of someone else that makes sense. To the contrary, there are situations in which one feels there is a line which one cannot cross. Such situations tend to represent value orientations which are closer to the core of who one is; and therefore, should not be compromised. This should also be the case with the shared values of one's company. Thus, one should spend time reflect on one’s own adaptability prior to accepting an assignment in someone else’s country.

• Finally, cultural differences can add value. Basic economics, not political correctness, is the primary reason to pay attention to cultural differences in business. Recapping what was said at the outset, successful chief executive officers of MNEs invariably have two overriding objectives as relate to the long-range success of their respective firms; (1) add value to stakeholders of the firm; and (2) create and maintain a competitive economic advantage. Neither is an easy task to accomplish. At the point where business and culture intersect, the most important criterion for selecting an approach in order to maximize an opportunity to excel (what some people like to call a problem), is not “correctness” or “superiority,” but rather the synergistic process of creating added value. As for the complex issue of creating and maintaining a competitive advantage in the marketplace, culture can either facilitate or hinder the process. Thus, the probability for global success only increases to the extent cultural learning throughout an organization is enhanced. 11and 12

ENDNOTES

1. Terence Brake, Danielle Medina Walker and Thomas Walker, TMC Cultural Orientations IndicatorTM, Training Management Corporation; Available from http://www.tmcorp.com/coihtml; Internet; accessed March 1998.

2. Vern Terpstra and Kenneth David, The Cultural Environment of International Business. 3d ed. (Cincinnati, Ohio: South-Western Publishing Co., 1991), p.6.

3. Terrence Brake, Danielle Medina Walker and Thomas (Tim) Walker, Doing Business Internationally: The Guide to Cross-Cultural Success, (New York, New York: Richard D. Irwin, Inc., 1995), p. 33.

4. Ibid. 5. Ibid, p.34. 6. Ibid. 7. Ibid., p. 35. 8. Ibid., p. 37. 9. Ibid., p. 45 10. Ibid., pp. 46-47 11. Ibid., pp. 70-74 12. Ibid., http://www.tmcorp.com: Internet; accessed August, 2012


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Identifying Managers' Perceptions of 'Value' in Public Management Development Programs: An International Comparative Study

Paul J. Davis

KIMEP University

This paper explores perceptions of what constitutes 'value' in public management development programs. The paper examines the extent to which perceptions of value differ among managers and the nature of these differences with particular emphasis on the geographical home of the participating managers. Seventy-three (73) mixed-level managers from four diverse regions (Australia; Sub-Saharan Africa; Arabian Peninsula and Malaysia) participated in semi-structured interviews. A Grounded Theory research design model was adopted for the study. While there were similarities between the managers from different regions, the data revealed differences in perceptions of what constitutes value between the regions. These differences are broadly: Social (Australia); Developmental (Sub-Saharan Africa); Instructional (Arabian Peninsula) and Informational (Malaysia). There are implications for those who design and deliver public management development programs and for companies and managers investing in this development pathway in the quest for delivering and receiving value for money. INTRODUCTION

A public management development program (PMDP) is a program hosted by a private 'training' company in a public venue with an open invitation to organizations to send employees for professional development. Typically, the venue is a conference room in an up market hotel and target organizations are contacted through a mass e-marketing campaign. A PMDP commonly runs from between two and four days and the service provider engages a subject matter expert, often a private consultant, to design and deliver the program on a fixed-fee or profit-share basis. A PMDP may run with as few as seven or eight attendees up to around fifty with the average attendance, based upon this author's experience, at about twenty delegates. Public management development programs are big business globally. An internet search reveals dozens of companies, many of them global, providing PMDP on dozens of topics from strategic human resource management to supply chain management to oil and gas technical operations. The clients of the PMDP providers range from the world's most iconic multinationals through to small localized companies and government departments. This author has, as a private consultant, designed and delivered PMDP globally for eight providers since 2006.

Given the proliferation of PMDP providers in recent years and the large number of companies investing in PMDP as a management development activity, it is perhaps surprising that that this mode of management development has not been the focus for scholarly research. The objective of this paper is to raise awareness of PMDP through the investigation of an enduring issue concerning scholarly interest in management development programs: value for money or, return on investment. This paper reports on an international study which sought to identify managers' perceptions of value as derived from PMDP.


Specifically; this paper is concerned with reporting on how managers from different geographical regions perceive the notion of 'value' as it relates to PMDP.

