A few thoughts on relationships – the final MBA Learning

2 years ago, I began writing weekly posts under a category called “MBA Learnings.” I thought it’d be a great excuse to share what I’m taking away from my experience at graduate school. While some of these started out as lessons from the classroom, the series has evolved into a collection of mammoth posts that attempt to frame the experience (classroom lessons are part of regular posts). The hope with these posts – such as today’s note on relationships – is that they are applicable to life as much as they are to graduate school.

In a meeting with senior administrator at school yesterday, she wondered why many just “get through” the experience when there is so much more you can absorb. My thesis is that it is similar to life – it demands a clarity around priorities that only comes after a certain amount of thought. The following 6 links hope to frame the landscape to make the thinking process easier.

1. I’m in, Now what? – An attempt at helping you structure your transition to school once you are admitted.
2. Advice to an incoming student – A long “expectation setting” post that breaks life at school into a tension between 6 priorities
3. Designing for introversion – An introvert’s guide to thinking about the MBA experience
4. Lessons learnt from internship recruiting – Lessons + a guide to how to think about the summer before school. I have, since, written a more comprehensive guide to a job search.
5. The recruiting journey through self doubt – A few thoughts on dealing with the emotional aspects of the recruiting process.
6. Digging into my 1st year process – A reflection on how I approached my 1st year and what I learnt

This final learning is one that has been many years in the making. The reason I picked relationships for the final post is because it is never an easy topic to write about. To approach this, let’s first ask the question – why is it so much easier to make friends in high school and in college than at work? More folks have “best friends” from their college and high school days than from work. That isn’t to say it isn’t done. It just happens lesser than one might expect.

While youth and malleability are a factor, my sense is that high school and college allow for two important factors that help with forming deep relationships – shared experiences and slack time. Shared experiences are powerful in forming relationships. Hours and hours of slack time help deepen those bonds as you learn about the little things about each other. At work, while working in teams on intense projects often creates those shared experiences, it is less common to find work projects that result in plenty of slack time.

Graduate school lies somewhere in the middle – there are shared experiences if you take similar paths. But, that is a big if – there are very few students who would even have the same academic journey as you. And, slack time is rare if you decide to keep busy. There are many who will admit to never having been as busy at work as they have been at graduate school. But, and this is where things get complicated, you expect to build friendships the same way you did in your college or high school. You also expect to build out a “network” – whatever that means. So, the business school dream ends up becoming about walking out with this amazing portfolio of friends who will refer you to dream jobs and partners on your course to building that great global business. So, you might be tempted to attend every social event, every dinner, every evening at the bar and build that “network.” As you might imagine, all this gets overly strategic and stressful very quickly.

My recommendation would be to call bullshit on everything before you get started. This is hard to do because you have to discipline yourself to cut through the noise to get to what matters. I clearly remember a good few instances when I found that very difficult. The strategic intent involved with “building your network has irked me” from time to time. But, I’ve learnt to get over that. The key with environments that offer a lot of opportunities to find your own approach.

If I had to boil what I’ve learned about friendships in graduate school (and life?) into 3 things, they would be the following –

1. Understand your own priorities and align your actions based on those priorities. This gets down to the question – what really matters to you? Do you care about having a broad network of global friends? Or, do you care about having a solid group of 3-5 friends? Do you care that these friends are international or would you like all of them to have similar backgrounds? There isn’t a right answer here. The key is to be intentional and to be consistent with the kind of person you are.

For example, I care a lot about a few deep relationships and my hope with school was no different. I just cared a lot about having 3-4 friends at the end of the experience that I would have a relationship with. But, I was also interested in getting to know people and hearing their stories – something the school environment uniquely enables. So, I would set up time to go for walks with people. I’ve probably taken walks with 2-3 new people 1-on-1 on average nearly every school week over the past 2 years. Whenever someone suggested we should grab coffee, I’d take them out for a walk. But, when given a choice between depth vs. breadth, I would choose depth.

2. Engage deeply in some communities or maybe even create your own. Going back to the idea of combining shared experiences and slack time, activities or communities help with both. It doesn’t matter if it is the running club, band or entrepreneurship club – it matters that you engage in communities that you care about. These sorts of communities enable you to meet diverse people with whom you can build relationships based on shared values and beliefs.

