Thursday, July 18, 2013

News: Municipal Bond Failure Detroit Style

News Break: The Dominoes Start To Fall.
Photo of abandoned Detroit home
Once the engine of democracy; Detroit is broke today
For those who didn't notice the headline, Detroit has announced that it will file for bankruptcy. I had written about the impact these defaults will have on bonds and subsequently on your taxes.
The fight over the few assets left in Detroit's balance sheet will probably get nasty. Unions, municipal employees, pension funds, bureaucrats, and little-ol grandmas who lent the city money will duke it out in front of a national audience.
If things get too rough, other cities facing the same problems may opt for increasing taxes; an option that Detroit didn't have since tax payers had long left the city, leaving behind only those who live from the state.
Screenshot Image of CNBC's The Kudlow Report Discussion on Detroit's Bankruptcy on 07-18-2013
Launch CNBC's The Kudlow Report
on Detroit's Bankruptcy
Then there is the chance that Obama may be tempted to use your money to rescue Detroit and any other city in trouble elsewhere. Just remember from my previous post that, whether through inflation or taxation, you always pay the bill when the President gives so called free money.
Let's see what comes out of this circus while keeping an eye on our wallets.

Tuesday, July 16, 2013

How Much Do You Buy? - US Retail Sales Report

Photo of six shopping bags on the floor and surrouding the legs of a lady shopper on hills
What do you do? 
This is the questions that's most commonly asked in the US to define an individual we just met. We seem to believe that a person's profession tells us who someone is. But while this may work from a social perspective, to understand a person's impact on the economy the right question should be: How much do you buy?
The US consumer is the envy of many nations. China, for one, would like to own many of them. But governments aren't the only ones with power-shopping in mind.
Visiting foreigners rush to outlet malls and premium retailers as soon as they land. When my mother-in-law visits us from south America, the local Chico's celebrates. They exclusively open the store after hours for her. She is then allowed to shop at her leisure and with a personal assistant. Would you believe me if I told you that she is not wealthy? She just loves shopping in the US.
In a very important way, shoppers define the economy. When consumers change buying habits, industries surge while others fail. This is the reason why every retailer has an eye on whatever Baby Boomers will do next. Boomers have made brands like Harley Davidson believe that they were "really good" at selling stuff. Honda thought the same with their street rockets during the late 70's and early 80's; that was at least until Boomers got married and stopped buying their motorcycles cold turkey. Hundreds of Honda dealerships closed. We will see what happens to Harley Davidson after aging lawyers discover that they won't be able to walk for days after ridding their hog for a couple of hours. It's incredible how small things like these impact the macro-picture.

Cyber-Push - Online Stores
Data Graph of Online Sales' Market Share of total sales and Year over Year Market Share Change in the US as of June 2013
e-tailers Market Share
and YoY Share Growth
If you ask a local brick and mortar retailer, they will probably tell you that online retailers have stolen a large portion of their sales; perhaps upwards of 45%. Because more consumers have adopted showrooming, retailers face the challenge of constantly having to defend their pricing decisions to a growing number of customers. In fact, it wouldn't surprise me if more than 45% of customers use online pricing as a way to put pressure on local retailers.
In contrast, the evidence shows that online retailers account for a much smaller share of total sales than brick and mortar retailers estimate.
As of today, the total market share for online sales resides right below 9%. This number is a vast improvement when compared to the close to 5% from the end of 2001.
Data Graph of Retail Sales for Nonstore (online) Retailers from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Nonstore Retailers
It is important to note that the late Peter Drucker doubted that online sales' would exceed the peak market-share of less than 28% by mail-order businesses.
Even if this prescribed maximum range proves to be a robust glass ceiling, there is still plenty of growth ahead for online retailers.
The updated sales chart for Nonstore (online) Retailers shows that, besides a clear and continuous rise, sales are actually accelerating. The old trend channel has now been left behind in favor of the new upper channel. If category growth continues, which it certainly looks like it could, more overhead channel breaks are possible. This means that a reversion to the bottom channel is highly improbable in the near future. Momentum is simple too strong; especially when compared to all other retail categories. 

The Lesser Side of Change - Department Stores
Data Graph of Retail Sales for Department Stores (Excluding Leased Departments) from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Department Stores (Excluding Leased Departments)
While online retailers continue their push higher, Department Stores have recently confirmed a new leg down within their negatively sloped trend. Since the turn of the millennium, more than 25% of their revenues have evaporated. That this is happening while population continues to grow highlights their terrible predicament. Boomers are slowing their support while younger shoppers are not coming on board. 
It seems as if the decline has not been kind with all retailers equally. Some, like Macy's have fared much better than others, like JC Penney
If the downward trend continues, it will be important to recognize that even the best management teams in the industry will struggle to keep their company growing. Great markets make bad managers look great while bad markets make great managers look bad. 
While nothing moves in a straight line, I feel that a reasonable target would be for total category sales to fall to near $12,500 million by February of 2015. Again, not a pretty picture.

Pent Up Expectations - Motor Vehicle Dealers
Data Graph of Retail Sales for Motor Vehicle and Parts Dealers from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Motor Vehicle and Parts Dealers
The nation is abuzz with the idea that automotive sales have rebounded. After all, who doesn't want Detroit, a symbol of our industrial might, to come back from its near death experience.
Fortunately, Motor Vehicle sales growth has built enough momentum now that it's trying to break above the Employee Pricing Program peak of 2005. Much of the push is probably due to the pent up demand accumulated during the past few years.
Unfortunately, a portion of the stored demand will be inevitably lost. This is because pent up demand has an expiration date. When a consumer skips two years to replace an aging car, she will not necessarily buy a vehicle two years ahead of schedule in the future to compensate. As a result, I feel that the chart to the right will not revert to its long term trend; which shows too large of a gap, even for any strong gains arising from further population growth. Moreover, there is a high possibility that we may experience a near-term correction in the trend as exponential-looking charts like this one are unsustainable.

