Cheat Sheet: every formula and must-know list

Porter: Five Forces

1. Rivalry among existing competitors
2. Bargaining power of buyers
3. Bargaining power of suppliers
4. Threat of substitutes
5. Threat of new entrants

Stronger force → lower price and/or higher cost → less attractive to incumbents. Analyze from the incumbent's view.
Buyers/suppliers are powerful if: large and concentrated; the industry needs them more than they need it; switching costs favor them; differentiation favors them; they can credibly vertically integrate.
Buyers are price-sensitive when the product is undifferentiated, expensive relative to their costs/income, or inconsequential to their own performance.
Entry barriers: economies of scale, switching costs, network effects, capital needed, incumbency advantages (brand, location, channels), government policy, expected retaliation.
Rivalry is high when: many equal competitors, slow growth, high exit barriers, irrational commitment. Price competition is likely when products are hard to tell apart, switching costs are low, fixed costs are high, capacity comes in large increments, or the product is perishable.
Not forces: regulation, technology, growth, complements. They matter only through the five forces. 🧠 "Really Big Sharks Sink Newbies": Rivalry, Buyers, Suppliers, Substitutes, New entrants

Porter: competitive advantage & value chain

CA = higher relative price and/or lower relative cost, measured against rivals in the same industry. Right measure: ROIC. Wrong measures: return on sales, growth, short-term share price, market share.
Value chain analysis: ① lay out the industry value chain ② compare yours to it ③ zero in on price drivers ④ zero in on cost drivers.
Operational effectiveness (doing the same things better) ≠ strategy (doing different things or doing things differently). Best practices get copied.

Porter: 5 tests of a good strategy

1. Distinctive value proposition: which customers? which needs? what relative price?
2. Tailored value chain (needs limits; you can't be all things to all people)
3. Trade-offs different from rivals. They arise from incompatible features, activity conflicts, and image inconsistency (Ferrari minivan).
4. Fit: ① consistency ② reinforcing ③ substitution (Zara stores replace advertising). Fit amplifies CA and sustains it.
5. Continuity: reinforces identity, helps suppliers/channels, builds capabilities

Strategy must change when: customer needs change; innovation invalidates the trade-offs; a breakthrough trumps the value proposition. 🧠 "Very Vain Toddlers Fight Constantly": Value prop, Value chain, Trade-offs, Fit, Continuity. Trade-offs "F-A-I" (Features, Activities, Image). Fit "CCS". Change triggers "NTB: Need To Bolt"

Hitt Ch 1: three models

I/O (external): industry determines returns. 4 assumptions: the environment constrains strategy; firms have similar resources; resources are mobile; decision makers are rational.
Resource-based (internal): unique resources and capabilities. Advantage requires VRIN: Valuable, Rare, costly to Imitate, Non-substitutable.
Stakeholder: internal/external, primary/secondary. Distributional justice; trust. These are three lenses, not contradictions.

Hitt Ch 4: business-level strategies

Cost leadership · Differentiation · Focused cost leadership · Focused differentiation · Integrated cost leadership/differentiation
Customers: who, what needs, how (≈ Porter's VP). Reach, richness, affiliation.
Risks: cost leader: process obsolete, loses sight of customers, imitation. Differentiator: price gap too big, imitation, experience narrows perceived value, counterfeits. Focus: out-focused, copied, niche evaporates. Integrated: stuck in the middle, hard to execute, may need alliances/acquisitions, needs a long-term view.
Integrated tools: flexible manufacturing systems, information networks (CRM), TQM.
Business models: franchise, subscription, digital platform.

Hitt Ch 6: corporate-level / diversification

Levels: single business ≥95% of revenue · dominant 70–95% · related constrained (<70%, all linked) · related linked (<70%, limited links) · unrelated (<70%, no links)
Value-creating: economies of scope (sharing activities = operational relatedness; transferring core competencies = corporate relatedness); market power (multipoint competition, vertical integration); financial economies (internal capital allocation, restructuring)
Value-neutral: antitrust, tax laws, low performance, uncertain future cash flows, risk reduction, tangible/intangible resources
Value-reducing: diversifying managerial employment risk, increasing managerial compensation

