How can large companies continue to grow?

May 2007 – This month’s post is a bit late (and short) as I’ve been working on a final paper for my international business class. We’re studding international companies like GE, IBM, and Exxon. It simply amazes me how large these companies are. In fact I’m so amazed by their size, I wrote about how large companies can grow for my mid-term.

Imagine this; GE had $160 billion dollars in sales last year. The pesty shareholders, which is a group I consider myself part if, demands companies like GE grow at double-digits. Double-digit revenue growth, double-digit earnings growth, double-digit this, double-digit that, and so on. We want almost $17 billion in new sales next year or about the same as Kenya’s gross domestic product. Yes that’s right! GE needs to grow sales this year that are valued the same as Kenya’s total value of goods and services. Exxon’s story is even more impressive (or overwhelming). Exxon needs to find $44 billion in new sales this year. That’s about the same as Slovakia’s gross domestic product. Amazing!

So how do these companies continue to grow at these rates? To be honest I don’t know. There’s probably not one single reason these companies continue to find and expand businesses at double-digits. That being said, I’m pretty sure there is one defining attribute; great people. And if I was to copy one thing these companies did, I’d hire great people.

A few years back I read Jim Collin’s book “Good to Great.” I’ve read a lot of business books and from what I can remember, most of them are pretty boring. Not “Good to Great” though. It’s by far the best business book I’ve ever read, and I’d be so bold to say it’s one of my top ten books of all time. Mr. Collin’s is in pretty good company given I’ve read almost all of Bill Bryson’s books, who may be the greatest writer who ever lived. Any way, my favorite chapter in “Good to Great” is the section on getting the wrong people off the bus and the right people on the bus. I’m guessing GE and Exxon have the right people on the bus, which helps them define where they need to drive to find all these new sales. The top notch talent they have are able to help the company continue to grow the businesses at these incredible rates.

In conclusion, if you’re looking to grow your large conglomerate at double-digit rates, make sure you start buy hiring great people who hire great people. If you can do this, coming up with new sales ($17 billion) that surpasses the gross domestic product of 83 countries (as of 2006) is trivial.

Should you write a book?

April 2007 - I'm thinking of writing a book. If you're my wife and reading this posting please settle down as I don't plan on quitting my day job. In all seriousness I'd like to someday take all the thoughts bouncing around in my head and put them to paper. Would anyone read it? I'd like to think so, but honestly it's more of a hobby than anything.

But let's say someone did like the book and wanted to buy it. How much would it sell for? And more importantly how much would I make from that sale? I'd like to think that if the book sold for $24.99, I'd get at least 75% of that. If you're a publisher you're starting to laugh off your chair. After a bit of research I can understand why. The writers of fine literature are paid for their work, but certainly not at the insane rate I'd like to see. So how much do writers make?

From what I can gather authors are paid in a number of ways, but all income is centered are around royalties. For a break down of retail, per book, and wholesale royalties see Stephen Nelson's posting (http://www.thewritersplace.com/writestuff/modules.php?name=News&file=article&sid=28). For the purpose of this discussion, let's just assume my prestigious publishing house is using retail royalty payments. Retail royalty rates can range from low single digit percentages (e.g. with my luck 5% or lower) to lower double digits for well known authors (e.g. maybe 15-20% for Stephen King).

Using 5% and a book price of $24.99, each book sold earns me $1.25 in profit. Alright! Didn’t Dan Brown's Da Vinci Code sell over 20 million copies? I'm guessing he quit his day job. Realistically though, I'm guessing my first book won't be nearly as popular so let's say I'm able to sell 1000 copies to threatened friends and family members. While $1,250 is nothing to write home about, it's a start. How much is this an hour though?

If you don't count my long "deep thought" walks, I estimate writing a book would take me 1000 hours. This might be high or low, but since I've never written a book before I don't have anything to base it on. Dividing my estimated income by the total number of hours, I make $1.25 an hour. That is slightly less than I made pumping gas as a 15-year-old.

So it looks like I'm not going to be rich. Back to my question; Should you write a book? Yes and No. If you're planning on quitting your day job to start writing, make sure you're ready to move in with your parents. I talked it over with my wife and this is not an option. If you're planning on writing the book for nothing more than a hobby, then write away. If you make $1.25 and hour then great for you. At least you're published!

Should I upgrade my health club membership?

March 2007 - In November of 1998 a good friend and I drug ourselves into Life Time Fitness for a membership sales pitch. It was an easy sale for the testosterone filled bulky back sales rep we talked with. In addition to looking forward to a good game of racket ball, my friend and I were young college grads who weren’t afraid to surround ourselves with pleasant looking gales. The salesman knew this and proceeded to tour us through the aerobics room (twice) and sealed the deal. Once members, we found that although there were plenty of well shaped females, there was plenty of competition from better trained and wealthier men.

