Think Functionally, Act Strategically
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The document discusses the evolving role of corporate support functions, such as HR, IT, and finance, in response to increasing market expectations and competitive intensity. It highlights that these functions are expected to provide greater strategic value rather than just servicing day-to-day needs, thus necessitating a shift towards a more strategic operational model. Functional leaders are now encouraged to focus on distinct capabilities that differentiate their organizations while managing resources effectively.
Think Functionally, Act Strategically
- 1. strategy+business issue 70 SPRING 2013 Think Functionally, Act Strategically When a company competes on capabilities, its specialist leaders— in HR, IT, finance, and elsewhere—play a new, influential role. by deniz caglar, namit kapoor, and thomas ripsam reprint 00158
- 2. feature strategy & leadership 1
- 3. special section: the new functional leader Think Functionally, Act Strategically When a company competes on capabilities, its specialist leaders—in HR, IT, finance, feature strategy & leadership and elsewhere—play a new, influential role.le. by Deniz Caglar, Namit Kapoor, and Thomas Ripsam 2 What should the role of the corporate support have been primarily transactional. They fulfilled day- function be in business strategy? Until recently, to-day needs, met legal and regulatory requirements, the answer was relatively straightforward. System-wide, accommodated requests from business units, and put service-oriented functions existed to carry out the many out the inevitable fires that erupted when there was a specialized tasks that every corporation needs to have conflict or urgency. When functional leaders were asked done. Human resources (HR) recruited employees, to make improvements, it meant doing the same things managed benefits transactions, and oversaw evalua- more efficiently and at a greater cost savings. tion and promotion practices. Information technology Recently, however, there has been a leap in expec- (IT) ran and helped support the company’s computer tations. Over the past few years, CEOs, business unit systems. Finance carried out all processes related to ac- leaders, and functional leaders themselves have been Illustration by Keith Negley counts, debts, and taxes. Learning and organizational asking support functions to deliver more value to the development offered training programs tagged to the organization at large. Instead of balancing services skills the company needed. Legal vetted contracts and among all business units equally, or striving to be best managed issues related to compliance. And so on. in class in everything, support functions such as HR, Though much has been written over the years IT, and finance are asked to be “fit for purpose”: more about the strategic importance of HR, IT, finance, and closely aligned to the enterprise strategy. Functions that other support functions, in most companies their roles are more directly related to individual brands and busi-
- 4. Deniz Caglar Namit Kapoor Thomas Ripsam deniz.caglar@booz.com namit.kapoor@booz.com thomas.ripsam@booz.com is a partner with Booz & is a partner with Booz & is a partner with Booz & Company based in Chicago. Company based in Chicago. Company based in Munich. He He focuses on organizational He specializes in formulating specializes in strategy-based design and cost fitness in the shared-services strategies improvement of top-line and consumer packaged goods and and improving the effective- bottom-line performance, retail industries. ness and efficiency of sales and with particular focus on sales, marketing functions. marketing, and general and administrative functions. ness units—which may include operations, sourcing, strides in maximizing efficiency and improving opera- marketing, sales, and R&D—have also been affected, tions. But they usually still have a lot of room for im- though not always in the same way as their counterparts provement, forcing many functional leaders to look for feature strategy & leadership at corporate headquarters. This leap is occurring for new paths to operational excellence and greater value, several reasons. usually while reducing costs. First, market environments and patterns have Finally, many companies have become aware of become less stable, and competitive intensity has in- the power of distinctive capabilities, that is, the ad- creased. Many companies—facing changes in customer vantage held by companies that do only a few things demand, the emergence of innovative new competitors in the market, but do them exceptionally well. Amazon’s from around the world, and greater macroeconomic un- success is based on its skill with online user interfaces, certainty—are raising expectations accordingly. Today’s logistics, and technology. Coca-Cola’s success depends functions must provide a far more complex set of activi- on its prowess in beverage creation, brand proposition, ties and expertise than they ever had to manage in the and global consumer insight. Hyundai gained its envi- past. For example, IT must design systems that mine able foothold in the U.S. automobile market through “big data” to support real-time consumer offers that stylish car design and marketing combined with disci- change on the fly; HR must recruit a broad range of plined quality improvement (see “Hyundai’s Capabilities people from around the world and design flexible career Play,” by William J. Holstein, s+b, Spring 2013). Func- 3 tracks to match their diversity. tional leaders face the difficult challenge of supporting There is also a new opportunity to raise the return these complex new capabilities while not compromising on discretionary investment. Over the past decade, what they already do. through outsourcing and process improvement, many For all these reasons, the role of corporate staff functions have become more efficient in performing functions is expanding in many companies. These their day-to-day activities. Therefore, the resources ded- businesses are investing more in their global corporate icated to routine, transactional tasks—managing HR staff, and are deploying functions such as marketing, benefits, dispensing IT equipment, resolving finance R&D, and sourcing across all