Source: The Economist
A more rigorous attempt to dissect the corporate mind and its effect on success
NOTHING succeeds in business books like the study of success. The current business-book boom was launched in 1982 by Tom Peters and Robert Waterman with “In Search of Excellence”. It has been kept going ever since by a succession of gurus and would-be gurus who promise to distil the essence of excellence into three (or five or seven) simple rules. The undisputed king of the genre at the moment is Jim Collins, whose “Good to Great” and “Great by Choice” can be found piled high in airport bookshops around the world.
“The Three Rules ” is a self-conscious contribution to the genre; it even includes a bibliography of “success studies”. Michael Raynor and Mumtaz Ahmed work for a consultancy, Deloitte, that is determined to turn itself into more of a thought-leader and less a corporate plumber. They employ all the tricks of the success genre. They insist that their conclusions are “measurable and actionable”—guides to behaviour rather than analysis for its own sake. They divide companies into three cutely named categories: “miracle worker”, “long runner” and “average Joe”. They even employ the cutest trick of all: the third rule is, “There are no other rules.”
But the authors are also more rigorous than most success-ologists. Mr Peters and Mr Waterman chose the companies that form the heart of “In Search of Excellence” by canvassing McKinsey partners and “a bunch of other smart people” about “who’s cool” and “who’s doing cool work”. Messrs Raynor and Ahmed studied Compustat data on companies that traded on American exchanges between 1966 and 2010—25,000 companies from hundreds of industries over 45 years. It uncovered 344 companies that produced statistically exceptional results.
Success authors usually serve up vivid stories about how exceptional business- people imprinted their personalities on a company or rescued it from a life-threatening crisis. Messrs Raynor and Ahmed are happier crunching the numbers: they provide detailed appendices on “calculating the elements of advantage” and “category, trajectory and era analysis”. This means that they escape from the most obvious booby traps. Alas, it also means that “The Three Rules”, though clearly and sometimes even elegantly written, can be tough going, stranded in the no-man’s-land between the airport and the ivory tower.
The authors spent five years studying the behaviour of their 344 “exceptional companies”, only to come up at first with nothing. Every hunch led to a blind alley and every hypothesis to a dead end. It was only when they shifted their attention from how companies behave to how they think that they began to make sense of their voluminous material.
Management is all about making difficult trade-offs in conditions that are always uncertain and often volatile. But exceptional companies approach these trade-offs with two simple rules in mind, sometimes consciously, sometimes unconsciously. First: better before cheaper. Companies are more likely to succeed in the long run if they compete on quality or performance than on price. Second: revenue before cost. Companies have more to gain in the long run from driving up revenue (for example by charging higher prices or appealing to more customers) than by driving down costs. The authors illustrate these “rules” with examples from a wide range of industries: “miracle workers” include Heartland Express in Trucking, Linear Technology in semiconductors, Thomas & Betts in electrical wiring and Weis Markets in groceries.
Most success studies suffer from two faults. There is “the halo effect”, whereby good performance leads commentators to attribute all manner of virtues to anything and everything the company does. These virtues then suddenly become vices when the company falters. There is also the post hoc ergo propter hoc fallacy whereby commentators assume that the simple fact that a behavioural difference is visible between two companies explains the difference in performance.
Messrs Raynor and Ahmed work hard to avoid these mistakes by studying large bodies of data over several decades. But they end up embracing a different error: stating the obvious. Most businesspeople will not be surprised to learn that it is better to find a profitable niche and focus on boosting your revenues than to compete on price and cut your way to success. The difficult question is how to find that profitable niche and protect it. There, “The Three Rules” is less useful.
Rule 1: Better before Cheaper – companies that sustain their performance through time do so by non-price benefits such as a great brand, style, functionality, experience etc.
Rule 2: Revenue before Cost – sustaining performance involves more than just creating value but also capturing that value in the form of profits.
Rule 3: There are no other rules – making decisions and executing strategies that put better before cheaper and revenue before cost are the fundamentals for sustained success.