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The Three Rules

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The Three Rules

How Exceptional Companies Think

Portfolio,

15 min read
10 take-aways
Text available

What's inside?

For superior, long-lived results, put performance before price and revenue before costs.

Editorial Rating

8

Qualities

  • Innovative
  • Applicable

Recommendation

How do some companies turn in exceptional performance year after year? Deloitte’s Michael E. Raynor and Mumtaz Ahmed apply a disciplined, statistically rigorous approach to determine what makes top companies great. The fruit of their impressive research is three pivotal rules any company can follow. To uncover this strategic knowledge, the authors worked as diligent “corporate paleontologists,” carefully analyzing the “fossil record” of high-performing companies to discover what makes them special. The authors back up their research with 110 pages of detailed appendices that reflect the meritorious rigor of their approach. Their intense research methods are solid and praiseworthy, but their opaque writing style is wearying, as is their criticism of other books that offer business advice based on anecdotes and one-off observations. getAbstract recommends their thorough analysis and practical findings to CEOs, COOs, business owners, organizational strategists, business professors, entrepreneurs, investors and avid students of the application of managerial theory to practical problems.

Summary

Research Methodology

To learn what makes certain companies extraordinary, most analysts focus on the organizations themselves. This logical approach has a major failing: A review of extraordinary companies often reveals little more than a “concatenation of unlikely and impossible-to-repeat events.”

The research that uncovered the three “decision rules” involved high-level analysis of Compustat data from upward of 25,000 companies. This information spanned a half-century, or “nearly 300,000 company-year observations from 1966 to 2010.” It focused on the “entire observable lifetime of each company” studied. Besides noting each firm’s long-range return on assets (ROA), researchers examined each one’s “annual ROA performance” to identify specific “elements of advantage.” Those factors might include selling, general and administrative expenses (SG&A), gross margin, and current and fixed asset turnover. The study used an “explicitly statistically driven method to separate signal from noise.” Its “powerful combination of large-scale data analysis and in-depth case studies” meets rigorous research requirements.

Superstar Firms

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About the Authors

Michael E. Raynor, a director at Deloitte Services LP, is the author of The Strategy Paradox and The Innovator’s Manifesto. Mumtaz Ahmed is chief strategy officer at Deloitte Consulting LLP.

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