An Exclamation

OK, it was not exactly a "J'accuse" moment, but I did get a reaction when I described this week's Corporate Finance case as a "European colonial" model.

Basically, the company we were studying develops property, then sells off part of the asset while maintaining enough of a stake to require them to manage it. So, they borrow some seed money, build, then get others to buy the risk (giving them back some of their seed money) and they make money running the place. It keeps their risk exposure low as they continue to expand. I thought it was a pretty straightforward case, with some intricate Beta and CAPM calculations.

Some of my friends in that class are European. I think they must have been shocked. Even better, the professor is Dutch (she took it with humor).

The thing is, I didn't mean to imply any negative connotation. I didn't say "A European colonial model wherein the firm gives pox-laden blankets to the locals in order to obtain resources", or "the firm enslaves the local population to strip the land bare of its mineral wealth." You borrow some money, build some ships, build a fort, then sell some other firm a stake in the fort while you continue to run the trading post. There is nothing wrong with that. Easy peasy lemon squeezy.

It does remind me though, I need to keep my trap shut.

Google Intervention - Marketing

A non-MBA friend of mine sends along this article.

As I read it, Google is setting p a third-party online forum that users can access at a moment's notice from their browser toolbars. This is a forum that individual websites have no control over.

I don't know what this means, other than another example of how the internet continues to change the relationship between firms and customers.

http://www.nextdayflyers.com/blog/google-sidewiki-if-you-have-any-web-pages-read-this/

More on Starbucks

After chatting with my Marketing prof at the break yesterday, I brought up Starbucks' marketing of Via. I mentioned my anecdote about being offering Via for free (essentially). OUr topics for the day were segmentation and brand extensions, and it wasn't clear where Via fit in Starbucks' overall strategy.

Our prof generally thought it was a bad idea. He said that while Starbucks has had success in selling its coffee beans and branded ice cream in grocery stores, Via was different because they were also trying to sell it in their own stars. Here you have a coffee brand that appeals to people who will 1) stand in line and 2) pay a hefty premium over deli coffee. Does Starbucks expect these people to stand in line in order to pay a premium for an instant version of coffee they can already acquire in other ways?

From my own life, I can say that if I want Starbucks coffee, I can either 1) stop in a Starbucks while I am out or 2) make coffee in my french press using beans I buy from Starbucks. The only time 'instant' single-serving enters the equation is if I am not going out and don't want to make more than one cup. This is an extremely rare situation.

That being said, I want Starbucks to succeed. Despite all the criticism leveled at them as they have become an international uber-chain, I still like the company, their products, and the fond memories of Seattle that they bring to mind.

Starbucks Promotion

A couple of weeks ago Starbucks rolled out their new line of instant coffee. I tried it; it's not bad; I even bought some, though I haven't used it yet. What grabs my attention, though, is how hard they've been pushing it.

The quality of Starbucks' coffee is a topic of high debate for some. I am one who likes their coffee. Every morning I get a tall cup of their over-the-counter coffee, with flavored syrup. The syrup is free because I have their rewards card.

This week, I have left my rewards card at home, lost it, whatever, so I've been paying a little more than two bucks for my drink. Two for two this week, Starbucks has offered to 1) give me free syrup and 2) throw in a three-pack of their instant coffee for $1.95 - less than the nominal value of what I'm buying in the first place.

That's right: they are offering their instant coffee for free and charging me less.

Yesterday It took the deal. Today I didn't. I already don't know when I'll drink the instant coffee that I do have. When I'm traveling, maybe?

In any case, it's something to bring up in marketing. How low will you go to promote your products? What's Starbucks' game here - to goose the numbers, to move product, to encourage people to try it?Hard to tell.

The Current Classload

So, we are officially three weeks in to the Fall 2009 semester, one quarter of the way through. I ought to comment on my current classes, Corporate Finance and Marketing.

Now that we've learned how the sausage is made (in Foundations of Finance) it's time to apply that to corporate planning. So far, we've learned how to model discounted cash flows for use in determining net present values, and to use NPV to make go/no-go decisions on projects. I find this very interesting, as I work in IT and I've worked on many projects from the ground level; now I am learning how they are valued and decided. Next up is risk assessment, which centers on gauging the beta value of a project, line of business, or segment.

Marketing is similarly proving to be much more interesting than I anticipated. It's a Saturday morning class, which I don't mind at all; it's an excuse to stop by my favorite bagelry (Murray's on 6th, just below 14th st). Marketing is so closely tied to strategy, I'm considering it as a specialization. All this time, I thought marketing came afterwards, but it seems that the intelligence gathering and product testing elements can actually help drive strategy.

Valuation

So in Corporate Finance, we're talking about valuation - how to value a company or a capital project. I work in IT, so it's interesting to see how the financial end of the decision-making process is managed. So many technology projects are rolled out with no concern as to the initial or ongoing expenses, and no regard as to what processes they are replacing, it's wasteful. 

Our case for last night's class had some interesting nuances to it. It revolved around a pharmaceutical company considering an opportunity to license an unapproved drug from another company. The pharmaceutical company would pay the costs to test and shepherd the drug through the FDA approval process. What was interesting to me was how to factor in the chances of successfully getting through each trial, along with the potential for the drug to have more than one benefit. 

Once the options were laid out in a decision tree, it was just like game theory: start at the end, and work backwards to see which branches were profitable. As it turned out, they all were, though some were more profitable than others.

My own company is engaged in the same process, but in reverse. We are divesting one of our flagship business units. How do you place a value on that? According to class, we'd have to look at the net present value of the company, which, based on their business model to date, would be diminishing (this is my speculation, and not a representation of my company's position, or based on any information not already public). What are the employees worth - thinking back to Strategy II, is this business unit an EVP or AVP proposition? From where I sit, they're on the cusp, and that makes the valuation all the more awkward.