What Inflation? - Gasoline Stations
Data Graph of Retail Sales for Gasoline Stations from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Gasoline Stations
Despite an unwavering commitment by our government to argue that inflation is nonexistent, Gas Station sales seem to paint a different picture.
As it's common with strong trending markets, the recent temporary boom and bust periods did not break the long term trend.
This trend should persist. Global inflationary pressure on energy costs and refinery bandwidth should continue for a few more decades while new middle classes are formed all around the world.
The chart shows that sales have just reached their 2008 peak. The coil formation shows that this is a pivotal point. When these coils form, charts usually move violently in either upward or downward direction. The fact that sales are now touching the bottom of the long term trend channel suggests to me that the coiling process is near its end. If this observation is correct, then sales could break either way any moment now.
Since energy consumption will continue to expand globally, even through slow economic stages, I expect energy prices to increase in the near future. This would drive Gasoline revenues higher. As a result, my bet is that the pivotal point that we are witnessing will resolve with a strong push upward, even if our national economy was to slow down. Hang on to your wallets.

Boom Anew? - Building Materials, Garden and Furniture
Data Graph of Retail Sales for Building Materials, Garden Equipment and Supply Dealers from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Building Materials, Garden Equipment & Supply Dealers
Despite evidence that housing continues to recover; I am skeptical that real estate investors like BlackRock will display the endurance needed for true long-term home-price sustainability.
Not withstanding any concerns I may have, retail sales at Building Materials, Garden Equipment and Supply Dealers have continued their recovery. Not quite past the 2008 peak, the chart shows its strong regression-to-the-mean tendency. Sales are close to the long term trend.
There are many reasons why these retailers should continue to rise despite a flat housing market. Home refurbishing could be as much of a driver as new home decoration, for example. At least for now, I feel comfortable assuming that sales at these retailers will continue to grow. If anything, I may keep an eye on the slope of the rising chart. I would not be surprised if growth was to decelerate in the event of lesser total US economic growth.
Data Graph of Retail Sales for Furniture and Home Furnishing Stores from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Furniture and Home Furnishing Stores
Also not surprising is the fact that Furniture and Home Furnishing stores are at approximately the same stage in their recovery. Both, after all, are levered to housing. The only note here is that it seems as if Furniture Stores will face a greater challenge than Building Material Stores trying to retake the long term channel.
It will be worth watching inventory levels and financial leverage of any retailers within these two categories. Those with the highest exposure to risk may fail in a continuously struggling environment. This is also a time when increased operational efficiency will result in improved market positioning.



Youthful Cheer - Sporting Goods, Hobby, Books and Music Stores
Data Graph of Retail Sales for Sporting Goods, Hobby, Books and Music Stores from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Sporting Goods, Hobby, Books and Music Stores
Sporting Goods, Hobby, Books and Music Stores are well within their long term trend. This category has proven to be quite resilient through the tough times; an indication that young shoppers have successfully taken the driver's seat from their Boomer parents.
Recently, the pre-recession top was confidently cleared. Growth will probably continue at the present measured rate. I just don't see a reason why growth should accelerate.
Now that innovation could completely change the picture. Let's keep an eye of these retailers to see if they surprise us



Old Faithful  - Grocery, Food and Beverages
Data Graph of Retail Sales for Grocery Stores from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Grocery Stores
At Yellowstone National Park, there is a famous geyser. Old Faithful never fails to deliver its gushes of steam and water, no matter the time of the year or the weather.
Likewise, there are those retailers that seem to always create positive cash flows during good and bad economic times. Grocery Stores, Food Stores, Beverage Stores, Food Services and Drinking Places are always reliable. They have in common that they serve a most basic human need: nourishment.
The three charts shown here display well controlled increases in sales over the long term. The trend channels are indeed smooth and tight. When it comes to Food and Beverage stores, not much changes over time; even during extreme boom and bust cycle gyrations. Looking at the three charts, it is difficult to discern any negative effects due to the global financial crisis. At most, sales flattened for a few months before continuing growth again.
Data Graph of Retail Sales for Food and Beverage Stores from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Food and Beverage Stores
Also a sign of their tendency to perform, the 2008 pre-recessionary peak was easily surpassed by mid 2010 in all three charts.
A lot of discussions have taken place about the fact that during the recession many consumers stopped eating at mid to premium restaurants in favor of cheaper alternatives. While this may be the case at some level, the last chart (Food Services and Drinking Places) shows that overall sales did not change much. Maybe consumers changed from say a Chilli's to a Burger King; but the size of the bills did not change much based on what the chart shows. This, by the way, is not unusual when looking at large data samples. While many shifts at the micro level create quite a bit of noise, the macro picture has a mechanism that cancels out such noises.
Data Graph of Retail Sales for Food Services and Drinking Places from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Food Services and Drinking Places
As long as population continues to expand, I see no reason for any changes in behavior in these category charts.
The forecast is that we will see smooth growth for a few more years. Even if the economy was to slow down, Food sellers would at worse see a flattening in sales for a few months. Growth would return soon after.









Teenage Lifestyle - Clothing and Clothing Accessories Stores
Data Graph of Retail Sales for Clothing and Clothing Accessories Stores from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Clothing and Clothing Accessories Stores
There are many expenditures that parents can curve when trying to stay on a budget. Nonetheless, nothing is as hard for them as to say no to a relentless teenager who periodically hijacks their emotions with threats of clinical depression for not having the latest pair of jeans that "the other kids in school" wear. Yes, teenagers know how to play the spending game.
Clothing retailers also know how to press those bright and cheerful buttons. As a result, the Clothing and Clothing Accessories Stores category shows no sign of anything but continuous growth. The recession brought a slowdown in sales; something that by now is simply part of history. The category broke past the 2008 top with plenty of conviction. If anything, maybe the chart shows that we are close to a short term top that may be followed by temporary flattening or even a small pull back in sales. This would only happen if the US economy was to go into another recession. But from the demographic perspective, there is nothing on the horizon that could adversely affect this category.