MANAGEMENT DEVELOPMENT PROGRAMS AND VALUE

The literature review section for this paper is necessarily abbreviated due to the fact that there is no scholarly literature pertaining to public management development programs. While there is a literature gap concerning PMDP, there does exist considerable academic interest in the concept of value in management development initiatives. There is general agreement in the literature that management development activities should, in some measure, deliver what is broadly considered 'value' to both participants and their organizations. It is not necessarily the case that value equates to financial return or benefit although that is most assuredly one focus for much research on the topic. In its most generic sense, value can constitute anything that may be said to have made the management development activity worthwhile or justifiable. In addition to a financial return, development initiatives can return non-financial or indirect financial value in the form of, for example, additional skills, knowledge or competence or tacit outcomes like increased levels of engagement or confidence.

That there has been an increasing emphasis on proving the value of management development initiatives in organizations is well documented. O' Connor et al., (2006) have said that this measurement of value is to demonstrate to the organization that management development investment contributes to organizational performance. While the authors note that doubts do persist regarding the real value of management development, they evidence that investment in management development initiatives continues to grow. Cook (2006) agrees that conjecture regarding the worth of management development investment persists. He highlights the challenge in proving a link between management development and company profitability, yet argues that management development initiatives can be evaluated for impact in some form.

It is the general agreement that value has many forms (and the difficulties proving infallible links between management development and financial returns) that have led many organizations to weigh value in management development by non-financial measures. Cook (2006) makes the point that organizations often measure customer satisfaction levels or productivity outputs in lieu of financial evaluations when assessing the return on investment in management development initiatives. Indeed; Adison and Cunningham (2006) acknowledge that while a key reason for investing in management development initiatives is to increase company profits, an equally important reason for so doing is to increase customer satisfaction levels.

This research project is concerned with one specific form of management professional development: PMDP. As explained in the opening paragraph of the paper, PMDP are formal training programs. There is conflicting data regarding the place of formal learning programs in contemporary management development initiatives. O' Connor et al., (2006) are far from lone voices in their criticisms concerning the effectiveness of formal training; arguing in favour of non-formal learning modes for management development. Others, however, argue that there is still a place for formal training in management development initiatives. Adison and Cunningham (2006) provide the example of formal training being an ideal mode of learning for specialist knowledge. Meanwhile, McGurk (2010) reports on a formal training program for managers led to more effective compliance with certain business objectives. McGurk does note, however, that the formal training program he reports on had little impact on contributing to strategic change within the organization. This may suggest that formal training as a management development initiative is more likely to achieve certain kinds of results than other kinds and so formal training might best be used in management development at particular times for particular desired business effects.

Furthermore; disagreement exists in the literature concerning the popularity of formal training in organizations as a management development exercise. While O' Connor and colleagues claim formal training is in decline (2006), others have found that formal learning dominates management development initiatives in many organizations (Suutari and Viitala, 2008). Irrespective of whether the sun is setting on formal learning programs within organizations, externally run programs such as PMDP are widely used


by organizations for the purposes of management development and therefore deserve to be measured for value along with other forms of professional management development.

This research project measured the value of PMDP through the perceptions of participants attending a PMDP event. Using participant perception, opinion and reflection to evaluate a management development experience is a well established practice according to the scholarly literature on the topic. The evaluation of a management development program in a large manufacturing plant in India (Ghosh et al., 2011), for example, used a questionnaire to identify participant perceptions of their management development program. The questionnaire sought participant opinions about the 'clarity of the trainer'; 'communication of the trainer'; 'facilities'; 'food' and 'practical application of the learning'. A questionnaire, along with focus groups, was used by another organization to assess participant perceptions of their management development experience Billington et al., (2009).

Interviews, the method of assessing value applied by the current research study, are also a valid technique for collecting data in the form of participant perceptions regarding management development initiatives. Shefy and Sadler-Smith (2006) conducted face-to-face interviews with managers in a small hi-tech company both immediately following and some time after the completion of a management development initiative to assess participant role perceptions and behaviors. Similarly, Lennox-Terrion (2006) used semi-structured interviews, as this author did, to evaluate the value of a management development program at the University of Ottowa, Canada. In this study, participants were asked to reflect upon their perceptions of their learning and the usefulness of the training to their jobs.

