Halo Effect, Narrative and Cultural Economy Approach to Management

The Halo Effect, Narrative and Cultural Economy Approach to Management and Financial Crisis, Financial Cycles and Managing Under Uncertainty in Contemporary Business

Topic 3: The Halo Effect, Narrative and Cultural Economy Approach to Management

The halo effect is fundamentally a way that mind is deluded into maintaining a coherent and consistent picture of a condition while reducing cognitive dissonance. This effect is being studied in psychology, social interactions and business world. In business world, this shown in condition when a company reach its financial success such as having a rapid growth or increasing sales and profit, their other performance for example the employee management, turnover and the way they handle its customer would be seen by others as positive success as well. In the same manner, when a company have a bad year in its financial performances, usually other people will see it as fault in the management handling.   

Rosenzweig mentioned about Lego cases in 2004 where the revenue is down by twenty five percent and lost $230 million for the year which is the worst in their history (2014). Public and the management blamed it into the product, Lego had deemed to stray from its core, it lost sight of its roots. It is believed that expansion tie-in with popular media such as Harry Potter, Star Wars, and another popular theme is blamed since it is straying for its core. For many years, Lego manufactured and sold construction building blocks for children and the tie-in expansion that started in 1999 has helped them to reach more revenue at that time and it is seen as a good expansion idea. As the profitability decreases, it had to give an explanation and the tie-in is to be blamed. However, months after Lego slanted that merchandising spin-offs is straying from its core, Mattel done the same thing for their Barbie line. This example showing the halo effects of same approach that give different impression under their financial success. When the profitability is down, the expansion that helped them before is deemed to be the fault.

The book (Rosenzweig, 2014) also give an example that it is not only the financial successes that can give impression on the Halo Effect. In customer support centre handling, the waiting time for complaint call that supposedly same for all calls is perceived by customer from the survey that it is longer for the complaint that cannot be resolved immediately. Though, when the complaint is resolved quickly, more customer think that their call is answered immediately.

Branding also works this way since customer have more confidence for new products if it is come from reputable company. It creates a Halos that customers are more likely to think favourably of the product or service even though it is new since the previous products proved the quality and our mind will infer it the same way for the new products or services offered. This bias is one of the effect that company pursue since if you get positive brand recognition, it means that the company will be able to market their product to the customer more easily.

To measure the performance of a companies, it is important to eliminate the halo effect that give the bias to really explain the cause of success of a business. However, there is no one way solution that can be applied to all cases to ensure business success. Every businesses have their own characteristic and approach that one company did and made them into a success might not be giving the same effect when it is applied to other companies.

In stock market, the halo effect is quite prominent. In 2014, there are 84 stocks that valued over ten times of its book value (Mackintosh, 2014). The price of the stock is fundamentally a trust that investor given to the company to produce future profit. Thus, story of the company such as news and other condition that give investor perception will affect the share price greatly.

In my previous company experience, good service and competitive pricing give the customer assurance for them to do repeat order. Since we have dealt with a wholesale of home electrical appliances (carrying products such as: rice cooker, water dispenser, hair dryer, mixer, blender, washing machine, iron, and stove) from business to business, the after sales service is very important. By prompt delivery service, returned goods handling, and decent customer service, we were able to create trustworthiness and able to maintain strong customer base. By providing a good track record, this increase the branding of the company.

Topic 4: Financial Crisis, Financial Cycles and Managing Under Uncertainty

To date, there are several financial crises that have happened and affected the world such as the dot com bubble in late 1997 to 2002, Asia financial crisis in 1997 to 1998, and real estate bubble in 2007 that triggered global financial crisis in 2008.

Dot com bubble started around 1997, peaked in 2000 and ultimately burst in 2002. The name dot com is derived from the speculation in internet technology companies that being the centre of the problem. When the internet grew rapidly to reach so far, so fast and to so many people, tech companies also growing at the same rate.

