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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.

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).

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.

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.

EPS 4

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.

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?

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.

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.

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.

EPS 4

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.

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.

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 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.

IPO 4

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.

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.

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.

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.

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.

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.

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.

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.

GDP 1

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.

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.

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.

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.

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.

NPV 2

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.

Case Study: A Short-Seller Crashes the Party

Harvard Business Review

When the well-known hedge fund manager and short-seller Jeremiah Hughes first put Terranola in the spotlight, issuing ominous warnings about unsold products, a looming patent expiration, and flawed growth projections, the considered judgment of the executive team was to do nothing. “I Terranola’s stock began tanking that afternoon, precipitating a slide that took the Seattle-based company’s reputation, employee morale, and ability to raise capital along with it.

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.

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.

Untangling Skill and Luck

Harvard Business Review

When asked why he was so intent on finding that number, he replied, "I dreamed of the number seven for seven nights. Most of us understand and accept this statement, but there are two good reasons why few of us understand the relative contributions of each. Similarly, if we suffer an adverse outcome because of poor skill, we blame our bad luck. We have psychological defense mechanisms that blur our view of the relative role of skill and luck.