Transcript Document 7137144

Lecture 10 – “The Big Finish”
Steve Montgomery
Introduction To The Business
Environment
● What to do when someone’s not telling you what to do
● Topics covered:
• Course introduction and Overview of corporate structure (1
•
•
•
•
•
2
session)
Fundamentals of business strategy (2 sessions)
Introduction to Marketing (2 sessions)
Overview of Accounting and Finance (2 sessions)
Project Valuation and ROI (2 sessions)
Putting it all together (1 session)
5/19/2016
Lecture 10
● Guest Speaker: Kristena Louie, Microsoft
Corp.
● Course wrap-up and summary
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Homework, cont.
● What is Cummins’ tax rate?
● What is Cummins’ WACC?
● What is the minimum initial price
you need to charge to make this a
positive NPV?
•
How does this change if your ASP
did NOT decline year on year?
– What steps could Cummins take to
preserve the ASP? (Put your
strategy hat back on)
● Assume the minimum IRR for
Cummins is 12%. What does the
initial price need to be to meet this
goal?
•
4
What is the NPV for this price
level?
5/19/2016
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Headcount = $125,000/year
Interest rate on debt = 6%
Final year growth rate = 2%
Risk free i = 5.3%, Stock premium
= 6.4%
● $50/hour labor rate
Cummins Info:
Cummins info:
● Source: Yahoo
Finance
● One mistake: Free
cash flow
• Remember the formula!
• Take out Capex, and
NWC from net income
and add back in
depreciation
D (000s)
$629,000
E (000s)
$3,230,000
Tax rate
30.56%
Cost of debt
Risk premium
Beta
5/19/2016
6.40%
2.12
Risk free i
5.30%
WACC
16.5%
Curr A (000s)
$4,713,000
Curr L (000s)
$2,639,000
NWC (000s)
$2,074,400
Sales rev
$14,250,000
NWC % sales
5
6%
14.5%
Point of this course?
● As future technical leaders, you will need:
• An ability to evangelize your ideas and rally support/resources
• An understanding/grasp of business topics and strategy
• An ability to communicate your ideas to senior management
• The ability to pick projects that maximize your business, promote
your career, and promote the careers of those on your team
● All the tools here are applicable on a number of levels:
• Your firm
• Your business group
• Your own career
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Course Wrap-Up
Goal of Any Business –
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Identify external threats and undue influences
Maximize own influence
Minimize negative influences
Create differentiation
By maximizing/minimizing influence, and creating
differentiation you get pricing power (assuming
there is a market)
● If there isn’t an existing market, and it makes
sense to do so, create one!
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Strategic Thinking
● As future leaders, you need to keep the following
ideas in mind:
• What incentives do the programs that I observe create?
• What behaviors do these incentives drive?
• Are these behaviors good or bad? Why?
● What metrics best reflect value creation?
• And how do you use them to your benefit?
● Everybody else plays checkers. You should play
chess.
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Incentives
● Simple rule of human behavior:
• Rational human beings respond to incentives
● Knowing what incentives are out there allows you
to predict a lot of behavioral patterns:
• Incentives can be positive or negative
• Incentives can be emotional or factual in nature
• Incentives can result from corp. structure, metrics of
measurement, or strategic directives
– Also intangibles like paranoia, but that’s another class
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Corporate Goals
● Any corporation in business today (for
profit, obviously) has the following goals:
• Survival
• Profitability
● Survival can mean many things:
• Staying in business
• Returning value to shareholders
• Pushing the state of the art
• Pursuing a mission and a set of values
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Survival
● To survive, companies seek to minimize
inefficiencies and streamline processes
● Organizations are grouped to streamline
tasks, allocate resources, and unify
functions
● Analyzing an org chart can tell you a lot
about what a company values
• …and is a gateway to understanding the
overall strategy and business model
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What Is Differentiation?
● Differentiation is achieving the ability to deliver a product
or service that customers perceive to be unique or distinct
in some important way
● Differentiation doesn’t need to be tangible - Examples:
• Nordstrom’s – known for customer service above all else, even on
•
similar merchandise to rivals
Mercedes, BMW – Perceived status of owning a Bimmer or a Benz
vs. an equivalent car
● Brand image plays a huge role in determining perceived
value
● Can be based on cost as well
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Differentiation, cont.
