Really need some company

Added: Lavaris Kowal - Date: 22.12.2021 06:10 - Views: 34999 - Clicks: 9452

Really need some company

Much of the strategy and management advice that business leaders turn to is unreliable or impractical, say the authors, because those who would guide us underestimate the power of chance. Raynor and Ahmed undertook a statistical study of 25, companies—those that had traded on U. They measured performance according to return on assets—a metric, they reasoned, that reliably reflects managerial efforts rather than simply changes in expectations, which are the primary driver of shareholder returns.

For purposes of comparison, they also identified Average Joes. After repeatedly trying and failing to isolate measurable behaviors that were consistently relevant to success, the authors shifted their emphasis away from what these companies did to hypotheses about how they thought. They realized that the choices these companies had made were consistent with 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; and 3 there are no other rules—so change anything you must to follow rules 1 and 2.

Much of the strategy and management advice that business leaders turn to is unreliable or impractical. Gurus draw pointed lessons from companies whose outstanding may be nothing more than random fluctuations. Executives speak proudly of corporate achievements that may be only lucky coincidences. What sets them apart? How can we follow their examples? 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:. We have no idea—nor do we know whether the executives even followed them consciously. Randomness can crown an average company king for a year, two years, even a decade, before performance reverts to the mean.

We tackled the randomness problem head-on. Finding what we assumed would be weak als in noisy environments required a lot of data, so we began with the largest database we could find—the more than 25, companies that have traded on U.

We measured performance using return on assets ROAa metric that reflects strong, stable performance—unlike, say, total shareholder return, which may reflect the vagaries of the stock market and changes in investor expectations rather than fundamental company performance. We call the companies in both these exceptional performers. For comparison purposes, we also identified companies that were Average Joes. In our quest to identify top-performing companies and figure out why they were among the best, we spent almost two years developing and working through appropriate statistical methods and another three years identifying the behaviors common to the best.

With the help of Andrew D. Henderson, of the University of Texas at Austin, we used quantile regression—which allowed us to strip out extraneous factors such as survivor bias, company size, and financial leverage—to rank companies according to their relative performance on return on assets income divided by the book value of assetsa metric that reliably reflects managerial efforts rather than simply changes in investor expectations, which are the primary driver of shareholder returns.

To figure out what made these companies special, we selected a Miracle Worker, a Long Runner, and an Average Joe in each of nine industries and then made pairwise comparisons among the three. Similarly, we figured out how much of the TAT difference was due to current asset turnover and fixed asset turnover. A total of companies qualified as Miracle Workers, and qualified as Long Runners. Exceptional companies, it turns out, come in all shapes and sizes. IBM qualified, and so did Syntel, even though at the time it was only 0.

To understand what was behind superior performance, we identified trios in each of nine industries; each trio consisted of one company from each of our performancecarefully matched for years of overlap and relative size. We searched for behavioral differences that might explain the specific performance differences we had discerned.

If asset utilization was salient, we looked for the behaviors that drove asset utilization.

Really need some company

Where the data permitted, we built financial models to estimate the impact of these behavioral differences on performance. To illustrate: Heartland Express, the Miracle Worker in our trucking-industry trio, relied entirely on gross-margin advantage for its ROA edge, and its gross margins seemed to be a function of higher prices.

Then things got messy. We repeatedly tried and failed to isolate measurable behaviors that were consistently relevant. Was customer focus the key? Risk taking? Nope and nope. All these factors were associated with great, good, or average performance in pretty much equal measure. Maybe, we thought, the lesson was that companies could be successful only if they did the right deals, pursued the right innovations, or took the right risks in the right sorts of ways. But those are truisms, and thus as useless as the advice businesspeople so typically get from what might be called the Do the Right Thing School of Management: Get the right people on the bus!

Did anyone ever want the wrong people? Have a clear strategy! Does anyone ever set out to create a confusing one? Give customers what they want! All these are taken from well-read success studies. A useful explanatory frame began to emerge only after we shifted our emphasis away from what these companies did to hypotheses about how they thought. That allowed us to see past what the exceptional companies were doing, which was endlessly variable, to how they apparently decided what to do, which proved highly consistent. When considering acquisitions, for example, Miracle Workers acted as though they were following our rules, going for deals that would enhance their nonprice positions and allow them to bring in disproportionately higher revenues.

The same was true for all other behavioral factors, from diversifying to taking a narrow focus, from globalizing to staying at home. The only factor that seemed to matter was adherence to the rules. And the rules are most assuredly not truisms. Every company faces a choice: It can compete mainly by offering superior nonprice benefits such as a great brand, an exciting style, or excellent functionality, durability, or convenience; or it can meet some minimal acceptable standard along these dimensions and try to attract customers with lower prices.

Miracle Workers overwhelmingly adopt the former position. Average Joes typically compete on price. Long Runners show no clear tendency one way or the other. Competitive positions built on greater differentiation through brand, style, or reliability are more likely to drive exceptional performance than positions built on lower prices.

Miracle Workers typically rely much more on gross margins than on lower costs for their profitability advantage, whereas Long Runners are as likely to depend on a cost advantage as on a gross-margin advantage. The drivers of gross margin can be determined only by examining detailed case studies. Statistical analysis strongly suggests that our case-study sample of 18 Miracle Workers and Long Runners is representative of the exceptional companies we identified from our population of more than 25, For example, inwhen trucking companies had to differentiate themselves after deregulation, a host of new growth opportunities opened up.