Self-reporting is another approach to gathering the perceptions of managers about their management development experience. Prager and Such (2010) have said that self-reporting by participants is a valid and useful way of assessing the value of management development initiative. In a similar vein, Billington et al., (2009) report on a management development initiative that sought participant self-evaluation. In this case participants were asked to assess their own learning advances measured against the program's intended learning outcomes. RESEARCH PARTICIPANTS

Seventy-three (73) managers volunteered to be a part of the research project through participating in a semi-structured interview with the researcher at some stage during their attendance at a PMDP facilitated by the researcher. Fourteen (14) participants were from Sub-Sahara African countries; Seventeen (17) from Australia; nineteen (19) were from countries on the Arabian Peninsula and the remaining twenty-three (23) were from Malaysia. Forty-nine (49) participants were male and twenty-four (24) were female. In terms of position, eight (8) participants identified as junior or front-line managers; thirty-three (33) identified as mid-level managers; twenty (20) identified as senior managers and the remaining twelve (12) identified as executives. Participants were from a diverse range of industries including oil and gas; banking; financial services; manufacturing; hospitality; media; government; logistics; education services; transportation; information services; telecommunications and tourism. All but eleven (11) of the participants worked in some area of human resource management. Company size varied considerably from fifty employees in the smallest to over twelve thousand in the largest. In regards to age, nine (9) participants were aged under thirty. Sixteen (16) were aged between thirty and thirty-nine; twenty-seven (27) were aged between forty and forty-nine; sixteen (16) were aged between fifty and fifty-nine and the remaining five (5) were aged sixty or above. The participants from the Arabian Peninsula were from: Oman (9); United Arab Emirates (5); Saudi Arabia (3) Bahrain (1) and Kuwait (1). The participants from Sub-Sahara Africa were from: South Africa (9); Tanzania (3); Namibia (1); Botswana (1). RESEARCH DESIGN

The research design is founded upon a constructivist / interpretivist paradigm. Firstly, ontologically, constructivism embraces the concept that reality is created through a process of inquiry. According to Lincoln and Guba (2000) this is quite different to the positivist paradigm which posits reality as an


absolute and something that is readily apprehendable. Constructivism is especially well suited as the paradigmatic lens for the subject of this study as constructivism posits that people create meaning through interactions and that those interactions create what is perceived as reality. PMDP are a form of management development that absolutely rely upon interactions between people for learning to take place.

Constructivism also complements the study epistemologically. Lincoln and Guba (2000) observe that the epistemology of constructivism is transactional and subjectivist while positivist paradigms perceive knowledge from an objectivist and dualist perspective. Schwandt (2000) has said that the epistemologies of constructivism and positivism are markedly different. Positivist epistemology, he contends, is realist and empiricist in nature wherein positivism claims that: "there can be some kind of unmediated and direct grasp of the empirical world and that knowledge (i.e. the mind) simply reflects or mirrors what is out there" (Schwandt, 2000, p. 197).

Axiologically, this researcher also perceives that the true worth of meaning emanates from the social construction of that meaning through human interaction. That meaning is given shape by the values, beliefs, ethics and norms of those interacting and that meaning is subjective by nature. Positivist-influenced axiology is non-formative and detached; values and beliefs are isolated and can be controlled and excluded. Reality is predefined and can be captured. Finally, methodologically, according to Lincoln and Guba (2000), positivist paradigms tend towards quantitative research methods while constructivist paradigms tend towards qualitative methodology. Positivism seeks largely to test hypotheses while constructivism is hermeneutical and dialectical.

As noted, this study adopts a constructivist / interpretivist paradigm. Interpretivism was chosen because paradigmatically it essentially seeks to understand human behaviour or attitudes. According to Schwandt (2000), interpretivism holds that human behaviour is inherently meaningful. He explains that in order to understand human behaviour such as voting or marrying, the researcher must come to know the meanings that constitute these behaviours. There is an important reason here why interpretivism, along with constructivism, was selected as the paradigm for this study. Therefore, interpretivism, with its focus on understanding human behaviour and attitudes and its principle that behaviour inherently holds meaning, is a valuable construct for this study.

This research project is framed within the qualitative research methodology. Watkins has said that qualitative research is "Research that does not include numbers and statistical figures or "count" data." (Watkins, 2012, p. 163) which is aligned with the data collection method for this study: semi-structured interviews. In a similarly poignant phrase that is central to the perspectives of this study, Carter and Morrow define qualitative research as a means "to explore the meanings made by human beings" (Carter and Morrow, 2007, p. 205). Furthermore; Andersson (2010) has said that the study of managers and management is best achieved through a qualitative approach. The qualitative approach, he argued, allows for a proximity to the managers and the complexity of their everyday roles. DATA COLLECTION METHOD

According to Evans and Kotchetkova (2009), the choice of data collection method can have a significant impact on the nature of the data collected and the role to be played by the researcher in analyzing that data. They give the example of deliberative data collection methods such as round-tables; citizen juries and workshops that can almost completely sideline the researcher from data collection. However, having chosen a qualitative research methodology, interaction-based data collection strategies were also open to this researcher. Interaction-based strategies provide a 'close up' role for the researcher in data collection and that was the preferred role this researcher desired to take.

