The 10 Minute MBA - Almost Everything You Need to Know to Manage Organizations, People, and Make Good Financial Decisions



Positive Externality

You need to know three things about management and finance:

80/20 Rule
Opportunity Cost
Compound Growth

80/20 Rule (Also called Pareto’s Law)

This idea says that a relatively small percent of actions account for a relatively large percent of outcomes. Find and concentrate your efforts on the important influences on your business.

The percentages aren’t always 80/20. Some examples:

20% of your customers account for 80% of your sales.
McDonald’s accidentally learned that 10% of its customers accounted for 60% of its daytime sales. And it was an identifiable group that they had never aimed its advertised at.

20% of your product line accounts for 80% of your sales and profits.
Often, companies with a large product line with many variations find that 50% of their products account for over 90% of sales. An even smaller percent usually account for most of the profits.

20% of your SKUs account for 80% of your stockouts (and lost sales).
20% of your programmers account for 80% of the bugs in new programs.
The possibilities are almost endless.

The 80/20 rule implies:

“Less is more” … reminds us that much of what we do, when closely analyzed, has negative value. Many activities, customers, products and suppliers actually subtract value, which helps to explain why their very positive counterparts produce such a high proportion of net value.

Richard Koch, The Natural Laws of Business(182-3)

Eliminate losing products, customers and functions.

Look at divisions, regions or product lines that consistently have low sales growth rates and make below the minimum cost of capital. Reduce or eliminate these businesses. This frees up capital and resources to find and fund growth opportunities. Loser operations have a potentially high opportunity cost (see below).

Look at positions or functions in the corporate structure that don’t add value to the company. Eliminate or outsource. This is a major strategy many companies are now pursuing, which is why a high percent of job losses over the last three decades occurred because the position or function was eliminated.

Better yet, avoid complexity in the first place. Growth through mergers and acquisitions is a high-risk strategy with a high failure rate.

Opportunity Cost

After you’ve identified the critical opportunities and problems, opportunity cost is a good guide to deciding what to do about them. It reminds you that time and assets are limited and valuable. Time and assets you spend on one problem or function might be more profitably spent managing something else. For example, if you have a small customer who takes up a lot of your time, either raise prices, reduce service or get rid of her. The opportunity cost is too high.

Opportunity cost is a guide for better decision-making. Good managers think in terms of possible alternatives, not simple yes or no decisions on isolated proposals.

What are the realistic options and alternatives (not a list from a management textbook)? Is there a less expensive (more profitable) way to do something? Lease or rent rather than own? Outsource some of your production?

What is the net benefit (profit) over time of each alternative?
Include risk as part of cost.

A word about accounting systems. Accounting systems are not set up to tell you which products or services are profitable. They are also poor indicators of return on capital or assets. Asset values should be adjusted from depreciated historical cost to present opportunity cost (often market value if sold or leased). The classic example is that Coca-Cola for decades carried the value of their brand name at $1 on their balance sheet. Really?


Compound Growth (also known as exponential growth). 

After you’ve freed up people and resources by applying the ideas of the 80/20 rule and opportunity cost, start looking for growth opportunities. By this time you will have a good idea what are the critical factors for your company’s success, the knowledge and resources that give you a competitive advantage. Develop opportunities that have a good chance for sustained exponential growth. Know the difference between sales growth rates and dollar amount of sales growth. 

In the beginning, new ventures often have low sales compared to the size of the company but high compound growth rates. If there are high growth rates, these ventures can become large contributors to sales and profits in the future. Other good things can happen such as continuing reductions in unit costs.

One application is personal investment. Compound growth rates are the first thing you need to know about finance, particularly personal investing. Earn income. Start saving early, save steadily over a long period of time, invest in high-quality bonds and dividend-paying stocks, and reinvest interest and dividends. Let compound interest (interest on principal and past interest) do its thing. Same advice for investing in stocks generally – start early, invest in index funds. Starting early is important because there will be periods when stock prices go down or stagnate. Spend all the time you save not analyzing or worrying about investments doing more pleasant and productive things (see opportunity cost).

These three tools work together.

These ideas applied to starting a new business:

Opportunity cost is a part of start-up costs.
Loss of income from the job you quit.
Loss of income from the saved money you invest.
What are the critical factors for success?
Look for sources of exponential growth and exponential reductions in unit costs as volume grows.


These ideas applied to personal life:

Eliminate activities and people with high opportunity cost.
Avoid high-maintenance (high opportunity cost) people (selfish, self-centered, demanding, whiny, long-winded).
Concentrate on a small number of important people and activities that
add meaning to your life.
Remember the learning curve when starting something new.
Persevere; learning something new is slow going at first but accelerates. (Also, 20% of the assigned reading in a textbook will account for 80% of the questions on the tests.)


ALMOST EVERYTHING YOU NEED TO KNOW ON HOW TO MANAGE AN ORGANIZATION

BEST BOOK ON HOW LARGE ORGANIZATIONS REALLY FUNCTION

Joseph Heller, Catch 22.

