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Take Care of Business by Posting Sincere Quarterly Results While Building Long-term Value

Balanced Shareholder Value Technological progress over the last decade—especially in communications—has accelerated the expansion of commerce, the creation of wealth, and the pace of living.

Consider a few statistics. There are now 15,000 communications service providers operating worldwide; just one decade ago, there were less than 1,000. Last year, enough fiber optic cable was laid to encircle the earth some 400 times. Internet traffic is doubling every 100 days. Nearly 350 million people are already online worldwide with 100 million more expected to join them in 2001. Buying and selling on the Internet, or ecommerce, has reached $700 billion worldwide—and is expected to approach $7 trillion in five years.

Technology and Growth

The technology industry has played a central role in contributing to this growth. Technology company is creating the systems and technologies that will make the Internet mobile and able to do things we can only dream of today. With the phenomenal growth of the Internet, the penetration of cable television and the rise of wireless communications, we live in a world where fact-based information, tailored to our individual tastes, is available 24/7 wherever we are. That is the bright side. On the darker side, the same technology is also delivering us rumors, innuendo, and blatant misinformation.

Pressures of Instant Information on Stockholders With our robust economy, expectations for a better life have never been higher. However, in many cases, high expectations give way to instant gratification and outright greed. Overnight wealth is now part of pop culture. The objective of corporations is to create wealth for shareowners by delivering products and services that customers find of value. You cannot do that if employees are in a free-for-all to undermine their colleagues. Creating value is a far different game than scheming to be the last person standing. And it requires far different behavior to succeed.

In any institution, you can find people who are out for personal gain at the expense of the enterprise. However, the lack of integrity catches up with them. It always does. At the same time, the business world does have its problems, real as well as perceived, including events that raise questions about corporate behavior.

Accidents happen. The Exxon Valdez oil spill was an accident. Manufacturing errors happen. That’s why Bridgestone and Ford are in the headlines today. And sabotage happens. How companies respond to these crises determines the size and healing time of the blemish on their reputations. Companies, like Johnson & Johnson, that are proactive and completely open with the public, recover fast.

Corporate reputations always seem to be under scrutiny. Corporations owe something to their workers, the communities in which they operate, shareowners, and other constituencies. Shortly after I joined technology company, the company held its annual Global Days of Caring—a worldwide employee volunteer effort in which tens of thousands of technology company people participate in worthwhile community projects, ranging from cleaning up parks, beaches and playgrounds, to assisting at childcare, senior citizen centers and homeless shelters. Making a difference in communities has become a central part of technology company’s culture.

Pressures of Instant Information on Stockholders

But meeting the needs of shareowners, employees, and the community is increasingly difficult, because companies face new pressures that are created by the combination of instant information and the growing notion of instant gratification by investors.

A few years ago, business could plan and execute for the long term. Sometimes that meant making sacrifices in the short term that retarded bottom-line growth for a quarter or two. But such sacrifices had the potential to create breakthroughs in technology that could change an industry, the way my company did with the invention of the transistor, lasers, and fiber optics—technologies that spawned new industries.

If a company was strong and had a reputation for making successful transitions and delivering value to customers, investors tended to show patience because they understood that efforts were being make for the long-term health of the business.

How to Beat Wall Street Reliably Today, instead of the idea of who will win in the long term, the market is focused on who’s winning this quarter, who’s winning today. Business has become a spectator sport, a high-stakes game that is played out daily by people who watch corporate box scores scroll across their PCs and television sets, by people who place instant online bets that are based on breaking news, rumors, or the body language of a CEO on CNBC’s Squawk Box—all designed to feed into Wall Street, which has become a casino as millions of new players ante up for the next deal.

Business journalists and financial analysts have the power to cut a company’s market value in half with a single negative comment, or instantly drive its value up with a glowing report.

With the constant bombardment of gossip, rumor, and sometimes deliberately misleading information, it has become increasingly difficult to determine what legitimate business news is.

The temptation to manipulate the system is as strong as the opportunity to do so. At Technology company technologies, we have regular contact with many financial analysts. In addition, the people we deal with are trying to do the right things. But they are under severe pressure in a world that’s been sped up and turned upside down. Their reputations have been built on solid analysis of income statements and balance sheets. That’s how value used to be determined. Now Internet upstarts with small revenue streams and losses instead of earnings can have huge market valuations. How do you analyze these companies and make recommendations to investors?

