Harvard Business Review

APRIL 30, 2015

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. To learn more about this commonly used business term, I spoke with Joe Knight, author of the HBR TOOLS: Return on Investment and co-founder and owner of www.business-literacy.com.

Cost of Capital 9

Cost of Capital Finance Discount CFO 9

Harvard Business Review

MARCH 10, 2011

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.

Discounted Cash Flow 12

Discounted Cash Flow Discount Cost of Capital Chief Financial Officer 12

Six Disciplines

MARCH 15, 2011

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.

McKinsey 90

McKinsey Cost of Capital Globalization Consultative 90

Six Disciplines

MARCH 25, 2011

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.

Drucker 114

Drucker Cost of Capital Definition Commitment 114

CoachStation

SEPTEMBER 16, 2015

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. Gabrielle Dolan: The Future of Leadership Conference, Bris, Sept 2015 After attending the Future of Leadership – Workplace Culture conference in Brisbane last week I have been reflecting on the content from some of the speakers. One stops to put on a pair of runners.

Competitive Advantage 112

Competitive Advantage Porter Storytelling Conference 112

Terry Starbucker

AUGUST 29, 2010

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. And change it did, because the new CEO had a vision that went beyond product, and costs, and overhead, and costs of capital.

Technology 238

Technology Cost Price Video 238

Harvard Business

JUNE 22, 2016

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. They enable both the buyer and supplier to improve their working capital by making it possible for the former to extend its payables and at the same time accelerate payment to the latter. the supplier gets $9,959 of the $10,000).

Supply Chain 31

Supply Chain Transportation Cost of Capital Finance 31

Harvard Business

SEPTEMBER 13, 2017

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.

Supply Chain 32

Supply Chain Net Present Value Retail NGO 32

Harvard Business

DECEMBER 13, 2017

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.

Short-term 30

Short-term Decentralization Silverman CEO 30

Harvard Business Review

SEPTEMBER 8, 2014

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.

Debt to Equity Ratio 8

Debt to Equity Ratio Cost of Capital Incentives Cost 8

Harvard Business

SEPTEMBER 4, 2017

“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.

Kaizen 44

Kaizen Human Capital Agility Gordon 44

Harvard Business

FEBRUARY 1, 2018

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.

Supply Chain 32

Supply Chain Discount Retail Fashion 32

Harvard Business

JULY 25, 2017

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.

ROI 30

ROI CFO Marketing Marketing Mix 30

Harvard Business

APRIL 5, 2017

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.

EPS 31

EPS Metrics Depreciation EBITDA 31

Harvard Business

AUGUST 20, 2018

Activist hedge funds have become capital market and financial media darlings. The Economist famously called them “capitalism’s unlikely heroes” in a cover story, and the FT published an article saying we “should welcome” them. The most comprehensive study of activist hedge fund performance that I have read is by Yvan Allaire at the Institute for Governance of Private and Public Organizations in Montreal, which studies hedge fund campaigns against U.S.

TSR 28

TSR Hedge Sample Price 28

Harvard Business

OCTOBER 25, 2018

The debate about superstar firms and superstar effects has been intensifying, partly in response to the rapid growth of global US tech companies. We define superstar to mean a firm, sector, or city that has a substantially greater share of income than peers and is pulling away from those peers over time. We analyzed nearly 6,000 of the world’s largest public and private firms with annual revenues above $1 billion. counties, which account for 90% of GDP in that sector.

GDP 34

GDP Intangible Assets Industry Metrics 34

Harvard Business

SEPTEMBER 26, 2016

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.

Objective 32

Objective Cost of Capital Letter Environment 32

Harvard Business Review

MARCH 10, 2011

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.

DCF 12

DCF Discounted Cash Flow Cost of Capital Discount 12

Harvard Business

MAY 25, 2018

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.

Incubator 30

Incubator Insurance Airlines Competitive Advantage 30

Harvard Business

FEBRUARY 7, 2017

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.

Long-term 35

Long-term EPS CAPEX Sample 35

Harvard Business

OCTOBER 10, 2017

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.

ROI 30

ROI Operations Benchmarking McKinsey 30

Harvard Business

JULY 31, 2017

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.

ROI 30

ROI Hotels Cost Comparison 30

Harvard Business

MARCH 1, 2017

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.

Finance 37

Finance IPO Venture Capitalist Banking 37

Harvard Business

APRIL 26, 2017

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.

