The Game of Arbitrage - II

I could hear words like VBM (Value Based Management), EVA (Economic Value Added), Cost Reduction, Value Creation very loudly from the direction where I saw two business managers in stylish suits having a hot discussion. I heard the one in blue suit saying; all our future decisions about capital allocation have to be based on the value creation criteria. Thus, we should know how to add value to our businesses and how to shift our strategic focus to realize higher value.

The other one in the brown suit said we have already adopted various best practices like Total Productivity Management (TPM), Total Quality Management (TQM), Business Process Restructuring (BPR), Six Sigma, and several other global best practices. We have robust governance practices and disclosure standards. We know our customers' needs better. We are actively doing international M&A and investing in future technologies. We have adopted a hybrid approach which seems in coherence with today's dynamic environment.

The one in blue suit remained silent for a while and then said every person, every organization and even government nowadays is a product of a coalition and the forces that are always at war. The war is between the Trivial Many and the Vital Few. The Trivial Many comprise the prevalent inertia and ineffectiveness. The Vital Few are breakthrough procession of innovation and effectiveness. However, the war is difficult to observe as it is the same person, the same unit and the same organization which produces both the forces. All we can see is the over all result i.e. the net effect of both the forces at work.

At the most, we only remove businesses that are most unpleasantly unprofitable whereas we put only minor efforts to increase the extremely profitable business. This is a dreadful compromise, based on our misunderstanding. We all say small is beautiful but complexity too is our sponsored thing. Believe me or not as we sponsor complexity, it also sponsors us. And, therefore we are skewed towards larger and complex organization instead of most profitable ones.

Each value seeking organization can become very much more valuable, but the crux of value creation is a process of innovation and substitution. The entrepreneurs shift the economic resources from low productivity areas to higher productivity areas. This same act is called Arbitrage by the modern financiers.

International Financial Markets are very quick to correct anomalies in valuation. For e.g. Exchange Rates. But the business organizations and individuals are generally found to be very poor at this sort of entrepreneurship or arbitrage, at shifting resources from low productivity usage to higher productivity usage, or at cutting the low value resources and buying the high value resources.

At first there is confusion as to what is more valuable and then there is resistance to change. It is easier to learn out of box thinking using popular nine dot puzzle but when it comes to reality and putting out of box thinking in practice, it is damn difficult.

Other said I don't believe you as today's business managers are smarter and they know how to solve nine dot puzzle using four lines, three lines and even one line.

I went ahead with my pad and pencil and asked the guy in brown coat to solve the new trick mentioned in The Game of Arbitrage -I , which he could not solve for next 2 hours.

I knew he was the same guy who resisted giving me 2 hours of his for sharing a revolutionary idea which could have reduced cost of monitoring risks and controls significantly for his multi unit organization.

Morale of the Story: Learn the Game of Arbitrage not just know the best practices.