AHEAD OF THE CURVEBy Philips Delves Broughton

Philip was a HBS graduate of Class of 2006. In this book, he vividly describes his 2 years experience in HBS. Philips was a journalist for 10 years before joining Harvard.

• Ethical lapses are sometimes necessary to survive. Behaving ethically in business is less about following a graven set of principles than about adapting to changing situations in as decent way as possible. Business ethic are dynamic rather than static.

• Having lived in Britain, France and the United States, I found things to recommend and object to in all of them, and one cannot say one was better than the other.

Example: The lack of vacation time in the Unites States versus Europe. The universal health care in France and Britain versus the 11000 $ cheque that I have just written for my family for insurance in US.

• An anecdote of an MBA student arguing with someone in the HBS administration.

• As the tempers rose, the student burst out, “Why are you treating me like this? I’m the customer goddamnit.” “No you’re not”, said the HBS employee. “You’re the product.

• Far better it is to dare mighty things, to win glorious triumphs even though they are checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the gray twilight that knows neither victory nor defeat – Theodore Roosevelt

• If everything ended for you right now, would you be happy with the life you have lived?

• But tonight, Paris was as old-fashioned and romantic as the poets and songwriters had promised. We asked each other what we had learned from living in France.

• “Patience,” I told her. There was absolutely no point trying to hurry a Frenchman. The revolutionary spirit lives on and they do what they want in their own time. If it’s pas possible, only charm, never muscle, can win the day.

• Accounting is useful camp said that

accounting created consistent standards across different companies and businesses and allowed one to compare their performances. It also helped in managing a company to know how money flowed through it and how efficiently it was being used.

• Accounting is useless camp said that

accounting was merely the art of manipulating numbers to fit whatever goal you had in mind. It was confusing and deceptive, and described events long after they had happened. There were far more effective ways of examining a company’s health and performance than trying to decipher its accounts.

• There are two mantras in accounting,

• Assets = Liabilities + Equity. • Accounting = Economic truth + Measurement

error + Bias.

• But I realized that my initial reaction to the Leadership course was like that of an earlier generation’s toward the idea of seeing a shrink. What do you need all that for? Can’t you just talk it out with friends? Sort it out for yourself ? Take a long walk and think about it?

• As the course wore on, I became more open to the idea that while the mysterious qualities of a Napoleon or an Alexander the Great could never be taught, there was still plenty one could learn about managing and motivating others.

• In TOM, our first case was about Benihana, the Japanese-inspired restaurant chain. We saw how its founder had deconstructed the mechanics of restaurants to create something unique and highly profitable.

• By having chefs prepare food at the tables, he could cut back on kitchen space. Customers were rotated in and out of the restaurant at speed. A limited menu meant far less waste.

• And all of this was packaged and offered up as entertainment, with chefs spinning their knives as they sliced up vegetables and meat and cooked them right in front of the diners.

• Several professors told us that the flood of learning was like “drinking from a fire hose.” And then there was FOMO, fear of missing out.

• The trick to HBS, the administration kept telling us, was not succumbing to FOMO. You had to choose exactly what you wanted to do and do it without fretting about what else was going on

• One company that had mastered the cash conversion cycle (the period between when it paid for goods and when it was paid for them) was Dell. it had managed to turn its mastery of cash management into an advantage over its competitors.

• Whereas other computer makers built computers, warehoused them, and sent them into stores where customers might or might not buy them, Dell waited until it had an order and payment in hand before making a computer.

• While its rivals risked making computers that might be obsolete by the time they reached stores, Dell never made a computer no one had expressly ordered.

• To do this, it needed a far slicker production system than its competitors, which it built. It needed to have the parts and capacity at hand when the orders came through, which it did. It needed to have accurate forecasts of customer demands, which it obtained through its sales force

• As Michael Dell himself explained, “what we’re all about is shrinking the time and the resources it takes to meet customers’ needs.

• Inventory, as we would learn again and again, is a dirty word in business, and the less you have of it, the better. For a company that made computers, and promised to deliver them within a day or two of receiving an order, Dell, staggeringly, had almost no inventory.