Interaction-based strategies are "basically conversations with a research purpose" (Cooksey and McDonald, 2011, p. 315). That is to say, they are premised on some kind of person-to-person connection whereby the researcher and subject are engaged with one another in some form of dialogue. Commonly, this would be face-to-face but with the advent of modern communications technologies such as VOIP, the


two may not be physically in the same location. The interaction-based data collection method adopted for this research project is semi-structured interviews.

This researcher decided that semi-structured interviews struck the right balance between very personable on the one hand and impersonal on the other. Another reason for selecting semi-structured interviews for this research project is the fact that semi-structured interviews are a data collection strategy consistent with the constructivist / interpretivist paradigm (Cooksey and McDonald, 2011). Furthermore; Cooksey and McDonald also assert that research that adopts a Grounded Theory approach, as this study does, frequently use semi-structured interviews as a primary data gathering method.

Semi-structured interviews have a number of attractive characteristics which this researcher found appropriate for the intentions of this project. The following four strengths of semi-structured interviews are provided by Cooksey and McDonald (2000). Firstly; the semi-structured interview is designed to encourage a more natural conversation. Semi-structured interviews also allow the researcher to follow, rather than fight against, the natural flow of the interview as questions do not have to necessarily be asked in the same order. This compliments the above point of a more natural conversation. The third of the four strengths of semi-structured interviews is that they allow the researcher to explore emergent issues that materialise unexpectedly. Cooksey and McDonald (2011) explain that sometimes during an interview something is said that may not have been predicted but is pertinent to the research themes. Semi-structured interviews give the researcher the flexibility to diverge and explore emergent topics. Finally; semi-structured interviews let the interviewee do the talking and drive the flow of conversation. There need only be minimal guidance from the researcher to sometimes seek clarification or to move the conversation along. DATA ANALYSIS

This project applied a Grounded Theory (GT) approach as the framework and process for data analysis. Although Grounded Theory was originally positivist epistemologically and objectivist by design, GT methods have been used by qualitative researchers since the approach was first developed 45 years ago (Charmaz, 2000). Today, GT is associated most with qualitative research methods and while there remain many 'schools' of GT research, this researcher adopts the well established constructivist GT method. Constructivist GT as proposed by Charmaz is adopted for guiding the research elements of this study because it a most appropriate approach for understanding people and their attitudes within the context of their work environment. GT methods have moved a long way from their positivist, prescriptive roots and constructivist applications of GT are flexible and adopted to focus on the construction of meaning.

In principle, GT methods: "Consist of systematic inductive guidelines for collecting and analysing data to build middle-range theoretical frameworks that explain the collected data" (Charmaz, 2000, p. 509). However, GT is fundamentally about analytical strategies and not data collection methods (Geiger and Turley, 2003; Leonard and McAdam, 2001). Optimally, GT requires extensive rich data be collected with thick description. However, GT is not prescriptive about how this data is collected but Charmaz (2000) has said that interviews are an excellent means of collecting sufficiently rich data for GT analysis and that interviews can be used alone to achieve this. Douglas (2003) has said that interviews are the predominant data collection method used in GT guided research and Creswell et al., (2007) have also said that GT is a valuable research approach where interviews are to be the main data collection method. Interviewing is the data collection method adopted by the present study.

GT methods are particularly distinct because the various elements such as data collection, coding, analysis and theory development are not separate steps carried out in set order which is common practice with other methods. Rather, GT is better perceived as a single, holistic and fluid process whereby the 'steps' are mixed in with one another. The original architects of GT, Glaser and Strauss describe GT thus:

"The joint collection, coding and analysis of data is the underlying operation. The generation of theory, coupled with the notion of theory as a process, should blur and


intertwine continually, from the beginning of an investigation to its end" (Glaser & Strauss, 1967, p. 43).

The GT process applied to this study is represented in Figure 1. It should be reiterated that there is not

a single, universal GT data analysis methodology and studies do vary in their approach to adopting GT methods for data analysis. This research project has surveyed a great deal of the literature on the topic and the approach this researcher has adopted is influenced by Glaser and Strauss (1967); Strauss and Corbin (1990); Charmaz (2000) and Douglas (2003).

