Understanding and Influencing Operations as an Investor - Harvard Business School MBA Program

Understanding and Influencing Operations as an Investor

Course Number 2135

Assistant Professor Nikolaos Trichakis
Spring; Q3; 1.5 credits
14 sessions
Option of exam or paper

Career Focus

This course is designed to impart to students who plan to become investors an understanding of firms' operations, and to students, including entrepreneurs, planning to operate companies an understanding of how to interface with investors. The course also serves students who simply want to develop a broader view and deeper understanding of operations management and analytics, as it will expose them to important concepts and tools such as dynamic pricing, decision making under uncertainty, optimization and risk management.

Educational Objectives

The course blends the operators' perspective widely adopted by courses in operations management with the perspective of investors. By "operators" is meant executives who exercise significant decision rights over operational activities, by "investors," fund-managers and firms that invest in debt and (public or private) equity markets with limited access to information (e.g., to financial statements and other publicly available data and news sources), and typically lacking decision rights concerning firms' operations.

The course explores two underlying themes related to (1) understanding and influencing operations, and (2) understanding and influencing investors.

The first theme is concerned with evaluating operational performance from the investor perspective. Investors need to be able to assess operating capabilities and strengths well before their impact becomes apparent on a firm's bottom line. For example, could Toyota's market cap growth over the past 20-30 years have been predicted in the 1980s (when its market cap lagged, but operational performance was superior to, GM's)? How can investors assess operating flexibility and supply chain resilience? The latter are examples of emerging capabilities firms make significant investments to develop, particularly in the face of market volatility and in the wake of recent natural disasters. How should investors reward such investments even before they have begun to impact the firm's bottom-line favorably?

The second theme is concerned with investors' impact on operators' decisions. Owing to the limited information available to investors, a firm's short-term valuation (e.g., as reflected in stock market prices) may differ from its true value. As decisions that maximize intrinsic value often do not maximize the firm's short-term valuation, how should a manager trade-off these competing demands? Should the manager ignore the short-term valuation and make choices that maximize the firm's long-term value or vice versa?

Content and Organization

The course grade is based on class participation and an exam or a paper. The course comprises three modules:

Module 1: Operations Forensics. In this module, students learn how investors can leverage operational indicators (e.g., utilization and inventory turns) to predict future performance, and examine the informational advantage that accrues to investors from studying operations and impact of information asymmetry on investors and operators.

Module 2: Operations-based Valuation. In this module, students are acquainted with frameworks that can be used to evaluate operating capabilities and concepts like flexibility, scarce resources, and investment optionality. Students are introduced to basic analytical tools associated with dynamic pricing, optimization, decision making under uncertainty, and real option valuation.

Module 3: Operational Risk. In this module, students are familiarized with ways of assessing, and hedging against, operational risk, as by leveraging financial instruments or operating capabilities. The module illustrates how financing vehicles that account for operational risk can be structured in ways that yield benefits for all stakeholders.