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We knew at the start of the year that things were not looking great economically, but few expected the punishing blow dealt to the stock markets last month. Sure, skies were cloudy everywhere, but there was no "black Monday" on the radar for January 21, 2008. Can we anticipate extreme happenings like these? And are there things we can do to soften the effects of these occasional market shocks on our assets? IESE Prof. Javier Estrada has performed an in-depth analysis of these so-called "black swans," concluding that instead of going for market timing - entering and exiting the market at specific moments - investors should structure their portfolios with a realistic acknowledgment that the worst-case scenario can and will happen. It is less about preventing risk than accepting that risk is an intrinsic part of any business. A lack of realism also affects companies' financial planning. According to a separate study included in this edition of IESE Insight, executives tend to overshoot with their profit expectations while doing the opposite with costs. And the farther off their forecasts, the farther off they drift. Yet these "inaccuracies" reveal some interesting reasoning, quite apart from simply showing the particular leanings of certain executives. Unrealistic predictions may be deliberately designed to secure financing from outside investors or from within the company itself. And there's always the pressing ploy to please the boss. That being the case, the bigger question is not whether we can predict all the eventualities of business; rather, it's whether we are capable of understanding the complexities involved so as to manage them better. For this February issue, we take a look at some of the contingencies that concern executives: the definition of strategy; the dilemmas associated with brand extension; and the jostle for limited shelf space in distribution. While none of these issues necessarily entails as many ups and downs as playing the stock market, if poorly planned, they could result in more than one Monday-morning migraine for the company in the months to come.
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Finance |
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How Investors Should Adjust for Black Mondays |
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| Javier Estrada |
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Highly improbable events do happen, and the financial markets are not immune. Few were prepared for the violent market downturns in Asia and Europe on January 21 of this year, with the FTSE 100 index, for example, experiencing its worst one-day drop since the attacks of September 11, 2001. Startled traders were given hair-raising flashbacks to other infamous Black Mondays. The paper "Black Swans and Market Timing: How Not to Generate Alpha" by IESE Prof. Javier Estrada examines how unexpected outliers can impact performance in the long term. Is it possible to predict events like the kind recently witnessed, or is that like gambling in Vegas? 
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Service and Operations Management |
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Shelf Life: Competitive Strategies for the Space Race |
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| Guillaume Roels, Víctor Martínez de Albéniz |
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| The race is on for shelf space. As retailers squeeze more and more products onto their shelves, suppliers must play an intricate pricing game in order to keep their spot and generate profits for all parties concerned. The paper "Competing for Shelf Space" by Victor Martínez de Albéniz and Guillaume Roels analyzes the growing competition for square footage and the potential benefits and pitfalls of various competitive strategies - from pay-to-stay fees, in which suppliers must pay for the privilege of putting their products on a shelf, to the controversial practice of category management, in which one "category captain" determines the pricing for all suppliers, often to the detriment of the end consumer.
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Innovation and Entrepreneurship |
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Dream On! Expert Advice for Entrepreneurs |
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| Pedro Nueno |
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| Pedro Nueno, IESE professor of entrepreneurship, offers expert advice for a young entrepreneur starting out, in his new book Letters to a Young Entrepreneur (Cartas a un joven emprendedor). As the title suggests, the book takes the form of a series of fictitious missives based on real-life situations. Packed with personal insight and expertise gleaned from Nueno's extensive background working with business leaders from diverse sectors and societies, each letter takes the reader through all the different stages an entrepreneur must go through on the rocky road from scratch to success.
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Finance |
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Profiting from Prediction Bias |
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| Christopher S. Armstrong, Antonio Dávila, George Foster, John R.M. Hand |
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| Financial forecasts play an important role in investment decisions, not only through shaping investors' views on a company's future prospects, but also by directly influencing share prices via earnings guidance. While nobody expects all forecasts to be perfectly accurate, could we learn more from paying closer attention to how and why they go wrong? Christopher S. Armstrong, George Foster, John R. M. Hand and IESE's Antonio Dávila review financial forecasts from a range of private firms, to identify predictable patterns and gain insight into motivations leading these discrepancies. Findings reveal that firms overstate expected profits in all time horizons, but accomplish this in different ways during one- and five-year projections, to strategically serve their best interests at each stage.