Investor started to get the hype and put a lot of money into them that driving the share price upwards. The discrepancy of the actual value and perceived value (share price) create a market bubble.

In March 2000, when the dot com bubble burst, in less than a month, a trillion $ shares value is lost (The Dot Com Bubble Explained in One Minute, 2016). For example: pets.com that was valued with over 300 million $ market capitalisation goes down to zero in less than one year and forced them to file for bankruptcy and get out of business. This also being further worsened by the 9/11 terrorist attack.

However, some companies able to survive such as Amazon that was valued at about hundred $ per share during its peak and went down to seven $ per share but able to climb back up until now and valued to be around 1500 $ per share (Macrotrends.net, 2019).

In my country, Indonesia, the effect of financial crisis is most prominent during the Asia financial crisis in 1998. This financial crisis started in Thailand during May 1997 with the speculative attack against Thai Baht. Thailand government lacked the currency reserve to maintain US Dollar-Thai Baht level and Thai Baht being unpegged against US Dollar. This unravel the chain reaction that halt Thailand’s economy and triggered massive layoffs in real estate, finance, and construction. Thai Baht devalued and lost its value of more than half as well as crash in Thai stock market resulting in Finance One, largest Thailand finance company until then, to collapse. This also being worsened by political instability from the resignation of Thailand financial ministry.

From then, the crisis spread to Southeast Asia and Japan in financial contagion. Thailand, Indonesia, Malaysia, Philippines and South Korea were the countries that are most affected and then followed by Hong Kong, Laos, Brunei, China, Singapore and Taiwan. The later group of countries had able to hedge their risk towards the crisis and only get a milder and shorter recession partly by their prompt government strategy management.

During that time, many corporations in Indonesia is taking a loan with US Dollar currency. It had been working well because in preceding years, ID Rupiah had strengthened against US Dollar and in line, their effective levels of debt and financing cost decrease. This changed in August 1997 when Rupiah came under attack. Rupiah dropped further from the fear of corporate debts, and mass sale out of Rupiah to buy US Dollar that decrease the value even further down by around 80 %. Rupiah that being traded on the level of 2,360 Rupiah before the crisis reached high time record of 16,000 Rupiah for each US Dollar.

The crisis in Indonesia did not only affect the economy but also triggered the political instability. Widespread riot happened in many parts of Indonesia such as Medan, Surakarta and its capitol city, Jakarta, during May 1998. The reigning president that have ruled for 32 years, Suharto, was forced to resign by public and vice president of B. J. Habibie replaced him.

In Malaysia, within days of Thai Baht devaluation, Malaysian Ringgit was heavily traded by speculators which decrease it values around 50 %. Malaysian prime minister imposed capital controls and fixed the Malaysian Ringgit to US Dollar. In 1998, this resulted in Malaysia to slump into recession.

In South Korea, there had been deterioration of macroeconomic condition in 1995 and 1996. Debt to equity ratios were very high and profitability very low among the large financial conglomerates. Here, the fall of Korean won is triggered by series of bankruptcies of the large conglomerates that had heavily borrowed in previous year for their investment projects. The string of bankruptcies started with Hanbo Steel in January, then Sammi Steel in March and the Jinro Group in April. In July, the Kia Group, the eighth largest conglomerates, was put under fiscal protection by the government. This string of corporate bankruptcies and financial difficulties in 1997 led to serious financial difficulties for the banks that had heavily borrowed abroad to finance the investment projects of the failed conglomerates. A number of these financial institutions were effectively bankrupt by the spring of 1997 (Min, B.S., 1999).

Initially, Korean Won is not affected as much by other currency depreciation. However, with financial contagion and the chain reaction of bankruptcy, it increased the dissatisfaction among the investor. Without effective international organisations to stabilise international financial vulnerability, it triggered mechanism to the panic and capital flight. As a result, value of Korean Won is decreased significantly to (38 %) in late 1997 and bring South Korea into financial and economic turmoil.