In contrast, Werner Enterprises, the Long Runner in our trucking trio, expanded in both scale—serving essentially the entire continental U. This approach imposed trade-offs. Second, its pursuit of economies of scale meant that the company occasionally had to accept less-profitable business in order to keep its vehicles rolling and thus maintain an adequate level of asset utilization. Its first-rate execution enabled Werner to achieve exceptional performance—it is a Long Runner, after all—but it never rose to Miracle Worker status. Transportation Services PAMthe Average Joe of the three, focused on a narrower range of customers and services than Werner did, but sought high volume through lower prices.

Oddly enough, as demand outstripped supply in the industry, PAM found itself short of drivers and burdened with idle assets. To restore profitability, the company switched to contract trucking, choosing to target the auto sector. When carmakers ran into tough times, so did PAM.

But PAM took a low-price position. When exceptional companies abandon nonprice positions, their performance typically falters. Maytag, for example, is one of our Miracle Workers, but only in one distinct era. But as big-box stores came to dominate the retail landscape, Maytag responded by diversifying its product line and price points, which compromised its nonprice position and price premiums.

Performance declined substantially, and the company was bought by Whirlpool in A useful explanatory frame began to emerge only after we shifted our emphasis away from what these companies did to how they thought. We mean only that in most cases, outstanding performance is caused by greater value and not by lower price.

Maytag could have diversified into only those segments where it could establish a superior nonprice position, even if the segments demanded lower price points than those the company had historically offered. Typically, a company that competes on dimensions other than price must constantly battle rivals that have figured out its formula.

At worst, they may find even better formulas for success. Our retail grocery trio was intriguing—first because the Miracle Worker of the bunch, Weis, was a price-based competitor that captured profits through low costs, but also because Whole Foods, a high-profile purveyor of organic products, clearly practices better before cheaper and revenue before cost, yet turns out to be an Average Joe.

Whole Foods may very well be en route to becoming a Long Runner or a Miracle Worker, but it might just as easily get submerged in a wave of competition. The rules can only tell you which hard problem you should try to solve. Charging higher prices in pursuit of higher gross margins is what creates opportunities in less-demanding market segments and provides oxygen for would-be disruptors with cheaper, good-enough products.

And a word to would-be disruptors: The most effective and profitable among you follow the rules when launching disruptive attacks. Companies must not only create value but also capture it in the form of profits. By an overwhelming margin, exceptional companies garner superior profits by achieving higher revenue than their rivals, through either higher prices or greater volume.

Very rarely is cost leadership a driver of superior profitability. Take, for example, the U. Its smaller stores are in locations that are easier for customers to get to, and many shoppers buy small amounts of a wide variety of goods. Running these stores is unavoidably costly—in fact, the company tolerates higher costs and lower efficiency than would many of its larger competitors.

Really need some company

But its consistently higher prices have enabled Family Dollar to enjoy a gross-margin advantage and, consequently, superior ROA for decades. For eight of the nine Miracle Workers in our sample, revenue was the main driver of performance. The ninth is the Pennsylvania-based grocery chain Weis Markets, which competes on price and drives profitability through lower costs; more on this company below. Six of these eight relied mainly on higher prices to achieve their revenue levels; the other two relied largely or entirely on volume. One of the two volume-focused companies is Merck, which globalized earlier, more successfully, and more aggressively than the Long Runner in the pharmaceutical trio, Eli Lilly.

Merck followed the better-before-cheaper rule, refusing to compete on price relative to the alternatives in global markets. But the lower price ceilings in those markets prevented the company from using gross margins as its primary source of advantage. Instead Merck drove volume by relying on the clinical effectiveness of its patent-protected medications.

Long-term success in any industry is a rare and difficult achievement, and finding a workable strategy that stays within the rules requires enormous creativity and flexibility. As a result, Merck was introducing three times as many products across twice as many therapeutic areas, yet enjoying economies of scope in both discovery and manufacture that stemmed from similarities among core compounds. The company was also a leader in international expansion, which further increased unit volumes and asset utilization.

This rule underscores the uncomfortable or liberating truth that in the pursuit of exceptional profitability, everything but the first two rules should be on the table. When considering all the other determinants of company performance—operational excellence, talent development, leadership style, corporate culture, reward systems, you name it—we saw wide variation among companies of all performance types.

More telling still, we found individual companies that had remained exceptional despite changing their approaches to a of critical determinants of performance. The reason? The changes they made kept them aligned with the first two rules. In other words, top-performing companies are doggedly persistent in seeking a position unrelated to low prices and adopting a revenue-driven profitability formula, while everything else is up for grabs. You are still responsible for searching actively—and flexibly—for ways to follow the rules in the face of what may be wrenching competitive change.

It takes enormous creativity to remain true to the first two rules. When these changes have led to superior profitability, it has been because they contributed to greater volume more than to lower costs. Although it would be nonsensical for companies that compete through lower prices to capture value through higher prices, every other combination of position and profitability formula is at least theoretically possible.

Arithmetically, a low-price position cheaper before better could drive sufficient volume to keep asset utilization high enough to secure superior profitability revenue before costbut we never saw this, either.

Our research shows that companies with lower-price positions tend to rely on lower costs to achieve profitability. The success of the grocery chain Weis shows how a lower-price position and a lower-cost profitability formula can work.

Really need some company

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