The first month’s membership bill showed up on my credit card bill for $33.50. I remember thinking that $402 a year ($33.50 * 12 months) for weights and a Stairmaster is ridicules. That was until I watched the repairman open up an out-of-service stepper and found out how difficult it is to fix one of those buggers. There were chains, gears, and wires that could confuse Einstein. The assurance that I never had to fix an electronic bike, treadmill, or wax a basketball floor made the $402 worth every penny.

Much to the dismay of my bill paying wife, over the course of the next nine years I’ve watched the $33.50 monthly fee turn into $53.00. That’s a 58% increase in just over nine years. According to my finance professor, 58% in nine years is slightly more than inflation (at 3% inflation, $33.50 is $43.71). Is the $53.00 we pay today still worth a membership?

I typically get to the club eight times a month which means each trip costs me (actually my wife) almost $7. Typically I use the elliptical machine, racket ball courts, treadmill, some weights (light ones I might add), lockers, and occasionally the cheesy stationary bike. In addition, I watch their TV, weigh myself once a week, and shower periodically. For the most part, I’m willing to pay $7 a trip for these services.

Just down the road from us, Life Time Fitness is building a new 150,000 square foot club that dwarfs the modest establishment I typically patronize. Always one interested in new retail, I inquired about the new club and found my $53.00 was a mere drop in the bucket for what an upgraded sports membership at the new club costs. Apparently the Fitness Membership I carry isn’t sufficient. In reality a sports membership is only $10 more ($63.00), but for a guy who brags about saving 10 cents at the coffee shop for getting the trivia question correct, $10 is a big deal.

Among a new construction scent and automatic paper towel dispensers, the new club includes an outdoor water park, complete spa and salon, and poolside bistro. I hear they also have tennis courts, but didn’t see that posted on their website. So back to our original question, should I upgrade my membership so I can attend the new club?

Although I’m sure some will find the added amenities worth an extra $10 monthly, I’m sticking with my Fitness Membership. The current stopping grounds provide the necessary resources to keep me just within the boundaries of average fitness. This all being said; since I had to park in a different zip code recently, I’m hopeful a majority of people disagree with my opinion and flock to Lakeville and enjoy the zero depth entry pool. That way the economical folks can enjoy less traffic at our current club. Good luck with your own assessment!

Which gas option should I use?

February 2007 - In retrospect the question of which gas option you should purchase while renting a car in Hawaii is painfully obvious. However, when suffering from jet lag and caring for a hungry, tired, and not to mention pregnant wife, making such a decision is overwhelming to say the least. A few weeks ago, Mrs. No and I headed off to the south pacific in search for rest and relaxation. We started off with a day and a half in Oahu and then jetted off to the Big Island.

The Big Island is an amazing rock out in the middle of the ocean. More impressive than its rich array of volcanic activity and wild life is the kind and speedy service offered by the rent-a-car companies. While I don’t rent a car very often (I dislike cars in general and when on vacation like them even less) when I do, it’s typically an hour of unfriendly, slow, and egregiously overpriced displeasure. Our experience was different than normal though. On the Big Island our vendor Dollar Rent-a-Car, which I found out upon arrival didn’t offer any “dollar” cars, provided the type of service only expected at the finest of steak houses. The shuttle service was prompt, rental line short, and service representative pleasant.

Before signing three sections and initialing another five, the smiling representative asked me which gas option I’d like. She pointed across a lively waiting area to a small sign stating “A – $2.95 per gallon, B – $4.25 per gallon, C – $3.15 per gallon.” Below each lettered section contained unreadable small print which I found out later explained the difference between the options in gory detail. Now remember I’m tired and caring for Mrs. No, who is in little mood for me to crunch numbers like I typically do with presented with financial options. So with little haste, I picked letter “A” and signed my life way.

As it turned out, “A” was the right choice for us. In the small writing below “A,” Dollar explains they’ll sell you a tank of gas for a 15-20 cent discount per gallon if you purchase the tank ahead of time. What they don’t explain in writing, but will when you ask them, is that there are no refunds. You pay the same whether you use one gallon or the entire tank. Our “economy” class car held around 13.9 gallons. With option “A” we drove around the entire island and broke even after using 12.9 gallons. Drivers who use more than 12.9 gallons, come out ahead.

Option “B” is a rip off for most of us. “B” says use as much gas as you’d like and just bring back the car. Then we’ll fill it up for you for a modest 35% markup over retail. There are only two times you should use “B.” You’re late for a flight or using an expense account for a company that just pissed you off. Use option “C” when you plan on using less than a tank of gas. For example on Maui we used option “C” and saved around $12 verses option “A.” That’s because we spent most of our time in Maui laying on the beech and reading fine literature.

