Research shows that companies which offer better value, even if at a price point which is higher than that of the overall competition, achieve exceptional results.

Imagine if all you had to do were to adhere to three simple rules. Wouldn’t that make the experience of running a business so much easier? I have recently come across some very interesting business research by none other than Michael E. Raynor (co-author of The Innovators Solution) and Mumtaz Ahmed, both from Deloitte Consulting LLP in the United States. In fact, they’ve recently published a book entitled: The Three Rules: How Exceptional Companies Think, (Portfolio/Penguin, May 2013).

I found their business research highly original and offering a parading shift in business management thinking. The research, which included an examination of 25,000+ companies that have traded on the US stock exchanges between 1966 and 2010, identified only 174 companies that qualified as “exceptional companies”. The metric used to define “exceptional performance” was Return on Assets (ROA), which in Raynor’s and Ahmed’s opinion is one of the most suitable metrics to measure “strong, stable performance”.

You don’t have to be big or global to be exceptional; you can be small and local

Equally interesting to me was the fact that of the 174 “exceptional” companies, which constitute just 0.7 per cent, and contrary to preconceived opinions, the exceptional ones come in all shapes and sizes.

Naturally, some names you can guess such as 3M, McDonalds and IBM, but others are less obvious such as WD-40 (a company built on a single unpatented product), Syntel (an IT outsourcing and consulting company) or Luby’s (a cafeteria chain). The point is that you don’t have to be big or global to be exceptional; you can be small and local. Maltese entrepreneurs read on please.

Furthermore, the research ignored or discounted what companies did and instead focused on what companies thought. Again, I find this research approach highly innovative and insightful. In fact, Raynor & Ahmed argue that when focusing on what exceptional companies “did” the variables were endless whereas when specifically focusing on what companies “thought” the results were “highly consistent”. Hence, the extraordinary claim that exceptional companies follow three rules only.

Rule 1: Better before cheaper.

This research shows that companies which offer better value, even if at a price point which is higher than that of the overall competition, achieve exceptional results.

This is not to say that you can’t lower your prices – say in a recession or during a price war – but that your prices must always remain higher than that of your rivals. It also means that profitability advantage in business is not acquired through cost leadership.

Rule 2: Revenue before cost.

The research also shows that revenue is the main driver of performance. Put another way, the focus of any business aspiring to be exceptional is to always have a bias in favour of growing the top line (revenue) rather than cost containment. In the words of authors “…exceptional companies often, even typically, accept higher costs as the price of excellence.”

Rule 3: There are no other rules.

In other words, do whatever you want, in whichever way you want, so long as you don’t go against rule number 1 and number 2 mentioned above.

I find this research counter-intuitive, incredibly simple but extremely powerful. In fact, I would go as far to say that if these rules catch on and become mainstream they stand to radically alter the way business people mange and run their companies.

Just in case you can’t remember the long list please allow me to repeat this incredible set of rules that could transform the prospects of your business and its future:

Rule 1: Better before cheaper (compete on differentiators other than price);

Rule 2: Revenue before cost (prioritise increasing revenue over reducing costs);

Rule 3: Follow rules 1 and 2.

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Kevin-James Fenech is a director consultant at Fenci Consulting.