Differentiation (Higher costs, higher prices)
Differentiators:
Nordstrom’s
Rolex
Porsche
Prada
Broad differentiators:
Intel
Samsung
Sony
Ford
Toyota
GE
Cost leaders:
Wal-Mart
Generic drug man’f
Southwest Airlines
Costco
Cost leadership (Low costs, low prices)
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Differentiation Summary:
● Firms make choices on which factors to promote or ignore
(we’ll explore this more in Lecture 3)
● When you achieve differentiation, either hard (features
you have the competition doesn’t) or soft (brand
perception), you can charge a higher price
• Key is delivering perceived value to customers
● Intangibles can be harder to imitate:
• Me-too products can be reverse engineered
• Intangibles often reflect execution, which is harder to match
– BUT, intangibles often are a function of consumer trust. If that’s ever
lost, may be difficult to get back (GM?)
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SWOT Scorecard: The New GM
Strengths:
●Partially owned by taxpayers and the
gov’t
●More nimble than before
●Starting to build some better vehicles
●Have a jump on electric vehicles, flex fuel
●Still have strong brand recognition
Threats:
●Backlash against bailouts
●Perception of weak quality
●Strong product offerings from competitors
●Brand damaged by bankruptcy
●Culture not really understanding of issues
(same people still running the show)
Weaknesses:
●Partially owned by the taxpayers and the
gov’t
●Union owns significant % of company
●Badly damaged brand image and
reputation for poor quality
●Operations damaged by restructuring
(have to take time to do this right)
Opportunities:
●Can load unproductive divisions/assets
into liquidation company and unload
●Can use gov.’t ties to influence flex fuel
regulations, EPA standards, etc. to get
ahead
●Can launch new ad blitz to re-introduce
themselves
●Can re-boot dealer network
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SWOT Summary
● Is a good technique to get the strategy discussion
going – puts a lot of high-level information in
context
● Use it to assess situations and think more deeply
about tactical moves
● If the SWOT picture looks really misaligned with
the market/your firm, can tell you that your overall
strategy should be reassessed
● Is only as good as the thinking that went into it
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Porter’s Five Forces Model
● Five Forces Model: A framework for shaping competitive
strategy
● Like SWOT, gives a repeatable set of criteria to judge a
situation by
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Five Forces Summary
● Is a good generic framework; is as detailed as you make it
● Curious treatment of the government – should there be a 6th force?
● Complementary products can make or break an offering –
•
•
•
iPod example
Cars are pretty useless without roads or gas stations
Airlines irrelevant without airports
● Does not tell you how to exploit a market, just helps ID the forces
driving it
•
There are other strategies for that
● Industry structure changes: Another item to watch for
•
•
Example: Newspapers. News is available 24/7 on the web. Is print
dead?
Does it make sense for big city newspapers to have foreign bureaus?
● Like other tools, is applicable up and down the chain
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How These Tools Relate To You
● Using SWOT and Five Forces in tandem allows you to:
• Identify the strategic environment
• Make an assessment of your strength relative to other players
• If you’re thorough in gathering information and disciplined in its
presentation, the right answer can leap off the page
● Apply these tools to:
• Your company
• Your business unit
• Your organization
• Your team
• You
● Strategy is a mindset!
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The Idea
● “Hit ‘em where they
ain’t”
● The business variant
of this is Blue Ocean
Strategy
Some strategies are
universal:
Baseball or armored
warfare
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Career Highlights
Keeler
AVG
HR
RBI
.341
33
810
Baseball’s #2 deadball era hitter
Patton
GER
Killed,
wounded,
captured
Territory
liberated
[sq mi]
Towns
liberated
1.28 M
81,522
27,000
3rd Army rampaged
across Europe
Four Actions Strategy: In General
Reduce:
What current items aren’t
generating value in
proportion to the effort?
Eliminate:
Which current items are
considered frivolous or
unnecessary?
Divert
Resources
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New
Value
Creation
Raise:
Which items are
substandard?
Divert
Resources
Create:
New features? New
combinations? New
segments?
