A Refresher on Cost of Capital

Harvard Business Review

You’ve got an idea for a new product line, a way to revamp your inventory management system, or a piece of equipment that will make your work easier. You’ll likely be asked to show that the return on the investment will be better than your company’s cost of capital.

Why Sit on All that Cash? Firms Uncertain on Cost of Capital

Harvard Business Review

Many are deeply uncertain about which initiatives they should fund — and one root of this indecision is a general lack of confidence in the cost of capital projections they are using to make the call. This is the key finding of the Current Trends in Estimating and Applying the Cost of Capital research released this week by the Association for Financial Professionals, a trade group of 16,000 corporate treasury and finance practitioners.

The Challenge Of Achieving Sustained Growth - Take Two

Six Disciplines

As reported in the Harvard Business Review's Daily Stat , the consulting group Bain's updated global database of Sustained Value Creators found only 12% of companies worldwide managed to grow profits and revenues more than 5.5% over the 10 years ending in 2008 and earn back their cost of capital. This study concluded that thirty of these companies were superior, based on growth over this period.

The Complexity of Business Communication

CoachStation

We may well be overcomplicating the language of leadership and business. Poor communication leads to confusion, mixed-messages and a lack of buy-in from our employees. 1) Many of us are guilty of over-using words, especially in business.

20 Quotes From The Daily Drucker

Six Disciplines

There is only one valid definition of business purpose: to create a customer. It is easier to raise the performance of one leader than it is to raise the performance of a whole mass. Listening (the first competence of leadership) is not a skill, it is a discipline. First, put down on a piece of paper a "boss list," everyone to whom you are accountable. The ultimate test of an information system is that there are no surprises. One can only be ahead of it.

CEOs Don’t Care Enough About Capital Allocation

Harvard Business Review

This failure to even mention return on capital seems perverse. It’s been more than 50 years since Nobel prizewinners Franco Modigliani and Merton Miller identified return on investments as a major component of value creation (and value destruction).

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Is Your Business Biased Against Innovation?

Strategy Driven

Many people do not typically think of metrics and accounting as roadblocks to innovation, yet you call these out as potential problem areas. The logic of NPV is to project cash flows into the future and then discount those flows back into today’s dollars at a given cost of capital. Yet for the small handful of companies that have managed to drive growth consistently – even through tough times – the payoff is great.

Strong Dollar, Weak Thinking

Harvard Business Review

The US dollar has appreciated dramatically over the past fifteen months — from a trade-weighted level of 102 in July 2014 to 120 recently. Americans can buy all sorts of foreign goods at an almost 20% discount from a year ago. Babo Schokker.

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Shutting Down Stores Doesn’t Have to Be Bad for Business

Harvard Business Review

When The Gap recently announced its plans to close 175 of its 675 stores in North America, it joined a number of other retail chains — including Staples, Office Depot, Target, and Radio Shack — that have been or soon will be shuttering a slew of outlets for one reason or another.

What If Companies Managed People as Carefully as They Manage Money?

Harvard Business Review

Today’s executives spend a lot of time managing the balance sheet, despite the fact that it doesn’t represent their company’s scarcest resource. Financial capital is relatively abundant and cheap. According to Bain’s Macro Trends Group, the global supply of capital stands at nearly 10 times global GDP. In contrast, today’s scarcest resource is your human capital, as measured by the time, talent and energy of your workforce.

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What U.S. CEOs Should Do with the Money from Corporate Tax Cuts

Harvard Business Review

The size of this windfall is remarkable, and it comes from several sources. It permits immediate expensing of many capital investments. In a world already awash in investable capital , these changes should further widen the spread between after-tax investment returns and capital costs, driving up multiples. One option, of course, is to drive up the stock price by buying back shares, and some CEOs may choose that course. Emma Innocenti/Getty Images.

Why Traditional M&A Is Becoming Less Important

Harvard Business Review

Mr. Rockefeller’s business strategy was to vertically integrate every aspect of the oil business (exploration, development, logistics, marketing) to assure an ongoing competitive advantage. His vehicles were not just mergers and acquisitions, though there were plenty of both along the way. Rather, they were interlocking series of trusts, partnerships and alliances designed for flexibility and control. The new face of deal making will take a variety of forms.

Still Many Ways to Skin a Capital Cost

Harvard Business Review

When executives evaluate a potential investment, whether it's to build a new plant, enter a new market, or acquire a company, they weigh its cost against the future cash flows they expect will spring from it. Estimating the rate at which to discount the cash flows — the cost of equity capital — is an integral part of the exercise, and the choice of rate has a significant effect on estimates of a project's or a company's value.

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The Basic Principles of Strategy Haven’t Changed in 30 Years

Harvard Business Review

Almost every time I teach the basic concepts of strategy — the five forces framework or the principles of competitive advantage — I get the same question. ” Unfortunately, this question demonstrates a lack of understanding of the nature of knowledge.

