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Designing High Performance Organizations

Key Takeaways

  1. Level 2 Listening: listen for values and to the person – not to the actual problem. Listen to what matters most and not to the goal/outcome. DO NOT try to relate to the person speaking by sharing your own experiences. Just listen
  2. Organizational Structure need to align with the company strategy
  3. Keep things you want to do in the ‘want to’ – I’m doing it because I want to. If you move it to the ‘have to’ – I have to do it (because of pay or something) – it takes the fun out of it and I would probably stop doing it
  4. In a crisis – go back to basics. Simplify and create clarity around what’s important to solve the problem – and what’s not 
  5. It takes 7 times for someone to hear something before they internalize it. It takes 30 times for someone to hear something to change their behavior
  6. Leaders’ words matter!
  7. When interviewing someone, listen to the stories people tell and how they connect together. Think about how the stories connect to each other, and see if there’s good connection. Ask questions like: ‘how did you get from story a to story b? What did you learn’? 
  8. Connecting with people on a value level is deep and can help bridge a lot of disagreements


Categories
Interesting Stuff

The Secret Structure of Great Talks

Categories
Books Four Thousand Weeks: Time Management for Mortals

Ten Tools for Embracing Your Finitude

Adopt a “fixed volume” approach to productivity.
keep two to-do lists. one ‘open’ and one ‘closed’. The open list is for everything that’s on your plate and will doubtless be nightmarishly long. Fortunately, it’s not your job to tackle it: instead, feed tasks from the open list ot the closed one – that is, a list with a fixed number of entries, ten at most. The rule is that you can’t add a new task until one’s completed.

Serialize, serialize, serialize.
Focus on one big project at a time, and see it to completion before moving on to what’s next. It’s alluring to try to alleviate the anxiety of having too many responsibilities or ambitions by getting started on them all at once, but you’ll make little progress that way.

Decide in advance what to fail at.
You’ll inevitably end up underachieving at something, simply because your time and energy are finite. But the great benefit of strategic underachievement – that is, nominating in advance whole areas of life in which you won’t expect excellence of yourself – is that you focus that time and energy more effectively.

Focus on what you’ve already completed, not just on what’s left to complete.
Keep a “done list”, which starts empty first thing in the morning, and which you then gradually fill with whatever you accomplish through the day. Each entry is another cheering reminder that you could, after all, have spent the day doing nothing remotely constructive – and look what you did instead!

Consolidate your caring.
Consciously pick your battles in charity, activism, and politics, with the understanding that to make a difference, you must focus your finite capacity for care.

Embrace boring and single-purpose technology.
Choose devices with only one purpose, such as the Kindle e-reader, on which it’s tedious and awkward to do anything but read. Less distractions this way.

Seek out novelty in the mundane.
Pay more attention to every moment, however mundane: to find novelty not by doing radically different things but by plunging more deeply into the list you already have. Experience life with twice the usual intensity, and “your experience of life would be twice as full as it currently is” – and any period of life would be remembered as having lasted twice as long.

Be a “researcher” in relationships.
Try deliberately adopting an attitude of curiosity, in which your goal isn’t to achieve any particular outcome, or successfully explain your your position, but as Hobson puts it “to figure out who this human being is that we’re with”.

Cultivate instantaneous generosity.
Whenever a generous impulse arises in your mind – to give money, check in on a friend, send an email praising someone’s work – act on the impulse right away, rather than putting it off until later.

Practice Doing Nothing.
“Do nothing meditation”, for which the instructions are to simply set a timer, probably only for five or ten minutes at first; sit down in a chair; and then stop trying to do anything. Every time you notice you’re doing something – including thinking, or focusing on your breaching, or anything else – stop doing it. Keep on stopping until the timer goes off. “Nothing is harder to do than nothing”, writes Jenny Odell. But to get better at it is to begin to regain your autonomy – to stop being motivated by the attempt to evade how reality feels here and now, to calm down, and to make better choices with your brief allotment of life.

