Back to business basics

Successful athletes and profitable companies know they’re successful, and they work hard to achieve it. Reading “Three Rules for Making a Company Truly Great” by Michael E. Raynor and Mumtaz Ahmed in the April 2013 Harvard Business Review reinforced my belief that firms need to adopt the fundamentals, or basics, as they strive to recover from the last big recession. I found this article quite interesting and very timely. How does it apply to your business?

Raynor and Ahmed had read Good to Great (Collins, 2001) and In Search of Excellence (Peters and Waterman, 1982), but they were surprised at the lack of data that supported the “successful business” title. So they set out to quantitatively study more than 25,000 firms that were in operation and publically traded from 1966 to 2010. Their investigation focused on return on assets (ROA), which is a measure of efficiency and shows how effective a firm is at turning assets into sales. The authors did look at other financial measures, but ROA was a primary one.

Consistency at the top
Surprisingly, many (greater than 75 percent) of the successful firms in earlier books weren’t on the successful list for this study. Why? Superior performance, defined as success over a decade or more, appears in many different types of industries and from many different sizes of firms. Of the approximately 400 firms that qualified for the title of successful in this study, the authors tried to identify reasons for their outstanding performance. Was it this activity or that one? No — it was how the company thought, not acted, that appeared to make the biggest difference.

Focusing on thought, not action, “Allowed us to see past what the exceptional companies were doing, which was endlessly variable, to how they apparently decided what to do, which proved highly consistent,” the authors say.

Enhancing value
What were successful companies thinking? For starters, they were thinking, “Be better before becoming cheaper.” This points directly to a firm’s value proposition, which goes far beyond price. Remember value? It is an essential component of the American Marketing Association’s (AMA) definition of marketing: create, communicate and deliver value (see the full AMA definition at the bottom of page 58).

Much like beauty, value is in the eye of the beholder. People pay for what they value, but how much they are willing to pay depends on them personally and their perception of the product/service/experience. Exceptional companies in this study understand their value proposition and enhance that before lowering price.

“Every company faces a choice: It can compete mainly by offering superior non-price benefits such as a great brand, an exciting style, or excellent functionally, durability or convenience; or it can meet some minimal acceptable standard along these dimensions and try to attract customers with lower prices,” Raynor and Ahmed say. Successful companies acknowledge this choice, either implicitly or explicitly, and decide to act on making their value proposition greater before lowering the price to a less well-defined or less valuable product/service/experience. I see far too many companies striving to lower price before they strive to enhance the value proposition.

Dr. Charles Hall and his former graduate student Madeline Dickson summarized many of the benefits of our industry’s products to help green industry professionals communicate value proposition more effectively (see “Economic, Environmental, and Health/Well-Being Benefits Associated with Green Industry Products and Services: A Review” in Journal of Environmental Horticulture; available online at bit.ly/18vUnxE). Lowering the price is a reactive action to competition. Proactive — and more successful — firms strive to continually enhance their value proposition and communicate the benefits of their products.

“Typically, a company that competes on dimensions other than price must constantly battle rivals that have figured out its formula,” Raynor and Ahmed note. Your company will be on the defensive to preserve, maintain and enhance its value proposition constantly in a highly competitive landscape, yet this is the soundest footing in an economy of shifting sands. When you rely on enhancing your value proposition, you make yourself different. When you build up your value proposition, you make yourself better. Distinguishing yourself in the marketplace by price is easily undone; differentiating yourself with a distinguishable value proposition is less easily copied.

Realities of revenue
Successful companies also grow revenue before lowering cost. This is not exactly a chicken-and-the-egg scenario, but it’s close. “Exceptional companies garner superior profits by achieving higher revenue than their rivals, either through higher prices or greater volume,” Raynor and Ahmed say.

Without revenue, your relative cost position is unclear. Cost structure is always relative to revenue. Revenue is always the denominator. Firms must generate revenue first then act on their costs.

How predictable is revenue? In economic recovery, it may be slowly building back or it still may be stalled. Focusing on the sale points us directly back at the value proposition; focusing on costs and cost-cutting points our attention more on price.

Some firms may need to lower price, especially when the value proposition isn’t different from the competition’s. When you’re different and people are willing to pay more, you can more easily focus on revenue first and cost reduction, becoming leaner and more efficient with the coffers full.

All for one (and two)
Last but not least, successful companies know that they must change anything they need to in order to follow rules one and two. It’s interesting that no other patterns that can account for success or identify exceptional companies emerged from this study. The authors say that’s somewhat liberating, but it’s also a bit scary. Culture, leadership, logistics, rewards, talent and many other factors play a role in success, but not to an identifiable pattern.

“Top-performing companies are doggedly persistent in seeking a position unrelated to low prices and adopting a revenue-driven profitability formula, while everything else is up for grabs,” the authors say. How great is that? Pursue the value proposition and revenue as the fundamental point of every decision. Does moving to this supplier enhance our value proposition and sales/revenue or not? Does adding this new cultivar enhance our value proposition and revenue/sales or not? Will adding these hours of operation, this method of ordering, this way of inventory management, this person to the payroll enhance our value proposition and sales/revenue or not?

Success comes in all shapes and sizes. The foundation of success for most athletes and businesses is exceptional execution of the fundamentals. This latest study reiterates just how essential the fundamentals are to achieving exceptional business performance. Better before cheaper, and revenue before cost.

Bridget Behe is a professor in the department of horticulture at Michigan State University. Have a Question? You can contact Bridget Behe at behe@msu.edu.