Economy & Credit Empire

Adaptors to change can be further divided by the rate with which they adapt to change: fast, medium, or slow. Each group uses a slightly different strategy when managing its internal change behavior and requires different sorts of information in order to move toward accepting change.

Fast adaptors are not afraid of change and in general view it as a positive. Although they are not “change junkies” like initiators, they tend to quickly analyze the change event and determine how their needs are going to be met. Once they have figured out how they will fit in during and after the change event, they adapt quickly. Fast adaptors tend to be optimistic; they also tend to require higher level information such as vision and mission to assess their future role in the change. Once they accept the change, they move quickly to implementation and can act as change champions within the partnership.

Medium adaptors are the largest segment of the population and the key group for management to support during a change event. The change managers must provide as much strategic information to them as possible, as medium adaptors like to know the specific strategies of the change and how those strategies will impact them and their work. They need more information about the change event than fast adaptors and tend to be less resistant to change than slow adaptors. Medium adaptors do not rush to embrace change—they tend to sit on the fence until they see how the change can help them get their needs met. However, once they accept change, they will move to implement it without putting up roadblocks.

Now that you have a plan for dealing with the change, you’ll want to implement it. Building a commitment to the change process is the strategy that works best. You’ve done your homework. You’ve visualized your future state, assessed your current situation, and developed a plan to move from the current situation to the future state. Now  it’s time to commit. Following are some of the tactics you can use in building commitment to change in partnerships.

Most of us would like to think we adapt to change fairly well. In the hustle and bustle of our twenty-first-century professional and personal lives, we are challenged with ever-increasing change. It’s instructive to understand the strategies we use to manage change and its impact on our partnerships.

Initiators of change not only have a high comfort level with change but also seem to be addicted to the adrenaline rush it can create. They create change for the sake of creating change. They are easily bored— routines drive them up the wall—thus they continuously change their environment and situation. Initiators of change provide the kinds of creative energy organizations need to break through the stagnation of the status quo and motivate innovation.

The second phase is assessing your current situation.What is your current capability? To move toward the future state, you must understand what you are currently capable of doing. This requires an internal assessment of your abilities and also your limitations. It’s important to assess the current situation accurately so you can see the gap between your current state and the future state.

Once you’ve assessed the current situation and identified the gap between the current situation and the future state, you can begin the third phase, developing a transition plan. This is your plan for closing the gap between today and tomorrow. Now that you understand how the change process works, you need to manage the change you’re creating. To do this, you need an action plan—which can be as simple as the one shown in previous artilce.

You may be thinking that an action plan based on what, who, when, and where is only common sense, and you are absolutely correct. But don’t minimize the power of creating a basic plan and then sticking to it. The vision starts to become real when you’ve made a plan to achieve it.Whether in your personal life or your business life, put the plan down in writing—using the simple  format shown earlier establish a framework for when and where things get done. In partnerships, success is achieved when things happen. And things happen most efficiently when you have a plan.

To help deal with partnership stressors, I use a model to explain the dynamic of change. You can use this model in forming business partnerships as well as in your personal life. The first step is to know where you’re going.You do this by creating a vision of what the change will look like when you’ve arrived. I once asked a marketing manager to think about what would happen if he partnered with the production manager. He responded by saying: “Well, we’d talk to each other regularly, we’d problem-solve issues, and we’d work together to meet production and shipping deadlines.” After thinking about this for a minute, he got very excited and said: “I think I get it! Now all I have to do is put a plan together to accomplish these three items and I’m on my way.” “Close,” I said. Then I mentioned that it
would be helpful if he included his production partner in the discussions. “Oh, yeah,” he said, “I forgot about him!” Even the best intentions can go haywire when we forget about our partner.

As illustrated in the model, the first phase in creating change is determining where you want to end up. You need a vision of the future state. You start to think about what the partnership is going to look like, how you will look in the partnership, what the partnership will do.You begin to think about how the partnership will satisfy your needs and those of your partner.