the business units in the discrepancies, maintaining mailing lists, and so on— enterprise. Corporate functions already have a more have been dropping. Such tasks now consume perhaps prominent seat at the strategy table than they used to, 35 percent of staff time, whereas they once consumed and are increasingly influential in setting and executing 70 percent. This development enables functional leaders the corporate capabilities agenda. strategy+business issue 70 to allocate more time, attention, and money to discre- Together, these changes give functional leaders a tionary activities, the strategic tasks that can make an mandate to think and operate more strategically than organization more competitive. they did in the past. They are rewarded less for provid- In addition, the pressure to execute flawlessly is in- ing a service bureau that fills all requests, and more for creasing. Most functional departments have made great their effectiveness and discernment, for emphasizing
- 5. the activities that differentiate a company in the mar- acquisitions and postmerger integration—the finance ket, and for finding less expensive or more comprehen- team increased investments. For consultative cost man- sive ways to deliver the rest. They are also being asked agement, they designed a leaner operating model, in- features title of the article feature strategy & leadership to focus, for the first time, on resolving function-related corporating new metrics for effectiveness and value de- conflicts among different parts of the larger organiza- livery. They also outsourced routine and transactional tion (for example, conflicts over incompatible IT sys- activities such as standard financial reporting. Perhaps tems or redundant talent initiatives). Every function, the most important change was in the reorganization local or global, should define its role in light of the over- of the financial planning and analysis staff. Under the all capability agenda, and how it can be fit for purpose old structure, these staff members had been embed- in driving that agenda—instead of thinking first about ded in business units around the world; they replaced how to fulfill its functional excellence agenda. this structure with a centralized staffing model, rein- Consider, for example, the story of the finance staff forced by service-level agreements with the heads of all at a large North American consumer packaged goods the business units. This gave the finance team a higher company. For years, they had focused on a single di- level of accountability for local results than they had mension of their role: as the “cost police” for the busi- had before, while gaining efficiencies and cost savings. ness units, processing transactions, tracking expenses, The top leaders of the finance function took on more and holding down costs, even when it meant constrain- of an advisory role, consulting with business unit 4 ing growth. Then, in the wake of the Great Reces- leaders on key decisions—such as where they should sion, the CEO asked the chief financial officer to cut channel their investments for growth and how to man- finance’s operating costs by 20 percent. age and control costs. That had the beneficial side ef- The CFO and his direct reports met to consider the fect of helping business units plan ahead, reducing some measures. Staff members were already stretched thin, of the urgent last-minute calls that drain every func- and this would stretch everyone further, possibly past tional group. the breaking point. The mood around the table was Within six months, the new system had freed up glum. Then the CFO said, “If we’re going to do this, more than 20 percent of the finance function’s budget— we’ll do it in a way that delivers more value to the busi- and a fair amount of executive attention. This was par- ness—not less.” ticularly helpful in making and integrating acquisitions; Over the next few weeks, the CFO and the top fi- the success rate for “onboarding” new enterprises grew nance team met one-on-one with the managers of some visibly. Because finance now managed business unit of the largest business units to talk about finance’s oper- costs more actively, the cash available for reinvestment ating model and where the department’s help was most was identified more accurately. The function’s new valued. These conversations, which had never before agenda provided the company with a clearer picture been conducted in that company, led to a quiet reor- of the return on investments; it helped the company ganization. In some areas—such as due diligence for overcome its ingrained reluctance to share information
- 6. and services across business unit boundaries. In short, won’t always know how to bring them together. Man- finance now played the kind of strategic advisory role aging these types of situations requires a high level of that made a significant contribution to the company’s leadership skill. feature strategy & leadership top line as well as to its bottom line. How, then, can you take on this new strategic role, maximizing your effectiveness, without being torn into Choices and Commitments pieces? You can accomplish it only by changing the way If you are a leader in a corporate function, you may have your function conducts business, overcoming the iner- a similar story to tell. The changes in your role may feel tia of embedded habits and practices, and putting stra- challenging or unfamiliar at times, but they represent a tegic activities first, before the usual long list of critical golden opportunity for you and everyone in your senior tasks and service requests. That is the purpose of the team and department. For years, you may have sought new functional agenda. more opportunities to bring your specialty to bear, not Like many other strategic exercises, convert- just in day-to-day services, but in defining and devel- ing to the new agenda begins with a statement of the oping the company’s distinctive edge. Now, the chance value proposition: your company’s chosen way to play is finally here. In fact, in many industries, it’s become in the market, how it intends to attract and hold cus- an imperative. tomers. This is, of course, set at the enterprise level, To be sure, you still have to manage your own but it is incumbent upon you as the functional leader 5 