IMPLEMENTING ECONOMIC CAPITAL IN AN INDUSTRIAL COMPANY: THE CASE OF MICHELIN

Economic capital (also referred to as "risk capital" or "risk-based capital") is the amount of capital, generally in the form of equity or equity equivalents, that is necessary to provide an adequate cushion against lower-than-expected operating results. Over the last two decades, the concept has taken root among banks, particularly in determining the amount of capital needed to protect against financial distress in the event of unexpectedly large credit losses.
Michelin is in the vanguard of industrial companies that are beginning to apply economic capital concepts. The company uses an option-pricing approach that effectively allows the market to identify the level of economic capital that is expected to maximize corporate value. Michelin has also begun the process of attributing economic capital to individual business units and activities. By so doing, the company is able to use a single, company-wide hurdle rate for all projects and business units. Thus, instead of raising the discount rate when evaluating riskier projects and businesses, management assigns them larger amounts of economic capital (and, hence, a higher charge for use of that capital).
The use of economic capital to evaluate ongoing activities and contemplated investments makes it more likely that decisions will translate into increased shareholder value. A case in point is outsourcing. As illustrated in an example analyzing the company's decision to sell but continue sourcing from a textile factory, outsourcing decisions typically reduce a firm's required amount of economic capital—and thus an analysis based on the use of economic capital provides a more realistic picture of the expected value added from such transactions.     

Tax wedges,bid-ask spreads,and international financial parity conditions

Tax wedges do not induce a priori inconsistencies in the international Fisher effect nor do they render forward rates biased predictors of future spot rates once proper account is taken of the bid-ask spreads present in spot and forward foreign currency transactions.     

On the efficiency of a chinese-type work-point system

At least since 1957, the basic system of incentives in Chinese agriculture has been based on a point system. Each task is assigned a certain number of points and the output outa work team is divided between members proportionally to the number of points they have acquired. This paper constructs a simple model of the point system and shows that it can lead to an efficient allocation of labor, even in the presence of uncertainty.     

Trends in business thought and literature: International perspectives on managers in a dual society

New winds are blowing as the 20th century draws to a close. Globalization of markets, emerging technologies, and a green alliance are factors leading to drastic changes in the structure of business and indeed in humanity itself. Market globalization results from the shrinking of the planet under a transport and telecommunications revolution. Television has become a global mirror that reflects human society, albeit imperfectly. The image transmitted is of a multicultural, heterogeneous society with a growing gap between world socioeconomic realities. Management is and will increasingly be a critical resource for development. Considerable investment has been made in all countries of the world on the training and development of managers and emerging realities will pose unprecedented demands on management development. These new challenges include new work methods, energy constraints, ecological concerns, demographic growth, product shortages, and geo-social-political instability. A radical change can hardly be expected in management education in the short term. It is possible, however, to insert an “innovation gene” in management education institutions to provoke a lasting change process. To determine such a “gene” it is advisable to screen some of the assessments that were made recently and to propose a search for “islands of modernization” in management education and training. © 1993 John Wiley & Sons, Inc.     

The end of the American challenge?

“Fifteen years hence not Europe will be the third industrial power in the world, after the United States and the USSR, but American industry in Europe” Servan-Schreiber wrote 1967 in his “The American Challenge”. Now those fifteen years are past. What has happened really?