Who Should Develop Business Strategy, the CEO, CFO or COO?
In the mid 1990’s the CEO of Rubbermaid developed an executive strategy for growth. The essence of the strategy was to innovate and grow through new products and new markets. Specifically, the plan was to develop a new product every day and enter a new market category every 12 to 18 months.
The company delivered.
For three years they developed a new product nearly every day of the year. The market noticed and Fortune Magazine named Rubbermaid its most admired company – it was considered more innovative than 3M, Apple and Intel.
But the strategy was a failure. By 1995 the company was losing money, in 1998 the Newell company acquired Rubbermaid, saving it from bankruptcy.
The problem was that from a financial and operational standpoint delivery of a new product a day was impossible. After three years nearly a thousand new products clogged the production and delivery systems. Operations could not adjust to the variability, efficiently or otherwise.
Financially costs grew even as prices were under pressure, eventually leading to losses. With constant demand for new stuff and no system to support it, the financial system was untenable.
Effective strategy requires a collaborative approach balancing all corporate functions. This means that there isn’t one owner of strategy, it isn’t the the responsibility of the CEO, CFO or COO, it is the responsibility of all of them together.
At its core strategy is about how a company will allocate scarce resources (CFO), to deliver products and / or services efficiently (COO), based on the opportunities in the market (CEO). Any strategy that does not address all three aspects is imbalanced; the ideas might be good but execution will be a challenge.
Why the strategy failed
The executive strategy failed at Rubbermaid, but the answer would not have been to move strategy to finance or operations. CFO’s can fall into the trap of a perfect financial strategy that minimizes cost to the detriment of the business. Minimizing cost without protecting a company’s ability to produce and innovate is a short path to bankruptcy. The cheapest way to operate is to not operate.
Just focusing on operations can lead to producing the wrong products, producing at the wrong cost or not delivering on promises. Operations need to be efficient but highly efficient operations can produce piles of inventory or commoditized services that nobody ever wants to buy.
Rubbermaid’s executive strategy focusing on innovation may have been the right market strategy, but to be successful it would have required a flexible operating model and strong financial management. Flexibility would have allowed for new products, while financial management would have focused the company on the most profitable opportunities.
Focusing on the top three functions isn’t enough
In fact, even focusing on the top three functions isn’t enough. The process of creating a strategy is an opportunity is to bring all of the executive functions together to solve the strategic challenge and define how a company will win. Together management can identify the opportunities and the constraints, develop a clear vision and craft a joint plan of action.
This is not to say that there is one strategy for all functions. Once the corporate vision is established each function needs to develop specific strategies and tactics. The CFO will have a financial strategy around cash and investment management, operations will have a strategy around delivery.
For any business beyond the smallest, any company where functions become discretely managed, this brings up the challenge of how and when to create and review strategies. In the past companies could follow an annual, biannual or even less infrequent process.
Today this doesn’t work. The speed of change in today’s market means that not only do different corporate functions need to work together they need to do so in real time, on a continuous basis.
The impact of Uber on San Francisco
The impact of Uber on the San Francisco taxi market shows how quickly change can come to a stable industry. When Uber entered the market, taxis were averaging about 1400 trips per car per month as they had for years. A year later, taxis were down to 900 trips. After two years they were down to 600 trips per month. A taxi company waiting a year to readjust its strategy would already be behind, waiting two years could have been deadly.
This is happening in all industries, so competitive strategy development and reassessment need to be continuous processes with feedback and functional realignment in real time.
What this means for business owners is that they must find the time and develop the systems to have regular strategic conversations. In these conversations they measure progress but also develop their understanding of how the market is developing and craft new approaches. They need to think about the future more than the past. And they need to ensure that individual functions are supporting the future goals of the company as a whole.
These conversations do not have to be offsite or large events, they can and should take place anywhere, any time. Owners and managers should develop the habit to question the future, challenge accepted truths and talk openly about progress.
Finally, for those companies without clearly delineated executive roles owners and leaders need to be sure that they are addressing all aspects of the strategy. For an individual or a small team this involves understanding the team’s strengths and weaknesses then finding the capabilities, through external advice, or adding to the team, to fill in the gaps.
A very common imbalance is to focus heavily on the product without addressing the operations, finances or long term market strategy. A great product is important and a wonderful asset, but without execution it is just a product.
Rubbermaid made good products and had a revolutionary vision of the future. They even implemented this vision, but it was to their detriment because the strategy was unbalanced. Any strategy that does not consider all functional aspects of the business risks suffering the same fate. Companies need strategies, they often need bold strategies, but these must be owned and implemented by all of the functions – not just once every couple of years but on a continuous basis.