This Asia financial crisis is solved by intervention from International Monetary Fund (IMF) that provide short term emergency loan to the affected countries. 110 billion $ is estimated to be given in advance to Thailand, Indonesia and South Korea to stabilise their economies. In turn of the loan that being given by IMF, the countries are expected to follow strict conditions including higher tax and interest rates.

Until now some countries like Indonesia still struggle to repay their debt and rebuilding the economy. Even though the economic growth is back, the ID Rupiah to US Dollar has only been stabilised in 11,000 – 12,000 rate and never able to reach the level before the financial crisis again. But more or less, other Asian economies have recovered from this crisis especially South Korea and Malaysia that have enjoyed strong economic growth.

The global financial crisis in 2007 to 2008 is ranked as the worst global financial crisis after the great depression of the 1930s. It started by subprime loan that being introduced by US banks for poor credit rating people. This subprime mortgage is being given to people to buy houses even though they have no track record or ability to repay it back. The US banks argued that they expected that the underlying property will increase in value in the future and this type of loan will generate them more interest.

Many of the subprime loan that being given before the financial crisis is having adjustable interest rates back up by securities. This allowed them to start several years of mortgage payments with very low payment. After some years, the interest of this loan is being adjusted upwards and many of borrower could not afford it and become default with their payment. As this happens, the banks were confiscating the houses and tried to sell the real estate back to the market. While this happens, more and more houses coming into sales and drive the supply up. Since there are no demand to back it up, the property prices depreciated further.

The credit housing market had indirectly affected all other markets around the globe. The lenders developed strict policies for their credit facilities and hence decreasing the consumer spending. Demand for the goods and services decreases, less profit hence less investment and production.

The bankruptcy of Lehman Brothers in September 15, 2008, the world’s largest stock brokerage and investment firm is also one of the result of the financial crisis. This news shook the financial banking industries where many banks and investment firms that also hold Lehman issued securities try to save themselves. Beforehand, Freddie Mac and Fannie Mae that are government sponsored enterprises mostly invested and backed in real estate and property assets securities were also taken over by federal government. Other financial institutions such as Merrill Lynch, Royal Banks of Scotland (RBS), AIG were expected to follow before getting bail out from US government. During this time, Merrill Lynch is acquired by Bank of America.

This also have effect for other parts around the world. Since the securities that backing off the subprime loan is an intertwined chain network, when it fails, it also brings the entire network down. It is further followed by recession in some parts of Asia such as Singapore and Malaysia in 2009 and European debt crisis in late 2009.

The European debt crisis or usually also referred as Eurozone crisis or Europe sovereign debt crisis happened because some of the countries (Greece, Portugal, Ireland, Spain and Cyprus) were unable to repay their government debt without assistance from third parties such as other European Union (EU) countries or European Central Bank or IMF.

It began at the end of 2009. The peripheral eurozone member countries of Greece, Spain, Ireland, Portugal and Cyprus were unable to refinance or repay their government debt or bail out their beleaguered banks without the assistance of third party financial institutions such as the European Central Bank, the IMF and the European Financial Stability Facility (EFSF). EFSF is created in 2010 by voting of seventeen eurozone countries specifically to address and assist the European sovereign debt crisis.

The European sovereign debt crisis peaked in 2010 to 2012. In 2009, Greece revealed that its previous government had grossly underreported its budget deficit, signifying a violation of EU policy and spurring fears of a euro collapse via political and financial contagion. The size of the debt is larger than the country’s GDP at that time.

A 2012 report for the United States Congress stated, “The eurozone debt crisis began in late 2009 when a new Greek government revealed that previous governments had been misreporting government budget data. Higher than expected deficit levels eroded investor confidence causing bond spreads to rise to unsustainable levels. Fears quickly spread that the fiscal positions and debt levels of a number of eurozone countries were unsustainable.”