Banking 35

Banking Credit Scoring Hedge Competitive Advantage 35

Harvard Business Review

APRIL 16, 2015

In his 1987 letter to investors, Warren Buffet made the following observation: “the heads of many companies are not skilled in capital allocation, and … it is not surprising because most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration or, sometimes, institutional politics.” This failure to even mention return on capital seems perverse.

ROIC 8

ROIC Merton McKinsey Cost of Capital 8

Harvard Business Review

APRIL 16, 2012

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.

Offshoring 12

Offshoring CFO Cost of Capital Pharmaceuticals 12

Harvard Business Review

OCTOBER 13, 2015

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. The standard concern is that the high US dollar hurts America’s manufacturing cost position because US production costs are inflated by the dollar’s appreciation. Babo Schokker.

EPS 8

EPS Short-term Price Cost of Capital 8

Harvard Business Review

JUNE 26, 2015

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. In retailing, most products, stores, business units, and even firms go through a life cycle of birth, midlife, and death.

Discount 8

Discount Cost of Capital Banking Advertising 8

Harvard Business Review

APRIL 23, 2015

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. It the same as saying to a maths professor who is explaining the principles of calculus, “These ideas are more than 100 years old.

Porter 10

Porter Price Cost Competitive Advantage 10

Harvard Business Review

SEPTEMBER 8, 2011

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.

Banking 12

Banking Cost of Capital Incentives Insurance 12

Harvard Business

OCTOBER 21, 2016

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.

Supply Chain 37

Supply Chain Price Depreciation Loyalty 37

Harvard Business Review

OCTOBER 15, 2013

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. At many companies the total cash investment in acquisitions, R&D, and fixed assets has not earned back its cost of capital after adjusting for the time lag in realizing incremental benefits. We are shifting our center of gravity.” CEOs face countless decisions.

Charan 8

Charan Delegation Fixed Assets CFO 8

Harvard Business Review

NOVEMBER 7, 2012

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 vast majority of executives think that their price is too low, but few can articulate an analytical case that backs that intuition. Next, compare the expectations of the market with those of management.

Analysis 8

Analysis Marketing Consensus Disruptive Innovation 8

Harvard Business Review

JUNE 27, 2012

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.

Kotter 12

Kotter Airlines Long-term Cost of Capital 12

Harvard Business Review

AUGUST 27, 2015

The worldwide trend of rising economic inequality applies not only to individuals. Companies in the top one-fifth of profitability earn, in aggregate, about 70 times more economic profit (accounting profit less cost of capital) than those in the middle three-fifths combined, according to McKinsey’s database of 3,000 large, publicly listed, nonfinancial U.S. The comparison is imprecise, of course, but nevertheless suggestive.

ROIC 8

ROIC Hypercompetition McKinsey GDP 8

Harvard Business Review

MAY 4, 2012

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.

CFO 12

CFO Depreciation Metrics Price 12

Harvard Business Review

FEBRUARY 2, 2012

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.

Porter 12

Porter Goleman Competitive Advantage Sharpe 12

Harvard Business Review

APRIL 9, 2015

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. If a company earns a $500,000 profit in a calendar year, shouldn’t it have $500,000 more in the bank on December 31 than it did on January 1 of that year? Most of your time will be spent on this step.

Depreciation 11

Depreciation Finance Net Present Value Rate of Return 11

Harvard Business Review

NOVEMBER 4, 2014

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.

Constraint 8

Constraint Cost of Capital Price Marketing 8

Harvard Business Review

NOVEMBER 4, 2014

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.

Constraint 8

Constraint Cost of Capital Price Marketing 8

Harvard Business Review

NOVEMBER 20, 2013

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.

McKinsey 8

McKinsey Resources Competitive Advantage Cost of Capital 8

Harvard Business Review

MARCH 31, 2015

Recent high-profile data breaches like those at Target and Home Depot have exposed the private sensitive information of millions of employees and consumers. While consumers are rightfully worried that their personal information may be compromised, shareholders and companies’ management have a wider set of concerns, including loss of intellectual property, operational disruption, decreased customer trust, tarnished brand, and loss of investor commitment.

Banking 8

Banking Loyalty Cost Cost of Capital 8

Harvard Business Review

OCTOBER 3, 2011

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.

Price 12

Price Long-term CEO Short-term 12