Dr. P.V. Viswanath

 

pviswanath@pace.edu

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  Courses / MBA 673 /  
 
 
 
 
 

MBA 673: Financial Strategy and Business Decisions Fall 2019

71212: Tuesdays 12:15 pm to 3:15 pm at the New York Campus, Room W610
Email: pviswanath@pace.edu Tel: (212) 618-6518
Webpage: http://webpage.pace.edu/pviswanath
Blackboard: http://blackboard.pace.edu

Office W433, Pace New York
Office hours:

I am in my office in New York most days of the week; e-mail me if you want to see me at other times.
   

Course Objectives

Students in an MBA program take a variety of courses in the different functional areas. Often, they have no way to tie everything together. Capstone courses manage this to some extent; however, the insights of finance are often left out. This course will provide students with the knowledge as to how to translate these insights into superior strategic decisions in areas such as marketing, human resource management, supply chain management and competitive strategy. In this course, we will look at several areas where financial decision choices impact in important ways decisions in the other functional areas of the firm.

The term strategic in the title of this course refers to the contrast between strategic and tactical thinking. Strategic thinking deals with long-term considerations, it is broader, covers many functional areas and goes to the ultimate goals of the organization. In this course, we will be looking at some corporate decisions that involve several functional areas (with one of them being finance) and addresses the ultimate goal of the firm, broadly defined as value maximization. Thus, when we consider a financial decision like hedging from a tactical point of view, we can talk about how to implement an effective hedge, what financial instruments to use, how long the hedge should be, etc. But when we look at hedging in a strategic way, we need to ask how hedging impacts the other functional areas in the firm and how the interaction affects firm value. The answers to these questions not only allow a better conceptualization of investment policy, advertising policy, pricing policy, etc., but also affects the rationale for hedging itself. Tactical solutions optimize locally, while strategic solutions optimize globally.

When you have completed this course successfully, you will be better aware of the importance of financial decision-making in the firm and how it interacts with other corporate decisions. You will have a better understanding of the basic truth that no decisions in the firm are taken in a vacuum. Topics such as marketing, human resource management and finance are taught in separate courses primarily for convenience; the truth is that to be a good manager it is important to apply the techniques taught in these different courses in an integrated fashion.

Here are some of the areas that you will learn about in this course:

  • Dupont Analysis and how to use it to make better marketing decisions.
  • The use of Capital Structure in making superior personnel, product quality and pricing decisions
  • How Risk Management affects corporate decisions such as management compensation, budgeting and personnel decisions.

As you can see from this list, this course really integrates the different areas of business, by looking at them from a economics/finance point of view. Whether you are in Human Resource Management or in Accounting or in Management or in Strategic Management, the tools and the perspectives that you will be exposed to in this course will give you an advantage over other professionals in your field.

Course Overview

We first start out looking at what financial decisions are and conclude that they include all decisions that have to do with the liabilities side of the balance sheet, while the left-hand side of the balance sheet reflects operating decisions, such as asset choice etc.  We expand this insight by noting that current assets (for example accounts payable and accounts receivable) are the flip side of current liabilities and hence we should modify our balance sheet to include Net Current Liabilities (Current liabilities less current assets) on the liabilities side of the balance sheet.  Thus financial decisions include working capital decisions, decisions about how much debt to issue (relative to equity), the particulars of the debt (and the equity), dividend decisions (which affect the total amount of equity) and finally, the contingent financial contracts that the firm enters into that affect the overall riskiness of the firm (which can include either contingent contracts dealing with interest rate obligations, foreign exchange or commodity contracts).

Following this, we start out with a look at Porter’s Five Forces Model.  This model is often used to evaluate an industry.  However, the objective here is not that.  Rather, we are using it as a model for the different factors that impinge upon a firm.  We can then look at how financial decisions affect a firm’s relationship with those five forces: existing competitors, new entrants into the industry, competition from other (existing and new) industries (i.e. new products), suppliers, customers and finally the government, which even though it is not one of the five forces, is behind the scenes in all the five interactions.

