Random Search for Excellence

In March, the folks at Deloitte produced the findings of some interesting research.  It implied that all of those business books that try to teach us the tricks behind successful businesses are of little use.

 

According to the research, most of the companies which appear to be successful in these books are really just lucky.  Therefore, studying the tactics and management styles of these so-called "successful" companies is fairly worthless, since it was luck which got them there, not their skills or management styles.

 

You can find the study at:  http://www.deloitte.com/dtt/cda/doc/content/us_consulting_persistencerandomsearchfor_April2009.pdf

 

You can find the Deloitte blog on the topic at:  http://blogs.deloitte.com/persistenceproject/.

 

I tried to put a comment about their report on their blog, but as of yet, they have not printed it.  Therefore, I am printing my response below.  In a few days, I hope to have a more formal blog on the topic.

 

My Response:

 

After reading through the data in your paper (A Random Search for Excellence), I came to a completely different conclusion than the one voiced in the document.  The underlying current written between the lines in the article seemed to be that "style does not determine substance."  In other words, the relationship between the way a company is managed (management "style") and the way it performs (its "substance" as defined by ROA or TSR) seems to be predominantly random.  Therefore, don't put a lot of hope into recommendations of how to improve your substance by changing your style. 

 

This line of reasoning leaves the reader in a rather hopeless state--Just try to be lucky and see if you can find a fable with questionable relevancy.

 

While all of this may have some truth in it, there is also a second truth in the data which I find very uplifting and practical.  This other truth is that while style may not determine substance, positioning does. Getting positioning right (something you have control over) can help you be successful.

 

Consider the two data conclusions from the paper: 

 

1) The most likely outcome for a firm in any decile is to repeat that decile in the following year.

2) This stickiness in performance is especially pronounced at the high and low ends of the spectrum.

 

What these two conclusions say to me is this:  Once you have established your position in the market, it tends to stick.  If you pick a winning position in the marketplace, you tend to remain a winner.  If you pick a losing position, you tend to remain a loser.  Therefore, rather than worrying about "style" we should focus on one's market position.  If you get positioning right, it can overcome a lot of other randomness and get you "sticky" in the right outcome place regardless of style.

 

Winning positions are the sweet spot between three forces:  consumer desires, internal capabilities and marketplace vulnerabilities.  In other words, if you are able to profitably meet a desire better than anyone else and the market allows you to own that position in the mind of the consumer, then you have a winning position.  (I go into the process of finding a winning position in a lot more detail in one of my blogs: http://planninga-from-nanninga.blogspot.com/2008/09/analogy-207-eight-questions.html)

 

Wal-Mart has won over all these years primarily because they have won the low price position in general merchandise, much more than any management trick.  K Mart has lost because it did not secure that position.  It has caused both of these companies to be stuck on opposing ends of the performance continuum.  They are not randomly walking.  Their fate is sealed by the nature of their position.

 

To learn more, read what Al Reis and Jack Trout have written on positioning, or better yet, read all of my blogs that are tagged with positioning (http://planninga-from-nanninga.blogspot.com).