Categories
Think Again: The Power of Knowing What You Don't Know

Actions for Impact – Collective Rethinking

Have More Nuanced Conversations

  1. Complexify contentious topics. There are more than two sides to every story. Instead of treating polarizing issues like two sides of a coin, look at them through the many lenses of a prism. Seeing the shades of grey can make us more open.
  2. Don’t shy away from caveats and contingencies. Acknowledging competing claims and conflicting results doesn’t sacrifice interest or credibility. It’s an effective way to engage audiences while encouraging them to stay curious.
  3. Expand your emotional range. You don’t have to eliminate frustration or even indignation to have a productive conversation. You just need to mix in a broader set of emotions along with them – you might try showing some curiosity or even admitting confusion or ambivalence.

Teach Kids to Think Again

  1. Have a weekly myth-busting discussion at dinner. It’s easier to debunk false beliefs at an early age, and it’s a great way to teach kids to become comfortable with rethinking. Pick a different topic each week – one day it might be dinosaurs, the next it could be outer space – and rotate responsibility around the family for bringing a myth for discussion.
  2. Invite kids to do multiple drafts and seek feedback from others. Creating different versions of a drawing or a story can encourage kids to learn the value of revising their ideas. Getting input from others can also help them to continue evolving their standards. They might learn to embrace confusion – and to stop expecting perfection on the first try.
  3. Stop asking kids what they want to be when they grow up. They don’t have to define themselves in terms of a career. A single identity can close the door to alternatives. Instead of trying to narrow their options, help them broaden their possibilities. They don’t have to be one thing – they can do many things.

Create Learning Organizations

  1. Abandon best practices. Best practices suggest that the ideal routines are already in place. If we want people to keep rethinking the way they work, we might be better off adopting process accountability and continually striving for better practices.
  2. Establish psychological safety. In learning cultures, people feel confident that they can question and challenge the status quo without being punished. Psychological safety often starts with leaders role-modeling humility.
  3. Keep a rethinking scorecard. Don’t evaluate decisions based only on the results: track how throughly different opinions are considered in the process. A bad process with a good outcome is luck. A good process with a bad outcome might be a smart experiment.

Stay Open to Rethinking Your Future

  1. Throw out the ten-year plan. What interested you last year might bore you this year – and what confused you yesterday might become exciting tomorrow. Passions are developed, not just discovered. Planning just one step ahead can keep you open to rethinking.
  2. Rethink your actions, not just your surroundings. Chasing happiness can chase it away. Trading one set of circumstances for another isn’t always enough. Joy can was and wane, but meaning is more likely to last. Building a sense of purpose often starts with taking actions to enhance your learning or your contributions to others.
  3. Schedule a life checkup. It’s easy to get caught in escalation of commitment to an unfulfilling path. Just as you schedule health checkups with your doctor, it’s worth having a life checkup on your calendar once or twice a year. It’s a way to assess how much you’re learning, how your beliefs and goals are evolving, and whether your next steps warrant some rethinking.
  4. Make time to think again. When i looked at my calendar, I noticed that it was mostly full of doing. I set a goal of spending an hour a day thinking and learning. Now I’ve decided to go further: I’m scheduling a weekly time for rethinking and unlearning. I reach out to my challenge network and ask what ideas and opinions they think I should be reconsidering.
Categories
Think Again: The Power of Knowing What You Don't Know

Actions for Impact – Interpersonal Rethinking

Ask Better Questions

  1. Practice the art of persuasive learning. When you’re trying to open other people’s minds, we can frequently accomplish more by listening than by talking. How can you show an interest in helping people crystallize their own views and uncover their own reasons for change? A good way to start is to increase your question-to-statement ratio.
  2. Question how rather than why. When people describe why they hold extreme views, they often intensify their commitment and double down. When they try to explain how they would make their views a reality, they often realize the limits of their understanding and start to temper some of their opinions.
  3. Ask how people originally formed an opinion. Many of our opinions, like our stereotypes, are arbitrary; we’ve developed them without rigorous data or deep reflection. To help people reevaluate, prompt them to consider how they’d believe different thinks if they’d been born at different time or in a different place.

