The Three Rules: How Exceptional Companies Think

I stumbled across the paper «A random search for excellence» a few days ago. To my amusement the article put another nail in the coffin on success studies like "In search of excellence" and "Good to great". I googled to find out more and to my disbelief I found that the authors had committed a "success study" themselves and come up with "The three rules". I bought the book to dissect it (just so you know my starting point).After one read-through I must admit that I love the book BUT (with capital letters), once again, the success recipe has not been proven. Thus, the book is an excellent description of methodology and the book is no more usefull to managers than previous "success studies".The best part of the book is chapter two. This chapter provides an in-depth description of the method used. I also recommend reading the paper "A random search for excellence" as you will find complementary information on methodology there. I must admit that I had started to list anticipated weaknesses in method already based on the book description. Maybe that is what I love most about the book: that you can read it like a detective story. Where is the error? As the story unfolded I could acquit most of my suspects and add new ones to my list. The book openly discusses strengths and weaknesses in method and why they have chosen the approach they have. The authors argue that the weaknesses are acceptable. I find that some of them are not and to the extent that their conclusions must be rejected.Below I will list my key objections to the three rules, i.e. not the book but its conclusions. My intention is to contribute to the debate and to further developments. Some or all of my critical remarks might be unjust or wrong. Please add comments if you agree or disagree.Here are my key objections:1) The authors criticises other "success studies" for having investigated "false positive" exceptional companies. However, as they point out themselves, setting the statistical limit too high would have excluded all 22,403 companies in their database. Thus the hurdle has been set lower and some of the exceptional companies investigated in this study might just as well be "false positives". More worrisome, in my view and also pointed out by the authors, is that the "Average Joes" used to compare against have not had to pass any hurdle. This might be why so many expected success ingredients could not be proven, as several of the "Joes" might be exceptionally managed but unlucky companies (false negative).2) Rule 1 is "better before cheaper". The authors seem to define market position as a continuum between non-price and price, i.e. any company charging a seemingly higher price than another company for a comparable product has a non-price position and vice versa. I do not like this definition of market positioning. It is quite analogue with Porter's differentiator vs. cost leader but the continuum dismisses "stuck in the middle"/"no strategy" positions. In my opinion the rule should have been "avoid stuck in the middle" as this is what the authors most probably have tested.3) Rule 1 and further on definition. In my world and by my definitions, many companies in a given market and industry can have differentiator positions but only one company can be the cost leader. My a priori assumption (and experience) is that most companies in an industry compete for differentiation (or focus) and only a few truly battles for cost leadership. Thus, if you have a bag of many red marbles and a few blue, which colour do you think you will pick? My hypothesis is that luck/bad luck is the reason why only one of the nine exceptional companies investigated where the cost leader of their industry. One look at the list of the richest people on this planet indicates that the position as cost leader can't be all bad. The position might even become more attractive if this book sells well.4)Rule 1 and on the design of the study. The rule is based on a cause and effect axiom made up by the authors. They claim that companies that have chosen a non-price position (cause) have thrived (effect), and vice versa. I do not accept this logic. In my world, companies develop new products, become more customer centric et cetera (cause) and then, if and when they start to experience increased sales, they might start raising their prices (effect). Companies standardise products and innovate their processes (cause) to be able to underbid their competitors (effect). Companies that do not succeed fully in their efforts can neither charge premium prices nor choose the low-price position for long.5) Rule 2 "revenue before cost" falls as a consequence and for similar reasons as for rule 1.6) Rule 3 "there are no other rules" should have been "we have found no other rules". The lack of life on March does not prove that we are alone in the universe.I recommend the book and encourage comments.My background is 10+ years as a strategy consultant supporting clients across Europe. My current position is Head of Strategy, Group HR, in banking.

