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Spreadsheet supplement for UV6895.

This note introduces multiple concepts of leverage from an accounting context, specifically as they relate to balance sheets and income statements. Both operating- and financial-leverage ratios and their relation to changes in widely accepted profitability measures are reviewed.

The third-generation leader of CFR Pharmaceuticals had been successful in executing a strategy of consolidating pharmaceutical firms across Latin America. As part of the company's expansion strategy, the CEO explored opportunities to develop multiple sources of growth and expand CFR Pharmaceutical's footprint in emerging markets; to do this, he found a company in South Africa, Adcock Ingram, to acquire. The combined company would offer CFR product synergy and diversification, improved manufacturing and distribution capabilities and a unique emerging market footprint in 23 countries. In the process of making an offer of approximately US$1.2 billion to acquire the company, the CEO faced increased interest in Adcock from other potential acquirers. He also encountered a series of difficulties when an Adcock shareholder resisted the acquisition, but CFR maintained the consistent support of the Adcock Ingram board.

The owner of Tesco Cranes Engineers Pvt. Ltd. was considering the impact of various issues that had led to the closure of the company's sub-assembly plant in December 2012. Despite his efforts, he had not been able to stop workers from joining a regional trade union in July 2012. Immediately after joining the trade union, workers had slowed down production and gone on strike. Later, the plant had been closed by the owner. The company had suffered a production decline as a consequence of the strike and the subsequent plant closure. In view of these unexpected events, the owner was facing a dilemma. On one hand, he was wondering whether he should take proactive action to prevent a similar situation from occurring in the other two Tesco Cranes Engineers Pvt. Ltd. plants in the future. On the other hand, he was questioning whether it had been ethical of him to close the sub-assembly plant; he knew that this decision had left all of those workers unemployed and helpless, with most of them doing menial work or returning to their villages.

Supplement case for W14593.

This is part of a case series. John Erceg was in a quandary. It was a sunny spring day in Barcelona in April 2010, and he'd been negotiating for several weeks with a possible buyer for the company that he'd created from scratch and built over the past seven years. Apart from buying two Barcelona apartments that got him started - thanks to his then girlfriend and now wife Lucia's good credit and a couple of hefty mortgages - and apart from maxing out a couple of credit cards in the early days and personally funding small losses in the early years, Erceg had not invested a single euro in an online travel agency business for which he had just been offered 17.3 million euros. The offer from GoTravelNow had come as a complete surprise. EnGrande, as Budgetplaces' corporate entity was called, was growing fast and was highly profitable, and Erceg wasn't sure what to do. After weeks of negotiations, he had managed to improve the cash portion of the offer to 8.5 million euros. 'A life-changing amount of security for seven years worth of work,' he thought. Should he take the offer that was on the table? It was time to decide.

Supplement to case LBS124. This is part of a case series. John Erceg was in a quandary. It was a sunny spring day in Barcelona in April 2010, and he'd been negotiating for several weeks with a possible buyer for the company that he'd created from scratch and built over the past seven years. Apart from buying two Barcelona apartments that got him started - thanks to his then girlfriend and now wife Lucia's good credit and a couple of hefty mortgages - and apart from maxing out a couple of credit cards in the early days and personally funding small losses in the early years, Erceg had not invested a single euro in an online travel agency business for which he had just been offered 17.3 million euros. The offer from GoTravelNow had come as a complete surprise. EnGrande, as Budgetplaces' corporate entity was called, was growing fast and was highly profitable, and Erceg wasn't sure what to do. After weeks of negotiations, he had managed to improve the cash portion of the offer to 8.5 million euros. 'A life-changing amount of security for seven years worth of work,' he thought. Should he take the offer that was on the table? It was time to decide.

Supplement to case LBS124. This is part of a case series. John Erceg was in a quandary. It was a sunny spring day in Barcelona in April 2010, and he'd been negotiating for several weeks with a possible buyer for the company that he'd created from scratch and built over the past seven years. Apart from buying two Barcelona apartments that got him started - thanks to his then girlfriend and now wife Lucia's good credit and a couple of hefty mortgages - and apart from maxing out a couple of credit cards in the early days and personally funding small losses in the early years, Erceg had not invested a single euro in an online travel agency business for which he had just been offered 17.3 million euros. The offer from GoTravelNow had come as a complete surprise. EnGrande, as Budgetplaces' corporate entity was called, was growing fast and was highly profitable, and Erceg wasn't sure what to do. After weeks of negotiations, he had managed to improve the cash portion of the offer to 8.5 million euros. 'A life-changing amount of security for seven years worth of work,' he thought. Should he take the offer that was on the table? It was time to decide.

Fictitious Colburn University boasts many "amenities" for its students, including cafes, a gymnasium, and U.V. tanning salon Campus Tans. Meredith Tang, a law student originally from Australia, and Barbara Holly, a public health student, cannot believe that this insidious industry has infiltrated campus life and worse yet seems to be promoted by the school, or at least is allowed to advertise on campus. Soon these students turned activists begin a campaign to evict the salon; however, they quickly discover that evicting Campus Tans may not be as easy as they thought. As the story ends, the student activists sit down to a meeting with school officials and the owner of the salon to negotiate an agreement that protects the health of Colburn students while balancing the interests of diverse stakeholders.

