A new book - 'The Three Rules: How Exceptional Companies Think' - has come up with 3 simple rules for corporations
to follow in order to have a sustainable superior performance. These rules are ‘Better
before Cheaper, Revenue before Cost, and deployment of all means to follow the
first 2 rules’.
As the US economy improves leaving the recession behind, a
rule such as ‘revenue before cost’ is likely to only help. The test for the
book will, however, arrive a few years down the line when the business cycles
may bring upon the next recession.
The book is meant for corporations and the rules sound
simple. In fact these are so simple that the authors actually had to qualify the
simplicity of the rules.
“Better before cheaper
and revenue before cost are not “dumbed down” simplifications of our findings,
nor mnemonics connected to more elaborate formulations. These rules are the
principles we inferred from our research, and so their simplicity does not come
at the expense of completeness.” (p.216)
However, while the rules are simple, reading the book is an
academic exercise in itself that requires a notepad, a pen, and a lot of time. That
investment nonetheless should be worthwhile because this book is not just
another one in the ‘business performance’ genre. What fundamentally separates
this book is –
a.
Choice of ROA as a parameter for performance as
against parameters like stock performance
b.
Scientific selection of top companies as against
author nominations
c.
Thorough understanding of each industry and
company and triangulation of facts to separate facts from beliefs. This process
was based on not just news reports and annual reports but hard facts and numbers
from sources not so easily available.
For a book that has 1/3rd devoted to notes and
methodology there is little scope to doubt the robustness of its results. Also,
the thickness of the appendices is not just a tacit stonewall deployed by many
to avoid a volley of questions it is actually a transparent and open invitation
to serious readers to detect and point out the gaps.
Given the confidence in the 3 rules proposed, one begins to think more closely of real life business scenarios and this is where I
have a few questions for the authors.
1. 3 simple
rules that are difficult to follow? – While we can buy in to the hypothesis
and the evidence that ‘Revenue should come before cost’ taking a call with
regard to this rule may be difficult. So, for example, should a company lay off
its employees and cut costs under changed circumstances or should it reason
that re-skilling the employees while focusing on new sources of revenue is a
better approach? I guess what the book is trying to suggest in these cases is to focus
more of the managerial attention on value generation and less on cost cutting.
Is that right?
2.
Rules for
companies or for products/services? ‘Better before cheaper’ appears to be a
rule applicable more to the product development than to the growth of a
company. So, if a company caters to customers from different income groups all
its products are not likely to come out true on the ‘better before cheaper’
front.
Putting it differently, in some markets a
cheaper product may be the only definition of ‘better.’ In such markets a
company that epitomises ‘better before cheaper’ may need to adapt.
3. Limits to applicability?
a. With the exception of the Retail industry, we
don’t see the example of any service company, especially of the kind reliant on
bidding for contracts? How would a service company bidding for contracts from US
government, given the current focus on Low Price Technically Acceptable (LPTA)
policy, win the contracts if it doesn’t focus on cost? We could reason that the
company should move out of such an industry but is that the only answer? Given
that services sector is no less than 50% of total global GDP it becomes important
to address this sector.
b. Do the three rules contradict the process of
disruptive innovation where the new entrants making a foothold provide
relatively low cost and low quality alternatives to gain a foothold?
