After registering, I was given a folder containing the case studies for the first week and told to report in fifteen minutes to a conference room in Spangler, the vast neo-Georgian building that forms the heart of the campus, to meet my study group. I went outside into the treacly warmth, found a bench close to the tennis courts, pulled out the first of hundreds of cases I would soon confront, and began to read. The entire HBS curriculum is made of case studies, business situations drawn from real life. The question you are expected to answer in each one is: What would you do? There are no right or wrong answers to these problems. In many cases the actions taken by the case protagonists turn out to be disastrous. The only thing that matters is how you think about the problems, how you deal with the paucity of information, the uncertainty. The hope is that long after the minutiae of accounting or bond pricing have faded to a blur, you will be left with a distinctive way of thinking and making decisions. Cases are written by members of the faculty and can range in length from a couple of pages to more than thirty. They generally include a dramatic narrative that sets up the situation, an analysis of the business under discussion, and several pages of exhibits, charts, tables, pictures, and any additional text required to illustrate the problem. My first case began: “Once upon a time many, many years ago, there lived a feudal landlord in a small province of Western Europe. The landlord, Baron Coburg, lived in a castle high on a hill. He was responsible for the well-being of many peasants who occupied the lands surrounding his castle.”
The baron had two peasants, Ivan and Frederick, whom he ordered to farm two different plots of land. He gave them seed, fertilizer, and oxen, but told them to lease a plow from Feyador the plow-maker. They returned a year later with different amounts of wheat, their oxen a year older, and their plows in different states of disrepair. The case concluded: “After they had taken their leave, the baron began to contemplate what had happened. ‘Yes,’ he thought, ‘they did well, but I wonder which one did better?’ ”
It was an accounting case, and the challenge was to help the baron answer his question by drawing up income statements and balance sheets for the two farms. Why any medieval baron given the choice between rape and plunder and bookkeeping might choose the latter beat me. But this was Harvard Business School, where even the medieval barons were different. On one of the tennis courts in front of me, two students were just beginning their warm-up. One wore a blue bandanna, the other no shirt. They began to hit, gently at first, each standing a few feet from the net, knocking the ball back and forth. I paused to watch them, hypnotized by their metronomic hitting. Slowly they worked their way deeper into each half of the court, their arms whipping through the air, the ball dropping closer and closer to the baseline. I wondered how many hours had gone into training those perfect forehands, that unerring focus on the ball traveling through the air. Within the rectangle of the court, everything was happening exactly as it should. I tucked my case study back in the folder and made my way to Spangler to meet my study group.
Sitting around a large blue table were two military veterans, a former employee of the New York City mayor’s office, a Taiwanese management consultant, and a very nervous blond woman, freshly sprung from a Boston mutual fund company. The vets seemed too big for the room, their biceps bursting out of skin-tight T-shirts, while the blonde seemed terrified and small. The New Yorker, Justin, it turned out, had grown up a few blocks from my wife. All of them, it became clear as we set to work on the baron, knew far more about business than I. They had flipped open their laptops and were ready to go. Before arriving at Harvard, I had only ever used one of the programs in Microsoft Office. That was Word. I had never opened the spreadsheet program, Excel, or the presentation program, PowerPoint. For the first few days, I decided I would stick with my trusty pencil and paper and focus on what was being said, rather than try to master new software. J. P. Morgan, after all, had never had Excel and he used to run most of the U.S. economy. I looked back at the baron’s problem. It didn’t seem that complicated: a couple of bushels here, a couple there, fertilizer, oxen, plows that undergo some wear and tear, and an exploitative feudal landlord.
“Ivan,” I volunteered after a few moments. Everyone looked up. “Ivan’s the better farmer.” I quickly explained my calculation.
“You forgot to depreciate the oxen,” said Jake, an ex-marine.
I went back to work. “Frederick,” I said a moment later.
“Did you put the full value of Ivan’s plow under ‘cost of goods sold’?” asked Jake. At this point, I decided to shut up. My entire knowledge of accounting came down to my assigned summer reading. What with having to move from Europe and everything, this reading had been skimpier than I had hoped.
