Michael E. Raynor

Mumtaz Ahmed

Much of the strategy and management advice that business leaders turn to is unreliable or impractical. That’s because those who would guide us underestimate the power of chance. Gurus draw pointed lessons from companies whose outstanding results may be nothing more than random fluctuations. Executives speak proudly of corporate achievements that may be only lucky coincidences. Unfortunately, almost no one provides scientifically credible answers to every business leader’s basic questions about superior performance: Which companies are worth studying? What sets them apart? How can we follow their examples?

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Reprint: R1304J
Much of the strategy and management advice that business leaders turn to is unreliable or impractical, say the authors, because those who would guide us underestimate the power of chance. Raynor and Ahmed undertook a statistical study of 25,000 companies&#8212;those that had traded on U.S. stock exchanges at any time from 1966 to 2010. They measured performance according to return on assets&#8212;a metric, they reasoned, that reliably reflects managerial efforts rather than simply changes in expectations, which are the primary driver of shareholder returns. Out of that 25,000 they identified 344 companies they deem exceptional: 174 Miracle Workers, whose ROA fell in the top 10% of all companies studied, and 170 Long Runners, whose ROA fell in the top 20% to 40%. For purposes of comparison, they also identified Average Joes.
After repeatedly trying and failing to isolate measurable behaviors that were consistently relevant to success, the authors shifted their emphasis away from what these companies did to hypotheses about how they thought. They realized that the choices these companies had made were consistent with three seemingly elementary rules: (1) Better before cheaper&#8212;in other words, compete on differentiators other than price; (2) revenue before cost&#8212;that is, prioritize increasing revenue over reducing costs; and (3) there are no other rules&#8212;so change anything you must to follow rules 1 and 2.

Three Rules for Making a Company Truly Great

Reprint: R1304J Much of the strategy and management advice that business leaders turn to is unreliable or impractical, say the authors, because those who would guide us underestimate the power of chance. Raynor and Ahmed undertook a statistical study of 25,000 companies—those that had traded on U.S. stock exchanges at any time from 1966 to 2010. They measured performance according to return on assets—a metric, they reasoned, that reliably reflects managerial efforts rather than simply changes in expectations, which are the primary driver of shareholder returns. Out of that 25,000 they identified 344 companies they deem exceptional: 174 Miracle Workers, whose ROA fell in the top 10% of all companies studied, and 170 Long Runners, whose ROA fell in the top 20% to 40%. For purposes of comparison, they also identified Average Joes. After repeatedly trying and failing to isolate measurable behaviors that were consistently relevant to success, the authors shifted their emphasis away from what these companies did to hypotheses about how they thought. They realized that the choices these companies had made were consistent with 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; and (3) there are no other rules—so change anything you must to follow rules 1 and 2.

Three Rules for Making a Company Truly Great

Summary.

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