Steps in BOS: Strategy Canvas
● First: Analyze your industry
● Chart common factors that outline areas of value:
• For example, Wine
– Common to all competitors will be taste, cost, image, selection
of types, etc.
• Gyms:
– Common to all will be price, class offerings, instructors, workout
equipment, features, location, etc.
● Plot each of these values on a graph showing
“high” offering levels and “low” offering levels
• Note that “high” in one category can be good while
“low” in another is also desired, e.g. cost
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Level of Offering: Low to High
The Strategy Canvas
● Construct a graph – product
attributes on x, “offering level”
on y
● Goodness /= high. High price,
for example, is bad
● Badness /= low. Low price, for
example, is good.
● Chart the target firm and its
competition in these terms.
Where do they line up? Where
are there gaps?
Product or Industry Attribute
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Steps in BOS, cont.
● Next: Change the rules
● “6 Paths” Framework:
1.
Look across alternative industries
●
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2.
Look across strategic groups within industries
●
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●
●
3.
Check for products/services that have similar functions but different purpose
Example: NetJets and fractional plane ownership, Worldmark and flexible time
shares
Why do people trade up or down between products?
What makes someone choose one thing over another?
Figure out a way to have cake and eat it, too
Example: Lexus: Mercedes, BMW quality at Cadillac prices
Look across the chain of buyers
●
Buyers may not be the end users
●
●
●
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Example – pharma. Doctors buy, but patients use. Big Pharma now markets directly to
patients
Intel Inside is the most famous example of this
What is the buying chain in your industry? If you shift this group, can you unlock
more demand?
Steps in BOS, cont.
4.
Look across complementary offerings
●
●
Are there complimentary products that make it easier to sell yours?
What’s the total solution that buyers are looking for?
●
●
5.
What are people ‘hiring’ your product to do?
Example: Bookstores have added lounges, coffee shops, couches
Differentiate between functional and emotional appeal – switch
your product
●
If you compete on emotional appeal, how can you make it appeal to
functionality?
If you compete on functionality, how can you make it appeal to
emotion?
●
●
●
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Example: Swatch watches. People bought them for the fashion statement,
not to tell time (Transformed a functional product into an emotional one)
Example: Starbucks: Changed getting a cup of coffee into a social
experience
Steps in BOS, cont.
6. Look across time
• What trends are developing that affect your
products?
• Can you affect these trends?
• Example: Apple’s iTunes (capitalized on
electronic file sharing), CNN’s 24/7 news
(capitalized on growing need for 24/7
information and spread of cable TV), Kraft Mac
& Cheese (families eating healthier)
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Summary of BOS
● Provides a framework, out of which you can visualize your market position
•
Attack the market with the strategy that presents itself
● “Value Innovation”
•
Sometimes, by looking at the data objectively, you can innovate and deliver unique
value in a crowded marketspace
● Remember to try and break the rules by looking for opportunities:
•
•
•
•
•
•
Are you even thinking of yourself in the right way? Look across industries
Look across strategic groups within industries. Look for underserved groups.
Look across buyers. Where are the eyeballs? Where are the real users?
Look at trends and exploit them
Look at complementary products. Is there a side product you can offer that
enhances your main offering?
Try and differentiate between emotional and functional appear
● Your competition gets a vote
•
Anything you do, most of the time, they can do it, too
– JetBlue vs. SWA. Honda et al. vs. Toyota
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Summary of BOS, cont.
● Also applies to you as a leader
• What skills can you give yourself to create your own
•
•
personal blue ocean at work?
How can you “value innovate” your career?
Same frameworks and toolsets apply
● In any case: Hit ‘em where they ain’t
• The best ways to win fights are:
– Attack with your strengths against their weaknesses
– Attack where they aren’t
– Continually improve and differentiate: always add new wrinkles
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Limitations of BOS
● BOS doesn’t guarantee a timeframe
• Here today, gone tomorrow
● You have to watch out for fads
• Example: Swatch. Are they getting the press they used to in the
80’s? Sketchers?
