New Book Review: "Rules to Break & Laws to Follow"

New book review for Rules to Break & Laws to Follow: How Your Business Can Beat the Crisis of Short-Termism (Microsoft Executive Leadership Series), by Don Peppers & Martha Rogers, PhD, John Wiley & Sons, 2008, reposted here:

 

Purchase of this text by this reviewer followed on the tails of "The Strategy Paradox: Why Committing to Success Leads to Failure (and What to Do About It)" by Michael E. Raynor (see my review) and "Strategy Safari: A Guided Tour through the Wilds of Strategic Management" by Henry Mintzberg, Bruce Ahlstrand, and Joseph Lampel (see my review). While initial interest in this work by Peppers and Rogers was due to its seeming focus on the strategic versus the tactical, however, potential readers should note that the authors instead investigate and present general principles that any firm should follow.

At the outset, this text does not beat around the bush. For example, in the first chapter the authors respond to the following first three rules to break by writing "No, no, no. No to all the above. These Rules to Break are really just assumptions about how business works, at the most basic level. They probably aren't written down anywhere in your strategy document, but they have almost certainly backed up your thinking and your company's actions for as long as you remember.": (1) "the best measure of success for your business is current sales and profit, (2) "with the right sales and marketing effort, you can always get more customers", and (3) "company value is created by offering differentiated products and services".

The authors further this instruction by pointing out that all of these assumptions are wrong. "If you operate according to these false assumptions, not only will your business fail to create much value, but you'll also soon find yourself trapped in a Crisis of Short-Termism. Everything you do will be so furiously centered on making today's numbers that you will become increasingly blinded to everything else. Business swept up by this crisis find that even as they try to do the right thing for their shareholders, they end up destroying value rather than creating it. So while these Rules to Break may look no more dangerous than ordinary common sense, in truth they're deadly."

According to the authors, executives need to change their mental models of what it means to succeed. The new model that Peppers and Rogers is based on the understanding that long-term business success relies on customer success as a prerequisite, and that employee trust of their employer precedes employee drive to earn customer trust. Interestingly, even though new technologies are presented as making possible sophisticated analytics, subverting the power of hierarchies, connecting consumers electronically, and undermining the advantages of new products, the authors state that it is customer trust that will provide a guideline for action even if financial metrics are not yet at the needed level of sophistication.

In the opinion of this reviewer, the third chapter entitled "Customers Are a Scarce Resource" is one of the best in the book, and if the potential reader does not have enough time to read all the chapters, they need to read this one. In this chapter, the concept of customer lifetime value (LTV) is discussed. "New customer acquisition has always been the quintessential goal of traditional marketing and is something often trumpeted to shareholders. But raising your customers' lifetime values is just as important, because over and above whatever profit you are earning currently, increasing your customers' LTVs increases the value of your business."

The authors continue by stating that the philosophy of some businesses is "based on the belief that as long as its sales and marketing effort is effective, it can always acquire more customers from somewhere. But this is a false assumption – a Rule to Break. Instead, to make the right decisions as a business, you must always take into consideration the population of customers and prospective customers truly available to you. After considering the whole population of customers and prospects, your job is to employ that population to create the most possible value for your firm. Because customers are scarcer than other resources, using up customers is more costly than using up other resources."

The fifth chapter was also especially enjoyed by this reviewer, where in discussing how to increase the value of one's business the authors present the concepts of "customer equity" and "Return on Customer" (ROC) that follow a discussion of ROI. The examples and accompanying tables in the third and fifth chapters are very well done. The thoughts that the authors share on innovation in the tenth and eleventh chapters were also appreciated, where the production of new ideas is said to be more important than making money from every new idea, and where the need to differentiate between "wise failures" and "fiasco failures" is said to be an important distinction, reminding this reviewer of a quote by James Cameron, who was recently quoted as saying "If you set your goals ridiculously high and it's a failure, you will fail above everyone else's success".