How to effectively manage a credit

Had the company been open about its plans, it would have recognized the issues up front and worked with these groups to minimize the product’s negative impact. But working with old mental maps, the organization wasn’t willing to disclose what it needed to—and was unwilling to risk trusting the advocacy groups to become partners in introducing the product. The telephone company ended up supplying a feature, free of charge, that allows subscribers to block their telephone number from being identified. Instead of a number, the product shows “number unavailable.” Although the company had the technology to do this from the beginning, it thought the issue was a minor concern and not worth the slight effort required to implement the blocking feature.

Closed behavior is the response of those operating with a past orientation who need to maintain the status quo. The status quo offers a kind of homeostasis within closed minds or closed systems. Change creates an imbalance between what we believe and what we see occurring around us. A common defense mechanism to help us resolve this state of imbalance is the denial mechanism. For most of us, it is easier to deny information than to challenge long-held assumptions based on our history. People operating in a closed system are less trusting and less willing to share decision-making processes. They have a strong need for control. And they refuse to share their future plans lest someone “steal” them. In this age of industrial sabotage and high-level power plays, there might indeed be some justification in such a reaction. But when weighed against the possibilities of an open paradigm or future orientation—the benefits of sharing the wealth and the knowledge—the positives far outweigh any strategic advantage of secrecy. Secrecy seems pointless anyway. Today’s organizations have the ability to replicate what they see a competitor doing almost overnight. The advantages of secrecy, therefore, are minimal.

One typical reason for spread differentials between bonds of the same rating are liquidity considerations, particularly with respect to stress situations. enerally, bonds with a large issue size, issued recently and actively traded by several market makers tend to be the most liquid. Sometimes old bonds with a small issue size, too, trade at rather tight levels. This is often the case for typical “CDO (Collateralized debt obligations) names”, that is bonds that are often included when CDOs are set up. Another reason for wide spread differentials between issuers with similar credit quality is that many market participants are concerned with potential mark-to-market losses. Therefore, rather illiquid and more volatile bonds require a higher spread, even if spread volatility is rather due to market technicals than uncertainty regarding company fundamentals. Consequently, it is natural that credit spreads differ even for bonds and issuers with the same rating.

But more importantly, only a fraction of the actual credit spread is explained by credit risk, which in turn is reflected by the rating.

This means identifying customers with the greatest profit potential, rather than the ones who are most profitable now. Businesses often try to be all things to all people, disregarding the need to retain a focus on the most profitable parts of the market. Customer loyalty may be important, but if the cost of ensuring a customer’s loyalty outweighs the benefits
and revenue of that customer, why bother? Maintaining market share for its own sake is often an unwise approach. If a customer cannot be retained without losing money, then it is better to lose that customer and focus on those that will help improve profitability.