Business School: The O.M. Scott and Sons Case

Since I started Business School I have discovered the MBA Professors best friend... the case study.

Cases are short synopsis of business situations that have accompanying attachments like financial statements or sales records. In accounting, my group completed several cases to help teach us how to unwind accounting voodoo that companies would use.

When studying a case, the most learning occurs when the answers are discussed amongst group members with differing opinions. This is exactly what happened yesterday when my group was completing the HBS O.M. Scott and Sons case.

The basic premise of the case is that the Scott company (lawn care seed and accessories) has introduces a new method of sales to their dealers. The major change is that instead of collecting all of the money for product at the end of a season, they collect it as a dealer sells the product. This means some of the products will be paid for earlier as they sell, but if there is product left over at the end of the season it will not have to be paid for until it actually sells. This would be mid-season or the next season. 

In addition to the sales change, the case covers topics like debt covenants that tie up working capital, earnings versus free cash flow, and overall wealth. This case is a very cumulative application of everything that we have covered so far in Finance.

My group began work on this case at 9:30 in the morning and didn't finish until 3:00PM. Our main hang up was that we hadn't all looked at the case very thoroughly before getting together. As a result, we argued the points out until they made sense to each one of us. This is a huge time suck, but it also contributed to all of our learning, and I think this is the point.

If a person was seriously considering Business School, this case is a good insight into the level of work that is done there.

I guess the bad part is when we "Finished" we really weren't done, so now we will be working independently until our next meeting where we will summarize the recommendation. Our final recommendation needs to be 2 pages with about 2 pages of graphs. We also have a midterm on Thursday.

Yes, it does seem a bit cruel and unusual.

Well, back to the books for me!

Lessons from Business School: Present Value

I mentioned in a previous post that one of the three classes I am taking this quarter is Corporate Finance. This has been a class that has demystified a lot of terminology. We have learned about things like Annuities, bonds, and perpituities. We have also discussed stock valuation, like what a stock is really worth, what people mean when they say "yield", and most importantly present value.

The Professor teaching the course, who I also had for Microeconomics, said that if he had his own business school he would make present value the central theme of the entire program. On a more recent occasion, he also said that the business school graduates he has seen making the big money are the ones that really understand present value.

So what is it? Well, it is the present value of all future cash flows in today's dollars. The discount factor used in present value isn't inflation though, as one might think. The future dollars are discounted using the opportunity cost of capital. Here is an example. Let's say you have $100 and someone offers you $110 next year for your $100 today. It is helpful to know what that is worth today. Let's assume you have a savings account that pays 10% interest (fat chance, but let's go with it for the example). If you put the money in the bank it would pay you $10.00 interest. Therefore, $110 next year is worth $100 this year to you. This may be different than an inflation rate of 2-%-3% or a deflationary rate which we are likely to see in the next year.

Anyway... I know... major boring stuff, but the concept is looking at what future opportunities are worth today. This is hugely applicable when it comes to spending a company's or your own money on something that will pay you back in a certain way. Do I invest in this business, or just throw my money in the S&P 500, which "always" yields about 7%? Should my company start making a new product that takes about a year to cycle back a 5% return or do we have other opportunities that will do better for us.

Sounds simple, right? All you do is look at the future cash-flows and discount them back. Anybody with a calculator or MS Excel could do that. True, but this is where it gets tough. Projecting cash flows isn't easy. Imagine you wantto buy a vending machine route. The seller tells you that they net $5000/month. You determine the purchase price based on the $5000, but what happens if one of the machines busts, or the factory where it sits decides they don't want it there any more. These are tough things to predict and can only be factored in using a risk adjusted discount rate. Here the whole thing gets even goofier. I'll spare you the rest.

