Help, I Have No Financials!

IB Business.

Obtaining financial data from companies can be tricky. Some companies oblige, others don´t, or they may give you some financial data but not very much. However, if you want a high mark for your HL coursework, it is recommended to try and do some financial analysis of your chosen company.

Why is getting financials tricky?

  1. The company may not be doing very well financially, and it does not want the whole world to know about it.
  2. It may not want competitors to see their financials, for obvious reasons.
  3. The numbers may reveal how much income the owners of the company make from their business, which is personal information.

Here are a few tips to help you increase your chances of obtaining financial data.

Say upfront, when you first contact the company, that you will need to have some financial data. If they say that this is not possible, move on to another company. This is a good strategy, if you have a wide choice of companies who could be the subjects of your research.

What happens if you don´t have a wide choice of possible companies? In this case, when first approaching your company don´t mention the need to have financial data. Talk vaguely about the need to collect ´information´ . Develop a good rapport  with your contacts in the company and wait until you feel that they trust you, before broaching the subject. This could be after the third or fourth visit. They should be more likely to say yes.

Even after all this, what happens if they still say no?

It´s not the end of the world! Your response should be:-

“OK, fine, I fully understand. Financials are sensitive. However, would it be possible to give me some financial information?  It does not have to be the actual numbers, but maybe percentage changes in certain variables, such as revenues, important costs, liabilities, assets  etc”.

In other words getting some information is better than none. And some of the best coursework my students have done has been when they have obtained some financial information and then, in the process of  analysing and evaluating this information, they have made ´guesstimates´about the missing data. As long as those guesstimates are based on good assumptions, further research and solid reasoning, you will be positively rewarded by the examiner.

 

 

 

 

Choosing Your Company – HL Coursework.

IB  Business.

If you don’t choose the right company for your HL Internal Assessment, then this could hamper you from the start. I give my students the following advice:-

  • Select a company that is quite small, ideally between 20 and 75 employees.
  • Choose one in which a family friend or family aquantance works, or one that has a conection with your family.  
  • Do not choose the company  that your parents work for.
  • The company should be in easy travelling distance from your home. 

Why this advice?

Smaller companies are much easier to navigate around, and to collect primary data from. Large companies, particularly multinationals, are notoriously bureaucratic, and it can be very time consuming getting permission to visit, or getting permission to talk to the right person in the right department. You will need to collect all your data during relatively few visits over a short short time span, three or four visits maximum. This is easier to do with a small, rather than a big company. Students can also get overwhelmed with the complexity, and the amount of secondary data that they are given by large companies.

With regard to the second bullet point, it is very hard to approach companies  ‘blind’  – you need to have a contact in the company to help facilitate your visit. You need a ‘foot in the door’ as it were.

Don’t choose the company that your parents work for. It can be quite hard to be objective about an organisation that your Dad founded, or your mum is the CEO of! Remember, the point of the IA is to critically evaluate the organisation. 

You may have to make multiple visits to your company so that it should not be too far away.

Amazonian Rainforest Fires.

I.B. Economics.

The recent Amazonian fires here in Brazil and their potential impact on global warming got me thinking about the role of economics, and how economic theories and models may be complicit in the process of environmental destruction and global warming. Do our models factor in the environmental impacts of economic activity, or do they ignore them?

Many analysts think that they ignore them and that new ways of thinking about the role of the economy and it’s connection to the environment are needed. One of these analysts is John Fullerton, an ex-Wall Street banker who has founded the Capital Institute, a non-profit organisation whose aim is to completely rethink our economic and financial models with a view to making them much more responsive and attuned to how they impact our environment.

“ This search first opened my eyes to the profound, interlocking crises we are now facing – ecological, economic, and social – including the shocking prospect that we are destroying the planet’s ability to support life as we know it. My most startling discovery, however, was that the modern scheme of economics and finance – what Wall Street “geniuses” (like me) practiced so well-formed the root cause of these systemic crises”
John Fullerton, Ex-Wall Street Banker

A major criticism of traditional economics is an obsession with economic growth. Maximizing economic growth is an important macroeconomic policy objective for most governments, but this usually has considerable negative environmental impacts.

Amazonian Production Possibility Frontier – The Trade-Off Between Economic Growth and Nature.

Jair Bolsonaro, the controversial new Brazilian President, wants to ‘develop’ the Amazon by encouraging more production of meat, soya and timber. In other words, using the PPF diagram above,  he wants the Brazilian economy to move from point e to point f on the above PPF. The opportunity cost of these policies, however, will be less rainforest as shown by the movement from A to X on the horizontal axis.

