Simple Things Aren’t

Oct 302011

I initially wrote this article at Case Entrepreneurs and am reposting it here.

I used to find this fun?

For several years I studied jujutsu. One of the things I remember most about my teacher is that he would often say, “Simple things aren’t.” At the time, I was listening to him in the context of jujutsu, where the performance of seemingly simple techniques concealed the layers and layers of subtle complexities. For example, I spent a great deal of time practicing ukemi, which from all appearances looks like falling down and doing summersaults. Little kids can do summersaults. Heck, I am pretty sure my cat does them on an irregular basis. Nonetheless, rolling around on the ground has many subtle nuances such as what parts of your shoulder and hip touch, what, if anything is in your hands and so forth. It takes a lot of practice to fall down the right way. Another example is forming a fist and punching somebody. I imagine humans have been balling their fists up and punching each other since the moment we stood upright. However, to form a fist just right, to line up your wrist with the elbow and shoulder, then to rotate your body, move your feet, and even to breathe just right; throwing punches is serious business. I would tend to think that most martial artists and boxers would likely feel the same way; or else everybody would be awesome at boxing. And, for those who are lovers and not fighters, just think about how simple it is to hit a golf ball. I mean, right, all you have to do is swing the club and hit a stupid little ball.

Dreaded Five Forces?

In business school we learn several frameworks; Porter’s Five Forces, Porter’s Value Chain, McKinsey Value Chain, McKinsey 7S, Marketing Mix, 4Ps, 5Cs, SWOT, and a multitude of things that can be described as the something-something matrix. These are relatively simple things to learn and to subsequently apply to established companies. Fill in the blanks. At the next level of understanding, it is not necessary to fill out the framework blanks each time, but rather to think about the frameworks while analyzing a business case. Arguably, a final stage of learning the frameworks is to ignore the frameworks. Sometimes they can be constraints limiting the variables and concepts that are considered; think outside the box, if you will. One of my strategy professors called the Porter’s Five Forces the Dreaded Five Forces; a zillion MBA students can do a Five Forces analysis, but it takes a little more work to think beyond it. As I noted, these frameworks are straight-forward and are relatively simple to use when applied to existing companies. You can Google-up what Google is all about, and then fill in the blanks. Most of us “get” what Google is all about.

Here is how that simple framework thing, isn’t: Start a business.

Recently, I began to work with a business accelerator to start my own business. At first I was loathe to use the frameworks (as some of my former classmates would not find surprising), but I concluded that these frameworks were developed for a reason; time to use my MBA education. Then things got difficult. When your business does not actually yet exist, one does not simply walk into Mordor do an internet search to find information. To really articulate your value proposition for each market segment, describe revenue streams, who exactly are your customers, competitors, collaborators, what is the internal rivalry, and how much power do your suppliers and buyers have, and so forth – all for something little more than an idea is a very difficult exercise. Uncertainty and ambiguity make otherwise seemingly simple tasks less simple and more complicated. For instance, just determining what it is you need to know and what questions you should be asking is a challenge.

As students, all too often we may learn something and subsequently become almost blasé users of that knowledge. At times, it is easy to dismiss things as being too simple to be of value. But, how many times have you fouled up a complex mathematical operation all because you forgot to carry the one (or any other elementary level mistake)? Chances are if things may seem to be too simple, then perhaps you have not yet been challenged to really understand the nuances of your knowledge.

Simple things aren’t. Especially for entrepreneurs.

