Three Simple Rules for Great Companies

The amount of printed material available about managing and running great companies is pretty staggering.  And, like fad-diets, the philosophies espoused in this literature seem to be either overly simplistic or incredibly weird.  That’s why I found this article in the most recent issue of The Harvard Business Review pretty refreshing.

Two researchers looked at the historical performance of over 25k public companies in an attempt to identify a common set of strategies that separate great performers from mediocre ones.  They looked at the impact of innovation levels, risk taking behaviors, M&A activity, hiring practices, and so on.  In the end, none of those factors were determinant.  In fact, the researchers did not find any silver bullets or magic strategies.  What they did find, were three simple rules that are practices by all these great companies:

  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.

It is obvious if you think about it-if you have a better product or service, more people will want to buy it.  As long as your price is in line with the value it creates, unit sales and revenues will be strong.  This point is often lost by the short sighted equity markets and financial press which seem to love all cost-cutting announcements.  It has said many times, “you can’t cut your way to greatness” and the research here seems to prove this point.

The authors call this discovery “liberating” because it gives managers the flexibility to follow any tactics or strategies that support the first two rules and offer advice:

Here’s how to put the rules into operation: The next time you find yourself having to allocate scarce resources among competing priorities, think about which initiatives will contribute most to enhancing the nonprice elements of your position and which will allow you to charge higher prices or to sell in greater volume. Then give those the nod.

This is, now quantifiably, a recipe for success.