Economics of Strategy
Econ was my hardest class but extremely valuable and a great
introduction to a career in consulting.
We covered economic basics including: elasticity
(how changes in price affect changes in quantity demanded), consumer and producer surplus (the
difference between what consumers/producers are willing to pay and what they
actually pay as measured between the demand and supply curves), shifts in
demand and supply (how demand moves and is shifted according to macroeconomic
effects, competition, and other factors), marginal
rate of technical substitution (the cost decisions firms make between two
or more inputs of production), and market structures (single firm monopoly, several firms in oligopoly, and perfect competition within low barrier
to entry markets).
I was able to refresh my calculus knowledge as we determined
profit maximization levels using marginal revenue and marginal cost.
We studied Porter’s Five-Forces
which includes analysis such as mitigating buyer
power by increasing demand for complementary
goods, differentiating the
product, price discriminating (for
example Coca-Cola experimenting with using vending machines which charge more
for soda during warmer times of the day), mergers
and acquisitions, and creating switching
costs.
I was introduced to Gametheory
principles and felt quite legit. The Nash
Equilibrium is a theory which supposes that competing firms will make
decisions based on what is best for the whole group and not just themselves. The
prisoner’s dilemma illustrates this
point as it explains the logical decision of ratting versus not ratting. We
explored other simultaneous games and
how to identify dominant strategies. Sequential games were interesting to
understand as a business strategy to employ when you must follow the decisions
of a competing firm. It was awesome to learn about how companies have tacit
agreements where they collude without
communicating with each other and how tit-for-tat
processes can use discount rates, and cooperation versus defect analysis, in
decision making.
We studied oligopoly pricing
strategy including standard Bertrand
oligopolies where prices settle to marginal costs, differentiated Bertrand markets where pricing only partially
determines where demand will go, Stackleberg
oligopolies where the reaction function
illustrates how a follower firm prices based off of a leaders lead time, and Cournot oligopolies where firms adjust quantity, not prices directly.
A highlight of the semester was seeing the economic research
of classmates applied to various topics ranging from football game attendance
to MLB salaries to testing center capacity. I was disappointed that my group
didn’t want to research how parking affects businesses, apartment complexes,
and BYU. I was interested to identify the economic value which businesses
received from having strict parking enforcement.
Marketing
This class was nothing but entertainment. I didn’t read the
book and only went to class because the teacher always showed awesome YouTube
videos and advertisements. I liked the guest lectures from Nike, Amazon,
Google, and Matts Hot Dogs. Marketing is the fun side of business but not
necessarily the most technical.
Marketing basics: Marketing
mix includes price, promotion, place, and product; advertising can be
cognitive (give awareness), affective (gain interest), or behavioral (promote
action); and atmospherics in stores
is critical.
Because we are BYU and we like entrepreneurs we learned
about leveraging leverage (riding horses, going beta, landing anchors,
building advisory teams, and seeking benefactors); crowd sourcing through Kickstarter and
Equity.com; and marketing events,
creating love fests, and feeding frenzies.
I learned that business to business type companies are where
to make money, Click Thru Rates, 7%
of Google searches go below the scroll down line, Amazon 1-click is genius
which needs to be applied to savings money, that online it is all about driving
traffic, and localized standardization is called going glocal.
Real Estate Finance
By far my favorite class, real estate was taught by a Round
Valley boy: Dr. Barry Slade. My world was opened up to new careers I am
interested in: real estate development, real estate appraisal, REITs, county
recorder’s office jobs, urban planning, commercial real estate jobs, and real
estate law. I want to join the city councils zoning commission and also buy a
house because of this class.
Property rights in
the USA go back to Puritan leader William Bradford who realized consecration
wasn’t working and that giving individual land rights was the only way to avoid
famine. Today’s fee simple estate
provides absolute ownership except for eminent
domain (5th amendment, government gives fair value and can take
land if it’s for the greater good), escheat
(if owner dies with no heirs then land defaults to government), police power (zoning for
health/safety/welfare/moral character), and taxation (property tax, ad valorem).
We covered some interesting current events including the
success of Wal-Mart and Target express stores, the rapid growth and returns on
farm land, strategic default by
homeowners buying foreclosed homes, and a proposed development in Provo where
Geneva Steel used to be.
We studied lots of random real estate law items: life estate agreements where a buyer
purchases land but allows the current tenants to remain until they die; liens by mechanics and contractors can
be placed on property which they work; deed
of trust laws vary quite a bit across state lines; refinancing is almost always the right decision; time value of
money is now actually interesting to me; and plottage is to bring together while plattage is to separate.