Hitt Ch 7: M&A

Reasons (7): increased market power (horizontal/vertical/related), overcome entry barriers, cost of new product development and speed to market, lower risk vs developing in-house, increased diversification, reshape competitive scope, learn new capabilities
Problems: integration difficulties, inadequate evaluation (due diligence), large/extraordinary debt, inability to achieve synergy, too much diversification, managers overly focused on acquisitions, firm too large
Effective: complementary assets, friendly deal, careful due diligence, financial slack, low-to-moderate debt, R&D emphasis, flexibility in managing change
Market power ≠ market share. 🧠 Reasons: "My Old Car Leaks, I Repair Later". Problems: "3 I's, 2 D's, M, L"

Hitt Ch 9: cooperative strategy

Types: joint venture (new independent company) · equity alliance (different ownership %) · non-equity alliance (contract: licensing, outsourcing; not suited to complex knowledge transfer)
Slow-cycle: enter restricted markets, set up franchises. Fast-cycle: speed to market, share R&D risk. Standard-cycle: complementary resources, scale, pool capital, learn.
Business-level: complementary (vertical = best success odds / horizontal), competition response, uncertainty reducing, competition reducing (collusion, mostly illegal; tacit collusion; mutual forbearance)
Corporate-level: diversifying, synergistic, franchising. Also international (cross-border) and network (stable vs dynamic).
Risks: inadequate contracts, misrepresented competencies, partner fails to use complementary resources, being held hostage. Manage via cost-minimization (contracts) vs opportunity-maximization (trust).

101 DICE (also Obj 3)

DICE = D + 2·I + 2·C₁ + C₂ + E D (time between reviews): <2 mo = 1 · 2–4 = 2 · 4–8 = 3 · >8 = 4
I (team integrity): capable, respected leader + skilled, motivated team + ≥50% of time = 1 … lacking all = 4
C₁ (senior commitment): clearly communicated = 1 · neutral = 2–3 · reluctant = 4
C₂ (local commitment): eager = 1 · willing = 2 · reluctant = 3–4
E (extra effort): <10% = 1 · 10–20% = 2 · 20–40% = 3 · >40% = 4
7–14 high chance of success · 15–16 risks rising · 17+ worry zone. Lower is better.

107 Operating model & 108 Short ↔ long

12 elements: purpose, value agenda, structure, ecosystem, leadership, governance, processes, technology, behaviors, rewards, footprint, talent → the "fingerprint"
4 outcomes: clarity, speed, skills, commitment
Redesign: document the current fingerprint → compare to successful fingerprints → refine (adjacent) or remake (new) → commit to outcomes and a path
108: Governance (influential, involved leadership + a strong FP&A team) · Processes (nimble: strategic plan ≤3 months, budget ≤2 months, in-year reallocation) · Analytics (rigorous, standardized, consistent ranking) · Decision-making (de-bias: avoid consensus-groupthink and loss aversion, reward noble failures, more voices) 🧠 108 = "GPAD: Good Plans Are Decisive". 4 outcomes: clarity, speed, skills, commitment

Budgeting Ch 2: strategy map & BSC

4 barriers: vision (only 5% understand the strategy), management (little exec discussion), resource (budget not linked), people (incentives not linked)
4 perspectives (read bottom → top): Learning & Growth → Internal Processes → Customer → Financial. Internal strategies: customer service excellence, technology leadership, operational excellence.
Measures: lead (early warning) vs lag (rear-view); efficiency (process) vs effectiveness (output); surveys, %, rankings, time
5 BSC components: Objective, Measure, Target, Sponsor, Initiative
Run financial and BSC budgets in parallel; break annual targets into quarter/month/week; link job descriptions and bonuses to the BSC.

Budgeting Ch 29: CPM 5 steps

1. Define the measures needed to implement the strategy (base measures, assumptions, KPIs incl. leading indicators, person responsible)
2. Define additional measures for reporting
3. Group measures into related schedules
4. Identify model structures (organizational/geographic)
5. Define how the strategy is presented to users

Review questions: which tactics do we fund? Which can't be done within limits? What do budget-holders say? If we cut, which tactics go, and what does that do to the strategy?