In 2010, with increasing fear of excessive sovereign debt, lenders demanded higher interest rates from eurozone states with high debt and deficit levels making it harder for these countries to finance their budget deficits coupled with overall low economic growth. Some affected countries raised taxes and slashed expenditures to combat the crisis, which contributed to social upset within their borders and a crisis of confidence in leadership, particularly in Greece. During this crisis, several of these countries including Greece, Portugal, and Ireland had their sovereign debt downgraded to junk status by international credit rating agencies, worsening investor fears.

In early 2010, the developments were reflected in rising spreads on sovereign bond yields between the affected peripheral member states of Greece, Ireland, Portugal, Spain and, most notably, Germany. The Greek yield diverged in early 2010 with Greece needing eurozone assistance by May 2010. Greece received several bailouts from the EU and IMF over the following years in exchange for the adoption of EU-mandated austerity measures to cut public spending and a significant increase in taxes. The country’s economic recession continued. These measures, along with the economic situation, caused social unrest. In June 2015, Greece, with divided political and fiscal leadership, faced sovereign default.

The following month, the Greek people voted against a bailout and further EU austerity measures, which raised the possibility that Greece might leave the European Monetary Union (EMU) entirely. The withdrawal of a nation from the EMU is unprecedented, and the speculated effects on Greece’s economy, if it returned to using the Drachma, ranged from total economic collapse to a surprise recovery. The Greek economy is still highly uncertain with unemployment rate at approximately 21 % in 2018 and a shrinking GDP as of 2016.

A combination of market volatility triggered by Brexit, questionable politicians and a poorly managed financial system worsened the situation for Italian banks in mid-2016. A staggering 17 % of Italian loans, approximately $ 400 billion-worth, were junk, and the banks needed a significant bailout. A full collapse of the Italian banks is arguably a bigger risk to the European economy than a Greek, Spanish or Portuguese collapse because Italy’s economy is much larger. Italy has repeatedly asked for help from the EU, but the EU recently introduced “bail-in” rules that prohibit countries from bailing out financial institutions with taxpayer money without investors taking the first loss. Germany has been clear that the EU will not bend these rules for Italy.

Ireland followed Greece in requiring a bailout in November 2010 with Portugal following in May 2011. Italy and Spain were also vulnerable. Spain and Cyprus required official assistance in June 2012. By 2014, the situation in Ireland, Portugal and Spain had improved due to various fiscal reforms, domestic austerity measures and other unique economic factors. However, with an emerging banking crisis in Italy and the instabilities following Brexit, the road to full economic recovery is anticipated to be longer.

References

• ‘1997 Asian Financial Crisis’ (2019). Wikipedia. Available at: https://en.wikipedia.org/wiki/1997_Asian_financial_crisis (Accessed 5 Jan. 2019).
• Kenton, W. (2018). European Sovereign Debt Crisis. [online] Investopedia. Available at: https://www.investopedia.com/terms/e/european-sovereign-debt-crisis.asp (Accessed 5 Jan. 2019).
• Mackintosh, J. (2014). Story stocks tell tall tales. [online] Ft.com. Available at: https://www.ft.com/content/461dcebe-98c3-11e3-8503-00144feab7de#axzz3aVkVAYbr (Accessed 29 Dec. 2018).
• Macrotrends.net. (2019). Amazon – 22 Year Stock Price History. [online] Available at: https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-price-history (Accessed 3 Jan. 2019).
• Min, B.S., 1999. South Korea’s Financial Crisis in 1997: What Have We Learned?. ASEAN Economic Bulletin, pp.175-189.
• Rosenzweig, P. (2014). The halo effect, how managers let themselves be deceived. London: Simon and Schuster UK.
• The Dot Com Bubble Explained in One Minute (2016). Added by One Minute Economics [online]. Available at: https://www.youtube.com/watch?v=5ksVshqVuiM (Accessed 30 Dec. 2018).