October 30, 2011 entrepreneur, entrepreneurship, frameworks, startups

5 Reasons Why the U.S. Needs More Debt

Jul 282011

$14,300,000,000,000

The U.S. is approximately $14.3 trillion in debt. And we need more. Why? Sovereign debt is not really the same as you and I going on an all-inclusive cruise, living on the beach, swimming with turtles, and bathing in 21 year-old Glenlivet Scotch Whisky, all by racking up the expenses on our credit cards. Albeit at times, the behavior of Congress can easily be confused with drunken snorkeling shenanigans with sea turtles. You and I paying off debt is entirely different than the situation is with U.S. debt. Here are a few reasons why you need Congress and the President to raise the debt ceiling:

Higher Interest Rates on U.S. Treasury Securities. When an entity defaults on debt, future issuance of those securities will be seen as more risky. Investors ask themselves, “Hey, are we going to get paid or not?” Therefore, the U.S. may have to to pay higher interest to counteract the increased risk of the securities. You care about this because it leads to. . .
Higher interest rates on everything else. Potentially your mortgage, student loans, car payments, and even your credit cards can have higher interest rates. Life could get more expensive.
Reduced confidence in U.S. financial instruments. While on one hand, the argument can be made there is nothing truly 100% safe to invest in (albeit gold investors like to think they are immune to reality while blissfully ignoring the entire housing bubble thing). However, on the other hand, historically U.S. Treasury bonds have been about as rock-solid and safe of an investment as you can find anywhere in the world. If you were content in earning a modest return (potentially not even pacing inflation depending on your investment) and your goal was to simply not lose money, then U.S. Treasury Securities were as dependable as Hollywood banking on a Tom Hanks movie.
Reduction of government spending. The government will not suddenly be out of business; the government is in the business of bureaucracy, and business is good. Although, the U.S. government would have to reduce spending by about 43%. It’s possible, or rather quite likely, that the Treasury would continue making interest payments on debt. That means cuts will have to come from all over the place to free up cash. On the positive side, the Treasury may have $11 billion in tax revenues coming in, but on the negative side we owe $30 billion in interest. You don’t need much gray matter to figure out that those numbers probably won’t work out.
Weaker U.S. dollar. This all leads to a weaker currency. In essence what could happen is that it is more expensive for you to buy things, while at the same time you have less spending parity with which to do it.

Fundamentally when you get down to it what is at stake is the reputation and confidence of the U.S. financial system. There is, and has been, lots of talk about the U.S. debt, which is really blown out of proportion. Granted it needs to be managed, but the U.S. is really the only country in the world where we not just only spend as much as we want, but the rest of the world also encourages us to spend money. This unique situation is partially because of the confidence in the U.S. financial system. Take away that confidence, by you know not paying the interest payments, then we may not likely have much else to bank on. Except for Tom Hanks acting career, of course.

The Point: While debt may be bad, skipping out on paying interest payments is worse. Right now the world invests in the U.S. because people know we are good for it. If we are no longer good for it, why would we assume there would be no repercussions?

July 28, 2011 debt, economy

The Insignificance of the Corporate Jet Tax Break

Jul 132011

As I write this, there is a heated debate in D.C. regarding the debt ceiling, spending, and taxes. Something that has been brought out to whip folks into frenzy is the talk of reducing the tax break corporations get for having a private jet. Or two or three.

As a political sound bite, sure it sounds great to eliminate those fat cat corporate tax breaks, right? I mean, who can’t get behind that???

However, is it really that big of a deal as the pundits lead you to believe? According to President Obama’s team, the elimination of this tax break would yield about $3 billion in additional tax revenue.

Over ten years.

The debt is approximately $14.3 trillion.

One way to look at this is to think about getting $300 million per year for a decade. Or to keep our units the same, that would be a tax increase of about $0.003 trillion in a $4 trillion deficit reduction bucket. Or about 0.075%.

Maybe not really as much as the politicians would like you to think.

Now let’s look at this a bit deeper. What exactly is this tax break? To answer that we need to take a step back and talk about depreciation.

What is Depreciation?

Depreciation is a tax deduction that businesses can use to deduct the deterioration, obsolescence, or basically the value of an asset over the span of that asset’s useful life. If you think about buying a car for yourself, you understand (hopefully) that the car loses value over time (like the moment when you drive it off the lot). Businesses basically get to write off that loss of value.