• The cash effect of this was that while Dell’s competitors sank money into product they weren’t sure people wanted, Dell earned interest on the money it was not spending on inventory.

• Finance, then, is really only about valuation, the only serious means to establishing an asset’s value is understanding how much cash it generates.

• With cash, you could become Dell, leapfrogging your opposition on a trampoline of greenbacks.

• In one case, we looked at Microsoft’s financial reporting strategy. It had often baffled investors why Microsoft kept so much cash on its books. Investors tend to like to see cash either invested in improving the business or returned to them as dividends.

• Accountants and financiers and corporate strategists who looked at that cash number had come up with all kinds of explanations.

• But Bill Gates gave a very different reason :• “The thing that was scary to me was when I started

hiring my friends and they expected to be paid. And then we had customers that went bankrupt—customers that I counted on to come through. And so I soon came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year’s worth of payroll, even if we didn’t get any payments coming in.

• Imagine starting a business, getting all your friends to leave their jobs to come work with you, and then not being able to pay them. It would be a betrayal.

• The cash number on Microsoft’s balance sheet was not some accounting gimmick. It was a direct reflection of Bill Gates’s start-up mentality. Whatever happened, if his little rinky-dink software company was ever going to have a chance, he could not let down his friends.

• I began to wonder, accounting firms should hire psychoanalysts as well as accountants. The accountants could work on the numbers, and the shrinks could explain those numbers as indicators of ordinary human behavior.

• Disney, Meg Whitman said, was a great company to work for, something she did not fully appreciate until she worked for a bad company. Culture and mission were not to be sneezed at. Employees are motivated by the feeling that they are on a mission.

• Meg Whitman’s nine point personal philosphy• The first point is to do something you enjoy, because if you

don’t enjoy it you’re unlikely to be any good at it. • Second, deliver the results, whatever you’re doing. • Third, codify the lessons learned. Since HBS, she said, she had

experienced 1.5 successes, 1.5 failures, and 1 gigantic home run.

• Fourth, be patient and stick around good people and good things.

• Fifth, build a team and share credit. • Sixth, be fun to work with. • Seventh, ask what you don’t know or understand. • Eighth, don’t take yourself too seriously. • Ninth, never, ever compromise your integrity.

• Early in its history, Toyota had established a goal of delivering an affordable range of cars in as efficient a way as possible. The Toyota Production System was designed to eliminate waste of every kind, be it overproduction, mistakes by employees, or an excess inventory of parts.

• One aspect of this was Just-In-Time production, a method of producing what was needed, when it was needed, and nothing more.

• Another was called jidoka, a means of making any problems immediately obvious and stopping production to resolve them. Anything that deviated from the correct process, including a mistake by a worker, was considered waste.

• To implement jidoka, Toyota had to eliminate any sense of stigma for an employee who halted the production process.

• The company encouraged workers never to assume any process was set in stone and to seek constant improvement.

• This was known as kaizen , change for the better. It was the power of process, Zeynep said. Toyota was such a success because it considered nothing too small. The company was constantly seeking to improve even the minutest details of its operation, and every employee was involved.

• Hasan, My colleague loved the academic work at HBS but found the social atmosphere stifling. “I’m used to having two personalities, work Hasan and social Hasan, and they’re very different,” he told me. “At work I’m very serious and professional, but socially I like to be really relaxed. Here I feel people are so obsessed with their place in the network, with their own personal brand, they never let go. You are expected to be the same person in every setting. I can’t really blur my personalities.”

• He complained that he was ridiculed for being so serious in class. “People use very passive-aggressive methods. They don’t confront you, they’re really politically correct about that, but their attitude is closed-minded. I feel like everything you say or do is being scrutinized so they know where to put you on the curve.”

• In 1980, a Harvard Business School professor called Michael Porter published an article, “What Is Strategy?,” that laid out the five forces he believed determined a company’s ability to capture value. They are: barriers to entry, supplier power, customer power, substitutes, and rivalry

• Notion of competitive advantage. • It came in two flavors: either you had a cost

advantage, whereby you made things cheaper and sold them cheaper, or you differentiated your product somehow, either by making it better than your rivals or by designing it differently to appeal to a different group of people.