FIGURE 1 GROUNDED THEORY DATA ANALYSIS METHODOLOGY

Adapted from Douglas (2003)

As data began to materialise from the semi-structured interviews this researcher began the process of coding that data. Following the advice of Charmaz (2000) that data analysis should begin early and then be ongoing, this researcher began analysis at the completion of the tenth interview. Douglas (2003) describes the coding process as a result of interrogating the data and sorting it to formulate provisional


answers. The process involves breaking down data, making sense of it and reassembling it in new ways. The objective of coding is that through coding text, categories begin to emerge and, secondly, coding commences the chain of theory development. Charmaz cautions that categories should not be pre-determined and this researcher was careful to begin the analytical exercise with no existing categories. The researcher should allow him or herself to be guided by the codes; they may lead the researcher in unexpected or new directions.

As data began to materialise from the semi-structured interviews this researcher began the process of coding that data. Following the advice of Charmaz (2000) that data analysis should begin early and then be ongoing, this researcher began analysis at the completion of the tenth interview. Douglas (2003) describes the coding process as a result of interrogating the data and sorting it to formulate provisional answers. The process involves breaking down data, making sense of it and reassembling it in new ways. The objective of coding is that through coding text, categories begin to emerge and, secondly, coding commences the chain of theory development. Charmaz cautions that categories should not be pre-determined and this researcher was careful to begin the analytical exercise with no existing categories. The researcher should allow him or herself to be guided by the codes; they may lead the researcher in unexpected or new directions.

This researcher adopted a thorough, three level coding process advanced by Douglas (2003) and Charmaz (2000). The fist coding activity is called open or critical coding; the second level is known as axial coding and the third level is called selective or focused coding. Open coding involves analysing the text line-by-line or phrase-by-phrase. This is a slow, focused and methodical process which ensures every word is read through an analytical lens. Charmaz (2000) also observes that this approach deters the researcher from imposing extant theories on the data or his or her own beliefs. Open coding supports constructivist ideology as the process focuses the researcher on the subject's views of their realities. Charmaz also notes that open coding empowers the researcher's ability to relate the respondent's views to the contextual background that has informed the research problems.

Open coding helps keep the researcher thinking about the meaning that is being revealed through the data and forces continuous questioning of that meaning. Line-by-line coding also quickly reveals any patterns that may become categories. The process also greatly assists comparisons to be made between data. Charmaz (2000) stresses the importance of comparisons in data analysis exercises. Comparisons can include comparing different respondents' views and experiences of the same phenomena; comparing data supplied by the same respondent; comparing codes for consistency and comparing categories for similarities and differences.

Following open coding this researcher then undertook axial coding, the second 'level' of data coding. According to Strauss and Corbin (1990), axial coding is the process of reassembling data to identify connections between a category and its sub-categories. This facilitates a deeper appreciation of the category in terms of its context and consequences. Douglas (2003) recommends that axial coding arrange the line-by-line codes to identify any relationships between them for the purposes of revealing core codes or primary codes. This researcher found that axial coding can take some time to reveal or decide upon core or major codes and the process progresses more fluidly as more data are analysed.

The third and final level of coding is called focused (Strauss and Corbin, 1990) or selective (Douglas, 2003) coding. The goal here is to take codes that appear frequently from the previous exercise so the researcher can refine and group these codes into clear and more specific sub-codes. For example; this researcher found through his analysis that the code "identifies HR functions" appeared very frequently but, on closer examination, contained many different functions of HRM departments. The single "identifies HR functions" code was unmanageable in size and scope to work with so this researcher broke it down into more specific and focused sub-codes (e.g. "recruitment"; "training"; "records management" and so forth). Another example was that the code which was known as "Interactions with HR" was split into three sub-codes: "positive interactions"; "neutral interactions" and "negative interactions."

Strauss and Corbin (1990) introduce a matrix in relation to selective coding. It provides a visual representation of the relative importance or centrality of conditions that influence respondent perceptions or opinions. They argue that this can enhance the quality of the researcher's explanations and conclusions


about phenomena by allowing the layering of data . This researcher developed a concentric circles model based on this idea and found it very helpful. The concentric circles model was used as a technique to visually map the relative importance, or centrality, of interviewee responses to the key themes of the questions. An example from this research project is provided in Figure 2

This researcher also used memoing throughout the research process. He found the concept is much like the common use of small 'sticky notes' which have become ubiquitous in modern organisations. According to Douglas (2003):

"Memos are written continuously through the entire research process... they are used to reflect upon and explain meanings ascribed to codes by actors and the researcher; to identify relationships between codes; to clarify, sort and extend ideas; and to record crucial quotations or phrases" (p. 48).

