The Three Rules: How Exceptional Companies Think

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Overview

Finally, an answer to the ultimate business question: How do some companies achieve exceptional performance over the long term?
 
In every sector, there’s an outlier. In the phar­maceutical industry, it’s Merck. In discount retail, it’s Family Dollar. It used to be Wrig­ley in candy and Maytag in appliances. Other superstars have been hidden in plain sight, like Heartland Express in trucking or Linear Technology in semiconductors. How do ...

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The Three Rules: How Exceptional Companies Think

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Overview

Finally, an answer to the ultimate business question: How do some companies achieve exceptional performance over the long term?
 
In every sector, there’s an outlier. In the phar­maceutical industry, it’s Merck. In discount retail, it’s Family Dollar. It used to be Wrig­ley in candy and Maytag in appliances. Other superstars have been hidden in plain sight, like Heartland Express in trucking or Linear Technology in semiconductors. How do these exceptional companies deliver superior perfor­mance over the long run despite facing the same constraints as competitors? What are they doing differently? What can we learn from them?
 
Michael E. Raynor and Mumtaz Ahmed have analyzed data on 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, 344 in all.
 
In collaboration with teams of researchers, Raynor and Ahmed then put a carefully chosen representative sample of twenty-seven com­panies under the microscope to uncover what made the stand-out performers different. They found that exceptional companies, when faced with difficult decisions, follow three rules:

  1. Better before cheaper. They rarely compete on price.
  2. Revenue before cost. They drive profits through price and volume, not thrift.
  3. 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.
 
The rules provide an indispensable compass that any company can use to chart its own path to greatness. Is it better to keep price down or invest in creating value that commands a higher price? Should you focus on talent and develop­ing the abilities of your people or build processes to extend the capabilities of your organization? How about acquiring a sizable competitor to secure economies of scale—or a small start-up to gain access to new technology? According to Raynor and Ahmed, the right answers to these and just about every other question are the ones most closely aligned with the rules.
 
The Three Rules is built on a powerful combina­tion of large-scale data analysis and in-depth case studies. Its guidance will increase the chance that your organization can become truly exceptional.
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Editorial Reviews

Publishers Weekly
Deloitte executives Raynor (The Innovator's Solution) and Ahmed were determined to find out what made certain companies succeed and others fail, and set out to perform the ultimate "success study." With a research team from Deloitte, they analyzed 45 years of Compustat data on more than 25,000 unique companies—compiling nearly 300,000 pieces of data (company-year observations) from 1966 to 2010. In the process, they identified three categories of organizations: Miracle Workers, Long Runners, and Average Joes. The authors looked at the behavioral differences among the companies studied, but there was no single area in which successful companies stood out—they excelled in virtually every area. But there were three rules that held firm. Rule #1: Better before cheaper (don't compete based on price). Rule #2: Revenue before cost (higher revenue is more advantageous than lower costs in achieving profitability). Rule #3: There are no other rules. The book offers a solid and engaging analysis, but one that is performed without much further insight into the dozens of comparative case studies presented, such as a comparison between Merck ("miracle worker"), Eli Lilly ("long runner"), and KV Pharmaceutical ("average Joe"). The dry writing and repetitive message make this book a tough sell for any but the most devoted success-seeker. Agent: Wesley W. Neff, Leigh Bureau. (June)
Library Journal
Oddly, despite the title, there are only two rules: "better before cheaper," which boils down to not competing on price and "revenue before cost," which concerns making money versus cutting costs. Authors Raynor (The Innovator's Solution) and Ahmed, both Deloitte executives, base their proposed rules on an extensive financial data-mining project involving 25,000 companies from 1966 to 2010. From this, they identified companies that had exceptional return on assets over the 44-year span. In addition, they identified runner-up companies in each of the nine major industries covered, as well as companies that exemplified average financial performance. These sets of three companies for each of the nine industries are the focus of the title. Acronyms and financial calculations abound as the authors expound on the two rules and how the best companies illustrate them. Almost one-third of the book is devoted to statistical appendixes and tables, outlining the data and calculations on which the research is based. VERDICT Somewhat repetitive and reminiscent of an overlong academic journal article, this book should be considered primarily where there is business research interest.—Susan Hurst, Miami Univ. Libs., Oxford, OH
Kirkus Reviews
A rigorous and lively study of excellence in business performance. Working from a multiyear database of 25,000 corporations, Deloitte Consulting officers Raynor (The Innovator's Manifesto: Deliberate Disruption for Transformational Growth, 2011, etc.) and Ahmed have narrowed down the data to identify the qualities of three tiers of performance, across nine economic sectors: "miracle workers," "long runners" and "average Joes." The authors' results run counter to the current prevailing wisdom, which favors return-driven, short-term interest over long-term concentration on building a lasting business. They base their three rules--"better before cheaper," "revenue before cost" and "there are no other rules"--on the performance of the 27 companies that comprise their grid, and their data shows that companies that can build an advantage based on nonprice factors tend to outperform companies that attempt to grab market share by competing on price alone. Businesses that successfully build revenue as a first priority also outperform those that focus mostly on controlling costs. Since there are multiple ways of evaluating both "better" in nonprice terms and the relationship between revenue and costs, based on the particular situation, their first two rules define a substantial area for the application of managerial talent over time. The authors argue for a fundamental shift in point of view, which is more valuable than many other specific recipes for business success. Their rules make possible "a widespread and shared consistency of action that is all but unachievable otherwise" and permit a balance between short-term and longer-term considerations. Raynor and Ahmed provide a way to separate exceptional performance from the noise of day-to-day statistical variation. A major contribution to the literature of business success.
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Product Details

  • ISBN-13: 9781591846147
  • Publisher: Portfolio Hardcover
  • Publication date: 5/30/2013
  • Pages: 384
  • Sales rank: 217,717
  • Product dimensions: 5.90 (w) x 9.10 (h) x 1.50 (d)

Meet the Author

MICHAEL E. RAYNOR is a director at Deloitte Services LP, where he explores cor­porate strategy, innovation, and growth with clients in a variety of industries. He is the coauthor, with Clay­ton Christensen, of The Innovator’s Solu­tion, and the author of the bestselling and critically acclaimed The Strategy Paradox and The Innovator’s Manifesto.
 
MUMTAZ AHMED is a principal in Deloitte Consulting LLP and the chief strategy officer of Deloitte LLP, responsible for the U.S. firm’s strategy, corporate development, innovation, eminence, and brand.
 
www.thethreerules.com

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