Three Rules for Making a Company Truly Great

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What separates the best businesses from all the rest? Frustrated by the lack of rigorous research on the drivers of corporate success, Michael Raynor and Mumtaz Ahmed of Deloitte conducted a statistical study of thousands of companies, and eventually identified several hundred among them that qualified as "exceptional."

As they describe in "Three Rules for Making a Company Truly Great," in the April 2013 Harvard Business Review, they discovered something startling. The many and diverse choices that made certain companies "exceptional" were consistent with just three seemingly elementary rules:

  1. Better Before Cheaper — in other words, compete on differentiators other than price.
  2. Revenue Before Cost — that is, prioritize increasing revenue over reducing costs.
  3. There Are No Other Rules — so change anything you must to follow Rules 1 and 2.

The rules don't dictate specific behaviors; nor are they even general strategies. They're foundational concepts on which companies have built greatness over many years. And, these rules can be used to help today's and tomorrow's leaders increase the chances that their companies, too, will deliver decades of exceptional performance.

The impetus for Raynor and Ahmed's research was the increasing popularity over the past 30 years of "success study" business books and articles.

Perhaps the most famous of these are Thomas Peters and Robert Waterman's In Search of Excellence and Jim Collins's Good to Great, but there are many others. The problem with those books and articles is that they don't give you any way to judge whether the companies they hold up as examples are indeed exceptional.

Randomness can crown an average company king for a year, two years, even a decade, before performance reverts to the mean. If we can't be sure that the performance of companies mentioned in success studies was caused by more than just luck, we can't know whether to imitate their behaviors.

So Raynor and Ahmed tackled this randomness problem head-on. They looked at the more than 25,000 companies that have traded on U.S. exchanges at any time from 1966 to 2010. They measured performance using return on assets (ROA), a metric that reflects strong, stable performance. Then...

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