We now start the main part of the course, which involves looking at how financial decisions circumscribe our ability to make operating decisions, i.e. decisions relating to the firm’s assets (the left-hand side of the balance sheet), such as personnel decisions, marketing decisions, advertising decisions, competitive strategy and dealings with the government, unions and other institutional players in the business world.  For this purpose, we divide financial decisions into three categories: working capital decisions, capital structure decisions and financial risk management decisions, and look at each one in turn.

In order to deal with working capital decisions, we use a well-known, but little used model, the Dupont model, which breaks down return on assets into the product of operating margin, asset turnover and leverage.  We use this model to look at the interactions between financial decisions and marketing decisions, such as the volume-margin decision and show how to use accounting information to understand and analyze these decisions as well as allow an optimization of net working capital.

Next, we turn to capital structure.  We first show how leverage decisions cause management to act in ways they would not others act if the firm were entirely equity-financed.  This provides the basis for an analysis of how capital structure can be used by management to manipulate, convince and out-maneuver the five (six) Porter factors.  We provide a quick intro to game theory and how to use game theory to analyze some aspects of competition, following which, we look at have leverage decisions can be used as components of the firm’s competitive strategy.  Next we look at how leverage decisions influence and can be used to extract value from product decisions, personnel decisions and other operating decisions. 

Finally, we introduce risk management and the different tools that are used by the firm to engage in financial risk management.  This allows us, then, to look at the implications of financial risk management (hedging) decisions on other operating decisions.

Part of the course is a look at corporate governance and how corporate governance decisions – whether they are taken by the firm or whether they are part of the legal, institutional and business culture that the firm operates in – have implications for whether and how financial decisions can affect operating decisions.

Course Text

We will be using some chapters (chapters 7, 16, 17 and 18) from the text-book, Financial Markets & Corporate Strategy, by Mark Grinblatt and Sheridan Titman, Irwin McGraw-Hill 2001. The book is out-of-print, but you may be able to get used copies online. If you can't get one of these copies, you can buy an e-book, containing only the chapters that we will be using. Instructions to access this e-book can be found in the accompanying pdf document (found on Blackboard). (Make sure to use my name, Viswanath, in searching for the book.) We will also be doing a few cases. One of them is Risk Management at Apache, HBS case 201113-PDF-ENG. This case can be purchased by going to https://hbsp.harvard.edu/product/201113-PDF-ENG. We may discuss some other cases, well. Details of these other cases will be provided later.

How to Study for this Course:

  • At the beginning of the course, read my notes on Recurring Themes in Finance.
  • Read the business sections of newspapers with a critical eye.
  • When you read general non-finance business news, look in the article for mentions of financial policies, such as capital structure, hedging and other financial risk management, working capital management, use of options and futures both in hedging and in managerial compensation, choice of debt maturity, covenants in borrowing agreements, bankruptcy agreements. Think of how they are relevant to the main subject of the article.
  • When you read finance-related business news, look in the article for mentions of impact on employees, product pricing, competitive strategy, advertising etc.
  • Think of how the non-finance mentions relate to the main topic of the article.

Computer Use and E-mail Policy:

You should obtain a Pace e-mail address as soon as possible, so that I can send you e-mail. Any student's Pace e-mail address can be obtained by going to http://appserv.pace.edu/WhitePages/Students.cfm or by going to the main Pace Home Page and clicking on White Pages from the IntraPace section towards the bottom of the page (the default password is the student’s Pace Identification Number).  More information about e-mail address, etc. can be obtained from the DoIT website and clicking on Computer from the left-hand side menu panel.  Even if you have another e-mail address where you wish to get your e-mail, you should still get a Pace e-mail address.  Once you have your Pace e-mail account and password, you can go to the Pace University Student E-Mail Server at http://stmail.pace.edu and have your e-mail forwarded to your preferred e-mail address.  You can find information on how to have your mail automatically forwarded at the DoIT website.  The only way that I can communicate with you is through your Pace e-mail account.  So please get your Pace account information as soon as possible.

Check your e-mail and the MBA 673 website on a regular basis.  This will enable you to get the maximum from the course. I am available for consultation by e-mail at pviswanath@pace.edu. I check my e-mail practically every day, and, in most cases, you should get a speedy response to any questions.  

