We’ve all worked with folks who love to strut their degrees, like the good old MBA. While I admit I learned some cool things while getting my own MBA, I can honestly say the MBA degree alone, while useful, just can’t give you the street smarts or plain old common sense you’ll need to get ahead in business. Working does that. And so does life.
Still if you don’t have an MBA – or even if you have one and forgot most of what you learned – here’s a handy-dandy guide to what I think are some of the most important and useful concepts the MBA program teaches:
Economics
Supply and demand – Basically, when you don’t have as much of something as people want, this raises the price that business can charge. Like when you see gas prices go up at the pump…economists explain it most simply by saying that demand exceeds supply, therefore price must go up. (Factors such as price manipulation and greed are not part of the simple model.) But if the demand were to fall, at least in theory, companies couldn’t raise the price – and, if demand fell sharply enough, they would probably have to lower it until demand picked up.
This relates to another concept called price elasticity that helps explain how high a price can go before people stop buying. Returning to our gas example, potentially there would seem to be a lot of upward give (elasticity) since as a nation we highly value our ability to drive wherever and whenever we want to. Left solely to the supply and demand principle, considering how strong the demand is, gas could probably keep going up and up for a while.
But because of things like almost instantaneous awareness of rising gas prices thanks to the internet and 24/7 media, and because of the interconnectedness of market forces, gas price elasticity is tempered. Possibly a sign of natural free market forces and possibly a sign you can only screw a customer so far these days before the company feels the heat from the media, screaming customers, politicians, and sites like ripoffreport.com. A company above all has to protect its brand, just as you have to protect your brand.
But despite market forces that may make it harder to raise gas prices quickly, there is a good deal of long-term give owing to the strong and seemingly unending demand for gas. So while the poorest people would have to make some serious decisions, our love of driving means that we will try to find ways to keep buying gas even at higher prices as long as we possibly can.
This brings us to the concept of utils (utility to us) or preferences that also help explain behavior or individuals and markets. Even if it means we switch to cars that give us better mileage, we still prefer to drive. And while I’m a huge proponent of fuel efficiency, I can’t help wondering if it won’t simply allow oil companies to keep raising prices since the price appears to be fairly elastic – resulting in the total amount we’re spending even with a more economical car (we may even drive more knowing it’s “cheaper”) arguably winding up being the same or more at higher gas prices! (Fear not. Oil companies don’t lose in any of this.)
But enough economics for now. Just knowing the words “supply and demand” will get you talking points. If you can throw in price elasticity and break-even point (a price where considering ALL your costs you break even and start to make profit), then you’re good as gold. (Gold being a precious metal / commodity whose price seems to act as a hedge against inflation and also a safe place to invest during uncertain times. Just remember…over time, gold has a wide trading range and little more than imaginary strings keeping it up, so anything can happen. No investment, not even gold, is a sure bet. But in reasonable quantities, it’s probably not a bad one as part of a balanced portfolio.)
Finance
The most important concept here is present value – most easily remembered by the phrase “A dollar today is worth more than a dollar tomorrow.” And the reason for that is the dollar today can be earning interest.
For example, if you get a tax return every year of say $1000 you feel pretty good. Right? But wait a minute. If there is money coming back to you, it’s only because you are overpaying – basically loaning the government money. Couldn’t you use that money yourself? So if you decided to take advantage of this, you could decrease the amount of withholding (you are allowed to do this) by some amount.
In the example of an annual return of about $1000, if you are paid every 2 weeks you have approximately 26 pay periods. Divide $1000 by 26 and get $38.46. If you DECREASE your withholding tax by this amount every pay period and put the extra in a special account, you will be earning interest on this money. Your own money. About $23 interest by the time you would normally get your return. (Therefore $1023 is the future value of this stream of extra cash.) Not bad for some simple present value theory.
Caution: You need to know that the IRS loves to use our money and so will assess a penalty if you underpay your taxes by not withholding enough. Actually, I just got assessed a penalty even though I overpaid. But that’s for my accountant to figure out.
Investments
Clearly any of these topics can fill a book. So when it comes to investments, here are a few basics only.
Any investment, whether it’s savings you deposit in your bank account, stocks and bonds, real estate, or even investing in someone else’s business all come with an expected rate of return, that is how much you are making on your money. If you invest $1000 and after exactly one year it’s worth $1050, then you have a a rate of return of 5%.
