Credit crunch and crisis cirrhosis
Understanding the woes facing the UK financial system
On Course | Issue 16 Generation Y not? Avoid a talent crush in the credit crunch Cleared for take off. Experts aim to make the airline industry more efficient
to the sixteenth edition of the School of Management magazine: On Course. The School has seen significant changes since the last edition, including: a new Head of School started in the autumn of 2008; a new executive education wing has enhanced the facilities for our MBA students; the opening of a new research centre in Banking, Finance and Sustainable Development. This edition of On Course also exemplifies the new University of Southampton brand style and, while some people have been sad to see the Dolphin disappear, this new look updates and refreshes the University’s visual identity for the twenty-first century. As always, we have been working hard to put this edition of On Course together and deliver features that are topical and relevant to our alumni. ‘We all know by now that the only constant in business life is change.’ Dr Lorraine Warren, Senior Lecturer at the School of Management, explains how managers need to innovate and are expected to check out on a daily basis what is going on in the business environment in her feature, Hitting moving targets (page 7). In his article Credit crunch and crisis cirrhosis (page 12), Dr Simon Wolfe, Senior Lecturer in Finance, gives an ABC guide to aid understanding of the current woes facing the UK financial system. Generation Y not? (page 18) shines a spotlight on the generational changes affecting organisations as Generation Y (those born between 1979 and 1995) storms into the workplace. Graham Manville, Senior Fellow in Strategy at the School of Management, discusses how to avoid a talent crush in the credit crunch. The School of Management has also been establishing links with other business schools across Europe and the rest of the world. Most recently the School has announced links with Guanghua School of Management, University of Peking in Beijing; Rikkyo University in Tokyo; and Korea University Business School in Seoul. Also in this issue, we bring more updates from our alumni. We are always pleased to hear from our alumni, and hearing how lives and careers have progressed since their time in Southampton. For more information on any of the stories and features in this edition of On Course, as well as a chance to have your profile featured in the next edition, please contact me by e-mail: firstname.lastname@example.org.
Christopher Hopper Alumni and Enterprise Coordinator School of Management
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Contents Page 4 School of Management News. Page 6 Cleared for take off.
School of Management News.
Experts in management science and computer science join forces to make the airline industry more efficient.
Hitting moving targets. Lorraine Warren explains how managers need to innovate and are expected to check out on a daily basis what is going on in the business environment.
New links with top business schools in China and Japan. So what did you do over the summer? Two enterprising students swapped the streets of Southampton for more exotic surroundings during the summer vacation.
Money markets under the spotlight. School launches new research centre. Exciting opportunities in world banking. A Phd student spends time working for the worldâ€™s top banking research institutions.
Page 12 Cover Story
Credit crunch and crisis cirrhosis. An ABC guide to aid understanding of the current woes facing the UK financial system.
Page 7 (above)
Hitting moving targets.
Page 15 Are we willing to pay for
sustainable hydro-electric power? An investigation into how the generation of water-powered energy can be made more sustainable has started at the University.
Page 16 Alumni update.
Credit crunch and crisis cirrhosis.
Generation Y not?
Page 18 Generation Y not?
As Generation Y storms into the workplace, Graham Manville discusses how to avoid a talent crush in the credit crunch.
School of Management News New Director for the School of Management
Helping ports operate more efficiently
Professor Terry Williams has been named the new Director of the School of Management.
Dr Yue Wu has won a research grant to investigate the best ways seaports can handle modern container traffic. She will be using mathematical programming techniques to develop innovative strategies to deal with the logistics issues of stacking and storing in container terminals as requirements and information constantly changes. The specialist in project management has more than 25 year’s experience in Management Science and Operational Research, largely working with complex commercial projects.
The Chartered Institute of Logistics and Transport (CILT) has financed the £7,500 seed corn grant. Yue and her research assistant will focus their work at the port of Southampton (DP World, Southampton).
In his new role, Terry aims to extend and develop the School’s reputation for the analytical study of management and business. He said: ‘In our complex world, executives need to master a wide range of skills. The School of Management provides this knowledge to our students and carries out cutting edge research and consultancy in these areas.’
‘Moving containers around can be difficult and expensive so it makes sense to explore the dynamics of the operation to save both time and money,’ she said.
Before joining in 2005, he headed the Management Science department at the University of Strathclyde. Earlier, he worked in a successful engineering consultancy, specialising in logistics, modelling and simulation within industry.
Professor Lyn Thomas has received a top award from the Operational Research Society, reflecting his career and its contribution to OR.
His research interests include how and why major projects fail and the lessons that can be learned from well-known examples such as the Channel Tunnel shuttle trains. Terry is also involved in project management professional associations and research networks and has authored or edited several books on these subjects.
