Download GRYFFINDOR The Three Rules For Making A

The Three Rules For Making A Company Truly Great
Frustrated by the lack of reliable data on organisational excellence,
Michael E. Raynor and Mumtaz Ahmed at Deloitte Consulting undertook
a statistical study of thousands of companies to empirically prove what
made certain companies truly great.
They eventually identified several hundred companies that have
done well enough for a long enough period of time to qualify as truly
exceptional. This is an excerpt from the full article published in the Harvard
Business Review in April 2013.
They discovered something startling: The many and diverse choices that
made certain companies great were consistent with just three seemingly
elementary rules:
1.
2.
3.
Better before cheaper – in other words, compete on differentiators
other than price.
Revenue before cost – that is, prioritise increasing revenue over
reducing costs.
There are no other rules – so change anything you must to follow Rules
1 and 2.
The rules don’t dictate specific behaviours; nor are they even general
strategies. They are foundational concepts on which companies have
built greatness over many years.
The team’s impetus was to remove the randomness factor from a
company’s success. Randomness can crown an average company king
for a year, two years, even a decade, before performance reverts to the
mean. The team began with the largest database they could find. The
database contained more than 25,000 companies that have traded on
U.S. exchanges at any time from 1966 to 2010. They measured return on
assets (ROA), a metric that reflects strong, stable performance.
They defined two categories of superior results: Miracle Workers fell in the
top 10% of ROA for all 25,000 companies. Long Runners fell in the top 20%
to 40%. Companies in both categories were regarded as exceptional
performers. They also identified those companies that were average for
comparison purposes.
Exceptional Companies came 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 that was designed to prevent corrosion
on nuclear missiles and has since become most famous as the bane
of squeaky hinges. McDonald’s proved to be exceptional, but so did
Luby’s, a cafeteria chain, when it had only 43 locations (it has since then
grown to 100 outlets).
As the study progressed the team shifted their emphasis away from what
companies did to hypothesise about how they thought.
White Paper No.2
RULE 1 – Better Before Cheaper
Every company faces a choice: It can compete mainly
by offering superior nonprice benefits such as a great
brand, an exciting style, or excellent functionality,
durability or convenience, or it can meet some minimal
acceptable standard along these dimensions and try
to attract customers with lower prices. Miracle Workers
overwhelmingly adopt the former position. Average
companies typically compete on price. Long Runners
show no clear tendency one way or other.
RULE 2 – Revenue Before Cost
Companies must not only create value but also capture
it in the form of profits. Exceptional companies garner
superior profits by achieving higher revenue than their
rivals, through either higher prices or greater volume.
Very rarely is cost leadership a driver of superior
profitability.
For eight of the nine Miracle Workers in the sample,
revenue was the main driver of performance.
RULE 3 – There are no Rules
This rule underscores the uncomfortable (or liberating)
truth that in the pursuit of exceptional profitability,
everything but the first two rules prevails. When
considering all the other determinants of company
performance – operational excellence, talent
development, leadership style, corporate culture,
reward systems there was wide variation among
companies of all performance type. These other factors
matter but no consistent patterns of how they mattered
were found.
The absence of other rules doesn’t mean executives can
shut down their thinking. You still have to search 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.
In pharmaceuticals the top companies have successfully
moved from in-house to joint venture to open innovation,
while in semiconductors we’ve seen increased capital
investment and an expanding portfolio of customers, all
in support of better before cheaper. In confectionary
the top performers have shifted from domestic to global
distribution, and in medical devices M&A has become
a cornerstone of growth. When these changes have
led to superior profitability, it has been because they
contributed to greater volume more than to lower costs.
Gryffindor
Gryffindor Limited
Adam House, 7-10 Adam Street, London WC2N 6AA
Telephone: +44 (0) 207 5209470 Email: [email protected] Web: www.gryffindor-ltd.co.uk
The Three Rules For Making A Company Truly Great
Choosing to be Exceptional
White Paper No.2
The first step in making use of the rules is to get a clear picture of your
company’s competitive position and profitability formula. Too many
companies lack that clarity because they spend too much time
comparing their present selves with their past selves. You only compete
with your current rivals, not with your passed self. Benchmarking may
help, but in many instances it devolves into a comparison of single
dimensions – Is our product more durable? Is our R&D higher? Rather than
a sophisticated analysis of the interplay of all performance dimensions.
Putting the Rules into Operation
The next time you have to allocate scarce resources among competing
priorities, think which initiatives will contribute most to enhancing the nonprice elements of your position and which will allow you charge higher
prices or to sell in greater volume.
If your operational-effectiveness program is mostly about cutting costs,
whereas your innovation efforts are mostly about separating you from
the pack, go with innovation. If, however, improving operations is about
delivering levels of customer service way above your competitors,
whereas innovation seems geared to doing the same for less, then invest
in operations.
Equally, if an acquisition is justified in terms of economies of scale then
it might be justified. If it is to realise the growth potential of a non-price
position that your company has already earned then it isn’t justified.
The rules can also be a useful antidote to intuition by the MD or top
management team.
Finally, the rules are specially powerful when dealing with the financial
ratios that govern so many businesses and can lead to pathological
consequences. In ratios such as ROA, cash flow, return on investment and
economic value added, the numerator is some measure of income and
the denominator is some measure of assets. When sales start to drop, it’s
too easy to try to make those ratios go up by shrinking the denominator.
This can be a road to disaster. Use the rules to make the case that by and
large, Exceptional Companies often, even typically, accept higher costs
as the price for excellence. In fact, many of them would rather spend
and invest over long periods of time into creating non-price value and
generating higher revenue. When successful companies are led astray by
the seeming certainties of short-run cost cutting or disinvestment, they are
more likely to destroy what they most want to enhance.
Gryffindor
Gryffindor Limited
Adam House, 7-10 Adam Street, London WC2N 6AA
Telephone: +44 (0) 207 5209470 Email: [email protected] Web: www.gryffindor-ltd.co.uk