I was at a Nasdaq event a week ago where Michael
Raynor and Mumtaz Ahmed, talked about their new book – the THREE RULES: How Exceptional
Companies THINK
From an 80/20 perspective I like the simple memorable 3 rules, backed by
compelling evidence, that can make increase the likelihood of long term
sustainable success instead of just the “right place right time lucky
one’s”.
Below is an excerpt from a HBR review of the book and
the authors.
Much of the strategy and management advice that
business leaders turn to is unreliable or impractical. That’s because those who
would guide us underestimate the power of chance. Gurus draw pointed lessons
from companies whose outstanding results may be nothing more than random
fluctuations. Executives speak proudly of corporate achievements that may be
only lucky coincidences. Unfortunately, almost no one provides scientifically
credible answers to every business leader’s basic questions about superior
performance: Which companies are worth studying? What sets them apart? How can
we follow their examples?
Frustrated by
the lack of rigorous research, we undertook a statistical study of thousands of
companies, and eventually identified several hundred among them that have done
well enough for a long enough period of time to qualify as truly exceptional. Then we
discovered something startling: The many and diverse choices that made
certain companies great were consistent with just three seemingly elementary
rules:
1. Better
before cheaper—in other words, compete on differentiators other than
price.
2. Revenue
before cost—that is, prioritize increasing revenue over reducing costs.
3. There
are no other rules—so change anything you must to follow Rules 1 and 2.
The rules don’t dictate specific behaviors; nor are
they even general strategies.
They’re foundational concepts on which companies have built greatness
over many years. How did these organizations’ leaders come to adopt
them? We have no idea—nor do we know whether the executives even followed them
consciously. Nevertheless, the rules can be used to help today’s and tomorrow’s
leaders increase the chances that their companies, too, will deliver decades of
exceptional performance.
Beyond Truisms
The impetus for our research was the increasing
popularity over the past 30 years of “success study” business books and
articles. Perhaps the most famous of these are Thomas Peters and Robert
Waterman’s In Search of Excellence (1982) and Jim Collins’s Good to
Great (2001), but there are many others. The problem with
them is they don’t give us any way to judge whether the companies they hold up
as examples are indeed exceptional. Randomness can crown an average company king for a year,
two years, even a decade, before performance reverts to the mean. If
we can’t be sure that the performance of companies mentioned in success studies
was caused by more than just luck, we can’t know whether to imitate their
behaviors.
We tackled the randomness problem head-on. Finding what
we assumed would be weak signals in noisy environments required a lot of data, so we began with the largest
database we could find—the more than 25,000 companies that have traded on U.S.
exchanges at any time from 1966 to 2010. We measured performance
using return on assets (ROA), a metric that reflects strong, stable
performance—unlike, say, total shareholder return, which may reflect the
vagaries of the stock market and changes in investor expectations rather than
fundamental company performance. We defined two categories of superior results:
Miracle Workers fell in the top 10% of ROA for all 25,000 companies often
enough that their performance was highly unlikely to have been a fluke; Long
Runners fell in the top 20% to 40% and, again, did so consistently enough that
luck was highly unlikely to have been the reason. We call the companies in both
these categories exceptional performers. For comparison purposes, we also
identified companies that were Average Joes.