Brazil is in the process of recovering from one of its worst-ever recessions and Bolsonaro sees Amazonian ‘development’ an opportunity to dig the economy out of the recession. The Amazonian region is also one of the poorest in Brazil and any development of the region could pull many of its inhabitants out of poverty.

However, the Amazon rainforest plays a crucial role in regulating the world’s environment; it contains twenty per cent of the world’s animal and plant species, its plants hold ten years worth of carbon emissions,  and it helps regulate the precipitation cycle of the whole of South America. Extensive deforestation of the Amazon would have incalculable impacts on South America’s ecosystem and would sharply accelerate global warming.

 

 

Brazil’s Labour Laws Reformed.

IB Business & IB Economics.

For the first time since 1945, as from today, November the 11th, 2017, new labour laws come into force in Brazil. The new laws have been welcomed by the business community, who feel that the laws bring Brazil’s labour market into the 21st century, but many, including  the Trade Unions and the poor, have protested against the changes.

In economic language these types of changes are often referred to as ‘ making the labour market more flexible’. In economics it is an example of a ‘ market based supply side policy’ the aim of which is to  increase economic growth and shift the long run aggregate supply curve of the economy to the right (see below).

 

Agg. Supply Curve Shifting Right.

The laws make it easier for companies to hire and fire workers, allow companies to use their workforce in more flexible ways, which will cut the cost of labour for many businesses. However, they are controversial and some feel that Brazil’s poor will be worst hit by the changes.

It is difficult to summarize all the changes to the law in such a short blog, but here are some of the highlights:-

  • It will be easier and less expensive to hire and fire workers. 
  • Meal vouchers, medical insurance, bonuses and travelling expenses will no longer be classified as ‘ employee remuneration’ as they are now.
  • Compulsory union contributions have been abolished. They will be voluntary from now on.
  • Allowing companies to split their employee’s vacation time into three separate periods. Previously holidays had to be taken over one period of 30 days per year.
  • From now on employers will not pay their workers overtime if they stay on at their work premises  because of poor weather or unsafe conditions.
  • Time spent travelling to work is no longer considered as ‘ working hours’. In the past it was.
  • Employers can now bargain directly with their workers to set pay and conditions, rather than with a Trade Union.
  • It will be easier to hire  workers on different types of contracts – part-time , remote workers (working from home) and intermittent workers.
  • Companies with 200 or more employees will have to set up a Worker Representation Committee.
  • Outsourcing will now be allowed , even for ‘core business’ functions. Previously it was only allowed for peripheral business functions like catering and security.
  • ‘ Equal pay for equal work’  rules will be more flexible. Previously workers working on different business sites, or even in the same city, could claim equal pay for equal work. Now it will be restricted to workers only working on the same site.

Sources.

https://www.latlegal.com/2017/08/brazil-labor-reform-what-you-need-to-know-about-law-no-134672017/

http://www.bbc.com/news/world-latin-america-40577868

Labor Newsletter: Mayer/Brown/Tauil/Chequer.  Labor Law (“Labor Reform”) – Federal Law No. 13.467/2017,  July 20th, 2017. 

 

Business Internal Assessment (SL) – It’s All In the Secondary Data, Stupid!

I.B. BUSINESS.

Unlike the HL internal assessment in IB business, which emphasises collecting primary data,  the emphasis in the SL internal assessment is on collecting secondary data. Primary data is data that you collect yourself, using interviews, surveys, questionnaires etc.  Secondary data is data that someone else has already collected or assembled for you. Examples are business reports, articles in the news media, information on company websites and Annual Reports. For this reason, the SL internal assessment is quicker and easier to do, because you have the data all there at your fingers tips, as it were.

Here is the assessment criteria for the supporting documents:-

Criteria A: Supporting Documents

A number of things need to be noted here.

  • Don’t select documents that are more than 3 years old
  • Ensure documents are translated into the language of submission, if they are written in a different language.
  • Include a minimum of 3, and a maximum of 5 documents. And don’t exceed the maximum!
  • They must be relevant, in-depth and must ‘provide a range of different views’.

By ‘range of different views’ it means that the documents must illustrate  different view points and opinions about the company or issue / problem that you are studying. So, for example, if all your data sources come from the company itself i.e. are all internal to the company, such as Annual Reports, marketing documents, the company website etc. then it is likely that you are going to be reading data that is biased in favour of the company and it’s activities. This may hinder your ability to really objectively analyse and evaluate the company, its strategies and the issue that you are studying. 

So it’s important to get documents that are not just internal to the company, but also ones that are external as well.  These should be more balanced and critical of the company. 

Prior to my students starting their research, I give them this document to help them collect a wide range of data sources (see below). I ask them to collect as many different internal and external sources of data as they can on the company or problem / issue they are studying prior to them writing their internal assessment.

