Authors Michael E. Raynor and Mumtaz Ahmed have set out to understand what truly great, long-term companies have in common versus the once-off, hero-of-the-moment type companies who might only be around for a short time. As business leaders we are constantly being swayed backwards and forwards by the “latest” thoughts and analysis from business experts.
While it’s interesting to read about how these companies came about and the flamboyant characters behind them, how much can the data be trusted in helping to build your company? Raynor and Ahmed, both involved in strategy and innovation at Deloitte, have set out to remove sheer luck and other coincidental criteria to analyze excellence through a cold, hard set of metrics.
Their book, The Three Rules: How Exceptional Companies Think, ignores celebrity infatuation and media hype around innovation, and digs deep into a sea of data from more than 25,000 companies spanning forty-five years. Their five-year study began with a sophisticated statistical analysis to identify which companies have truly exceptional performance.
From the initial 344 companies they examined, 27 where eventually put under the spotlight to examine what made these stand-out performers different. These companies are found in the unlikeliest of places and many have never been considered game changers. As they state in the book, “We started our investigation in a sector that, like air, is essential and invisible. America’s trucking companies literally keep the economy moving yet collectively make up what might just be the world’s least glamourous industry.
There has never been a trucking stock-market bubble, never a global crisis precipitated by trucking companies’ risk management practices, barely a whiff of glitz or glamour, not a single save-the-world invention, and no Nobel Prize winners.”
In the early 1980s we were fed international bestsellers such as Tom Peters’ In Search Of Excellence, one of the biggest selling and most widely read business books ever, selling over 3 million copies. Jim Collins followed in the 1990s with the first of four best sellers, Built To Last, Good To Great, How The Mighty Fall and Great By Choice.
While each of these titles became legendary, required reading among aspiring entrepreneurs of the day, they weren’t without controversy. Accusations of skewed data and the premise on which Collins selected companies emerged and questions around what defined “greatness” were levelled at Collins.
While both authors certainly got us thinking at the time and probably inspired many ventures, Raynor and Ahmed have now emerged to re-examine the concept of what makes a remarkable company by focussing firmly on the data. They found that exceptional companies, when faced with difficult decisions, follow three rules:
- Better before cheaper. They rarely compete on price.
- Revenue before cost. They drive profits through price and volume, not thrift.
- There are no other rules. Everything else is up for grabs, and they are willing to change anything to remain true to the first two rules.
Basically, don’t undervalue yourself during tough times, focus on creating value using better services and products before cheaper and stick to rule number 1 and 2 without becoming too distracted. The quest for greatness leads naturally to the study of great companies.
Unfortunately, the study of great companies does not lead to great insights. Moving beyond the entertaining corporate biographies we are fed by the marketing departments and advertising agencies of these companies falls short of the hidden and powerful generalizations that the authors set out to find – that can show who is truly performing over the long term.
“Getting beyond mere storytelling demands that we isolate the effects of a company’s behaviors on its performance from many other significant influencers, such as industry structure, the pace of technological change, unpredictable regulatory regimes, globalization and even dumb luck.” If you’re expecting to be dazzled with cool anecdotes from companies that produce desirable items then this is not the book for you.
Instead, Raynor and Ahmed have focused on “finding signals in the noise” as they put it. They are of the opinion that our intuitions are terrible judges of what constitutes a meaningful difference in performance. A 1 percent return in profits over 3 months sounds more important when it’s scaled up to the same return over 10 years.
The latter feels like a significant difference, yet is this a difference worth exploring, and more importantly, trying to replicate in your business? Raynor and Ahmed divided their findings into three categories, the Miracle Worker, the Long Runner and Average Joe, in a first step to uncovering the behavioral differences that make some companies better than others.
Picking apart typical business strategy plans such as customer focus, smart acquisitions, organic growth and risk-taking, the pair show that neither sound economics nor charismatic leadership are the key drivers in achieving exceptional performance.
The Miracle Workers made choices that were consistent with the three rules mentioned above while the Long Runner’s and Average Joe’s consistently violated them. In a recessionary environment where long-term sustainability has become a crucial objective for many companies it makes sense to remember that role models for exceptional performance are not only found among the cool, fashionable companies we know so well, but among a broad, holistic field of different sectors that might reveal unlikely leaders.
While Raynor and Ahmed can be overly businesslike and analytical at times, their refreshingly frank views in the book cut through the guru hype of business coaching and deliver hard data that might alter the way you view Fortune 500 companies in the future.