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Dorothea Carvalho from CILT said: ‘The CILT Seed-Corn Fund supports research into issues of current and practical interest to logisticians. The efficient handling and storage of containers is a problem facing all our major ports and impacts the operation of manufacturers and retailers supply chains. Therefore we are pleased to support this project.’ Derek Smith, Business Development Manager, DP World Southampton, added: ‘We are delighted to hear that Yue has won a research grant to assist her in carrying out her project. We very much welcome time and effort spent looking at innovative strategies for container handling and improving efficiencies and look forward to assisting Yue where possible.’
National award for School of Management Professor The Beale Medal is the Society’s most prestigious award and has been presented to Lyn in recognition of his achievements, including theoretical work and data mining developments which underpinned the development of mathematical approaches for credit scoring. These new approaches are beginning to be used throughout the financial services industry to assess the creditworthiness of potential borrowers and address some of the issues in previous credit risk assessment modeling.
The School of Management’s Professor Sally Brailsford said: ‘Lyn has made a major contribution to management science. He has served as President of the OR Society, is a Fellow of the OR Society and the Royal Society of Edinburgh and is an outstanding candidate for the Beale Medal.’ Lyn has been in the School since 2000, and has also held academic posts at the Universities of Swansea, Manchester and Edinburgh and the US Naval Postgraduate School in Monterey, California. He is the author of more than 160 articles and books.
Assessing risk in a turbulent world Stephen Ward, Professor of Risk Management, is encouraging engineers to change the way they think about risks.
He has been awarded a research grant from the Institute of Civil Engineers (ICE) for a preliminary study, examining how companies and organisations involved in major infrastructure projects in transport, energy, water and waste management need to regard operational risk in the twenty-first century. He is looking beyond the commonly recognised project risks of time, cost and specification to consider uncertainties associated with the long-term operation of infrastructure. ‘Traditionally, a contractor has seen its responsibility for risk end when the project
is over, for example when a power station is handed over to its owners,’ said Stephen. ‘But, under systems such as Private Finance Initiatives (PFIs), construction companies can remain involved for many years afterwards.’ He argues many risks associated with operating infrastructure are difficult to pin down. Companies building a road do not know how much traffic it may carry in future or exactly how well or badly it may be maintained and repaired. Nuclear power stations may become targets for terrorism. Government policy decisions may turn a viable business based on the continued operation of infrastructure into an unprofitable one. New environmental laws may transform the economics of some forms of infrastructure operations.
He will also join colleagues from the School of Management in analysing applications before the final decisions are made. The awards aim to highlight, and acknowledge the pivotal role non-executive directors and trustees play in supporting companies in the private and public sectors, along with the challenges they face. Judges will be examining how non-executive directors challenge senior management
Designed with experienced students in mind, the School of Management’s new Executive Education Centre is now open for business.
Stephen has already discussed the perceptions of risk with experienced managers from a variety of infrastructure operators and contractors such as the Highways Agency, RWE Npower, Thames Water, Mott MacDonald and the consultancy Atkins. ‘I want to understand the scope of operating risks and highlight them to the civil engineering community by finding out what companies are doing now and exploring what they could do in future,’ said Stephen.
Seeking the UK’s top Non-Executive Directors School of Management leadership and change management specialist, Professor Malcolm Higgs is on the judging panel for this year’s Non-Executive Director Awards.
A new home for the University of Southampton MBA
and create value for the company. Malcolm said: ‘The appointment of a non-executive director is a key driver for investors, shareholders, customers, bankers and creditors, and highly influences their view of the company, and their decision to invest in it. Now, more than ever, it is vital to have the right people on the board of an organisation.’ The School of Management is sponsoring the awards with investment bank KBC, global professional services firm Alvarez and Marsal, law firm Pinsent Masons, the NonExecutive Director Association (NEDA) and the Sunday Times.
Students on the Masters of Business Administration (MBA) course will be taught there. There will also be programmes for experienced managers, including the Masters in Professional Development, short courses covering various aspects of managerial education and bespoke programmes for individual companies. The new facility is an annex to the School of Management, but self contained for executive students. Rather than traditional lecture theatres, the teaching room uses a ‘cabaret’ style with round tables, moving the emphasis away from the lecturer at the front of the class to participation and interaction between the students. Helene Glasspool, MBA Director, said: ‘Our new Centre is ideally suited for professional people who want to enhance their qualifications at the School of Management. We have modern teaching rooms and other facilities along with our own entrance on Salisbury Road. It is an ideal environment for learning.’