Checklist for Supporting Documents

Price Elasticity of Demand.

 ECONOMICS.

If the price of a product falls, by how much will demand increase ? By a small amount or a large amount ?

This question is a very important question in economics. The magnitude by which demand (or supply) changes when price changes is very significant. If you were a business executive, for example, you would want to have an idea of how much demand for your product will increase by, if you decided to lower it’s price. Alternatively, if you were a government official and you wanted to place a tax on cigarettes, you would want to know how much tax revenue you would earn by doing this. Understanding elasticity of demand of the product would give you an idea.

The elasticity of demand measures the amount by which demand changes when the price of a product changes  (the ‘sensitivity’ of demand). If the change in price was very small, but the change in quantity demanded was large, then we say that the demand for the product is very elastic (very sensitive). If the opposite were true (the change in price was very large but the change in quantity demanded was small) then we say the demand is inelastic (insensitive).

Elasticity of demand is measured using the following formula:-

PED

If the answer to the above equation was <1 then demand is said to be inelastic.

If the answer exactly equaled 1, then elasticity of demand is said to be unitary.

If the answer were >1, then elasticity of demand is elastic.

For example, if in the above equation the change in quantity demanded was 20%, and the change in price was 10%, then demand would be elastic. (20% divided by 10% equals 2, which is greater than one ).

Working out the ‘percentage change’ in something can sometimes be difficult. Another way of formulating the above equation is to break it down even more. To work out the percentage change in a variable you use the following formula:-

Change in variable/original value of variable × 100

Substituting this into the above equation, you get:-

PED1

Another way of formulating the above equation is to write it like this:-

PED2

Use what ever method of calculating elasticity of demand you feel most comfortable with. As long as you use the formulas correctly, you will always come up with the correct answer !

Note.

Technically, all formulas for calculating elasticity of demand should have a minus sign in their answer. This is because changes in demand and changes in price always move in opposite directions. If the price of a product falls, then quantity demanded increases (change in price is negative, change in quantity demanded is positive). In practice, economists usually don’t bother to put in the minus sign.

Exercises.

Do these exercises to practice the PED calculation. Work out the elasticity of demand for the following examples:-

1) The price of apples rises from $4 to $5. Quantity demanded falls from 340 kg per week to 300.

2) The price of cinema tickets rises from $11 per seat to $14. Demand falls from 2000 seats to 1800 per week.

3) The price of copper rises from $3400 per tonne to $4800. Demand falls from 800 tonnes per week to 200 tonnes.

4) Demand has risen from 33,500 units to 45,000 units because prices fell from $3.2 to $1.6.

5) The price of fuel fell from $ 6 to $4 per litre. Demand rose from 12,000 litres to 16,000 litres.

6) What do you think determines the elasticity of demand of a product ? Why are some products more elastic than others ?

Click here to see the answers.

Executive Pay and Donald Trump.

IB BUSINESS & MANAGEMENT AND IB ECONOMICS.

From ‘Brexit’, to the election of Donald Trump as US president, a number of recent world events have surprised and shocked many people.

Can we link anything on the IB Economics and IB Business & Management syllabuses to these profound changes in politics, society and economics? Can business and economics explain anything about these happenings?

Of course it can!

Let’s look first at executive pay (Section 2.4 of the Business syllabus, salaries and remuneration) . As Ha-Joon Chang points out in his masterly book “23 Things They Don’t Tell You About Capitalism“, the salaries (or more accurately the compensation packages) of senior US company executives has increased dramatically over the past few decades. In Chapter 14 of his book, “US Managers Are Overpriced”, Chang produces some astonishing statistics to back up his claim in the title of the chapter. He says that in the 1960’s the ratio of CEO compensation to average worker compensation used to be in the region of 30-40 to 1; in the 1990’s this ratio rose to about 100 to 1, and in the 2000’s to an astonishing 300-400 to 1 (P150).

How do economists explain such a huge rise in executive pay in US corporations? Demand and supply of course!  (Section 1 of the syllabus, Microeconomics) The reason why executive salaries have risen so high, they say, is that the demand for such skilled and able managers far exceeds their supply. Companies have to pay these managers such high salaries because,  if they don’t, they would be poached by their competitors. Moreover, these high salaries just reflect the ‘ contribution’ (read productivity) that these executives give to the companies that employ them.

Chang comprehensively debunks this argument. He points out that it is mainly neo-classical, or free-market economists (Section 2 of the syllabus, Macroeconomics), who believe this. US Executives would have to be ten times more productive than equivalent personnel just a generation ago and this is extremely unlikely (P151).

