The Business Book (DK) (Part 2)

Culture is the way in which a group of people solves problems. Tradition, culture and structure are important for a company. Culture is a shared history of what the company has. It is a narrative. There are basically 5 dimensions of culture. They are 1) power distance; 2) individualism vs collectivism; 3) uncertainty avoidance; 4) masculinity vs femininity; 5) long vs short-term orientation. Power distance refers to distance in authority between managers and executives. Culture matters a lot. Organization culture is non-static and can change over time.

Emotional Intelligence is the intersection of heart and head. EQ is the ability to perceive, control and evaluate emotions. There are 5 domains to EQ. It is an essential trait in highly effective business leaders. They are 1) self-awareness; 2) self-regulation; 3) motivation; 4) empathy; 5) social skills. EQ can grow with age and experience. Emotional balance is a key factor in commercial success.

Management is a practice where art, science, and craft meet – Mintzberg’s management roles. Management roles fall into these 3 categories: 1) informational; 2) interpersonal; 3) decisional. Effective managers must use all three and know when to use them appropriately. Management is both an art and a science. Management is complex and multi-faceted.

A camel is a horse designed by a committee – Avoid Groupthink. We tend to nod in agreement even if we disagree. This is because we want to feel like we ‘belong’ to the others. Groupthink can be so strong that proper analysis might not be conducted at all. It encourages extreme risk taking. Managers must encourage all to talk and encourage dissent in order to avoid groupthink.

The art of thinking independently, together – the value of diversity. Males have the tendency to employ other males. Greater diversity means scope for creativity. Diversity can combat groupthink.

Making money work: Managing finances. Finance strategy has emerged in importance nowadays. Leverage is a double-edged sword. Is it the director who is responsible when things go wrong? Learn to ignore the herd instinct. There may be wisdom to listen to your customers. For instance, China has a huge potential. Management accountants work hard to derive accurate costing. ABC is a good way to do this. Financial accountants must play by the rules and abide by FRS and their principles. Often, companies are trying to make ‘money’ from ‘money’ rather than concentrate on their core operations.

Do not let yourself be involved in a fraudulent business. Learn to err on the side of caution. Consider rules plus morality as well. Do not inflate profit figures if you are an accountant. Prudent approaches must be made with regards to the provision of bad debt. Directors must be alert to any creative accounting being employed. IFRS relies more on principles as compared to rules-based US GAAP. Is mark-to-market accounting misleading in times of economic boom? No set of rules can govern ethical behaviour.

Executive Officers must be free from avarice. Managers can act in their own interests. They must not be opportunistic and simply interested in personal gain. Shareholders are now even more concerned about governance and gain.

If wealth is placed where it bears interest, it comes back to you redoubled – Investment and dividends. Dividends are more rare nowadays. Share buy backs are more common. In periods of high growth, companies should reinvest a great amount in order to grow the business. When growth is slow, companies should pay dividends. Apple only started paying dividends in 2013.

Borrow Short, Lend Long – Make Money from Money. However, this is a short term strategy. Invest in financial products. The treasury function emerged in the late 1970s. Speculation via derivatives can be risky indeed.

The Interests of the shareholders are our own – Accountability and Governance. Governance must be proactive and ethical in nature. Lines of responsibility are clear. Board members must be fully informed and work in the long term interests of business and shareholders. Board members must be alert. Many board members had no idea what risks the company faced. Good governance is necessary.

Make the Best quality of goods at the lowest cost paying the highest wages possible – your workers are your customers. Sale of stable groups are growing rapidly. Sometimes, your workers will also be your customers. This will be good. China is the biggest market for consumer spending. There is a lot of potential in this market. Bosses need to focus on workers’ delight and fulfilment more than ever. Encourage the workforce to manage themselves.

Utilize OPM other people’s money – Who bears the risk? In the event of liquidation, shareholders tend to lose out as they are the last to be paid. Staff might lose their job when the company fails. The pension funds might be wiped out and hence affecting employee welfare.

Swim upstream. Go the other way. Ignore the conventional wisdom. You need to have a contrarian view to make money. Public shareholders should not follow mass trends. Do not stampede to make takeover bids. This is because the company will tend to overpay. Do not buy other businesses for diversification sake when others are doing so. Avoid followership and imitate market innovators. Learn to swim upstream

Debt is the worst poverty – Leverage and excess risk. In the long run, taking leverage is not good. However, in the short term, it might help the company to grow. The optimal debt should be about 25 to 30%. Leveraged buy-outs exist in the market. For instance, LBOs rescued MGM Grand.

Cash is King. Profit vs Cash Flow. For fast growing companies, cash flow is more important than ever. Profit is an accounting concept. Those with weak cashflows can use overdrafts and supplier credit. However, in times of recession, cash is king. Companies must be able to tie over the period of negative cashflow in order to survive unscathed.

Only when the tide goes out do you discover who’s swimming naked. There is off-balance sheet risks. Not all liabilities may be reflected on the BS. Losses can be parked with subsidiaries or SPVs and not consolidated.

ROE is a financial goal that can become an own goal. ROE is vital. Share repurchases help to boost ROE. However, this results in a risky capital structure. Hence, ROE can be misleading at times.

As the role of private equity has grown, so have the risk it poses. PE involves loading debt onto the business, similar to LBO. Debt has inherent risk. Managers are pressured to perform to pay off the debt. Hence, there is more incentive for short term performance rather than long-term gain. Those who make PE purchases are usually institutional investors. The trick is to try to turn the company such that it becomes profitable.

