Interview: How successful companies go beyond luck

May 26th 2015 |

In an interview with Katharine Morton, Editorial Director of EuroFinance, Michael E Raynor, author of The Three Rules: How Exceptional Companies Think, says being lucky isn’t a sustainable strategy – you make your own luck. Treasurers should take note.

For five years, Raynor and his partner analysed data on more than 25,000 companies spanning 45 years to see why some companies perform exceptionally over the long term. Since the book’s publication, his work has expanded pro-actively to show many companies how they too can aspire to exceptional performance.

Come and see him expand on these issues in Copenhagen on 23-25 September at EuroFinance's flagship International Cash and Treasury Management conference.

Q1: What are the three signs that your company is not an exceptional performer?

We think of exceptional performance in terms of three dimensions:

  1. It is multidimensional:  Many exceptional” performers deliver strong results along several measures simultaneously.  For example, they do not deliver supercharged growth at the expense of profitability, or great profitability while treading water on the top line.  They deliver growth and profitability.  So if you find yourself wrestling with trade-offs among performance measures, chances are your company may not be exceptional.
  2. It is consistent over time:  Companies with wild fluctuations in performance tend not to clear benchmarks for exceptional results.  It can take the better part of a decade for a company to establish itself as “more than just lucky,” so if your company is dealing with peaks and valleys beyond industry-level variation, chances are you’re performance won’t be statistically remarkable.
  3. It is relative:  It can be tempting to focus on the absolute results – Have sales increased, is profitability on the rise?  But exceptional performance is a relative construct, and to be exceptional is to perform better than other companies.  That means having a clear sense of how well your company is doing compared to the largest possible relevant comparison set.  If you’re benchmarking against only your closest competitors, and using their performance to set your own improvement targets, there’s a chance you’ll be setting your sights too low.

Q2: How do companies set realistic performance goals?

It begins with an accurate understanding of your performance in relative terms. Unfortunately, this is hardly a trivial task. Common approaches to benchmarking are extremely sensitive to the underlying assumptions – how many peers you look at, over how long a time frame, and so forth – and you can get wildly inconsistent results depending on which method you adopt. What’s more, our survey research suggests executives’ intuition about their companies relative performance often diverges dramatically from more statistically robust estimates.

Knowing your starting point allows you to set realistic goals – few companies go from worst to first in a single bound.  And should ambitious goals be appropriate, knowing your starting point allows you to estimate the likelihood of success, which is critical to establishing viable plans.  After all, a target for profitability improvement with a one-in-10 chance of success is typically unlikely to be accomplished with run-of-the-mill cost-cutting, for example.

Q3: What’s the difference between signal and noise in terms of performance?

For us, the signal reflects what a company is truly capable of, given its circumstances. We wouldn’t expect a company in a highly-profitable sector to have the same performance as one in a low-margin one. Nor would we expect a company to grow a $50 billion base as rapidly as a $50 million one. And all companies are subject to the vagaries of broader economic and political events. So we want to adjust for those factors. We also want to avoid being fooled by the ‘noise’ of short-term spikes, up or down. So it’s important to look at longer time frames.

By ‘stripping out’ of these factors, our hope is to see in a company’s financial performance something fundamental what it can achieve over the long term.

Q4: What’s the role of luck versus judgment in performance?

When we look around for companies to emulate, it’s all too easy to see a streak of strong performances and conclude that it must be the result of good management, innovative products, or whatever. But when we started looking at the companies touted in classic ‘success studies,’ we found that on the order of just 5% were actually statistically remarkable. So to learn from the leaders, we developed a method that we believe helps to identify the skilled from the merely fortunate.

Of course, there’s nothing wrong with being lucky. But ‘be lucky’ isn’t a strategy…at least, not a very reliable one.

Q5: What's your top tip to help the average corporate treasurer guide strategy for exceptional performance?

We recommend approaching goal setting with three questions in mind:

  1. How does your company stack up?  This means having a robust, empirically-grounded estimate of your company’s relative performance, not just compared to your traditional competitors, but compared to the broadest possible group.  This can be crucial to seeing nascent competitive threats from non-traditional corners of the economy.
  2. What do you need to improve?  It can be tempting to focus on what you’re good at, and so companies with strong growth might tend to keep focusing on growth, when in fact the real upside lies in improved profitability.  
  3. How much of an improvement should you seek?  Setting tough but attainable goals is not easy.  The stereotype of “everyone grow revenue by 10% and cut cost by 5%” is not nearly as apocryphal as we might hope.  A deep understand of relative performance, and what that means for the plausibility of specific targets, is a good way to connect strategic and financial plans.

If a corporate treasurer asks these tough questions, they’ll be much better equipped to help guide their company’s journey to exceptional performance.

Hear Michael speak at EuroFinance Copenhagen 2015

In 2.5 days, you will hear from a wide range of experts and innovators that will help you ensure core treasury fitness, make incremental gains and train for the big strategic leaps that will mean your treasury is fit for purpose, fit for growth and fit for the future.

Full programme now online!

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