Approach Disagreements as Dances, Not Battles

  1. Acknowledge common ground. A debate is like a dance, not a war. Admitting points of convergence doesn’t make you weaker – it shows that you’re willing to negotiate about what’s true, and motivates the other side to consider your point of view.
  2. Remember that less is often more. If you pile on too many different reasons to support your case, it can make your audience defensive – and cause them to reject your entire argument based on its least compelling points. Instead of diluting your argument, lead with a few of your strongest points.
  3. Reinforce freedom of choice. Sometimes people resist not because you’re dismissing the argument but because they’re rejecting the feeling of their behavior being controlled. It helps to respect their autonomy by reminding them that it’s up to them to choose what they believe.
  4. Have a conversation about conversation. If emotions are running hot, try redirecting the discussion to the process. Like the expect negotiators who comment on their feelings and test their understanding of the other side’s feelings, you can somethings make progress by expressing your disappointment or frustration and asking people if they share it.
Categories
Think Again: The Power of Knowing What You Don't Know

Actions for Impact – Individual Rethinking

Develop the Habit of Thinking Again

  1. Think like a scientist. When you start forming an opinion, resist the temptation to preach, prosecute or politick. Treat your emerging view as a hunch or a hypothesis and test it with data. Like the entrepreneurs who learned to approach their business strategies as experiments, you’ll maintain the agility to pivot.
  2. Define your identity in terms of values, not opinions. It’s easier to avoid getting stuck to your past beliefs if you don’t become attached to them as part of your present self-concept. See yourself as someone who values curiosity, learning, mental flexibility and searching for knowledge. As you form opinions, keep a list of factors that would change your mind.
  3. Seek out information that goes against your views. You can fight confirmation bias, burst filter bubbles, and escape eco chambers by actively engaging with ideas that challenge your assumptions. An easy place to start is to follow people who make you think – even if you usually disagree with what they think.

Calibrate Your Confidence

  1. Beware of getting stranded at at the summit of Mount Stupid. Don’t confuse confidence with competence. The Dunning-Kruger effect is a good reminder that the better you think you are, the greater the risk that you’re overestimating yourself – and the greater the odds that you’ll stop improving. To prevent overconfidence in your knowledge, reflect on how well you can explain a given subject.
  2. Harness the benefits of doubt. When you find yourself doubting your ability, reframe the situation as an opportunity for growth. You can have confidence in your capacity to learn while questioning your current solution to a problem. Knowing what you don’t know is often the first step toward developing expertise.
  3. Embrace the joy of being wrong. When you find out you’ve made a mistake, take it as a sign that you’ve just discovered something new. Don’t be afraid to laugh at yourself. It helps you focus less on proving yourself – and more on improving yourself.

Invite Others to Question Your Thinking

  1. Learn something new from each person you meet. Everyone knows more than you about something. Ask people what they’ve been rethinking lately, or start a conversation about times you’ve changed your mind in the past year.
  2. Build a challenge network, not just a support network. It’s helpful to have cheerleaders encouraging you, but you also need critics to challenge you. Who are you most thoughtful critics? Once you’ve identified them, invite them to question your thinking. To make sure they know you’re open to dissenting views, tell them why you respect their pushback – and where they usually add the most value.
  3. Don’t shy away from constructive conflict. Disagreements don’t have to be disagreeable. Although relationship conflict is usually counterproductive, task conflict can help you think again. Try framing disagreement as a debate: people are more likely to approach it intellectually and less likely to take it personally.
Categories
Financial Analysis and Valuation

Financial Statements & Performance Evaluation

ADD SLIDES FROM FOLDER – LECTURE WEEK 3

Categories
Financial Analysis and Valuation

Liability vs Debt

Liability VS Debt: 

LIABILITY 

Accountants describes liability as a present contractual commitment to another entity that entrails settlement by probably future transfer or use of assets on an agreed upon date (or timing) when the obligating event has already occurred. There is no exact definition of debt in accounting, and not all liabilities are debt. Also, it is possible that some types of debt are not considered a liability by accountants (off-balance sheet financing).  

DEBT 

For our purposes, debt is an amount contractually owed to another party that has an explicit or implicit interest payment that we can measure. That includes notes, mortgages, bonds (debentures), and other financing instruments that typically have an explicit or implicit interest rate. That EXCLUDES liabilities such as deferred income taxes, unearned revenue, and most other operating liabilities (for example, accounts payable (AP), wages payable, accruals, etc.) 