• One nightmare for a business is to have no advantage, to be neither the cheapest to produce nor clearly differentiated. This was to be “stuck in the middle.”

• A competitive advantage exists in the gap between a company’s costs and what consumers are willing to pay for its product.

• If your gap is wider than that of your competitors, you have the advantage. If you can keep that advantage over time, despite all the usual competitive pressures, the advantage is sustainable.

• Building sustainability is the strategist’s next challenge. If you are profitable, rivals will come after you. Success tends to breed complacency,

• which is why Bill Gates keeps a photograph of Henry Ford in his office. It reminds him that however pioneering and successful you are, you have to keep innovating and protecting your competitive advantage or else a rival will defeat you, as General Motors eventually defeated Ford.

• Having established the goal of sustainable competitive advantage, the strategist’s next task is to develop and integrate a consistent set of mutually reinforcing activities. The aim is not to have the greatest marketing department in the world but, rather, the best marketing department for your company.

• Wal-Mart’s magic is not just in its low costs and low prices. It also has a frugal corporate culture, low store-construction costs in rural and suburban locations, limited advertising, a stellar logistics operation, no unions, a stranglehold on suppliers, who depend on it to sell colossal volumes of their product, and top-notch technology and inventory tracking. It is the integration of all of this that makes Wal-Mart successful and so hard to replicate.

• To make their advantage sustainable, all companies should try to develop a pattern of causes and effects that over time becomes an irresistible flywheel blowing away competitors.

• Procter and Gamble, for example, sells a lot of toothpaste. This means it produces a lot of toothpaste.

• Producing a lot of toothpaste makes Procter and Gamble a better toothpaste maker and allows it to use its toothpaste factory, employees, and marketing more efficiently. It can then set a lower price, without reducing its profit margin, and sell even more toothpaste.

• Its rivals may be able to make toothpaste, but because they do not have the scale advantages or marketing muscle of Procter and Gamble, they struggle to compete.

• The notion of “the more you practice the better you get” is known as the learning curve and was first observed by business academics during the Second World War. The more factories produced military aircraft, the faster the planes came off the production line and the better they were. Companies that move up the learning curve fastest tend to do better than their rivals.

• After integration, the strategist must next consider the reactions of his company’s competitors. If I do this, what will my rival do? At HBS we were introduced to game theory as a means of analyzing the consequences of a competitive situation.

• Finally, we moved to issues of scope. What should our business do? What should it own? Where should it operate?

• The business class had become so used to the rules and language of its own particular game—the bluffing, the subterfuge—that it seemed to have lost sight of the honesty, plain speaking, and plain dealing that non-businesspeople expected in human transactions.

• There were basically three schools of negotiators: the poker player, who regards it all as a game; the idealist, who insists on doing the right thing every time; and the pragmatist, who knows that what goes around comes around.

• We were introduced to two concepts every good negotiator should know (whether or not they use these terms): BATNA and ZOPA. BATNA is the “best alternative to a negotiated agreement.”

• Knowing your BATNA prevents you from making a bad deal. If the negotiation is going poorly, you know what your options are if it collapses or you decide to walk away.

• ZOPA is the “zone of possible agreement,” the range of scenarios you and your opponent are likely to agree upon.

• You should have a pretty clear idea of both your BATNA and ZOPA even before your negotiation begins

• The most important motive for work in school and in life is

• pleasure in work, pleasure in its result, and the knowledge of the value to the rest of the community.”

• The second was from Gandhi: “Live as if you were to die tomorrow. Learn as if you were to live forever.”

• Rubin wrote that the risks most people ignored were the very low probability risks of catastrophic outcomes. They spent an inordinate amount of time worrying about the 20 percent chance of having a bad day and no time thinking about the 1 percent chance of their entire life being turned upside down.

• For the risk arb, the 0.1 percent risk of losing $100,000 from your savings is identical to the 20 percent chance of losing your wallet containing $500. The present value cost of both outcomes is $100.

• A small risk of disaster equals a moderate risk of something quite bad. A small chance of great riches is equal to a moderate chance of moderate riches.