So is PV important? Should I be trying to calculate the PV of business school in terms of the future increase in salary and fulfillment I will receive? Maybe, but not yet. I still have 6 weeks left in the class :)

Glad I'm Getting My MBA Degree: Bloody Monday

I was reading an article on CNN earlier today about the latest round of US job cuts. The article details all of the jobs that were lost yesterday. The grand total is 71,400. What an astounding number! This got me thinking... these are real people losing there jobs. Most of these people are supporting families or spouses and they won't all find jobs immediately, or any time soon. And 71000, that is the size of the city I grew up in - and this is just one day we're talking about here.

With the economic climate the way it is, anyone could be next... I could be next. So what would I do if I lost my job? Well, I would pray for a severance and start looking. I have a little bit of savings, so I would be OK for a few months, but after that it would be all about deciding which order to throw the bills in the recycling bin. I just don't know how we would survive on one income (my wife's). Unfortunately, I think my situation may be better than most. At least we have two incomes and some savings.

I guess the silver lining in this stormy time is that I am in school. I know that my fist inclination after losing a job would be to improve my marketability as a candidate. Since I am in school now, I am already doing that as I work. If I am laid off, well, at least I got a small head start.

Besides, it is a fantastic time to be pursuing an MBA degree. As I was studying financial accounting, I got to see the bottom fall out of the market along with all the real life business cases that resulted. In economics we discussed supply and demand as the demand for just about everything began to shift inward at record pace. In statistics we have been looking at standard deviations while the market is living in an area that was 5-6 standard deviations from the mean. The applications are countless and it is really contributing to the learning.

Not to be a profiteer of pain and suffering, but I am getting an opportunity to live through things most students getting their MBA degree only read about in a text book.

Back to the economy... yes, the outlook is bleak, but if you read the article, a little hope is offered.

An economist is quoted at the end as saying,

These recessions are like geometry... ...it looks like we'll have a V-shaped cycle, in that we're going into this with very sharp losses. This intense-phase recession will probably recover fairly quickly, with the job market coming out it at the same angle it came in."

There you have it... out the same way it came in.


Happiness is a state of mind :)

Business School Continues: Midterms on the Horizon

I am coming into the 4th week of my second quarter in Business School which means that midterms are just around the corner. I actually have a stats midterm on Tuesday, but my Finance midterm is still about ten days away.

I am still getting used to the speed of the quarter system. When I did my undergraduate degree I was on a semester system. Midterms were almost two months after the term started. It seemed like you had ages to prepare and the information had become second nature to you by then. With quarters you are still learning how to spell the professors name when midterms begin. I joked with a couple of the guys in my group about how the midterm in stats was  five weeks away. This was a conversation we had the day before the quarter began!

So here I am two days away from the stats midterm and I haven't began studying. I have to do a complete review of everything we have covered. This includes the basics of probability and information summaries such as mean, median, and mode. But, it also includes standard deviation of populations and samples, standard error, Z-scores, T-scores, independent variables, dependent variables, mutual excluvisity, probability trees, binomial shortcuts, etc.

Am I ready? Absolutely not. But, I have the day off tomorrow and the exam is open note, open book, and we can even use Excel. This seems kind of silly since excel has formulas that can solve any stats problem we get, but I guess we will be able to use Excel in the real world too.

After the Stats exam, I will switch almost immediately to Finance. There I will focus on Fisher Diagrams, Present Value, Annuities, Bonds, Stock Valuation, and other exciting Business School topics. But I can't start looking at that stuff until this weekend. I wouldn't want to get ahead too much.

For either exam I will have a crib sheet at a minimum so hopefully they won't be as stressful as last quarter's. Here I go... deep breath has been taken. I'll see you on the flip side.

Business School on Pause: Why the fact that the Obama inaguration is no big deal is a huge deal

I wanted to put all of the talk about business school, the economy, and professors on hold for this entry to write about our 44th president who is going to take office today.

It seems like the primary election took half a lifetime, mainly because the candidates starting campaigning two years before the nominees where officially named. And the general election seemed to linger on forever too... it was like running an extra 10 minutes at the gym after completing a normal workout. It just seemed like overkill and every one got bored and boring.

Now, the boredom is over. We have a historical event taking place today. We are about to install the first African American president in our nation's history. This is a huge deal, right? Well, I'm not so sure.

