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How Exceptional Companies Think

THE THREE RULES

DIRECT FROM DELOITTE: NEW RULES FOR SUCCESS

The Three Rules: How Exceptional Companies Think is a tribute to the power of combining exhaustive statistical data with consulting insight. Written by two veteran Deloitte consultants backed by a team of researchers, The Three Rules provides the empirical evidence that, as the book’s inside flap declares in large letters, finally gives “an answer to the ultimate business question: How do some companies achieve exceptional performance over the long term?”

The answer from authors Michael E. Raynor and Mumtaz Ahmed is a three-parter, as readers might have guessed from the title of the book. The three parts are:

  1. Better before cheaper. In other words, don’t compete on price.
  2. Revenue before cost. Profits need to come from price and volume, not cost-cutting.
  3. There are no other rules.

Don’t take rule number three as a witty throwaway line. The point of this last rule, according to the authors, is that anything else can be done as long as you don’t undermine the first two rules.

The Methodology

Analyzing 45 years of Compustat data on more than 25,000 companies, Raynor and Ahmed were able to build a sample of nine trios of companies. Each trio consists of three companies that are from the same industry and for which there exist no outside factors that might give one company an advantage over the others. The three companies in each trio include the exceptional company, called the “Miracle Worker,” which has sustained high performance; the “Long Runner,” which is still exceptional but at a lower level and for a longer period of time; and the “Average Joe,” which, as its name implies, can achieve only average performances.

After failing to find consistent behavioral rules that separate the successful from the unsuccessful, the authors finally realized that it was how companies “think” that makes the difference.

What the Trucking Industry Tells Us

One of the trios involves three players in the trucking industry: Heartland Express, the Miracle Worker; Werner Enterprises, the Long Runner; and P.A.M. Transportation Services, the Average Joe. Heartland competes on non-price value, meaning that it might not be the least expensive carrier but it can, in the authors’ words, “provide superior non-price value through an on-demand ability to get this shipped there by then.” It can achieve this because it focuses on a limited number of customers within a limited geographic area. Werner is less focused and competes more on price. P.A.M. is more focused, the authors write, but “it was not focused in ways that created superior price or non-price value.”

The Three Rules, with its statistical measures of performance and its comparison companies, is similar to other success studies, such as Good to Great. The authors argue, however, that other success studies had fundamental flaws, including using shareholder value as a measure of performance, which makes The Three Rules more accurate in predicting success. Whether or not readers found Good to Great and other success studies compelling in the past, they should read The Three Rules carefully: The authors succeed in making a rigorous empirical case for their groundbreaking conclusions on what makes companies exceptional.

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