You can also create your own little communities, of course. A couple of friends created an activity where they spent time with individuals doing an activity the individual loved. Another duo regularly hosted dinners where the conversations were based on meaningful themes. Another brought the same group of foodies together to eat at various restaurants. I was part of a group that showed up every Friday evening at a spot to discuss our lessons for the week.

Communities are especially important if you seek to build relationships with people different from you. Most relationships need to make their way from knowledge -> understanding -> trust. If you and I grew up in the same place, it is easier for us to understand each other and, then, to trust each other. But, if we’re from different continents, we need an excuse to really get to know each other and, slowly, understand each other. The flip side of this long process to understand each other is that the trust that emerges is one that, like all things hard earned, is very special.

3. Learn to let go – expectations are relationship killers. This is a general life lesson but one that is incredibly applicable to relationships. Expectations destroy relationships. All relationships are two way streets – it can only work if both sides are equally keen to make it work. When it works both ways, we aptly call it “chemistry” – because the reaction between the two produces an outcome that is different and better. But, it is hard to know when things work out well. It generally requires a lot of experimentation. Reactions also happen at different speeds – some are instant, some happen over a longer period of time.

My experience here is that you attract people based on who you are. If you are a person of good character, you attract people of good character. In the long run, it all works out. That doesn’t mean it is easy to let go in the short run. Whenever we put in the effort to give to people around us, it is really hard to say – “Hey, I’ve given this everything and did so because I cared. But, I don’t expect any reciprocation from the other end.” But, doing so makes life much happier. Just be patient with yourself – if my experience is anything to go by, this is something you’re always working toward. :-)

One last thing. Relationships are never easy. When we attempt to build them – whether it is a friend or a significant other – we have to give ourselves to people and choose to be willing to extend ourselves. This means coming face-to-face with our own insecurities and our desire to be loved. As is the case with these attempts, we will often meet with failure and breaches of trust. The takeaway from those experiences shouldn’t be to stop trusting altogether. It should be to get better at picking people.

We have many influences in this life – our diet, the information we consume, our environment, etc. – but probably none more so than those we spend time with. Every once a while, we will come across people who not only make us feel loved but also push us to be the best version of ourselves. When that happens, hold on tight and enjoy the ride.

In the end, all we have is each other…


Interviewing Dan Ariely

I had the privilege of interviewing the wonderful Dan Ariely in person last Wednesday. I had interviewed Dan three years ago over Skype and shared it here and the erstwhile “Real Leaders Project.” On an inspired day in January, I’d reached out to Dan if he’d be up for another Skype interview. It turned out he had planned a trip to Chicago in May and was planning to visit Kellogg. Voilà! We locked 2pm-3pm on Wednesday, May 25th.

Dan shared a few very personal anecdotes in the interview and requested us to not share the video in public. So, while I don’t have the video, I have my notes from the talk –

On the reproducibility crisis which is threatening to question the validity of many social science findings. As consumers of research, keep healthy skepticism. However, also dig deeper to understand what principles underlie the results being presented and whether they can be replicated in different environments.

For example, he conducted a study in a slum in Kenya testing various techniques to help people save. This included a variety of reminders, incentives and the like. The winner was a large fake gold coin which the participants placed in their hut and added a scratch mark every week they met their savings target. This large coin was a daily reminder to save and the principle here was to have frequent reminders around them to save. It worked great. But, how much of this would be replicable in a city? And, how many items in our home remind us to save?

Life is complex. So, when we go into a new environment, we need to understand the context and figure out which principles would work in that environment.

On how to think about the vast amount of social science research. One of the mistakes we make is hyperbolic discounting – over weighting the present. As we create more technology, we seem to find more ways to kill ourselves. Smoking, texting and driving, etc. The big question is how can we help people eat better, exercise more, sleep right, etc. We haven’t made progress on these. Instead, we’ve made better donuts and made Facebook more addictive.

When we seek to understand human behavior, a process that helps is to analyze people’s micro decisions in a day to look for patterns instead of trying to understand overall goals. Everyone wants to be healthier. But, what are the tiny decisions they make in a day that goes against that goal?

