Archive for the ‘Uncategorized’ Category

Turbulence on Ground

Posted: October 2, 2009 in Uncategorized

sril

By Joseph Thavaraja

SriLankan Airlines is the national flag carrier of Sri Lanka, a full service airline, and is one of Asia’s leading airlines. It has won the Best Airline Turnaround of the Year 2004  from Centre for Asia Pacific Aviation and also the Best Airline in South Asia (3 consecutive times) from Travel Trade Gazette. As of April 2009, the airline has a route network serving 28 destinations (51 through codeshare) in 15 countries (28 countries through codeshare). SriLankan’s fleet comprises of 13 Airbuses and two AN12 freighters. SriLankan Cargo, (two dedicated freighters) through its AN12s operates to 50 destinations in 28 countries in Europe, the Indian Sub-continent, Middle East, Far East and South East Asia.

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Skytrax Research, the leading research advisors to the world airline and air transport industry, and the largest aviation research agency in the world, has given Sri Lankan a 3 Star rating. Skytrax’ 3 Star ranking is defined as “3 Star rating – awarded to airlines delivering a fair Quality performance, but with greater levels of inconsistency.”

Nevertheless, according to recent reports, revenue has dropped only by 7% (Rs. 5.8 Bn) during the year compared to last year, but Net Profit after Tax has dropped by 302%. Obviously the revenue drop due to global down turn would not be the main contributing factor. Cost of operation has increased by 12% making cost to revenue ratio 94% to 113%.

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f1

By Joseph Thavaraja

“In good times, financial markets embrace capitalism. In bad times, financial markets

re-discover socialism.” – An Economic Quote Now Regaining Its Popularity

As the US economy went to recession in the middle of the financial crisis the US House Speaker Nancy Pelosi, at a recent Capitol Hill news conference announced triumphantly that a ‘stimulus package’ is coming. “Tens of millions Americans will have a check in the mail. island3It is there to strengthen the middle class, to create jobs and to turn this economy around.” The plan would send checks of $600 to individuals and $1,200 to couples who paid income tax and who filed jointly. People who did not pay federal income taxes but who had earned income of more than $3,000 would get checks of $300 per individual or $600 per couple” she said. The stimulus package is aimed at re-energising the economy back to its feet. But economists may not necessarily agree that the ‘package’ as it is, alone would be sufficient. To understand this, one needs to understand the key to short term macroeconomic baheviour, simply called as Business Cycles.

Short term fluctuations in macroeconomic output, employment and prices are called business cycles (BCs) resulting the recurring expansion and contraction (leading to recession) of the national economy. Expansion is the normal state of the economy; recessions are rare and brief but are the defining characteristic in a business cycle. The dominant macroeconomic model where BCs are closely watched is the free-market enterprise system.

“Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises[1].


US GDP

The BCs influence actual GDP (production) rather than the potential GDP. Actual GDP often changes sharply from year to year.

The “quarter to quarter growth in Real GDP” as shown by the US Bureau of Economic Analysis clearly indicates the graphical trend in decline in GDP and starting of the recession in the Q4/2007, where a negative GDP growth is reported. A stagnant trend existed throughout the Q1 of 2008.

The “US Monthly GDP-Latest Estimates[2]shows even more clear (zoomed in) view of the monthly GDP scenario clearly showing the negative GDP trends (circled), namely Oct -2007 and Nov-2007.

US UNEMPLOYMENT

As stated, the broadest indicator of the three indicators is unemployment. Unemployment, stands for the percentage of labour force that is unemployed in the economy. BCs affect on unemployment rates as well. The table and graph (next page) clearly show the rising trend in the unemployment levels. The pattern is clearly discernible; From Jan-2007 to Nov 2007 it was growing at a slow rate; the second phase begins from Dec 2007 onwards where a steady climb in the rate is clearly evident; this is the recessionary period. It is important to note that the importance of unemployment rate is not limited to being an ‘recession indicator.’ Some strongly believe that the key to recovery is here – rather than the proposed stimulus package (discussed below) by the Bush Administration.

Skepticism is high on refinancing and liquidity plans.

Merrill Lynch investment strategist Rich Bernstein: “Investors have been reluctant to admit that this cycle, unlike 1998’s credit crisis, is imbedded in the real economy. The US government can come up with any number of refinancing and liquidity plans, but households are likely to increasingly default on mortgages and other debts if cash flow is not stabilized via employment[3].”

WILL THIS CAUSE THE MULTIPLIER EFFECT?

The multiplier theory was suggested by John Maynard Keynes as a tool to help governments to achieve full employment. It measured the amount of government spending for a level of national income that would prevent unemployment.

