The authors of “The Three Rules – How Exceptional Companies Think,” Michael Raynor and Mumtaz Ahmed,looked at 25,000 enterprises over 45 years. 344 of them were identified as truly exceptional long term wealth creators and profit makers. They then derived 3 rules that are like magnetic north on a compass for keeping your business on a profitable course. These rules help explain the differences in performance between ‘miracle workers,’ ‘long runners,’ and ‘average Joes.’ In summary competitive advantage is a result of how you think and how that thinking shapes your priorities.
- Better before cheaper. The first rule addresses the question, “How do you create Value for your Customer?” The ‘miracle worker’ businesses consistently chose to compete on non-price factors before price. At PBC, we encounter numerous examples of businesses exceeding customer expectations. Like the elevator service company that found a retired employee who could produce a component that’s no longer manufactured; saving big money for their customer. Or the small telecom business that holds the big guys at bay with custom services direct to the client. This rule calls for such non-price competitive activity to be the strategic focus of your business. Other non-price factors that can guide your business to exceptional profit are durability, functionality, convenience, style, brand, etc. Non-price means the customer does not necessarily see it called out on the invoice, but really appreciates getting it.
- Revenue before costs. When asked “How do you create value for yourself?” ‘miracle workers’ said they consistently prioritize increasing revenue as the road to improving their return on assets (ROA). There are 2 other roads to improving ROA: cutting costs or reducing assets. These are the roads often traveled by ‘average Joe’ businesses. It’s not one or the other but about setting priorities, what comes first, and revenue should come first. In the long run ‘miracle worker’ businesses are able to charge higher prices, while giving greater apparent value to customers.
- No other rules. Nothing else matters. When asked, “How do you cope with change over time?” ‘miracle workers’ changed whatever was needed, they just consistently followed rules 1 and 2. When under pressure to slash prices, exceptional companies look behind the customer clamor to find their real needs. In the face of economic recession, real wealth creators do not abandon a winning strategy to cut costs or downsize assets. ‘Miracle workers’ stay cool in the white-hot furnace of technological change. They put their faith in the solid foundation of rules 1 and 2 to guide their decision making and statistically they outperform because of it.
I strongly recommend you take a look at ‘The Three rules’ – How Exceptional Companies Think, and let the 3 Rules be your guide to exceptional performance over the long term. If you want your business to rise above the herd to become a star performer, you need to make strategic and everyday decisions that follow the 3 rules. Average Joe businesses breach them and end up lost.
Also consider these additional resources:
5-minute interview with
Michael Raynor (co-author of the book – The Three Rules: How Exceptional Companies Think)
by Harvard Business Review
13-minute TEDx talk on the
“Three Rules for Success“
of Michael Raynor (co-author of the book – The Three Rules: How Exceptional Companies Think)
This originally appeared in my September 2014 Newsletter.