● Strategy frameworks are good, but garbage in/garbage
out applies
• Measure the right things or you’ll misread your market
● You can have great strategy, but if your execution is off…
• Be mindful of introducing radical change in your organization,
unless you can manage it
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What Is Marketing?
● Marketing is a design process:
• Subject to assumptions, boundary conditions, safety
factors, costs and specifications
● Just like every other design problem, the above
factors must be balanced and aligned with the
overall program goals
● Good marketing mixes math, customer focus,
and human psychology in equal parts
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What Is Being Designed?
●
What is being designed?
•
●
A message, with the aim of imparting positive imagery in a
target buyer’s consciousness
Why design a message?
•
Because, as we’ve seen:
The best technical design doesn’t always win
Customers make buying decisions based on perceived value
1.
2.
●
What does the design target?
•
The sensory and retention systems of one of the most complex
machines on the planet, the human brain
Ideally: Product and message are
co-designed so as to optimize
*both*
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Marketing = More Than
Advertising
● One perception is that marketing is just the process of designing ads
● NO! Marketing:
•
•
•
•
•
…helps identify the needs/wants of customers
…used properly, influences the design process of the product
…creates additional value by establishing the vital perceived value of
products
…determines the value a customer assigns to a product, and thus sets
the price
…and many more
● In short, marketing is a core component of your overall strategic plan.
It’s the voice you use to communicate with the outside world (i.e.,
your customers)
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End Purpose of Marketing?
● Just to repeat:
• “Create, communicate and deliver unique value to customers so
that the organization can capture a portion back in the exchange”
– D.J. Turner, UW Assoc. Dean
● Also:
• “Customers have money. Organizations want it. And marketing—
at its essence—is the approach to getting it.” – D.J. Turner
● And:
• Marketing is “Achieving organizational goals by discovering and
influencing the needs and wants of consumers and delivering the
desired benefits more effectively than competitors.” – E. Stearns,
UW Foster Business School.
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How Does This Relate To You?
● Your companies have to sell the technology you develop
• If you’re not working on things you’re company can’t/won’t make
money on…
● As current or future program/project leaders, your job is
simple:
• Marshal resources and secure funding & support for your
programs and ideas
● One of your primary roles is the program’s evangelist
• If your programs are misaligned with your company’s strategy –or–
you can’t communicate their intent to management, you will fail
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The Big Picture
How Can I Make ‘Better’ Marketing Decisions?
Subject of Today’s
Discussion
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Source: Dan Turner, UW
The 5 C’s of Marketing
Context
Customers
Competitors
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Company &
Collaborators
Zooming In…
Customers
Money
Lost
Here
Get paid
here
Competition
intense here
Competitors
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Company &
Collaborators
Ideally…
Context
Customers,
Company &
Collaborators
Competitors
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● Align your offering with
exactly what your customers
want – maximizing the
exchange for you
● Create a local monopoly (by
offering much more than
anyone else)
• Your offering delivers real and
•
perceived value
Essence of Blue Ocean Strategy
= differentiation
The 5 C’s: Summarized
● The 5 C’s represent your collective intelligence
on:
• What you’re building
• Why you’re selling it
• Who you’re selling it to
• What environment you’re selling it into
• Where you’d sell your product
● And also provides insight into:
• Engineering decisions you’ll make
• How you’ll approach the market with your offering
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The 4 P’s
● The 4P’s are:
• Product
• Price
• Place
• Promotion
● The 4P’s represent the ‘Marketing Mix’
● Or, in other words, once you’ve identified context,
customer, company & collaborators, and competitors, how
do you actually take the product to market?
● What is your market implementation strategy?
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Summary, cont.
● Why should you care about Marketing?
• Marketing, used properly, becomes another set of inputs and
•
boundary conditions for your product design team
Products that aren’t designed correctly, placed to draw the most
eyeballs, priced out of reach of potential customers (or too low),
and inadequately promoted either fail or leave $$$ on the table
● The right marketing strategy promotes and enforces your
company’s overall strategy
● Use strategic marketing to feed data into the your
strategic toolsets (i.e. BOS, SWOT, etc.) to help create
localized monopolies, i.e. Blue Oceans
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Summary, cont.
● Why should you care about Marketing?
