If you want to increase your chances of delivering business growth and exceptional performance well into the future, read on! The information that follows is relevant to you regardless of the size or revenue of your business.
Two Deloitte consultants conducted a study of twenty five thousand companies to come to a conclusion of what makes a company truly great. They selected 340 that had done well enough for long enough to qualify as truly exceptional. It is a study similar to that of Collins in his work “Good to Great.” Although the Deloitte results showed that:
“The many and diverse choices that made certain companies great were consistent with just 3 seemingly elementary rules.”
The rules are:
#1: Better before cheaper
#2: Revenue before cost
#3: There are no other rules
According to this study, these rules are not how a company takes specific actions. Nor can this be considered strategy. Rather they are “fundamental concepts on which companies have built greatness over many years.”
Mergers and acquisitions, customer focus, innovation, and risk taking were associated with all levels of performance equally from the good to the great. The rules came into focus when the emphasis was shifted from what these companies did to how they thought. An interesting concept…
The rules provide what is believed to be credible answers to every business leader’s basic questions about superior performance.
Let’s take a deeper look at each.
Rule #1: Better before cheaper
Every organization has a choice:
- To compete mainly by offering superior NON-PRICE benefits such as brand, function, style, convenience, etc.
- To meet some minimum standard on these dimensions and try to attract customers with lower prices.
Top performers overwhelmingly adapt the former.
- Be better than the competition.
- Compete on differentiators and not price.
- Add value wherever possible.
In most cases it was found that outstanding performance is caused by greater value, not lower price. (When was the last time you really spent time evaluating the value you bring to your customers?)
This rule makes it clear that companies seeking sustained profitability should pursue strategies consistent with this rule. And avoid those that aren’t.
Rule #2: Revenue before cost
Top performing organizations garner superior profits by achieving higher revenue than their rivals. However,lowering costs rarely drives superior profitability. Rather, increased revenue came by building a better product.
Rule #1 talks about creating value. Rule #2 is capturing value in the form of profit. The best companies increased revenue through increasing volume. They prioritized increasing revenue over reducing costs.
You can and should drive out inefficiencies and lower costs where possible while following revenue before cost. Just don’t try to achieve a profitability advantage through cost leadership. Because there is no data to indicate this works.
Rule #3: There are no other rules
There are a lot of determinants of company performance. Such as:
- Leadership style
- Operational excellence
- Control systems
These all need to align with rules 1 and 2.
Change anything you want. The aforementioned are all fair game.
But you must follow rules 1 and 2.
The conclusion is: Lowest price is not a position that top performing companies consistently sought . Rather, they adopted a revenue driven, profitability formula. Finally, everything else is on the table.
Don’t be misled. The rules are simple. They are not simplistic. This is not an excuse to shut down your brain on any other critical strategic thinking. I think you’ll agree that long term success in any industry is a rare and difficult achievement. Finding a strategy that is workable for you, and that stays within the rules, will require an incredible amount of both creativity and flexibility in your planning.
It’s clear that the concentration should be on:
- Creating value using better before cheaper, and
- Capturing value with revenue before cost if you want to beat the odds.
Further, following the rules won’t guarantee organizational success. The rules only provide a guide for what complex problems you should try to solve. Not how to solve them. This should lead to some pretty powerful discussions in your strategy sessions.
These rules can be used to help you increase the chances that you will experience business growth. In addition, that you will will deliver exceptional performance well into the future. It doesn’t guarantee it though.
*Adapted from The Harvard Business Review