On July 21, 2017, Pieter Levels shared a thread on Twitter about what he learnt during his MBA degree. The thread is incredibly insightful for anyone interested in an MBA or business as a whole, but given the popularity of the thread, it has become incredibly noisy to read. Here is a cleaner version of the thread to read in peace. All credits go to the original author. Enjoy ✌️.
Porter’s 5 Forces
Your competitiveness is based on threat of new entrants, substitutes, power of suppliers & buyers. (wiki)
Threat of new entrants: if low barrier of entry to market and an easily replicatable product, profit will trend towards zero w/ new entrants
Threat of substitutes: how easily can customers replace your product with a competitor’s one? If switching is easy, that’s bad for you
Bargaining power of customers: if there’s many alternative products and low switching costs, customers can push prices down, bad for you
Bargaining power of suppliers: if there’s only a few suppliers (think labor or raw materials) they can set prices high, bad for you
Industry rivalry: how innovative are your competitors? How much is ad spending? How secretive or transparent (so you can copy) are they?
Low Cost vs. Premium pricing
A low-cost airline sells 100,000 flights per day avg $50 with 1% profit margin: $50,000 profit per day.
A premium handbag maker sells 55 bags at $1,000 with 90% profit margin: $50,000 profit per day but 99,945 less customers.
You’re either low priced and high volume (many customers) or high priced and low volume (few cust), you NEVER want to be in the middle!
Ansoff Matrix: a framework to pick a company strategy for growth (and stick to it) (wiki)
Market penetration: the most common strategy, you sell more products to your current customers (upsell) or find new customers in your market.
Product development: you also probs know this one; create new products in same product segment you’re in (like washing powder XXL).
Market development: keep same product but target it to new customers in diff markets like new countries, demographics, subcultures etc.
Diversification: the riskiest strategy, make new products in markets you’re not in. This is suitable if you’re a giant corp, not for noobs!
Scarcity in the value chain
Generally, Money 💰 flows to the part of the value chain that has highest scarcity. The product ppl want most, but there is few off (eg gold)
Obviously you can produce inf. amounts of widgets to sell, so this means if production stays same, price will rise with high profits. Good!
Low-cost airlines exist but their logistics are HARD to replicate, so they can exist even though their product is not high value or scarse
The Product Marketing Mix or 7 P’s
You can use it as a “set of marketing tools to pursue objectives in your target market”
1) Product: how are its features, design, quality, branding, packaging, warranty etc.
2) Price: high or low? Price influences the perceived value, e.g. Gucci bags are $1,000 which is marketing (regardless of cost to make it)
3) Place: where can customers buy your product? Online? Which shops? Many or few? Do you franchise stores? Or exclusive selling? Logistics?
4) Promotion: how do make your product known and communicate to potential customers? Buy ads, PR, press, sales promotions (discounts)
It used to stop at the 4 P’s and they’re definitely the most important. But in 1981 they added 3 more: process, people and physical evidence
5) People: the staff that interacts with your customers and represents your product’s values also influence your marketing
6) Process: the process by which a service is delivered. This means the internal sequential tasks to create the service for the customer
7) Physical evidence (odd name I know): if you provide a service, this can be tangible goods that prove the service has occurred
Honestly “Physical Evidence” is obtrusely described. When you fly Emirates, you buy a service, but you also get a sleeping mask etc.
The 7 P’s of the Product Marketing Mix might be confusing because it’s not very actionable. So go through each and perfect product in each P
Mid-thread TL;DR: make a unique high-value high-priced product that’s hard to replicate in a market that’s hard for competitors to enter.
The worst: a low-priced product that’s easy to copy in a market that’s easy for competitors to enter (eg fishing, transport or coworkations)
Brands to study
- Louis Vuitton (premium)
- Ryanair (low cost)
- Amazon Web Services (barg power supplier)
- Dropbox (fail cuz replicatable)
One of the most important concepts in finance is Net Present Value (NPV). Ask yourself: would you rather have $100 now, or $100 in 12mo?
NPV is a way to valuate anything based on time. If you give me $100 in 12mo, how much is that worth today? At 5% interest: it’s worth $95.24
Why? Because if you gave me the $100 today and I invested it, I would have made ~$5 on it. So by giving it to me in 12mo, I lose ~$5.
$100 in 12 months / 5% annual interest rate = $95.24
or in math:
100 / 1.05 = $95.24
NPV is used to determine if an investment is viable. No point buying a house & renting it if the cash flow doesn’t pay itself off in time.
Spending money has an opportunity cost over time. Because by spending it, you can’t invest or save it and make $ on interest.
If a $500K house gains $300K in value over 10y, that sounds like success. But at 5% bank interest, that’d be $314,447 gained. $14,447 more!
If I buy $100K house and rent out for $24K/Y for 5Y: -100K+(24K/1.05)+(24K/1.05^2)+(24K/1.05^3)+(24K/1.05^4)+(24K/1.05^5)=📈 +3K NPV 😊
If I buy $100K house and rent it for $12K/Y for 5Y: -100K+(12K/1.05)+(12K/1.05^2)+(12K/1.05^3)+(12K/1.05^4)+(12K/1.05^5) = 📉 MINUS 48K! NPV 😭
That means we can predict if an investment with future cashflows has positive or negative NPV and make investment decisions based on it!
NPV is depends on interest rates! The lower the interest rates, the less opportunity your money has to 📈 on a bank, and the higher NPV is!