You should wonder why option “A” turned out to be the right choice for us on the Big Island. Mathematically both option “A” and “C” turned out the same as both cost us around $41 (give or take a few cents). Time is money though and option “C” would require an inconvenient stop at the gas station before a 9AM flight. Mrs. No likes to arrive at the airport with days to spare, so any amount of time saved sooths her nerves and lengthens my beauty sleep. All other variables equal, the time saved using option “A” worked best for us. Happy travels!

How much do Christmas lights cost to run?

January 2007 - When asked, my wife refers to me as an “interesting” person as apposed to odd, nerdy or weird. And so when presented with an idea that gives most people a loss of words or a feeling of social unrest (e.g. my three year light bulb experiment in the garage which I share with all house visitors), she usually shakes it off as just part of my “interesting” character. That has recently came to an end though, as on the morning of December 2nd I informed her we’re conducting a month long study on how much our Christmas lights cost to operate.

Every fall I drag myself out to the garage and spend a good portion of the morning and afternoon untangling a series of Christmas lights that have mysteriously found themselves in a rat’s nest. It’s simply amazing how Christmas lights can spend all year tangling themselves without me even knowing. After a bit of emotional counseling and a frank discussion with my inner self, I spread them out and dangle them haphazardly from my shingles using duck tape.

My light collection is made up of thirty to forty feet of “icicle” lights consisting of around 1330 bulbs. As a side note, these lights are the ones where if one simple bulb burns out, the rest of the string finds itself in the dark. Ironically, these are the ones I always end of hanging on the tall dangerous part of the roof. We then have 120 smaller lights that are used to string around a bush or two. In all, we have around 1450 candescent light bulbs hanging from various spots.

The study was conducted as so. On select nights when the temperature was going to be consistent for two consecutive nights, I shut my Christmas lights off early and took a meter reading at 10PM and 7AM the following morning (night one). The following night I did the exact same thing with the exception of leaving my Christmas lights on all night (night two). Assuming all other variables are consistent (e.g. furnace fan run rate or the number of times my wife turns on the light for a bathroom run), the difference between night one and night two should give us the amount of kilowatt hours it takes to run our Christmas lights. This figure divided by the number of hours (i.e. 9 hours) gives us the kilowatt hours needed to run these crafty little buggers per hour.

And so the results are in. Night one consistently shows we use three kilowatt hours of electricity to run the house. This is primarily due to our furnace fan, the running fan in the bedroom (i.e. the noise maker), and my wife’s annoying alarm clock, which by the way goes off every nine minutes between 6 and 7AM. Night two consistently shows we use seven kilowatt hours (the arithmetic mean is actually 7.33) to run the house with the Christmas lights flaring all night. For those of you who are math deficient (like me), the difference is four kilowatt hours. Meaning it takes four kilowatt hours of electricity to run our 1450 Christmas light bulbs for nine hours or close to .444 kilowatt hours per hour. Looking at my last electric bill we pay $.0725 per kilowatt hour meaning our total cost for an hour of Christmas lights is a little over three cents.

So what does this mean? Honestly it really means nothing other than if you hang Christmas lights and leave them on four hours every day in December, you can expect to pay three to four dollars extra on your electric bill. Even a fiscal conservative like me can handle the expense for a little seasonal excitement in the neighborhood. Happy holidays!

How can I apply my new MBA skills?

December 2006 - Regular readers of my column (which by the looks of it are few and far between) may notice that I’m currently getting a masters degree in business administration from a fairly respected local university. Recently I just finished up with one of the tougher courses called “Data and Statistical Analysis for Managers.” As a side note, one would think “for Managers” in the title would make the class a bit less intensive and compared to a PHD class it might be. That being said, for the average student, which is a group I include myself in, the class is pretty challenging so beware.

While I faired alright on the homework and exams, the true question in my mind is how can I apply these new concepts to my job? This question only makes sense as my employer paid the outrageous price of tuition. Now I’m not proud of it nor tell even my dearest friends, but I’m pretty close to an expert on the format of a seven step hypothesis test. How in the world does this help me as a software engineer though? Let me try to explain how we’ve taken a simple concept from my statistics course work and tried to apply it to work.

