Performance, Strategy

Are there rules to create a great company?

myth-busted

When you read an article which says “three rules for making your company truly great” you have to become slightly skeptical…. Then you read it and it turns out there are no three rules… there are two!

  • Rule no. 1: Better before Cheaper (it is best to compete on differentiators other than price) – this points to value creation.
  • Rule no. 2: Revenue before Cost (prioritize Increasing revenue over reducing costs) – this points to value appropriation (capture).

(Rule 3 turned out to be: there are no other rules).

Rule number 1 seems like a straightforward rule… better to compete on differentiators. However, which kinds of differentiation are we talking about? There are quite a number of variants when you pursue a differentiation strategy. Henri Mintzberg says there is price differentiation, image differentiation, support differentiation, quality differentiation, and design differentiation (and even undifferentiation). Besides that you can compete on scope (segmentation, niche, customizing). Together these provide for many different ways of strategic positioning.

Moreover, one of the biggest problems when it comes to value creation and innovation is to actually be able to appropriate (capture) this value in the form of profits. It turns out that in many cases companies are able to create value, but not to capture it. There is even an entire stream of research on this called “Profit from Technological Innovation” – David Teece is a champion of this. Definitely not so simple as applying rules.

What is interesting about this three two rules article is that according to their comparison of 9 industries (semiconductors, medical devices, electric wiring, clothing retail, confectionery, grocery retail, pharmaceutical, trucking and appliances) the “score” is 8 – 1 for differentiation.

The advice is: if you have the choice a differentiation and revenue focus provides a higher chance on becoming an industry’s “miracle worker”. The small print, however, should add: this study was focused on the winner and does not include the many anonymous players who also are also differentiators and did not make it to the top.

There are no real rules in making your company truly great, only articles titled “rules for making your company truly great”.

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