house. Transactional tasks remain; businesses continue to understand and articulate it in the context of your to demand service. You are still judged on your opera- specialization. Will your company distinguish itself as tional effectiveness and efficiency. Senior management an innovator, launching technologically sophisticated may send mixed signals; it isn’t always clear how to products and services? Will it be a value player, outpac- resolve conflicts between the day-to-day needs of indi- ing rivals through lower costs? Will it provide a compel- vidual businesses and the long-range, in-depth efforts ling customer experience? Or will it forge some other needed to build distinctive capabilities. Many things way of delivering value? that you would like to see improved, including some In every successful company, the value proposition highly important cross-functional initiatives, are outside is closely linked to the firm’s most critical capabilities: your control or jurisdiction, yet seem to require your in- the things it has learned, over time, to do particularly volvement and influence. Moreover, if your enterprise well. Inevitably, functional leaders are involved in defin- (like most) is struggling with incoherence—not quite ing, building, and maintaining these capabilities. Thus, strategy+business issue 70 able to settle on an overarching direction that is appro- you need a clear understanding of the company’s overall priate for all its products, services, and priorities—then value proposition, of the capabilities required to fulfill the function you lead will undoubtedly struggle as well. it, and of the role your function plays. To start, divide Different businesses will make contradictory demands all the capabilities that your function provides into of you, you won’t be able to fulfill them all, and you three broad categories:
- 7. Being best in class in every process or activity simply isn’t possible; no function has the funds or organizational stamina to be excellent at everything. • Basic business capabilities are the capabilities (and deserve) a major share of investment and attention needed to keep the company running. These servic- from every function that contributes to them. es—which include payroll, employee benefits admin- As a functional leader, you must recognize which features title of the article feature strategy & leadership istration, and basic computing services—remain the capabilities fall into which categories—and balance responsibility of the functions. They are critical but your resource investments accordingly. All three can be non-differentiating. They should be tightly controlled costly to build and maintain, and many functions have for efficiency, and often automated, outsourced, or rel- gotten used to spending more on competitive necessities egated to low-cost shared services, thus freeing up re- and basic business capabilities than they should. Differ- sources that functional leaders can redirect to differenti- entiating capabilities get shortchanged as a result, and ating capabilities (see “Is Your Company Fit for Growth?” when that happens a company can easily lose ground. by Deniz Caglar, Jaya Pandrangi, and John Plansky, s+b, Being best in class in every process or activity with- Summer 2012). in a given function simply isn’t possible, no matter how • Competitive necessities are the “table stakes” that professionally satisfying; no function has the funds or enable a company to compete in its industry. In many organizational stamina to be excellent at everything. In- companies, these include logistics, sourcing, back-office stead, you need a clear sense of which category each ac- processes, and integrated IT architecture. They are es- tivity falls into. There must be some activities in which sential to survival and success, but they can often be being merely adequate is appropriate, where “good 6 managed for cost and efficiency, rather than for perfor- enough” is actually good enough. mance at a world-class level, or even at the same level as This can be a very difficult path. Many people competitors. within your function, and in the business units you • Differentiating capabilities provide a company serve, will push back on the idea that their day-to-day with the distinctive advantage needed to outperform capabilities need less investment. In the short run, you competitors. Most of these capabilities are cross-func- still need to tailor your approach to the individual pri- tional; they gain their power from the fact that different orities of every business, and to your organization’s cul- functional proficiencies fit together in ways that other ture. But in the long run, if you don’t have a clear and companies cannot easily copy. For example, Procter & consistent idea of the right trade-offs and priorities, you Gamble’s innovation capability, as chronicled during will never muster the capital or attention you need to the years that A.G. Lafley was CEO, was not related fulfill your strategic imperative. solely to its R&D function. Financial reviews, product design and manufacturing, and immersive market re- Blueprint for an Operating Model search were closely involved. The Swiffer WetJet mop With a more conscious approach to channeling invest- was developed when a launch team, in visit after visit to ment, the pressure to execute effectively has increased. consumers’ homes, saw them struggling with conven- A functional blueprint is a plan spelling out how to ac- tional mops. Truly differentiating capabilities demand complish this: how you will deliver the most value to the