We will also be using Blackboard as a gateway for some aspects of the course.  Please log in to Blackboard at the earliest opportunity.    Blackboard login procedures can be found on the appropriate Blackboard site.  Essentially, your login ID for Blackboard will be your email ID, and your password will be your 9-digit social security number.  

Make sure you bring a laptop to class since you will be using web resources for some of these assignments. Make sure also that your laptop is charged. (Please do not use classtime to read your email or do other things unrelated to the class.)

Course Requirements

Details regarding course requirements and assignments can be found on Blackboard.

Working with Teams

We will be doing class exercises in groups. Please form groups on the first day of classes. It is important that there be diversity in class groups; this is very important for student learning. If I believe that a group is overly homogenous, then I may reassign students to other groups.

Each group will be required to research and make a presentation (if there is time) on a topic related to the interaction of finance with a non-finance management decision area.

Tutoring

The Tutoring Center, located on the 2nd floor, 41 Park Row, offers free tutoring to all Pace University students. No appointment is necessary, but students should contact the Center for more information.

Academic Integrity

The school's academic integrity statement can be found here. Academic integrity infractions can include, but are not limited to, copying and presenting the work of another as your own, collaborating with others on assignments intended to be done individually, using unauthorized resources such as an instructor's manual to complete assignments, copying the work of others during an exam, and failing to reference the work of others or creating fake references in your assignments. You may receive a failing grade in any assignment, exam, or course in which an infraction takes place, and you may be suspended or expelled from the school. If you need more information on how to avoid plagiarism, you can find it on the Library's website.

Disability Policy

Please refer to the Pace website for the school's policies on students with disabilities, affirmative action and emergency closings.

Assignments

I am likely to give you assignments over the course of the term. The main purpose of these assignments is to make sure that you understand the material, and to prepare you for the exams. Assignments can be found on Blackboard under the different modules. Due Dates for all assignments can be found on the Course Calendar page.

Media Articles

On my webpages, you will find recent media articles.  From time to time, I will add to this list.  There are several reasons why you should look regularly at these pages.  

  • I will be posting interesting and recent articles to this directory.  As such, it will be a useful way for you to keep abreast of topical issues (in addition to your regular perusal of the Wall Street Journal.)
  • I will pose questions on the subject matter of several of the articles.  These questions will be good preparation for the media article based questions on the exams.
  • You can draw on the articles for classroom discussions.
  • These articles and the appended questions are useful preparation for job interviews.

The password, necessary to access the Media Articles section, will be announced in class and can also be found at the Blackboard website. In case of emergency, you can contact me for the password.

If you have difficulty in accessing the site and you're using Internet Explorer, you may want to try the following fix: Go to Tools on the Main menu, then choose Internet Options. Then choose Security; after that select Trusted Sites. Then click on sites and add "http://webpage.pace.edu/pviswanath" (make sure that you have unchecked the "Require Server Verification for all sites in this zone").
This should allow you to access the articles by using the correct password.

Grades

Your final grade will be determined as follows:

Factor Impact on Grade
Porter Model Analysis 5%
Dupont Analysis 10%
Apache Risk Management Case
 15%
Problems on Capital Structure and Incentives
 15%
Term Project
 25%
Tests 30%
 Total 100%

Letter grades will be assigned as follows:  

Course Grade Quantitative Class Score
A,
 95%-100%
A- 90%-94.99%
B+
 85%-89.99%
B 80%-84.99%
B-,
75%-79.99%
C+ 70%-74.99%
C 60-69.99%
F 0-59.99%

Note that the minimum and maximum quantitative scores for plus and minus refinements to the letter grades will be at my discretion. These will be partly determined by the distribution of student scores within each letter grade category.   I place a high value on effort; at my discretion, I will raise your grade one notch if I feel that you have tried hard to satisfy all the requirements of the course.

Prerequisites:

Students must have satisfied the prerequisite for this course, viz. MBA 648. I will presume complete familiarity with all topics taught in this course.