Successful Companies: Only Three Rules Needed?
Anneke Zwart, Student (University), Netherlands, Moderator
Raynor and Ahmed did a statistical study of a large amount of companies and discovered that just 3 seemingly easy rules are consistent with successful companies and their strategic choices:
1. Better Before Cheaper. Companies can choose either a way of attracting customers with relatively lower prices; or companies could focus on non-price advantages such as design, superior branding, exceptional functionality, sustainability or convenience. Keeping in mind that an organization cannot afford to ignore the price position and vice versa, in most cases the latter choice causes exceptional performance. And if the competitive environment changes, one can always choose to reduce the price at that moment and still follow the rules established.
Nevertheless, focusing on the non-price features by companies goes together with challenges. First, there is an everlasting battle between rivals that have figured out each others’ formula and find improved formulas for success. Another challenge is disruption, which is now well enough known as a result that one can easily determine when alternative solutions bear disruptive potential and thereby certainly will lead to counterattacks.
2. Revenue Before Cost. It is found that profitability is rarely caused by focusing on cost. Although profits could increase if you increase your prices it is found that the main driver of exceptional performance has been revenue in most cases. And also in this case increasing efficiency and lowering costs can still go together with the rule of Revenue Before Cost if changes in the competitive environment occur.
3. There Are No Other Rules. The research that has been done about the successes of companies reveals that no consistent patterns of existing company performance determinants exists. In other words, as long as it is adhering to the first 2 rules - seeking for a non-price position and focusing on revenue-driven profit - a company can freely pick its other company performance determinants. One must keep in mind that this does not permit a company to stop thinking, since creativity is a key element in following the first two rules successfully.
When putting the rules into operation, a company needs to clearly depict its position. Companies often forget that they compete with current rivals instead of competing with their own company; they too often celebrate internal improvements, even if the companies' performance worsened compared to rivals. The key is to consider the actions that will contribute to improvements of the non-price features of your position. Besides, thinking about which elements permit an increase in prices/volume will be critical to success and leads to high performance.
Source: M.E. Raynor and M. Ahmed. (2013). Three Rules For Making A Company Truly Great. HBR magazine, April 2013.