When Delta emerged from bankruptcy, in 2007, its leaders knew that a full recovery would depend on innovative thinking. They began by instituting an employee profit-sharing program and a unique stock ownership plan that gives 15% of the company's equity to pilots, flight attendants, ground crew members, and support staff. Delta also deepened its foreign partnerships by buying a minority stake in three overseas carriers--Aeromexico, Brazil's GOL, and Virgin Atlantic--while strengthening its existing alliance with Air France--KLM. It moved toward vertical integration by acquiring the Trainer oil refinery, outside Philadelphia--a decision that shocked both aviation and oil industry observers, but succeeded in driving down the company's fuel costs while making its executives smarter about hedging, buying, refining, and transporting fuel. And it took back its reservations system, becoming the only U.S. airline to own and control the data around it. Thanks to these and other unconventional moves, Delta is now one of the healthiest, most profitable airlines in the world.

Power clearly isn't what it used to be. We see Goliaths being toppled by Davids all around us, from the networked drivers of Uber to the crowdfunded creatives of Kickstarter. But it's difficult to understand what power actually is in this changed world, and how to gain more of it. Two fresh voices to HBR--Jeremy Heimans, cofounder of Purpose and Avaaz, and Henry Timms, director of the 92nd Street Y in New York--offer a framework for organizations seeking to effectively use the two distinct forces of "old power" and "new power." Old power, the authors argue, works like a currency. It is held by few and is zero-sum. Once gained, it is jealously guarded, and the powerful have a substantial store of it to spend. It is closed, inaccessible, and leader-driven. New power operates differently, like a current. It is made by many. It is open, participatory, and peer-driven. Like water or electricity, it's most forceful when it surges. The goal with new power is not to hoard it but to channel it. New power actors differ from old power players along two dimensions: the models they use to accumulate and exercise power and the values they embrace. Some enterprises, like Facebook, have new power models but don't seem to embrace the values; others, like Patagonia, have new power values but wield their influence using traditional old power models. This big-picture piece examines the underlying dynamics at work and looks at how power is really shifting: who has it, how it is distributed, and where it is heading.

Most executives will admit that their companies don't innovate in a reliable, orderly way. Too many breakthroughs happen only because of serendipity or individual heroism. Great ideas remain locked inside employees' heads, and the concepts that are developed often aren't the most promising. But there is a way to make innovation more systematic--without massive investments, restructuring, or even a single hire. In this article three consultants explain how a company can build a "minimum viable" innovation function, in just three months, by doing the following: Day 1-30: Define your innovation buckets, looking at how much growth innovations in your core can produce and how much will need to come from new-growth initiatives; Day 20-50: Zero in on a few strategic opportunities, after talking to customers to identify growing needs that match your capabilities; Day 20-70: Dedicate a small team to begin developing innovations; Day 45-90: Set up a committee to shepherd projects, borrowing venture capitalists' best practices. Drawing on the experiences of a financial services firm, a water utility, a hospital, and a 100-year-old nonprofit, the authors describe how to use this approach to build systems that ensure that good ideas are encouraged, identified, shared, prioritized, resourced, and developed.

The data you already have can't tell you how customers will react to innovations. To discover if a truly novel concept will succeed, you must subject it to a rigorous experiment. In most companies, tests do not adhere to scientific and statistical principles. As a result, managers often end up interpreting statistical noise as causation--and making bad decisions. To conduct experiments that are worth the expense and effort, companies need to ask themselves several questions: (1) Does the experiment have a clear purpose? Managers must figure out exactly what they want to learn in order to determine if testing is the best approach. (2) Have stakeholders made a commitment to abide by the results? Are they willing to walk away from a project if the findings suggest they should? (3) Is the experiment doable? The complexity of the variables in a business experiment and their interactions can make it difficult to determine cause-and-effect relationships. Choosing the right sample size is important. (4) How can we ensure reliable results? Randomized field trials, "blind" tests, and big data can help. (5) Have we gotten the most value out of the experiment? Conducting the experiment is just the beginning. Use the data to assess which components of a new initiative might have the highest ROI or the markets where it is most likely to be successful.

Like any corporate operation, innovation requires effective leadership. But it's a different kind than the core business calls for, involving skills and tactics many executives have yet to master. The authors' study of companies that consistently launch novel offerings and enter new markets reveals the process that successful innovation leaders follow--one that draws on risk-reduction ideas developed over the past 50 years. This process, which the authors call the innovator's method, is at heart a journey of discovery, and so the role of the person leading it is to set other people down a path and demonstrate a willingness to push boundaries and embrace uncertainty. Indeed, the innovation leader is not the chief decision maker but the chief experimenter, helping to identify critical assumptions on which new offerings are based, fashion experiments to test those assumptions with customers, and interpret the results. Preparing the organization to accept novel ideas is a crucial part of the job. Innovation leaders can do that by emphasizing that the process is aimed at minimizing the risks of innovation in the same way that other organizational processes minimize core operational risks. Finally, the innovation leader must give team members not just time (uninterrupted blocks are best) but also the resources and tools to explore the unknown.

