THE THREE RULES OF BUSINESS SUCCESS (According to Michael Raynor and Mumtz Ahmed, HBR April 2013)

HBR coverA casual reading of the Harvard Business Review article by Michael Raynor & Mumtaz Ahmed might lead you to think that this is another ephemeral piece by a couple of Deloitte consultants, and published by one of the premier East Coast business schools that has brought us CEO’s focused on Wall Street, GM-style mass production, top-down command & control management, and radically irresponsible (at best) financial and banking executives.

A more careful reading however reveals some interesting observations. The three rules they espouse are;

Rule 1: Better Before Cheaper
Rule 2: Revenue Before Cost
Rule 3: There are no other rules

According to the article, these “rules” came from studying more that 20,000 successful companies over a period of more than 40 years. They identified that in 8 out of the 9 industries studied the premier companies followed these three rules. The focus of the study was to use a large number of companies over a long period so as to identify the true “signals from the noise”. To obtain statistically valid information. They also took time in the article to politely slag down other researchers like Tom Peters & Robert Waterman (In Search of Excellence) and Jim Collins (Good to Great) by suggesting they have no way to understand why their exemplar companies obtained better results.

As I mulled over the article and the implications of it’s finding, I kept coming back to the Five Lean Principles (5 Lean Principles) and the economics of lean thinking (Economics of Lean). When working with value stream managers we always bring their job description down to a few (overly simple) phrases:

A. Create more value for the customers
B. Eliminate waste from every process
C. Use the freed-up capacity to make & sell more stuff
D. And make tons of money. (VS Manager Role)

It seems to me that point A is directly addressing Raynor & Ahmed’s first rule of “Better Before Cheaper”. If a value stream manager truly understands the needs of his/her customers and increases the value provided, then he/she is putting “Better Before Cheaper”.

Similarly if every process in the value stream is radically improved over time, including everything from sales to planning to engineering to purchasing, production, shipping, cash collection, and payables; then the value stream will create greatly improved value for the customer, and free up huge amounts of capacity to create even more value. Now, I recognize that many western companies adopt lean methods to achieve “cost cutting”. But we know that this is not lean thinking at all. It is what Bob Emiliani calls “fake lean” (Real Lean).

The third issue – point C – is focused on Revenue Before Cost. Instead of using spurious calculations of “savings”, the value stream manager will utilize the newly available capacity to grow the top line revenue without any additional costs other than direct materials.

If Points A, B, and C are occurring systematically, then Point D – making tons of money – will come naturally from the value stream. This will more than satisfy the ROA objectives of the Raynor and Ahmed study.

Perhaps companies on an authentic lean journey are following the thesis of “Better Before Cheaper”, “Revenue Before Cost”, and “There Are No Other Rules” – before they were identified by our learned friends from Deloitte. I would (as the Irish say) be deloitted if this is truly the case. Let me know what you think.