On applications of his work.  Particularly exciting when government does things like – making people sign at the start of the tax form versus the end (done in South America).

There are four factors that waste human capacity – health, time, money and hate. If we can do things to improve these four, it’ll be huge progress.

On political climate in the world. I love the definition of a just society by John Rawls – “If you knew everything about it, you’d be willing to join in a random place.” It is a beautiful definition.

In an experiment on ideal distribution of wealth, we found that people all around the world want a reasonably even health distribution. They just don’t know that the bottom 40% of people in the United States only have 0.3% of the wealth.

Much of the objective in politics is to get people to not think. So, we have slogans and ideology instead of thinking about where we are and what we want to be. What could we do to make sure people think once every 4 years? It is one area where we haven’t improved decision making at all.

On biases that get in the way of us being good leaders. A behavior that is hard to get over is to develop the courage to express your true opinion in a world that values political correctness. How can we as leaders encourage people who will disagree with us?
The academic process is pretty solid here – to get tenure, you need people from other universities to write letters. So, you can have very open discussions. While it is not possible to replicate this in corporates, this is something we need to be very mindful of.

Embracing failure. Experiments teach us humility. Understanding how often you are wrong is incredibly helpful. Doubting our intuition, keeping an open mind and experimenting is critical. It is shocking how many companies make decisions based on intuition. Intuit encourages “magnificent failure” with a prize of $1M every year and provides the creator 6 months off to test the ideas. Failing in a magnificent way means you tried, failed and learnt.

On ethics. I had an offer to speak to the management of a tobacco company for a large fee. So, I called the American Heart Association and asked – should I not go or should I donate the fees to you? They asked me to go. But, I decided not to because I don’t think the person I spoke to grasped the externalities of that decisions. Ethics are expensive. I think a lot about my own conflicts of interest. There is no easy answer.

On decisions. I think of 3 categories of decisions. Little decisions (e.g. buying a coffee or donut) – these I don’t pay attention to. Big decisions are those which we can do better at with a bit of effort. Then, there are habits – this, I do think about. If I set up a few good habits, then there can be huge impact in my life.

On heroes. Joep Lange, who was killed in the Malaysian Airlines flight that was shot down, single handedly worked to reduce AIDS in Africa. This required a rebellious nature, true dedication and single mindedness.

On how research has affected him as a parent. The environment is changing – not necessarily with your long term benefit in mind. Acting well is going to get harder with more interruptions from smartphones and other devices. So, we need to be aware of this.

As far as money goes, we give kids allowances and have them split into 3 buckets – for them, for people they know and for people they don’t know. Researcher Mike Norton has shown that people who aren’t happy with money are those who haven’t figured out how to give. In an experiment, people were given Starbucks cards and asked to use it on themselves or for other people. The people who bought coffee for others were much happier.

On one piece of advice. Take more chances. We are privileged to live long. Think of life as an opportunity for continuous learning. Education is never over. Keep on thinking of life as what we are going to learn and get better.

On an idea that inspires you that you’d like to share with us. A problem I am thinking about – how can we make side effects in medicine feel pleasurable? Cyclists enjoy the pain from cycling. If they don’t feel the pain, they don’t feel like they have done their job. We call this benign masochism. :-) Can we frame side effects as less negative? Could we make patients feel good about them? Could we increase adherence?

Dan Ariely, Kellogg

First principles thinking with Dean Jacobs

I am 3 weeks away from finishing up my final quarter at graduate school. As I reflect on some interesting lessons and moments in the past 2 years, I was reminded of a conversation with former Dean Donald P Jacobs last year. Dean Jacobs, well into his eighties now, was the Dean at the Kellogg School of Management for 26 years between 1975 and 2001. Aside from the fact that the length of the tenure is notable, Dean Jacobs’ accomplishments in that time were nothing short of legendary.

Education is a sector where brands are sticky. There is a joke that Harvard was the top ranked school in Physics before Physics was even taught at Harvard. Reputation matters a lot and stays with you for a very long time. Dean Jacobs took over at Kellogg in 1975 when the school was decidedly a third tier business school. He retired with the school firmly considered in the top tier and consistently on top of the rankings. It is very rare to see a turnaround of that nature. As I was part of the team running the orientation for the incoming class, a teammate and I decided to speak with Dean Jacobs to understand the context and history of our school. Many of the stories he shared are covered in this Poetsandquants article. But, there’s one nugget that stood out to me.