====================== 

ROIC – Return On Invested Capital = NOPLAT/Invested Capital (=debt + equity) 
NOPLAT = Net Operating Profits After Tax (to get the tax rate = taxable income/tax expense) 
NWC (Net Working Capital) = current assets – current liabilities 

NOPLAT 
• ROIC 
Invested Capital 
• NOPLAT= EBIT* (I-t) 
• Total Invested Capital = Equity plus interest bearing debt
Reorganizing the Balance Sheet: 
Invested Capital 
• By separating line items and rearranging the accounting identity, 
Operating Nonoperating 
Assets 
Assets 
Operating 
+ Debt + Equity 
Liabilities 
• We can create two new terms, invested capital and total funds invested: 
Operating 
Assets 
Operating 
Liabilities 
Nonoperating 
Assets 
Invested capital equals 
operating assets less 
operating liabilities. 
Total funds invested equals 
invested capital plus 
nonoperating assets. 
USCMarshall 
School of Business 
= Debt + Equity 
Total funds invested can 
also be measured by 
summing debt plus equity 
FBE 529 - Scott Abrams - Spring 2021 
165
Invested Capital: Operating 
pers ective 
Operating 
Assets 
Operating Liabilities 
Invested Capital 
Nonoperating Assets 
Total Funds Invested 
Operating assets include current operating assets (working cash, accounts 
receivable, inventory, prepaid expenses), along with PP&E and net other long- 
term operating assets. Include capitalized leases and R&D as operating assets. 
Operating liabilities include non-interest-bearing current liabilities; the most 
common are related to suppliers (accounts payable), employees (accrued 
salaries), customers (deferred revenue and customer advances), and the 
government (income taxes payable). 
Nonoperating assets include excess cash, marketable securities, notes 
receivable, prepaid pension assets, nonconsolidated subsidiaries, and other 
equity investments). 
Total funds invested from an operatinq perspective.
Invested Capital: 
Financin Pers ective 
Debt 
Debt 
Equivalents 
Equity 
Equity Equivalents 
Total Funds 
Invested 
Debt includes all interest-bearing debt from banks and public capital markets. 
Debt equivalents include off-balance-sheet debt and one-time debts owed to 
others that are not part of ongoing operations (e.g., severance payments as part 
of a restructuring, an unfunded pension liability, or expected environmental 
remediation following a plant closure). 
Equityincludes original investor funds (common stock and additional paid-in 
capital, net of treasury stock repurchased), investor funds reinvested into the 
company (retained earnings and accumulated other comprehensive income), 
and investor funds to be paid out shortly (dividends payable). 
Equity equivalents include accounts that arise because of noncash 
adjustments to retained earnings; they are similar to debt equivalents but are 
not deducted from enterprise value to determine equity value (e.g., most 
deferred-tax accounts and income-smoothing provisions). 
Total funds invested from a financinq perspective.
Categories
Financial Analysis and Valuation

Financial Statements, Growth & Ratio Analysis

The flow of the financial statements..

Statement of Cash Flows 
(in millions) 
Balance Sheet, 12/31/20X4 
12/31/20X4-12/31/20X5 
Cash 
All other assets 
Liabilities 
Capital Stock 
Retained earnings 
30.0 
1 ,233.2 
1 ,263.2 
652.0 
172.0 
439.2 
1 ,263.2 
Operating activities 
Investing activities 
Financing activities 
Net increase in cash 
Beginning cash 
Ending cash 
Income Statement, 
Net sales 
Expenses 
Net income 
11.5 
(92.8) 
(14.7) 
10.0 
30.0 
40.0 
1 ,530.o 
1,434.5 
95.5 
Balance Sheet, 
Cash 
All other assets 
Liabilities 
Capital Stock 
Retained Earnings 
40.0 
1 ,284.o 
1 ,324.0 
632.0 
194.0 
1,324.0 
498.0 
Statement of Retained Earnings 
12/31/20X4 - 12/31/20X5 
Retained eamings, 
Net income 
Dividends 
Retained earnings, 
12/31/20X4 
12/31/20X5 
439.2 
95.5 
36.7 
498.0
 