• When people talk about trade-offs in their personal life, they often keep it at a very high level. If I take this job, my salary will be higher, but I’ll spend less time with my family. But what if you turn that “less time with my family” into the actual consequences you most fear? Your spouse will leave you. Your children will treat you as a stranger.

• And then assign a probability to it. Each outcome used to carry a bearable 5 percent risk. Now that rises to 25 percent. How does that $50,000 pay increase feel now that you have raised the odds of jeopardizing your entire family life by 20 percent?

• It was the strength of the cluster, not the individual firm or sector, that mattered, and the strategist aiming to spur economic progress should work to develop every part of the cluster

• To understand the success of Wall Street, for example, it was insufficient to credit the banking talents of a few executives, or the organizational setup at a few firms. You had to look at the presence of so many firms and financiers working in such a tight space, all the terrific universities in and around New York City turning out gifted graduates, the proximity of first-rate corporate lawyers, the courts and the legal framework, the exchanges, the Federal Reserve Bank of New York, the range of other businesses and corporate headquarters in the city. Together they made Wall Street what it was..

• Peter Drucker, the revered management guru, wrote that “executives who make effective decisions know that one does not start with facts. One starts with opinions.” Opinion sets the criteria of relevance for facts.

• But a single opinion was never enough. “A decision without an alternative is a desperate gambler’s throw, no matter how carefully thought through it might be.”

• Rivkin told us that in order to influence company strategies early in our careers, we should learn about all of our employer’s operations, especially those that drove the business or faced change.

• We should find companies where new ideas were encouraged and developed and stay close to the people who were in charge.

• Finally, he told us that to be a great strategist required intellectual restlessness paired with a grounded competence. You needed to understand your business from top to bottom, but also be ready to tear it up and start again, to listen to evidence that challenged your biases and ceaselessly revise your judgments.

• We studied companies such as Sears and IBM as they struggled to adapt what had once been very successful, well-integrated business models.

• We saw how they tried at first to tinker with one aspect of their business—sales, for example, or pricing.

• But it was only in the face of crisis, the threat of bankruptcy, with their pants on fire, that they undertook dramatic changes to their entire business, unpacking every aspect of it and reassembling it to pursue new strategic goals. It was at these moments that the strategist was paramount.

• Process matters as much as outcome. In fact, process determines outcome. Toyota worked because every single worker kept his eye on the process and had the right and obligation to improve it and even shut it down if there was a flaw.

• “There is nothing more important you can do,” Gilbert said, “than to ingrain a culture where everybody is looking and has the power to make changes.”

• This was the crux of Rivkin’s course: always be alert to a better way of doing everything, never stop innovating.

• If there was one thing we should remember coming out of HBS, Gilbert said, it wasn’t the weighted average cost of capital or the four Ps of marketing. It was to return calls and e-mails in a timely way. That would put us 99.9 percent ahead of our competitors. “People are shocked, people are in awe. They can’t believe it. And we can’t believe that people can’t believe it because we think everybody should do it.”

• everything about a company from its top line, its revenue.

• All of its creativity, innovation, and processes were there in that top line.

• Revenue was proof of your ability to win customers, which would determine your success more than your ability to squeeze a few pennies out of your costs.

• 1) When we look back, the big things will look small and the little things will look big.

• 2) Comparison is the death of happiness. • 3) We are all we have. No one else will rescue us.

• “you never should consider yourself the smartest guy in the room. I was surprised how valuable the input during the class discussions was.” It wasn’t that all the comments were brilliant, though a few were. It was more the range of perspectives that surprised him.

• “Now I never make a decision without asking what the other guys think. Although people can be annoying, it’s still worth listening. I was a pretty reasonable guy before going to HBS, but now I always have questions, I never make a statement.”

• My emotional experience of going through HBS was like swimming across a broad river. I had started out from one bank, confident in my own strength and with a clear view of my destination, only to be swept up in unseen currents. It was a fight to get to the other side. When I did, I was humbled, gasping and spitting up water. Only when I had caught my breath and looked back did I realize what I had done.