In the 1970s, a lot of management education was delivered by former business leaders. It was a lot about the latest trends in business and was pretty tactical. The parts that were delivered by academic professors were, well, very academic. When Dean Jacobs asked – “What will management education look like in the next few decades?,” one of his key conclusions was that we would need to dig deeper into the first principles which governed business. To him, this meant taking a much more academic approach to management as learning about current trends in pricing was going to be obsolete in a couple of years. However, understanding how the economy works and how pricing fits in would be knowledge that would be evergreen. So, instead of hiring business folk, he focused entirely on hired freshly minted P.hDs in fields like Game Theory, Economics, etc., to teach at the school. While this was a game changing move, he ran into the known problem that these Professors didn’t know much about business. But, since he believed that we were moving toward an era of life-long education, he decided to build the first executive MBA program with funding from Booz Allen’s co-founder James Allen. This was a masterstroke for a few reasons. First, the executive MBA was an innovation that helped build the school’s nascent brand with executives around the world. Second, it was a great source of revenue. And, finally, it gave the Professors the opportunity to understand first-hand what was going on in business in exchange for giving executives a first principles academic perspective on business. In the exec MBA classrooms, the executives shared stories and real life case studies where the learning was applicable. All of this fed right back into the full time MBA program.

His investment in academics led to plenty of interesting new research at the school. Key among the new wave of research was a recurring conclusion that business education needed more emphasis on working in teams. His decision to invest heavily in building a culture where students worked well in teams went on to define the culture of the school and served as a competitive advantage in the late 80s and 90s.

There’s plenty more that can be written about the innovations that Dean Jacobs led. For me, however, the interesting part is that it comes down to that first principles question that can be applied to anything we do – “What drives this and how is that going to change in the next few decades?”

Everything we do is a product of the questions we ask.

Dean Jacobs(Dean Jacobs greeting Dean Sally Blount who took over in 2009)

Interviewing Seth

I had been looking forward to a Skype interview with Seth at school for many months. It took me a few months before I was sure the technology would work. I promised him a good experience and I definitely felt a bit of the pressure of the promise in the days leading up to it. It all worked well (thank you to KIS – our tech team!) and the interview was a real treat.

Unfortunately, though, the video recording was not the best. So, I’m afraid I’m unable to share that with you. Seth has very kindly offered an audio interview for this blog in the future. I won’t be taking him up on it anytime soon as he was so generous with his time and perspective. But, I look forward to doing so in a year or two.

Until then, I am pleased to share my notes. These are paraphrased and “I” refers to Seth.

Thank you so much, Seth. I intended to have a cliff notes version of the talk. But, there were SO many pieces that resonated.

On general and specific. There’s a difference between a wandering generality and a meaningful specific.

On how we’re measured. Today, we are measured on the change we make on other people.

On daily blogging. It is malpractice to not have a daily blog. Because, if you write something in public every single for 50 years, you will be better. You will be happier, you will be smarter and more connected.
When you look back on your posts, what you are going to see is your intellectual development. Doing it in public is much better because you can’t lie to yourself and you can’t skip a day.

On whether there’s the pressure of writing one of the most read blogs on earth. I love the fact that I’m about to touch people. But, if someone doesn’t get it, that’s okay – for both of us, I hope. That’s the only way I can do the work – by saying this one’s only for the person who gets it.

On productivity and the MBA. (I asked Seth a question about productivity but he decided to talk about what he thought was more important. I am glad he did) In some ways, it is the best time in history to get an MBA. In some ways, it is the worst. It is the worst because there is more supply of people who did what MBA’s did than ever before. There are also less organizations who demand the blue chip stamp. And, then there are other organizations who are asking you to do things that aren’t necessarily things you want to do – they’re just paying more.