How to Beat the Street Reliably

'Investor Relations For the Emerging Company' by Ralph Rieves (ISBN 0230341969) Compounding the difficulty is the sheer speed of the market rollercoaster. One analyst recently said, “We live 12-week lives,” living quarter to quarter with the companies he is covering. That’s not healthy. That 12-week life involves predicting an earnings number with factors such as a company’s strength, the market’s strength, as well as a company’s own guidance on what it expects to deliver. They sit on the sidelines, watching and waiting. Meanwhile, companies are on the field competing—driving their businesses toward the finish line. They’re under phenomenal pressure to perform well and cross the finish line with increasingly higher results. It’s not enough to deliver what’s expected. The system rewards companies who under-promise and over-deliver. That’s the only way to consistently beat the Street’s expectations.

Not only are there expectations of a specific earnings number, there are expectations of a precision in delivering the number. In effect, the system is demanding perfect execution in every 12-week period. We have arrived at the age of instant analysis and sound bites that can cause major tremors in the market.

This is the reality companies face today as they work to serve their customers and build value for their owners clearly pressures are great to deliver strong quarterly performance—to “beat the Street”—and to do it consistently to keep the stock price rising.

Stock price was always the key measure of a company’s long-term health. But today stocks have become a strategic weapon. Stocks are the new currency for acquisitions of companies, technologies, and employees to bolster a firm’s competitive capabilities. Your stock price puts you in a position to be the parent or the acquired. Also, the value of a stock has a major impact on a company’s ability to attract and retain employees. Upstart Internet companies that are preparing to go public can be a huge temptation. Much is riding on quarterly performance. In striving not to disappoint Wall Street, companies are tempted to make short-term decisions that could be harmful in the long term. Worse, some companies are under such heavy pressure in the competition for investor dollars that they feel compelled to overstate their market performance and exaggerate their potential. So they provide a set of lenses for the fortunetellers. Sometimes it’s a microscope. Sometimes it’s a telescope. And very often it’s a kaleidoscope. Politicians call it “spin doctoring.” And some businesses have honed it into an art form.

'Using Investor Relations to Maximize Equity Valuation' by Thomas Ryan (ISBN 047167852X) If it works, it’s easier to do it a second time and a third time, until it becomes an addictive drug. Many companies have been on drugs. It’s time to get off them and begin managing their businesses, instead of managing their stock price. It’s a lot easier to cling to your values when you’re riding high. But the true test of a company’s character comes when it stumbles.

I believe that it’s the job of senior corporate leaders to step up to this challenge—to change the game by striking the right balance between the long- and short-term decisions that produce lasting health for companies. Business leaders must refuse to be drawn into shortsighted decisions that are driven by the media frenzy. They must resist being dragged to center-stage in the spectator sport that business has become. Business leaders have been entrusted to build strong companies by growing real value through innovating and delivering products that change the way people live and work. Instead of concentrating on what’s needed to make analysts happy, leaders should be focused of what they can do to serve their customers better. In the long-term that could mean facing up to the prospect of short-term pain if it’s necessary to sustain long-term gain.

Creating Balanced Shareholder Value Over the Long Term

Creating Balanced Shareholder Value Over the Long Term The system may be out of control, but the future is not. Value is not created overnight or over a 12-week period. Value comes from creating products and services that meet market needs. That’s not a short-term proposition. Companies experience vicissitudes. The fast pace of today’s marketplace requires constant adjustments and transitions. Often, companies that go through those transitions will pay the price for a quarter or two. But if they perform well, they come back quickly because of the bandwagon mentality of Wall Street’s fortunetellers.

Every year Fortune magazine compiles a list of America’s most admired companies. The criteria for the list range from long-term investment value to social responsibility. They are also viewed as the best places to work. These companies are taking care of business and meeting the needs of their shareowners, their customers, and their employees. And doing so has paid off. The top 10 percent of Fortune‘s list of most admired companies did twice as well in the stock market as the bottom 10 percent. That’s encouraging, because it says that in the end, good companies will always justify their value as long as they do the right things the right way.

Assess how well you balance short-term expediency and long-term growth.