• You’re in charge of a product or a technology. You have two
responsibilities:
– First, management needs to understand it and give your resources to
execute it (short term)
– Secondly, somebody needs to consume your product/technology and
you need to understand how to incorporate anything that will affect
your design earlier rather than later (long term)
● The principles of marketing are the same no matter whom
it is you’re facing. Only the audience and the relative
parameters (context, collaborators, etc.) change.
● If you understand how your company markets its existing
products, you can gauge how well received your
technology will be
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Simple: The Pomelo, cont.
● Now consider this description:
• “A pomelo is basically a supersized grapefruit with a very
thick and soft rind.”
● Notice the brevity!
● This message takes advantage of an existing association
● The mental imagery was already there; this description merely linked
to it
● Concept is similar to “A picture is worth a thousand words” (that you
don’t have to say)
● Corollary here: “An existing mental association is a thousand
descriptions you don’t have to make”
Bottom line on Simple: Pack as much
information as possible into as little space as
possible!
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Unexpected, summarized
● The gap theory hinges on being able to teach people what they don’t
know
•
You’ve caught they’re attention. Now create a new mental association
(schema) for recall later
● One way to look at it is moving from “What info do I need to convey?”
to “What questions do I want my audience to ask?”
•
Once you’ve reached this point, your audience is much more engaged
● Set the context and give enough details to almost fill a knowledge
gap – then let curiosity take over: The idea of the Unexpected Idea
•
Roone Arledge at ABC Sports
Unexpected: Deliver a calculated surprise to
hold the viewers attention, then insert a new
schema with the association you want
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Concrete, Summarized
● People remember concepts that are firmly defined:
• Firm, fixed numbers and concepts
• Or nouns that conjure mental images
● Concrete helps focus the brain into relevant subsets of
the world – more resources are activated
● Remember the Curse of Knowledge – it’s easy to forget
that people don’t know what we know
Concrete ideas create a “shared ‘turf’ on
which people can collaborate”
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Credibility, Summarized
● Summary:
• Credibility can be created through a number of
•
•
•
pathways: Statistics, personal experience
(antiauthorities), authority figures, testimonials of
trusted people
The key idea is to pass the believability test. Is the
authority trustworthy?
Vivid details can really help
Draw on multiple sources for credibility
Credibility comes from tangibility, and relating
this to your target. Think of credibility as “try
before you buy”
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Emotion - Summary
● Emotional appeals won’t work when people are thinking
analytically –
• Studies show that when people are confronted with statistics and
numbers, their thinking is driven by analytics rather than emotions
● Make your target care:
• If they don’t care, they won’t act
● Appeal to self-interest, but also to identities
● Create empathy for individuals and/or associations that
people already care about/have a connection to
Emotional appeals need to make people care
– appeal to more than Maslow’s Basement
(Because everyone else always goes there
first)
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Stories, summarized
● Stories are mental simulation – the target brain will
activate more sections that they story itself would suggest
● Use this simulation time to evoke emotion – give the story
plenty of velcro in the form of vivid details
● Stories tend to contain a lot of SUCCES all on their own,
and given enough detail, can really touch on unexpected
and concrete
● Make sure the story you’re telling is reflective of your
agenda – in other words, get to the point!
Stories are like mental flight simulators. Your
audience gets to fly along with you.
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Made To Stick, Summarized
● Remember SUCCES
• Simple, Unexpected, Concrete, Credible,
Emotional, Stories
● In engineering, can we always tell an
emotional story?
• No, but we can ‘talk shop’ and create new
schemas that didn’t exist before – like Ingersoll
Rand
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Overall, What Sticks?
● Remember that the audience gets a vote:
•
•
Sometimes the core of your idea may change due to how the target
interprets the data
Be mindful of “idea pride”
– People marry their ideas…and never want to change them
•
After the message morphs, is the core of the idea still there?
● Spotting great stories is just as good as writing them yourself
•
The world tends to produce a lot of great stuff on its own
● There’s no correlation between being a tremendous public speaker
and Making It Stick
•
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Stress 1 point rather than ten. Tell a story. Tap into emotion. But keep it
simple, concrete and credible.
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What Sticks, cont.
● Getting action from your target requires
that they:
1.