“Is the baron the equity holder or a lender?” inquired Jon. He had just returned from leading combat teams into terrorized areas of Baghdad. He seemed by far the least anxious in the room. “And does anyone get charged for depleting the land with fertilizer?”
For the next hour, I scribbled away while the same handful of numbers chattered in my head like garbled code. “Twenty pounds of fertilizer are worth two bushels of wheat, an ox valued at forty bushels with ten years’ worth of work in him works for a year. Ivan still owes Feyador for the plow . . .” The numbers kept shifting beneath me. First Ivan was the better farmer, producing two thirds of a bushel more per acre than Frederick. Then Frederick nudged ahead by five sixths. It was like one of those children’s puzzles where you roll balls around a flat surface trying to get them to stay in holes, and just when you think you have all six in, the first one rolls out again.
“I’ve done some ratios,” said the blonde. “Net sales over assets shows Frederick is the better farmer.” The others nodded. But the peasants aren’t selling anything, I thought. They are simply turning their goods over to the feudal landlord. So perhaps feudal tribute over assets might be the better ratio. This wasn’t helpful.
Next up was “The Case of the Unidentified U.S. Industries.” It was our first foray into finance. From the moment I was accepted by Harvard Business School, I had been dreading finance. I was eager to learn about it, but I worried that I would be so far behind the class technically that everything would sail over my head. That first evening did nothing to boost my confidence. We were given a list of twelve industries, from a basic chemical company and a supermarket chain to a major airline and commercial bank, and an unlabeled set of balance sheet percentages and ratios. We were to match the industry to the correct set of numbers.
I had gotten the gist of ratios during my summer reading. You compared numbers from financial statements to develop insights into the quality of a business. Take inventory. Companies that need to hold inventory are constantly trying to balance the cost of storing inventory with the need to keep up with supply. It’s like any household. You want enough food to feed the family, but you don’t want so much it’s spilling out of your cupboards and going rotten before you get a chance to eat it. But then again, you might want to buy occasionally in bulk, getting things cheaper, rather than running out every day to the overpriced corner store. Or perhaps you’re a real foodie and like to buy fresh food every day. The point is that different households will have different ways of managing inventory. The only crimes are waste and undersupply. To analyze inventory management in a set of financial statements, you might start with the figures for “cost of goods sold” and “inventory.” “Cost of goods sold,” or COGS, is simply the cost to the manufacturer of the goods it has sold in a given period. “Inventory” is the cost to the manufacturer of the goods it is waiting to sell. Divide COGS by inventory and you get a pretty good idea of how fast the company is shifting product. A ratio of one tells you that the company holds exactly as much inventory as it sells in the period covered by the balance sheet. In a fresh foods market, for a balance sheet covering a year, you would expect an extremely high ratio as inventory is replenished on an almost daily basis. But in a high-end jeweler’s, that ratio might be below one, as each item is held for a long time before it finds a buyer.
“The supermarket’s going to have the highest inventory turnover,” said Jon.
“Or the meat packer,” said Jake.
“The commercial bank will probably have the most current assets and liabilities for deposits and withdrawals,” said the Taiwanese. I could tell Justin was as baffled as I was, from the way he kept tugging at his hair and chin.
“Wow,” I exclaimed. “I wonder who could make 16.7 percent profit margins. Jewelry stores?” I was just trying to say something.
Everyone kept scanning the numbers, trying to find meaning. We looked at debt over assets. A company with lots of fixed assets, like factories, would most likely have more debt than an advertising agency, whose main assets were human beings. It is one of the least appealing features of company accounts, and perhaps their greatest flaw, that humans appear only as costs on income statements, never as assets on a balance sheet. Unlike a factory, humans, of course, can get up and walk out the door at any time, hence banks’ reluctance to lend to advertising agencies, law firms, or architectural practices. No chemical plant is going to say to hell with it, default on its loan, and go join an ashram.
We squinted at net sales over net assets, trying to figure out which companies were generating the most sales from their assets. Again, the ad agency, with nothing but some rented office space and few assets, should have had a high ratio, indicating lots of sales from few assets, whereas the manufacturer would have had a lower one. After an hour, we thought we had nailed down half of them. After two hours, we were up to eight. As the third hour rolled by, it felt as if we would never get there. Just when we thought we had identified the airline, it started to look like the automaker again. Or could it be the maker of name-brand quality men’s apparel?
