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Deloitte’s Michael E. Raynor and Mumtaz Ahmed have boiled long-term corporate success down to three simple rules: 1) Pursue a “better before cheaper” strategy. 2) Focus on revenue before cost. 3) There are no other rules; follow the first two.

For decades, management studies have sought to pinpoint the qualities that distinguish truly great companies from the rest. Such studies often have focused on identifying the actions companies and their leaders have taken to achieve high performance—actions that other organizations can’t necessarily replicate for various reasons.

A more useful approach may be to investigate the thought processes and decision-making rules that have propelled industry leaders into long-term success. That’s what Michael E. Raynor, director of Deloitte Services LP and author of “The Strategy Paradox,” and Mumtaz Ahmed, chief strategy officer for Deloitte LLP, have done in their new book, “The Three Rules: How Exceptional Companies Think” (Portfolio/Penguin, May 2013). As the title indicates, the authors identify three guiding principles that capture how high-performing enterprises deliver superior results over the long run, despite facing the same constraints as competitors:

Rule No. 1: Better before cheaper: Compete on differentiators other than price.

Rule No. 2: Revenue before cost: Drive superior profitability with higher prices or higher volumes, not lower cost.

Rule No. 3: There are no other rules: Change anything/everything in order to abide by the first two rules.

In this Q&A, Raynor and Ahmed explain how they reached their findings and what those findings can mean for companies looking to improve their performance.

How did the three rules—better before cheaper, revenue before cost, and there are no other rules—evolve from your research?

Raynor: We were looking for patterns of behavior that connected specific activities, such as innovation and growth and R&D, to superior performance, but those patterns never showed up. We began to extract order from chaos when we shifted our focus from companies’ behavior to the decision-making rules implicit in their choices over time. We can’t say that’s why the people who ran those companies made those choices at that time. But if we look at the big choices, which we have strong reason to believe made the difference for success, we can infer the kinds of decision rules that are consistent with those choices, namely, better before cheaper and revenue before cost.

Ahmed: One obvious area that we looked at in our research was deal activity. The specific questions were, “Do great companies do more deals or fewer?” and “Do they do different types of deals?” Interestingly, we found patterns in deal activity that were sometimes common to the highest-achieving companies as well as to the average performers. For example, both average and exceptional performers did lots of deals in one sector and very few in another.

The point is, by examining dealmaking activity alone, we were not able to find patterns that would explain the performance of the companies we studied. But when we were able to link their patterns of dealmaking with a higher purpose—such as better before cheaper or revenue before cost—we could make sense of them. The more persistently companies pursue these rules, the better their odds of beating the competition and becoming truly exceptional.

Why did you choose return on assets (ROA) as the measurement benchmark for your research?

Ahmed: We picked ROA because it reflects to a significant extent what management has done to affect performance. Other measures seem to be affected by factors outside managers’ control. For example, total shareholder return and share price are subject to the vagaries of investors’ expectations.

Variations on ROA, such as return on equity, return on capital employed, return on invested capital, and so on, can also work. But we chose ROA because it’s likely to capture outcomes that are as directly related to management behavior as possible. It also reflects the outcomes of strategy execution. As an added bonus, ROA can be broken down into its constituent elements, that is, gross margin, asset turnover, and so on, allowing us to connect specific behaviors to specific performance outcomes.

Raynor: We wanted to understand what makes for a great company, not what makes for a great investment. Companies can be highly profitable and consistently so while delivering only market average returns because everyone has figured out that they are highly and consistently profitable. Measures such as share price are certainly important, but they are important to other constituencies for other reasons.

How did you go about identifying the companies that stood out for following these rules?

Raynor: Keep in mind that we wanted only those companies that were good enough for long enough that we could be confident something special was going on. We wanted companies that were truly exceptional. To that end, we analyzed nearly 300,000 company-​year observations from 1966 to 2010. From that universe we identified a population of 344 exceptional companies. From this population of exceptional companies we selected a representative sample of trios—three companies from each of nine industries. Each trio consists of a Miracle Worker (the very best), a Long Runner (the very good), and a third company of average performance that we call an Average Joe. By comparing the very best with the very good, and both with the merely average, we hoped to shed light on two different types of exceptionalism. First: What does it take to pull away from the pack? In other words, how do Miracle Workers and Long Runners separate themselves from Average Joes? Second: How do Miracle Workers pull away from Long Runners?

Ahmed: We found that the companies in the nine trios made systematically different choices across a wide range of issues. The Miracle Workers consistently put better before cheaper and revenue before cost. The Long Runners did so to a somewhat lesser extent.

Raynor: Regardless of circumstances and constraints, our top performers were doggedly persistent only in their adherence to the first two rules. Expansionary markets? Better before cheaper; revenue before cost. Recessionary economy? Better before cheaper; revenue before cost. Technological disruption? Better before cheaper; revenue before cost. Plague of locusts? Zombie apocalypse? Better before cheaper; revenue before cost.

How can a CIO or any other senior executive apply the thinking from your research?

Raynor: It starts with a diagnostic, which can be an eye-opening experience for companies when they are shown how they stack up over time against the companies they consider their most important competitors. Once that diagnostic is in place, executives can look at allocation of effort. Where is the business spending most of its energy and money? Where is the organization focused? How are incentive structures aligned? Is management pointing the company consistently at improving its differentiation, price, and volume advantages, or are they spending most of their time worrying about price competitiveness and finding ways to cut costs? When we look at what many companies actually do and what they spend most of their time, energy, and money on, we find that it often lies at the wrong end of each of the first two rules. Once management realizes that, the next step is making improvements aimed at building superior long-term profitability.