Editor’s note: This article was first published in October 2013. The BlackBerry discussion (price cuts, mass layoffs, struggling against new competitors) reflects the company’s situation in 2013; it stopped designing its own phones in 2016.
How much of a company’s success is down to chance, luck or good planning? After analysing more than 25,000 companies from 1966 to 2010, some conclusions could be drawn from the 344 companies that earned the title of exceptional companies. Raynor and Ahmed set out the study in the book The Three Rules: How Exceptional Companies Think.
The authors say that these rules are very easy to apply in any business or industry. Here is a summary of those 3 “secrets” of great companies. When studying them, the authors took into account their stability over time, not just good runs or particular moments. In the end, the great companies sum up their success as follows:
1. “Better” before “cheaper”
Bringing a product to market that is cheaper than the competition’s can be a short-term strategy. If you want long-term success, your company needs much more than that. What’s more, competitors can cut their prices too. That is why the only way to consistently beat your competitors is to make a better product than theirs, make it more accessible, build an attractive brand, provide better service and stand out in many more ways than price.
When it comes down to it, in the market, customers are willing to pay for a product’s value, yet sometimes they are not willing to pay its price, even when that price is lower than that of another product with more value.
A recent example comes from Apple. As Tim Cook put it, more or less: “We never said we would make a low-cost iPhone. Let others make the junk.”
2. Profits from revenue before cost-cutting
If a company facing a sharp drop in sales (falling revenue) makes a profit by cutting costs, it is simply putting a short-term patch on things that doesn’t solve the main problem. The companies that have succeeded over the long term did not do it by laying off staff every time their sales fell. That is a very effective strategy for tomorrow, but it doesn’t last long.
The companies with a healthy, competent system beat their rivals by selling more and charging more. In other words, by increasing their sales volume, looking for new markets, new customers and new products to sell. Keeping workers busy on new ideas instead of laying them off is what makes companies great in the long run. Obviously, a company must also keep a balance between costs and revenue, but focusing solely on costs is sometimes exactly what stops the revenue from coming in.
(Read: The 2 smartest, most brilliant strategies in business history)
3. The third rule: there are no other rules
The third rule is not to take any action that goes against the first two. Although there are endless variations and options for beating your competitors, and sometimes the strategy is unique, every rule leads us to change any decision that is not in line with the first two rules.
Sounds easy, right? Well, it isn’t
If we look at what most companies in the world, listed and unlisted, large and small, have done as soon as headwinds arrived, the first thing they have done is pull the lever of price and cost cuts.
It is very hard not to give in to the temptation to lower prices and cut costs, because the decision shows up immediately in the quarterly results. By contrast, making a better or different product, or looking for a new market, can be more complicated and even costly at first.
BlackBerry is a company that has been slow to get the message: “Don’t cut the price of your product. It has been cheaper than the rest for a while now, but it’s not what I want.” It is also an example of a company that has tried cost-cutting through mass layoffs, and it has been shown that this is not the path to long-term success.
Following these authors’ logic, BlackBerry‘s success was a product of luck: once serious competitors appeared, it proved not to be so good at business, and it was also a company guilty of a lack of creativity that failed to adapt to a new era.
“The best companies don’t take the easy road, but the road towards providing more value with every step they take, and they look for ways to get the consumer to pay for it.”
Further reading
- Richard Branson: 6 business lessons from sporting success
- 10 Warren Buffett quotes on business
- 18 business lessons you will learn sooner or later
Featured image: Flickr user 'gloom', CC BY-SA 2.0, via Wikimedia Commons.
