Business Strategy

3 Rules to Make a Company Great

The April 2013 issue of Harvard Business Review features a story that argue there are only 3 rules to making a company truly great.  The article provide insights into how exceptional companies deliver superior long-term performance, even as they face similar obstacles to their competitors.

The scope of the study is pioneering. They draw on “big data” – hard financial information on more than 25,000 companies that spans nearly half a century. They identify 344 exceptional companies—either Miracle Workers or Long Runners using rigorous statistical methods to identify them and analytics to determine what makes them great.

Here are the 3 rules;

(1) Better Before cheaper
When it comes to how you differentiate yourself from the competition, seek out a position based on non-price value — that is, performance, broadly understood. Do not compete on price. Price-based competition can work, but only rarely does it drive exceptional performance.

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.

(2) Revenue before cost
Driving superior profitability means having some combination of higher revenue and lower costs than your competition. The advantages of higher revenue tend to be more valuable and durable than the advantages of lower cost. Use your differentiated position to charge higher prices or appeal to more customers. Do not try to “cut” your way to greatness. Just like price-based competition, cost advantages can be effective, but only infrequently.

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.

A dollar more of revenue is worth more than a dollar less of cost (profit is just revenue minus cost so there are two ways to get to the net result however increasing revenue is better that reducing cost)

(3) There are no other rules
Whatever competitive or environmental changes or challenges you might face, do not give up on the first two rules. Everything else is up for grabs. Everything. Change whatever you must about your business — your markets, your technologies, your people… anything. But no matter what, stick with better before cheaper and revenue before cost.

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.”

 

Reference
Raynor, Michael E., Mumtaz Ahmed. “Three Rules for Making a Company Truly Great.”Harvard Business Review, April 2013.

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