2.
3.
4.
5.
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Pay attention: UNEXPECTED
Understand and remember it:
SIMPLE/CONCRETE
Agree/believe it: CREDIBILITY
Care: EMOTIONAL
Be able to act on it: SIMPLE/STORY
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Balance Sheet Math
A – L = SE
● In short, whatever is left over after paying
the bills belongs to the firm’s owners
(shareholders)
● Always adds up
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Ratio Analysis
● Much like in engineering, you can perform some
calculate some basic ratios to understand
performance:
• Return on equity
• Profit margins
• Return on assets
• Return on invested capital (recall from Lecture 1)
• Debt to equity
• Current Ratio
• …and many others
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Accounting Things To Keep In
Mind…
● Good profitability comes from both top line growth (more people buying your
stuff) and bottom line discipline (keeping costs under control)
● Oftentimes, new and highly profitable companies go through a “more money
than brains” phase:
•
•
We’ve got lots ‘o dough, let’s spend it!
Problem: One day the thrill ride is over and you have to cut things that folks might
take for granted
● Sometimes cutting seemingly innocuous things can have a big negative
effect:
•
•
You used to give your employees free soda, and as a result they stayed at work
through their sugar highs).
When you took it away, people stopped staying late being fueled by Coke and
Pepsi.
● Be wary of short-term fixes. One of the pratfalls of accounting is that you can
sometimes game the system to make the numbers look good (big subject of
revenue recognition, loss recognition, and repricing of assets)
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Tensions To Manage
● As engineers, there is
a natural tension in
design and analysis:
Better
Growth
• I can’t have everything,
so what must I trade?
● Similarly for decisionmaking: What do we
have to compromise
on?
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Faster
Profit
Cheaper
Control
End Result of Managerial
Accounting, and Takeaways
● Managerial Accounting (we only scratched the surface) is a study in
decision making and incentive creation
•
The right decision making metrics can help you make the right decisions –
– Discontinue another product?
– Change allocations?
– Bundle it with something else?
● When budgeting your project, measure the right things
•
Sometimes costs can mysteriously appear on your programs, making
them look worse
● People respond to incentives: If you create an incentive that
rewards a particular behavior, that’s what you’ll get
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Time Is Money, cont.
Effect Of Compounding Interest Over Time
$20.00
$18.00
With Rate 1
With Rate 2
With Rate 3
$16.00
10%
$14.00
Value j  Value j 1 1  i 
Value, [$]
or
Value j ,n  Value0 1  i 
$12.00
n
$10.00
$8.00
$6.00
5%
$4.00
3%
$2.00
$0
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5
10
25
20
15
Compounding Period
30
35
Future Value, cont.
CFj  F0 1  i 
j
●
●
●
●
●
CFj = Cash flow value at some jth compounding period
j = The jth compounding period
F0 = The initial investment
i = The interest rate (Also called the discount rate)
Note that this is the value of some single investment at some future
date
● The factor (1+i)j is called the “Future Value interest factor”
•
•
59
Sometimes tabulated
Handy to use in spreadsheets when doing discounted cash flow analysis
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Present/Future Value Problem
Summary:
● PV/FV techniques are useful for a variety of
different calculations –
• Investment decisions
• Retirement savings
• Bond buying
• …and much more
● They’re also useful for evaluating projects. The
only thing we do differently is change the
discount rate and the cash flows
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Discounted Cash Flows
● Discounted cash flow analysis is the extension of PV calculations:
•
•
Just let the CF’s change year on year
Is used in project valuations
● Why would CF’s change?
•
•
•
•
Market growth/shrinkage
Average selling price (ASP) changes
Changes in COGS, SG&A, taxes, etc.
Changes in other realities:
–
–
–
–
Stopping an underperforming project
Headcount cut or add
Other managerial accounting realities
Doubling down on a successful project
● Use a spreadsheet to track it all (subject of next lecture)
•
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Multiple things compounding at once
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Visualizing NPV
CF1
CF2
CF3
CF4
CF5
CFn
Period
1
Period
2
Period
3
Period
4
Period
5
Period
n
Period 0
(Today)
Initial
Investment
NPV = PV(Cash flows) – Initial Investment
● New wrinkle added: We had to spend money to make money
● Money we spent is in today’s dollars. Money we will earn is in
tomorrow’s dollars. Need to discount the future cash flows back to
today to see if this is a good use of our $$$$.
