What I Learned from Reading Deloitte’s Three Rules: How Exceptional Companies Think
The Three Rules: How Exceptional Companies Think is a culminating text written upon decades of research and study by Deloitte’s director Michael E Raynor and chief strategy officer Mumtaz Ahmed.
Here are the three rules, simplified:
- Better before cheaper
- Revenue before cost
- There are no other rules
And here are the three rules, explained:
Three Effects
Post hoc is a logical fallacy that states, “Since event Y followed event X, event Y must have been caused by event X.” In other words, causation does not imply correlation. The authors posit that modern corporations are assuming many wrong principles are contributing to their success. They maintain that other studies trying to chronicle success have missed crucial factors as well.
The halo effect, on the other hand, refers to the phenomenon that our attitudes on being bold or narrow-minded is contingent upon how the economy is faring. If the economy is doing well, we are bold in action. If not, we remain narrow-minded. This causes a ripple effect, that further propagates the economy in any direction.
Lastly, the target after shooting effect refers to the false sense of success experienced as a result of deliberately aligning goals to actions. It requires a shift of targets and the convincing that this shift was really what was being striven for after all.
Better Before Cheaper
During the recession, Abercombie and Fitch refused to lower costs to accommodate supply. They needed to maintain their brand, that Abercombie is high-quality and that the price justifies just that. By remaining true to their brand– arguably their “why” as Simon Sinek– would say, Abercombie endured through the recession, while others closed down or lost their brand identity.
Beyond the clothing industry, the authors also applied their theory of “better before cheaper” to appliances.
Maytag was a miracle grower, focused on marketing, while Whirlpool was a long runner competing on price. Yet later, when Maytag competed on price as the lower-mid sector emerged. As a result, Maytag experienced a degradation of identity and was acquired by Whirlpool in 2006.
Abercombie won because they followed the “better before cheaper” principle. Maytag didn’t and lost.
By extension then, major corporations today, like Walmart and Apple, should be anomalies. Yet, it was already part of their brand identity to provide cheap products and services to the masses.
Notice how they were already cheap; they didn’t go cheaper from mid-range pricing. Moreover, the promotions and competitive pricing that ensue are too insignificant to be factored into the authors’ definition of “cheaper.”
The direct comparison between “better” and “cheaper” maintains that one often requires the sacrifice of the other. And those who don’t prize their product or service’s value and identity always lose.
Revenue Before Cost
Although many startups focus on minimizing costs, it might be useful to take a backwards approach and consider revenue first. If your product or service is valuable and it’s justifiable to charge a premium, it might also be warranted to pay more in costs.
Such is the case with the trucking industry. Certain companies focus on a specific demographic, one in which they know can afford the increased value and higher premium.
Those that focus on “revenue before cost” understand the negative correlation principle: it’s impossible to have 100% market share because of the disparity of products and services available.
For example, if we consider commercial vehicles, some may prefer a powerful, roaring SUV. Others may prefer a quiet, fuel-efficient hybrid car.
In any business, there are going to be competitors. The competitors will eat up some market share simply due to what portion of the market they cater to.
Motel 6 and Four Seasons are both in the hospitality business. Thus, they will have similar propositions… the differentiating factor is, how similar?
That begs another question as to even if two product or service providers are very similar and cater to the same sub-market, to what extent over revenue, profit margins, timeline, etc. will yield a significant difference in success?
Is it the difference between a discernible percentage value or is this an arbitrary philosophical thought?
There Are No Other Rules
The authors argue to not follow intuition because of innate human fallacies to discern patterns incorrectly or when there is none. When considering the pros and cons of intuition vs rules, we must consider the false positives and negatives.
A false positive involves trying something you should not have, which ultimately, might result in a minor setback, but should yield no significant harm.
A false negative, on the other hand, refers to forgoing something you would have liked. Interestingly, there’s no harm here either, for you can’t miss anything you can’t have known.
(It’s paradoxical in that the authors argue for following rules, yet rebut the rules others have instated. Nonetheless, I do appreciate their efforts in covering all bases, as they have conceded this point in the conclusion.)
Conclusion
If you do what your competitor is doing, you will not improve your own performance since what is applicable tot hem may not be so for you.
To self-reflect, the authors maintained that other organizational theorists have posited three criteria in evaluating theories: simplicity, accuracy, and generality.
Yet, there are trade-offs if we want to apply each:
- To seek simplicity involves isolating only a few variables that may lead to inaccuracy in the grand scope of things
- To seek accuracy involves introducing more variables, compromising simplicity
- To seek generality may warrant simplicity, but it is definitely impossible to encapsulate everything that precedes accuracy.
Thus, we run into the “run just to stand still” effect. How do we do better than our competition?
If the advice is right, it will be universally adopted. Yet, if the advice is universally adopted, then it will not improve our overall performance, rendering the advice as wrong. Competitors will improve, leaving us with no advantage at all.
No matter how high we soar, gravity will drag us down. Take-off is optional, landing is mandatory.
The difference is that when we’re in the air, how much higher and farther can we fly than our competitors before coming down.
By adopting the three rules, perhaps we can defy gravity for that much longer before they’re universally adopted and rendered futile as well.
