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A more rigorous attempt to dissect the corporate mind and its effect on success
NOTHING succeeds in business books like the study of success. The current
business-book boom was launched in 1982 by Tom Peters and Robert Waterman with
In Search of Excellence . It has been kept going ever since by a succession of
gurus and would-be gurus who promise to distil the essence of excellence into
three (or five or seven) simple rules. The undisputed king of the genre at the
moment is Jim Collins, whose Good to Great and Great by Choice can be found
piled high in airport bookshops around the world.
The Three Rules is a self-conscious contribution to the genre; it even
includes a bibliography of success studies . Michael Raynor and Mumtaz Ahmed
work for a consultancy, Deloitte, that is determined to turn itself into more
of a thought-leader and less a corporate plumber. They employ all the tricks of
the success genre. They insist that their conclusions are measurable and
actionable guides to behaviour rather than analysis for its own sake. They
divide companies into three cutely named categories: miracle worker , long
runner and average Joe . They even employ the cutest trick of all: the third
rule is, There are no other rules.
But the authors are also more rigorous than most success-ologists. Mr Peters
and Mr Waterman chose the companies that form the heart of In Search of
Excellence by canvassing McKinsey partners and a bunch of other smart people
about who s cool and who s doing cool work . Messrs Raynor and Ahmed studied
Compustat data on companies that traded on American exchanges between 1966 and
2010 25,000 companies from hundreds of industries over 45 years. It uncovered
344 companies that produced statistically exceptional results.
Success authors usually serve up vivid stories about how exceptional business-
people imprinted their personalities on a company or rescued it from a
life-threatening crisis. Messrs Raynor and Ahmed are happier crunching the
numbers: they provide detailed appendices on calculating the elements of
advantage and category, trajectory and era analysis . This means that they
escape from the most obvious booby traps. Alas, it also means that The Three
Rules , though clearly and sometimes even elegantly written, can be tough
going, stranded in the no-man s-land between the airport and the ivory tower.
The authors spent five years studying the behaviour of their 344 exceptional
companies , only to come up at first with nothing. Every hunch led to a blind
alley and every hypothesis to a dead end. It was only when they shifted their
attention from how companies behave to how they think that they began to make
sense of their voluminous material.
Management is all about making difficult trade-offs in conditions that are
always uncertain and often volatile. But exceptional companies approach these
trade-offs with two simple rules in mind, sometimes consciously, sometimes
unconsciously. First: better before cheaper. Companies are more likely to
succeed in the long run if they compete on quality or performance than on
price. Second: revenue before cost. Companies have more to gain in the long run
from driving up revenue (for example by charging higher prices or appealing to
more customers) than by driving down costs. The authors illustrate these rules
with examples from a wide range of industries: miracle workers include
Heartland Express in Trucking, Linear Technology in semiconductors, Thomas &
Betts in electrical wiring and Weis Markets in groceries.
Most success studies suffer from two faults. There is the halo effect ,
whereby good performance leads commentators to attribute all manner of virtues
to anything and everything the company does. These virtues then suddenly become
vices when the company falters. There is also the post hoc ergo propter hoc
fallacy whereby commentators assume that the simple fact that a behavioural
difference is visible between two companies explains the difference in
performance.
Messrs Raynor and Ahmed work hard to avoid these mistakes by studying large
bodies of data over several decades. But they end up embracing a different
error: stating the obvious. Most businesspeople will not be surprised to learn
that it is better to find a profitable niche and focus on boosting your
revenues than to compete on price and cut your way to success. The difficult
question is how to find that profitable niche and protect it. There, The Three
Rules is less useful.