Deflation Du jour  - Electronics and Appliances Stores
Data Graph of Retail Sales for Electronics and Appliance Stores from January 2000 to June 2013
Retail Sales
January 2000 - June 2013
Electronics and Appliance Stores
The electronics industry is perhaps the best supporting example of the belief that says that aggressive market competition is great for consumers, who are left with all the gains, while being terrible in the long term for the businesses that compete.
As technologies evolve, more complex manufacturing processes are compressed into tinier development times. This means that lagging competing products of good enough quality arrive to markets soon after those from the most innovating companies. Besides driving revenues lower, deflationary pressures are exerted much sooner than at any other time in history.
Then add the fact that online retailers have brought improved operational efficiency and pricing transparency to the market and you have a compounded deflationary effect. 
As a result, a store that sells the same quantity of units year-over-year will see a substantial reduction in sales and margins. In electronics, the only way to keep the head above water is by moving more boxes every single day. But even moving more boxes is challenging as the gross margin base shrinks due to deflationary pressures. There is just no money left to hire the additional people needed to handle the extra transactions. Do you now wonder why is it that places like Best Buy have fallen out of favor with Wall Street analysts? It is simply tough business. 
The updated sales chart shown here highlights the sensitivity that this category has to the economic environment. Its Beta is high. As the economy boomed, electronic sales grew past the long term trend. Now that we are experiencing an almost nonexistent recovery, sales volumes are diverging from the trend. This divergence may reflect the fact that Baby Boomers are now leaving the Electronics party in favor of other categories. This divergence also helps us anticipate an extended period of flat performance. At worst, a decline in sales could materialize; something that I am not sure will happens as long a the US population continues to expand. I guess that if we were to fall back into another recession, sales would go down for a period before flattening soon after.
At any rate, neither the picture nor the forecast are great. Keep an eye on this important category.

Finally Bending - Health and Personal Care Stores
Data Graph of Retail Sales for Health and Personal Care Stores from January 2000 to June 2013
Retail Sales
January 2000 - June 2013

Health and Personal Care Stores
Take a look at all the charts. Even the best performers like Online and Food Retailers display a recessionary elbow as part of the curve during 2008. Now look at this chart of the Personal Care category. It could be argued that there is no elbow. My feeling is that females of the Baby Boomer generation might have compromised on everything they bought for the family during the recession; everything that is but their cosmetics. If there was ever a generation of well pampered residents, theirs would be it.
But now, after risk has supposedly subsided, the chart has broken out of its long term trend. The diverging gap is in fact growing. In my opinion, this tells a very dark story about the near to mid term future for these retailers. We are at least 10 years away from seeing the children of these Boomer moms start buying the same Personal Care products and services. In fact, it is my experience that when they do come on board as clients, the younger generation will not buy the same products or shop at the same stores. I would therefore watch for innovators withing the category and stay away from any retailer that can't cover its cost of capital. For about a decade now, things may get very tough.

Hurray for US Shoppers
 In general, retail sales have demonstrated that American consumers continue to be the most reliable economic force in the global economy. While China slows down trying to control a renegade real estate market and Europe comes to the realization that incomes must be matched by productivity, the US remains the best and most desirable market in the world. People all over the planet are willing to buy our securities at ridiculous prices despite fiscal irresponsibility and political dysfunction. I believe that, at the end of the day, there are two great reasons that make all of it happen; and both are tied to American people.
Our companies are more innovative because our people. Our Retailers have experienced resilient sales thanks also to our people. Whether as a shopper or as an innovator, each American person has bought our incompetent government more time to try to get us back on track. Hurray for US Shoppers. 

Friday, July 12, 2013

2013 Top 20 Business Books List (Part II)

Q&A Section
  • Question: Can you Recommend Any Good Business Books for Executives?
  • Answer: Absolutely (Part 2)! 
This is part two of my 2013 Top 20 Business Books List. If you missed the first installment, you may prefer to start there. In part one, I discussed ten books under the categories of Economics, the Environment, Human Resources, Leadership, Marketing and Operations. Today, we will end the list by going over the books on Strategy. Yes, half of the books in the list resided in just this one category. By using trader lingo, we could say that I am overweight Strategy.
Picture of Brown book over golden marble table with 2013 Top 20 Business Books List on cover
2013 Top 20 Business Books List
Why so many Strategy books? A reason could be that Strategy is important in business. Another more mundane reason may be that bookstores offer many more books dealing with Strategy than any other business subject; something I didn't test.
The real reason why my list is overweight Strategy is that it includes three series. There are three books by Clayton Christensen, three more by Peter Drucker and two additional ones by Jim Collins. Think of it this way: if each author was represented by a single book the total number of books under this section would be five; half as many.
While there is a high risk of repetition when suggesting various books from a single author, I did not make the choices lightly. Each book series was highly influential in my professional life. In all cases, every book was needed to get a complete message from the author.
Enjoy this the second part of my 2013 Top 20 Business Books List.


