“Option Games”: Filling the Hole in the Valuation Toolkit for Strategic Investment

The paper describes how strategic decisions can benefit from analysis using techniques drawn from both real options and game theory. It explains the trade-off between flexibility and strategic commitment and offers a toolkit for making choices in competitive markets.

Steven Sinofsky

[Mike Maples] spent many years watching people fight to move expenses to other teams, claim revenue for their own team, or even fight against the price of shared corporate services. This “allocation” dynamic is extreme “finance gymnastics” that grows exponentially complex as the business cross-dependencies grow. Ultimately the meaning of P&Ls derived from allocations becomes the undoing of most rational thought in an organization — hiring, investing, … [ Read more ]

Steven Sinofsky

Going back to the history of accounting, a P&L is a tool used by executives to inform decisions around resource and capital allocation, pricing, etc. In a large organization, it is very difficult to assign revenue and costs to a specific unit within a company and even more difficult to offer true span of control or accountability to a unit leader. The creation of P&Ls … [ Read more ]

Be Your Own Activist Investor

With these 10 principles for rethinking cost management, you can maximize value and avoid threats from Wall Street.

Warren Buffett, Charlie Munger

Borrowed money causes more people to go broke than anything else. Charlie Munger has said, smart people “go broke from liquor, ladies and leverage”

Top Excel Tips For Data Analysts

Data and business go hand in hand. And whether you’re analyzing a client’s data or using your company’s data to make executive decisions, your tools have to be able to handle the tasks you perform with that information.

If you’re a data analyst, most of the time you go through these stages of data analysis:
– Data Cleaning: Transform and rearrange the data in a way suitable … [ Read more ]

A Better Way to Understand Internal Rate of Return

Investments can have the same internal rate of return for different reasons. A breakdown of this metric in private equity shows why it matters.

The Return of Zero-Base Budgeting

The venerable technique has vaulted back into the consciousness of corporate leaders—for good reason. But getting it right is not easy and depends on five key elements.

A Refresher on Return on Assets and Return on Equity

There are several ratios you can look at that will help you evaluate whether your company can generate sales and control its expenses. I talked with Joe Knight, author of the HBR TOOLS: Return on Investment and co-founder and owner of http://www.business-literacy.com, to learn more about the Return on Assets (ROA) and Return on Equity (ROE) ratios and how managers can use them.

A Refresher on Internal Rate of Return

Any time you propose a capital expenditure, you can be sure senior leaders will want to know what the return on investment (ROI) is. There are a variety of methods you can use to calculate ROI — net present value, payback, breakeven — and internal rate of return, or IRR.

For help in deciphering this I talked with Joe Knight, author of HBR TOOLS: Return on … [ Read more ]

Rob Del Vicario, Michael E. Raynor, Mumtaz Ahmed

Calculating a company’s relative performance … is not straightforward, and for at least two reasons. First, we wish to capture the performance of the company that is a function of those factors most subject to the company’s control. When it comes to assessing a company’s historical performance, we typically wish to separate out the material impact that year, industry, and company size have on profitability. … [ Read more ]

John H. Cochrane

In 1970, in “Efficient Capital Markets: a Review of Theory and Empirical Work,” Gene Fama defined a market to be “informationally efficient” if prices at each moment incorporate all available information about future values. Informational efficiency is a natural consequence of competition, relatively free entry, and low costs of information. If there is a signal, not incorporated in market prices, that future values will be … [ Read more ]

A Way to Know If Your Corporate Goals Are Too Aggressive

For better goal-setting, it will help to understand where financial targets typically come from. Often, they’re based on past performance. But a company’s recent track record says nothing about how much its performance could or should improve; what’s needed is a useful assessment of a company’s probability of future success. One way to think about the likelihood of hitting a given performance increase is to … [ Read more ]

Brian J. Hall

Shareholder value or profits are measures, not goals in and of themselves. It’s hard to wake up in the morning and get excited about creating shareholder value.

Louis V. Gerstner

One simple but powerful approach some multibusiness managers are using today is to sort their individual businesses into three broad portfolio categories: sources of growth (future earnings); sources of current and intermediate earnings; and sources of immediate cash flow. One of my colleagues has suggested that these categories relate directly to the so-called product lifecycle curve which can also, for these purposes, be termed a … [ Read more ]

The Do-or-Die Struggle for Growth

Does following best practice in strategy, marketing, operations, and organization generally make it possible for companies to increase their revenues consistently—or does that kind of growth usually require something more?

Do Carveouts Make Sense?

Yes, but not for the reasons you might think.

8 Reasons Companies Don’t Capture More Value

Doesn’t every business want to maximize its profits? Pricing textbooks certainly all assume they do, or at least that they want to achieve a certain profit level under given constraints. But in truth businesses rarely focus on only profitability; most strive to satisfy various stakeholders and meet the goals of balanced scorecards. And even when a company is focused tightly on financial performance, there are … [ Read more ]

Startup Best Practices 16 – Option Pool Planning

No matter the stage of the business, startups need to manage the size of their Employee Stock Option Pool or ESOP. The ESOP contains the shares set aside by the company for hiring and retaining employees. Like a financial budget, ESOP budgets help a startup plan how to finance its growth.