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.Powered by Sidelines