Strategy

Clayton Christensen
Beauty shot picture of book by Clayton Christensen, "The Innovator's Dilemma", "When New Technologies Cause Great Firms to Fail"
When New Technologies 
Cause Great Firms to Fail;
Clayton Christensen
We start with a trilogy that offers the latest in strategic thinking. Clayton Christensen, Professor of Business Administration at the Harvard Business School, created three fantastically insightful books. Each builds on the previous.
Thus, I suggest to start with The Innovator's Dilemma, then follow with The Innovator's Solution and end with Seeing What's Next. While each book offers new and independent ideas, they are all elegantly interconnected. Christensen's concepts are effective either way, in isolation or grouped together. It is this balance between individuality and unity that makes me think so highly of his books.
Through three three books, Christensen gives structure to a series of concepts; all tremendously important for business.
Beauty shot picture of book by Clayton Christensen and Michael Raynor, "The Innovator's Solution", "Creating and Sustaining Successful Growth"
Creating and Sustaining 
Successful Growth;
Clayton Christensen
Through his work, he suggests that strategic decisions made by businesses are binary in nature. There are just right or wrong choices. Right decisions propel the business far ahead of competitors and industry standards. Wrong decisions, on the other hand, hold the business back in mediocrity. The implied message is that all organizations continuously make the wrong choices.
His logical frame begins with an analysis of what happens when innovation disrupts an industry. How do market participants respond? What do market leaders do? What are the available alternative routes? What happens when each of such routes is selected?
Beauty shot picture of book by Clayton Christensen and Scott Anthony, "Seeing What's Next", "Using Theories of Innovation to Predict Industry Change
Using Theories of Innovation 
to Predict Industry Change;
Clayton Christensen
Next, he identifies and explains the common patterns he found. With superior insight, he disproves generally accepted business beliefs that will inevitably take a company to its perish. He breaks with tradition. From there, he studies the predictability of future performance based on corporate action.
Is your head spinning yet? Yes, all that I just wrote is quite cryptic. To me, everything makes sense. But to someone who has not read the books, these words probably sound like gibberish. If I am being a little ornery, it's because I want to make sure that you read these books and discover on your own. I don't want to give too much away.
From all that I have learned over the years, I have come across many neat techniques and ideas. But I found it almost impossible to discover new fundamentally based concepts. That's why these three may be the most important books I own today. In the future, as their prescriptions evolve from strategic advantages to best practices, there may be other more important books. But for now these three are the best in this list. As you read them, try to prevent the natural tendency to simply follow the text. Instead, I recommend that you stop periodically to make an inventory of what the book just described. Along that way, you will get the best from the them.
These three books are too valuable. As an executive, you can't afford not to read them. Start now.


Beauty shot picture of book by Peter Drucker, "Managing for the Future", "The 1990's and Beyond"
The 1990's and Beyond;
Peter Drucker
Born right after the turn of the 20th century, Peter Drucker had a front row seat to the nation's evolution from an aspiring and disorderly bunch, to leaders of the economic and military worlds.
From his great perspective, he was able to discern distinct macro patterns from the otherwise noisy global picture. Peter Drucker used insights from such patterns throughout his professional life. He became the most prodigious business thinker of the century.
The three books included here describes these patterns in an extensive fashion.
He notes, for example, that coal and the steam engine had a similar effect on the economy as today's computers. Coal and the steam engine gave birth to the locomotive. Likewise, computers gave birth to the internet. Both locomotives and the internet reduced distances and opened new markets. Just like locomotives created a global economic boom, so would the internet.
Beauty shot picture of book by Peter Drucker, "Managing in a Time of Great Change"
Managing in a Time 
of Great Change;
Peter Drucker
Early in his career, he recognized the impact that knowledge would have on productivity. Along the way, he coined the term knowledge worker. Later he would dedicate much of his effort to further develop his understanding of knowledge workers, the elements that drove their productivity and their emotional makeup.
Some have recognized Drucker as the father of modern business. During most of the first half of the 20th century, corporate managers studied law rather than business. At the time, there was no such thing as a business school.
Drucker has also been credited with applying strategy to business. Prior to such change, strategy was exclusively associated with war.
Beauty shot picture of book by Peter Drucker, "Managing in the Next Society"
Peter Drucker
As if these accolades weren't enough, Drucker was too the personal adviser to Jack Welch. Much of what Jack describes in his books were originally conceived during meetings between the two giants.
It should be evident by now that a collection of books that does not contain Drucker is simply incomplete. He has greatly impacted what we now know as business. He can't be missed.
It is incredible to think that his books are full of new and relevant ideas, even by today's standards. Just imagine how much of a revelation were his innovations 40 years ago.
Yes, there are a couple of repetitions within the three books. The idea of a knowledge worker, for example, is mentioned in all of the books. But Drucker is too important of an erudite for lazy research. Besides, each book covers a broad selection of different topics. So I had to include them all. I enjoyed these books greatly and so should you.



Jim Collins
Beauty shot picture of book by Jim Collins, "Good to Great", "Why Some Companies Make the Leap...and Others Don't"
Why Some Companies Make 
the Leap...and Others Don't;
Jim Collins
Everyone has a theory of what makes a good company. These beliefs are clearly visible in the way we conduct business.  But the reality is that no one really knows with a high degree of scientific certainty whether what they think is valuable or just voo-doo.
No one, that is, except Jim Collins. His first book, Good to Great, became a sensation precisely because it offered strong evidence that contradicted many widely held beliefs. Collins conducted an exhaustive study of public company data that lead him to many important conclusions. He framed these conclusions with the question: what makes a Good company become Great?
And that is how it all started. Collins applied regression analysis to determine how Good companies became much better than their peers. His first book documents the methodology he used and the results obtained.
Beauty shot picture of book by Jim Collins and Jerry Porras, "Built to Last", "Successful Habits of Visionary Companies"
Successful Habits of 
Visionary Companies;
Jim Collins
Very impressive is the fact that he was able to turn a scholarly document of such data-rich nature into a narrative that any manager could follow.
How do great companies set goals? What do they do or stop doing? What are the characteristics of their employees and leaders?
After dominating such a beast of a project, it occurred to Jim and his team that they should try to conquer an even greater challenge; their aim was to transcend time. They wanted to know what does it take to create a company that could outlast all other? Where there any special kind of founding principles? What about culture and practices? Was the leader's vision important?
I hope that by now you are excited with anticipation. The two books are fantastic and should be read in order, to get the most out of them. Jim is clear in his delivery. The ideas are all actionable on their own or as part of a complete restructuring effort. Best of all, his findings fit nicely with results from many other great researchers.
They are so good that you will want to share these books with everybody in your team.