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Use the Theory of Constraints to Create a Viable Vision

Any complex system is based on inherent simplicity

Strategic Vision is Viable

Viable vision is the opportunity of a company to have, within four years, annual net profit equal to its current total sales. Any complex system is based on intrinsic simplicity. Capitalizing on the inherent simplicity empowers incredible improvements within a short time. The more data needed to designate fully a system, the more complex it is. Enumerating reductions in total systems costs that are often heart to the customer company is also difficult. Most companies, even small ones, are complex and accordingly challenging to manage. The few elements commanding the performance of the system are the restrictions or advantage points —the Theory of Constraints.

When I scrutinize a company, I am rather fulfilled only when I clearly see how it is possible to bring the company to have, within four years, annual net profit equal to its current total sales. That is what I mean by a “viable vision.” In emergent markets such as China and India, clients want decent quality products that are simple to install, use, and maintain.

I am careful when sharing this anticipation with the top management; I expose the reasons why I believe this vision is viable. I share my analysis of what is obstructive performance. Using logic, I deduce the steps that will eradicate that block. Then I detail the steps to take to capitalize on that breakthrough. In this way, the reaction of top managers is, “This is common sense. Why aren’t we doing it?”

Capitalizing on Strategic Simplicity

Any complex system is based on inherent simplicity. Capitalizing on the inherent simplicity enables implausible improvements within a short time.

The more data needed to describe fully a system, the more complex it is. These infringements come at a significant cost to the organization, since too much time spent on day-to-day details can endanger future growth.

How complex is the system you manage? How many pages are needed to describe every process and the relationships with each client? Most companies, even small ones, are complex and thus tough to manage.

We manage a complex system by dissecting it into subsystems that are less complex. However, this can lead to miss-synchronization, harmful local optima, and the silo mentality. Since our systems are compound, we might think that all we can do is to improve synchronization and nurture collaboration between the subsystems. Public corporations are required to maximize their return to shareholders—not to customers. If this is the only option we contemplate, we will believe that achieving a major jump in profit within a short time is a rarity. We will think that creating net profit equal to current total sales in less than four years is unrealistic.

Leaders of successful innovation exertions are gifted visionaries. To see the potential of a company, we need to realize that the thing that makes our system difficult to manage is that what is done in one place has complications in other places; the cause-and-effect relationships turn our system into a maze. Strategically central issues and opportunities can occur at any time, and they cannot always wait for the next planning cycle or off-site to roll around. However, that fact also provides the key to the solution. This model had served them well. However, they began conjecturing about their organization in the future. They began to wonder if the model would work when the commodity that was being passed around was information, not metal.

Examine a system and ask, what is the minimum number of points we must impact to impact the whole system? If the answer is “10 points,” this is a challenging system to manage because it has too many degrees of freedom. However, if the answer is “one point,” this system is easy to manage.

Theory of Strategic Constraints - Strategic Wisdom

Now, the more interdependence between the components of the system, the fewer degrees of freedom the system has. However, the realities and the consequences of how they actually use their time are often quite different. Bearing in mind the complexity of your system, only a few elements govern the entire system. The more composite the system, the more profound is its essential simplicity.

To capitalize on the inherent simplicity, we must identify those few elements that govern the system. In addition, if we clarify the cause-and-effect relationships among all elements of the system, we can manage the system to achieve higher performance.

Companies turn out to be too focused on executing today’s business model and stop thinking about the fact that business models are perishable. Because companies’ decision-making systems are designed to push investments to initiatives that offer the most perceptible and immediate returns, companies shortchange investments in initiatives that are imperative to their long-term strategies.

Theory of Strategic Constraints

The few elements dictating the performance of the system are the constraints or advantage points-the Theory of Constraints (TOC).

In this school of management, we are qualified never to bring forward problems without a recommended solution. The marketing and strategy of companies is in it’s not luck. They have to be streetwise but not necessarily wise in other ways. They need to be fledgling and without much need for sleep. If you read these books, you will agree that the conclusions are horse sense, even though they fly in the face of common practice. Moreover, if you put it into practice, you experience remarkable improvements in a short time.

Is a viable vision possible for your company? Is it feasible to have, within four years, yearly net profit equal to its current yearly sales? The complications are discouraging. For example, such profitability is impossible without a huge increase in sales, and this is doable only if you have a remarkable new offer accepted by your markets. Can such an offer exist? Can you produce on such an offer? What investments will be needed? In addition, is your team capable of implementing such a change?