I’m leading up a project for migrating our source code repository from a fragile, debilitating, and antiquated system to a new (hopefully robust) tool set. One of the outcomes of this effort is the migration of years of change history that is a critical part of source control management. While the migration tool we’re using is “suppose” to flag us with migration errors, there always is a chance where we could run into a migration error which never got caught (if you’re wondering, I’m a skeptic of most things). Here is a question that I often hear upper management asking us worker bees before pushing a button that could potentially bring the company and all it’s stakeholders to our knees, which this migration could easily do. “How confident are you everything is correct?” Never being an overconfident engineer, I’ve always said “we’re as confident as we can be with the information at hand.” As one can guess this never goes over very well as from what they tell me, it’s not quantifiable. The follow-up questions are always based around confidence numbers (e.g. 90% or 99.99% confident) of which I have no clue how to talk my way out of.

As luck would have it, in my difficult “for Managers” statistics class, levels of significance and confidence intervals were discussed on week four. After scouring my notes, we’re thinking we can use some of the techniques learned to “quantify” how confident we are (or are not) to impress upper management. How though you might ask? While we’ve not started the migration yet, after a “successful” migration we plan on taking a random sampling of source files in the new system and comparing the history with the original source file history in the old system. The result will give us a proportion of the file history that was fully migrated verses the total number of files in the sample. Based on the arbitrary assumption that 95% of all the history is migrated (we simply picked 95% as we’re comfortable losing 5% of history during the migration), we can in return run a proportion z-test using a specified value of alpha (i.e. .05) and figure out the probability of migrating 95% of all our history. The specified value of alpha will give us our level of confidence.

Now I have no grand elusions of impressing upper management with our results. If anything, I’m sure the question will come up as why we spent so much time on this migration and totally forget the fact that we did the migration, saved close to 95% of the history dating back from the early stone ages, and quantified our confidence. Putting upper management aside, the true outcome is that we’ve taken a very important (and difficult I might add) concept from our learning (which upper management paid for) and used it to quantify our confidence level. When upper management then asks, how confident are we that the new system will work and contains all the history we’ve created for the past 10,000 years, we can simply say “at the .05 level of significance (alpha is .05) we’re confident (or not confident) we’ve migrated 95% the history to the new system.” In addition to comforting upper management, this experiment will actually comfort us as well and since we’re ultimately responsible this is probably a good idea. So we’ll see how it turns out.

And the interesting thing is after we’re done with this experiment I’ll be on to my next class (business ethics) learning some new exciting things to annoy upper management with! Shouldn’t they be so lucky to pay me for this!

Do stock prices matter?

November 2006 - I make no secrets about my love for the morning business section in the local fish wrap (i.e. newspaper) or my unsuccessful run at stock price speculation. My stock picking is so bad of late my colleagues and friends have found investing against me to be quite profitable. This all being said, the curious mind does know one thing for sure; no mater what the list price is, stock prices do not matter. Let me explain.

A few years back while waiting in line for an overpriced latte, I overhead a young man brag to a half listening acquaintance that a stock (of which I’ve never heard of) just split and he was taking his wife out for dinner to celebrate. Being anti-cerebral at the time, I cordially congratulated the gentlemen under my breath and wished to someday be as lucky as he apparently just was.

Five or so years after this experience, I was fortunate to struggle through my first financial accounting course and during an especially arduous homework assignment found that a stock split has no, let me repeat no, economic affect on the stock. Every company issuing stock has a market value, which is simply the total number of issued shares of stock multiplied by the price of the stock. For example, at the time of this writing Google (GOOG) has a market cap of around $143 billion and is trading at $471 a share. This means Google has roughly a little over 300,000 outstanding shares.

A student loan ridden, large mortgage owner, future family man like me has little expendable cash lying around, but if I did I could probably afford ten shares of Google. Let’s say after breaking open my piggy bank and purchasing ten shares of Google, Google decides to split its stock two for one (i.e. two shares for every one share). The result is 600,000 outstanding shares trading at $235.50 and instead of only having ten shares, this curious mind has twenty! Hurray, right?

Now I grew up directly across the street from a corn field in the middle of the upper Midwest and have never once been praised for abnormal intellect. But, I was taught (in the first grade I believe) that ten multiplied by $471 is $4,710 and oddly enough equal to twenty multiplied by $235.50. Consequently, while I may feel wealthy having doubled my stock holdings in Google, in reality I’ve gained absolutely nothing in economic terms.

Of course if you don’t take my word for it, just ask Mr. Warren Buffet whose company “Berkshire Hathaway” was trading (at the time of this writing) for around $105,000 a share. Warren (as I like to call him in person conversing over a Coke) has never split his company’s stock. While I don’t know the exact reasons why, I’m pretty sure he sees a split as needless as I and avoids dealing with superfluous details as such.

In conclusion, do stock prices matter? No, market capitalization matters and your percentage ownership of it. Stock prices are simply arbitrary numbers which can be manipulated to any value wanted.