Legal descriptions
are interesting and we studied metes and
bounds, rectangular survey, and lot and block systems. There are 5280
feet in a mile, 43,560 square feet in an acre, 640 acres in a square mile, 36
sections in a township, and Baseline Ave in Phoenix is the baseline for the
valleys legal descriptions. Fun fact.
I spent hours and hours putting together a 31 page report on
an investment property. This was extremely tangible experience which adds
tremendously to my finance portfolio. It also convinced me that my parents
renting out their basement is a really good investment.
We studied various mortgage types including: Adjustable Rate Mortgage (ARM; mortgage payments change every year
depending on a baseline interest rate such as U.S. T-bills), prime conventional (loans which avoid Private Mortgage Insurance (PMI)
premiums because they have a 20% down payment), FHA and VA loans which are
government backed loans by providing insurance to lenders in the case of
default, nonconforming jumbo loans
(homes that are worth more than what Fannie
Mae or Freddie Mac will insure
and thus often have an interest rate higher than others), and reverse mortgages (provides same benefit
as a home equity line of credit, the homeowner pays high origination fees in order to receive a loan which is secured by
their home, when they die or sell the home they (or the heirs) have to pay off
the reverse mortgage).
There are a lot of players in the home market. Essentially
there are originators, servicers, and owners. Banks, brokers, lenders, mortgage
backed securities, thrifts, depositories, and investment banks all play a role
in the transfer of risk and responsibility.
It was fun to see the church pay $0.5 billion and buy land
in Florida. I enjoyed a talk from President Hinckley which talked about how the
church has private arms, and that the purpose of these arms is to be temporary
players in helping the church achieve its mission. It was also interesting to
learn from Nate Boyer a little about how the City Creek Mall is running The
Gateway into the ground. I also liked learning that the church does not allow
any restrictions (CC&Rs) on the
deeds it purchases even if someone wants to give it for free (because they may
decide not to build a church where the giver wanted to).
The housing decision was a valuable part of our discussions
and showed the negatives and positives of buying early. Discount points and origination points should be analyzed in
conjunction with comparable interest rates. Borrowers should not pay points if
they are planning to move out of the home fairly soon.
We spent a lot of time working valuation problems. I finally
embraced a finance basic: the income
approach (discounted cash flows and reversion
analysis). The effective gross income
multiplier was more interesting than the PE ratio ever was to me. Band of investment technique was more
fun than WACC calculations which I did all of last year. And cap rates were much more effective than
Sharpe ratios.
Going forward I want to become involved in real estate. I am
excited for my first buying decision and then growing my wealth so as to become
an investor on the side. When I retire I want to join 1031 exchangers and just put tons of money in exciting real estate
projects.
Supply Chain
Management
Supply chain
management is an extremely simple idea, but one which it was fascinating to
consider in-depth. The principles we studied in class were very
straightforward, but they had a tangibility and application which often is left
in want in other classes. These key take aways included: running Excel regression analysis on inventory levels;
using moving averages to predict
demand and order fulfillment; using weighting
to overcome the effects of seasonalization;
and applying exponential smoothing
formulas in order to not overuse historical data. We covered expected value calculations where you multiply
expected payoffs with the probability of them occurring. That grand ole
statistical measure, the p-value, was
applied to quality management and trends within normal distributions were
evaluated in order to determine nonrandom events.
We analyzed projects and their preceding tasks. We were
introduced to Gantt charts and
determining critical paths. I was
introduced to MS Project software,
which was extremely useful in determining project management decisions.
The class was fairly relaxed and we had several days where
we got to play games which illustrated principles. The tabletop game was useful in studying training effects, the rootbeer
game illustrated mean reversion between
different entities inventory expectations, the cougars and utes game showed the
complexities of an efficient supply chain which connects factories, suppliers,
distributers, salesmen and customers.
We studied many companies including Wal-Mart, Fed Ex, and
Amazon. In addition, we studied Toyota which created the just in time (JIT) manufacturing process and focused on eliminating
Shingo’s Wastes.
Logistics includes
various theories such as cross docking,
hub-n-spoke systems, consolidation warehousing, and break-bulk facilities.
Going forward, I suspect I will learn more about Six Sigma, MS Project, decision trees, and
regression analysis. Our professor pointed out that it takes about 6 months to
learn an industry and that was encouraging advice which got me excited to move
into my career.
Strategic Management
Another fairly conceptual class but with entertaining
projects. I learned various strategy frameworks including diamond (arenas,
vehicles, staging, differentiating, and economic logic) and Porters Five
Forces.The Capsim simulation we did was enjoyable. It included making business
decisions for a make believe company (R&D, finance, marketing, human resource,
and production).
We studied a residential insulation company in Minneapolis
and provided some useful consulting to them. The Matthew Effect is interesting: rich get richer, and poor get
poorer. Overall a pretty bland class.
