Many leaders of midsize companies – especially if they’re the founders – are constitutionally inclined to see new opportunities around every corner. And they love to pursue them, deadline commitments or old strategies be damned. They forget that the strategy which took them from small to midsize has already proven itself a winner. But a new vision is always more exciting to them than the present one. So they begin tinkering with their core strategy, burning up resources while their companies wander off their tried-and-true growth path.
The tales of two companies, cell phone accessories retailer Cellairis and skin care products maker Rodan + Fields, illustrate the dangers of top-level strategic tinkering.
Three friends, Taki Skouras, Joseph Brown and his twin brother Jaime Brown, launched Cellairis in Atlanta in 2000 to ride the cell phone boom. They had the epiphany that they could use cheap retail space – the carts that sit in the middle of shopping malls – to sell mobile phone accessories, mostly cases. Five years later, they had a $50 million business (including franchisees’ revenue). The future looked bright.
That’s when the tinkering began.
In 2006, they hired an experienced president to manage their rapidly growing business. The new president thought Cellairis should not only sell accessories, it should sell wireless phone service as well. Skouras, the company’s CEO, thought that sounded like a swell idea. People shopping for cell phone cases were natural customers for a wireless service provider. So the company jumped wholeheartedly into a joint venture with a reseller of wireless service, AMP’d Mobile, and opened AMP’d stores in the malls. Cellairis’ leaders didn’t think it necessary to test their new strategy. After all, it was just a slight variation on the core strategy of selling accessories. Nothing more than a tweak, they thought.
But AMP’D underpriced its services and regularly extended credit to bad-risk customers. After nine months, AMP’d filed for bankruptcy. It stiffed Cellairis and the wireless providers whose services it resold.
During those nine months, Cellairis’ leadership had been distracted from their core business. Not surprisingly, it had languished. In those nine months, the company’s revenue fell 33%. Closing the AMP’d stores cost millions. Cellairis had tinkered with its core strategy, one that had been working beautifully, and it had turned ugly. Fortunately, the founders were quick to stop tinkering and refocus on their core business of wireless accessories. System-wide revenue for 2013 was $350 million – seven times revenue for 2005.
Tinkering can kill midsize companies. Unlike a startup company, which is supposed to play with alternative strategies until the right one emerges, a midsize firm already has a strategy that is working. Sure, it must always consider whether to adjust that strategy in the face of new competition, changing customer demand, technological innovation or all three. But because midsize companies lack the resources of big companies, which can experiment with multiple new strategies and launch pilot projects, midsize firms are at risk when they divert scarce resources from their core business.
The management team at Rodan + Fields, today a $250 million skincare products company, understood this risk. That’s why the San Francisco-based company tinkered with its strategy the right way, off to the side, in a manner that would minimize damage if the experiment went wrong.
In late 2009, CEO Lori Bush was searching for a way to raise the productivity of the company’s sales force. As a direct seller like Avon, Mary Kay, and Herbalife, Rodan + Fields works with about 50,000 independent businesspeople who in turn sell its skincare products to others in their community. A direct selling company’s sales strategy is its core strategy. The reason is that unless it can continue motivating and helping salespeople succeed, a direct seller’s products won’t sell themselves. And it doesn’t have a retail channel to fall back on.
While Rodan + Fields’ makes its sales force feel like insiders, they remain a channel of independent sales professionals (whom the company calls “consultants”), some of whom hope that commissions from selling Rodan + Fields products will become their primary income. And while they love the company’s products, five years ago there was a wide disparity in sales skills.
Bush, Chairman Amnon Rodan, and adviser Oran Arazi-Gamliel decided they had two choices for the firm’s sales strategy: They could juice the sales commission plan with temporary short-term bonuses, trying to motivate their consultants to work harder. Or they could analyze the behaviors of the most successful consultants and train others on their methods. They moved on both paths at once, but with caution.
By the end of 2010, they found that incentive bonuses did have a minor impact on growth but that as soon as they were discontinued, sales dropped again. Over the same period, Bush and Arazi-Gamliel had identified top consultants in one particular city and studied their behaviors. They pinpointed a number of new consultants who were excelling, identified their behaviors and then implemented the new field development strategies with their Atlanta consultants (a tough market for the firm). The results were remarkable. Sales rose 300% in Georgia by the fall of 2010 and rose even more the following year. Since then, the company has refined and repeated the training program in many other regions of the U.S..
Rodan + Fields’ revenue growth has been breathtaking. Revenue in 2011 was $59 million. By mid-2013, the company was chugging along at a $200 million annual revenue rate.
The lesson here is to experiment carefully with variations on your successful strategy, not tinker with it in the field of play. This is a hard lesson, running counter to the improvisatory instincts of many CEOs. But they must learn it.
Once their firms have reached midsize, the CEO’s impulses must cede center stage. Scaling the business must be center stage, and strategic innovations must be tested in the wings. Creating a program to prove the viability of a significant change in the firm’s strategy ensures that the experiment won’t knock the ship off course if the idea turns out to be flawed.
In these instances, CFOs can play a valuable role: keeping the CEO (or other C-suite leaders) from yielding to the impulse to tinker. The most successful CFOs I know insist their company’s core strategy be written down. When someone begins to tinker with it, they push for clarity. They want to see exactly what resources will be required and what priorities are emphasized. As important, they want everyone to know how much time a new strategy experiment will be given to succeed.
Such discipline creates focus and forces leaders of midsize firms to determine whether a new strategy fits with the original winning plan. These simple protocols can be the difference between a midsize company that keeps its eye on the road ahead, and one that ends up in the ditch because it became distracted.
source: Tinkering with Strategy Can Derail Midsize Companies April 04, 2014 at 02:00PM