We Can’t Study Short-Termism Without the Right Metrics

Harvard Business Review

This can lead to faulty estimations of companies’ myopia. Of these, the last indicator is perhaps the most likely to accurately capture a company’s short-termism. For instance, McKinsey considered a smaller ratio of capital expenditure to depreciation to indicate short-term thinking, because it’s assumed that short-term companies will invest less, and less consistently, than other companies.

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The Three Decisions You Need to Own

Harvard Business Review

When resources are allocated from the bottom up instead of from the top down, they get out of sync with what the senior team is trying to accomplish. It reflected the reality that a lot of GE’s growth will be coming from the developing world, and the leaders have to be there.

A Refresher on Marketing ROI

Harvard Business Review

I talked with Jill Avery, a senior lecturer at Harvard Business School and coauthor of HBR’s Go To Market Tools , about this concept and what it tells leaders about their spending on marketing. Marketing ROI is exactly what it sounds like: a way of measuring the return on investment from the amount a company spends on marketing. It can be used to assess the return of a specific marketing program, or the firm’s overall marketing mix. Juan Díaz-Faes for HBR.

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The Real Reasons Companies Are So Focused on the Short Term

Harvard Business Review

Quarterly profits have only increased 5% since 2012 , but investors’ valuations of those profits (as measured by earnings per share) has increased 59% over the same period. Some argue that profits are stagnant because of short-termism—that decades of focusing on current profits over long-run innovativeness has resulted, now, in companies that are hollowed out. Instead of hiring outside CEOs, hire insiders—or at least CEOs with domain expertise.

How to Quantify Sustainability’s Impact on Your Bottom Line

Harvard Business Review

We thus wanted to figure out a way to help executives quantify the financial benefits of reducing their firm’s greenhouse gas (GHG) emissions. We chose Brazil’s beef industry as the location of our case study , both for the size and complexity of the industry and for its impact on the planet. of revenues) and $13 million to $62 million (0.01% to 0.7% of revenues). of the world market, and the second-largest beef producer and consumer.

The Case for Investing More in People

Harvard Business Review

“A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker.” ” There is a virtuous cycle between productivity and people: Higher levels of productivity allow society to reinvest in human capital (most obviously, though not exclusively, via higher wages), and smart investments result in higher labor productivity. Steven Moore for HBR.

What Your Stock Price Is Really Means

Harvard Business Review

There is a fascinating relationship between executives and the stock prices of the companies they manage. On the one hand, executives generally want their stocks to rise, affirming the perceived health of the enterprise they run and padding their remuneration.

The False Premise of the Shareholder Value Debate

Harvard Business Review

However, it feels to me that all of the argumentation contains an unhelpfully false premise. Proponents of shareholder value maximization got a crucial logical boost in the late 1970s when Mike Jensen, a friend of mine and a great scholar, made the argument that the only way a corporation can make intelligent decisions is if it has a single goal that it seeks to maximize because it is impossible to optimize two (or more) things at once.

Even for Companies, the U.S. Is Split Between Haves and Have-Nots

Harvard Business Review

The worldwide trend of rising economic inequality applies not only to individuals. companies’ return on invested capital (ROIC), and compare it with economy-wide ROIC estimates constructed by Deloitte. The comparison is imprecise, of course, but nevertheless suggestive.

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Should Companies Retain "Strategic" Cash?

Harvard Business Review

To enhance financial flexibility, companies have been retaining unprecedented amounts of cash on their balance sheets, calling it "strategic" cash to distinguish it from the "operating" cash that is needed to run the business. This raises the question of whether retaining strategic cash makes economic sense and should be viewed as a legitimate corporate finance tool in today's environment. Much of the strategic cash is typically held outside the United States.

Finally, Proof That Managing for the Long Term Pays Off

Harvard Business Review

Among the firms we identified as focused on the long term, average revenue and earnings growth were 47% and 36% higher, respectively, by 2014, and market capitalization grew faster as well. In recent years we have learned a lot about the causes of short-termism and its intensifying power. We can all see what appear to be the results of excessive short-termism in the form of record levels of stock buybacks in the U.S. and historic lows in new capital investment.

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The Most Common Mistake People Make In Calculating ROI

Harvard Business Review

Your company is ready to make a big purchase — a fleet of cars, a piece of manufacturing equipment, a new computer system. But before anyone writes a check, you need to calculate the return on investment (ROI) by comparing the expected benefits with the costs.

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Why Data Breaches Don’t Hurt Stock Prices

Harvard Business Review

Recent high-profile data breaches like those at Target and Home Depot have exposed the private sensitive information of millions of employees and consumers. Companies are spending millions in litigation costs, efforts to restore brand loyalty, and refunds. Steven Moore.