Budgeting Ch 30: ZBB

Traditional budgeting problems: requests exceed funds; long-term goals hard to translate into action; problems and alternatives not identified; hard to adjust; trade-offs not visible
5 elements: identify objectives · evaluate alternative means · evaluate alternative funding levels (eliminate / reduced / current / increased) with cost-benefit · evaluate workload and performance measures · establish priorities
4 steps: identify decision units → analyze each in a decision package → evaluate and rank all packages → prepare detailed budgets
Decision units are discretionary activities only, not direct labor, material, or fixed overhead.
Package contents: purpose, actions, costs and benefits, workload/performance measures, alternative methods, levels of effort
Why a minimum level: forces in-depth evaluation, frees funds for other programs
Changing situation: adjust labor/material/overhead → identify affected packages → modify rankings → add/delete packages in priority order 🧠 5 elements "OAF-WP": "Only A Fool Wastes Pennies" (Objectives, Alternatives, Funding levels, Workload, Priorities)

Koller Ch 13 & 109 FP&A

Steady state: constant growth with a constant reinvestment rate, and a constant return on existing and new capital. Explicit forecast 10–15 years (5 is too short). Detailed 5–7 years, then simplified (growth, margin, capital turnover).
7 worksheets: raw data, integrated statements, historical analysis and ratios, market data/WACC, reorganized statements, ROIC and FCF, valuation summary
Advanced issues: nonfinancial drivers, fixed vs variable costs (almost all are variable long-run), inflation (nominal throughout) Expected inflation = (1 + nominal) / (1 + real) − 1 109's six: ① probabilities on all assumptions (one model owner) ② true momentum case, then initiatives layered on top ③ bear case (1-in-3 or 1-in-4) ④ consistent, sourced macro ⑤ disaggregated inflation ⑥ relentless back-testing

Koller Ch 3: value creation

g = ROIC × IR    FCF = NOPAT × (1 − g/ROIC) Value = NOPAT₁(1 − g/RONIC) / (WACC − g) = FCF₁ / (WACC − g) Value/NOPAT = (1 − g/ROIC)/(WACC − g)   Value/IC = ROIC(1 − g/ROIC)/(WACC − g) EP = IC × (ROIC − WACC)   Value = IC₀ + PV(EP) Value Inc. (ROIC 20%, IR 25%) = 1,500 vs Volume Inc. (ROIC 10%, IR 50%) = 1,000, both growing 5% at a 10% WACC.
ROIC > WACC: growth adds value. ROIC < WACC: growth destroys it. High-ROIC firms should grow; low-ROIC firms should fix ROIC.
Conservation of value: no change in cash flows means no value created (buybacks, accounting changes, financial engineering, sale-leasebacks), except for tax shields and behavioral effects of debt.

Koller Ch 16: EV → equity

Value of operations + non-operating assets = EV; EV − non-equity claims = equity; ÷ shares = value per share.
Non-operating assets: excess cash and securities (book value), nonconsolidated investments (market value if listed, else DCF, CFE at k_e, multiples, or a tracking portfolio), loans to others, finance subsidiaries (value as a bank; don't subtract their debt again), discontinued operations, excess real estate, excess pension assets (net of tax), tax-loss carry-forwards (DCF of tax savings)
Non-equity claims: debt, debt equivalents (unfunded pensions), hybrids (convertibles, options), minority interests
Don't treat real estate needed for operations as non-operating.

Koller Ch 18: multiples

5 principles: ① sum of the parts ② forward earnings ③ net EV/EBITA or net EV/NOPAT ④ adjust for non-operating items ⑤ the right peer group (similar ROIC and growth, not an industry average)
P/E is distorted by capital structure and non-operating items. EBIT is distorted by acquired-intangible amortization (the A+B example: 10× EBITA becomes 16× EBIT). EBITDA can mislead when capex differs or assets are leased. Use NOPAT when tax rates differ.
Alternatives: EV/revenue (start-ups, volatile margins), PEG (horizon arbitrary, ignores ROIC), invested-capital multiples (banks, regulated RAB), operating metrics (subscribers; must link to ROIC and growth)

Koller Ch 32: divestitures

Value created = Price − Value forgone − Separation costs = Price − Standalone value − Lost synergies − Disentanglement costs − Stranded costs Divest when another owner can extract more value. EPS and P/E changes are irrelevant, and they depend on use of proceeds: hold cash (most dilutive) > repay debt > buy back shares (least dilutive), or invest.
Private: sale, JV (captures a premium; may be taxable). Public: IPO, carve-out (minority IPO), spin-off (shares to existing holders), split-off (exchange offer), tracking stock. Only IPOs and carve-outs raise cash.