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WACC Formulation
● Multiply KE by the amount
of equity
● Multiply KD by the amount
of debt
● Divide by the total to get
WACC
● WACC is your firm’s rate
of return for its activities
● This is the rate of return to
use in NPV calculations
and project decisionmaking
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
1  t K D D  K E E
WACC 
DE
KE = Cost of equity
iG = Avg. return of
govt. bonds (~5.3%)
SE = Risk premium of
stocks (~6.4%)
 = Stock Beta (firm
performance multiplier)
FCF Definition
FCF  Net Income  Depreciati on 
 Capital Expenditures  Working Capital
● Why is depreciation added back in?
•
We used it to take a tax deduction – we artificially took it out of our net
income
– Remember, it’s not a real cash expense
● Capital expenditures?
•
This is part of the definition of FCF – the firm needs to make investments
in itself (i.e. replace old equipment or buy new things) to grow
● Working capital?
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Terminal Value: Constant Growth
CFFinal ForecastedYear
Terminal Value 
WACC  g 
● This is a constant growth model
● Model obviously breaks if g (growth rate >
WACC)
• If g>WACC, then you should still be forecasting year
•
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by year or rethinking your WACC
Terminal values are supposed to be calculated when
the business has matured, i.e. beyond any explosive
growth phase
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Finance Summary:
● Valuing a business is a present value problem:
• Your company will have a preferred WACC that it uses to value
opportunities
There may also be an IRR target to hit
•
● Finance sheets become assets when complete –
• Lots of data to mine, lots of scenarios to envision
● Typically, present to your management a “Low, Typical,
High” suite of options
• Each option is based on different variables –
– Low = Worst case scenario (lowest price charge, highest costs, etc.)
– Typical = Average for everything
– High = Best case scenario
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Overall Summary
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Disruptive Innovation
● “There’s plenty of room at the
bottom”
● It’s tough to displace an entrenched
player in their home space
• Throwing your strength against theirs =
hard
● One strategy is diffusion
• Enable the product to be used by more
consumers, expanding the universe of
potential users
– Essence of Blue Ocean Strategy
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Examples of Disruptive
Innovation
● Charles Schwab disrupted
traditional brokerage firms
● TD Ameritrade/E*Trade
disrupted Charles Schwab
● Fidelity disrupted
traditional stock brokers
with Mutual Funds
● ETFs are disrupting
Fidelity
● Southwest/JetBlue
disrupted hub-based
airline
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● Honda/Toyota disrupted
GM/Ford
● Kia/Hyundai are disrupting
Honda/Toyota
● The desktop PC disrupted
mainframes
● Laptops disrupted desktop
PCs
● Netbooks are disrupting
Laptops
Disruptive Innovation and
Project Selection
● Many of those products had something in
common:
• “That will never work”
● BOS boils down to the following:
• Only fight when you can win
• Hit ‘em where they ain’t
● The other tools help ID things “That will
never work”
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The Most Important Notion About
Strategy
● There is one constant about strategy, in all forms:
• It always changes.
• The lesson of MSFT/Yahoo! is – “Make lemons out of
lemonade”
● Remember that “Men plan. God laughs.”*
• Any strategy that you set in motion *must* be flexible
•
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(insert cliché here)
If you can’t change it on the fly, it’s not a good strategy
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End Goal:
End goal:
Understanding your business, how you
reach customers, your firm’s business
condition and the potential impact your of
your work allow you to pick smart projects
and sell them to management
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Important Notion, cont.
● You will work with (and for) others who will
not share your appreciation for thinking
ahead
• Treat them as another variable
• Sometimes, you need to work around them
• Factor them into what you want to do
• Tools for this are found in the next class,
“Technical Leadership”
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Segue To Next Quarter
● The tools learned here are universal,
applying to:
• Your career
• The team you’re in
• The division you report to
• The company you work for
• The market you compete in
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Life is about
strategy!
Thanks!