Wednesday, December 29, 2004


This is actually not the book review of the famous economist Lester Thurow, but something very closely realted to his favourite subject-The American economy.These are some of the lesser known facts about the reatailing giant Wal Mart and how it could/is influencing the economy of the world's richest nation.It 's quite awesome that how a small retail chain of the 70's could go on to become the monolith which could control an entire eco system of supplier, distributor, and customers spread across the goegraphies of this world.

Some stats of WAL MART are as under:
  • 100 million: The number of people who shop at Wal-Mart's 3400 American stores every week.
  • 1.2 million: The number of Wal-Mart associates in the U.S. Any full- or part-time Wal-Mart employee, up to and including the CEO, is considered an "associate," in Wal-Mart parlance. Internationally, Wal-Mart employs an additional 330,000 associates.
  • 600,000: The number of new employees Wal-Mart hires each year. The company's turnover rate is 44 percent -- close to the retail industry average.
  • $256 billion : Wal-Mart's sales in 2003. In the words of Wal-Mart CFO Tom Schoewe, Wal-Mart's sales are equal to "one IBM, one Hewlett Packard, one Dell computer, one Microsoft and one Cisco System -- and oh, by the way, after that we got $2 billion left over."
  • $9.98: The average full-time hourly wage for a Wal-Mart employee. The average full-time hourly wage in metro areas (defined as areas with a population of 50,000 or more) is $10.38. In some urban areas it is higher: $11.03 in Chicago, $11.08 in San Francisco, and $11.20 in Austin.
  • $15 billion: The amount of Chinese products Wal-Mart estimates it imports each year; others suggest the number may be higher.As someone told, WAL MART'S JV WITH CHINA.

Tuesday, December 28, 2004

Repurchasing of Stock by the companies

Read an excellent article on "The Relationship between Employee Stock Options and Stock Repurchases".Perhaps the time is ripe for this issue of corporate governance to take a fronseat and the regulator to see that companies are not misusing this option.
The following excerpt from the article is given below;

While the intricacies of corporate accounting may be puzzling at best, the advanced statistics basically boil down to reporting how much a company earned and what factors affected those earnings.
There are two ways to calculate a company's earnings: basic earnings per share (EPS) and diluted earnings per share. To derive basic earnings per share, a company takes the amount of its earnings divided by the average number of common shares outstanding throughout the year. Diluted earnings per share, which will be lower than basic EPS, take into account all securities which can one day be converted into regular shares of the company. These convertible securities include warrants, convertible debt, and employee stock options.
In the late 1990s, employee stock option plans became an extremely popular way for companies to compensate their employees. These stock options usually form the largest percentages of a company's convertible securities. As a compensation tool, employee stock options make it easier for companies to pay their employees without expending cash and reducing earnings. When employees have the option of becoming shareholders of the company, the logical conclusion is that they will be more invested in seeing the company succeed and work harder to make the stock price go up.

Managers have substantial discretion to time their firm's stock repurchases, which increases diluted EPS. The authors sought to identify if and when firms were repurchasing their own shares to manage diluted EPS, and whether employee stock options played a role in these decisions. The issue is especially pertinent since repurchases are often portrayed as being good for the company. However, the authors argue that repurchases for the purpose of managing diluted EPS should have no real effect on firm value.
The authors find that managers increase the level of their firm's stock repurchases to offset the effects of securities such as employee stock options, which can decrease diluted EPS. Numerous articles in the financial press have suggested that managers repurchase shares to offset EPS dilution in response to employee stock option plans, and executives acknowledge that their decisions to issue and repurchase shares are influenced by potential earnings per share effects.
The authors also find that managers increase their firm's stock repurchases when earnings fall short of the level required to maintain the past growth rate of diluted EPS. This finding suggests that some EPS growth cannot be attributed to improved firm performance, but rather repurchase activity.
The study controls for several other motives often cited for repurchases, including distributing excess cash flow, signaling to offset perceived undervaluation, and releveraging the firm.
While stock repurchases may temporarily boost diluted EPS, these actions do not create any value for shareholders.
"Repurchasing your own stock for this purpose is like taking money from your left pocket and moving it to your right pocket," says Wong.
Bens adds, "The cash managers are using to buy back shares could have been put to better use. If there is no upside to repurchases to offset this dilution, and there is a potential downside, why do it?"