Cleared for take off
University experts in management science and computer science have joined forces in a unique research collaboration aimed at making the airline industry more efficient. Douglas Macbeth, Professor of Purchasing and Supply Chain Management at the School of Management, and Professor Nick Jennings and Dr Alex Rogers from the School of Electronics and Computer Science have won a £116,600 grant from the Engineering and Physical Science Research Council (EPSRC). They will explore how aircraft engine overhaul systems can be improved to reduce the time these engines spend in workshops around the world. The research will involve investigating complex airline supply chains and scheduling systems. Computer agents will be used to explore different methods of creating better scheduling solutions in this complex and dynamic setting. Agents are computer systems which are capable of flexible autonomous action in dynamic and unpredictable situations.
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Douglas said: ‘Supply chains are very complex. Business leaders need much information to understand what is going on so they can make informed decisions. The University of Southampton’s School of Electronics and Computer Science is worldclass and I look forward to working with its experts to unravel supply chain issues.’ Nick said: ‘Agents are increasingly being used to perform autonomous decision-making in complex information chains which involve multiple distributed partners. This project will enable us to work across a number of decision-making processes and to explore the ways that agent-based technology can provide greater efficiency, speed up decision making and hence maximise profits.’
Hitting moving targets We all know by now that the only constant in business life is change. Managers are expected to check out, on a daily basis, what is going on in the business environment, to innovate, to find new solutions to new problems and to create value as new possibilities arise. While that has always been true to some extent, the pace of change has increased over the past decade or so, as globalisation and new technology present great opportunities for businesses â€“ and, not surprisingly, challenges too.
Hitting moving targets
2007, McKinsey identified a “Our research has shown InsetDecember of key technology-enabled trends that are shaping the businesses of the future that entrepreneurial which draw, in part, on the possibilities of leveraging innovation across the value chain. theme is McKinsey’s analysis managers who are Ais prominent the idea that the use of technology itself is to unlock economic value. Wealth successful over long unlikely creation occurs when managers combine with new ways of doing things, periods of time are technology such as creating new business models, new products and services, and stimulating new practising anticipatory patterns of behaviour in customers and consumers. behaviours that can Of course, managers are expected to keep up, to become creative leaders and to be learned or realise value from the changing business environment, in other words to shape the for their organisations. In his recent developed in others” future book, The Future of Management, Gary Hamel suggests that in order to achieve success in today’s business world, we have to change our mindset about what management is, and what tools and toolsets we have at our disposal to deal with what is going on around us. But conversations with managers reveal that much of their time is spent firefighting, running as fast as they can to just keep up with what is happening around them, reacting to change rather than reflecting how they can proactively reshape their markets and industries. It is good to see what the new trends are from analysts such as McKinsey – but by the time busy managers hear about them, the competitive edge may have been taken elsewhere. There is a sense of frustration evident in some managers that they can never get ahead, they are always
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chasing after moving targets, the goalposts shifting with each successive change in the law, new version of technology… and so on it goes. Our research has revealed that these problems are particularly acute in fastmoving settings such as the airline services industry. Mangers striving to maintain entrepreneurial firms in airline services have had to cope with enormous structural change as the travel industry and the legislative environment have changed beyond all recognition. For example: • deregulation of competition in the EU leading to a huge expansion in low-cost point-to-point travel. Airlines such as Ryanair expand annual passenger numbers in the thousands in 1985 to around 30 million today • increases in long-haul travel to support new business activity overseas as well as the desire for exotic tourist destinations • the all-but disappearance of the travel agent from the value chain, as business was channelled through call centres and internet bookings • the use of new technological architectures to support and develop newly emerging supply chains. These changes have resulted in FlightDirectors, one of our long term case studies, developing three revenue streams in the 20 years they have been in business near Gatwick Airport. Starting out handling the flight arrangements of
those small airlines using Gatwick without the benefit of a permanent staff there, they have gone on to develop a call centre operation for flight bookings and latterly, a direct booking service for regional pointto-point flights worldwide, concentrating on the considerable opportunity presented by airlines not served by the big companies such as ebookers or lastminute.com. This sustainability over time has required a great deal of foresight, matching limited resource to future projects where industry direction is uncertain, yet where technological systems (and the legal right to use them) are deeply embedded and highly regulated, requiring considerable forward planning to install and use.
periods of time are practising anticipatory behaviours that can be learned or developed in others; they do not have mysterious prescience that reveals the future in ways not available to the rest of us. Instead, they have developed embedded patterns of behaviour that are unique to the context of their particular firm and industry network. A key part of that behaviour, is that they are engaged in a pattern of continuous experimentation that repeatedly generates new strategic options, some of which, in time, become ‘the firm’, when the time to act is right. We have identified four key, highly inter-related processes, which result in the emergence of novelty over time in entrepreneurial firms:
to try and understand these processes in more detail, asking questions such as, why do some experiments become part of the firm and others do not; what environmental signals and critical points trigger a response, and why. If, as Hamel suggests, we need new visions of innovative management, then we hope that in time our work will contribute to the new mindset needed by managers in the twenty-first century. Further, we hope that in better understanding the dynamics of fast-moving industries, we can aid entrepreneurs to take advantage of and develop opportunity in new areas where little guidance currently exists. Dr Lorraine Warren, Senior Lecturer in Entrepreneurship and Innovation.
