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The 'Exceptional 100' Thrive on Performance, Not Luck

The 'Exceptional 100' Thrive on Performance, Not Luck

A new way to look at company financial performance offers insights on where to target improvement.

Every company dotes on a raft of performance measures. That's because no one measure fully describes how a company is doing. But it can be maddeningly difficult to sort through these different metrics and arrive at a cohesive picture of performance.

Then there's the issue of determining how well you are performing against your competitors, or against an even broader set of companies. Are you really world-class like your promotional literature promises, or are you just pretty good?

It is that multidimensional nature of performance that helped drive Michael Raynor, a director at Deloitte Services, and Mumtaz Ahmed, chief strategy officer at Deloitte, to develop "The Exceptional 100," a list of the top 100 U.S.-based publicly traded companies.

The Exceptional 100 measures financial performance based on three core measures -- growth, profitability and value. But Raynor and Ahmed also combined these measures to create four additional performance markers -- "profitability and growth," "growth and value," "profitability and value," and "growth and profitability and value."

Why add these measures? Raynor says no one measure matters more than all the others and capturing these combinations provides a more complete picture of a company's performance.

Company benchmarking often is based on looking at similar companies in its industry. "More traditional benchmarks recognize it doesn't pay to compare a defense contractor against a consumer products company or a company with $200 million in revenue against a company with $40 billion in revenue," Raynor said.

The problem with that, he told IndustryWeek, is that comparisons frequently involve too small a group to make them really valuable. So he has employed sophisticated statistical tools to strip out the impact of year, industry and size on a company's performance. This allowed him to compare a company's performance against a large number of public companies from different industries.

Based on this methodology, Raynor found that 474 of the more than 5,000 publicly traded companies active in 2013 qualified as exceptional on one of the seven measures. To make the Exceptional 100, companies had to qualify as exceptional in at least four measures. Companies also had to have a higher probability of being exceptional on each measure. And companies had to demonstrate exceptional performance over a period of time. Companies in the Exceptional 100 had a streak, or high level of performance over time, for an average length of nearly 12 years.

Seven companies were exceptional on all seven of the measures. That exclusive group was led by Copart, a $1 billion provider of online vehicle auction and remarketing services.
 

Raynor likens the value of the Exceptional 100 to a map. Plugging in data about your company, you can determine where it stands and use that as a starting point for helping to make some critical decisions about how you will move forward.

For example, Raynor says, a $20 billion to $50 billion company may decide that after a decade of double-digit growth, it is reasonable to expect that it will be entering a period of slower growth. Yet looking at its relative growth, it may turn out to be in the 80th percentile of companies. That's certainly strong performance, he says, but not so good it leaves no room for improvement.

"It's not like there is nowhere left to go," Raynor says. "You may be prematurely taking your foot off the gas."

So the Deloitte methodology offers companies not just a way to assess where they stand but offers them guidance on making the changes that will make them better. Help in doing that is no small matter.

"Our research found that up to 80% of managers either over- or underestimate their company's relative performance or percentile rank," said Ahmed. "This misunderstanding can lead to misplaced efforts, such as an unnecessary focus on aggressive cost-cutting, as opposed to increasing margins through strategic differentiation to improve long-term profitability."

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