Higher risk might get you higher returns. But the important word here is MIGHT. As risk goes up, there is also a chance the investment may turn into dust. So that guaranteed 20% return the nice man on the phone is promising you comes with a risk that you lose all. (Although HE doesn’t.) That’s why so many people with lots of money own tons of treasury securities and other relatively low-paying safe investments. They feel it’s better to protect your principle (in this case the amount you start with) and earn a guaranteed lower rate, than go for the dream of huge money and wind up losing.
But they already have huge money and for those of us with a lot less, it’s tempting to try to earn more on the little we have, both to keep our nest egg growing and to help counter future inflation.
But Portfolio theory tells us not to put all out investment eggs in one basket – no matter how tempting the basket is. Spread it around (municipal bonds, corporate bonds, stocks, treasuries, funds, real estate) in case an egg or two break or in case you have to hold on to some of the eggs…er…investments for a while until they recover or mature, as in the case of bonds.
Mutual Funds allow us to invest in a group of (hopefully diversified) stocks and/or bonds that are managed by (hopefully) experts. You should know that each fund has management fees built in and many charge a fee (load) to buy and/or sell. No-load funds charge no in/out fees, but may still have management fees that confuse the issue of how much we’re really going to make. It’s a good idea to check out this stuff for yourself – no matter how much you like your broker. Morningstar.com is a good source of performance info.
Many experts suggest index funds as a good way to go since they are managed to follow market indices like the S&P 500 the Wilshire 5000, the FTSE 100, etc. Over time, with a rising market, you should do fine. But as with funds of any kind, what goes up can also go down!
Bonds - These can be corporate or government and basically finance debt. For instance if a city needs to build new roads, they might issue bonds that can be insured or uninsured. Companies also issue bonds to help finance their operation. What you need to know about bonds is that interest rate and price have an inverse relationship, meaning if rates go up in the outside world, the price of the bond goes down. So if you originally bought the bond at par (price when issued) but now interest rates have gone up a percent, your bond will be selling at less than you bought it for.
Why is this ok? Because bonds usually have a due date and if you hold it to term, you get full value plus all interest you’ve earned (in many cases interest may have been paid to you already as it was earned). But bonds also have a secondary market (as do stocks and certain other investments) and can be traded. Bonds also provide balance for stocks, since a poor stock market may be a good bond market. It’s good to have a little of each investment type if possible, with your balancing becoming more conservative as you get closer to retirement.
Stock Market – Stocks are shares in companies. While some companies are private – meaning shares are not available for the public to purchase – for public companies it’s one way of raising money to finance their operations.
The most important thing for you to know is that, although the stock market can be exciting and people like Jim Cramer on his show Mad Money make it seem like you can make money hand over fist, if it were that easy there would be a lot more people on Wall Street who wouldn’t need to work any more. The market goes up and it comes down. Don’t get suckered by an up market that seems like it can’t end – it can.
That’s why smart investors diversify by having some of their money in safer investments and then taking some money to gamble with. Even with a rising market, you can be holding a dog of a stock that never barks again! But that said, the market certainly offers people an opportunity to make more than the piddly interest rates some banks offer. Just know that, even though it will eventually go up again, there is no guarantee of value at any given time. So just don’t put all your eggs here.
Banking – Basically banks exist to make money from your money. And they sure do! In fact, banks create money because they can lend money without actually having it sitting right there in the bank. Remember that marvelous scene from It’s a Wonderful Life where Jimmy Stewart is trying to stop a run on the bank?
“No, but you… you… you’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…”
If you want to know more about how banks create money, here’s a quick primer: How Banks Create Money.
As a bank customer, your main goal is to either get as much interest as possible from any of your deposits investments and to pay as little as possible in interest on any of your loans or revolving credits (credit cards, lines of credit, and HELOCs – Home Equity Loans.)
What about interest rates? Where do they come from? Well, there are many factors that lead to the magic number you are being charged (including outrageous greed when it comes to certain credit cards), but at the root of that number is the Fed Fund Rate. This is the rate banks charge each other for overnight loans. Why do they need these loans? Banks are required by law to keep a certain percentage of money in reserve based on their assets and liabilities. This amount varies all the time and needs a little tweaking, depending on the activities of the day. If they fall short, they borrow; if they have extra, they lend. These rates, in turn, influence rates throughout the financial marketplace.