The reason this is the best moment is – if you choose to, you can see. You can see how the world works, you can see through the lens of behavioral economics, industrial history, social movements. You can see all of these pieces fit together – not from a technical point of how do I do this or that. None of the technical stuff is going to matter 4 years from now. What’s going to matter 4 years from now or 20 years from now is – are you the person in the room who sees the world as it is and cares enough to change it? There are very few people are privileged who can do both of those things. I think that is 10,000 times more important than your productivity. What we know is that it doesn’t take an enormous amount of sleepless nights to do those 2 things. What it takes is the bravery to do something that might not work.

On mentors and heroes. There aren’t enough mentors for every mentee. Heroism scales. If you decide to be a long term investor, you can ask – what does Warren do? And, you can read his book or the Berkshire Hathaway annual report. Heroes don’t have to be rich or famous. They just have to be on a path that you hope to go on one day. The magic of that is that you can inculcate their beliefs and act as if. And, sometimes, you can get really good at it and do it better than they did because you are starting with a bigger head start.  (So, you can read my 7,000 posts and go farther than I ever did. I’m just trying to be a compass.)

On being right. Being right about the strategy is irrelevant if your audience isn’t enrolled. You’ve been trained to be right. It has taken me a long time to train myself that being right isn’t all that important. The people who are daring and are doing it out of generosity make WAY more impact. If you look at the list of products that Apple and Microsoft have made over the last 25 years, it will stun you. It just goes on and on with one wrong product after another. You can be wrong a lot of times and make the iPhone and you will be fine.

On Trust. Trust comes from making promises and then keeping them. The goal is to not just be consistent but to make bigger and more generous promises.

On career choices. Acceleration is a change in velocity. I picked a job after school based on two things – was it in an industry that was growing fast? and who was going to be my boss?

I’ve done projects all my life. With projects. you realize that you don’t have to hit home runs ever. Singles are better than a home run. People who talk to me about regrets after business school bought safety when they left. They started wanting to do that for 4 years. But, what they don’t do when they get there is share an apartment and eat brown rice and white beans everyday. Instead, they buy a BMW (since they have a miserable job) and the next thing you know, they get a promotion and stock options. Then, they worry about losing the stock options – haven’t you guys gone to your sunk cost class? :-)

Trade safety for acceleration and freedom.

On being “on duty.” If you can be the person you choose to be when you are being judged, you can be that person all the time. Then, your life becomes way simpler. You don’t have to worry about who’s watching. Just be that person in your private life and you’re going to do great. The mistake is to let the person in private be the person you are all the time. Then, you are going to disappoint us.

On management and leadership. Management is getting people to do what they did yesterday, but faster and cheaper. Leadership is helping people go where they want to go. Leadership is about getting people signed up to do what all of us want.

On the AltMBA. The goal is to transform into people who see the world as it is, to understand how to use words and images to cause other people to change their mind, and how to make better decisions. If we can help people do those 3 things, sky is the limit.

Everyone of you, even those with appropriately sized egos, is more powerful than you imagine. The challenge we face is – given that power, what are you going to do with it?

On creative process. As I get older, I get better at my creative process and get less creative. Because I don’t think those two things go together. There is no such thing as a creative process. Creativity is the work you do when you are not afraid. And, whatever method you can find to stop being paralyzed by your fear – because you can’t make it go away – but, so that you can dance with it is good. People who have something to show for their creativity have it because they decided it was important and cared enough to live with the fear.

Every one of you is an artist who has been pushed to fit in. The hard part now is to care enough to fail, to care enough to say – “Here, I made this.” And, when the person says – “I don’t like this, I don’t like you, you are a fraud”, you can say – “Oh, it must not be for you.” Then, offer it to somebody else.

You get to be the best in the world by not running away from the hard work that makes you the best in the world.

On quitting. Quit before you start if you are not prepared to stick it out to the end.

On parenting. Every kid is home-schooled between 3 o clock to 11 o clock at night. Even if you are not at home, they are home-schooled. You’re going be asked to trade-off time with your family for metrics of money or notoriety. I hope you’ll choose to trade some of it, maybe even a lot of it.. because they are counting on you.

On difficulty. I’ve been bounding out of bed every morning for 38 years. It is a choice. I’ve been to places where any of us would do almost anything to not have to live in that village with no electricity. And, I remind myself on a regular basis – this is not hard work. This might be difficult but it is not hard work. Hard work involves helping someone with leprosy, burying someone you grew up with. This is the safest human beings have been in our history, more powerful. What a privilege.