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Organizations and People |
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SMBs Need To Improve Reconciliation Policies |
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| Inés Alegre, Nuria Chinchilla, Consuelo León, Miguel Ángel Canela |
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| Which type of company is better at balancing family and professional life: small- and medium-sized businesses, or multinationals? Despite the fact that 99 percent of all Spanish companies are SMBs, studies done thus far in this area have been mainly concerned with large companies. Given this, the new study by professors Nuria Chinchilla (IESE) and Miguel A. Canela (UB), along with Inés Alegre and Consuelo León (IESE), in which they analyze 2,200 Spanish SMBs with respect to work and family-life issues, makes this paper of paramount importance, enabling managers to make informed decisions when considering their reconciliation policies.
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Marketing |
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How To Stretch Your Brand Without Sacrificing Appeal |
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| Juan Manuel de Toro, Marta Mira, Carlos Pérez |
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| In today's markets, it's hard to differentiate one product from another based only on tangible attributes. Competition is as fierce as it is global, and technological innovations can be copied. In this context, the brand and its image are key elements in distinguishing products. Apple has achieved this with iPod, its digital media player that keeps selling despite its price, proving the importance of a good brand name: It allows strategic decisions to be taken, which is essential in a market where lack of action leads to failure. IESE Prof. Juan Manuel de Toro and research assistants Marta Mira and Carlos Pérez explain how to open up the brand without losing its appeal or falling into the many traps along the way.
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Leadership, Strategy and Change |
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Corporate Advantage: Exploitation vs. Exploration |
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| Adrián A. Caldart, Joan Enric Ricart |
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| Corporate advantage: All companies want it. It's that little (or not so little) something that pushes one corporation ahead of another. The paper "Corporate Strategy: An Agent-Based Approach" by Adrián Atilio Caldart and Joan E. Ricart sheds new light on corporate advantage by regarding corporate strategy from two viewpoints: exploration versus exploitation. Some companies take a straight-line approach to strategy and are strictly bound by a deliberate corporate plan (exploitation) while others are willing to abandon their initial plans on the spur of the moment to seize a promising new path or innovation (exploration). So, which strategy works best? A lot depends on the nature of the business and the firm's initial strategic plans.
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Finance |
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More Efficient Banking Could Turn Fortunes of Developing Countries |
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| Francesc Prior, Javier Santomá |
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| Withdrawing money from a cash machine, getting credit or paying with plastic: these are normal activities for the majority of citizens in the developed world. However, in poorer countries, they are privileges within reach of only a minority of people. Although this situation is frequently blamed on a lack of demand, IESE Prof. Javier Santomá and researcher Francesc Prior think that it is, in fact, more a problem of supply. They aim to demonstrate this in their paper, "Distribution model of microfinance services for low income segments in developing countries."
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E-Business |
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FreshDirect: Online Grocery that Actually Delivers! |
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| Sandra Sieber, Jordan Mitchell |
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| In 1999, the words "online grocery sales" had investors, journalists and dot-com devotees salivating over the prospects; three years later, those same three words had become much harder to swallow. Perhaps it was the highly publicized, billion-dollar bankruptcy of the online grocer Webvan that ruined appetites for grocery sales over the Internet. Not a very promising environment in which to launch a new cyber-grocery service, but in the year following the Webvan crash, that is exactly what FreshDirect did, in New York City. Surprisingly, it's still delivering. What's more, it has created a profitable business model. How did FreshDirect succeed where others failed to produce the goods?
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Knowledge and Information |
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Advertising Key Factor in TV Audience Fragmentation |
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| IESE, Carat, Deloitte |
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| Over the past 25 years, the total number of hours a viewer spends in front of the television in Spain has multiplied by 30. This increase in consumption has been accompanied by industry deregulation and the appearance of new broadcasters. However, contrary to expectation, deregulation has not been the main cause of audience fragmentation; rather, the actual source appears to be advertising. These and other findings are contained in "Television in Spain: 2007 Report" ("La televisión en España: Informe 2007"), a study by the International Research Center for Media Companies (CIEC) at IESE, in collaboration with Carat and Deloitte. The report tunes in to the television industry in Spain and offers analysis of the couch potatoes who spend nearly four hours a day glued to the tube.
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