A study of 25,453 companies over 44 years to find: The 3 Rules for Success

In the April 2013 Harvard Business Review, Raynor and Ahmed illustrate the 3 rules a business must follow to be truly great.

These are: (1) Better before cheaper (2) Revenue before cost and (3) There are no other rules.

Better before cheaper

Every company faces a decision, they explain, in relation to the first rule.

It can compete by providing excellent nonprice advantages like convenience, durability, or strong brand; or it can meet an acceptable standard and try to win customers with lower prices.

High performers, they found, generally compete on nonprice benefits while average companies mainly compete on price.

A company should not ignore its price position, Raynor and Ahmed maintain, but it should be aware that outstanding results are typically reached by greater value and not by lower price.

They recommend competing on differentiators other than price.

Better before cheaper.

Raynor and Ahmed’s second rule is: Revenue before cost.

Their research found that superior companies earn profits by achieving more revenue than their competitors through either higher prices or greater volume.

They recommend that a company prioritises increasing revenue over reducing costs.

A low cost of operation, they caution, is rarely a driver of high profitability. Raynor and Ahmed assert that in top companies, revenue is the main driver of performance.

These companies mainly rely on higher prices or large volumes to achieve their revenue levels.

It is possible to lower costs while adhering to the revenue-before-cost rule but high profitability cannot be achieved through a cost leadership strategy.

According to Raynor and Ahmed: There are no other rules.

Their studies have shown that successful companies are following the first 2 rules.

The way to make use of the rules is to get a clear picture of your company’s competitive position and profitability plan.

Often senior leaders lack clarity and do not continually analyse the relationship of all performance determinants such as operations, culture, leadership style, development, and systems to the drivers of profitability.

Raynor and Ahmed learned that exceptional companies have variations in the determinants of performance and make changes in their approaches to them but keep aligned with the first 2 rules.

A great company will put resources into generating nonprice value and boosting revenue. Raynor and Ahmed conclude that these principles should guide a company through all significant decisions.

A successful company must remain true to the 3 rules.