Income Statement: Operating income vs non-operating income –  If we’re looking to value OPERATIONS ONLY, we’re stopping at the EBIT! After the EBIT come the financial performance.  
Operating Income: the income generated by the firm’s core business operations.
Non-operating Income: income generated by investments the firm has made in assets that are unrelated to the firm’s primary business. For example: 

  • Gains from the sale of investments 
  • The sale of a subsidiary or division 
  • Costs incurred from restructuring 
  • Currency exchange 
  • The write-off of obsolescent inventory 
Net sales 
Cost of goods sold 
Gross Margin 
Selling, general, and administrative expenses 
Operating income 
Other income 
Earnings before interest and taxes (EBIT) 
Interest expense 
Earnings before taxes 
Income taxes 
Income after tax and before extraordinary items 
Extraordinary items 
Net income 
Preferred dividends 
Net income available to common shareholders 
3,365 
2,252 
1,113 
654 
459 
200 
659 
28 
631 
252 
379 
56 
323 
22 
301

The Balance Sheet: provides a snapshot of the firm’s financial position at a moment in time and a detailed account of the company’s assets’ liabilities (debts), and shareholders’ equity. The balance sheet equation requires that the sum of the book values of the firm’s assets equal the sum of the debts the firm owes to its creditors plus the investment of the stockholders’ equity.  

Consolidation Rules: 

  • An equity investment involving more than 20% but less than 50% of the equity of another firm is recorded as an investment. This will typically show up on the balance sheet as ‘investments in unconsolidated subsidiaries’. 
  • If the firm owns more than 50% of a subsidiary, then the rules of accounting call for consolidation of the subsidiary into the firm’s balance sheet and income statement. A minority interest account appears between liabilities and shareholders’ equity, representing the value of the minority-owned shares, because 100% of the value of the subsidiary’s assets were incorporated into the consolidated balance sheet. 
  • The presence of a long-term investment category on a firm’s balance sheet signifies the presence of a potentially significant non-operating asset that will need to be valued. This means that the analyst will need to dig deeper into the footnotes of the financial statement to determine the exact nature of the investments in order to determine an appropriate approach to valuing them. This line item (sometime referred to as long-term investments because they are assets the company intends to hold for longer than one year) can consist of stocks and bonds of other companies, real estate, as well as cash set aside for a specific purpose. 
Ownership: 
Accounting 
Method 
Balance Sheet 
Income 
Statement 
20-50% 
Cost 
Investment shown at 
cost 
Dividends recorded as 
income 
Equity 
Investment originally 
shown at cost, 
adjusted for income 
(+) and dividends (-); 
% of profits recorded 
as income 
>50% 
Consolidation 
100% of subsidiary 
balance sheet 
consolidated; results 
a noncontrolling 
interest (NCI) 
100% of profits 
recorded as net 
income; income 
attributable to 
noncontrolling 
interest then 
subtracted out

Ratio Analysis

Categories of ratios: 

  • Profitability Ratios 
    • Profit margin (net income/sales) 
    • Return on assets (ROA) = net income/total assets 
    • Return on equity (ROE) = net income/total equity 
  • Short-term solvency (liquidity ratios) 
    • Current ratio (CA/CL) 
    • Quick ratio (CA-inventory)/CL 
  • Long-term solvency 
    • Leverage ratios 
      • Total liabilities to total assets (TL/TA) 
      • Total liabilities to total equity (TL/TE) 
      • Total assets to Owners’ equity (equity multiplier): TA/TE 
      • Total debt to equity (TD/TE) 
    • Coverage ratios 
      • Times interest earned/EBIT interest coverage (EBIT/interest) 
      • Cash coverage/EBITDA Interest coverage (EBIT + Depreciation)/Interest 
  • Asset utilization ratios (AKA Activity) 
    • Total assets turnover (sales/total assets) 
    • Inventory turnover (COGS/inventory) 
      • The longer inventory sits on a company’s shelves, the lower the rate of return on those assets, and the greater their vulnerability to falling prices and obsolescence. You want to keep your inventory turning, however not at the expense of your overall profit margins or business strategy 
    • Days in inventory (365/inventory turnover) 
    • Receivables turnover (sales/avg. Accounts receivable) 
    • Avg. Collection period (365/receivables turnover) 
  • Valuation multiples 

Benchmarking using ratios: so, what is a good benchmark? 

