A Blueprint for Digital Companies’ Financial Reporting

Harvard Business

On June 25, 2018, Facebook lost market capitalization of more than $100 billion in just two hours of trading after it announced its quarterly performance, despite exceeding analysts’ earnings forecasts. This example illustrates that investors consider information beyond just earnings as value-relevant. Information on revenue and its drivers are, without doubt, the digital companies’ most value-relevant disclosures from the investors’ perspective.


Why Quants Should Manage Your Supply Chain Risk

Harvard Business Review

When Thai flooding created significant shortages in the hard disc drive market, manufacturers lost millions of dollars. Let's start by defining what we mean by risk, which is simply the possibility of more than one outcome (of unequal values) to a given future state. The possibility of more than one future outcome can very easily generate a cost in the present. Because the fact that value is not guaranteed in the future lessens value in the present.


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Why We Need to Update Financial Reporting for the Digital Era

Harvard Business

The market caps of just four companies, Apple, Alphabet, Amazon, and Microsoft, now exceed $3 trillion. Their combined assets of $944 billion are an order of magnitude lower than the combined assets of $7,700 billion of the largest 3,177 companies in 1986, when the aggregate market capitalization reached $3 trillion for the first time. In our recent HBR article , we argued that financial statements fail to capture the value created by modern digital companies.


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

Harvard Business Review

We also know that private equity funds have outperformed public equity markets over the last three decades , even after the fees they charge are accounted for. ” PE firms typically take three types of value increasing actions — financial engineering, governance engineering, and operational engineering. These value-increasing actions are not necessarily mutually exclusive, but it is likely that certain firms emphasize some of the actions more than others. (We


How to Quantify Sustainability’s Impact on Your Bottom Line

Harvard Business

We found that sustainable and deforestation-free practices created significant financial benefits for all players in the industry’s value chain. Specifically, our analysis found that the net benefits to ranchers ranged from $18 million to $34 million (12% to 23% of revenues) in net present value projected over 10 years. For slaughterhouses and retailers (Brazilian operations), we also projected positive benefits: $20 million to $120 million (0.01% to 0.1%

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. Finance Marketing

CFO 12

Only the CEO Can Make the Big Bets

Harvard Business Review

In the late 1990s, we presented the Gretzky metaphor to a division of a large, global bank. But instead of trusting our "educated gut" and making the bet, we used traditional market research to ask customers in those segments what they thought about the idea right now! And using net-present-value estimates for "beginning" ideas is nuts. Incremental innovation can and should be pushed down into the operating levels of the organization.

Don’t Let Your Company Get Trapped by Success

Harvard Business Review

This can be quantified by analyzing the extent to which the share prices of S&P 500 firms are driven by a firm’s present value of future growth options (PVGO) rather than cash flow from current operations. This overall decline represents an enormous loss in future option value. Investors now value the future growth options of these firms relatively less—by a staggering $1 trillion. It’s harder to stay on top than to get there.

Beware of Short-term Management, Not the Short-term Investor

Harvard Business Review

The short-term investor does not reduce the firm's long-term competitiveness and value;short-term management does. Moreover, I fail to see any argument why such short-term traders, by themselves, destroy value for the economy as a whole. Clearly, some of these traders could get very rich even while others lose money, but these trades — unless they influence operators within companies — amount to little more than robbing Peter to pay Paul.

How to Choose the Ideas Your Company Should Invest In

Harvard Business Review

Can we get to the market without any technological miracles? After exploration, there are lots of ways to plan, but at the very least a good plan details the target customer, crucial stakeholders, the essence of the idea, key economics, the commercialization path, proposed operations, the team, financial requirements, and the action plan. Note what isn't part of the decision: an idea's net present value or return on investment.

The Big Trends Changing Community Development

Harvard Business Review

Three lines of progress are crossing, and rapidly reshaping how businesses and nonprofits together strengthen the locales in which they operate. Take the example of child sponsorships, highly popular as a marketing tool for many NGOs. Child sponsorships have been operating since 1953, and all of them share the high-level objective of breaking the cycle of poverty. From the private sector, the trend is toward recognizing the business value of community progress.

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Warren Buffett's 2010 Shareholder Letter: What to Expect

Harvard Business Review

Establish "an unbending standard of performance" : Since 1965, Buffett has annually compared Berkshire's compounded growth in book value per share to the growth in the S&P 500 (plus dividends). But why compare apples (book value) to oranges (share price and dividends)? Buffett explains that book value is the best proxy for "intrinsic value," the net present value of all estimated future cash flows. billion more than their total tangible book value.

P&L 17

Why Is an App Worth as Much as a Small Oil Field?

Harvard Business Review

While on the surface, the dirty business of fossil fuels is nothing like Silicon Valley, many in the oil business have moved beyond the standard net present value (NPV) model for assessing the merit of investments. If you’re evaluating the rights to new shale oil reserves in a place like North Dakota, today you’d rely instead on a different economic model: option value. But Facebook has also bought itself time to figure out how to extract value from that audience.

NPV 12

Will You Be Writing Off Your Investment in Egypt?

Harvard Business Review

For decades multinational corporations have poured hundreds of billions of dollars of foreign investments into emerging markets , sometimes preferring the investment climate of "stable" authoritarian regimes over "messy" democracies. If the first possibility prevails, then it's hard to see how the short-term hit to profits created by political instability could subsequently be made up (unless an investor were granted some favor that created or locked in a favorable market position).

Shape Strategy With Simple Rules, Not Complex Frameworks

Harvard Business Review

Employees frequently attribute breakdowns to incompetence or bad faith on the part of colleagues in other departments: "Those bozos in headquarters [or finance or marketing] screw everything up." To prioritize projects, for instance, the ALL team could have forecast future cash flows for every potential investment and ranked all proposals on the basis of their net present value.

Is Your Business Biased Against Innovation?

Strategy Driven

Many conventional metrics we use to estimate value are based on faulty assumptions. Net present value [NPV] is a case in point. For instance, intelligent failures can add more value than predictable successes, and low-cost experimentation trumps analysis. The authors then show how to best execute specific initiatives, test major project assumptions, and develop a culture that values disciplined experimentation and learning over meeting mindless and unrealistic goals.

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