You do not have to coin your own phrase, but if you can find a simple, clear concept at the core of your policy, and if you can get others to appreciate it, then you are on your way to forming nuggets of you of strategic wisdom. A winning, stupendous concept will keep a team positively focused and sustain it during the inescapable disappointments and trying times.

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Seven Pillars of Wisdom for Bond Buyers from Dan Fuss

Seven Pillars of Wisdom for Bond Buyers from Dan Fuss

There are no totally safe places in the bond market. The threat of capital loss is nominal if you invest in short-term Treasuries, but you have supreme reinvestment risk.

Dan Fuss, Loomis, Sayles & Company The Loomis Sayles Bond Fund has returned more than 10 percent a year over the past 20-plus years—about 3 full percentage points beyond the return for the entire bond world all through this same period. At the helm of the fund since 1991 sits Dan Fuss, who is also vice chairman of the Boston-based Loomis, Sayles & Company. He has been handling investments for more than half a century. Dan Fuss was honored March 8 2012, as the beneficiary of The Lipper Award for Excellence in Fund Management at Lipper’s annual mutual fund awards ceremony in New York City. According to Jeff Tjornehoj, head of research for Lipper Americas, the Award for Excellence in Fund Management, “recognizes an outstanding asset manager who has delivered consistently strong risk-adjusted returns to their investors and, in the opinion of Lipper’s research analysts, represent the best of the funds industry.”

  • Don’t trade. Even institutional buyers get killed by bid-ask spreads. Only exception: coupon Treasurys.
  • Avoid junk. Especially the covenant-lite stuff that is coming out now.
  • Buy TIPS direct. If you must own inflation-protected bonds (yields are meager,) but at a Treasury auction to avoid the nasty spreads. Inflation insurance in the form of TIPS, or Treasury Inflation Protected Securities, has returned about 10% this year, according to Barclays Capital indexes.
  • Stay in North America. Japanese and European yields are ridiculous.
  • Beware ETFs. The liquidity of exchange-traded funds will evaporate in a crash if they own junk or emerging market bonds.
  • Hold some cash. Put it aside to use in the next financial crisis.
  • Look for discounts. A corporate bond trading at 90 cents on the dollar won’t be called away in the rebound.

As you head to work in the morning and look around you, you get a sense for what season it is. Just as the calendar has seasons, there are also seasons of the economy, what one can also refer to as “cycles.” These can greatly affect bond returns. One advantage I have is being older than the hills . . . I’ve seen a good number of seasons, and I can perhaps recognize them a little better or quicker than most.

Market Unpredictability in Bond Markets

Bond markets in many ways are like other financial markets, where market unpredictability can play an imperative role in determining whether an investment will be moneymaking. The main source of volatility in the bond market is a variable interest rate since this affects the coupon on the bond, which is where the profit is made. If an investor bought a bond with a fixed coupon rate, changes in the interest rate will not affect the bond. However, if the coupon rate is associated to a variable interest rate and that rate changes, it may be advantageous for the bondholder to sell the bond rather than keep it until the maturity date. Traders, institutions, and other actors in the bond market implement transactions like this every day; the sum of these actions is what makes up the bond market.

A significant theory of finance is that the evaluation of returns is only meaningful on a risk-adjusted basis. However, risk is often hard to measure. This creates a chief restriction in the delegation of investment decisions. Financial go-betweens and investment managers that are evaluated based on deficient risk metrics face an inducement to buy assets that comply with a set yardstick but are risky on other dimensions.

But since individual voters cannot change election outcomes, they will not carefully weigh benefits and costs of default. Instead, they will place massive weight on symbolism and status-group affiliation—they will allow their feelings to abuse the facts of the matter. It is quite unlikely that defaulting nations will be considered high-status, so voters will be reluctant to support politicians who support default. Politicians who support default will likely find themselves turned out of office, a fact that foresighted politicians will keep in mind.

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Buyback Binge and Financial Engineering

Boston-based asset management firm Grantham Mayo van Otterloo’s Jeremy Grantham scrutinizes the buyback binge and the financial engineering it entails:

Jeremy Grantham of Grantham Mayo van Otterloo Grantham argues that capitalism is failing for now. He blames the rise of “stock option culture” and a complicit U.S. fed for the problem. Up to 80% of executive compensation now flows from stock options, which are tied to short-term performance of a company’s stock rather than long-term performance of the company. People respond to the incentives they’re given, so managers tend toward those actions which increase the value of their stock options. Investing in the company is slow, uncertain and risky, and so capital expenditures (“capex”) by publicly-traded firms is falling. Buying back stock (overpriced or not) and issuing dividends is quick, clean and safe, and so that sort of financial engineering expands. Interest rates at or near zero even encourage the issuance of debt to fund buybacks (“Peter, meet Paul”). It would be possible to constrain the exercise of options, but we choose not to. And so firms are not moving capital into new ventures or into improving existing capabilities which, in the short run, continues to underwrite record profit margins.