Managing Diluted EPS

Understanding stock repurchases requires understanding the incentives of managers. Managers are concerned about diluted EPS for the same reasons they are concerned about reported earnings. Investors tend to reward firms that report consistent earnings growth, meet analysts' earnings forecasts, and avoid earnings disappointments. However, using cash to repurchase shares means either reducing the firms' investments or increasing its borrowing, both of which reduce future earnings.
Part of the curiosity of a company repurchasing its own shares is the fact that such behavior does not create value for shareholders, though on the surface it raises the earnings per share.
In addition, managerial incentives may cloud the company's larger goals.
"Though some managers just want a short-term gain, we ideally want managers to care about the long term," says Wong. "If managers want to maximize long-term shareholder gain, there is no point wasting time and money to buy back shares in an effort to manage employee stock option dilution."

Precise Measurements

To clarify the underlying relationship between employee stock options and stock repurchase decisions, the authors used annual data for 357 firms classified as S&P 500 industrial firms for the years 1996 to 1999. They hand-collected data on total employee stock options outstanding for these firms as well as actual share repurchases per year.
Using each company's Form 10-K, the authors collected detailed data on employee stock options, and then calculated the dilutive effect of employee stock options on earnings per share.
Stock repurchases during the sample period averaged $301 million per year. The same firms granted an average of 28 million options per year to their employees, who in turn exercised 6.5 million options per year. On average, firms repurchase 2 percent of their shares outstanding each year, while employees exercise options representing 1 percent of shares outstanding.
After controlling for many other determinants of repurchases, the authors find that on average, firms repurchase 0.2 percent of shares outstanding for every 1 percent increase in the number of potentially dilutive common shares. In addition, the authors find that when earnings-the numerator of EPS-fails to grow at the historical growth rate, firms increase their repurchases by over 1 percent of shares outstanding to affect the denominator of EPS.
While previous research has addressed other rationales for stock repurchases, the study is the first to measure the real accounting effects of employee stock options.
"Our research shows that the reason stock repurchases increase is not because of employee stock options per se, but rather because managers attempt to adjust for the dilutive effects of these options by managing diluted earnings per share," says Bens.

For Consideration

Controlling for a number of alternate explanations, the results indicate that managers' repurchase decisions are driven partially by financial reporting incentives. The authors support the general view that accounting rules have economic consequences, in this case through their effect on managers' stock repurchase decisions.
While they are not opposed to stock repurchasing, Bens and Wong caution that the logic behind these repurchase decisions is not especially sound.
"Investors should be aware of how much managers are repurchasing to manage earnings per share," says Bens. "As a manager, I would be aware that it's a fool's game. You are not really creating value, but a lot of managers behave like they are."
The stock market may seem to reward these repurchase decisions with an increased stock price, but that should not be a reason for buying back stock if it has only a short-term effect. Bens notes that increasing a firm's stock price through repurchases is very different from true value-enhancing strategies such as finding new customers for the firm.
In addressing the larger issue of corporate governance, Wong notes: "The message for the board of directors is to keep its eyes open as to why managers want to buy back shares. Make sure the managers are not wasting time trying to buy back shares to manage earnings per share."