Koller Ch 43: banks

Income: net interest, fee and commission, trading, other. Use equity DCF, because operations and financing can't be separated. CFE = NI − ΔE + OCI Equity value = NI₁(1 − g/RONE)/(k_e − g) = E(ROE − g)/(k_e − g) if RONE = ROE k_e = r_f + β·MRP (4.5% + 1.1×5% = 10%) CET1 minimum ≈ 8–10.5% of RWA (target ≈ 13%). RWA = credit + market + operational risk.
Pitfalls: sources of value creation, leverage/business risk in k_e, tax penalty on equity capital (= equity × t, e.g. $50m × 30% = $15m)
Complications: loan loss provisions (through-the-cycle), different value drivers for interest, trading and fee businesses. Use scenarios.

Damodaran Ch 13: control

Value of control = Optimal value − Status quo value Market value = SQ + (Optimal − SQ) × P(mgmt change) Nonvoting share = SQ/(n_v + n_nv)   Voting share = SQ/(n_v + n_nv) + (Opt − SQ) × P / n_v FCFF = EBIT(1 − t)(1 − reinvestment rate) g_{new inv} = reinvestment rate × ROC   g_efficiency = (ROC_t − ROC_t−1)/ROC_t−1 5 determinants: CF from existing assets, growth rate in the high-growth period, length of high growth, cost of capital, cash/cross-holdings/non-operating assets
Raise value: increase cash flow from existing assets (redeploy, efficiency, taxes, less working capital/capex), increase growth (reinvestment rate × ROC), lengthen high growth (barriers), cut financing cost, manage non-operating assets
4 mechanisms: moral suasion, proxy contest, board changes management, hostile takeover
Private firms: minority ≈ status quo value, majority ≈ optimal value. Control doesn't always need 51%.

Damodaran Ch 15: synergy

Operating: economies of scale, pricing power, combined functional strengths, higher growth. Cost synergies are bounded; growth synergies are unbounded.
Financial: cash slack (add the NPV of projects that would otherwise be rejected), tax benefits (e.g. 40% × $1bn of losses = $400m), debt capacity (less correlated cash flows), diversification (no value for public firms)
3 steps: value each firm alone → sum them (no synergy) → value the combined firm with synergy. The difference is the synergy.
Dubious: accretive EPS, "quick growth" (depends on the price paid)
Errors: subsidizing target shareholders, wrong discount rate (use the combined firm's rate; never riskless), mixing control and synergy (value control first)
Why overpay: biased bankers, hubris, no synergy plan

110 Hitchner: premiums & discounts

Levels of value (top → bottom): synergistic/strategic control → control stand-alone → marketable minority (as-if-freely-traded) → non-marketable minority. Order: apply DLOC first, then DLOM. Discounts multiply: 1 − (1 − 20%)(1 − 20%) = 36% DLOC = 1 − 1/(1 + Control premium) Liquid (actively traded public stock) · Marketable illiquid (blocks, thin trading, restricted stock, control interests public or private, real estate, M&E) · Non-marketable (minority stake in a private company)
Entity-level discounts: key person, contingent liabilities and litigation, small company, non-homogeneous assets, customer/supplier concentration, blockage
Acquisition premiums mix control and synergy, so they overstate control premiums. DLOM on a controlling interest is debated (≈0–20%).

Which optimization type?

Linear: objective and constraints linear in the decision variables.
Nonlinear: products of variables (price × quantity), variance/covariance (portfolios), distances (location), demand curves.
Discrete: yes/no choices, whole units, fixed setup costs, either/or, "at most k of n". Binary, integer, or mixed.
Simulation: several random inputs combined, with no closed form. It estimates distributions but doesn't optimize.

Ch 5: simulation

Discrete sampling: split [0,1) into intervals with widths equal to the probabilities; map each uniform U to its interval.
Continuous: solve F(y) = P(Y ≤ y) = U. For a normal, y = μ + σ·Φ⁻¹(U).
Outputs: distribution shapes, P(events), means and standard deviations. CI for the mean: x̄ ± 1.96 s/√n.
Managerial confidence: understanding the problem, using probability correctly, communicating it.

Ch 7: linear optimization

Decision variables · objective function · constraints (resource, capacity, quality, policy) · non-negativity. Count every revenue and cost once; ignore sunk/fixed costs.
Graphical method: non-negativity → constraints → feasible region → objective isoquants → optimal corner.
Binding: holds with equality at the optimum. Feasible region is a polygon. Outcomes: multiple optima / unbounded / infeasible.
Shadow price = change in the optimal objective per +1 unit of RHS, valid only within the allowable range. Units = objective unit per constraint unit. Non-binding constraints have a shadow price of 0.
Two-stage under uncertainty: stage-1 decisions → enumerate states and probabilities → variables per state → constraints per state → objective = today's terms + expected future terms.

