The Three Rules: A book review by Bob Morris

Posted on: June 10th, 2013 by bobmorris

Three RulesThe Three Rules: How Exceptional Companies Think
Michael E. Raynor and Mumtaz Ahmed
Portfolio/Penguin Group (2013)

The paradox of exceptional organizational performance: Do not be an exception to three rules

With rare exception, the best business books are research/evidence-driven and that is certainly true of this one. Michael Raynor and Mumtaz Ahmed rigorously examined a database of more than 25,000 companies from hundreds of industries throughout a period of more than four decades and eventually identified 344 companies that qualified as statistically “exceptional.” That is, 174 “Miracle Workers” (the best of the best) and 170 “Long Runners” (exceptional but at a lower level). But after five years of research, they failed to identify a consistent pattern of behavior that separated the exceptional companies from all the others.

Eventually, they shifted their attention from what people in these companies did to series of hypotheses about how people in these companies thought . Their conclusion is that exceptional companies have people who consistently make the best decisions about (a) what to do, (b) how to do it, (c) what not to do, and (d) why. For example, which questions to ask? Which problems to solve? When and where to compete?

In this context, I am reminded of a passage in the first chapter of a book co-authored by Noel Tichy and Warren Bennis, Judgment: How Winning Leaders Make Great Calls, in which they assert that what really matters “is not how many calls a leader gets right, or even what percentage of calls a leader gets right. Rather it is important how many of the important ones he or she gets right.” They go on to suggest that effective leaders “not only make better calls, but they are able to discern the really important ones and get a higher percentage of them right. They are better at a whole process that runs from seeing the need for a call, to framing issues, to figuring out what is critical, to mobilizing and energizing the troops.”

This is precisely what Raynor and Ahmed have in mind when observing, “By seeking the decision-making criteria in the many and varied choices our exceptional companies made, we were able to reduce an overwhelming complexity to a mu h more manageable set of rules that applied regardless of the circumstances.” Check out Chapter 1, “More Than a Fortune Cookie” and appendices A-J, Pages 241-351, for complete details about the research, evaluation, and selection processes.

The title of the book refers to three rules that, according the Raynor and Ahmed, have guided and informed the decisions made by leaders of exceptional companies and can also do so for decisions made by leaders in all other organizations, whatever their size and nature may be. “Better before cheaper” does not mean price competition is irrelevant; it means that when you have a choice to make, and when the data are unclear, go with “better.” Next, “revenue before cost” does not mean increasing revenue is more important. As for “there are no other rules,” it does not mean you can blindly follow the rules; it means you must apply all your creativity and insight to follow them in the face of all manner of other changes. “Hewing to the two rules means that everything else is on the table, and this imposes a heavy burden of active search to determine how best to adhere to the two rules in the face of sometimes wrenching competition and environmental change. It takes a great deal of flexibility to be persistent.”

Raynor and Ahmed are convinced that the path to exceptional performance lives in the pursuit of the first two rules “and regardless of the choices you face there are no other rules. The quest for greatness finally has more to sustain it than a fortune cookie.”

These are among the dozens of passages of special interest and value to me, also listed to indicate the scope of Raynor and Ahmed’s coverage.

o Better Before Cheaper, Revenue Before Cost, and There Are no Other Rules (Pages 10-29)
o Deciding to Be Exceptional (29-33)
o Measuring Performance (41-56)
o The Relativity of Position (63-69)
o Execution: Kinetic Energy (86-96)
o The Structure of Differences in Profitability (111-117)
o Same Recipe, Different Ingredients (158-161)
o Change to Stay the Same (162-179)
o Reactive Change: Only if Necessary (183-192)
o Playing the Odds (204-209)
o Three Dimensions of a Generalized Case Study Analysis (220-229)
o Defying Gravity (229-231)

In addition to the Miracle Workers and Long Runners, Raynor and Ahmed also studied companies they characterize as “Average Joes.” As their name suggests, they are merely average. Two of several questions addressed in this book are: “What does it take to pull away from the pack, that is, how do Miracle Workers and long Runners separate themselves from Average Joes?” and “How do Miracle Workers – the very best – pull away from the Long Runners – the very good?” They suggest that their reader think in terms of gold and silver medals, analogous to International Olympic competition. There are no medals for unexceptional athletes. In fact, they don’t even qualify for competition at that level.

Michael Raynor and Mumtaz Ahmed are convinced that the path to exceptional performance lies in the pursuit of the first two rules “and regardless of the choices you face there are no other rules. The quest for greatness finally has more to sustain it than a fortune cookie.” When concluding their book, they observe, “Every glider lands eventually. How long it stays up, how far it flies, and the heights it reaches are all profoundly affected by the pilot’s choices. It is our belief that by consciously adopting the three rules – better before chapter, revenue before cost, and there are no other rules – you can reasonably hope to deny gravity its due for just that much more longer.”

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