For example, if a company was to buy a $10 million piece of equipment, and the depcreciation schedule for that type of asset is ten years, then the company would expense $1 million per year. This is called straight-line depreciation and is not typically used for U.S. IRS tax purpose. Instead something called Modified Accelerated Cost Recovery System (MACRS) is used. This allows companies to depreciate a greater percentage in earlier years and less during the end of an asset’s life. In essence this gives a larger tax ‘break’ sooner rather than later. For instance, a company may get to write off 40% year one, 25% year two, 15%, year three, 10% year four, 5% years five and six. This allows companies to have higher cash flows in the earlier years (cash is king), which means that companies can, well spend cash. This can be investments in other projects which can, in return generate revenue.

For further reading on depreciation:

What Does This All Mean?

OK, so now with a basic understanding of depreciation we can get back to this corporate jet tax break. Commercial aircraft are depreciated under MACRS for seven years. Private aircraft are depreciated over five years. That’s the tax break.

This means that, in theory, if I was a corporation I have an incentive to purchase a new aircraft every five years because starting at year six I can no longer write off the depreciation of the asset. What’s interesting, if true per this article at Business Insider, is that if a company charters their aircraft to other firms, then they must use the seven years depreciation schedule. Therefore, for a number of firms any changes in the depreciation schedule will make no difference at all.

My question: Does the depreciation schedule actually influence the purchase of aircraft for companies? I imagine if a firm had the intent of replacing an aircraft anyhow, I imagine the timing could be influenced by depreciation schedules. However, I find it a bit difficult to believe that a company will purchase new aircraft every five years simply to take advantage of the tax break.

Now the follow-up question you should ask yourself: Is this really anything of significance? Again, politically it makes a good sound bite for politicians in upcoming elections. In regards to any meaningful tax revenue this change may generate, I have no clue what the actual impact might be.

Finally, what can be very interesting is how this can affect U.S. aviation manufacturing. Many manufacturers of private jets are in the U.S. (e.g. Boeing, Lear, Cessna) and if companies are disincentivized to purchase aircraft on a more frequent basis, then what impact can the aviation industry feel due to this change in the ‘tax break’?

I do not wish to get political, or take ‘sides’ as it were, for any particular party. I think it is reasonably safe to assume that members of all political parties tend to use language that will emotionally impact voters. Today, politicians will curse corporate tax incentives. Tomorrow, they will lambaste corporations for the decline of U.S. manufacturing. I wonder if they will eventually connect the dots? I wonder if they care.

The Point: It may be easy to march out the so-called evils of corporate tax breaks during heated political times. However, sometimes those tax breaks just simply do not have much significance in the big picture of the economy. Do you think it is possible that a change in tax breaks could have an impact that goes beyond a company’s balance sheet and affect workers in the industries that are supported by those very same corporate tax incentives?

July 13, 2011 deficit, depreciation, tax

Phenomenal McDonald’s Ad Film

Jun 202011

If you are remotely interested in marketing or advertisement, then you must watch this advertising film.

In this advertisement – clocking in at nearly 9 minutes I see this as a sort of short film – McDonald’s acknowledges many perceived negatives regarding the brand. Instead of arguing point by point, it feels as if McDonald’s embraces those negatives and shows, by way of the film (character development in a commercial??!!) that in today’s Great Recession those negatives really are not all that negative.

Basically, it is better to have a job flipping burgers than no job at all.

One could argue that McDonald’s may not have stellar pay or benefits (being that this is taking place in the U.K. let us ignore their NHS structure), but I think the implied message from this film could be, “Sure, the benefits and wages aren’t great. But, they are better than nothing at all which is what you have if you stay at home unemployed.” Additionally, the messages of community service and how to interact with customers are hardly things which one can reasonably and effectively argue against.

Jim Edwards at BNET has a fantastic commentary regarding this film. It was where I first learned of this, and for the most part I agree with his analysis.

The Point: Bravely facing criticism and using it to one’s advantage can be a clever and strong way of marketing your firm. If you were college educated, from a single parent working-class household, with no other job prospects, does this film change your perception of McDonald’s?