The Three Rules: How Exceptional Companies Think by Michael Raynor and Mumtaz Ahmed is different from the vast collection of books that purport to tell you “Here’s what great companies do.” It’s about how successful companies think.The authors began their look at what makes really successful companies really successful in the same way that most people do. They looked at behaviors, what the companies that performed better than other companies did. They found that if you look at enough companies, you can find behaviors of all kinds resulting in success or in failure. Then they tried something else. Here’s their description.“A useful explanatory framework began to emerge only after we shifted our emphasis away from what these companies did to a series of hypotheses about how they thought. This slowly began to bear fruit. By seeking the decision-making criteria implicit in the many and varied choices our exceptional companies made, we were able to reduce an overwhelming complexity to a much more manageable set of rules that applied regardless of the circumstances.”The difference in performance was rooted in how companies identified key strategic choices and how to make them. The military calls this a “strategic doctrine.” Doctrine establishes the rules by which strategy will be conducted. This is a strategic doctrine for businesses.Here’s the basics of the analysis. The authors used Compustat data covering the 45 years from 1966 to 2010. That’s extensive data on more than 25,000 companies. They went looking for exceptional performers who had performed at a high level for long enough that their success could not be attributed to chance.They identified 174 companies that they called “Miracle Workers.” Miracle Workers were in the top 10 percent of companies. They identified 170 companies they called “Long Runners.” Long Runners were in the top 50 percent of companies, but for a longer period. “Average Joes” made up the rest of the companies.They discovered that the super successful companies used three doctrinal rules.• Better before cheaper.• Revenue before cost.• There are no other rules.Better before cheaper refers to the decision to compete on value rather than on price. It’s a decision about positioning.Revenue before cost is about profitability. There, Miracle Workers and Long Runners worked to build profitability by growing revenue rather than by cutting costs. Long Runners are more likely to rely on cost leadership as part of their strategy, thoughAll of this made sense to me when I looked at the companies that were in their groups and how long they’d been successful. It made sense when I looked at my own experience with companies and how they achieved profitability.Here’s how the authors say that all of this comes together.“The three rules constitute useful advice because they define which of many plausible alternatives is systematically associated with exceptional performance. Better before cheaper does not mean price competition is irrelevant; it means that when you have a choice to make, and when the data are unclear, go with better. Revenue before cost does not mean keeping cost under control does not matter; it means increasing revenue is more important. There are no other rules does not mean you can blindly follow the rules; it means you must apply all your creativity and insight to follow them in the face of all manner of other changes.”Over the last decade or so, we’ve been getting more and more research that confirms the idea that more complex solutions are not always better. In fact, simple heuristics can often get better results, and certainly faster results. That’s what the “There are no other rules” rule is all about. You can find an excellent overview of heuristics in Simple Rules: How to Thrive in a Complex World by Donald Sull and Kathleen Eisenhardt.The first two rules are not catchy slogans to lead you to more complex thinking. They are the rules. The authors suggest that if you use them when you make strategic choices, you will do better. That’s all there is.In A NutshellThe Three Rules: How Exceptional Companies Think gives you a research-backed strategic doctrine that will help you make wise strategic choices in a wide variety of situations. The book explains the research behind them well and gives you concrete suggestions about how to use them.

I felt the book gave plenty of examples. However I do not feel that the book gave enough illustration into why the three rules are important. I think a deeper dive into how better before cheaper affects margin and why margin performance is more important than other metrics. Also I am unclear as to why a focus on revenue before cost wins out in the long run. He gave examples of companies that did it but didn't thoroughly explain the why it is better than other metrics.

This is possibly the only “business success stories” book based on a painstakingly detailed analysis of financial data spanning decades.While it may be a bit tedious at times, it proves to be invaluable in the simplicity of the lessons it gives to pursue success in business; and in the coherence of the analysis carried out by the authors to validate their thesis.

this book is about long-term strategy, not short term. if you want to build a business that will last, grow, and be profitable over the long run, the principles this book teaches are the ones that should be considered above all other pontifications you have heard/read.

nonesense

The three rules felt intuitively 'right' to me - so I guess I was an easy sell - but the authors back up the top-level message with some impressive statistical research and in-depth analysis. Thoroughly recommended.

read and forget it