- 8. You may have to shift from a service bureau orientation, where your role is to fulfill every request, to a more strategic approach, where you sometimes have to say no. Measuring new products during the next 18 within the company, to drive your months. function’s effectiveness and effi- feature strategy & leadership Functional 2. Clear drivers of value. Iden- ciency wherever possible. This may Performance tify the sources of your function’s greatest contributions to the enter- include the use of charge-backs, service-level agreements, and make- prise. Improved demand manage- versus-buy assessments (analysis of E very function’s first priority should be to support the build- ing and management of differentiating ment might depend, for example, on having sophisticated analytical tools that can provide streamlined whether to build a capability in-house or outsource it). Leading companies deploy capabilities. Therefore, it is essential access to data, greater scale, and the rigorous processes and tools to to define and measure explicitly just bundling of expertise. Metrics should ensure the alignment of ongoing and how much value each function is establish the degree to which these proposed functional activities and delivering. You can use four distinct tools exist and are used. investments with the functional pri- indicators to assess this value. 3. Cost-effectiveness. Continue orities and the operating model, and 1. Quantifiable impact. Measure to track the relationship between ex- to ensure maximum value creation. all the function’s activities against penses and outcomes. Your function’s Within the context of continuing pres- 7 definable business outcomes that are contribution to the enterprise—mea- sure on support budgets, this helps aligned with the company’s strate- sured through financial performance functional leaders allocate their gic priorities and tied to a specific improvement in revenue or profit— resources to the activities with the time frame. A centralized consumer must outweigh the cost of its activity. highest value. insights capability, for instance, might 4. Internal market validation. be measured by the reduction in the Seek out and incorporate feedback number of weeks required to develop from your clients and constituents organization as a whole, how you will work together with “Measuring Functional Performance,” above). The blue- other functions to ensure the delivery of the greatest val- print defines a number of key elements that may have ue, and how you will continually raise performance. gone unexamined in the past. For example, you may re- strategy+business issue 70 In developing the blueprint, you should rethink visit the roles and responsibilities in your organizational decision rights (who has final approval), processes, and structure, along with existing patterns of centralization tools. The way you measure performance should also and decentralization. Differentiating capabilities tend be explicitly defined, both at the functional level and to benefit from having global centers of excellence, or at the level of each function’s specific activities (see even an organizational structure designed around them
- 9. (see “Beyond Functions,” by Paul Leinwand and Cesare that you can counsel business unit leaders, even telling Mainardi, s+b, Spring 2013). Competitive necessities, them hard truths—for example, that their priorities which are requisite for every company in an indus- conflict with those of the overall enterprise. features title of the article feature strategy & leadership try, may naturally involve more decentralized opera- As the company becomes more coherent, you may tions—or, alternatively, may fit best in shared services. often be called on to help build or develop differentiat- Many basic business capabilities can be outsourced. ing capabilities—and to help discard investments that Collaborate with business leaders and your coun- no longer fit. That may mean shifting abruptly from a terparts in other functions to make these decisions. For service bureau orientation, where your role is to fulfill example, a distinctive product development capability every request, to a more strategic approach, where you may require setting up common activities across IT, help set and maintain priorities and sometimes have to R&D, marketing, and sales. The marketing and sales say no. Even as its leaders espouse greater coherence, functions will need to improve their market-sensing your organization may not move smoothly in that di- capabilities to understand what the customer wants, rection. Everybody tends to think that the number of and R&D and product management will need to draw projects should go down, starting with everyone else’s upon those insights in designing new features. IT will projects. In those organizations that embrace coherence, be called on to provide an underlying infrastructure to too much centralization can be a weakness; you will support knowledge transfer and collaboration. What also have to guard against top-down rules and practices 8 conversations do you need to arrange, among which in- in your function that stifle creativity and make it hard dividuals, to ensure that these new systems and struc- to reach out to customers effectively. tures are in place? A well-designed and well-executed functional agenda makes all this easier. Once you can establish an Leading from Within open, well-communicated set of priorities and an ex- If you are a functional leader, your role is more chal- plicit, well-understood functional blueprint, you will lenging than ever before. You are a critical player in not be operating alone. By putting these together and every aspect of capabilities: identifying them; design- talking about them openly, you reinforce a higher de- ing the processes, tools, and practices that enable them; gree of alignment between the corporate center, the lo- and executing the strategy through them. Your personal cal business leaders, and your own team. As you gain leadership qualities—your interpersonal skills and stra- practice in saying no to multiple priorities, and focus- tegic insight—are a primary source of success not just ing on the few most critical capabilities, you enhance for the function, but for the enterprise as a whole. In your own ability to lead. When the company moves in your most important work, on differentiating capabili- the direction of a capabilities-driven strategy, and needs ties, you share authority with other functions and de- your function to take part wholeheartedly, you and your partments, instead of maintaining unilateral control. team will be ready. + You need a level of credibility and integrity high enough Reprint No. 00158
- 10. strategy+business magazine is published by Booz & Company Inc. To subscribe, visit strategy-business.com or call 1-855-869-4862. For more information about Booz & Company, visit booz.com • strategy-business.com • facebook.com/strategybusiness • http://twitter.com/stratandbiz 101 Park Ave., 18th Floor, New York, NY 10178 © 2013 Booz & Company Inc.