BEST BUSINESS MANAGEMENT BOOK

Andy Grove, Only the Paranoid Survive. Andy Grove grew up in communist Hungary, escaped during the Hungarian Revolution, got his Ph.D. in solid-state physics at 22, and was CEO of Intel during its critical period developing and mass producing the integrated circuit (aka the microchip).

BEST ADVICE ON STRATEGIC MANAGEMENT FOR A SMALL, DISRUPTIVE COMPANY

“Hit ‘em where they ain’t.”
“Wee Willie” Keeler

One of the greatest hitters in baseball. Only one of 22 men ever to hit over .400 in a season. Also one of the smallest ever to play in the major leagues. Innovative. See biography in Wikipedia.

“Get there the firstest with the mostest.”
Nathan Bedford Forrest

Surprisingly successful Confederate general in the Civil War. Consistently defeated larger Union armies. Not size but speed, surprise and force at the point of attack leads to victory. Same strategy used by Stonewall Jackson and Erwin Rommel against larger forces. Reason for success of guerilla warfare.

Good general advice but especially relevant if you are going up against a larger competitor with more resources.


ALMOST EVERYTHING YOU NEED TO KNOW ON HOW TO MANAGE PEOPLE

Be consistent.
Subordinates will then know how to act and what to expect.
If you are consistently nasty, expect to change jobs every two or three years.

Business educators, consultants and commentators love sports analogies. But be careful.

Football (American) analogy. Be a pulling guard. You’re a pulling guard, not the quarterback (COO) or coach (CEO). Run interference for your people so they can concentrate on high value-added work.
Hire good people (independent, flexible, adaptable, cooperative) and have confidence in them.

Never hire a graduate of Harvard Business School or someone who has only been a consultant. All they think they are qualified to do is run the business. Before they understand it.

If your company’s management is hiring a lot of management consultants to tell everyone how to run their operations, you should probably update your resume and think about working for a better company. One that has confidence in its employees.


MANAGING UNDER UNCERTAINTY

"Nell," the Constable continued, "the difference between ignorant and educated people is that the latter know more facts. But that has nothing to do with whether they are stupid or intelligent. The difference between stupid and intelligent people - and this is true whether or not they are well-educated - is that intelligent people can handle subtlety. They are not baffled by ambiguous or even contradictory situations - in fact, they expect them and are apt to become suspicious when things seem overly straightforward.

Neal Stephenson, The Diamond Age, 256.

This is a key to success in the information age. Your phone can contain more facts than you can learn in a lifetime. It can analyze more data in seconds than you can in a year. But algorithms hate ambiguity. Well, so far.

Good managers are not afraid to make decisions in uncertain environments. I’ve worked for corporate and divisional managers who talked a good game but were scared to make decisions quickly because they were afraid they would be blamed or fired for a bad outcome. Then there is the tyranny of the quarterly report. Management by fear or blame.

When the CEO is like this, the company is doomed to mediocrity. Or worse. Update your resume.

Some decisions fail – lose money, not meet corporate cost of capital, not achieve a tactical or strategic goal. But good managers cut losses and change strategies quickly as they realize their assumptions were wrong or the actual outcome turned out to be different than expected. This takes courage. And humility. 

A company’s managers don’t have to be right all the time – just more often than the competition. And adapt quicker to changing circumstances.


LEADERS AND MANAGERS – KNOW THYSELF

Are you a leader or a manager? 

A leader has strategic vision.
A manager has functional expertise.

A leader looks outward.
A manager looks inward.

A leader thinks abstractly.
A manager thinks concretely.

A leader anticipates.
A manager reacts.

A leader is able to make decisions in an uncertain environment.
A manager attempts to reduce uncertainty to routines.

A leader thinks and worries about the future.
A manager thinks and worries about the present.

A leader indicates a general direction for the company.
A manager wants specific instructions to carry out a function.

A leader is paranoid and insecure.
A manager seeks security and certainty.

A leader thinks in terms of trade-offs and possible scenarios.
A manager wants to find the one best way to optimize performance.

A leader is not guided by financial data and short-term financial objectives.
A manager is directed by her budget.

A leader thinks strategically in a hostile, competitive environment.
A manager is concerned with operational efficiency.

A leader can make decisions in an environment of accelerating change and
      discontinuities.
A manager can’t.

A leader sees potential opportunities in an age of radical change.
A manager sees problems to be dealt with.

A leader persuades.
A manager commands.

A leader adapts, improvises, overcomes obstacles.  (From Heartbreak Ridge)
A manager waits for explicit instructions.

A leader looks for talent.
A manager looks for skills and experience.

A leader trusts other people.
A manager controls other people.

A leader discovers, nurtures and promotes potential leaders inside the company.
A manager doesn’t.

A leader reads books and articles about history, the global economy, other cultures and values, new ideas like complexity theory and tipping points, biotech, and science fiction.
A manager reads books and articles about management and her functional
       specialty.

A leader reads The Economist.
A manager reads The Harvard Business Review.

If you see yourself as a manager, join a large organization. If you see yourself as a leader, think seriously about starting your own company.


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