Firms such as FlightDirectors which have managed to, not only take advantage of the right entrepreneurial opportunity at the right time, but also keep on doing that, repeating success year in, year out, in such dynamic environments must have something to tell us about sustainability. How do managers maintain agility, the ability to see ahead, to strategise in an innovative manner, to act at the right time to repeatedly achieve and maintain competitive edge? At times it might seem to outsiders, and perhaps even to managers themselves, that its all about luck, being in the right place at the right time, perhaps even being sprinkled with some magical entrepreneurial stardust that you either have or have not got? We would disagree!
• experiments: small scale models testing for fitness in the landscape
Acknowledgements Dr Warren would like to acknowledge the contribution of the following co-authors of this research stream: Professor Ted Fuller, Director Lincoln Business School, University of Lincoln Paul Argyle, CEO FlightDirectors, Horley, Surrey
• reflexivity: the continuous reshaping of the meaning of what the owner and the business ‘are’ in relation to others • organising domains: the breaking and reforming of everyday patterns of doing business • sensitivity to conditions: the detection and evaluation of environmental change and the motivation to respond.
Lorraine Warren may be contacted at email@example.com
Full details of the research referred to may be found in Fuller, T. and Warren, L (2007) Sustaining entrepreneurial business; a These processes are not planned, they are complexity perspective on processes that not written down, they do not have a session produce emergent practice, International in the diary at 2pm on a Friday afternoon. Entrepreneurship and Management Journal, Rather, they are a ‘way of being’, the essence online Fuller, T. and Warren, L. (2006) of agility and foresight for the entrepreneurs Entrepreneurship as Foresight: A Complex Our research has shown that entrepreneurial we have worked with. We are currently using Social Network Perspective on Organisational managers who are successful over long complexity theory as an organising metaphor Foresight, Futures, 38/8, 956-971
New links with top business schools in China and Japan The School of Management has announced new links with prestigious Asian universities.
in China, and Rikkyo University in Tokyo, one of the top private universities in Japan, as well as Korea University Business School in Seoul, the no. 1 business school in Korea. These links will enable UK students to study In addition, the School is targeting links overseas and students from overseas to come with leading institutions in Singapore and to Southampton. Staff exchanges can also be Thailand. arranged. Partner universities in Europe currently ‘Our aim is to offer a global business include Aarhus in Denmark and Toulouse education, both in the Far East and closer to Business School in France; further additions home. Opportunities to study in different are in the pipeline. parts of the world are invaluable,’ said Director of International Development University Pro-Vice-Chancellor Professor Professor Richard Werner, who has worked Alastair Fitt visited Rikkyo earlier in the and travelled extensively in the region. year to strengthen the budding partnership. He met up with the President of Rikkyo The links are with the respected Guanghua University and the Head of the College of School of Management, University of Peking Business. in Beijing, known as the best business school
So what did you do over the summer?
Two enterprising School of Management students swapped the rainy streets of Southampton for more exotic surroundings during the summer vacation. Management with Entrepreneurship undergraduates Tom Saunders and James Duncan, now third years, are back home after spending part of the year on the other side of the world. Tom studied entrepreneurship at the prestigious Babson College in the United States. He worked alongside young people from Brazil, Argentina, Russia and Spain during the two week course in Massachusetts. The opportunity arose thanks to an arrangement with Santander bank, who will also be sponsoring three ‘enterprise interns’ to work at the University over the coming year.
‘Getting the chance to understand the management theories taught at Southampton from a company’s perspective was very valuable’
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‘It was a great opportunity to learn about international business styles,’ said Tom. ‘I made a lot of friends and got new insights into management skills are very useful in Southampton.’
James worked for two months at Chinese IT outsourcing company PCCW Solutions in Shanghai through an internship secured through AIESEC, an international organisation that promotes leadership through exchanges. ‘Getting the chance to understand the management theories taught at Southampton from a company’s perspective was very valuable,’ he said. ‘It was an amazing experience. And going to work everyday wearing a suit was a complete contrast to student life!’ Tom and James hit the headlines last year by doing well in the Ernst & Young Profitunity competition to encourage student enterprise. Among their moneymaking ideas was a Smurf-themed party that received media coverage. Both will be spending part of their final years promoting student entrepreneurship through the University society Fish on Toast.
Money markets under the spotlight A new research centre in Banking, Finance and Sustainable Development has being launched at the School of Management.
Professor Richard Werner
It will examine current major issues including financial and banking crises, market fluctuations and exchange rates, the debt problem, worldwide economic systems, Islamic banking and sustainable economic development.
