Three Rules to Deliver the Best Possible Performance for as Long as Possible

Michael Raynor and Mumtaz Ahmed went looking for those companies that were good enough for long enough to be considered exceptional and to rule out luck as the primary source of their performance. What they found they present in The Three Rules: How Exceptional Companies Think.

When they looked at behavior they found that the exceptional companies did better than the average companies because they did whatever they did "right." Not too helpful. But when they looked at what exceptional companies thought as opposed to what they did, a pattern emerged. They were able to identify a small set of decision rules implicit in the choices exceptional companies made that lower-performing companies did not seem to use. This forms the basis of The Three Rules.

Here are the three rules you can use to guide your own decision making:

1. Better Before Cheaper. Competing on non-price value, not price. When it comes to how you differentiate yourself from the competition, seek out a position based on non-price value. Do not compete on price. Price-based competition can work, but only rarely does it drive exceptional performance.

When the recession hit in 2008, Abercrombie & Fitch (one of their exceptional companies) was criticized for not cutting their prices as most other retailers did. And although their profitability suffered significantly in the short-term and full recovery remains an uphill climb, they are not struggling to cure their customers of a "discount addiction." "Those competitors that coped with the recession with price discounts are finding it difficult to increase their prices, having taught their customer that their T-shirts do not have to cost $30 after all."

Of course, no company can afford to ignore its relative price position. That's why the rule is "better before cheaper:" being price competitive is far from irrelevant, but when it comes to position in a market, exceptional performance is caused more often by greater non-price value rather than by lower price.

2. Revenue Before Cost. Outperforming through higher revenue rather than lower costs. When exceptional companies face a trade-off between increasing profitability by increasing revenue or by decreasing cost, they systematically choose increasing revenue even if that means incurring higher cost. Do not try to "cut" your way to greatness. Just like price-based competition, cost advantages can be effective, but only infrequently. Profitability advantages driven by higher revenue, even when they incur higher cost, prove to be more valuable than advantages driven by lower cost.

"To beat the odds," say the authors, "you want to focus on creating value using better before cheaper, and on capturing value with revenue before 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. The first two rules tell you what you should do. The third rule tells you what you should not do; namely think that anything else matters in a systematic, specifiable way. 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.

What sort of leadership contributes best to corporate success: charisma, hard-driving, larger than life CEOs who move the company forward seemingly by force of will, or humble, deliberate, share-the-glory servant-leaders? As far as we could tell, all that mattered consistently was whether or not leadership was focused on building a non-price position and revenue-driven profitability formula.

The idea here is that when faced with strategic decisions, ask yourself which option best conforms to the three rules. Use the rules like a compass to point you in the right direction. It's not a formula to follow but a way of thinking that informs your decisions. Ask yourself if your strategy is taking you in the direction of better and revenue or cheaper and cost. The authors have found that companies that consistently chose the former path deliver superior results.

The three rules are measurable and hence actionable. "Because you can measure the degree to which you are following the three rules, you can adapt your behavior to remain consistent with them."

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Posted by Michael McKinney at 12:02 AM
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