On infinite games. As the industrial age ends, information is not finite. Either we keep playing finite games and blow ourselves up, we will adopt a different mindset and just keep playing. We won’t pass it forward because we will win. We pass it forward because we can.

Seth, Kellogg

A few thoughts on culture

As part of my annual review process at the end of every year, I ask myself – “Who/what were my biggest sources of inspiration this year?” It is a useful question as I think about all those people who’ve had a repeated positive impact on me. Inevitably, Seth Godin takes the top spot. I have been reading Seth’s blog for five years or more now, sharing his posts and thoughts here and, most importantly, revisiting his posts from time to time. Often, when I think of the topics he tends to write about, I realize that my definition of a particular idea came from one of his posts.

One such seminal post and idea is “change the culture, change the world.” This post boils culture down to one line – “This is what people like me do.” The first time I read this, I asked myself and all my friends (I think they got tired of hearing about this post within a week) – “What is it that people like us do?” And, we ended up attempting to coordinate a “Mastermind Group” across three continents to discuss various topics that mattered most to us. We decided our culture was one around having conversations that matter. The project didn’t work because of timezone issues but it is one that demonstrated to us how much we cared about having conversations that matter. I have continued to implement that idea ever since – at graduate school, I have time set aside every week for a conversation that matters with a group of friends.

I realize now that my answer to the question about my biggest source of inspiration was actually incomplete. There is one other person who has influenced me in a way similar to Seth – Clayton Christensen. While he doesn’t have a daily blog that I know of, his book “How Will You Measure Your Life?” got me started on a path that has gone on to help me define how I live. I listened to Clay’s TEDx talk and read his excellent article (which, unfortunately has been put behind a paywall by the folks at HBR) and I was again left thinking about culture. Clay’s insight was – “Ultimately, people don’t even think about whether their way of doing things yields success. They embrace priorities and follow procedures by instinct and assumption rather than by explicit decision—which means that they’ve created a culture.” Or, “this is what people like me do.”

I’ve written before about how you build culture in a team. Building culture and sharing the culture are two different things, though. While you might imagine any great culture would be automatically shared, it doesn’t work that way. As I have repeatedly learnt, “build it and they will come” is fundamentally flawed. Our culture is built around “best selling” or, in the case of the internet, “best sharing?”

I think the way culture is shared is by sharing stories. It is like the famous collection of Macy stories which talk about Macy’s employees who go to incredible lengths to please a customer. It is the Zappos person who was on the phone with a customer for many hours. Stories are powerful.

As I reflect on their power, I see the effect they have had on my life. In two days, I’ll be leading and participating an initiative called “The Good Life Sessions” in my final quarter in graduate school. The Good Life Sessions is a three part series of workshops that gets to the questions – “How will you measure your life?” through a series of other questions that help break that large question down. As you might imagine, there is a lot of Clay Christensen in the Good Life Sessions.

I also start these sessions and pretty much any initiative I lead by saying – “This might not work.” While I say this to myself every time before I take a leap, I say it in public generally to shocked reactions – “What do you mean? It should work. Do you lack confidence?” Those close to me understand it. Those who are getting to know me give me feedback about it and tell me I must stop saying it. And, folks listening either love it or hate it. This is one of those things where I choose to ignore all that is said and say – “This is the cost of me doing things. This is how I approach things and this is part of me being me.” “This might not work” is a Seth idea that embraces the fact that anything worth doing begins with an acceptance that it might not work.

As this example illustrates, Clay and Seth have shared their cultures with me and their cultures are an important part of my culture and how I operate. And, they’ve shared this without us ever meeting in person. Clay doesn’t even know I exist.

That is how I’ve come to learn that cultural change is incredibly powerful. It is a big part of what I have spent my time learning about and pushing for during my time in graduate school over the past year and a half – to encourage more reflection, more conversation, and more understanding. And, as you might imagine, a big part of this is just attempting to be all of this myself – because that’s what Clay and Seth have taught me. You have to be the change you wish to see.

And, most importantly, no one is going to pick you to make cultural change. You have to pick yourself.