Memoing is a common technique in Ground Theory framed data analysis. Memoing encourages the

researcher to minute thoughts and record observations that may become useful later. It is a way of capturing ideas and suggestions for self as they occur which might otherwise be forgotten when the particular idea becomes relevant later in the analysis or formulation of grounded theories. Memoing can be a way of connecting thoughts and ideas that span the various stages of the data analysis exercise.

FIGURE 2 CONCENTRIC CIRCLES MAP FOR DATA CODING

FINDINGS AND DISCUSSION

Participants across the four regions provided many examples of what they perceive as constituting value in PMDP. There was a broad consensus on three issues that equated to value for money: new learning or new information; content relevant to current work context and issues; benefiting from the real

Social

Hearing the stories of others

Relaxing / having fun Time away

from the office

Meeting new people

Conversation


experiences of the facilitator and other delegates. Typical examples of the consensus among delegates from different regions on the point of new learning and new information include:

"It will be valuable if I walk away knowing something useful that I didn't know before I walked it...you want to hear something different; not just what you already know."

(Australian delegate; female; media; 40-50 years)

"I come to learn, so I hope that there will be much new information and I will hear ideas that I can use in the company. A training program is...should be...a learning program."

(Malaysian delegate; male; telecommunications; 30-40 years)

"For me the important thing is to get some competitive advantage for my division and my company, and that means some kind of latest thinking to apply in the job...something that my competitor does not know because he didn't attend the program. I rely on the program to give me an edge; that's really what I am paying for."

(Sub-Sahara African delegate; female; oil and gas; 30-40 years)

The second point of broad agreement among delegates from different regions was that value equated to gaining relevant information or learning to current work issues and contexts:

"We have some reorganisation in our company; a restructure, and I am hoping to find out advice and ways to deal with the human side of restructuring to manage our employees through the process. This is important right now; a top priority for us."

(Arabian Peninsula delegate; male; oil and gas; 50-60 years)

"There are some major challenges...well, problems to be honest, that we are facing right now and we are looking for answers wherever we can. Maybe this course can shed some light...that would be really helpful."

(Sub-Sahara African delegate; female; government; 30-40 years)

"We want to implement a talent management program in our company so this course obviously looked perfect for us."

(Malaysian delegate; female; logistics; 30-40 years)

The third issue upon which there was general consensus in terms of perceiving value from PMDP was benefiting from the experiences of the facilitator and other delegates:

"It's always good to come to this type of thing and find out what others are doing in their companies...not just to learn what's working but also what doesn't work."

(Australian delegate; male; financial services; 50-60 years)

"The facilitator is an expert in the field so it is valuable to listen to his experience about industry trends and best practices."

(Arabian Peninsula delegate; male; transportation; 40-50 years)

"Networking with other delegates is the most valuable part of the program...the facilitator is very knowledgeable but hearing the experiences of peers and sharing ideas and stories with them is what really helps to improve how you do things."

(Sub-Sahara African delegate; female; utilities; 40-50 years)


There were, however some distinct patterns observable from the data based upon the geographic clusters. It was discernible, for instance, that the Australian delegates described value partially in the context of social dimensions such as having fun; chatting with others over lunch; connecting with others on social media; enjoying a break from regular work; meeting new people; relaxing; de-stressing and mingling with others during coffee breaks:

"I come because it is a way to escape the office and unwind a bit while still being seen to be doing something worthwhile...I enjoy the social part of the program where you can relax but still be discovering something through having a yarn with others."

(Australian delegate; male; logistics; 40-50 years)

The social aspects of PMDP were not mentioned at all by delegates from the Arabian Peninsula and very little by those from Malaysia and Sub-Saharan Africa. The Australian interviewees also stressed that they attended the program to validate what they were doing in business; check they have the latest knowledge; to refresh their knowledge and to benchmark their professional practice against what other delegates were doing in their companies:

"We send people to training like this for reassurance that we are on the right track... we are a market leader so there shouldn't be too much new in these programs; its more about making sure that what we are doing is right.