Activities will include workshops, seminars, links with the regional business community as well as applied research in banking, international finance, monetary economics, institutional design and other disciplines.
Professor Richard Werner, who leads the centre, said: ‘Across the world, the link between banking and development remains a crucial issue for states which want to succeed in the global economy. Yet very little reality-oriented research is done into their interaction.’
Richard, whose work emphasises the unique and crucial role of bank credit creation in the economy, became known through his early prediction of a major banking and economic crisis in Japan and his analysis of central bank monetary policy. He is currently conducting a study on the role of banks in the build-up of a major housing bubble in the UK and the implications for the economy in the years ahead, and sees many parallels with Japan’s predicament.
The new Centre will involve research staff in the School of Management but also University specialists in economics, law, psychology, sociology, politics and engineering. A new Masters programme in Finance and Development is planned in coming years. Early indications are that this topic is attracting interest from students in developing countries, but also practitioners at international organisations.
Leading economist Charles Goodhart, former external member of the Bank of England’s Monetary Policy Committee and Professor Emeritus at the LSE, will chair the Centre’s Advisory Board.
Exciting opportunities in world banking A PhD student at the School of Management has spent several months working for the world’s top banking research institutions. 24-year-old Sarah Odesanmi secured two coveted placements – at both the International Monetary Fund (IMF) in Washington and the Bank of England in London. She is currently studying for a PhD in banking and systemic stability at Southampton and expects to graduate in summer 2009. ‘My research project at the IMF was focused on post crises behaviour of banks in South America. I went on to work in the financial resilience division at the Bank of England.’ Sarah took her first degree in Economics at the University of Botswana, then travelled to Southampton to take a Masters degree in International Banking followed by a doctorate. After graduation, she hopes to work in a financial stability division in an organisation such as the IMF or the Bank of England. Her supervisor Dr Simon Wolfe says he is delighted at Sarah’s success. ‘She is a very bright student and has a mature attitude to her work.’
Credit crunch and crisis cirrhosis A credit crunch is simply a time when the whole banking system has little or no money to lend to customers. It does not take a genius to work out that if businesses cannot get loans and individuals cannot get mortgages that there will be trouble ahead for the economy.
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Dr Simon Wolfe, Senior Lecturer in Finance
The answer is complex, but I will attempt to provide an ABC guide to aid understanding of the current woes facing the UK financial system.
In August 2007, the money markets quite literally went pop – meaning that the cost of borrowing between banks rose dramatically and became prohibitively expensive. This dislocation in the market means that banks became unwilling to lend to each other, in other words we have entered a time when ‘cash is king’ and all the banks have become precautionary hoarders. At the same time the securitisation market seized up and has remained frozen. Securitisation is a process whereby banks were able to sell illiquid loans such as mortgages to raise cash. Now banks cannot sell assets such as mortgages and have to hold them until maturity (which might be for up to 25 years). Taken together these two disfunctional markets mean that banks cannot gain access to any new cash other than what is deposited in the bank by retail customers. UK deposits held at banks has been static over the past 12 months as hard pressed individuals needing more money to meet a rising cost of living are consequently saving less. In sum, UK banks have no money and are unlikely to have any for the foreseeable future.
The trigger that caused these markets to freeze was the US sub-prime debacle that came about because of lax lending practice by US banks and poor regulatory oversight by the US authorities. US banks had been binge-lending trillions of dollars to individuals who were unlikely to ever be able to repay their loans in full. The banks securitised these sub-prime loans and sold them on international markets, where UK banks, among others, bought them. Many economists refer to this complex process as the US banks slicing and dicing the loans and selling them on to ‘innocent’ third party investors. Northern Rock, for example, had invested some £300 million in these financial products prior to its rescue from collapse. However, it is important to note that Northern Rock’s direct investment into US sub-prime securitisation products had no bearing whatsoever on its demise. Investments made in these securitised products based on sub-prime lending are now worthless and UK banks have to report millions and, in some cases, billions of pounds of losses accordingly.
Currently, the US banking system has no cash, this has come about because of many of the same reasons cited for UK banks.