Working capital and cash conversion cycle – MBA Learnings

Let’s imagine a company we called Nile, Inc. Nile is a vegetable retailer who has the following metrics –
Cost of Goods Sold (COGS) = $365
Average inventory = $10 (they have low levels of inventory in general)
Sales = $1095
Accounts Receivable = $30
Accounts Payable = $30

Based on these metrics, we can do the following calculations –

Inventory turnover = COGS/average inventory = 36.5
Nile, Inc. turns over its inventory 36.5 times a year. That’s a good sign. The more turns means the more efficient its inventory buying process.

DSI or Day Sales Inventory = (1/Inventory turnover) *365 = 10 days
This means it takes Nile, Inc. 10 days to convert its stockpile of inventory into cash. If Nile turned its inventory slower, it would take longer. Since it is a vegetable retailer, we can imagine it requires to turn fresh produce quickly.

Receivables Collection Period = Accounts Receivable / (Sales/365) = 10 days
This means it takes Nile 10 days to collect its receivables. This is common in businesses that work with consumers as credit card money comes in within 5-10 days.

Payable Period = Accounts Payable / (Sales/365) = 10 days
Nile takes 10 days to pay its suppliers – a short payable period for most businesses. But, this is on account of Nile’s size. As Nile grows, it is can extract longer payable periods (e.g. 100 days).

So, if we now think of what this looks like –

cash conversion cycle, working capital

So, Nile takes 20 days to convert inventory to cash – 10 days to convert it from inventory to a sale and 10 more days to convert the sale to a cash. However, since it takes 10 days to pay suppliers, we can now reduce the  20 day number to 10 days.

10 days is Nile’s Cash Conversion Cycle. The Cash conversion cycle is an important idea since this means Nile requires 10 days worth of “working capital” (Current Assets – Current Liabilities on the balance sheet) to keep its business solvent. Since, at any given point, Nile will require enough cash to support 10 days of operations, if it doesn’t have the cash itself, it will always need access to a revolving line of credit that can make sure the business runs. Reducing the cash conversion cycle is an attractive prospect for most small businesses as it means less dependence on external capital. It also reduces the working capital requirements of the firm.

Amazon is an example of a firm that does an outstanding job with working capital management.

cash conversion cycle, working capital

As you can see, Amazon’s cash conversion cycle (CCC) is actually negative. This means Amazon receives cash very quickly, turns over its inventory quickly and takes much longer to pay its suppliers. So, the business is practically throwing off cash. Negative CCCs work well for growing businesses. However, when a business stops growing, these cycles can be painful since it means you have to pay your suppliers greater amounts than you make.

Aside from a thank you to all our Finance professors, I’d like to also give a thank you shout out to Prof Aswath Damodaran from NYU Stern. Prof Damodaran has some fantastic resources available online for different kinds of finance problems.

The cost is not just the cost – MBA Learnings

Let’s take a situation where a firm decides to buy a smaller technology firm for $1 Billion.

Every decision that is made is typically the result of a cost-benefit analysis. In some cases, this analysis is entirely quantitative. In others, it has a huge qualitative element (e.g. fit with strategy). Either way, the costs of the acquisition are not just the cost of acquiring the company. Those are just the financial costs.

The costs that should matter to us are the economic costs of the acquisition – driven by the opportunity cost of using that capital. In this case, the acquiring company had 3 options on how to spend the billion dollars related to that acquisition (there are options beyond this – we’ll assume the acquisition was critical) –

  1. Build the technology
  2. Partner with the technology company to get access to it
  3. Acquire it

When we take these options and their opportunity costs into consideration, the only way we get to option 3 is if we believe that it is the best use of the 1 Billion dollars. Or, put differently, had we invested the billion dollars into options 1 or 2, the long term results would be sub-optimal.

Understanding opportunity costs is fundamental in life just as it is business. At any given time, saying “yes” to a decision just because it provides us some benefit is a really bad way to make decisions. The way to make such decisions is to ask – “Is this the best possible use of my time given all my priorities?”

Great strategy requires us to make choices after understanding trade-offs. And, having a good decision making process that considers opportunity costs is an integral part of great strategy.

cost, opportunity cost