Research by Daniel A. Bens and M. H. Franco Wong

Friday, December 17, 2004


This is in for quite a surprise for the people who thought that PSU's are the worst performers when it comes providing reliable services to its customers.As we are moving towards a 'Services economy'(nearly 60% of our GDP would be from service based companies),the PSU have taken a lead over customer reliability index survey.Though the study is not very elaborative in nature, but it is not a surprise for me to find the financial institutions occupying the premier slots as they have always been reliable to its customers,though they were initially slow in adopting best practices and technology but since then they have tried to improve their image in a variety of ways by proper marketing and image makeover.Besides, its existence for so many years had also added to their reliability.
But it was surprising for me to see the inclusion of IIT's and IIM's.Truely so, they as brands have always delivered to their students(customers!) what they have promised.But hii, NIIT and Reliance Mutual Fund was quite a surprise for me though.Perhaps the survey couldn't find any other brand which could be listed as reliable!

India's Top 50 Most Trusted Service Brands 2004

1. LIC
2. State Bank of India
4. ICICI Bank
5. Bank of India
6. Reliance Indiamobile
7. Airtel
8. Central Bank of India
9. Punjab National Bank
10. Indian Bank
11. Indian Oil Corporation*
12. Indian Airlines
13. LIC Mutual Fund
14. Tata Indicom
15. Canara Bank
16. Union Bank of India
17. BPL Mobile
18. Taj Hotels
19. Pizza Hut
20. Orange/Hutch
21. Kendriya Vidyalaya
22. Bank of Baroda
23. UTI Bank
24. HDFC Bank
25. ICICI Pru
26. Syndicate Bank
27. HDFC
28. IIT
29. CBSE*
30. McDonald's
31. Cafe Coffee Day
32. Allahabad Bank
33. NIIT*
34. SBI Life*
35. Delhi Public School (DPS)
36. Oberoi Hotel
37. Sainik Schools*
38. MTNL
39. Citibank
40. Air Sahara
41. Reliance Mutual Fund
42. HDFC Standard Life Insurance*
43. Prudential ICICI Mutual Fund
44. IDBI Bank*
45. HDFC Mutual Fund
46. IIMs
47. Tata AIG*
48. SBI Mutual Fund
49. UTI Mutual Fund
50. Aptech*

*New entrant.

Source:-The Economic Times.

Monday, December 13, 2004

Top 50 Thinkers

There is an interesting piece of information which I came across recently.The study lists the greatest management thinkers of the present time based on certain parameters.The top 10 seems to throw no big surprises as such.But what the lists points out as well as the study poignantly describes the contribution of the American thinkers in the field of management which is vindicated by the presence of 70% of Americans in this global survey of thinkers.

There are two Indians in the study-the late Sumantro Ghoshal of LBS and the ubiquitous CKP,whose provocative thoughts have influenced the present generation and their firm belief that India is in the threshold of greatness (argued way back in the beginning of 90's) .In fact, there is only the venerable Kenichi Ohmae of Mckinsey from Japan who features among the list of visible asians in this study.It is really a shame that the largest continent and where three-fifths of the population lives could contribute only three thinkers in the list of fifty.Why does India with so many reputed management institutions have not even produced a single thought leader in all these years.(CKP is from the first batch of IIM-A,but I strongly argue that it could have never made him what he is today as there was hardly any research opportunity availablein India .Sumantro"World Class" Ghoshal worked as a trainee in one of the indian PSU and later moved on to LBS).This is perhaps linked intrinsically to the lack of research initiatives on part of the management institutes in India.These institutes can't exonerate themselves from the blame that they have failed to produce any thinkers in all these years of their existence.The story of the other management institutions(mostly private) is a pity.The corporates too are to be blamed as they have never looking towards management institutions as places of leadership,thought creators but just as a source of procuring good human resource capabilities.This has failed to create the type of bonding between the academia-industry which is prevalant in the US.Until we create such form of long lasting sustainable relationship, we can't expect to see any other faces in the next list of Great Thinkers.Lastly,Indians should remember that sitting quietly won't help and one has to go for self branding to make their thoughts heard.(Learn to promote from people like Tom Peters or Mr.Porter)
Of couse, not the say the Europeans fare no better.They have a strong representation from the Scandavian lobby(not incld Peter Drucker) and the famous Briton Charles Handy.It must also be wondered why the Europens are also lagging in producing great minds compared to the Americans.They seem to lack the American savvyness of generating ideas and writing books and participating in various events which could put them into limelight. There are some excellent work done by some of the independent institutions in Europe but to make yourself heard you do need to tell the world that you exist!