Thomas Friedman
Thomas Friedman, multiple Pulitzer Prize winner for The New York Times, offers one of the most relevant geo-economic insights of our time.
Beauty shot picture of book by Thomas Friedman, "The World Is Flat", "A Brief History of the Twenty-First Century"
A Brief History of the 
Twenty-First Century;
Thomas Friedman
During one his many travels abroad, he noticed a pattern. The international playing field was beginning to level. The gaps in information, market transparency and access to resources between people in advanced nation, like the US, and those living in places like India begun to converge. It was this leveling that inspired the name of the book. The World is Flat describes how, for the first time and thanks to the internet and the digital age, people in faraway places are beginning to participate at a more equal level in our markets.
When I hear employees complain that the Chinese are taking their jobs, I reply that the Chinese are also fighting for my job. Even business owner's risk losing their job to business owners abroad. You see, the Chinese have a deeper commitment to becoming educated than most Americans. While we are trying to stop schools from giving homework to our children, Asians are often upset when homework is too easy or when there isn't science work for students to do at home. Now that many great colleges are offering free education online, it is a real shame that the only ones taking advantage of it are foreigners.
Then add the fact that Asians have a solid work ethic and you now can see the challenge. They are willing to learn more, work harder and get paid less. Even Steve Jobs once said that it was difficult for Americans to compete with the Chinese to make the iPhone. But the problem is not limited to factory workers and other forms of skilled labor. There is an incredible amount of new patents being created by Chinese divisions of companies like Microsoft. In no time, China will graduate more engineers than the US and the pressure on knowledge workers will increase. This should be a warning to doctors who think that they will always be able to charge as much as they want. Many X-ray charts are already being evaluated by experts in India overnight, for example.
A hungry and aggressive manager in China with such an educated and dedicated team, could easily push an American company into failure; ending all future-wealth dreams of the North American business owner.
For the first time, this book made me realize that we have now extended the major leagues to include additional and very competitive teams and players from abroad. Competition will therefore get tougher rather than easier.
The change is inevitable. We should stop complaining and start working faster and more effectively. It is time to stop the leisure that so many people in this country feel entitled to.
Always do remember that all these new comers don't want us to fail. They just want to drive the same BMW's. You will enjoy this book very much.


Kenneth Gronbach
Would you like to know what the future holds for your industry? How about any other industry? There is a method that renders a future economic forecasts of unbelievable accuracy.
Beauty shot picture of book by Kenneth Gronbach, "The Age Curve", "How to Profit from the Coming Demographic Storm"
How to Profit from the Coming 
Demographic Storm;
Kenneth Gronbach
Births are the only event that takes place in the past that can also offer a window into the future. While Harry Dent is perhaps the best known of the practitioners of demographic based analysis, it wasn't until Gronbach's book that I came across the concept. I therefore credit Gronbach with helping me understand it. The book is easy to read and his examples are clear and relevant.
Why did the number of Honda motorcycle dealers decline after Top GunThe movie hit theaters everywhere and created a great image for the products. Why did sales decline despite Honda's better engineering, better products and more competitive prices? Even the extensive marketing campaigns couldn't prevent revenue losses.
The reason behind this tragic business tail is that new wives do not approve of street rockets for their new husbands. Want to understand more? Read the book.
I will warn you that it'll be too easy to dismiss any ideas as being nice but unimportant for daily use. Bad managers keep their schedule busy by running from fire to fire. They are chaos experts. Like five-year-old's playing soccer, these leaders are data-dependent. They cluster together chasing the ball rather than running to where the ball will be. Like with soccer, it takes maturity to get a manager to see beyond the short term. This is why I believe that a great manager has the ability to compartmentalize short, medium and long term goals in a way that none is ignored. We should always keep an eye on all three of these periods regardless of the number of emergencies at hand.
The information contained in this book will fit nicely in the long term compartment. This is not because demographic-driven events never take place. No. It is because the long term eventually turns into medium and then short term. All demographic considerations thus transform from data into actionable strategy.

2013 Top 20 Business Books List
While it is difficult to recall every important fact in so many books, especially those I read over ten years ago, I aimed at creating a comprehensive list that could serve as a great informational foundation for any executive. Now that the list of complete, I hope that you find it relevant and valuable. 

Wednesday, July 10, 2013

2013 Top 20 Business Books List (Part I)

Q&A Section
  • Question: Can you Recommend Any Good Business Books for Executives?
  • Answer: Absolutely! 
Photo of black hard cover book with the phrase "2013 Top 20 Business Books" embossed on its cover
2013 Top 20 Business Books List
I will split it into two parts. Today, I will cover the first ten books.