As if that was not bad enough, it is increasingly evident that UK banks were also entertaining lax lending practices during 2006 and 2007 to customers on high earnings multiples. In other words, UK banks were advancing mortgages up to unprecedented levels of up to ten times a customer’s salary. This suggests trouble and we are already seeing UK banks increasing their loan loss provisions and write down huge losses to UK customers. However, losses on UK lending are only just starting to accelerate and will be exacerbated further by the onset of recession. As customers default on their loans and mortgages, banks have to absorb losses and because banks are such highly geared institutions these losses translate into a cutback on lending up to 10 times the scale of the losses. As a rule of thumb, for every £1 a bank makes in losses it will have to reduce lending by £10. Moreover, this lax lending may result in default rates that exceed all previous experiences. Worryingly, banks have been assuming that the worst case scenario is the losses seen at the time of the last recession in 1990-92. This suggests that the banks are going to need much larger buffer stocks of capital to absorb these, potentially much higher, levels of losses. Banks in the UK have been desperately trying to shore up their capital positions. All the high street banks have, with varying degrees of success, been issuing new shares and trying to boost their weakening capital positions. The value of most banks share price has more than halved over the past 12 months reflecting the poor performance and poor prospects for earnings. Healthy banks are critical to a well functioning and growing real economy and the reverse is
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also true. Therefore, when will the current difficult conditions abate? The answer can partly be observed by what is happening in the US. The UK is on a business cycle that is approximately 12 months behind the US. So what we see today in the US markets is what we will observe here in the UK in 12 months time. Currently, the US banking system has no cash, this has come about because of many of the same reasons cited above for UK banks. Therefore, the prospects for the US do not look good for some time to come. Once the interbank lending market returns to normal and banks are again able to securitise their loans as before, it will then take six more months to feed into the real economy. However, there is no sign of any stability returning to these effected markets. House prices in the UK experienced a bubble up to late 2007. A bubble means that people believe that rising asset values will continue even though this may be out of line with fundamentals, e.g. average earnings. We are now seeing a severe correction in the value of UK house prices. Latest figures suggest that prices have fallen by 13 per cent since the peak one year ago. How much further can prices fall? Nobody knows the answer to this question. However, given the state of the banking sector I would suggest that prices will fall for a long time to come. Moreover, if you can get a bubble where prices overshoot for a period of years then you can also get a time where they undershoot. What of the government response? The Chancellor of the Exchequer’s measures to provide a one year hiatus for stamp duty due on property sales up to £175,000, intended to mitigate the perceived negative externalities of the credit crunch, will have very little impact. There is no get out of jail quick card in this market!
A major innovation in financial markets over the past decade was the creation of credit derivatives. In particular there was an exponential growth in the size of these markets over the past four years. These products enabled banks to efficiently remove risk from their balance sheet and transfer it to the market. So if a bank used lots of credit derivatives it could dramatically lower its regulatory capital requirements and operate more efficiently. Everyone, including the Federal Reserve in the US believed this was a fundamental paradigm shift in international finance. However, the flaw in everyone’s thinking was that they never asked the question ‘what is this so called market that all the banks’ risk had been transferred to?’ It is only now that we know that the market was in fact the banks themselves. In other words, one bank would sell its credit risk through the credit derivatives market to investors who typically were other banks. So banks sold their own risk to other banks and in replacement bought and held other banks risk. Consequently, there was no great reduction of risk facing the banking sector as a whole and losses would come home to roost in an economic downturn. In conclusion, banks have become very risk averse and are currently only lending to super-prime customers. Banks cannot afford to lose any more money and therefore are imposing strict lending criteria for whatever new business they conduct. The colliding of complex financial products with highly complex financial markets and confusing complex bank ownership structures has resulted in a banking system that is not easily repaired and rectified. Dr Simon Wolfe, Senior Lecturer in Finance
Are we willing to pay for sustainable hydro-electric power? An investigation into how the generation of water-powered energy can be made more sustainable has started at the University of Southampton. Engineers working in the hydro industry have to balance the need to keep an efficient flow of water into the generating turbines with the continued maintenance of eco-systems in rivers and channels. This results in a complex web of action and interaction amongst many stakeholders. The University’s Schools of Civil Engineering and the Environment (CEE), Management and Social Sciences have joined forces to enable a PhD researcher, sponsored by a pilot scheme funded by the Economic and Social Research Council (ESRC) and Engineering and Physical Sciences Research Council (EPSRC) to examine the issue from technical, social and economic perspectives.
Lake Mead, Las Vegas
Laura Watkin, who embarked on the work in October, has completed a Masters degree in Environmental Science at CEE, specialising in freshwater eco-systems. ‘I’ve always been interested in these issues ever since I was young and went out fishing with my grandfather. This research will be both fascinating and important as we try to reconcile our desire to protect the environment with our needs for energy.’ Dr Ian Harwood from the School of Management said: ‘This is a unique project, combining technical, social and economic aspects of renewable energy. It is also an exciting development in terms of interdisciplinary PhDs degrees within the University.’
