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Their findings can be summed up in less than a paragraph: Rule One, better before cheaper. Rule Two, revenue before cost. Rule Three – there is no Rule Three. (Comstock/Getty Images/Comstock Images)
Their findings can be summed up in less than a paragraph: Rule One, better before cheaper. Rule Two, revenue before cost. Rule Three – there is no Rule Three. (Comstock/Getty Images/Comstock Images)

ANDREW HILL

The three rules of corporate success (including the fake one) Add to ...

The first two rules of Fight Club, according to the film of the same name, are “You do not talk about Fight Club” and “You DO NOT talk about Fight Club”. Studies of corporate success follow the opposite code. Since Tom Peters and Robert Waterman published In Search of Excellence in 1982, readers have not stopped talking about whether the lessons taught by such books are valid.

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Seconds out, then, for round one of a bout with a new challenger, The Three Rules: How Exceptional Companies Think, due out in May.

Authors Michael Raynor and Mumtaz Ahmed come out swinging. In an article about their work in April’s Harvard Business Review, they accuse previous studies of lacking rigour, before describing their analysis of 25,000 U.S. companies’ data going back more than four decades.

Their findings can be summed up in less than a paragraph: Rule One, better before cheaper (compete on benefits other than low price). Rule Two, revenue before cost (go for increased sales over cost-cutting). Rule Three – cheekily – there are no other rules.

Even the busiest chief executive officer should be able to memorize this mantra. It has a simple and sensible force. But will any manual for corporate success ever be The One?

The air of hucksterism that surrounds the genre suggests not. Authors are often selling something other than books. Jim Collins, who wrote or co-wrote Built to Last and Good to Great, among many, has built a franchise. Mr. Peters – now one of the world’s best-known business speakers – and Mr. Waterman were both McKinsey consultants. Mr. Raynor and Mr. Ahmed work for Deloitte. Their clients can guess what they will be getting for their next birthday gift.

Since before alchemists first mixed base metals in a quest for gold, the inventors of magic formulas have sought fame. Success studies offer corporate leaders an amalgam of the elixir of life, Eldorado and the perpetual motion machine.

But such promises also stoke controversy if not fulfilled. Previous analyses were slated, variously, for measuring the wrong things, using a flawed sample, or even failing to guarantee durable achievement for the companies they picked.

The authors of The Three Rules anticipate such criticism. Their research was more exhaustive and used better gauges of performance (return on assets rather than total shareholder return, for instance), they claim. They also advise readers to handle their advice with care. This comes close to management consultants’ classic get-out clause: “It wasn’t our strategy plan that was wrong; it was the way you implemented it.” But, as Mr. Raynor says, it’s unreasonable to demand “perpetual exceptional performance” from any company.

That is evident from their own examples. Of the 25,000 companies, just 344 counted as exceptional: “Miracle Workers” consistently fell in the top 10 per cent of returns and “Long Runners” in the top 20 to 40 per cent. A group of “Average Joes” was selected for comparison.

Awkwardly, but unsurprisingly, rule followers didn’t always prosper, and rule benders sometimes did. For instance, on performance, the Whole Foods Market chain is merely an Average Joe among retail grocers, despite having stuck to the rules, whereas Weis Foods, in the Miracle Worker category, defied them with its policy of discounting, before fading in the 1990s.

Glib-sounding rule three also gives the authors some leeway. They use it to explain that other strategic components – innovation, culture, acquisitions, leadership style – matter too, but companies should not be afraid to change them to serve the first two imperatives.

The secrets of business excellence cannot, then, be defined neatly in a few maxims. But unlike alchemists, some companies do hit gold, so it would be churlish to fault success-studiers for trying to encapsulate how that happens. As Mr. Raynor puts it: “Everyone knows there’ll only be one 100-metres winner, but it still makes sense to study the training methods of past winners.”

His observation is doubly true because corporate leaders themselves lack the time, and the insight, to analyze their own achievements. The Three Rules is a quantitative study. But when the authors did ask CEOs for a magic formula, the bosses attributed their success to areas the research suggested were less important. In short – and this is good news for peddlers of these studies – even business leaders who get it right don’t always know how.

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