Introduction
Many years ago, my grand father thought that the time had come to push my father, who was a teenager at the time, to read a real book. As a normal youngster, my father had many more important things to deal with than to read books. Tired of the pressure nonetheless, my father asked grandpa for a book to read. "I want to make sure that I read a good one", he said. To what my grand father replied, "how would you know it's good if you haven't read the bad ones?"
If I was to follow my grandfather's advice, I would have you read the good books as well as the bad ones. But just this time, it may be a good idea not to follow the wise-man's suggestion.
I have read over 250 books, most of which were business related. At an average speed, reading all of them should take about five months of solid dedication. Unfortunately, about half of them were a waste. From the rest, I consider 20 or 8% of the books to be fantastic.
As a way to benchmark the list, let's compare to Zappos' Library. Zappos, the online shoe retailer owned by Amazon, has 38 books as part of the library they offer to their employees. Zappos lets its employees take any of these books home any time they want. This is part of their seriously solid culture. I visited their offices and found their library to include the books I had read and many of the ones I am suggesting in this article. As someone who admires the company, I felt this was a great coincidence.
Photo of reading glasses over an open book. The subtitle reads "Lee un Buen Libro" in Spanish.
Lee un Buen Libro
But what if your top book is not on my list? Well, consider the fact that I have not read everything. Besides, it is always possible that I may be wrong.
In any case, you can still feel reassured that all the books on my list are serious contenders when compared to all other books, even if not absolute number-ones for each category.
A few of the books I am recommending are easy to read thanks to their narrative style. Books from authors Louis Gerstner and Jack Welch fall under this category. Then there are those that are densely packed with technical information. These may need to be read twice. But don't even think of skipping them. While harder to read, these contain incredibly innovative concepts. That is why they make it into the list. Paco Underhill's book and Clayton Christensen' fantastic trilogy fall under the latter more difficult category.
As a group, these books cover most topics within business; a coincidence that makes me feel good about the selection. From reading the blog you should know by now that I like to maintain broad business coverage.
The books are placed within various business categories to prevent having to rank unrelated books together. There are books on Economics, the Environment, Human Resources, Leadership, Marketing, Operations and Strategy.
Following are the first ten books from my 2013 Top 20 Business Books List. The second set of books will be available in a following post. Enjoy!


Economics
If you manage a business, you must understand economics. How else will you see the environment outside your window with the clarity needed to allow you to chart a successful plan? Let's also not forget that economics helps us understand how is it that people make buying and selling decisions; something of paramount importance.

Beauty shot picture of book by Tim Harford, "The Undercover Economist", "Exposing Why the Rich Are Rich, the Poor Are Poor-and Why You Can Never Buy a Decent Used Car!"
The Undercover Economist
The Undercover Economist
Exposing Why the Rich Are Rich, the Poor Are Poor-and Why You Can Never Buy a Decent Used Car!
Tim Harford
I have read more books on economics than on any other subject. While many of them are easy to read and understand, these are often so basic that they feel repetitive; covering the same simple principles over and over.
Then, there are a few more that offer interesting new ideas but at a high access-cost to the reader. They are just hard to follow by those not intimately familiar with economics concepts and terminology. Because I felt that a general and clear understanding of the subject is preferable for typical executives, I stayed away from the latter; those books covering complex concepts. Instead. I opted for a book that could communicate with a high degree of clarity and relevance.
Tim Harford's book exceeded my threshold. It is simple to understand, broad in nature, focused when it matters and, at times, very funny; if there is such a thing as a funny economics book. It breaks the ideas discussed into easy-to-relate fragments. Why is it impossible to get a good used car? Read the book. You'll enjoy it. By not getting deep into the weeds, this is a book worthy of periodic recommendation.


Environment
Talking about the environment turns off many executives. But things are changing. While there was a time when employees were abused by their employers, today the best companies are those who treat employees with dignity.
I am not talking about feeding a sense of entitlement or giving in to value-eroding unions. Instead, I am referring to understanding that we are all members of a community that thrives when we all thrive. Game Theory tells us that to win big and often, everybody needs to give-in a little.
When we learn to honor our civil responsibility, by eliminating all harmful outputs, companies and citizens win. Notice that I didn't say we should protect this or that part of the environment. Making such statements inevitably leads to the kind of debates that derails the conversation away from the real issue. No harmful outputs is the goal instead.
This is not a matter of being a tree-huger or a regulation-lover; neither of which I am. In fact, I believe that regulations lead to wrong and unexpected outcomes; no matter how well intended such regulations may be.
In markets, greed is behind the creation of all of the value gained by every participant. That is what Adam Smith's invisible hand time-tested concepts suggest. Likewise, I feel that it is possible for greed to drive environmental responsibility. In other words, I believe that market forces, and not an over reaching government, lead to the right environmentally responsible solutions. It just takes leadership and confidence. The same stuff needed to treat employees with dignity. Note that this section may prove to be of greatest difficulty to many leaders.

Beauty shot picture of book by Ray Anderson, "Confessions of a Radical Industrialist", "How my company and I transformed our purpose, sparked innovation, and grew profits--by respecting the earth"
Confessions of a
Radical Industrialist
Confessions of a Radical Industrialist
How my company and I transformed our purpose, sparked innovation, and grew profits--by respecting the earth
Ray C. Anderson
Innovation is the best tool for business. At least from the point of view of economics, innovation is the only multiplier in the master productivity formula. To establish the size of a given economy, add labor and capital together and multiply the result by innovation. While labor and capital lead to linear growth, innovation leads to exponential expansion.
It is therefore essential that we deploy innovation to solve the challenge of creating businesses that are free from harmful outputs; as we have now defined our environmental responsibility. The target is for the same engineers that find better ways for business to profit to also devise creative solutions to the environmental challenge.
Interface Inc., lead by former CEO Ray Anderson, did exactly that. It didn't need regulations to become more responsible. Along the way, the company discovered that solutions that eliminat harmful outputs also improved company efficiency and subsequently raise profitability.
What would you do if you were trying to find the best way to transport a product from China to the US; at the lowest cost, fastest time, with the lowest risk of loss, and in the most customer-centric form? You would hire expert engineers to design everything: from packaging, to inner and outer cartons, to the best logistical route. Well, the environmental challenge is no different. You need engineers that will innovate for you. They will design changes that will eliminate waste and thus save you money. If you do it better than your competition, customers will be happier to spend more money with you. This is exactly what Interface Inc did. And Ray Anderson clearly describes every aspect of this process in his fantastic how-to guide for business leaders.
That Mr. Anderson was able to uniformly motivate so many professionals to solve environmental problems while increasing corporate profits shows his leadership ability. He empowered people to a higher goal.
At some point through the book, it will be clear that Anderson's environmental plans became a strong influence on President Obama's initial months in office. But don't let this turn you away from the book. Anderson accomplished incredible results by motivating and empowering others. In contrast, Obama uses fiat and dictatorship as part of a plan that has predictably failed to gained any traction. One was a competent leader while the other is not. Anderson obtained the results that Obama can't. The book is simply about doing things right and in no way endorses the incompetent White House resident.
Because it deals with an inevitable future where there will be less resources available, this book is a must-read for all leaders; especially those who use LEAN.