Alumni update James aims for new goals in the City... Investment dealer James Sewell combined his passion for football with a talent for Management Science during his time at the University of Southampton. Currently, he works for the Royal Bank of Canada, buying and selling equities, bonds, derivatives and funds but is about to move to Man Financial to become a derivatives broker with, hopefully, a spell at the firm’s New York office. James graduated in 2006, then spent a year at Reuters building up his knowledge of the financial markets. Going into the world of finance was a natural choice for the Londoner. ‘My father has always been in financial markets so this is an area I became drawn to. Over the years, I had some spells of work experience with banks and brokers which reinforced the idea.’ While he studied business at school for A level, alongside economics, information technology and media, he wanted to take a broader degree. ‘I thought Management Science at Southampton would be perfect, especially as it is one of the best universities for the course.’ The flexible nature of the programme appealed to James. ‘I chose quite a few electives in different areas such as economics, small business management and entrepreneurial studies which was very valuable.’
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While he signed up to ‘absolutely everything’ during Freshers Week, James ended up concentrating on football and DJ-ing. ‘Most memorable for me was the University football team’s tour of Rimini. One game, I ended up playing for Bolton Uni because they were short of players. As the match started, I noticed the entire Southampton team running on to the pitch with hair clippers to try and shave my head. I have never run so fast.’ Perhaps not surprisingly, the West Ham fan turned to sport for a dissertation subject. ‘It was a study into football shares and whether they were a valid form of investment. But there was a serious side too. Basically, it was an analysis of their performance against the market and why they performed as they did.’ As his career develops, perhaps even across the Atlantic, James has vowed to stay in touch with the School and his university friends. ‘I always enjoy finding out what has happened since I was there. My time at Southampton went by so fast and I loved being in the city. It was close enough to London so I could go home if I wanted to, but far enough away to live the real university experience.’
Berry was banking on management... Banker Berry Lau from Hong Kong, who graduated with a BSc degree in Management in 2006, looks back on her time in Southampton with great affection. ‘It’s a great place but, most importantly, the university is well respected for management subjects. I knew I would learn a lot!’ She travelled to Southampton from Lincolnshire where she had completed an International Foundation course. ‘I always knew I wanted to study management because it gives you so much knowledge and so many chances to work in different fields. There is a very broad range of opportunities out there. Every business needs management, right?!’
Berry is now working at Citibank in Hong Kong as a financial planning manager. ‘There are a lot of ways for my career to develop in this new field, even with today’s fluctuating economy. It’s good to gain as much experience as you can.’
Settling into Southampton and beating homesickness was not too difficult as Berry quickly joined the Chinese Society. ‘That brought me three great friends who were studying Medicine and Music. We did enjoy our life so much when we were all in Southampton,’ she said. ‘Year two was definitely an unforgettable year in Burgess Road. I have kept contact with all of my friends, Kerry, Whitney, Jessie, Peggy, Lilian, Gillian, Jasmine, Jeffrey, Gary, Nelson, Roger and Nick, I miss all of you so much.’
She has this advice for today’s students. ‘Concentrate on the units such as portfolio theory as you will find them very useful if you want to develop your career in banking. I’m not sure about other countries, but in Hong Kong, if you want a good job in a bank, you may need to have more qualifications. Therefore, even after your degree, remember one thing, education is endless. You will need to take examinations regularly in order to have a stable career.’
Personal tutor Melanie Ashleigh was very helpful and supportive. ‘I’m not sure if she still remembers me. But I definitely need to say thanks to her and hope to make it to Southampton again so I can do so in person. I’ll certainly keep in touch with the School of Management.’
Avoid a talent crush in the credit crunch Generation Y is storming into the workplace, infused with energy, talent and attitudes geared for a fast-changing world. As many baby boomers head towards retirement and Generation Y begins to take the spotlight and target centre stage, marketers forecast this population – those born between 1979 and 1995 - will have a huge economic and social impact in the coming years. Those organisations that can effectively manage and retain them will undoubtedly perform best.
Generation Y has grown up in a culture of positive affirmation. They are ‘can do’, ambitious and confident. With no personal experience of business downturns, negative equity and tight business budgets, and no fear of uncertainty or failure, their expectations for career development and progression are untempered by the economic environment. The terms of their psychological contract are paramount - these rising stars value career development. They seek professionally recognised qualifications and transferable experience. Potentially this group could form between 30 and 40 per cent of the workforce by 2014. Managed well, Generation Y employees can significantly improve the performance of an organisation. Looks good so far? The downside is that their career expectations often race ahead of their current abilities. Generation Y members are impatient to get ahead. They want rapid progression - and it cannot come soon enough. They expect instant and frequent recognition. They yearn for international travel irrespective of the business case. They don’t want to wait around for unspecified periods of time for promotion opportunities. But the stark reality is that they lack the influencing skills of office ‘realpolitik’.
