The 12-Week MBA Chapter 10: Creating Value - How Every Manager Connects to the Big Picture
Nobody wakes up in the morning and says, “Honey, today was a win. We created a million dollars of value by nudging the cost of capital down by 0.005 percent!” But somehow, every single manager in every company is connected to value creation. Chapter 10 explains how.
This is post 12 in my 12-Week MBA retelling series.
This is the final chapter of Part I, and it ties together everything we have covered about profitability, growth, risk, cash flow, cost structures, and valuation. The big question is simple: where do you fit in?
The Netflix Crash, Revisited
The authors bring back the Netflix example from Chapter 9 to show how value shifts in the real world. On April 19, 2022, Netflix stock dropped from $348 to $226 in a single day after reporting 200,000 lost subscribers. How could the value of a company change that much in a matter of hours?
They break it down into four factors that were running through investors’ minds.
Revised forecasts. The bad news was not just the 200,000 lost subscribers. Three months earlier, Netflix had predicted growth of 2.5 million new subscribers for that quarter. So investors were not just processing the loss. They were processing the gap between what was promised and what happened. All those projected future subscribers and their monthly payments disappeared from the valuation model.
Surprise. It was not only that the numbers were bad. Netflix executives did not see it coming. The swing from plus 2.5 million to minus 200,000 shattered confidence in management’s ability to forecast demand. And confidence is a big part of what keeps the cost of capital low. When investors stop trusting your predictions, the discount rate goes up and the company value goes down.
The subscription model looked weaker. Streaming subscriptions are not locked in. You can cancel any time. As long as net new subscribers kept growing, investors assumed subscriptions were sticky. One bad quarter forced everyone to question that assumption. With Disney+, Amazon Prime, and others competing for the same eyeballs, switching costs are basically zero.
Entertainment is unpredictable. Netflix had just scored a massive hit with Squid Game in 2021, which made everything look rosy. But creating must-see content is expensive and impossible to predict. Nobody at Netflix expected a violent Korean series to become their biggest global hit. The subscriber loss suggested the previous quarter’s good numbers might have been a sugar high, not a sustainable trend.
All of these factors feed directly into the DCF framework. Projected cash flows got smaller. Confidence dropped. Risk went up. The intrinsic value fell.
Where Do You Fit In?
Most managers understand how they affect sales and expenses. Your salary shows up on a line item. If you are in sales, your deals show up as revenue. If you manage a budget, your spending shows up as costs. The connection to cash flow is usually pretty clear.
But do you affect the cost of capital? The authors say yes, but not in any way you could measure. The cost of capital gets expressed with maybe two decimal points of precision. Any single action you take has a tiny and unmeasurable effect that gets swamped by bigger forces like investor sentiment, central bank policy, and whatever news is trending that day.
Still, the connection is real. Think about it this way.
If you are in sales and about to close a huge deal that increases your territory by a third, that is great. But what consequences does it have? Will it require stepping up fixed costs in ways that increase risk? Will it demand new long-term investments that consume cash? How dependent will the company become on that one contract?
If you are in production and have an idea for an investment that saves costs, that sounds like a no-brainer. But are your cost savings estimates based on a product whose market is shrinking? Could the cash your project would consume be better spent on attracting new customers?
If you are in HR and struggling to get budget for talent development, could you make a stronger case by showing how your programs reduce risk? Not just building skills, but preventing the loss of key employees to competitors?
Every function, every level, every decision involves trade-offs between profitability, growth, and risk. That is what makes management interesting and also what makes it hard.
The Trust Chain
Here is the part I found most interesting in this chapter. The authors describe a chain of trust that runs from individual managers all the way up to investors.
Investors rely on information shared by executives. But executives know nothing they have not learned from the network of information collection and interpretation called management. The value investors claim is built on trust in executives.
Executives may seem all-powerful, but their power comes from their ability to make promises to investors and then keep those promises. They can neither keep promises nor know what promises to make on their own.
Managers at all levels are the ones who actually produce results and generate the information that flows upward. Your reports, your forecasts, your reliability in hitting targets. All of it feeds into the story executives tell investors.
Day-to-day value creation, the authors write, boils down to the ability of managers at all levels to marshal the resources they control to grow the company and make it more profitable while channeling the information that executives use to shape shareholder expectations.
Trust lies at the heart of value. Trusting relationships between people. This sets up Part II of the book, which is all about the human side of management.
Evaluating Projects Like a Mini-Company
You might never value an entire company, but you will probably pitch an investment project at some point. Maybe you have an idea that requires spending money now to save money later, or to generate new revenue over several years.
The authors say the evaluation framework is exactly the same as company valuation:
- Map out all expected cash flows, positive and negative
- Add up each year’s inflows and outflows to a net figure
- Discount each annual net cash flow using the cost of capital
- Add up the result
That result is called the net present value (NPV). If NPV is positive, the project earns more than the cost of capital. Green light. If NPV is negative, it does not earn enough to justify the risk. Red light.
But here is what the authors say matters more than the NPV calculation itself. Senior leaders will be more impressed by how thoroughly you prepared your model than by the final number. They want to know:
- Does this project align with company strategy?
- What assumptions did you bake in? How robust are they?
- Did you consider impacts on working capital, not just sales and expenses?
- What does the worst case look like? The best case?
If you can answer those questions well, calculating the NPV is practically an afterthought. A couple of keystrokes in a spreadsheet.
Shareholder Value and Stakeholder Value
The authors end Part I with a thoughtful note about the limits of valuation. The intrinsic value formula is not some cosmic truth. The inputs are a mix of historical data, educated guesses, and work borrowed from other people who were also guessing. What we are measuring is itself squishy: a shareholder’s perceived value in an uncertain claim on future cash flows.
But valuation tools are still useful. Not because they give precise answers, but because they reveal the direction and trade-offs of business decisions.
And there is a bigger picture. It is not just shareholders who have a stake in a company. Customers get products they could not make themselves. Employees find meaningful work. Communities benefit from economic activity. The environment is affected by what companies do.
The authors make a subtle but important argument: the long-term orientation baked into valuation naturally pushes toward stakeholder value. To create shareholder value, you need confidence in an indefinitely long stream of future cash flows. You cannot get that by burning out employees, cheating suppliers, or destroying the environment. Those things create unpredictability, and unpredictability destroys value.
A company that keeps generating cash flows indefinitely has to keep creating customer value year after year. It has to treat vendors and employees well enough that they do not fold or leave. And there has to be a future worth operating in, one not wrecked by war, disease, or environmental collapse.
Is this a perfect argument? No. Managers can and do goose short-term valuations in unsustainable ways. But the long-term perspective embedded in DCF analysis is, as the authors put it, “a decent way to get a glimpse of stakeholder value.”
Key Takeaway
You do not need a finance degree to create value. You create value every day through the decisions you make, the information you share, and the results you deliver. All of those things feed into the three drivers of company value: profitability, growth, and risk.
The most important insight from this chapter is that trust is the foundation of all of it. Investors trust executives. Executives trust managers. And that trust is built on reliable results and honest information flowing in every direction across the organization.
Part I is done. We now understand how money flows through a business and how value gets created. Part II shifts to the human side: how do you actually get people to work together effectively?
Book: The 12-Week MBA by Nathan Kracklauer & Bjorn Billhardt | ISBN: 978-0-306-83236-9
Previous: Chapter 9 - Valuation Foundations
Next up: Chapter 11 - Joy and Frustration - The human side of management.
Part of the 12-Week MBA retelling series