Source: The Mutual Fund Observer’s report after Morningstar’s Annual Investor Conference in Chicago.

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Social Responsibility is a Business Imperative

Social Responsibility is a Business Imperative

Is your company and industry doing enough to fulfill its social responsibilities?

Obviously, we can all do more. It’s not just a responsibility—for us it’s a business imperative. When we work to make our communities more vibrant, beautiful and prosperous, we’re investing in making them more attractive to our visitors and giving them a reason to travel. Of course social responsibility is not just about investing in places—it’s also about investing in our people.

A guiding principle at our company is when we take care of our associates, they take care of our customers. When we provide a community’s young people with education and training, we enhance the quality of the labor pool. And when we do our part to make entire communities or countries more prosperous, we broaden and deepen a global middle class who can afford to buy the services we sell.

Community service initiatives are laboratories for leadership. They help identify and develop promising leaders, build teamwork, and improve loyalty. And obviously, when our companies demonstrate social responsibility, we add to our industry’s reservoir of goodwill from governments, customers, and the general public.

Real and effective social responsibility is shared by the entire company. Although we set policies for Marriott’s “Spirit to serve our communities” program, our leaders worldwide are strongly encouraged to get involved on a personal level in their communities.

Knowing what a community needs is critical to social responsibility. Just swooping in and offering some global cookie-cutter program and acting as though we know bestjust doesn’t work. Our communities know best what they need—and how to achieve it.

In 47 cities—worldwide, our general managers form business councils representing all of the brands in their market. One top priority is to pool their capital and human resources to serve the needs of their communities.

Of course, there are many needs, and we can’t meet them all. So, we try to leverage our core expertise. That might mean offering ballroom space for charitable fundraisers, or donating surplus furniture to housing programs.

It also means tapping the experience of our leaders. For instance, 50 percent of Marriott’s managers come from the hourly ranks, and those people personally know how rewarding it is to climb the economic ladder. And those same leaders have helped to bring thousands of chronically unemployed people into the work force. Our leaders are the spirit behind a program we call “pathways to independence” —where people learn to find and keep good jobs.

In our pathways program, we match participants with mentors, train them, and help them with solutions to problems that get in the way of work-like childcare and transportation. When they complete the program, they’re guaranteed a job offer.

Environmental protection is another example of social responsibility. In environmentally fragile areas, we might support the community and its tourism-reliant economy by protecting endangered species. For example, at the JW Marriott Phuket Resort nearly 2,500 guests and locals gathered at sunset to release 10,000 baby turtles into the ocean—helping to raise awareness about the plight of these creatures.

Sometimes meeting local needs means building a roof over someone’s head. At a recent Habitat for Humanity project in Costa Rica, associates and top executives from Marriott worked side by side to help build several homes for local families. We’re doing the same in Washington, D.C., and many other cities.

We also need to invest in our communities by investing in our people and improving their lives. Travel and tourism is a 24/7 business, so we help our people deal with this. Every parent knows childcare can be a challenge, but when you’re working the overnight shift at a hotel, it can be almost impossible. That’s why we offer several resources to help families. One example is our associate resource line, which provides access to local services for help with family, legal, and other issues. We also coordinate closely with our people to find flexible and creative solutions to childcare needs. At our Desert Springs resort in California, for instance, six housekeepers with 11 children formed a “childcare cooperative” where they take turns caring for each other’s kids. The property helps coordinate their work schedules—and it works!

Now, all of these ideas are fine, but meaningless if we don’t address our industry’s challenges. We need to work together to get people traveling again.

Travel and tourism’s “perfect storm” has created great challenges. Yet, in every dark cloud there is a silver lining. The events of the last three years have significantly raised awareness about the vital importance of travel and tourism.