OC Issue 16 | School of Management
Managers report that this generation needs lots of feedback and guided supervision. They are career agile. They neither expect nor desire a job for life – indeed it is common to find a trail of past jobs on a CV reflecting less than five years of experience. This creates real challenges for recruitment and retention. It also means managers can not take their foot off the pedal when it comes to Generation Y and personal development - despite the very real business challenges in tighter business conditions. Investing time and energy on understanding and developing this demographic is critical to maintain their engagement and loyalty. In management theory, products and business units showing great promise are either ‘stars’ or ‘problem children’. Both have huge potential, but one is a risky option. The authors believe that members of Generation Y mirror this theory. We believe the workplace faces a significant challenge. This relates to developing and adapting resource planning and career development to harness Generation Y’s potential. This group has come of age in a 24/7, ‘on demand’ personalised environment. Naturally intuitive in a Web 2.0 environment, Generation Y seamlessly multi-task, combining work, personal life and and networking online, including exploring future career opportunities.
This group has come of age in a 24/7, ‘on demand’ personalised environment. Naturally intuitive in a Web 2.0 environment, Generation Y seamlessly multi-task, combining work, personal life and networking online, including exploring future career opportunities.
Generation Ys who do not feel they are being stretched and developed, with a clear career path, are unlikely to remain loyal to companies, even in challenging times. And of course, employees don’t need to physically leave to disengage!
Of course straight talk is easier said than done. Care needs to be taken to avoid undermining employee morale. Managers can also unwittingly influence employees negatively through their own insecurities.
HR professionals can now, more than ever, add value by keeping managers focused on longer-term resource and talent strategies, with emphasis on harmonising and leveraging different generational work styles. Using interventions such as Socratic Increasing the proficiency of managers’ questioning and performance success coaching and mentoring skills to guide coaching can radically improve and encourage realistic self-assessment organisational effectiveness and facilitate by Generation Y and educating managers self-development for Generation Ys. In short, and employees on effective career planning the manager needs to be a critical mentor and performance feedback techniques to the employee and sometimes redefine is key. This will also help managers forge and manage expectations. Many managers professional network links with Generation are familiar with anecdotal evidence of Ys. Research conducted with graduates ambitious Generation Y employees wanting recently employed in the financial sector rapid promotion, but not a fully rounded illustrates that whilst Generation Y are not business education, a kind of ‘tick list’ typically blindly loyal to organisations, they approach to career progression. will retain personal loyalty to managers they believe they will learn from and whose The challenge for HR and for managers opinion and feedback they value and respect is not to side-step this soft skill need. - true ‘talent magnet’ managers. Positive affirmation alone may gain shortterm approval from employees, but it does Generation Ys have grown up in a learning not address the real issue. Generation culture which encourages curiosity. They Y employees need to be equipped with a thrive on a challenge. HR professionals and voice to successfully influence a changing organisations, if they are astute, will ensure environment. Face-to-face coaching and feedback is critically important. This is vital to address Generation Y’s underdeveloped ‘soft’ skills.
their strategic people agenda includes meaningful opportunities to involve this population in exploring, suggesting and implementing initiatives and novel solutions to address topical business issues at all hierarchical levels. This approach is not simply a form of job enrichment; it effectively involves and immerses Generation Y in actively defining, building and creating the evolving corporate culture. In contrast, firms that do not take the long term view or who simply pay lip service to personal development run the risk of taking their eye off the real prize. The result could be a polarised Generation Y workforce of high-fliers and high-maintenance employees. Increased economic uncertainty means employers can be more selective. They will want to pick the ‘stars’ and to keep them. However, many Generation Ys will need a stark reality check to avoid the ‘problem child’ label and to avoid being an expensive talent casualty in the current credit crunch. By Graham Manville, Assistant Dean for Enterprise and Innovation for the Faculty of LASS, Senior Fellow in Strategy in the School of Management & Gill Schiel who has an extensive HR background and is a director of a HR Consultancy.
Are you ready to join the management? Specialist Masters. Whatever career path you have chosen: sciences, engineering, medical or arts, at some point you are likely to be invited to join the management. So why not give yourself a head start? Gain the knowledge and skills to take on the challenge with confidence. The University of Southamptonâ€™s School of Management is ranked among the top management schools in the UK, providing cutting edge research and education with a global focus. We will encourage you to challenge conventional wisdom, safe in the knowledge that you will be supported by our academics and your fellow students. MSc Accounting and Finance MSc Accounting and Management MSc Corporate Risk and Security Management MSc Global Supply Chain Management MSc Higher Education Management and Policy MSc Human Resource Management MSc International Banking and Financial Studies MSc International Financial Markets MSc Knowledge and Information Systems Management MSc Management MSc Management Sciences MSc Management Sciences and Finance MSc Marketing Analytics MSc Marketing Management MSc Risk Management MSc Strategic Entrepreneurship MBA Full-time and Part-time MPhil/PhD Research Programmes For more information contact us on +44 (0) 23 8059 3076, email: firstname.lastname@example.org or visit www.management.soton.ac.uk