Three proven rules: discovering how exceptional companies think

Abstract

hat is the secret of long-term exceptional corporate performance? There have been many attempts to answer this question, but satisfying prescriptions remain elusive. Previous efforts typically succumb to one or both of two flaws. First, they fail to identify truly exceptional companies and end up studying ''lucky random walkers.'' Second, their advice is frequently vacuous when boiled down to statements such as ''get the right people on the bus,'' as if getting the wrong people on the bus was ever an objective. With this history in mind, our search for the keys to exceptionalism began with a radical premise: that what constitutes stand-out performance is not obvious. It is not enough simply to set up a performance benchmark, no matter how demanding it might seem, and see who clears it. Neither is it enough to put a sample or even a population of companies in rank order and focus on those at the top of the list. What we wanted were those companies that were good enough for long enough that we could be confident something special was going on.To that end, we adapted cutting-edge statistical techniques to the analysis of 45 years of Compustat data on over 25,000 unique companies -nearly 300,000 company-year observations from 1966 to 2010. From that universe we identified a population of 344 exceptional companies in two categories: 174 Miracle Workers, or the best of the best, and 170 Long Runners -still exceptional, but at a lower level and for a longer period of time.From this population of exceptional companies we selected a representative sample of trios, three companies from each of nine different industries. Each trio consists of a Miracle Worker, a Long Runner, and a third company of average performance that we call an Average Joe (see Exhibit 1). By comparing the very best with the very good, and both with the merely average, we hoped to be able to shed light on two different types of exceptionalism. First, what does it take to pull away from the pack; that is, how do Miracle Workers and Long Runners separate themselves from Average Joes? Second, how do Miracle Workers -the very best -pull away from Long Runners -the very good?

Countering Disruptive Innovations

“…Yet as incumbents fail to detect disrupters, it offers even greater opportunities for disrupters to build further capabilities to not only target customers in the lower-end market segments, but also the mainstream customers that are considered as the most profitable by the incumbents. As they undertake such initiatives, they tend to preserve advantages such as cost control and capabilities to offer superior qualities that influenced their initial success (Raynor & Mumtaz, 2013). The implications of these are often latent in the fact that disruption tends to occur when a significant number of the customers in the incumbents' most profitable segments begin to embrace the disrupter's offerings.…”

“…In such cases, disruptive innovations may not only cause declining sales, revenues, profitability and returns on shareholders' value, but also a firm's probable exit. That implies constant analysis and devising of the strategies for dealing with disruptive innovations are prerequisites for leveraging a business' overall sustainability (Raynor & Mumtaz, 2013). Unfortunately, research and development of the theories for dealing with disruptive innovations remain largely premature for businesses to identify any meaningful business models that can be replicated to counter threats from disruptive innovations.…”

Risky business: How strategy relates to survival

“…Research conducted after Campbell-Hunt's comprehensive review but using the dimensional approach to strategy he recommends has done little to resolve the debate (Leitner & Güldenberg, 2010;Spanos et al, 2004). Research by Raynor and Ahmed (2013) found that pure differentiation strategies are the most likely to yield sustained levels of exceptional profitability, and pure costbased positions (insofar as they are made manifest through competitive positions reliant on price leadership) are the least likely to do so, with hybrid positions enjoying intermediate probabilities of exceptional longterm results. Interestingly this work controls for the relationship between returns and longevity when calculating its relative measure of corporate performance.…”