Moreover, why have average US worker wages remained stagnant? Is this because their productivity has remained unchanged over the past two or three decades? Again highly unlikely, says Chang (P152).

Real Average Hourly Wages, USA.

(https://www.epi.org/publication/a-decade-of-flat-wages-the-key-barrier-to-shared-prosperity-and-a-rising-middle-class/)

The diagram above shows how the average hourly wage growth of the richest people in the US population has increased dramatically since the beginning of the century, whilst the wages of lower income groups, the 20th and median percentiles,  have fallen.

Chang also points out that US executives, in comparison to their foreign counterparts, are excessively paid. In 2005, Swiss and German CEO’s were paid 64 and 55 percent of their US counterparts’ salaries; Swedish and Dutch CEO’s were paid 44 and 40 percent respectively, and the Japanese a measly 25 percent (P152).

So what has all this got to do with the election of Donald Trump? A lot. Trump ran on a ticket saying that he was going protect the American middle classes and the jobs of working class Americans. He fed off the justifiable anger that many middle class and poor Americans feel about the stagnation of their wages and the consequent fall in their living standards.  He used the language of ‘them and us’ –  it is us against the ‘global elite’.

Who is this ‘ global elite’? According to Chang, it is composed of super-wealthy business executives, who for years have paid themselves bigger and bigger salaries and better and better compensation packages at the expense of their own employees (and indeed of their own citizens and own societies).

“ The power of this managerial class has been most vividly demonstrated by the aftermath of the 2008 financial crisis. When the American and the British governments injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers responsible for their institution’s failure were punished. Yes, a small number of CEO’s have lost their jobs, but few of those that have remained in their jobs have taken a serious pay cut…” (P155).

 

Market Failure & Development.

I.B. ECONOMICS.

The second educational podcast in a series of three that looks at the  Section 4 topic of Development, in particular at the question of ‘the balance between markets and government intervention’  (Section 4.8).

Click here to see the first in the series.

Should governments intervene a lot in markets and in that way boost or accelerate development? Or is it better for them to leave markets alone and take a ‘stand off approach’?

What happens if, as is often argued, market failure in poor countries is much greater than in rich countries? Should governments intervene more because of this?

This podcast explores the issues of why market failure is higher, and whether or not the government should therefore intervene in markets because of this.

 

How To Synthsize and Evaluate.

I.B. BUSINESS & MANAGEMENT.

If you want to get top marks on your IB Business & Management course you have to be able to synthesize and evaluate well. It is classified as a ‘ higher order skill’ and so gains high marks for students who can do it well.

So what is it,  how do you do it and when do you need to do it?

It is one of the courses’  ‘Assessment Objectives’, AO3 in particular.

According to the syllabus, synthesis and evaluation:-

“ …..require students to rearrange component ideas into a new whole and make judgments based on evidence or a set of criteria”. (P21 Business & Management syllabus.)

Synthesis is the process by which a seemingly disparate set of ideas and concepts is brought together into a simplified whole. Evaluation involves making a balanced judgement based on evidence.

What do you need to apply it to? Business strategies and practices or decisions. It requires critical thinking and formulating recommendations at the end of the process.

Examples of the type of decisions might be a business:-

Launching a new product, entering a new market, deciding to downsize and delayer,  implementing a new production process, or deciding to merge with another company. The possible scenarios are endless.

When and where do you need to do it? Whenever you see the following ‘command terms’ in the exam:-

commandterms
Evaluation Command Terms

And in these sections of the exam and internal assessment:-

evalibbusiness
Evaluation in the exams and coursework.

How do you do it? Well it is quite hard, especially under the limited time of examination conditions,and requires practice.

A number of approaches can be taken:-

  1. Focus on the different stakeholders in the business – investors, employees, shareholders, suppliers, the local community etc.  Which ones benefit and lose out from the decision or strategy and why? What are the short and long run effects on these stakeholders? List the stakeholders from most affected, to least affected and why.
  2. Focus on how the different functional departments are affected by the decision or strategy. The Marketing, Finance, Operations (Production) and Human Resources departments. How will they be affected by the strategy? What policies will they need to implement and will this be positive or negative for the company?
  3. Focus on the impact of the decision or strategy on the company financial statements, the Profit & Loss Account, the Balance Sheet and the Cash Flow Statement. Will the decision increase or decrease revenues and costs (the Profit & Loss Account)? Will it have a positive or negative impact on working capital or on the overall valuation of the company (Balance Sheet)? Will it increase or decrease net cash flow (Cash Flow Statement)?

As you can see, this is quite a difficult thing to to do, but is possible with lots of practice!