Our industry has top-of-mind awareness among world leaders. We must continue to educate our leaders about the tremendous value of our industry. We need to be active champions for our industry and continually ask, “Are we doing enough to make travel and tourism work for everyone?” We are doing a lot, but I hope we never allow ourselves to believe it’s enough in social responsibility, as in leadership, success is never final.

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Posted in Investing and Finance Management and Leadership

Koch Industries’s Three Key Criteria When Evaluating A Deal

Koch Industries

Koch Industries is one of the largest conglomerates in the United States. It is based in Wichita in the state of Kansas, USA. Koch Inc has been ranked second by Forbes list of largest private companies.

'The Science of Success: How Market-Based Management Built the World's Largest Private Company' by Charles G. Koch (ISBN 0470139889)The Koch brothers, Charles Koch and David Koch, own Koch Industries. The conglomerate began as an oil refining business. Fred C. Koch, the Koch brothers’ father, had developed a more efficient method for refining gasoline which allowed him to compete with established refineries. Koch Industries has since expanded into other manufacturing sectors. The Koch brothers are equally infamous primarily for their involvement in politics, including GOP fundraiser events, Super PAC spending in the hundreds of millions, and for their financial support of the Tea Party Movement.

Kochs Brothers: Charles Koch and David Koch

Here are the three key criteria when Koch Industries evaluates a deal:

  1. The business in question must be in trouble. When a company is teeming along, there’s not a lot of upside in any potential deal. If it has some sort of enormous problem, there is a better chance that Koch Industries can harvest profits from its revival.
  2. The deal must be a long-term play. Most public companies need to show good results on a quarterly basis. Even private equity funds need to show their senior investors that investments are paying off in at least a few years. Koch does not. Being privately held means the company has a long-term investing horizon and can think operationally and strategically in terms of decades.
  3. The target company must have key skills or “core capabilities” that will benefit the company over the long term. Koch doesn’t just bring money to the table. It bring expertise. And if Koch doesn’t already know something important about running the business in question, it will pass on the investment.
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Stay Ahead of Rising Costs

Stay Ahead of Rising Costs

Imposing accountability and awareness can go a long way to taming the bane of many businesses.

  • Share the Responsibility: You and your chief financial officer shouldn’t be the only ones trying to rein in spending. Grab your financial statements and make sure someone in the company is accountable for monitoring every line by listing an employee’s name next to each one. “If no one ‘owns’ a cost, very likely it will get out of control,” advises entrepreneur Jack Stack, author of “The Great Game of Business”.
  • Reveal the Price: Your office staff probably doesn’t know how much it costs the company to send a letter by overnight mail (ouch!). Similarly, a repair worker may not know the price of the parts he’s using to fix equipment. Telling them can save you a bundle. A maintenance coordinator at SRC Holdings, Stack’s Missouri-based vehicle components remanufacturing firm, was floored to learn that shrink-wrap was costing the company $2,500 a roll. She soon hunted down a vendor who would sell it for $1,800.
  • Monitor the Use of Items: Employees at Sandow who need pens, notebooks, and even Tylenol get them from a vending machine by inserting company cards that “pay” for the supplies and track their use in real time. The 350-person media business has saved thousands per year since installing the machines-made by Fastenal-at its corporate headquarters in Boca Raton, Fla., in 2012. “It has put our employees in the mindset of not being wasteful,” says Stephanie Brady, operations manager.
  • Spend Wisely to Win: By not chasing long-shot deals, you can slim your sales costs dramatically. “Market leaders are using the savings from pulling the plug on mediocre opportunities … to over-resource the business they want most,” says Neil Rackham, author of “Rethinking the Sales Force”. If you’re neck and neck with a rival and you both spend $50,000 to get a $2 million sale, the rival may beat you. Invest $100,000 and you’ll be likely to bag the client.
  • Raise Your Prices: When was the last time you took a course in pricing? For most entrepreneurs, the answer is “Never.” Get one on your agenda now so you know you’re not leaving money on the table. Meanwhile, read the Pricing With Confidence blog by Reed Holden, who has lectured at Columbia University and elsewhere. It’ll give you the courage you need to charge what your product or service is worth. A small price increase can have a giant impact on your bottom line over time.
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Critical Success Factors for Joint Ventures

Joint Venture Management

According to the Association of Strategic Alliance Professionals, there are 7 critical success factors for joint ventures:

  1. Well-defined shared objectives
  2. An appropriate scope for the partnership
  3. Support of senior management from both the JV partners
  4. Devoted champions on both sides of the joint venture partnership
  5. Strong relationship management at all levels
  6. Cultural compatibility / or respect for diversity
  7. A high level of trust
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Ideal Structure for a Successful Joint Ventures

Joint Venture Management

Joint ventures developed using familiar best practices can fail without a solid structure and a cross-process discipline for strategy, planning, operations, and implementation. Joint ventures that frequently struggle to sustain the continuity of vision as they develop and execute joint ventures.

