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You need to be better, not just cheaper

Apr 15, 2013 Business Daily, Strategy

“Frustrated by the lack of rigorous research, we undertook a statistical study of thousands of companies, and eventually identified several hundred among them that have done well enough for a long enough period of time to qualify as truly exceptional. Then we discovered something startling: The many and diverse choices that made certain companies great were consistent with just 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.
3.There are no other rules—so change anything you must to follow Rules 1 and 2.

The rules don’t dictate specific behaviors; nor are they even general strategies. They’re foundational concepts on which companies have built greatness over many years.”

MICHAEL E. RAYNOR and MUMTAZ AHMED Harvard Business Review (April 2013)

It is interesting that after so many centuries of running businesses, no one can really give you a rigorous answer to the question: what causes companies to succeed?

Many attempts have been made, of course, but much of what has been offered as management wisdom turns out to be a set of truisms, or even chicanery. Most management theorists work backward from observed data: they study which companies are empirically the most successful, and they try to isolate common practices that may be causing the success.

I remain dubious about all such studies, and view every new one with a healthy dose of scepticism. I have seen too many in my time, and most simply don’t withstand the test of time.

Michael Raynor and Mumtaz Ahmed, two Deloitte consultants, are the latest to jump into the fray. They used a large US database and isolated companies that had enjoyed very high Returns on Assets (ROA) for extended periods – long enough to suggest their success was unlikely to be a fluke.

What is interesting in this study is that the authors boil down success in business to three very simple ‘rules’, as shown in the excerpt. These rules are not strategies: they simply seem to isolate the common types of judgement that drive success.

Perhaps because of their very simplicity, I found them attractive. The first asks you to be better before you try to be cheaper: in other words, don’t sell on price alone. Work on your product and give it distinction; don’t just strip it of all uniqueness in order to sell it in volume. The second rule asks you to focus on growing revenue rather than having a strategy of simply cutting costs and entrenching yourself as the cheapest provider. (The third rule is just the authors’ trick to make you focus on the first two).

In the authors’ own words: “Companies don’t become truly great by reducing costs or assets; they earn their way to greatness. Exceptional companies often, even typically, accept higher costs as the price of excellence.”

This makes intuitive sense. Sure, some firms can make great inroads by simply being the cheapest provider in a price-sensitive market – we have plenty of those in Kenya. However, in the long term, simply stripping everything down to basics won’t sustain you. Customers grow and evolve, and eventually abandon low-cost options to embrace higher-value brands. They tire of stripped-down service and shoddy product quality.

To excel in the long run, you have to be making something worth consuming at a price worth paying. As opposed to relying on customers who are forced to buy your product because they can’t afford any better. The latter will not last, any more than China can sustain a strategy of being the cheapest provider of everything.

These may seem obvious, but ask yourself how many times your business is caught in the trap of cutting price and cost in order to compete, and realize you have a long-term problem.

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