Almost one year ago, we moved from Houston to start a masters at Harvard Business School. After completing half of the MBA, I thought it was time to reflect on my learnings so far. Below are some of my favorite takeaways from each class of the first year.
The first semester kicked off with Finance, Financial Reporting & Control, Technology & Operations Management, Marketing and Leadership & Organizational Behavior.
The first Finance course taught me that comparing investments with the S&P market performance is inappropriate. Investments ought to be measured not by their total return but instead by their risk adjusted returns (expected return / volatility). For example, if I have two investment opportunities. Option A yields a predictable 8% return with 2% volatility. Option B yields a return of 28% with 14% volatility. Even if I am looking for higher returns I should choose option A (risk adj return of 4 vs option B's 2). This is because I am better off going with Option A and using debt to lever the portfolio and still achieve a 28% return (with a lower risk (i.e., volatility)).
Financial Reporting and control is HBS's accounting class. What was most interesting is that accounting is not black and white. It's all shades of grey. One of the key takeaways with respect to Financial Accounting (opposite to Tax Accounting) is that when in doubt about assumptions, one should use the principle of conservativism (assumptions that favor incurring losses/expenses and deferring gains). This keeps us out of trouble. The other takeaway is that Fraud within organizations occurs when we have three conditions. 1) Pressure, 2) Opportunity, 3) Rationalization. Pressure is hard to avoid but internal controls can cut the opportunity and company values / culture can mitigate the rationalization aspect. Finally, the last piece of advice from our rock star professor "If you are ever in legal trouble, do not accept the company's lawyer to represent you."
Technology and Operations management was probably one of the most insightful courses I took. The key learning was that no operating model can do everything for a company. The key to a successful operations strategy is accepting tradeoffs. In other words, both the company's tangible investments (e.g., technology, facilities, capacity, and distribution) and intangible investments (e.g., organizational structure, processes, human capital management systems) need to be focused on reinforcing the customer value proposition. One simple example is a manufacturing plant that is organized as an assembly line. This allows it to be efficient and low cost. However, if the strategy changes to one of more sophisticated product customizations, it will not be able to compete with the plant next door that is organized as a job cell and focuses on innovation and creativity. The bottom line is that the performance of a company is dependent on its ability to align its customer promise with its operating model.
My favorite Marketing class covered the factors that drive diffusion of a new product or service. Some of these are: Relative Advantage (Does it have a lower cost and/or higher benefit than existing products?). Compatibility (How new is this for the customers?). Complexity (How easy is it to use?). Trialability (Is it easy and inexpensive to try out?) Observability (Can customers observe it being used by others?) Distribution Channel (Can it easily be delivered to the customer?).
Finally, the last class of the first semester was Leadership and Organizational Behavior. My favorite insight there was related to approaching change within organizations. Specifically, it is important to think through the following questions: 1. Scope (should it be incremental or radical), 2. Origin (should it be driven top-down or bottom-up), 3. Breadth (should it be localized or system-wide) and 4. Delivery (should it be continuous or episodic). Getting these parameters right is in many cases the key to effectively driving change within organizations.
The second semester included another set of required courses. We studied Politics & Macroeconomics, Entrepreneurship, Finance II, Leadership and Corporate Accountability and Strategy.
Politics & Macroeconomics (or BGIE in HBS lingo) was great. I learned that modern economists are rightly obsessed with metrics that measure the performance of economies (e.g., GDP, Unemployment, Inflation, Deficits, Savings, etc). However, one tool that is constantly overlooked is the Balance of Payments (BOP). This covers the flows of trade and capital across a country's borders. It is important because it describes the level of liquidity of these capital flows (i.e., whether investments are allocated in illiquid long term infrastructure or in highly liquid stocks). Understanding the level of liquidity of foreign capital provides insights into a given country's exposure to financial crises (which are typically exacerbated by capital flight). Additionally, when the balance of goods and capital does not add up to 0 on the BOP, it suggest unaccounted and illicit capital transfers. This is a great predictor of financial crises. For example, between 2006 and 2007, the unaccounted capital flows in Iceland grew by 7B, in a country where GDP is only 20B that is extraordinary. We all know what followed in 2008 & 2009. In summary, the balance of payments can be a crystal ball to predict financial crises.
The Entrepreneurship class was focused around the idea of embracing failure. Finding cost effective ways to launch early and often allows us to test the business hypothesis and to pivot when unsuccessful. Eventually, we'll reach a product-market fit and only then should proceed with scaling.
Finance II taught me what "LBO Financial Engineering" is about. It means leveraging market imperfections to create economic value. For example, private equity firms follow the practice of raising debt to buy companies. The interest payments lower the taxable income of the acquired firm. Essentially, the PE firm created value for its shareholders by taking advantage of the tax rules (i.e., interest expense deduction).
In Strategy we learned that when you are trying to disrupt a large establish industry you should never go head to head against its giants (Ryan air is a good example of a company that almost went bankrupt for doing that). Instead, one proven strategy is to start on the fringes with a profitable sub-segment that is too small for the incumbents to respond. Then, slowly grow into mainstream. Both Red Bull and Ryan Air 2.0 used this playbook to carve out spaces in highly competitive Industries.
The last course was leadership and corporate accountability. There we discussed different approaches to make decisions that involve tradeoffs between economic legal and ethical considerations. It is important to first be highly analytical about ones responsibilities to all the stakeholders involved (investor, customers, employees and society). However, at the end of the day, some problems have no optimal answer. For each leader, it is his or her own character, upbringing and values that determine which decision is right for him/her. This is why it is important to develop one's self-awareness by internalizing questions such as: Where do my values come from? Am I more of an idealist or a pragmatist? What are the red-lines I will never cross regardless of the potential utilitarian benefit?