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The underlying article for this week s discussion is from the Harvard Business Review. Here is a quick overview: With interest rates rising in real
The underlying article for this weeks discussion is from the Harvard Business Review. Here is a quick overview: With interest rates rising in real terms, the value of growth strategies has declined. Managers need to look carefully at where they allocate capital, focusing more on investing in productivity. Nor should they treat strategymaking as a periodic exercise but rather as a dynamic, continuous process.
The article discusses how todays higher weighted average cost of capital WACC is impacting company strategies, particularly with respect to growth strategies vs increases in marginsproductivity There is an interesting chart that shows how a increase in sustained operating margin increases a firms value by irrespective of the cost of capital. In contrast, at lower capital costs, growth strategies can be highly affecting in increasing firm value. However, as WACC gets higher, the margin narrows and above cost of capital, growth strategies lose any benefit over productivityoperating margin increases.
Given that background be sure to read the entire article find a firm that discusses strategies for growth vs margin control. It could be a firm that indicates they are moving full steam ahead on growth strategies can you find anything on their cost of capital such as recent IPO, bond sale, etc. to give you an idea why they are going for growth vs operating margin increases. Note that I am using productivity increases, increase in margin, and operating margin increases interchangeably. We are talking about increasing EBITrevenues basically.
Alternatively, find a firm that discusses why they are looking at margin increasing cost control as a key strategy at this time. Can you find out why this is their plan?
Hint: Maybe a firm is trying to increase growth by internally funding by savingcutting budgets in other areas. FYI, I found an interesting article on this very thing going on with some major firms.
Bottom line: This discussion is about the cost of todays higher cost capital compared to the lowcost days before and its impact on firm strategy. Find a firm for which you can find somethinganything on their strategies for growth vs margin increases that is or at least very well might be driven by their cost of capital. You dont have to discuss both topics growth and margin increases just one where you can get some information.
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