The more the need for consumption, the greater is the multiplier effect and Keynes expected the government can influence the size of the multiplier through changes in direct taxes such as a cut in the basic rate of income tax will increase the amount of extra income that will be spent on further goods and services.

In the 2008 Recession, instead of Keynes “Tax Cuts” approach (1), the US government appears to directly handout lump sums to US households in the form of a “Stimulus Package” at a cost of $ 146 billion.

US House Speaker Nancy Pelosi, D-California, at a Capitol Hill news conference:

“Tens of millions Americans will have a check in the mail. It is there to strengthen the middle class, to create jobs and to turn this economy around.” The plan would send checks of $600 to individuals and $1,200 to couples who paid income tax and who filed jointly. People who did not pay federal income taxes but who had earned income of more than $3,000 would get checks of $300 per individual or $600 per couple[4].”

However, opinion surveys in 2008 March found that upto 87% of the public plans to either invest their tax rebates or use it to pay down debt[5]. With the steady rise of inflation post March, this percentage can only grow upwards. In fact, if more than 80% of the US public are unwilling to spend their tax savings, will they even spend what they receive on a check? Thus, the “checks in the mail” are less likely to be used for spending and thereby, to the economy is less likely to be stimulated. Therefore, any calls for the multiplier effect should be viewed with high skepticism.

US INFLATION

Inflation, in which the price levels of economy increase, affects the purchasing power, eroding power of money. Historical evidence shows that rapid price changes disturb the economic decisions of companies and individuals, people lose their confidence in currency, slows down the economic activity and increases unemployment. The United States has lost 760,000 jobs in the past nine months, according the US Bureau of Labour Statistics estimates.

The graphs below illustrate how the inflation rates soared from end of Q4 / 2007 onwards as the US economy entered recessionary cycle.

What Caused the Crisis?

It is incorrect to say that one can correctly judge the trigger-exact reason for a recession –especially for one that is as complex as the 2008 Recession, where a host of multifarious and interwoven factors have been at play. It is strongly believed that the increase in consumer debt to about $ 943 billion, is the strongest contributory factor (per capita debt: $3,112.19). This consumer debt growth, in turn, has its roots in the last US recession in 1992. In its aftermath, the Federal Reserve artificially expanded credit and investment, but was not backed by increase in voluntary household saving. The instrument from this expansion has been transferred to the market by the banking system as newly created loans at extremely low interest rates. This fueled a speculative bubble in the shape of a substantial rise in the prices of capital goods, real-estate assets, and the stock market, where indices soared. However, this bubble is not based on voluntary savings (healthy for economy) but artificial expansion (unhealthy for the economy). Entrepreneurs use these artificial funds for investment but with the pretentious confidence that their funds are from savings.

Nevertheless, Nouriel Roubini, president of Roubini Global Economics had foreseen the US Recession back in August 2006. His diagnosis: “The decline in investment in the housing sector and inventories that are not moving[6].” He highlighted US National Association of Realtors data that stated “sales of existing homes fell 4.1% in July, while inventories soared to a 13-year high and prices flattened out on a year-over-year basis”.

“By itself this slump is enough to trigger a U.S. recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust (dot com bust) that triggered the 2001 recession. Housing has accounted, directly and indirectly, for about 30% of employment growth during this expansion, including employment in retail and in manufacturing producing consumer goods..[7]

In order to protect the banking and finance sector, the state, through the Federal Reserve has intervened with a ‘bailout package’ of $700+ billion and to cushion the negative recessionary effects on households and stimulate the economy, the Bush Administration has unleashed a “stimulus package” though it is yet to be seen whether the “bailout” and the “Stimulus package” are a treatment for symptoms rather than the disease itself. The only clear lesson from the chaotic US economy so far is the financial bailout affirming the popular economics saying that “In good times, financial markets embrace capitalism. In bad times, financial markets re-discover socialism.”

(The Writer is a Research Officer with the Social Indicator-Centre for Policy Alternatives, Colombo 3. His email is josephonline@gmail.com )


[1] Burns and Mitchell, 1946, p. 3

[3] FORTUNE MAGAZINE – OCT 15, 2008

[5] Kathleen Pender in San Francisco Chronicle, February 5, 2008– “Consumers not likely to spend tax rebates “

GRAPHIC – GIS & SRI LANKA

Posted: October 7, 2008 in Uncategorized

Glenn Brooks once used remote sensing and computerized mapping technology to track down and nab crooks in Alaska.

Now, Brooks and a gang of volunteer data crunchers plan to use GIS — Geographic Information Systems — and other high-tech mapping technologies to assist with the rebuilding efforts in Indian Ocean communities devastated by the tsunami.