I was beginning to feel what would become a familiar set of sensations. The life-sapping effect of fluorescent lighting. The vague stench of Styrofoam and Chinese noodles drifting up from the waste basket. Dehydration and itching skin. The realization that half the people in the room were checking e-mail and surfing the Web, which explained why any question lingered in the air for seconds before stimulating an answer. Through the window, I could see the hulking shadow of Harvard Stadium in the blue-black night. What had begun as a rat-a-tat exchange of thoughts had slowed to dreamlike speed. Words and ideas drifted between us in slow motion. It was nearly midnight when we gave up.
The air was still hot and thick when I walked out to my car. I drove home to our new apartment in West Cambridge, ten minutes from the business school. There was no one on the streets, and for the first time in a decade I wasn’t living in a major city. My dog, Scarlett, greeted me at the door. She had been waiting patiently on the steps in the dark, and the moment I arrived she burst out to pee on the sidewalk. The lock on the front door was broken. It was unsettling sleeping in an empty apartment in a town I barely knew. My life had been reduced to school and this room with an air mattress on the floor and a picnic table from Costco in the corner. I lay there hearing every single noise, a tree branch scratching against my window, the cars passing outside, their lights shining on the ceiling above me. It took me hours to get to sleep that night as a single question churned around my mind: What have I done?
We rejoined the battle the next morning at seven. The Spangler meeting rooms were jammed with Math Campers struggling with the as-yet unidentified industries. Their enthusiasm for the task was staggering. The halls rang with discussions of profit margins and leverage ratios. Banks, I heard someone say authoritatively, tended to have huge short-term liabilities—otherwise known as the money in their customers’ accounts, which could be withdrawn at any time—and similarly huge amounts of receivables, or loans made to its customers. For banks, loans are assets, while the money it holds for its customers is a liability. It took me a while to get this straight. The money they have is a liability, whereas the money they have given away is an asset. But once I had figured it out, I looked at my unidentified industries and there it was, leaping out at me, the bank! Finally I had something to offer my group. I raced into the room with my discovery, but they had already figured this out. It was a relief to go to class.
There are two main classroom buildings at HBS, Aldrich and Hawes, which contain thirty or so almost identical classrooms. Aldrich is named after Senator Nelson Aldrich, a lavishly mustachioed Rhode Islander, whose daughter married John D. Rockefeller, Jr. Rod Hawes graduated from HBS in 1969 and made his fortune in insurance. He built and sold Life Re Corporation of America and has since diverted much of his fortune into philanthropy. In each of the classrooms ninety or so seats ascended in five semicircular rows, divided by two aisles. A few of the rooms had tall windows looking out onto campus, but most had none at all. Sitting in these windowless, temperature-controlled, mercilessly lit rooms was like being in a casino, with no sense of the world outside, immune to time and nature. We were each allotted two laptop widths of space along the curving desks and a swiveling office chair upholstered in purple. When we arrived in class at our assigned seats, we had to slide a white laminated card printed with our names into a slot in front of our place so the professors could identify us. Tucked under each desk were plugs for our computers. To my right was Laurie, an Alaskan with a doctorate in chemistry who previously ran a research center for a biotech company. To my left was Ben, a former employee of the New York City Parks Department. Laurie would spend the two weeks of Math Camp in a state of staring-eyed terror. Despite her obvious brilliance, she dreaded being called on by a professor. Give her a molecule to decompose, she said, she would decompose it, recompose it, and tie it up with a bow. Ask her for an accounting ratio, and she dissolved into a puddle. Ben was much calmer. He wore a beard and sandals and had spent the previous two weeks hiking the Appalachian Trail. Like me, he seemed allergic to his computer and took his notes in longhand. But he evidently had one of those clear, logical minds that would lend itself well to this place. Occupying the lower two thirds of my view was the thick buzz-cut neck of a former marine. For several hours a day, for the next two weeks, his surreal muscles flexed and twitched inches from my face, distracting me from the weighted average cost of capital and decision trees.