Book Marks: 3 from the Other Side

Categories Author: Patrick O'Shaughnessy, Business

Books about business and the creative process have just as much wisdom to offer investors because they let you see what good companies do to become great, or what turns great ideas into profitable ventures. Chances are, if you see a company following any of the best practices prescribed below, they’re more than likely a good place to put your money and let it grow. 
As an aside, many of our OSAM Blog subscribers have asked, “Financial-related books are fine, but is that all you read??” To that end, sign up and stay tuned for the next installment of Book Marks, which wanders even further astray (in a good way) with a half-dozen books that have nothing to do with money at all — yep.

Innovation and Entrepreneurship
by Peter Drucker

book cover

If you want the most business-oriented book on creativity, you cannot do better than Peter Drucker. The book explores these seven areas: the unexpected event, incongruities, process need, changes in market structure, demographics, changes in perception, and new knowledge. Each can be used to find areas of a market ripe for innovation.

Like most books I’ve read on innovation and creativity (a long list), this one de-emphasizes the individual genius aspect. Drucker agrees that creativity is a process and that it requires hard work:

Innovation is a discipline, with its own, fairly simple, rules. And so is entrepreneurship. Neither of them requires geniuses. Neither of them will be done if we wait for inspiration and for the ‘kiss of the muse’. Both are work whatever changes the wealth-producing potential of already existing resources constitutes innovation.

Drucker makes a compelling case that most innovation isn’t in the technology field (in fact, technology is one of the hardest fields in which to innovate). Rather, innovation is about recognizing a new pattern which fits an emerging need in the world:

There was not much new technology involved in the idea of moving a truck body off its wheels and onto a cargo vessel. This ‘innovation’, the container, did not grow out of technology at all but out of a new perception of the ‘cargo vessel’ as a materials-handling device rather than a ‘ship’, which meant that what really mattered was to make the time in port as short as possible. But this humdrum innovation roughly quadrupled the productivity of the ocean-going freighter and probably saved shipping. Without it, the tremendous expansion of world trade in the last forty years – the fastest growth in any major economic activity ever recorded – could not possibly have taken place.

This next passage sounds a lot like Zero to One (reviewed below):

Still, successful entrepreneurs aim high. They are not content simply to improve on what already exists, or to modify it. They try to create new and different values and new and different satisfactions, to convert a ‘material’ into a ‘resource’, or to combine existing resources in a new and more productive configuration.

Drucker encourages us to use the seven areas listed above to find current opportunities. Forecasting is too hard so “don’t try to innovate for the future. Innovate for the present!”

Zero to One
by Peter Thiel (with Blake Masters)

book cover

This is an obvious suggestion, because Thiel’s book is the talk of the town and sits at the top of bestseller lists everywhere. I still feel obligated to mention it because it’s rare for a book to be as thought provoking as this one. Thiel asks early and often, “What important truth do very few people agree with you on?” His goal with the question (and the entire book) is to get you to analyze whether what you are producing — be it an investing strategy, a marketing plan, a start-up, or really anything — is really new or just an iteration of something that has come before.

So much of investing is herd behavior, this will have you thinking different than the crowd. “Zero to one” means creating something that didn’t previously exist as a category, business or style. “One to N” means simply improving or iterating something that has already been created. It is humbling to think of one’s own efforts in this way, because the vast majority of what we do is one to N. This book still has me thinking.

Double Your Profits in 6 Months or Less
by Bob Fifer

book cover

Bad title (and odd design) for a very interesting, if somewhat dated, book. It’s a book about business and profits, but there is a lot in here that applies to your personal life too. I’ve heard that 3G, the famous private equity firm which most recently partnered with Berkshire on Kraft Heinz, encourages managers to read the book and apply its principles.

The principle that resonated most with me were the ideas of cutting unnecessary costs and other administrivia… “Never write a memo if telling someone will do, never call a meeting if a memo will do, never call a four-hour meeting if a one-hour meeting will do, never have two meetings if one will do, and never set up a process if two meetings will do.” Fifer advocates increasing what he calls “strategic costs,” or costs that bring in business and improve the bottom line. In fact, your goal should be to outspend all others on strategic costs. But non-strategic costs should be cut to the bone, and no cost is too small. This reminded me of Bear Stearns’ Ace Greenberg and his obsession with paper clips!

There is more: on costs, sales, management, and all other areas of business. The book’s advice can come off as a bit cold and Spock-like, but I think the end result for most companies, were they to follow the book’s principles, would be very positive — not just for the bottom line, but for culture as well.

I liked these quotes too:

No business ever made a penny on a forecast. Optimizing profits is what the business is here for, not predicting them. At most companies, I would eliminate 80% of the people resources dedicated to forecasting and number-crunching and spend that time on making money, not counting it.

Superb managers do 1% of the work but add more than 50% of the value to their organizations, because they make the truly profit-enhancing decisions based on superior experience and judgment. [This and many other sections of the book made me think of Paul Graham’s essays on inequalities]

I liked this final passage just because it’s so contrarian — even though I do believe in making the customer experience as good as possible. I’d love to hear Jeff Bezos’s reaction to this (he might just say “scoreboard” and point to AMZN stock’s rise without hardly any profits).

MAXIMIZING CUSTOMER SATISFACTION LEADS TO BANKRUPTCY There are many ways to differentiate your company’s products and to achieve superior customer satisfaction: By offering higher quality (e.g., Mercedes Benz), better service (Disney), a broader selection (Toys “я” Us), a superior brand image (Federal Express), or some combination of the above. All of these are nice things to have, but all cost money to provide. The goal of the profit-maximizing organization is not to maximize differentiation, but to: Provide those elements of differentiation that the customer is willing to pay for and not those that the customer is not willing to pay for. This is not insensitive or selfish; this is survival and common sense…You are not doing customers a favor by building unwanted differentiation and costs into your products or services that raise the prices your customers have to pay. Sooner or later, they’ll switch to a supplier smart enough to include the right but exclude the wrong types of differentiation…Striking the right balance as to what to sell your customer is where the profits are, where the greatest judgment is required, and where the true fun of running a business lies. You must conceive a way to offer superior differentiation, or you have nothing to sell. However, the vast majority of people in your organization—the salespeople, the engineers, the marketers, the entrepreneurs—are trained to add differentiation. Who is trained to eliminate those costly elements of differentiation that the customer is not (or no longer) willing to pay for? The answer is precious few, and that’s why it’s so critical for you to train the organization to create a culture of “What is the customer willing to pay for?”… “Maximizing Customer Satisfaction” is a platitude and a cop-out.

As a counterpoint to the latter, I suggest one of Jeff Bezos’s recent annual letters to shareholders!

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