  1. Balanced unique value added from shareholders to JV
  2. Business dependence between JV and shareholders
  3. Balanced returns from JV to shareholders
  4. Good mechanisms to manage support and involvement
  5. Balanced leverage between shareholders to ensure JV remains on the right path
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Brief Reviews of Recommended Books on Business History and Biographies

“Titan: The Life of John D. Rockefeller, Sr.”

'Titan: The Life of John D. Rockefeller, Sr.' by Ron Chernow (ISBN 1400077303) A biography of John D. Rockefeller traces his life the archetype of the American Dream. John D. Rockefeller began his life as threadbare country boy with nothing, remained an evangelical Baptist, and ended with the success and riches of royalty. As the Standard Oil magnate he controlled 90 percent of the oil market and went on to become the world’s richest man at the height of his active career. After the break-up of Standard Oil, Rockefeller became a legendary philanthropist and donated millions to medical research and education.

Buy ‘Titan: The Life of John D. Rockefeller, Sr.’ by Ron Chernow

Walter Isaacson’s Biography of Steve Jobs

'Steve Jobs' by Walter Isaacson (ISBN 1451648537) Drawn from three years of exclusive interviews with Apple co-founder Steve Jobs, established biographer Walter Isaacson offers a comprehensive portrait of the most prominent genius of our times. This thoroughly researched biography provides a fantastic insight into the process that made the Apple co-founder such a giant in computers. Jobs had an extraordinary obsession for creating “insanely great products” and had a vision of integrated architecture for Apple’s products and Apple’s processes for how engineers, designers, and marketers implemented a brilliant innovator’s ideas.

Buy ‘Steve Jobs’ by Walter Isaacson

“The Starbucks Experience: 5 Principles for Turning Ordinary Into Extraordinary”

'The Starbucks Experience: 5 Principles for Turning Ordinary Into Extraordinary' by Joseph Michelli (ISBN 0071477845) Joseph Michelli outlines that a huge share of the success of a trendy Seattle-based coffee shop that has turned into a lucrative international franchise comes from its creation of experience for customer and business culture. Michelli recognizes five fundamental values (‘make it your own,’ ‘everything matters,’ ‘surprise and delight,’ ‘embrace resistance,’ and ‘leave your mark’) that forms the success formula for the Starbucks culture and provides a number of anecdotes based on how the company and its employees have reinforced their connection with customers.

Buy ‘The Starbucks Experience: 5 Principles for Turning Ordinary Into Extraordinary’ by Joseph Michelli

“When Genius Failed: The Rise and Fall of Long-Term Capital Management”

'When Genius Failed: The Rise and Fall of Long-Term Capital Management' by Roger Lowenstein (ISBN 0375758259) Since the ’90s, practically every major investment house employed highly paid statisticians and mathematicians in their trading divisions. These “rocket scientists” developed and deployed complex, computer-aided trading strategies trying to beat the market. With two Nobel Prize winners among its partners, Long-Term Capital Management, a multibillion-dollar hedge fund, relied on computers to find historical relationships between related securities. If one security would trade out of line in comparison to historical patterns, the firm would place bets that prices would get back into the pattern predicted by their mathematical analysis. The combination of absolute-return trading strategies and high financial leverage employed by the hedge fund, ineffective regulations on hedge funds, imprudent banking, hubris led to a $4 billion- loss in investors’ capital and triggered the near collapse of the world’s financial system.

