Photo by Justin Sullivan / Getty ImagesMcDonald's is among the exceptional companies in a recent survey that looked at what makes companies great.
In a recent article in the Harvard Business Review,
two business authors are pulling on Jim Collins’ cape with their new
study entitled “Three Rules for Making a Company Truly Great.”
Michael E. Raynor and Mumtaz Ahmed complain about the lack of reliable business advice to be gleaned from most studies of successful companies, because they say previous authors underestimated the role of chance. Raynor and Ahmed accuse such popular studies as Collins’ Good to Great and the 1980s best-seller In Search of Excellence of using too short a timeline to prove that the high-performing companies they identified were truly exceptional.
Now they have completed their own study to suss out the secrets of long-term performers. And yet their hard work has produced what’s probably the shortest and simplest list of “rules” you’ve ever seen for running an outstanding company. The authors say that “the many and diverse choices that made certain companies great were consistent with just three seemingly elementary rules.”
1. Better before cheaper: Compete on differentiators other than price.
2. Revenue before cost: Prioritize increasing revenue over reducing costs.
3. There are no other rules: Change anything you must to follow Rules 1 and 2.
The authors spent five years studying companies’ return on assets from the biggest database they could find: Compustat’s list of more than 25,000 companies trading on U.S. stock exchanges between 1966 and 2010. They identified two categories of overachievers: “Miracle Workers” (the companies in the top 10% of ROA often enough that their performance was unlikely to have been a fluke) and “Long Runners” (companies in the top 20% to 40%). They used advanced simulation techniques to identify long-term performers (e.g., a Miracle Worker that had been public for just 10 years had to make the top 10% for the full decade, while one that had been public for the entire 45-year time span needed to crack the top 10% for at least 16 years).
Out of 25,000 companies studied, just 174 qualified as Miracle Workers, and 170 as Long Runners. (Regarding previous studies, the authors added this catty note: “It’s probably worth mentioning that of the allegedly superior companies mentioned by 19 high-profile success studies we examined, barely 12% met our criteria, even for Long Runner status.”)
The authors discovered that long-term great companies come in all shapes and sizes: “3M, with its legendary innovation and thousands of products in commercial and industrial markets, made the list, but so did WD-40, a company built on a single, unpatented product… The globally ubiquitous McDonald’s proved to be exceptional, but so did Luby’s, a cafeteria chain, when it had only 43 locations.”
Indeed, Raynor and Ahmed had trouble identifying common success factors. Some companies prospered through acquisition; others grew organically. Popular success factors such as customer focus, innovation and risk-taking proved equally attributable to great companies and average performers.
The authors made their breakthrough when they shifted focus from what the top-performing companies did to how they apparently decided what to do. “When considering acquisitions, for example, Miracle Workers acted as though they were following our rules, going for deals that would enhance their non-price positions and allow them to bring in disproportionately higher revenues.”
Better before cheaper The authors found that Miracle Workers competed mainly by offering superior non-price benefits such as a great brand, exciting style, or excellent functionality, durability, or convenience. “Average Joe” companies, by contrast, competed mainly on price, while the Long Runners showed no clear focus.
Revenue before cost The authors say top-performing companies “garner superior profits by achieving higher revenue than their rivals, through either higher prices or greater volume.” Only rarely was “cost leadership” a driver of superior profitability. Raynor and Ahmed were surprised by the many ways great companies leveraged this strategy. For instance, discount retailer Family Dollar Stores offers superior convenience through its sheer numbers of neighbourhood stores, even though that produces higher cost structures than those of its superstore competitors.
There are no other rules This cheeky rule was developed to underscore the idea that other strategies that supposedly lead to business success, from operational excellence to corporate culture, don’t seem to matter in a statistically consistent way. Still, they note, “the absence of other rules doesn’t give you permission to shut down your thinking. You are still responsible for searching actively — and flexibly — for ways to follow the rules in the face of what may be wrenching competitive change. It takes enormous creativity to remain true to the first two rules.”
Michael E. Raynor and Mumtaz Ahmed complain about the lack of reliable business advice to be gleaned from most studies of successful companies, because they say previous authors underestimated the role of chance. Raynor and Ahmed accuse such popular studies as Collins’ Good to Great and the 1980s best-seller In Search of Excellence of using too short a timeline to prove that the high-performing companies they identified were truly exceptional.
Now they have completed their own study to suss out the secrets of long-term performers. And yet their hard work has produced what’s probably the shortest and simplest list of “rules” you’ve ever seen for running an outstanding company. The authors say that “the many and diverse choices that made certain companies great were consistent with just three seemingly elementary rules.”
1. Better before cheaper: Compete on differentiators other than price.
2. Revenue before cost: Prioritize increasing revenue over reducing costs.
3. There are no other rules: Change anything you must to follow Rules 1 and 2.
The authors spent five years studying companies’ return on assets from the biggest database they could find: Compustat’s list of more than 25,000 companies trading on U.S. stock exchanges between 1966 and 2010. They identified two categories of overachievers: “Miracle Workers” (the companies in the top 10% of ROA often enough that their performance was unlikely to have been a fluke) and “Long Runners” (companies in the top 20% to 40%). They used advanced simulation techniques to identify long-term performers (e.g., a Miracle Worker that had been public for just 10 years had to make the top 10% for the full decade, while one that had been public for the entire 45-year time span needed to crack the top 10% for at least 16 years).
Out of 25,000 companies studied, just 174 qualified as Miracle Workers, and 170 as Long Runners. (Regarding previous studies, the authors added this catty note: “It’s probably worth mentioning that of the allegedly superior companies mentioned by 19 high-profile success studies we examined, barely 12% met our criteria, even for Long Runner status.”)
The authors discovered that long-term great companies come in all shapes and sizes: “3M, with its legendary innovation and thousands of products in commercial and industrial markets, made the list, but so did WD-40, a company built on a single, unpatented product… The globally ubiquitous McDonald’s proved to be exceptional, but so did Luby’s, a cafeteria chain, when it had only 43 locations.”
Indeed, Raynor and Ahmed had trouble identifying common success factors. Some companies prospered through acquisition; others grew organically. Popular success factors such as customer focus, innovation and risk-taking proved equally attributable to great companies and average performers.
The authors made their breakthrough when they shifted focus from what the top-performing companies did to how they apparently decided what to do. “When considering acquisitions, for example, Miracle Workers acted as though they were following our rules, going for deals that would enhance their non-price positions and allow them to bring in disproportionately higher revenues.”
Better before cheaper The authors found that Miracle Workers competed mainly by offering superior non-price benefits such as a great brand, exciting style, or excellent functionality, durability, or convenience. “Average Joe” companies, by contrast, competed mainly on price, while the Long Runners showed no clear focus.
Revenue before cost The authors say top-performing companies “garner superior profits by achieving higher revenue than their rivals, through either higher prices or greater volume.” Only rarely was “cost leadership” a driver of superior profitability. Raynor and Ahmed were surprised by the many ways great companies leveraged this strategy. For instance, discount retailer Family Dollar Stores offers superior convenience through its sheer numbers of neighbourhood stores, even though that produces higher cost structures than those of its superstore competitors.
There are no other rules This cheeky rule was developed to underscore the idea that other strategies that supposedly lead to business success, from operational excellence to corporate culture, don’t seem to matter in a statistically consistent way. Still, they note, “the absence of other rules doesn’t give you permission to shut down your thinking. You are still responsible for searching actively — and flexibly — for ways to follow the rules in the face of what may be wrenching competitive change. It takes enormous creativity to remain true to the first two rules.”
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