4 Ways Leaders Can Get More from Their Company’s Innovation Efforts

Harvard Business Review

A recent McKinsey report found that while 84% of corporate executives think innovation is key to achieving growth objectives, only 6% are satisfied with the innovation performance of their firm. While the execution of a conventional strategy lends itself to linear progress and clear benchmarks, innovation often proceeds by S-curves , moving at a slow crawl until it explodes at an exponential rate. Other times, however, one of those elements is missing.

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How Banks Can Compete Against an Army of Fintech Startups

Harvard Business Review

Banking for small and medium-sized enterprises (SMEs) has been astonishingly unaffected by the rise of the Internet. The marketing, underwriting, and servicing of SME loans have largely taken a backseat. Other sectors of retail lending have not fared much better. Recent analysis by Bain and SAP found that only 7% of bank credit products could be handled digitally from end to end. The problem is that about 60% of small businesses want loans below $100,000.

Divestment Alone Won’t Beat Climate Change

Harvard Business Review

The fossil fuel divestment movement — an increasingly popular approach with environmentalists — primarily tries to convince pension funds, university endowments, and other asset holders that their investments in oil and coal are unethical because of impact of fossil fuel emissions on the world’s climate. Both of us have done work on sustainable development and are keen to see a transition away from fossil fuels in order to limit climate change.

How Blockchain Is Changing Finance

Harvard Business Review

Our global financial system moves trillions of dollars a day and serves billions of people. But the system is rife with problems, adding cost through fees and delays, creating friction through redundant and onerous paperwork, and opening up opportunities for fraud and crime. It’s no small wonder that regulatory costs continue to climb and remain a top concern for bankers. This all adds cost, with consumers ultimately bearing the burden.

6 Digital Strategies, and Why Some Work Better than Others

Harvard Business Review

As incumbents fight back with their own digital strategies, our research shows that they often trigger a second wave of competition, closer to the notion of Schumpeterian imitation where incumbents start themselves to innovate, sometimes aggressively, against the threat of entrants slashing yet more revenue and profit growth. The six types of digital strategy.

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Why the 21st Century Will Belong to Family Businesses

Harvard Business Review

An oft-cited statistic is that only 30% of family businesses make it through the second generation, 10-15% through the third, and 3-5% through the fourth. How many companies of any kind are still around after the equivalent of three or four generations?

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Divestment Alone Won’t Beat Climate Change

Harvard Business Review

The fossil fuel divestment movement – an increasingly popular approach with environmentalists — primarily tries to convince pension funds, university endowments, and other asset holders that their investments in oil and coal are unethical because of impact of fossil fuel emissions on the world’s climate. Both of us have done work on sustainable development and are keen to see a transition away from fossil fuels in order to limit climate change.

Get the Strategy You Need — Now

Harvard Business Review

Two uncomfortable strategic truths face the vast majority of executives and companies – and probably you, too. Though both statements may sound extreme, they are the clear implication of new McKinsey research on how companies create value and allocate resources. The widespread absence of a powerful strategy is clear from our recent study of 3,000 of the world’s largest companies, which finds that just 20 percent in that group create 90 percent of its total economic profit.

What Private Equity Investors Think They Do for the Companies They Buy

Harvard Business Review

PE firms typically buy controlling shares of private or public firms, often funded by debt, with the hope of later taking them public or selling them to another company in order to turn a profit. We also ask questions about the organization of the private equity firms themselves.

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Why Europe's Carbon Woes Matter to the Whole World

Harvard Business Review

And it''s all because of a failure of political will in Europe to override the market''s built-in lack of flexibility and fix the imbalance between supply and demand. The supply of carbon credits is fixed through 2020 — not by a regulator or a committee, but by law.

The Key to a Jobs Plan that Works

Harvard Business Review

There is no shortage of ideas on how to fix the economy. Open any newspaper and the ideas proliferate with an air of desperation: cut corporate taxes, increase personal taxes, decrease government spending, increase government spending, deregulate, re-regulate, ad nauseum. While I don't have the credentials of many of the experts (nor do I anticipate being a father-in-law for another 20 years), I do know a few things about making decisions.

When "Creative Destruction" Destroys More than It Creates

Harvard Business Review

When changes in the natural environment accelerate, so do the extinction rates of the Earth's creatures. The same happens in business, and we are clearly entering a period where the extinction of the slow, the inflexible, and the bureaucratic is about to happen in record numbers. A list of the top 20 banks today contains only seven that were on the list a decade ago. Consider these three statistics from our ongoing analysis: Nearly two-thirds of companies now destroy value.

Providing Earnings Guidance? Think Again

Harvard Business Review

As we conclude another earnings season, then, it's a good time to consider the advisability of providing earnings guidance. It's a question that has defied consensus, with valid arguments on both sides of the issue. The arguments center on the value of establishing increased transparency with investors, and include: Higher Stock Price: The advocates for guidance argue that it can result in a higher stock price.

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