All too often, groups fail to achieve the storied wisdom of crowds. In recent years, behavioral research has begun to identify precisely where groups go wrong. But so far this academic work has yet to have a noticeable effect on actual practice. The two main reasons for error are "informational signals" (some group members receive incorrect signals from other members) and "reputational pressures" (people silence themselves or change their views to avoid serious penalties). These two factors lead to four separate but interrelated problems: (1) Groups don't merely fail to correct their members' errors; they amplify them. (2) They fall victim to cascade effects, following the statements and actions of those who went first. (3) They become polarized, taking even more extreme positions than originally. (4) They focus on "what everybody knows," ignoring critical information that only one or two members have. The authors offer some simple suggestions for improvement: Silence the leader, "prime" critical thinking, reward group success, assign roles, appoint a devil's advocate, establish contrarian teams, and the Delphi method.

On the occasion of the 50th anniversary of the admission of women to Harvard Business School's MBA program, the authors, who have spent more than 20 years studying professional women, set out to learn what HBS graduates had to say about work and family and how their experiences, attitudes, and decisions might shed light on prevailing controversies. What their comprehensive survey revealed suggests that the conventional wisdom about women's careers doesn't always square with reality. The survey showed, for instance, that: (1) The highly educated, ambitious women and men of HBS don't differ much in terms of what they value and hope for in their lives and careers. (2) It simply isn't true that a large proportion of HBS alumnae have "opted out" to care for children. (3) Going part-time or taking a career break to care for children doesn't explain the gender gap in senior management. (4) The vast majority of women anticipated that their careers would rank equally with those of their partners. Many of them were disappointed. It is now time, the authors write, for companies to consider how they can institutionalize a level playing field for all employees, including caregivers of both genders. The misguided assumption that high-potential women are "riskier" hires than their male peers because they are apt to discard their careers after parenthood has become yet another bias for women to contend with.

A survey of 761 of the largest corporations in North America and Europe showed that the number of corporate functions had increased at about a third from 2007 to 2010. Leaders at three out of four companies believed that their functions' influence had grown. At the same time, complaints about the performance of those functions were increasing. The authors combined their survey data with insights from structured interviews at large European multibusiness organizations to understand why corporate functions so often underperform and what might be done about it. They learned that the performance of these functions may well be related to how they respond to the varying management challenges they face at different life-cycle stages. In "youth," for example, the function may not be seen as valuable by all the businesses. Its mandate may be unclear, its staffing problematic, and its efforts to get up and running overhasty. In "adolescence," the function may have a tendency to expand its activities without due regard for how that affects its relationships with the business divisions. In "maturity," when it is well established and its mandate is fairly stable, it may spend too much time benchmarking and searching for best practices, diverting attention from the needs of its internal clients. In the fourth stage, which calls for change, the function's managers may fall into the trap of looking for opportunities to redeploy their skills rather than acquiring new ones. The authors discuss these and other challenges and offer remedies.

With more and more companies doing business in far-flung places and more and more employees telecommuting, virtual teams--those made up of people in different physical locations--are on the rise. Geographic separation can make it challenging for dispersed teammates to communicate and collaborate. But evidence suggests that if virtual work groups are well managed, they can outperform teams with common office space. Consultants at Ferrazzi Greenlight believe that four elements are crucial for success: (1) The right team. Start by assembling qualified people who can work independently and flexibly. Keep the group size small, and divide the labor appropriately. (2) The right leadership. Effective managers foster trust, encourage open dialogue, and set clear goals and guidelines. (3) The right touchpoints. Virtual teammates should meet face-to-face occasionally. This is especially useful when a project kicks off, when someone new comes on board, and when key milestones or problems occur. (4) The right technology. To maximize productivity, install easy-to-use systems for conference calling, making direct calls, sending text messages, and participating in online discussion forums and virtual team rooms.

London mayor Boris Johnson has been a magazine editor and a shadow cabinet minister for the UK's Conservative Party; he is also the author of several books. In this edited interview he discusses work-life balance, influence, and ambition.

Augustin Rey, the president of Emilia, a century-old clothing retailer in Spain, is determined to revamp the company's merchandising strategy and redesign some of its dowdiest stores. He also wants to do away with discounts, circulars, and special sales, and win customers over with a strategy he calls hablar claro--"straight talk." That means the same low prices every day. At first, Emilia's financial results were outstanding. But they've since started to slip: Customer traffic is down significantly, and same-store revenue has dropped. Rey's board of directors is pressuring him to go back to the old ways. This case is based on real events at J.C. Penney and includes commentaries from Shari Rudolph, of Gabriel Brothers, and Yashodhara Shroff, of the Indian retail chain ffolio.