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Strategy & the zero-sum game
Ajoy Nair | March 06, 2006
If the stock market has you running around in circles, here is a fun way to see whether you are getting more bang for your buck.
Businesses create value as fast as they destroy it through strategic decisions that were once perceived as success factors, which in retrospect are often termed as misconceived.
This raises a question, are strategic decision successes in the end a zero-sum game? Consider this. The Government of India as an investor in the Oil and Natural Gas Corporation (ONGC) raises the price for the crude supplied to Indian Oil Corporation Ltd (IOCL) where the government has a stake.
IOCL, in turn, refines the crude into petrol and distributes this through IBP, another company with some government stake. The bureaucrat working for the government in either of these companies buys the petrol as a customer. So, this makes the government a stakeholder across the profit chain!
Thus, if ONGC makes a profit through this price increase and the government receives dividend, would the government as a shareholder have maximised its wealth at the cost of minimising its wealth from their other investments?
Would this strategy not, in the long run, lead to a zero-sum game? This explains more emphatically than ever, that all successful strategies in the long run are a zero-sum game. The necessity for businesses to formulate proactive strategies rather than drift into a game plan that is a by-product of its overall business approach is undisputed.
The need to link decisions in a coordinated manner across the organisational fabric is universally recognised. These decision-making processes and the subsequent actions that determine how or why organisations excel, survive or fail has been intensely debated in both the academic and the business world.
This includes identifying key success factors, the determinants of competencies which in turn lead to business models that reason as to why organisations succeed as much as they fail.
Business success is ultimately financial success, and this is even more apparent today, despite what strategic thinkers profess being not the only base measurement of performance. The only universally established quantifiable measure of business performance is profit.
This is debated as a measure of success but rarely debated as a measure of failure. It is in this context that strategic success can become the ultimate zero-sum game. Prefixing the term 'strategy' before every functional discipline taught in B-schools is probably never given as much forethought, as to what practitioners in business encounter in real life operations.
Daily business chores often precede forward strategic thinking, theoretically prescribed. This further reinforces the necessity to rethink successful strategy formulation and implementation as necessarily a zero-sum game.
Rambling through concepts and practices, taught, as key success business practices would emphasize the need for organisations to realise why this radical departure gains relevance for a strategic thinker and implementer.
Just-in-time is a philosophy of operations management that essentially focuses on eliminating waste. The approach strives for zero inventory, zero employee non-productive time, zero defects and so on. This makes business sense and more appropriately finance sense. It is undisputed that inventory can be viewed as an expensive waste, as it represents idle resources that incurs a cost for holding it.
Therefore, a strategic decision for any business is to make available parts for their processes at the right time and the right place, that is 'just-in-time' to be used. An integrated management process is a solution, with small inventories to provide as a buffer for successive processes, which is strategically termed as the implementation of a pull system when an upstream process would not produce something that the downstream process does not need.
This works perfectly, provided uncertainties do not exist at both the upstream as well as the downstream levels.
To illustrate this, take for example a scooter manufacturer. If the scooter manufacturer's business process is considered as a stream or a chain, the supplier of components or parts is at the beginning which is the upstream and the customer at the end is the downstream.
Whenever the customer or the downstream, adopts a 'just-in-time' purchase decision the manufacturer necessarily has to stock the scooters to meet this demand, and this would lead to a stock pile up of inventory, given the competitive nature of today's business and the uncertainties in the customer's decision both in numbers and time.
This results in the upstream inventory stocking decisions a 'just-in-case' with large buffers built to combat uncertainties.
Thus, if the scooter manufacturer has to reduce or rather minimise in-process inventory pile-up, he consequently tries to minimise his upstream inventory pile-up and thereby extending their problem to their component supplier, say a cable harness supplier. The supplier of this component in turn would need to hold inventory or adopt a 'just-in-time' by transferring this to their upstream supplier, say the copper or PVC supplier and so on.
Another example could be a paper manufacturer. He needs pulp and the pulp manufacturer needs lumber, and this is from a tree, so the forest bears the inventory! Thus every stream necessarily has an ultimate end as much as a beginning where somewhere, someone needs to ensure that inventory is available to meet the 'just-in-time' demands midstream.
In the long run as uncertainties loom large and the stream extends further with technological advancements, the situation would tend to regress towards a 'zero-sum' for all, when a perceptible win-win situation emerges in the short run.
Stock market decisions
Investment analysts are everywhere and we do encounter strategic investment advisors who would probably always advise what one would want to hear. Their advice stems from being authoritative, assertive and often in a language that borders on exotic terms of market situations and dynamics.
Strategic decisions in a bullish market and conversely in a bearish market are well laid out to potential clients and their advice is often the source of several success stories. Stock market advises and consequent profiting stems from three basic decisions: hold, divest or buy.
A student of stock market dynamics is often intrigued when analysts advise a strategic sell decision, the presumption in such cases is that someone is willing to buy. It also means that if such advise is incorrect, it would be the buyer who would end up gaining from it at the seller's expense.
If this cycle repeats in succession over lengths of time, no one gains and therefore a resultant zero-sum. Supplementary theories of economics, information asymmetry, the utility of money as well as behavioral sciences aid the analysts in further substantiating claims of success or failure.
A different perspective sometimes exemplifies these stock market forecasts and explanations of success. Stock market forecasts are varied in format, incomparable in design and content and therefore different people act differently as they necessarily cannot act on all of them. Those who act on these strategic investment advices and fail more often than not are quiet about their experiences.
There are others who would do well, and proclaim their experiences as determined by their strategic decisions, bringing in more people to join the race and a new strategy emerges and thrives till it is a failure.
Shareholder wealth maximisation
The fundamental tenets of finance or the objective for any strategic business decision is to augment the wealth of shareholders. The objective has merits considering that the shareholder is the residual claimant in the profit chain.
Unlike the value chain in an organisation, the customer is upstream in the profit chain with the shareholder downstream as the residual claimant to the profits.
Capital is a scarce resource and its mobilisation is a key factor in today's business world and the need to tap a large mass base becomes increasingly necessary. For large organisations this has resulted in an increasing shareholder base. However, today a distinct class of shareholders that is primarily ownership 'motivated' is diminishing.
Further the shareholder today, in a large company, is more often than not a 'stakeholder' in the profit chain. We have stock options for employees, lenders invest in stocks of companies, and companies exist where the government too have a stake in the 'ownership'. The objective of the stakeholder in the profit chain would necessarily conflict with their objective as a shareholder in the same chain.
Thus maximising shareholders wealth as a strategic objective takes a different dimension and meaning. Profit maximisation would be therefore be theoretically possible by maximising the contribution from the customers or minimising the returns to the other stakeholders. In this context if the stakeholder is also a shareholder in the profit chain, would this in effect in the long run lead to a zero-sum game?
Strategic thinking is a much-pronounced phrase, and often trumped as the only panacea for success. However, measuring its success complicates it. A recognition that success if measured with the same parameter as failure, would be more comprehensible if business decisions are ultimately viewed as zero-sum games.
In other words, no one stands to gain and in the short run if one does, it's at the cost of the other. This is some food for thought for strategy formulators and reviewers.
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Published with the kind permission of The Smart Manager, India's first world class management magazine, available bi-monthly.