If
you want your company to be the best, there are three rules:
1.
Be better.
2.
Don't be cheap.
And
3. There are no other rules.
That's
according to a recently released book co-authored by Deloitte director Michael
Raynor and strategist Mumtaz Ahmed, The Three Rules: How Exceptional Companies
Think (Portfolio/Penguin, 2013). Raynor, who earned his doctorate from the
Harvard Business School, and Ahmed, along with a team of researchers, analyzed
a database of 25,000 companies across hundreds of industries spanning 45 years
to identify those companies that were statistically "exceptional."
Defining
"exceptional" was a project in and of itself, but it began with one
question: "How much of a difference is enough to make a difference?"
What Raynor's team ended up doing was generating something of an actuarial
table for business success. "If somebody says I am 82 years old. Is that
person old or not? Well, if they live in the Northern Islands of Japan, that is
early middle age because those people live forever. If they are from Tanzania,
they are probably the oldest person in the country. What counts as old is a
consequence of your context."
Raynor
and his team also developed a mathematical algorithm that corrected for age of
business, date, amount of debt, size and industry, among other variables. The
goal of the analysis was to strip out the effects of luck and variation to come
to an answer to the question: "What do managers do to make companies
great?" says Raynor, who is based in Mississauga in Ontario, Canada.
After
identifying 344 top performers, Raynor and his team, who officially started
working on the project in 2007, looked for common traits to define how those
exceptional businesses acted.
The
team largely came up empty.
However,
when Raynor and his team started to look at how those exceptional companies
think, the principles started to become clear.
They
are as follows:
1.
Better before cheaper. Differentiate yourself from your competition based on
quality, not price. While you may achieve some level of success undercutting
your competition with cheaper prices, you will almost never become exceptional
on a price-based model.
2.
Revenue before cost. It will be more valuable to your company to drive your
revenues higher than it will be to drive your costs lower. Cutting costs may
result in some degree of success, but, most likely, your company won't sustain
an exceptional level of greatness.
3.
There are no other rules. Technology, talent, markets, people -- it can all
change. But don't mess with Rule 1 or Rule 2.
Exceptional
companies include long-haul trucking company Heartland Express and teen
clothing retailer Abercrombie & Fitch. The companies are all publicly
traded companies, larger than the sorts of companies that many young
entrepreneurs may have on their hands. But Raynor says the three rules still
apply to younger, smaller companies, if with a modicum of compassion in the
application.
Consider
the rules "a compass, rather than a map," says Raynor. "You are
lost in the forest and somebody says civilization is North. If I hand you a
compass, I have done you a favor. You still have to be creative. You can't just
walk straight north, you will bump into a tree, walk off a cliff, do whatever
it is you do. And so sometimes you have got to go East, West, double back South
even and really pay attention to cost for a while, but you want to make sure
that over time, you are pushing your company in one direction versus
another."
Very
often, new startups are especially cash strapped. And Raynor recognizes that.
But the rules of putting quality and revenue first still apply on a comparative
level.
"If
you want to have higher profits than your competitors, the way to do that
systematically is not to have lower costs than your competitors," he says.
Raynor
cautions that this doesn't mean businesses should put "gold-plated Aeron
chairs and Godiva chocolates in all the conference rooms," but that
businesses should figure out where they are better than their competition and
exploit that gap with higher prices or higher volume, not lower costs.
"It
is all about your relative position. If you want to be relatively more
profitable, you want to have relatively higher volume and/or relatively higher
price" than your "relevant" competition, he says.
Courtesy: www.entrepreneur.com