It is often not clear what is a ‘good’ or ‘bad’ level for a financial ratio and no one benchmark exists for all companies in all valuation contexts. We know ratios vary over time and we know they vary by industry – we also know that companies tend to regress towards the mean – so a common benchmark is the company’s industry or comparable group. That said – deviations from the ‘norm’ might be good and indicate an industry leader and a potential competitive advantage. 

Sales Growth Rate (CAGR = Compounded Annual Growth Rate)

Formula and Calculation of CAGR 
CAGR 
where: 
1 
EV = Ending value 
BV = Beginning value 
n = Number of years

ales growth is an important driver of the need to invest in various types of assets and of the company’s value. It also provides some indication of the effectiveness of firm’s strategy and product development activities. 

Analyzing Growth: 

Growth can be disaggregated into three main components: 

  • Portfolio Momentum: organic revenue growth a company enjoys because of overall expansion in the market segements of its portfolio 
  • Market share performance: organice revenue growth from a company gaining or losing share in a particular market 
  • Mergers and acquisitions: inorganic growth a company achieves when it buys or sells revenues through acquisitions or divestments 

Growth and Value: growth translates to value when return on invested capital (ROIC) exceeds the cost of capital(!!!). Sustaining high growth is much more difficult than sustaining ROIC. Despite some variation on the patterns of growth, high growth is not sustainable, due to the natural cycles of products. 

Types of Growth and Value Creation 
Q.) 
o 
Q.) 
1 
2 
3 
Above average value creation 
Create new markets through new products 
Convince existing customers to buy more of a product 
Attract new customers to the market 
Average value creation 
Gain market share in fast-growing market 
Make bolt-on acquisitions to accelerate product growth 
Below average value creation 
Gain share from rivals through incremental innovation 
Gain share from rivals through product promotion and pricing 
Make large acquisitions
Categories
Financial Analysis and Valuation

General Notes

  • Intrinsic value: the value that WE THINK the company is worth. The actual worth of an investment or asset justified by information about its future cash flows. This is the ‘true’ value according to a model. 
  • Market value: the price determined by buyers and sellers on an open market. It’s the consensus value of all market participants. 
  • Is growth always good? It depends on the return on capital. Growth = IR (investment rate) * ROIC 
  • Invested Capital: the cumulative amount that the business has invested in its operations – primarily PP&E and working capital 
  • Guiding Principal of Value Creation 
    • Firms that grow and earn a return of capital that exceeds their cost of capital create value 
    • As long as the spread between ROIC and WACC is positive, new growth creates value. The faster the firm grows, the more value it creates. ROIC > WACC = VALUE CREATION! 
    • If the spread is equal to zero, the firm creates no value through growth. The firm is growing by taking on projects that have NPV of zero 
    • When the spread is negative, the firm destroys value by taking on new projects. If a company cannot earn the necessary return on a new project or acquisition, its market calue will drop. ROIC < WACC = VALUE DESTRUCTION! 

High ROIC companies should focus on growth. Low ROIC companies should focus on improving returns before growing. 

The amount of value they (the company) create is the difference between cash inflows and the cost of the investment made, adjusted to reflect the fact that tomorrow’s cash flows are worth less than today’s because of the time value of money and the riskiness of future cash flows. 

A combination of three primary financial metrics typically measure how well a company is delivering value to shareholders: earnings per share (EPS), return on invested capital (ROIC) or return on equity (ROE), and after-tax cash flow. 

Warren Buffet’s principles for an outstanding business: 

  • A high ROIC and is able to reinvest its earnings at a high rate 
  • A “moat”, a barrier against competition, something like a world-class brand or advantage of scale. Often it is the firms business in a particular market 
  • Either an outstanding management or is so powerfully positioned that it doesn’t need one 

A large established company might have a low return on capital as it might have lost its competitive advantage (it grew at first thanks to its good ROIC). A small company might have a low return on capital as it struggled to ever establish and source of competitive advantage