(Australian delegate; female; media; 40-50 years)

Therefore, for the Australian delegates, there was much more of an emphasis on seeking reassurance about what they know and what they are doing rather than actively seeking to learn or acquire new knowledge. This contrasted sharply with the Sub-Saharan African delegates and the Malaysian delegates who sought new knowledge from their PMDP experience.

The delegates from Malaysia placed a much greater emphasis on the learning materials as a measure of value than the other three clusters. Common responses from the Malaysian delegates included: quality of materials; quantity of materials; number of 'take away' resources; number and usefulness of models and check-lists; follow up support from the facilitator; bonus resources; practicality of resources; clear explanations in the learning materials. While some delegates from other clusters referred to knowledge or what they learned during PMDP, the focus was not on the physical materials themselves but on what could be extrapolated and applied from course content. Delegates from the other clusters paid scant interest in the physical learning guides and resources:

"There should be a lot of well presented resources to take back to the business because when the training is over, the trainer is gone, and you need to maintain the, how to say it, momentum of the training days."

(Malaysian delegate; male; manufacturing; 40-50 years)

"I like the booklets and soft copy of the PowerPoint slides...I can return to my colleagues with information to share and I can train them using the materials. This way, everybody can benefit, not just the two or three fortunate enough to attend the workshop."

(Malaysian delegate; female; banking; 30-40 years)

Delegates from the Arabian Peninsula discussed the concept of value as being much more related to the knowledge and expertise of the facilitator than did the delegates from other regions. For those from the Arab nations, value was inextricably linked with what the facilitator knew and shared with them. These delegates saw the facilitator as the provider of answers and suggestions; a subject matter expert who should provide solutions which can be relied upon. Several delegates saw the facilitator as someone who should not be without a good answer and who should not be unsure in answering questions. There


was even the expectation that the facilitator should be able to readily provide high quality, on-the-spot solutions to specific, real business problems the delegates' companies currently face:

"We need to know what is the best practice in the best foreign companies and we need the expert trainer to tell us and show us...my company sends many people to trainings to know how we should be working...we wish to know the right ways."

(Arabian Peninsula delegate; male; oil and gas; 50-60 years)

"My company has questions about what we should do next in developing employee competence...is it this way or that way? This model or that model? I expect to talk with the trainer about our company and find the answers for us."

(Arabian Peninsula delegate; male; construction; 50-60 years)

Even though PMDP are for a general audience, unknown to the facilitator, the Arabian delegates held far higher expectations of the facilitator's ability to meet specific business conundrums with infallible solutions. In this way, the Arabian Peninsula delegates tended to equate value with the facilitator's ability to instruct them what to do and to solve their business problems. In contrast, this theme did not emerge from the responses of delegates from the other three regions who sought information or ideas which they might adapt and adopt to address business challenges.

Finally, the Sub-Sahara African delegates placed a much greater emphasis on professional networking and professional development as benchmarks of value than did the other delegates. The Arabian Peninsula delegates did not mention networking with other delegates or professional development in their interview responses and while the Australia delegates did talk about interactions with other delegates, the focus was on social rather than professional interactions. Three of the African delegates explained that they get few opportunities to attend PMDP facilitated by international specialists and that therefore such events can be a rare opportunity to meet their professional peers from other companies in other countries. Exchanging business cards; asking other delegates questions; listening to others' problems and solutions; developing skills and knowledge; hearing how to solve business problems; practical class activities and group discussions were some of the common responses given by the Sub-Saharan African delegates when describing what value in PMDP means to them.

"The most important thing for me is to get among the other people from other companies and listen and talk with them...I always leave a program like this with everybody's contact details...the best information often comes from your peers."

(Sub-Sahara African delegate; female; utilities; 40-50 years)

"I think trainers don't want to come to Africa; we don't see many high quality international trainers here so when they do come, we don't want to miss the opportunity to up-skill and add to our knowledge...I love the networking such programs allow."

(Sub-Saharan African delegate; female; oil and gas; 30-40 years)

Table 1 provides a diagrammatic summary of the key regional perceptions of value relating to PMDP. The thematic differences that emerged from the data reveal an insight into the varying foci for perceiving value that managers in different regions would appear to have. The priorities for different regions may be influenced by factors such as cultural or societal norms and values; national or industrial stage of economic development; organizational conditioning or other such variables. This study does not seek or claim to understand the underlying reasons for the apparent regional differences in perceptions of value concerning PMDP only to highlight that differences do exist. Future studies may consider investigating the associated issues of this study.