The asymmetric distribution of corporate bond returns is easily explained by the Merton model introduced previously. Numerous studies substantiate that even the return distributions of less risky and more liquid asset classes like government bonds are skewed and leptokurtic. Moreover, index returns exhibit significant autocorrelation that can be explained partially by a permanent component. Basically, bond returns are a result of price movements, interest accrual, pull to par, and roll down of the yieldcurve effects. While the first component is highly variable the other three components are rather stable over time.

Because of their long history and good data reliability the empirical study is based on Merrill Lynch indices for the period January 1987 to September 2003. So the sample period comprises 201 months, spanning more than two business cycles. It contains the 1989/90 US recession, two periods of dramatic Fed tightening, the Tequila crisis in 1994, the Asian crisis in 1997, and Russia’s default in 1998. Driven by a secular trend of disinflation the yield of 10-year treasury notes declined from 7.2 to 3.9 percent in this period. With regard to future return expectations this should be kept in mind.

A special situation occurs in the high-yield sector. The illiquidity in large parts of the universe causes price lags meaning that the aforementioned small changes in credit quality are not immediately reflected in bond prices.

In the economic literature, this effect is known as non-trading. With respect to high-yield indices non-trading and non-synchronous trading of index bonds can lead to autocorrelation of returns. Therefore, estimates of the  index volatility for illiquid asset classes can be distorted. Usually the  true volatility of illiquid asset classes is underestimated. In a portfolio context too large portfolio weights are the consequence. Especially portfolios constructed in the classical mean–variance framework suffer from that problem.

Mean–variance analysis, made popular by Markowitz and Sharpe, has been the basis for the process of portfolio optimization since the 1990s. Yet, the method itself suffers from various pitfalls. Among others it ignores deviations of the return distributions from normality. The asymmetric risk profile of corporate bonds and the illiquidity of certain segments of the international corporate bond markets make great demand on the process of portfolio construction. Merton (1974) clarified that corporate bonds can be replicated by the combination of a riskless bond and a short put on the assets of the company. This shows that the return potential of corporate bonds is somewhat constrained whereas the possible loss in the event of default is only limited by the recovery. Between 2000 and 2002, spectacular defaults like Enron and WorldCom heightened the sensitivity of investors to the risks associated with credits. In general the following relation holds: the higher the leverage of an issuer, the higher the credit risk. Remember that the short-put option on the assets of a highly leveraged issuer is much closer at-the-money than that of a conservatively financed company. And the closer the short put option is at-the-money the more asymmetric becomes the risk profile of a corporate bond. For those issuers small changes in credit quality such as, for example, due to increased dividend payments, can lead to significant volatility of spreads and corporate bond prices.

Clearly investors willing to allocate a part of their budget to corporate bonds are facing two questions. First, they have to decide how much of their budget they want to invest in corporate bonds. In this context we will focus on a pure fixed income portfolio. Usually private as well as institutional investors define their long-term asset allocation with respect to the asset classes such as stocks, bonds and real estate in a preliminary process.

The second decision concerns the sector allocation of the portfolio which is part of the tactical asset allocation. As noted before, the sector allocation of a
corporate bond portfolio essentially determines its risk/return profile and portfolio beta.

Focus on the product. Getting the product right before launch is often where most effort is spent, but developing a long-term strategy and direction for the product is important as well. Things to consider include how to make the product desirable with popular, distinctive (if not unique) benefits, deciding which product features to emphasise and planning future enhancements early.

Develop a pricing strategy. Getting the pricing strategy right depends on a number of things, including the competitive situation, product costs, product benefits and the nature of the market (see pricing decisions above).

A valuable approach when entering new markets is to challenge existing practices, so as to provide a better service and serve customers in a way that delivers (and ideally exceeds) their expectations. This requires skills of creativity and innovation, a talent for spotting opportunities and the ability to re-evaluate the way the business operates. Questions to ask include:

Why are things done the way they are?

What would happen if they were approached differently, and what would be the implications of an innovative approach (for example, what would it mean for cash flow, production costs, sales volumes, pricing and brand reputation)?

How will the position in the market be sustained and grown?

Are there practices from other industries that could be emulated?