Here is a 27 year old's perspective. For my entire life I have heard about racism, mostly read about it, but rarely ever seen it in action. I've heard rappers on TV complaining and men convicted of crimes crying racism, but I haven't seen it in my every day life. I guess I don't see the inequality. As a west coast kid, I was in highschool before I even realized that skin color and ethnic background really mattered.

It didn't surprise me to see African American's, Asians, Indians Mexicans, or people of any other background succeeding in sports, acedemics, student government, or aything else. We are all people and I've always felt like people with unique backgrounds have an advantage. I guess I should tell you that my father is East Indian and my mother is white. So I too am a "minority". It just never mattered, didn't count, didn't figure in to the equation.

...and I'm not unique in this view. I have other friends with mixed parents, white parents, Pakistani parents, Indian parents, Japanese parents, and Chinese parents who feel the same way. We are all thinking to ourselves with this Obama thing, "what's the big deal? Obama is just another guy. Anyone can be president, he is the next one, so what?"

Well, I began to understand how important this is last night when I heard one of the Tuskegee airmen on the radio. For those of you who don't know, these were African American men who flew in the airforce during World War II. They were trained at a segregated base in Tuskegee, AL. They fought and died for their country, but were often disrespected and even spit on by Americans who didn't want people of their color in the military.

Anyway, the Tuskegee airman on the radio was talking about what a huge day this was for African Americans, and for him especially. He spoke about Obama as if he represented the vindication he had been looking for since the late 40s. He was proof that an African American can do anything.

That's when it hit me. The fact that I am not surprised by Obama's success is the very reason why we should be celebrating. A generation has passed since WWII and another one will soon be passing since the racial struggle of the 60s, and we are finally moving on as a nation. It is becoming the norm for skin color and ethnic background to be a non-issue in an individual's success. People really are being judged by the content of their character. How amazing!

So, I guess I will be watching this historic event on Television today because it is a really big day... not just for African Americans, but for everyone in this nation. Although, there are still more wounds to heal - this is big!

Business School Continues: Incentivising Failure

This last week I made the decision to add one more class to my current quarter. The name of the course is Corporate Entrepreneurship and it is centered around the idea that established corporations can both participate in and support entrepreneurship. I thought it would be nice to add a touchy feely elective like this, and it will help me finish Business School at least one quarter early.

I missed the first class, but the second one we spent a good deal of the time talking about monetary incentives in the work place. The basic stance that the Prof took was that incentivising your employees with money doesn't work. She went further to say that it doesn't foster innovation. Her point was that employees perform and innovate best when the reward for doing so is intrinsic, meaning they like to do it.

In addition to numerous studies, she gave Wegman's market and GE as examples. Wegman's is a grocery store on the East Coast that is full of employees that are nuts about food. The cheese people are cheese connoisseurs, the meat guys are fully versed on the details of their grass-fed, organic, and non-organic meats, and the wine people train in Italy. They find people that love food to work there and reward them with training, status (Wegmans is an enviable place to work), and a sense of ownership in their work.

The example she gave from GE is one of her engineering friends who had an idea for an MRI machine that could be used during surgery to give real-time scans to a doctor. Her friend brought this to management and was granted two years with a full salary to research the idea. She had all of the companies resources and full rights to use the GE name to get help. At the end of the day the idea was a success and her friend can't stop talking about it.

The common thread here is that no performance bonus is given at Wegmans and it did not occur in the case of the GE example either. The rewards are intrinsic for everyone involved. So her question to the class was, "Are companies doing any good by adhering to pay for performance plans?".

When she asked this, the discussion began with quite a fervor. The sales guys in the class began debating. One said that he doesn't know how you would get people to sell things without incentives, while the other said that sales people become so blinded by incentives that they look to them to determine what to sell. Another woman who works as an engineer said that pay for performance at her company doesn't exist and that it would stifle creativity if it did.

