Tag Archives: MBA

Lessons from a Masters In Business Administration: Risk/Reward & Predicting Cash-Flow

Risk and Reward/Predicting Cash-Flow: Investors think as much about risk as they do reward. Most people tie their investments to resources, expecting them to grow, and with it, their own rewards. Where rewards are expressed in percentage growth, risks are harder to characterize. Guessing a company’s future cash-flow involves looking at past revenue, you then make reasonable assumptions based on how the new product will fair or how their rivals will be purchased. A dollar today is worth more than a dollar in a year’s time so if I buy a one-year bill that promises 5% interest, you will have $1.05 next year. Whereas a dollar next year is just a dollar. If I want a dollar next year, I could buy 95.2% worth and have the 4.8% to spend. This works with the federal government but a company or angel investor can expect to demand a higher return to compensate for the risk of their capital. The next step is to determine what the return on investment would be for these investors. Opportunity costs; it’s better to invest in an apartment than a stock. Apartments are illiquid, and it is much easier to trade in and out of other investments. Savings have low returns because they are highly liquid. If you tied up your money for a long period, it would bring about higher returns. Imagine a house party where you are going to meet the person of your life. If you didn’t go to that house party, then you would have missed out and the risk is enormous. Risk is actually not just the possibility of a bad thing happening, but of something good not happening.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: Beta Measures

Beta Measures: describes the risk of a stock. A beta of 1 implies that the stock, on average, tracks the market perfectly. If the market goes up 5% so does the stock. Beta 1.5 would mean the stock goes up 7.5% or if the market goes down, the stock goes down by -7.5%. Therefore, a low beta stock is less volatile than the market. So starting your own company is high-beta, and working in a consultancy is low-beta.

Note however that there are skeptics like Warren Buffett because a perfectly good company with strong revenues, low costs, and a sustainable competitive advantage might one day have the CEO kill herself. Suddenly it is a high beta stock. So beta is not a good way of measuring a business’ value. Alpha is a better measure. Warren Buffett is good at what he does, he found his alpha. It is basically the value add that one person gets over another person that does the exact same thing. Picking the right investments, and bundling them together is all about finding companies that have that alpha.

To gauge if a company is worth investing in, you should ask: do they work hard? Are they honest? Likable? Creative? Entrepreneurial? Do they spend more than they earn? Are they mortgaged to the hilt? What if they lost their job tomorrow? Would they find another one quickly? Look at how they prioritize their spending, and you will see how they prioritize their life.

How To Think In Consultancies: you need to reach big conclusions from a handful of numbers. You have tylenol sales from one store, and the number of people who use the store, then the number of (as a percentage) people who live in the area, then apply it nationally. And you gross the sales at that original store to get a national estimate of Tylenol sales. That’s how you have to think in a consultancy.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: Leadership and Corporate Accountability Class

Leadership and Corporate Accountability Class: Leadership & Corporate Accountability Classes teach MBAs to avoid chasing money down sewers. Ethical moments do not come with labels. M x F = D which means that a court decision (D) is the product of a legal model (M) and the facts (F). Is bluffing true ethics? Business seems to be about playing with a set of rules, and not seeking the higher ground. If you found out that hackers had broken into your credit card system you are obligated to tell your customer immediately. If you are bluffing your business with people’s lives in the balance, you are breaking an ethical code in many peoples opinion…think Jeff Skilling at ENRON. HBS shoulders a lot of blame over the years in business, so they have tried to quantify ethics, and leadership to counter-act this problem. People are taught accounting on the condition that they do not then manipulate their company’s earnings or minimize taxes to such an extent that it amounts to crime or ethical problems.

Lavish Executive Compensation: mediocre CEOs in the US and Europe are habitually paying themselves as if they are entrepreneurs or athletes. Is this wrong? Friedman hated the idea of companies donating to museums or sending employees to work in homeless shelters. That is robbing shareholders. Companies have a moral and economist purpose. The best employees want to work for good companies with good cultures, not just maximizing ones.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: What Is Strategy?

