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Book Review: The Three Rules by Michael Raynor and Mumtaz Ahmed

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The Three Rules: How Exceptional Companies Think by Michael Raynor and Mumtaz Ahmed is an important book which has applicability mainly to manufacturing companies. The book spends little or no time on financial companies, derivative products or the inter-market analysis impacting decision-making for the global exchanges.

The authors discuss the three main drivers of performance; namely, value, revenue before cost and no other rules. The book explains how Merck produced a compounded annual revenue growth of over 11% for the years 1966-2010. Approximately 25,000 companies were analyzed over a 45 year period to produce 344 truly exceptional companies.

The authors explain how performance suffers when non-price competition is abandoned. Retailers like Family Dollar have done well by realizing that the needs of the customer are paramount. Furthermore, return on assets is a good measurement of performance over a wide range of companies. There are times when assets become obsolete and their earning power deteriorates accordingly.

The authors cite several miracle workers among the companies analyzed. A miracle worker relies on gross margin advantages to retain and build upon an ROA (return on assets) lead or competitive advantage. Thomas and Betts is one such miracle worker with revenue growth from $49 million to $2 billion dollars over the period analyzed.

Although the authors cite the importance of revenues before cost, the rule structures employed should give due credit to innovation as a driving force for sustaining and growing revenues over time.

Cost is not entirely irrelevant. The technological innovations of the microchip slashed calculator component costs by 90% or more. This dramatic cost-cutting resulted in billions of dollars in new sales to customers who bought calculators for the first time. A similar learning curve happened elsewhere in compact televisions and even net computers.

The Three Rules is a good book which provides some important perspectives for corporate managers, investors and the general public. The rule structures may not have a universal applicability to every industry like financial services or real estate. Nonetheless, this book does provide important information for investors and the general public with regard to the presentation on truly exceptional companies and the emphasis on the value of products and processes to customers everywhere. This book is an important one for investors to read due to the identification of exceptional companies and their long term performance.

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About Dr Joseph S Maresca

I've taught approx. 34 sections of collegiate courses including computer applications, college algebra, collegiate statistics, law, accounting, finance and economics. The experience includes service as a Board Director on the CPA Journal and Editor of the CPA Candidates Inc. Newsletter. In college, I worked as a statistics lab assistant. Manhattan College awarded a BS in an allied area of operations research. The program included courses in calculus, ordinary differential equations, probability, statistical inference, linear algebra , the more advanced operations research, price analysis and econometrics. Membership in the Delta Mu Delta National Honor Society was granted together with the degree. My experience includes both private account and industry. In addition, I've worked extensively in the Examinations Division of the AICPA from time to time. Recently, I passed the Engineering in Training Exam which consisted of 9 hours of examination in chemistry, physics, calculus, differential equations, linear algebra, probability/ statistics, fluids, electronics, materials science/structure of matter, mechanics, statics, thermodynamics, computer science, dynamics and a host of minor subject areas like engineering economics. A very small percentage of engineers actually take and pass the EIT exam. The number has hovered at circa 5%. Several decades ago, I passed the CPA examination and obtained another license in Computer Information Systems Auditing. A CISA must have knowledge in the areas of data center review, systems applications, the operating system of the computer, disaster recovery, contingency planning, developmental systems, the standards which govern facility reviews and a host of other areas. An MBA in Accounting with an Advanced Professional Certificate in Computer Applications/ Information Systems , an Advanced Professional Certificate in Finance and an Advanced Professional Certificate in Organizational Design were earned at New York University-Graduate School of Business (Stern ). In December of 2005, an earned PhD in Accounting was granted by the Ross College. The program entrance requires a previous Masters Degree for admittance together with a host of other criteria. The REGISTRAR of Ross College contact is: Tel . US 202-318-4454 FAX [records for Dr. Joseph S. Maresca Box 646 Bronxville NY 10708-3602] The clinical experience included the teaching of approximately 34 sections of college accounting, economics, statistics, college algebra, law, thesis project coursework and the professional grading of approx. 50,000 CPA examination essays with the American Institute of Certified Public Accountants. Additionally, membership is held in the Sigma Beta Delta International Honor Society chartered in 1994. Significant writings include over 10 copyrights in the name of the author (Joseph S. Maresca) and a patent in the earthquake sciences.