Ch 8: nonlinear · Ch 9: discrete

NLP: portfolio (minimize variance s.t. return ≥ target, Σw = 1), production/pricing, facility location. The optimum may be interior. Local ≠ global, unless it's convex minimization or concave maximization (linear equalities; ≤ constraints convex; ≥ constraints concave). Shadow prices hold only for tiny changes.
Branch & bound: relax to 0 ≤ x ≤ 1 → branch on a fractional variable (=0 / =1) → a node goes inactive if binary, infeasible, or no better than the incumbent.
Binary tricks: if A then B: x_B ≥ x_A · at most k: Σx ≤ k · mutually exclusive: x_A + x_B ≤ 1 · fixed charge: x ≤ M·y, cost includes F·y

111 Deciding How to Decide

Two questions: do I have a causal model? Can I predict the outcomes and their probabilities? (Plus: is the information centralized?)

Situation	Tool
1 Causal ✓, outcome predictable (new US store location)	Capital budgeting: DCF, NPV, expected return
2 Causal ✓, range + probabilities (new sandwich)	Quantitative scenarios: Monte Carlo, decision analysis, real options (pilot)
3 Causal ✓, can't predict (emerging market)	Qualitative scenarios + case-based
4 Causal ✗, range predictable (consulting business)	Case-based
5 Causal ✗, can't predict (obesity backlash)	Case-based

Aggregation tools: Delphi, prediction markets (need a specified outcome range), incentivized estimates, similarity-based forecasting
Complications: executives don't know what they don't know, cognitive bias, organizational processes, reliance on a single tool, ignoring the option to delay (iterative experimentation)

112 MINDSPACE

Messenger · Incentives (loss avoidance) · Norms · Defaults · Salience · Priming · Affect · Commitments · Ego
System 1 is fast, automatic, intuitive. System 2 is slow, deliberate. De-biasing only reaches System 2, so change the context instead of trying to change minds (e.g. CV-blind hiring to counter Oxbridge salience; blue vs red proposal covers as a prime).

113 Bazerman Ch 12: 7 strategies

1. Use decision-analysis tools (linear models beat intuition, which suffers from affect, representativeness and correspondence bias)
2. Acquire expertise, not just experience (judge the process, not the outcome)
3. De-bias: unfreeze → change (clarify, explain roots, reassure) → refreeze. "Consider the opposite."
4. Reason analogically
5. Take an outsider's view
6. Understand biases in others (context → biases → adjust)
7. Nudge (opt-out organ donation ≈ 96% vs opt-in ≈ 4%)

🧠 "The Expert Doctor Always Offers Useful Nudges": Tools, Expertise, De-bias, Analogies, Outsider, Understand others, Nudge

105 Capital bias

Optimism (survey past estimates vs actuals; use data, not narratives) · Expert (seek multiple experts) · Narrow framing (company-aligned metrics; look at all projects together).
Process fixes: how are proposals submitted? (diverse sources) How are they assessed? (consistent, objective metrics). Examples: US Navy cost/energy metrics; telecom risk-adjusted benefit vs cost.

106 Hardy Ch 19: bias catalogue

Self-deception: over-precision, overconfidence (over-estimation, over-placement; impostor syndrome is the opposite), self-attribution, optimism, hindsight, outcome
Information processing: confirmation, framing, anchoring, conservatism, availability, recency, representativeness, gambler's fallacy
Social: groupthink, polarization, endowment, authority, conformity/herding (information cascade), loss aversion, sunk cost, regret aversion, disposition effect, ambiguity aversion, status quo, inertia, hyperbolic discounting, probability distortion
Cohesion × conformity: high cohesion + low conformity is best. High cohesion drifts toward high conformity over time. 🧠 "Me, my Mind, my Mob": Self-deception, Information processing, Social

Overcoming bias (Hardy 19.4)

Metacognition · devil's advocate · board challenges the CEO · decision rules (written input before and after) · no early solutions · change group membership · involve outsiders · encourage debate · discuss individually · avoid narcissists · diversity · ethics and responsibility · evaluate individually in advance · realistic time · objective data (beware information bias) · reframe · transparency (front-page) test · plausible worst case
Answer template: bias → precise error in this situation → consequence → specific fix.