MORE

by Rick Wartzman – Businessweek

Peter Drucker didn’t have a whole lot of nice things to say about those on Wall Street, at one point likening them to “Balkan peasants stealing each other’s sheep.”

Given the magnitude of the latest crisis to grip Fannie Mae, Freddie Mac, American International Group, Lehman Brothers, and their friends, one can only imagine what kind of acid analogy he might have used today.

BUSINESSWEEK ARTICLE IN FULL

How Objective!

Posted: September 1, 2008 in Uncategorized
Tags: ,

By Joseph Thavaraja

Management By Objectives (MBO), was first introduced by Peter Drucker in 1954 in his book, The Practice of Management. By 1960s and 1970s, MBO became the no 1 buzzword of management practices and some form of a panacea for management ills. Most importantly, MBO has, for the first time, introduced significant changes to the command-control top down management system practiced at that time.

Not that the Command & Control company system did not have any goals and objectives. It did. Whatever the period of origin, all companies and organizations had goals and even managed processes so that they achieved them. However, MBO framework had managed to slot the goal setting through ‘direction’ for the organization by developing an organizational role and mission statement, specific objectives and action plans for each member in a participative decision making style. Further, MBO established key results and/or performance standards for each objective with periodic measurement/assessment of the status or outcome of the goals and objectives. In setting Goals, MBO adheres to SMART (Specific, Measurable, Achievable, Realistic and Time related) methodology so that the goals are valid.

Nevertheless, today the MBO framework has undergone significant changes from its original ‘driver of change’ outlook to a ‘goal setting and a performance appraisal system’ and then the most recent adaptation being the ‘project management framework’.

Heinz Weighrich and Harold Koonz define MBO as “a comprehensive managerial system that integrates many key managerial activities in a systematic manner, consciously directed towards the effective and efficient achievement of organizational and individual objectives.” And by its general outlook, MBO is a system aimed at achieving objectives of the organization, facilitating employee participation and making them more committed to the organization. It emphasizes clarity and balancing of organizational objectives and the participation of managers and subordinates with accountability for results.

Originally, MBO was born as a ‘driver of change’ and ‘enabler of corporate mission.’ Hence before explaining what I feel about the concept, it is important to briefly clarify what changes were brought by the MBO process to the then existing command control system.

In the command-control top down management system, organizational objectives are set by the top management and ‘handed down’ for activities/functional silos to achieve them. There was no consultation with the employees in the formulation of objectives. The objectives were often broad, general and organization-wise, rather than silos based. At times they specify an explicit time period (for goal achievement) but no “agreed system of feedback” back to the top management was seen. MBO changed this practice by introducing participatory objective setting by both the employee and the employer through the concept “Cascading Organizational Goals and Objectives.” Goals and objectives were set on all levels -strategic, tactical and operational- specifically. These collated objectives were a result of individual organization-wide member objectives where specific goals for each member has been identified with the input and agreement of each member. An explicit time period is also agreed upon to achieve the set objectives. The process is not complete unless feedback and evaluation is performed so that in the next wave, the process is improved and made more realistic. In setting Goals, MBO adheres to SMART (Specific, Measurable, Achievable, Realistic and Time related) methodology so that the goals are valid. In the command control organizational structure however, SMART was not methodologically applied.

Since its introduction in 1954, MBO concept has come a long way- from its original ‘driver of change’ outlook to a ‘goal setting and a performance appraisal system’ and then the most recent adaptation being the ‘project management framework’. For the following reasons, I believe that the MBO needs rethinking for it to survive (as the original MBO version rather than ‘project management’ etc) in today’s demanding and competitive business environment.

1. All Purpose Outlook

2. Performance Appraisal

3. Short term focus

4. Perception as a top-down command-and-control system

5. Target Fatigue

All Purpose Outlook : Due to lack of a coherent and singular definition on MBO, wide confusion prevails as to the real meaning of the framework.

“There is no other term in the vocabulary of contemporary management that is so inadequately defined as MBO[1]

It is clear that goal setting and performance appraisal is at the heart of MBO. However, the overall MBO framework is a much wider in concept. So much so that it has turned to an all purpose concept so that anyone can choose a relevant and a required meaning from it[2] and declare that they ‘now practice MBO’ (Instead, what MBO should strive to be is to be an effective management tool). This is a huge disadvantage in MBO as confusion of this nature would result in undoing all pre-set objectives to be evaluated in a non-uniform manner and lack of consensus across different functional silos-in turn leading to implementation issues. In other words, different members with different perceptions of MBO would understand the same organizational objectives in different ways especially as a result of expected future production volume overload, leading to issues in organizational objectives direction and implementation. In an MBO implementation study with Volvo car manufacturer[3] in 2005, it was reported

“Different interpretations of a seemingly clear objective, different views on both the rationale for and possible direction of the needed change and an increasing gap between middle and top managers are organisational responses to the demanding volume ambition[4]..”