In these examples I used a theoretical interest rate of 5% but right now bank rates are 0%. More opportunity to invest your $$ outside bank!
Finance parts of MBA are hard to summarize. They’re mostly math concepts.
A big part of finance is being able to understand companies based on their documents filed. Here’s a profit & loss (P&L) statement…
It’s the core of a company accounting and gives a glance how a company is doing. If number is between (brackets) it means loss on that part
You generally use a spreadsheet to input a lot of data and it outputs predictions about the future of your company.
You input many assumptions (like sales and costs) and it outputs an income statement, cashflow statement and balance sheet for the future.
Financial modeling stands and falls by the accuracy of its assumptions. If you put in bad data, it outputs faulty predictions!
Next: Finance options, you might know them from the stock options you get if you work for a startup! (wiki)
Options simply mean you promise me the “option” to buy or sell a stock at a future date for a set price.
Let’s use oil as an example. I am a car factory and need oil every day. But oil prices fluctuate from $50 to $200. Which is risky for me.
If oil is $200, I lose money on making my cars! I want to hedge this risk so I’m always profitable. So I buy an option from you.
You promise to sell me oil for $50 on Jan 1st, 2018. Even if the price by then is maybe $200 or $200,000. You promised me $50! 🤷
Exercising an option means I tell you “Hey, you need to stick to your promise! Sell me the oil for $50!”. How you do that, is your business.
If you have oil laying around, just give me that. If you don’t, you’ll have to now buy it on the market!
If oil is $200 by Jan 1st, it means you have to spend $200 and then sell it to me for $50, you lose $150! That’s the risk of selling options
Options are complex financial instruments, or derivates, because they’re derived FROM the actual underlying asset (like oil, stocks etc)
One of the most important formulas in finance relates to options: it’s called Black-Scholes and is used to price options.
Here’s Black-Scholes’ formula. It’s obtruse to look at and took me weeks to understand.
Why is it important? “B-S is a relatively accurate method for pricing insurance (e.g. options) on the future price volatility of an asset”
If you’re still here, I commend you! Next in finance: Capital Structure defines how a company finances its operations.
Debt financing (borrowing $) is generally less risky than equity (issuing stocks) because equity can give shareholders power over you.
This stuff is boring. I wasn’t a big fan of finance either. But it’s part of an MBA. And knowing a bit is helpful if you ever do a startup.
Literally organizing people in, well, an organization. I’ll discuss the foundations of management theory by Peter Drucker.
Peter Drucker (1909-2005) pretty much created management theory out of thin air. Many of his theories were influenced by military leadership
Drucker invented Management by Objectives (MBO). It means we measure the performance of an employee vs. typical standards for the job.
By measuring actual achievements of employees, departments and the organization against objectives it can improve employee motivation.
Drucker uses S.M.A.R.T. goals as objectives: Specific, Measurable (w/ data), Attainable, Relevant (for org) and Time-Based (deadlines).
S.M.A.R.T. goals are highly useful in your own life too and I use them every day. If a goal doesn’t pass the S.M.A.R.T. test, it’s bogus.
Drucker’s theories are STILL highly relevant in 2017. Apple, Google, Facebook use DECENTRALIZED teams that even compete w/ each other!
Without data, management is blind. We collect and in turn interpret data to make decisions. Management Information Systems (MIS) do this.
There’s many more management theories than Drucker but they’re by nature highly subjective to change every decade. Drucker is foundational!
TL:DR management: collect data, interpret data to make decision, delegate to employees w/ autonomy, set SMART business goals!
We’ve discussed strategy, marketing, finance and management. Now let’s discuss a more recent entrant into MBA programs: entrepreneurship!
Entrepreneurship is “setting up a business + taking on financial risks in the hope of profit”. It’s esp popular due to the rise of startups.
Theories on entrepreneurship revolve around: 1) combining resources 2) risk taking 3) opportunism 4) innovation 5) achievement
The first theory defines entrepeneurship as “combining resources” in new ways: to produce a higher value than the sum of its parts
If it does work out, an entrepreneur gets rich financially and in social status (see @elonmusk). They have to take on high risk for that.
3rd theory states entrepreneurs are opportunists, simply people that (often by luck) see an opportunity of making profit and act upon it
Economics sees these opportunistic entrepreneurs as agents of arbitrage that simply correct market efficiencies.
That sounds hard: it just means that if there is money to be made SOMEONE will do it until nobody else can do it anymore and gets the market
4th theory: entrepeneurship are economic agents producing innovation by developing and marketing a new idea, device or method
5th and last theory discusses the psychology of entrepreneurship. Why do people choose to become entrepreneurs? It’s not for everyone
Schumpeter (1965) argued that entrepreneurs are individuals mostly motivated by personal achievement, not so much money
Related to this: entrepreneurs have a strong internal locus of control: they believe THEY can shape their own future by their actions
Now that we’ve defined entrepreneurship:
Let’s go more practical and discuss entrepeneurial theories you can apply to build a business
The most popular recent contribution to entrepreneurship theory has been the Customer Development method which evolved into the Lean Startup
Lean Startup: 1) customer feedback in product dev 2) less outside funding (e.g. stay lean) 3) release product before it’s done 4) iterate
By asking customers early on what they want, we can build a product WITH customers instead of just FOR customers.
That means they’ll be more satisfied customers and we’ll be sure there’s actually a market for what we are building (a common mistake)