Assign costs according to the resources consumed. Use ABC. Overhead costs can be vague in nature. ABC calculates the actual overhead costs. This allows the company to make better decisions. This is good for non-standard products. To do this, one needs to identify the cost drivers for each activity.

Working with a Vision – Strategy and Operations. Everyone should have a common objective. Strategy is vital. Companies must be nimble and change course if necessary. There is a need to balance long and short term objectives. Flexibility is important. Regulation is taking centre-stage now.

Turn every disaster into an opportunity. There are many success stories that emerged because of failure. There are opportunities in disasters. Analyze every failure and learn from them.

If I had asked people what they wanted, they would have said faster horses. The company that leads the way can dominate an industry even if they are copied. This is because people associate the concept with them first. This is known as first-mover advantage. Do things that no one else is willing to do. Being the first is everything. You need to get into the mind of your customer. Toyota created the Prius car.

The main thing to remember is, the main thing is the main thing. Protect the core business. Diversification usually does not bode well for companies. A business should focus only on what they are good at. Outsourcing some non-core functions is possible. The outsourced function must be managed well.

You don’t need a huge company – Just a computer and a part-time person (Small is beautiful). Internet had disruptive power. Google was phenomenal. eBay is a very successful auction house. Anyone can sell unique items on such platforms. Internet allows business to be run at a much cheaper cost. Cost and speed of delivery are important too. Customer service is increasingly important in this modern age. Feedback is always useful for business owners. Customization is possible for small businesses.

Don’t get caught in the middle – Porter’s Generic Strategies. Companies generally choose between cost leadership or differentiation. This is how companies develop a competitive advantage. For low cost strategy, companies might be worried that their idea will be copied. Bose is a company that pursues a differentiation strategy. A focus strategy is good to target a niche market. Ryanair is a typical low cost carrier. SIA pursues a differentiation strategy.

The essence of strategy is choosing what not to do – Good and bad strategy. Choosing what not to do is as important as choosing what to do. Good strategy should be developed from SWOT. Kodak is an example of a company which used bad strategy. They neglected the potential of the digital camera.

Synergy and Other Lies – Why takeovers disappoint. The purpose of merger and acquisition is to create synergy. The most reason why things don’t work is because the two companies cannot agree on a common strategy. There might be a mismatch in organizational culture.

The Chinese word ‘crisis’ is composed of two characters: ‘danger’ and ‘opportunity’. Crises can strike anywhere. Crisis management is important. Leadership must be swift and decisive. It is always crucial to care for the well-being of your customers. Sometimes, product recalls are necessary.

You can’t grow long term if you can’t eat short-term. There is a need to balance the two. It is a delicate balance. If you only think long term, you might not have the immediate capital to fund your business. It is important to preserve the core of the business and yet stimulate progress.

Market attractiveness, business attractiveness. MABA is a business framework. It is also known as the GE-McKinsey Matrix. This helps to plot the relative profitability of business units or products.

Only the paranoid survive. RIM did not innovate. It is normal to relax when things are well. Every business faces change. Intel had to reposition themselves when Japanese companies could produce memory chips at a lower cost than them. This is known as a strategic inflexion point. Leaders must make the right decisions during inflexion points or the business has a high chance of failure. Leaders need to look out for black swan events that might hurt the business. Keep asking ‘why’ till you get to the root of the problem. Managers must question processes. They need to constantly ask whether there is a better way of doing things. Victorinox started selling watches after its business for pocket knives were hit.

To Excel, tap into people’s capacity to learn (The Learning Organization). Companies need to be devoted in development and education. The community will benefit as a whole. Peter Senge made headway in his research. The two traits are discipline are personal mastery and mental models. The other three are team learning, systems thinking and building a shared vision. Turnover is a big problem in major organizations. This could be due to poor management practices. Honda is an example of a good learning organization. Those organizations which focus on learning have better hope for the future.

The future of business is selling less of more (The Long Tail). This means low volumes of an increasing large number of products. Customers are now buying niche items from online sellers. iTunes offers a wide range of music that no one else can compete with them. Physical stores can only offer a limited variety of items.

To be an optimist, have a contingency plan for when all hell breaks loose – Contingency planning. One must have an adequate plan to tackle a crisis. It is important to be able to manage disasters well.

Plans are useless but planning is indispensable. Ask what is likely to happen the next few years. Shell managed to diversify into other energy sources when there was an oil embargo.

The strongest competitive forces determine the profitability of an industry. They are the power of suppliers, buyers, rivalry among existing firms, threat of new entrants and threat of substitutes.

If you don’t have a competitive advantage, don’t compete. Companies can add value at any stage of the value chain. Companies must know how to analyse their value chain.

If you don’t know where you are, a map won’t help (The capability maturity model). Processes must be proactively applied and then managed and monitored. Continuous process improvement is crucial.

Chaos brings uneasiness, but it also allows for creativity and growth. Companies need a flatter structure with more flexibility. A company has to re-visit its strategy frequently. Workshops and team briefings are important.

Always do what is right. It will gratify half of mankind and astonish the other. There is morality in business. Companies may cheap because they want to boost performance. Some companies engage in price fixing etc.

There is no such thing as a minor lapse in integrity – Collusion. There is a fine line between collaboration and collusion. Accountability is important and must be emphasized.

The Business Book

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