  1. Performance Appraisal Douglas McGregor, proponent of Theory X and Theory Y, advanced MBO to a performance planning and appraisal system (HBR-1957), criticizing existing performance appraisal systems at that time. He suggested that subordinates should set short term objectives with the superiors based on MBO and when evaluation comes, they should be evaluated against their own agreed goals. After McGregor’s suggestions, MBO gained wider recognition also as a ‘performance evaluation and appraisal system’.

However, MBO is NOT a performance evaluation system. It’s focused on participatory objective setting at all three levels, and then at the individual level so that the organization is in continuous equilibrium with the competitive environment. MBO concept therefore aims to facilitate the overall managerial direction and control of the organization but NOT to act as an employee evaluation process per se. Thus, the performance appraisal aspect of MBO has been over-ranked and over emphasized to the extent that MBO is identified as a “performance appraisal” method with inclusion of such terms as ‘MBO-KPI’s, ‘MBO-matrices’ etc. In fact, the latest trend being “performance management” touted as the successor of MBO, which demonstrates the extent of MBO transformation from its original purpose. What is more important is that MBO itself is now fading in significance as a performance appraisal concept.

In a 2005 Australian research study, it was found that the popularity of MBO has dramatically declined by almost ten-fold and MBO is seen as a more ‘traditional’ performance appraisal system.

The primary types of systems reported in this study suggest that more serious attention is being given to the customisation of performance management schemes than in earlier studies. For example, MBO alone was by far the most dominant type of performance appraisal system in both the 1990 and the 1995 studies (70% and 68%, respectively), which is contrasted with only 7 per cent in this study[5].”

  1. Short term focus Goal setting is an important factor in motivating employees. To this end, MBO’s short term focus could be beneficial in employee motivation. However, if there is no back-up plans to continuously motivate the employees after the MBO loop is closed with ‘feedback’, the employee respect for the concept and the MBO system within the organization declines. In other words, MBO stands to lose its effectiveness if its solely designed for short ranged focus forgetting it as a ‘driver of change’. Thereafter, in the absence of a new cycle of an MBO, employees could become demoralized and begin to slack. However, this is prevented if MBO is set up for a long term focus, which is not how it’s applied since managers tend to get focused on the short term. However much the external environment becomes competitive, however much the short term flexibility is rewarding for an organization, it still needs to have focus on the long term (at least for the next 5 year period).
  1. Perception as a top-down command-and-control system MBO is a bottom up team based planning system, rather than a top down command control methodology. The members starting from operational level/first line contribute in goal setting. Nevertheless, in practice of MBO has become the prisoner of command control system of management. The key reason is that the executive anxiety of losing managerial powers. Therefore, the at the implementation levels, the MBO champions should ensure that functional silos within the organization should be given training on how MBO is actually implemented and that it is not a threat to their managerial power/status or the functions per se. The training should focus on how to integrate targets at the line level towards tactical and strategic planning.
  1. Target Fatigue Since MBO focuses ‘so much’ on objectives and goal setting, it has become mired in ‘targets’ resulting in ‘target fatigue’ for members, especially in production and manufacturing sectors. However, as mentioned earlier, MBO is, in essence, a driver of organizational change and not a mere goal-setting apparatus. Even in the above mentioned Volvo cars study, target fatigue of organizational members was reported as a negative outcome of MBO implementation.                                   (Except the Businessweek Graphic, Copyright by Joseph Thavaraja – www.ejoseph.org – 2008 September).


[1] Kirchoff (34, P17)

[2] Wikstrom (103, p1)

[3] The unintended consequences of management by objectives: The volume growth target at Volvo Cars-(2005)-by Fredrik Dahlsten, Alexander Styhre, Mats Williander-Leadership & Organization Development Journal, Volume: 26 Issue: 7 Page: 529 – 541

[4] Ibid

[5]Compton, R. (2005). Performance Management: Panacea or Corporate Outcast?, Research and Practice in Human Resource Management, 13(1), 46-54 (The study was undertaken jointly by the School of Management at Curtin University of Technology (CUT), the Australian Catholic University (NSW) and the Australian Human Resources Institute (AHRI), and was conducted by means of an e-survey posted on the AHRI website in mid 2003).