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A huge number of business books fall into the category of “success studies.” They use examples of great companies or executives to make a point or give advice on how to excel.
Most of them use businesses that aren’t actually exceptional, but just lucky, according to Deloitte Services Director Michael Raynor.
He’s the co-author of the recently published book “The Three Rules: How Exceptional Companies Think,” which aims to separate chance from true greatness.
Raynor says when they examined other authors’ success studies, the “overwhelming majority” of companies they used weren’t good enough for long enough to convince him that their success was more than luck.
The difference between his research and everything else that’s been done was the sheer depth. They looked at 25,000 different companies over 37 years. Additionally, they looked at return on assets (ROA), a metric that shows stable performance, rather than shifts in market or investor opinion.
Out the 25,000 companies the authors examined, only 344 were found to be truly great over the long term.
To find out why, they tested a variety of strategies or behaviours that might account for outperformance, like customer focus, the ability to innovate and risk taking. But in the end, it wasn’t any strategy that was consistent across all of these companies; it was a certain way of thinking that defined everything they did. The authors boil it down to three rules:
Better before cheaper
You can often sell more than a competitor by slashing prices. But eventually the competitor will bring prices down as well. The only way to consistently win is to find a way to make your product better, more available, build an appealing brand, or provide better service. In other words, you must differentiate yourself in a meaningful way beyond price.
Revenue before cost
The companies that were most successful over the long run didn’t get there by being the leanest, least expensive operations. They won out by charging higher prices and increasing volume. Cost-cutting can be an effective short-run strategy, but it doesn’t last.
And there are no other rules
The key is that beyond those first two rules, and even in following them, there are endless options and variations. The ingenuity of the strategies and products that allow businesses to charge more and make more money than their competitors are endless and often unique.
Anything that goes against those first two rules should be changed.
It sounds simple, but given that only a tiny subset of companies survive at all, let alone thrive for decades, it’s clear that the reality is very complex.
Knowing the rules is the easy part, and most people would agree with them.
“What you tend to see is that as soon as you face even the mildest of headwinds people start reaching for the price-cutting and cost-cutting levers,” Raynor says. “When you think of the range of options you have to consider if you’re going to commit to differentiation based on value rather than on price, the number of different ways that you do it is, in theoretical terms, infinite and, in practical terms, overwhelming.”
The price and cost levers, as Raynor calls them, are right there in front of a manager. Those cuts are easier to execute, and results seem more certain. That’s a difficult temptation for business owners to avoid. Rather than confront the ways of making a product different, or better, or finding a new market, too many companies slash costs and prices at the first hint of adversity.
That’s not the path to long-term success. The three rules are simple to understand, but extremely hard to follow. The best companies don’t take the easy way out; they find a way to provide more value at every turn, and get consumers to pay for it.
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