And lastly, I ponder how could Naomi Klien be listed among one of the top 50 thinkers,of course not questioning her contribution as a journalist as well as in the field of management too.And why are the names of people like Michael Cusumano or Lester Thurow missing? Any answers..

Thinkers 50 2003.
1 Peter DRUCKER 2 Michael PORTER 3 Tom PETERS 4 Gary HAMEL 5 Charles HANDY 6 Philip KOTLER 7 Henry MINTZBERG 8 Jack WELCH 9 Rosabeth MOSS KANTER 10 Jim COLLINS
11 Sumantra GHOSHAL 12 CK PRAHALAD 13 Warren BENNIS 14 Peter SENGE 15 Robert KAPLAN & David NORTON 16 Stephen COVEY 17 Edgar H SCHEIN 18 Chris ARGYRIS 19 Kenichi OHMAE 20 Bill GATES 21 Kjell NORDSTROM & Jonas RIDDERSTRALE 22 Clayton CHRISTENSEN 23 John KOTTER 24 Nicholas NEGROPONTE 25 Jim CHAMPY 26 Andy GROVE 27 Scott ADAMS 28 Richard PASCALE 29 Daniel GOLEMAN 30 Naomi KLEIN 31 Chan KIM & Renee MAUBORGNE 32 Don TAPSCOTT 33 Michael DELL 34 Richard BRANSON 35 Edward DE BONO 36 Ricardo SEMLER 37 Thomas A. STEWART 38 Geoffrey MOORE 39 Jeff BEZOS 40 Paul KRUGMAN 41 Lynda GRATTON 42 Alan GREENSPAN 43 Manfred KETS DE VRIES 44 Robert WATERMAN 45 Watts WACKER 46 Patrick DIXON 47 Geert HOFSTEDE 48 DON PEPPERS 49 Stan DAVIS 50 Fons TROMPENAARS

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Friday, December 10, 2004

I am Back

Hii this sounds like a sequel to Arnold's famous line but my entry isn't that devastating.Its even a surprise for me that I could accomplish what I had set out for days, a morning jog!Hope to keep this up with the same fervour in the near future.

Anyway, read a great article today which would actually drive to nuts all those venerable laptop guys (thank god I don't own one till date,clever of me isn't it?).Its really scaring guys,I know..but I never told you to get one,or did I?

Check out the story at;

Though, such studies are yet to be vindicated with proper research but it actually opens up hordes of opportunities for cos like Intel to actually come up with solution which could reduce power consumption and levels of heat dissipation by at least one-third.This has been one of those grey areas where much has been said but very little has actually been done.One of the major problems being faced by most of the users has been the low battery support and the heat generated while using the laptop.There are a lot of scope for small companies to address this issue as innovation on such fronts can come only from these smaller players as bigger players with ample resources are busy pushing their technology instead of delving into the potential of such innovations.

Thought for food-another idea for a great START UP.What are you people waiting for,got the idea now jump into the bandwagon!

Thursday, December 09, 2004

Back from the Sabbatical

Its been a long time since my last post and I will try to be as regular as possible.There have been a lot of events during the last few days and perhaps the hangover still persists.Anyway,the weather out here is awesome and really don't feel like getting up early in the morning,though promised my better half (my roomate) to go out for morning jogs from tomorrow as I am putting on a lot of weight.I am dead serious about it this time and I have actually drafted a strict regimen for myself(as always!)..oomph I am serious,ain't I?