What Is Strategy? Michael Porter’s five forces have shaped business strategy since his theory was published in 1980. Five Aspects of Business Strategy: 1) barriers to entry, 2) supplier powers; 3) customer power; 4) substitutes, 5) rivalry. An example of the application of this model would be a London kebab shop: barriers are relatively low, does not require highly skilled labour, and anyone can buy a kebab shop with a bank loan. That is why so many immigrants run kebab shops in London UK, for example. If you speak bad English, have little money, and are prepared to work hard, kebab shops are a great first entrepreneurial endeavor. The suppliers to a kebab shop are those who make meat rotator machines and the variable costs like the Halal meat. There is plenty of both, so prices are lowered, and there are options to change suppliers at any time. The bad news is customers, as there are 100s of kebab shops in central London. If they don’t like your kebabs, they can go to another. Competition is fierce, and stoked by low barriers to entry, weak suppliers, powerful customers, and substitutes in the market where the business is located. In addition to the five forces is “6) complements”: Complement are for example, PCs you could get the software, and printers. The better software, and computers make the PC more desirable. Nurturing complementary businesses can have a positive effect on your business.

Competitive Advantage: either you have a cost advantage where you can make things cheaper and sell them cheaper OR you differentiated your product somehow either by making it better than your rivals or by designing it differently to appeal to a different group of people. There two forms of differentiation were known as vertical or horizontal. Vertical is meant to be better or worse; horizontal means different. Vertically differentiators would mean for example that you have two cars, one with better brakes, and steering. That car is better therefore they are vertically differentiated. If you have identical cars but one has been painted pink they are horizontally differentiated. One nightmare for a business is to have no advantage, to be neither the cheapest produce nor clearly differentiated. Bill Gates has a picture of Henry Ford in his office because it reminds him that success breads complacency. Ford was over taken by General Motors overtime. When the iPad came out, Amazon introduced the kindle fire…

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: An MBA Is About Taking Control

MBA = Taking Control: Business school is about gaining control of your financial future. HBS believes that their experience training can also be applied to other spheres- politics, education, health care, the arts. Business culture is pervasive so learn it from within.

Case Studies Are A Learning Device: The entire HBS curriculum is built on the law school model of case studies. The question you will be asked each time is: What would you do? How do you think about solving a given problem? There is a difference between people who are tough-minded, and people who are tender-minded according to Malcolm McNair. Toughness refers to the intellectual apparatus, and toughness of spirit. It is the attitude and training that allow us to seize facts, and make courageous decisions. They know the answer is not in a book, but in real life cases. Grading will be for your benefit as a student, but will not be used by recruiters.

The Baron & The Two Peasants: learning accounting: Imagine a Baron in a small patch of present day Bavaria. The baron is responsible for the well-being of many peasants who occupy the lands around his stately castle. The baron has two peasants whom he asks to farm two different hectares of land. He supplies them equally with seed, fertilized, oxen, and allows them both to lease a plough. The two peasants Sam and Jesop return a year later with different amounts of wheat with the conditions of other resources having deteriorated over the year.

Q: Who was more successful?

This is an accounting case as you are now expected to determine which peasant was more successful. An MBA should be expected to generate an income statement and balance sheet for the two farmers. So, you might need to depreciate the oxen, and you might put the full value of Sam’s plow under ‘costs of goods sold.’ As you begin to play with the empirical figures, you’ll see that the answer of who was more successful shifts according to your metrics. There is no right answer. So the lesson in accounting is actually to use common sense rather than cling to rules.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: Further Strategy

Further Strategy: you need to sound out the cost and willingness to pay with your clients. You will see the source of the competitive advantage if you look at these forces. To understand that cost and willingness to pay you need to breakdown the business into its multiple parts, and then try to integrate them in different ways. If you move production, how does it effect culture? You always seek to empower everyone in your business; it was a guy from the mail room that discovered that you could cut a hole in the bottom of the pumpkin in order to allow a candle to be covered by it rather than cutting it from the top: Think Different.