I sat back and listened to all of the discussion during the class and had this thought. Money is a cheap way to reward and encourage a work force that a management team is too lazy to get to know. Rather than cramming different personalities into the same jobs and pushing them forward using money as a carrot, why not hire the right people in the first place and empower them to use their strengths for the good of the company. Give them the freedom that GE is willing to give and let them work for you in there own way. Employees will flock to a place where they aren't shoved into a system and made to feel like a cog.

What a different way to view things. Think about it. Yes, a good salary is essential, but are you going to stay at a place that give lots of bonuses, or the one that lets you do what you love. For the long term, I think it is the latter.

Anyway, the class should be interesting. I will keep you up to speed on some of the other topics and adventures next week in Business School.

Business School Returns: Round Two of the MBA Degree

It has been four long weeks since the agony of the Micro Econ final. I enjoyed time off to spend with my wife, a vacation home for Christmas, and lots of sleep. But, this Monday I returned to the grind.

The second quarter of the MBA degree program has two new classes. Goodbye Financial accounting an Economics... hello Quantitative Methods (Stats) and Corporate Finance. I started off on Tuesday with the Stats class. The professor is new and a former employee of one of the many banks that just failed. Overall, the tools I will gain from the class (regression, distributions, CHI Squared) seem very good, but the professor is as dry as can be. In his defense, I doubt he planned on teaching as of just a few months ago, but it is obvious that hasn't put a lot of thought into the course. The Powerpoint he is using is the one created by the author of the book and he reads directly from it during class. Some of us think he is reading it for the first time during class.

The boringness and unpreparedness of this guy really concerns me. I wasn't in love with my Econ Prof, but at least he had passion about Econ and a mastery of it. I didn't always like his style, but he knew his stuff. This guy knows stats... I think, but he isn't the best at communicating the concepts, and so far is not very good about giving real life examples that relate to the material. I will keep you updated on how this turns out, but the "odds" aren't very good.

Corporate Finance is taught by the same Prof that taught the Econ class I took. I am hoping to capitalize on my previous knowledge of him to get the most out of the course. To be honest, I think this class will be a little bit less cryptic than Econ was. We started out with Net Present Value (NPV) and outside of some weird notations it is all making sense. Although, that's what I would have said last quarter at this time. We will see...

So, one week in and only 10 to go until Spring Break. Stay tuned for the latest progress on my MBA degree.

Business School, the Spiraling Economy, and Plan B

Happy New Year!

I have been enjoying a long and relaxing winter break, besides the whole job thing that is. But the beginning of this Business School pause started off slightly more stressful than it is ending. The added tension was brought on by an announcement at work.

Our local Senior Manager called a meeting and announced that we had lost about two thirds of the business from our largest customer. He said that we were trying to get some more business, but that there would definitely be some changes coming. On December 31st, the first person was laid off.

This is just the beginning, we won't officially lose the business until the spring. The general consensus is that there are going to be more broad lay offs at a local level. Contemplating this, I began to think about what I would do if I was laid off. Of course, the first thing that I would do is look for another job. I have some side things going that, when combined with a modest severance, could keep my wife and I going for about three months. But I have no real savings outside of my 401k, and that would only make my house payment or about a year. That doesn't include all of the other expenses that my income pays for.

The bottom line is that if I couldn't find a job quickly, we would have to short sell or foreclose on our house and take a major hit to our lifestyle. In the worst circumstances, we would need to move back home and live with one of our parents until we could recover. It is the potential for that move that prompted me to cover the worst case scenario.

I have applied for a Full-Time MBA program back home. I am fortunate that both my parents and my in-laws live within 60 miles of a top 25 Business School. However, the idea of leaving the program that I fought so hard to get into is not pleasant. I don't know if any of the classes would transfer, and I would have to abandon my group and a school I really enjoy. This is definitely a path of last resort.

Completing the application has been much easier this time around since I have the practice, but the whole process has felt very strange. I really didn't think I would ever have to do this again. But two recommenders, 4 essays, and a GMAT score report later I am almost ready to send it in. 

I want to get in for the sake of my self confidence, but I hope I never attend.