Human Resources
For Jack Welch, Human Resources was the most important side of business while at General Electric. This is, after all, the department that finds and develops the best employees the market can offer. HR establishes compensation, educates and gauges adherence to rules. As a result, this department can make or break your business.
What's interesting is that there aren't a lot of good books that deal with HR. It is as if legal compliance and insurance contracts were all that HR had to deal with. These facts make the following book even more valuable as it deals with the fundamental science behind human success instead.

Beauty shot picture of book by Daniel Goleman, "Emotional Intelligence", "Why It Can Matter More Than IQ"
Emotional Intelligence
Emotional Intelligence
Why It Can Matter More Than IQ
Daniel Goleman
I doubt that Daniel Goleman had the slightest idea that his research would become a cult. The term Emotional Intelligence has certainly taken over the business education industry.
While he wasn't the first to coin the term or even to discover that IQ (Intelligence Quotient) scores failed to have any correlation with human success in life, he did develop the subject to its point of critical mass. Thanks to him, Emotional Intelligence has now been democratized. We can all benefit from it.
Be prepared to read a highly technical book. It is, after all, a seriously scholar paper. This means that since you are not a psychologist, you will probably find much of the initial terminology a little dense. But be patient. Soon, you will be describing the Limbic System with the same degree of dexterity as any surgeon.
Today, every business school offers courses on Emotional Intelligence, the kind of intelligence that matters in the real world and which is the focus of this book. Look online and you will find countless Emotional Intelligence groups and certification programs. Regardless, this book is the only original.
Next to Emotional Profiling, Emotional Intelligence is the most important concept to master. Unfortunately, I have yet to come across a good book on Emotional Profiling. Thankfully, Emotional Intelligence is well covered here.
Understanding the book's concepts will also result in a much happier you. Not because this is a Kumbaya book, but because it clearly explains how you are and what can be done with what you have. This book is so good that it is often quoted by the best business writers.



Leadership
The books in this section are by far the easiest to read. Narratives seem to always resonate with people. Deep inside, we all like stories. But these are not just superficial stories. No endless Rich-Dad-Poor-Dad narratives where one is left wondering where the new insights were. No! These are documents full of the right stuff. They have as much essence as a Harvard Business School case study.

Beauty shot picture of book by Andrew Grove, "Only the Paranoid Survive", "How to Exploit the Crisis Points That Challenge Every Company"
Only the Paranoid Survive
Only the Paranoid Survive
How to Exploit the Crisis Points That Challenge Every Company
Andrew S. Grove
Only the Paranoid Survive is an incredible book. It narrates the difficulties endured by Intel on its way to becoming the company we now know. There was a time that things were so bad that Andy Grove, the author, faced the possibility of being fired. This prompted him to explore what would happen if he was fired and then re-hired for the same position? He asked, what would a recently hired Andy do with the problems? What would the changes be? Then, with his new insight, he executed. There were no sacred cows or pet projects left. This became a unique moment highlighting the importance of introspection; a point discussed in Emotional Intelligence.
The book addresses how Intel was reinvented after the company had to completely abandon what it did best in order to survive. Andy also discusses the interesting concept of 10x performance improvements.
After reading Only the Paranoid Survive, you will be left with the conviction that seeing way into the future is indeed possible when surrounded by capable people.

Beauty shot picture of book by Louis Gerstner, "Who Says Elephants Can't Dance?" "How I Turned Around IBM"
Who Says Elephants
Can't Dance?
Who Says Elephants Can't Dance?
How I Turned Around IBM
Louis V. Gerstner
I came across this book by accident. I found it on a bargain shelve at a TJ Maxx. You know, the kind of shelve where everything looks like garbage. It was quite a find, if there was ever one.
Since the book is old, you may have difficulty buying it. It is nonetheless worth the search.
Louis Gerstner came from McKinsey via American Express. Next to the Boston Consulting Group and Bing and Company, McKinsey is at the top of the business consulting world.
His ability to be both incisive and a clear thinker meant that he was born to solve complex problems; and it turns out that IBM had massive problems indeed. This book narrates his experience trying to break bureaucracy and lethargy at Big Blue. After his arrival, Wall Street analysts asked what his strategic plan was. He responded that IBM had lots of those in their file cabinets. Clearly, that statement took backbone.
Under Gerstner, IBM went from a capital-intensive electronics manufacturer to a high return-on-capital consulting firm. Profits and employee morale skyrocketed. It is perhaps the best reinvention of a company in the history of American capitalism. Gerstner prevented IBM from experiencing a Kodak moment. The book serves as a guide on how to successfully turnaround a business.

Beauty shot picture of book by Jack Welch, "Jack", "Straight from the Gut"
Jack
Jack
Straight from the Gut
Jack Welch, John A. Byrne
To many, Jack Welch is the best CEO of our time. Direct and unstoppable, this man was once known as Newton Jack. After taking the leader's chair at General Electric, he cut employees by such large numbers that it was said that only the buildings were left standing. He then started the turnaround. Under his control, GE became insanely profitable. Employees delivered much more value for him than for any other executive anywhere.
Jack introduced the idea of cutting the bottom 10% of employees to replace them with better people. His belief in education resulted in Crotonville, GE's Leadership Development Center where all promising stars are prepared to lead one of GE's many companies. Jack also took Six Sigma, Motorola's operational invention, to the ultimate level. By defining clear but demanding goals, Jack created a culture of performance never before seen in industry. If you like your job as a corporate leader, you will love this book.