Identify the bad customers who will make a spectacle early on. Business is about the people who run it, regardless of what an Excel spread sheet will tell you. People buy from people. You can tell in Indonesia, which companies are most closely connected to the party leader by what happens when that leader is taken ill. You don’t need to get a patent for a drug, if you can simply keep it a secret as Coca-Cola had with their soft-drink. Environmental campaigns often attack companies that will likely get their campaign the most attention. They may not target the most obvious environmental offenders.

Questions Upon Leaving Your MBA Program: How will I find a mentor? How will I pay off my student loans? How do I make sure I don’t get sacked after two years? People choose consulting because they aren’t sure what they want to do. You should start to recognize your weaknesses, and focus on developing your strengths. Are you willing to make a Faustian pact to work long-hours, and skew your work to family balance?

Rules To Live By: when we look back, the big things will look small and the little things will look big;

  1. Comparison is the death of happiness;
  2. We are all we have. No one else will rescue us.
  3. Resist the temptation to be a short-termist;
  4. Be honest with yourself about what jobs are the right ones for you.
  5. Keep your moral compass
  6. Maintain the proper balance between your professional career and your personal life.
  7. Be unconventional: success should not be based on monetary gain, but value.
[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: Mergers and Acquisitions / Porter’s Theory

Mergers and Acquisitions: Company A announces a merger with Company B, it offers a price x, for Company B which is about Company B’s current stock market valuation. The arbitrageur asks himself, is the likelihood that this deal will actually go through? Will the shareholders of Company B accept it? Will there be account fraud of Company B? What if the CEO of Company A dies? The stock prices of the merging companies move around more than usual as investors weigh up the probability of the merger’s taking place. For risk arbitrageur, the risk of losing $100,000 is .1% and the risk of losing $500 is 20%. They spend an inordinate amount of time thinking about the 20% chance ruining a day instead of the .1% chance of running a career. Everywhere in life there are small risks of disaster that you would think of as an arbitrator: chances of the babysitter turning to be a kidnapper; and the costs would be infinite.

Porter’s Theory: Michael Porter believes that competition is the engine of productivity, growth and every business, town or country should be seeking out a competitive advantage. He’s not interested in cost and willingness to pay…

Private/Public Sectors: The relationship between business and government. Government gets its tax revenue from businesses, don’t ever forget that fact. Many believe that business does not need government whatsoever. MBAs are taught to believe that business is the most important institution in society.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: With Money Comes Freedom, Entrepreneurs and When Pitching To A VC

With Money Comes Freedom: Business and government can work together. You can come from business, and move into government ie. Mitt Romney, or work in government and transition into business ie. Japanese civil servant system. In order to be successful in business/government ventures, David Rubenstein believes that you should be:

a) reasonably intelligent; b) have a strong work ethic; c) the ability to get along with others; d) desire to build something important; and e) the ability to keep one’s ego in check. People who mix government and business like Rubenstein have power over the most important aspect of the human experience: they control their time.

Work/Life Balance: Gandhi said that you should “Live as if you were to die tomorrow. Learn as if you were to live forever.”

When Pitching To A VC: it is vital to “get them juiced in the first five minutes. Get them captured and fully engaged quickly.” Do not start the pitch with Macro conditions. Aim high, solicit big players for input and advice. Sell with personal passion, make a personal connection. As venture capitals have become institutionalized, the people in it have become less and less venturesome. Those who visited campus were overwhelmingly male and white or Asian. VCs like to think of themselves as rule breakers but are frequently uniform.

Choosing Your Electives In Your MBA: You will need to rank your choices in order of preference. The challenge of picking the right courses was time consuming. You could choose to deepen your knowledge of one specific area. Or you could work on your weaknesses. Or finally, you could take the easier courses to free up time.

