Why do an MBA anyway?

Alex-Scott-wee.jpgProfessor Alex Scott
Director of Learning and Teaching
Edinburgh Business School, Heriot-Watt Univeristy

If you're considering starting an MBA, do you know exactly what you're about to learn and, more importantly, what that knowledge will mean to you and your career?

An MBA is the core of business education which imparts a set of transferable management skills.  Great, but what does that mean exactly, let's start with a scenario...

A long established British manufacturer of high quality hand tools for craftsmen in the British market is going to launch a new product into the international market place; it is something of a departure from its current activities in that the new products is power driven and is aimed at the emerging do-it-yourself enthusiast.

You may think this is a fairly straightforward business move but you might well change your mind by the time we have looked at it in the light of the core disciplines.


Organisational behaviour

The introduction of a different type of product means organisational change resulting from the introduction of different skills and different production methods to the company. There will be implications for organisational design, reward and control systems. The question of whether the organisation is able to absorb new people and working methods, and whether the incentive system is aligned with these changes, needs to be addressed at an early stage. In fact, knowledge of organisational behaviour heads the list of requirements for any manager because if you cannot handle people then you are not a manager. It is as simple as that. The fact is that people run organisations, and if you have no understanding of what motivates people and how they interact in the organisational setting then you are unlikely to get an efficient response from the people you are managing. So the new product launch is not simply a marketing or production problem, it is fundamentally a people issue.


Quantitative methods

Imagine the sheer quantity of numerical information which would have been produced up to the launch of the new power tool. Technical reports, market research surveys, costing studies, stockholding estimates and much more would have passed over the manager’s desk and it is not an exaggeration to suggest that about 95% would be ignored or inspected in the most cursory manner without much in the way of real comprehension. Why should this be? It is partly because managers often miss the important point about numbers: it is not the numbers themselves which are important but the use made of them. For example, imagine the market research survey report concluded that within one year the power tool would be selling at the rate of 2000 per week. It is difficult to comment on this conclusion unless you can ask the right questions: was the sample random? Was it stratified? What is the confidence interval? The fact is that if you don’t understand basic statistical ideas you are completely at the mercy of someone who does and, as in this example, is able to present you with a single point estimate which you don’t have the knowledge to dispute.


Economics

The economist would focus on several important issues. At the macro level he would ask what is happening to the economy and large and question whether this is the right time to be investing in a new product launch. The company is now entering the international arena so it is important to consider what is likely to happen to exchange rates. In particular he would ask whether the company is likely to be competitive internationally given current and expected exchange rates. He would also look at the power tool market structure and attempt to assess the likely competitive reaction. Many managers operate under the mistaken impression that economic factors either have little impact on their business or cannot be understood by anyone anyway. However, an understanding of basic economic ideas enables you to discuss and interpret the type of question raised here; without that understanding you literally have no idea what is going on.


Marketing

Marketing is often mistakenly thought of as advertising, but advertising is simply one of many marketing tools. Marketing is the complex process of relating product characteristics to market demand and attempting to win competitive advantage in a dynamic competitive setting. So the company has to consider what are the distinguishing features of the new power tool in relation to its price; for example, if the product is similar to others on the market and is priced well below competitors it may stand a good chance of success. However, the act of setting a low price may position the product at the low end of the market in the eyes of consumers and this may not be the sector the company is targeting. This product positioning may have an effect on the reputation of the company; previously the company was an established high quality producer but launching a low price power tool into a mass market may undermine this reputation.


Finance

The financial analyst will primarily be concerned with whether the power tool is likely to add value to the company. He will assess the rate of return on the overall investment in development and launch taking into account quantifiable risk factors. It is essential to make projections of cash flows and subject them to discounting techniques when evaluating an investment of this nature. While projected cash flows are not the only important items of information the fact is that if an investment cannot be justified in financial terms then it is likely not to be worth while pursuing.


Accounting

If you are going to make cash flow predictions it is necessary to establish exactly what the costs of the new product are. But this is extremely difficult to do in practice in a company which produces more than one product. The financial analysis used to justify the investment in the first place may be seriously misleading if inappropriate accounting conventions are used. When it comes to potential competitive action, what can be learned from the published profit and loss accounts of competitors? The inability to interpret published accounts is a serious liability because it is often the only hard information available about competitors. Therefore a basic knowledge of accounting ideas is central to an understanding of both the business and its competitive environment.
 

Strategic planning

Strategic planning is a process which involves setting objectives, carrying out analysis, making strategic choice and implementing courses of action. A brief look at the strategy process in relation to the limited information provided on the power tool launch is highly revealing.

•    What is the objective the company is pursuing in launching this new product? Is it to move away from traditional hand tool products or is it to expand into international markets? These are different objectives with different implications for company action

•    Has the company carried out adequate analysis of the external and internal environment and properly identified its competitive position? It is not exactly rocket science to observe that the power tool is a new product being launched into new markets. The company is unfamiliar with the technologies and production processes involved with the power tool and is also unfamiliar with the do-it-yourself and international markets into which it will be sold. The risks associated with this high degree of unfamiliarity are bound to be high and it is as well to recognise this at the outset. Is there likely to be any synergy in production? This seems unlikely given the different skill sets required to produce high quality hand tools and high volume power tools. Indeed, does the company really have competence in the power tool market place?

•    What strategic options have been considered in the process of choice, for example is the intention to compete on the basis of low cost or differentiation? It has previously competed in a highly differentiated niche market but there is clearly much less scope for differentiation in the power tool market. Furthermore, should the company be looking for a strategic alliance to break into foreign markets rather than relying on building up its own distribution networks?

•    Has the implementation stage been planned: success factors identified, adequate resources deployed and control systems put in place?

Simply addressing the process in this way raises some awkward questions: are company objectives clear, has the appropriate analysis been carried out, are the strategic choices optimal and have resources been deployed in an effective manner? It is the strength of the strategic process which will determine success in the longer term.

So the MBA programme will provide you with the basic tools of management together with a framework within which they can be applied. If you reckon that you are ready for this type of personal development then don’t delay.