Marketing
According to the American Marketing Association “Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders.”
OK. So you have a product or service and you want people to pay money for it or in some way give you what you want in exchange. This allows for marketing an idea or person (as in politics) as well as an actual product of some kind.
Your job is to figure out what you have to sell, who you are selling it to, how you are going to get their attention, how to brand it, what you are going to charge (if that applies), how to package it, where/how to distribute it, what kinds of ads or promotional material and where to place them, what point-of-sale info or support you will need, and how to make sure the message will stick and motivate customers to actually follow through and buy it. You also need to work with Operations to make sure the product quality meets the expectations you’re setting and that supply is adequate.
Of course, as with the Xbox, limiting supply of something that everyone wants and bottling up unfulfilled desire until it reaches a state of frenzy can also be a marketing tool. But if you don’t have a product like Xbox, this can backfire – not only alienating customers but your entire distribution network!
One other word of caution: Marketers can pull out all the stops to hype the idea of the product and create the desire, but the product has to meet expectations or the product flops big time. So above all, develop the best product you can before putting it on the market. (Uh…I guess Microsoft is an exception considering all the version releases that are not quite finished. But they have the clout and built-in market to get away with it. Most companies don’t.)
And above all, make sure that there is a customer service operation in place that can handle inquiries, suggestions, and problems. Nothing undermines a good product like rotten service. (OK…I have to add AOL as another exception for a company that mostly gets away with it.)
All this applies to your brand too!
For more info on the basics of marketing, I’d like to direct you to another site I found that provides some key concepts: Marketing 101 – Some Basic Marketing Theory.
Management
Basic Theories
I’m not going to get into an esoteric discussion of modern management theory. Theory comes and theory goes. If you’d like to know more, here’s a link to Patrick Boylan’s excellent overview of the history and philosophy of management theory and theorists.
Basically a good manager has to find a way to balance business and employee needs as well as resources while turning out a quality product. Delegation rather than doing it all is the key. I’m a big believer in maximizing autonomy and creativity for the individual employees to the extent that a manager is mostly handling politics, monitoring progress, tweaking things when needed, and planning for near-term and long-term needs. A shop that runs smoothly is one where the boss does NOT have his or her hands into everything. (But remembering to compliment an employee or finding other ways to show your appreciation as well as having an open door and open ear when needed is a good practice for any manager.)
Although many businesses nowadays operate on a philosophy of short-term planning and quick profits, I am a firm believer that long-term planning with investment in human capital, research & development, and quality products/services (including excellent customer service) are the way to go. The best businesses – the ones you’d want to invest in or work for – know this secret.
Although I don’t want to dwell on the various theories and theorists, I am particularly fond of William Deming who died in 1993 but has left his mark on the world forever by helping give birth to the miraculous rise of the Japanese auto industry. Although he was known as an expert in the United States, it seems the US auto industry thought his management ideas were too radical for their taste. He suggested things like working with employees to find out what the real issues are, long-term planning rather than short-term thinking, and consistency in management – which he saw all too often to be the root of the problem.
In fact, in 1981, after his miracle in Japan showed no signs of subsiding, Ford knocked on his door and asked for help. According to Wikipedia.com: William Edwards Deming “questioned (Ford’s) company’s culture and the way its managers operated. To Ford’s surprise, Deming told Ford… that management actions were responsible for 85% of all problems in developing better cars.”
According to Boylan, some of Deming’s key beliefs (that are still taught and used today) are:
- Improve constantly and forever every process planning, production and service.
- Institute modern methods of training on the job for including management.
- Adopt and institute leadership aimed at helping people to do a better job.
- Drive out fear, encourage effective two-way communication.
- Break down barriers between departments and staff areas.
- Eliminate exhortations for the workforce – they only create adversarial relationships.
- Eliminate quotas and numerical targets. Substitute aid and helpful leadership.
- Remove barriers to pride of workmanship, making sure there are annual appraisals and Management by Objectives.
Cost-benefit analysis
When making decisions, a preferred method is to make a list of costs and benefits of proposed projects, products, purchases, methodologies, or whatever. You then look at the list and see which option wins.
In the case of deciding to buy a new copier, for instance, you might list 5 choices and the costs and benefits of each choice. The entire process is a bit more complex since each cost or benefit may have conditions or subsidiary considerations that you might want to give weighting to in assigning a relative value, but in general I think you get the idea of what cost-benefit decision-making is about.