Buy ‘When Genius Failed: The Rise and Fall of Long-Term Capital Management’ by Roger Lowenstein

“The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance”

'The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance' by Ron Chernow (ISBN 0802144659) A 150-year multi-generation history of one of the greatest regal dynasties of American commerce and the banking empire that the Morgans built. Ron Chernow effectively captures the personalities and eccentricities of many of these key figures, Junius Spencer Morgan (who started merchant banking firm J.S. Morgan & Co.,) J. Pierpont Morgan (who lead a banking coalition that stopped the 1907 financial crisis and thus dominated the nation’s high finance) and John Pierpont ‘Jack’ Morgan, Jr. (who financed the Allies during World War I, the 1929 Crash of Wall Street.) An overarching theme is the long-term effects of regulation on the banking industry. In the second half of the 20th century, federal regulation made it progressively difficult for banks to make profits and financial institutions engaged in ever-increasing risk-taking in order to maintain revenue streams and profitability.

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“Liar’s Poker: Rising Through the Wreckage on Wall Street”

'Liar's Poker: Rising Through the Wreckage on Wall Street' by Michael Lewis (ISBN 0393027503) Liar’s Poker is the very funny autobiographical account of Michael Lewis’s three-year, dog-eat-dog climb at Salomon Brothers. Salomon Brothers single-handedly invented a market for mortgage bonds that made the firm wealth. At Solomon, Liar’s Poker was a figure of speech for the Salomon culture of intense risk-taking with immediate payoffs. Lewis rose in the firm from a training program newbie to the highest paid salesman in his trading class. When Lewis made massive loss for clients by selling them bad investment; yet Lewis’s co-workers gave him kudos for his impressive sales maneuvers that profited Solomon, as was the nature of the culture of Salomon Brothers. The firm’s greedy and innovative bond-selling practices resulted in a Treasury bond scandal in the early ’90s.

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“Small Giants: Companies That Choose to Be Great Instead of Big”

'Small Giants: Companies That Choose to Be Great Instead of Big' by Bo Burlingham (ISBN 1591841496) Bo Burlingham profiles companies that resisted the temptation to grow for the sake of growing. The book contends that being small businesses may in fact be turned into a competitive advantage if we learn how to take advantage of nimbleness. The central thesis is that small businesses able to follow the leader’s intuition, gather information more quickly, act on ideas swiftly with less need for justification. Being small can also allow extraordinarily personal relationships amongst employees, and with customers and suppliers.

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“The Big Short: Inside the Doomsday Machine”

'The Big Short: Inside the Doomsday Machine' by Michael Lewis (ISBN 0393338827) A succinct, clear, and compressed explanation of the build-up of the subprime mortgage crisis and credit bubble during the 2000s and the resulting banking crisis of 2008. In a quest for profits, lenders, no longer concerned about whether borrowers could pay them back, used deceitful tactics to convince Americans to give up the equity in their homes and take on mortgages they could not afford. The credit default swap market bet against the collateralized debt obligation (CDO) bubble. The credit-rating agencies gave top ratings to risky assets, which opened the door to a huge market of CDO buyers. Many of key players bet against the CDO bubble and thus ended up profiting from the financial crisis. Michael Lewis highlights the unconventional nature of the type of traders who think against the grain and bet against the market.

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“Barbarians at the Gate: The Fall of RJR Nabisco”

'Barbarians at the Gate: The Fall of RJR Nabisco' by Bryan Burrough and John Helyar (ISBN 0061655546) An excellent account of backgrounds of the key players, the bidding sequences, and the events that led up to the leveraged buy-out (LBO) of RJR Nabisco by Kohlberg Kravis Robert (KKR.) In the late ’80s, executive Ross Johnson who, through a series of cunning moves, became the head of RJR Nabisco. Discontented with the low valuations by Wall Street, Johnson launched management-led leveraged buyout (LBO) of RJR Nabisco. This led to a bidding war involving Johnson (aided by Salomon Brothers and Shearson Lehman Hutton), Kohlberg Kravis Roberts (KKR), and Forstmann Little & Co.

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“Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron”

'Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron' by Bethany McLean and Peter Elkind (ISBN 1591840538) Kenneth Lay, the former chief executive officer of Houston Natural Gas founded Enron as an interstate pipeline company in 1985 by combining Houston Natural Gas with Omaha-based InterNorth. By 1999, 90 per cent of Enron’s income came from trades over Enron Online, the company’s website for trading energy-related commodities. Enron quickly rose to become America’s seventh largest corporation and constituted what was principally a Ponzi scheme that manipulated and gambled its energy-trading business. “The Smartest Guys in the Room” contends that Enron was a con game almost from the start and shows how the company used cunning accounting techniques to keep the momentum of earnings growth.

Buy ‘Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron’ by Bethany McLean and Peter Elkind

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