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.

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What You Don’t Know About Sales Can Hurt Your Strategy

Harvard Business Review

The goal of strategy is profitable growth, meaning economic value above the firm’s cost of capital. There are basically four ways to create that value: (1) invest in projects that earn more than their cost of capital; (2) increase profits from existing capital investments; (3) reduce the assets devoted to activities that earn less than their cost of capital; and (4) reduce the cost of capital itself.

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.

The Rise of FinTech in Supply Chains

Harvard Business Review

A new type of services company could transform global supply chains: Financial technology companies that act as intermediaries in facilitating transactions between a company and its suppliers. the supplier gets $9,959 of the $10,000).

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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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.

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.

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.

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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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.

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.

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.

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.

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?

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.

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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A Refresher on Price Elasticity

Harvard Business Review

In fact, determining price is one of the toughest things a marketer has to do, in large part because it has such a big impact on the company’s bottom line. One of the critical elements of pricing is understanding what economists call price elasticity.

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.

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 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.

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.

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.

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.

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.

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.

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.

The Comprehensive Business Case for Sustainability

Harvard Business Review

Today’s executives are dealing with a complex and unprecedented brew of social, environmental, market, and technological trends. Yet executives are often reluctant to place sustainability core to their company’s business strategy in the mistaken belief that the costs outweigh the benefits. Hoping to alleviate their concerns, this article also provides concrete examples of how sustainability benefits the bottom line.

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.

Desperately Seeking Simplicity

Harvard Business Review

The softly drifting snowflakes that greeted me every morning at the World Economic Forum in Davos this year were an inadequate warm-up for the cold blast of reality I felt in session after session during this five day Congress on the "state of the world.". I heard it in the opening remarks of WEF founder Klaus Schwab who talked about a growing phenomenon of "burn-out" among world leaders with finite energy and time to put against seemingly bottomless complexity.

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.

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.

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.

An HBR Refresher on Breakeven Quantity

Harvard Business Review

Marketers often have to make the call on whether a certain marketing investment is worth the cost. Can you justify the price tag of the ad you want to buy or the marketing campaign you’re hoping to launch next quarter? ” The company sells each pair of flip flops for $24.00.

How CMOs Can Get CFOs on Their Side

Harvard Business Review

Marketing is in the midst of an ROI revolution. The arrival of advanced analytics and plentiful data have allowed marketers to demonstrate return on investment with a degree of precision that’s never been possible before. In our experience, companies that adopt this marketing analytics approach can unlock 10–20 percent of their marketing budget to either reinvest in marketing or return to the bottom line.

How Passion Can Revolutionize Digital Technology, AND Change The.

Terry Starbucker

This once proud company had taken a bunch of body blows, and was staggering – badly. Its CEO at the time was great at cutting costs and preserving capital, but investors weren’t buying it.

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.

What Shareholder Value is Really About

Harvard Business Review

This blog post is part of the HBR Online Forum The CEO's Role in Fixing the System. Most CEOs, as well as some of the other contributors to this forum, appear to have a false sense of what creating shareholder value means. Concepts like "societal value," "shared value," and "customer capitalism" are offered as desirable and more enlightened substitutes. The problem is that the true definition of creating shareholder value seems to have gotten lost.

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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Why Those Guys Won the Economics Nobels

Harvard Business Review

The Swedes had given the award to one guy, Eugene Fama , who is best known for originating something called the efficient market hypothesis, another guy, Robert Shiller , who once called the efficient market hypothesis “one of the most remarkable errors in the history of economic thought,” and a third guy, Lars Peter Hansen , whose work is so dense that even academic economists couldn’t satisfactorily explain it or its connection to Fama and Shiller. That’s kind of a deep insight.