Human Resources
There are way too many related topics for me to go into here including hiring, firing, compensation, staff development, benefits, reviews, disciplinary actions, etc. For now, just know that these are all issues to be considered.
Project Management
Again…not going to make this a large topic. Just know that basic project management includes but is not limited to: analyzing the situation, defining scope and objectives, creating a detailed plan, preparing a budget, obtaining human and other resources, setting milestones, communication, monitoring progress, testing, training & documentation (as in IT projects), implementation, evaluation, and post-implementation adjustments as needed.
Financial Management
Very briefly, an important part of financial management is something called cash flow, which is a spreadsheet that shows by month or some other time period when money will flow in (revenues, loans, accounts payable receipts) and when it will flow out (loan payments, payments for goods, salaries, taxes, etc.) Hopefully, in general, more should be coming in than going out. But if there are times that a month will have a negative cash flow, a cash flow statement will let you know so you can do something about it to prevent a crisis – like putting in some of your own money or getting a bridge loan.
When starting a new business or submitting a proposal to potential funders, a cash flow statement is critical since most business will not be making much (or any) money for a while and it’s important to see where the sources of money will come from to keep the business afloat. A good cash flow statement will not only help you run the business, it will show potential funders that you are on top of things.
Budgets, balance sheets, profit & loss statements, five-year plans, etc. are all part of financial management, but I’ll leave it at that.
Business Law
Way too complicated to cover here, but to summarize: Get it in writing. Even if you’ve heard an oral contract is ok, GET IT IN WRITING. Make sure both parties are clear about the terms and that there is agreement to each item the contract covers. Don’t assume anything. Spell it out as clearly and fully as possible. And if in doubt and this is about an important aspect of your business, ask a lawyer. It’ll be worth it in the end.
Computers and Technology
Ah! I could go on and on about this since I worked in IT development for many years, but I won’t. Basically databases are like large filing cabinets that you put things into and need to get things out of. Computers helps you retrieve and process the information in various ways, but it’s still a matter of GIGO – Garbage In Garbage Out. (Meaning if the data you put in hasn’t been properly cleaned or categorized, you can’t expect the computer to spew out good information.)
One other thing…if you are a non-techie working with a technical person, don’t be intimidated. They want to turn out products you can use. So take the time to carefully map out what you need and let them know if something they designed doesn’t work for you – even if they’re in love with all the bells and whistles. But also have patience and don’t get frustrated if they don’t understand you the first time around. You just need to find a common language. The effort up front is worth it since once again this is a case of GIGO.
If at all possible, when developing new systems, see if the IT team can work up a prototype that is dynamic enough to at least allow you to see how it works. This is a great way for you and the development team to really understand each other. Also, if deadlines are tight, be open to a phased-in approach so you can get a quality system that really meets your needs and not something they were forced to throw together because of impossible deadlines.
Rarely do non-IT people understand all that steps that go into developing a good system. Whether you are a developer or user, I strongly recommend taking the time to make all the steps clear, including detailed time-lines for each step and phase.
Operations
This is one of the most important aspects of business and yet one of the most under-rated when it comes time to hand out the awards and kudos. Line management is the key, of course. But so is upper management having a realistic grasp on what is needed to produce the desired results in the time allotted. Frequently there is a disconnect here, as upper management comes up with tight deadlines to show the Board they are on top of things and then their line managers have to come through anyway. Quality often suffers and things have to be reworked. And way too often the line managers are blamed for what they couldn’t possibly accomplish in the first place.
Good operations management occurs when there are smooth communications and a willingness to listen up and down the management hierarchy. Not always the case, but definitely a worthwhile goal.
Social Responsibility
When I went to grad school, this was something pretty new to the management school curriculum. More and more, companies are learning it really does pay – not only for public image alone, but in the bottom line as savvy investors and customers pay attention to the impact of corporate policies on things like the environment, workers rights, and even executive compensation as Robert Nardelli, the now former CEO of Home Depot, learned last year.
***
Well…that’s about it. Oh sure, there are a lot more things we could talk about, but these are some pretty good basics – especially for a 10-minute course. Now you know almost as much as I do – and you did it in about 29,990 less minutes than I did when I got my MBA.
Congratulations!
Ronnie Ann***