Marketing
The art of creating demand for your products depends on your ability to understand your customers. The two books listed here are, without question, miles above any marketing theology books. Both rely on very solid research. They have proven to be effective under all circumstances.

Beauty shot picture of book by Paco Underhill, "Why We Buy", "The Science Of Shopping"
Why We Buy
Why We Buy
The Science Of Shopping
Paco Underhill
When it comes to Paco Underhill's work, I could go on and on dishing out accolades. I understood consumers and their shopping behavior only after reading this book. Before the book, I thought I knew something. After understanding Paco's work, I realized I was wrong. Chances are that you too will find much of what you're missing.
This book has tons of great information; so much so that it is like drinking water from a fire hose. No matter how thirsty you are, it is still a lot of information coming your way. I therefore recommend that you allocate enough time to fully digest the many great concepts Paco shares with his readers.
For a short insight into the solid work done by Paco and his army of researchers, read my previous post on this book.

Beauty shot picture of book by Clotaire Rapaille, "The Culture Code", "An Ingenious Way to Understand Why People Around the World Live and Buy as They Do"
The Culture Code
The Culture Code
An Ingenious Way to Understand Why People Around the World Live and Buy as They Do
Clotaire Rapaille
Do you know what's the difference between what Americans and the French think of cheese? American's view cheese as dead. It comes in a body bag. You keep it in the refrigerator. It's cleansed through pasteurization. The French, on the other hand, view their cheese as alive. It constantly evolves (grows more mold). It is kept outside the refrigerator. It's not pasteurized.
But the interesting question here is not about cheese. Instead, all value lies on the methods Clotaire Rapaille used to figure what we think about cheese. Think about it: we all know that consumers would never describe their food as dead, for example. This is what's most impressive about his work. He synthesizes research results until the solution is clear. What looks like a soft science after initial review, turns out to be very effective at deciphering what people want; all without asking them for a description. No need for the usually misleading focus group. Even Henry Ford commented that if he had asked customers for what they wished for during the developing the Model T, they would have asked for faster horses.
Mr. Rapaille's work and credibility are simply fantastic. He is on retainer with almost all the big companies in the US. His book is therefore a very important tool for anyone wishing to create strategic initiatives aimed at satisfying consumers.


Operations
What would you answer if I asked: what's the main goal of your operations department? I have asked this same question to dozens of operations managers and found the results to be quite disappointing.
The elimination of all waste! That's the goal. Time, labor, money and space are just a few forms of the resources that could be wasted. As a result, operations should engage with every aspect of business. Sadly, I have come across managers who think that operations are only responsible to supply desks and pens to employees. What a waste of opportunity.
Think about it. As a manager, you have two main responsibilities: to increase sales plus reduce costs. Operations deals with half of this equation. Yet, it is seldom taken seriously in business. Some managers think that being tough while negotiating with a vendor is all they can do to eliminate waste. Others think that counting toilet paper sheets delivers the goods. The problem with either is that they are treated as an art that only the manager is capable of doing, rather than a portable system that could be carried by all employees. They'll never become part of the company's culture and will have no chance at creating continuous improvements. To be of real value to the business, any waste-eliminating practice must be systemic. The books I selected send this message very clearly. They also show how important operations are for a business. Best of all, they do not get lost in the statistical jungle of LEAN and Six Sigma as many other books do.

Beauty shot picture of book by Charles Fishman, "The Wal-Mart Effect", "How the World's Most Powerful Company Really Works—and How It's Transforming the American Economy"
The Wal-Mart Effect
The Wal-Mart Effect
How the World's Most Powerful Company Really Works—and How It's Transforming the American Economy
Charles Fishman
This book by Charles Fishman left me with a feeling of awe. It is clear that there is no company in the planet that is as equally committed to efficiency and the elimination of waste as Wal-Mart. They are, literally, vicious about savings.
Be prepared to read about how the company focuses on activities that would be viewed as trivial by competitors. From the way boxes are reused to the constant pressure they put on their vendors to reduce costs. Did you know that it was cheaper for Walmart to pickup products from Procter & Gamble than to have P&G ship them to Wal-Mart?
In their world, every fraction of a cent matters. There are just so many ready-to-use business practices within this book that it would be a terrible shame to skip it. The author does a great job keeping things objective. In today's Occupy Wall Street world, it would be easy to criticize Wal-Mart for their practices. But doing so would miss the institutional improvements that they have implemented for the benefit of their customers.

Beauty shot picture of book by James Womack and Daniel Jones "Lean Solutions", "How Companies and Customers Can Create Value and Wealth Together"
Lean Solutions
Lean Solutions
How Companies and Customers Can Create Value and Wealth Together
James P. Womack, Daniel I. Jones
This great book by James Womack, professor at the Massachusetts Institute of Technology, made me understand the true value of LEAN. It gave me a rare a-ha moment.
The book keeps the message clear from jargon or data. It is therefore accessible by every executive regardless of statistical-analysis experience.
LEAN focuses on the elimination of all non-value-add activities. But this phrase carries no meaning without context. You will need the explanations contained in this book.
Best of all, the book takes a manufacturing-centric idea and expands it to other business areas. When you read it, don't just follow the words. Instead, take everything the book describes and ask how it could be applied to your industry. LEAN is a great concept because it is naturally flexible and adaptable. It's therefore very possible that you may turn into an executive who gives LEAN new uses.

The Second Part
In my next post, I will tackle the rest of the books. As a matter of coincidence, the second part of my 2013 Top 20 Business Books List deals exclusively with Business Strategy.