TABLE 1 VALUE PERCEPTION TYPOLOGIES FOR REGIONAL CLUSTERS

Australia

Social

Non-formal, ex-curricula interactions for fun, enjoyment and

non-professional discourse; validation of current practice

Sub-Saharan Africa

Developmental

Professional networking; professional skill and knowledge development; enhance practice;

learn from others Arabian Peninsula

Instructional

Solutions to real business problems; expert advice from facilitator; answers and direction; address

specific individual concerns

Malaysia

Informational

New tools and guides for adaptation; Resources to take

away and implement; prescriptive guidance

Table 2 provides some recommendations for public management development program designers and instructors. The table highlights the differences in design preferences based upon the value perception typologies presented in Table 1. The recommendation is that the design features of different programs in terms of content delivery and instructional style need to vary significantly to best meet the differing value perceptions of different regional audiences. For example; a very flexible, even negotiable, program structure might be welcomed by Australian managers whereas a formal, pre-determined, rigid and carefully timed program structure is most likely to be appreciated by delegates from Malaysia and the Arabian Peninsula. In terms of delivery style, learners from Australia and Sub-Sahara Africa reflect a strong preference for a high level of control over their own learning. For Australians this would likely be informal and social while for Sub-Saharan Africans it would be learning-situated and guided by the instructor. Self-guided learning, however, would not likely be well received by, in particular, Arabian Peninsula managers whose typology suggests a far more instructor-centered approach would be most suitable.

In terms of content design, Arabian Peninsula and Malaysia managers would probably prefer content heavy with facts in both the facilitator's oral delivery and the printed learning materials. These delegates do not indicate a preference for having to interpret or contextualize content; it should be readily understandable and able to resonate in itself with their needs. Australians, conversely, seem much less interested in facts and data and indicate a preference for receiving knowledge tacitly and informally. For Sub-Saharan Africans a balance between informal and formal content delivery would appear to be important as they consider both casual networking and instructor delivery to be important for their learning needs. Participative interaction is strongly favored by Australians and Sub-Saharan Africans and strongly disassociated with what Arabian Peninsula and Malaysian managers value according to the interviews. Finally Table 2 shows that the managers in different regions also have differing preferences for the level of authority the facilitator exerts over the learning process. Again, there is a big difference between the Australian managers' preference and that of the Arabian Peninsula managers with the former's typology suggesting a preference for minimal facilitator control and the latter preferring a high level of facilitator control.


TABLE 2 PROGRAM DESIGN FEATURE RECOMMENDATIONS

Australia Sub-Sahara

Africa Arabian

Peninsula Malaysia

Formal program structure

Low Moderate High High

Self-guided learning High High Low Moderate

Preference for facts over tacit knowledge


Participative interaction High High Low Low

Preference trainer control over learning


CONCLUSION

The research found that while managers from different regions of the world do share common perceptions of value pertaining to PMDP, they differ starkly, too, on what equates to value in their opinion. The implications for PMDP providers and organisations investing in PMDP as a part of their strategy for the professional development of managers are significant. Firstly; service providers and the consultants they contract to design and deliver PMDP should avoid a generic approach to hosting and delivering the same program in different regions. For better results and increased levels of client satisfaction, the research findings suggest that a tailored approach be adopted depending on the origin of the participants. Secondly, canvassing participant expectations and needs prior to the commencement of the program may be a useful tactic to help the program facilitator better meet the 'benchmarks of value' of participants.

A third point worth considering is the design and structure of programs. In Sub-Saharan Africa, for example, more applied practice and simulations would appear to heighten the participants' sense of value in the program. They may also prefer more effort on the part of the program trainer to encourage and facilitate networking and information exchange. In Australia, meanwhile, more time for socializing and a less rigid course structure might heighten participant satisfaction with their investment. In Malaysia a greater focus on the volume and quality of take-away materials would seem to be important to increasing participant perceptions of value. For Arabian Peninsula PMDP it would appear that greater focus on facilitator preparation and a pre-course questionnaire for participants informing the facilitator ahead of time about specific questions and issues participants have is integral to a successful program.

A further conclusion emanating from the research findings is that organizations investing in PMDP should better understand the expectations of their managers and how service providers aim to meet these expectations. Organizations should also carefully consider their own perceptions of value and whether these are aligned with their managers who are attending programs. Briefing managers before they attend PMDP could be one way to ensure that these managers also consider what their employer considers to be valuable in their attendance at a given program.

This research has provided an important insight into a booming area of management professional development. It would seem there is more to discover about PMDP and their value. More research on this


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