Entrepreneurs: to be a successful entrepreneur you must be a strong sales rep. Sometimes it is about solving the customers’ problem so efficiently that competitors come to join the company. The difference between success and failure as an entrepreneur is very fine.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: Juicing Up The Returns

Juicing Up The Returns: Imagine 2 companies, each has assets worth $1,000,000. The first has funded its assets with $800,000 in borrowed money and $200,000 in equity from investors. The interest rate is 10% on borrowed money and the tax is 50%. Each year the $1,000,000 worth of assets leads to $200,000 in operating profits. $80,000 goes to pay interest on the debt, which the government calls an expense, of the $120,000, $60,000 pays taxes and the remaining $60,000 goes to equity holders. For their $200,000, the equity holder get a 30% return annually. Now imagine the same company funded with equity alone. They produce the same $200,000 in operating profits. There is no interest payment. $100,000 goes to government in taxes, leaving the equity holders with $100,000 which is a 10% return.

So, which would you want a Juiced or not juiced company?

Next you might buy a non-juice (debt-free) company, and dump your debt incurred into that new company. If at all possible, this will equal or exceed the amount of cash you yourself put into the deal. So you then are able to recoup your investment. Pooling debt into a company carries the innocuous term “leveraging the balance sheet.”

Now, you need to generate cash to keep up those interest payments. The company will be better run because it needs to run well or die, and it can be sold two or three years down the line at a huge profit:

First, you must strip the HQ down to its bare essentials, removing any perks or visible signs of comfort. Gut the health plans, fire loyal employees to keep up with crushing interest payments. Then you get consultants who are sharp-suited number crushers booked into the local Four Seasons, who tell you to keep squeezing the company, and the people within it. If you do so, you will be rewarded handsomely. Management is loyal to its equity holders, even though they plan to drop the business within a few years. Then the consultants send you a bill for their services which states is so high that you will have to take on more debt. After all, the government pays a chunk of it to charge interest as an expense. This enhances the returns of equity.

Next, you float the company on the stock exchange as if it has been ‘improved.’ The private equity investor recouped his original investment months ago by selling their stocks off in the IPOs very young stages. If the investor bought it for $1 billion and can sell it for $3 billion, the $2 billion is all his + the original equity. There will be a lot of suckers at the end of that ride!

This behaviour can potentially victimize communities where hedge funds are in it for the money, and see companies as economic machines. The social role of a company is zero. A private equity investor can stay in his lavish apartment, and trust that everything will be right without having to deal with the day to day consequences of their actions.

So some important questions need to be asked: Where are the leaders and difference-makers in private equity? What conscience do they bring to their work? What balance do they see in their roles as economic and social actors?

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]

Lessons from a Masters In Business Administration: Negotiations 101, Leverage and Debt Theory

Negotiations 101: the fundamentals begin with discussing ethics followed by the basic analytical tools of negotiations. The negotiator often tries to misled his opponent but the risk of unethical negotiations is a bad reputation. Bluffing is fine in negotiations. The sophistication of the parties is also relevant. Selling a complicated derivative to an economic illiterate and then blaming that person for not understanding the contracts hurts you in court proceeding.

There are three schools of negotiators: (1) the poker player who regards it all as a game; (2) the idealist who insists on doing the right thing every time; and (3) the pragmatist, who knows that what goes around comes around. BATNA is the ‘best alternative to a negotiated agreement’. BATNA prevents you from making a bad deal by asking what the alternatives might be; in other words you have a walk away strategy. ZOPA is the zone of possible agreement which means the general area/scope of agreement possible. When you go into a negotiation, you should determine the other person’s position a priori. The gifted negotiator adopts a three-dimensional perspective, working both at the table and away from it. If negotiations stall, the negotiator should go to the balcony to gain perspective and reframe the issues, moving from defensive positioning to shared interests.

Leverage and Debt Theory: hedge funds and private equity are awash with money. So much so that investment banking is considered a second tier move. Surely running a company is more important than banking services? Private equity brings managers, and owners closer together. In Private Equity and Hedge Funds, the money comes courtesy of debt. Debt is actually not a bad thing, because it allows you to leverage, structure your financial deal etc. Things become more possible using this method. Debt focuses the mind, forcing people to concentrate on THE ONLY THING THAT MATTERS: the cash flowing out of the business. Debt for lack of a better word, is good. Debt works. If a company is struggling to be valuable, then you would simply load up the balance sheet with debt. More to come.

[This is a synopsis of several books on the MBA experience including What They Teach You At Harvard Business School by P.D. Broughton]