How CEOs Can Get It Right
May 26 2013 by JP Donlon
In your experience, when does it make sense for the CEO and perhaps his team to go offsite, leave headquarters and go off to some retreat to drill down on strategy?
Don’t think of this as an event. Think of it as part of the work that you do every day. So, when you do go offsite, it’s part of an ongoing process. Getting away and shutting down the day-to-day, turning off these things [points to his iPhone and Blackberry], can help you get started. Take a big company like GE or P&G; we always had a few fix-it-ups. There are always one or two or three businesses that are struggling. And we had start-ups. We either had acquired businesses that we were integrating and starting up, or we had businesses that we were creating and starting up.
When you’re starting something up, it makes sense to go off somewhere, where you at least get away from the day-to-day for two or three days. The longest offsite I ever did was one week with the team. I wanted them to look ahead five to 10 years and hypothesize two or three really big choices we were going to have to make in order to position ourselves in a stronger place a decade from now. Most of the time, the strategy horizon for us was three to five years. I work with a lot of smaller companies, private companies now and I think it’s the same for them.
How should smaller, simpler firms—a maker of industrial valves, say, or an auto parts supplier—approach strategy when they don’t have the abundant resources or in-depth talent of a P&G?
In these kinds of businesses, the simple questions matter a lot. Often, they’re not really crystal clear on what “winning” means. For example, we buy a lot of businesses that are just priced wrong. They price off cost. It’s a common mistake. Then, when they face inflation, their input costs become volatile. Suddenly, pricing becomes more strategic. Should you price to a market or price to a customer’s want or need? In every market, there’s a commodity end of the market and there’s a value-added segment of the market. The first thing we look at, when eyeing a business, is their revenue strategy and their pricing strategy. Many times, the two are inconsistent, which we find baffling.
So, what is winning? Is it growing with the market? Is winning growing 1 percent or 2 percent faster than the market? Is winning growing my volume market share, or growing my revenue share or is it growing my share of the value that’s created in the market? Lots of people get confused by that. They chase volume. They may or may not do as well with a revenue share. Lots of times, they’ll chase volume, lose revenue share and lose share of value creation. That’s sort of what happened to Dell. They were the volume leader in PCs; but because they sold their PCs at a lower price on average and because everybody had duplicated their fast, flexible, low-cost supply chain by outsourcing to basically the same or similar suppliers in Asia, they ended up with a cost base that was way too similar to their competitors and they ended up with pricing that was less than their competitors.
The biggest mistake is thinking that winning is improved short-term financial results. Warren Buffett will tell you [that] it’s long-term cash flow. But Warren will also tell you it’s the ability to create a strategic position. He likes businesses that have what he calls moats around them. That’s called positioning yourself in a preferred position. But the first question that most companies should ask on where to play is, who? Who is my best customer? Who should be my best customer? [This is] because the customer you have today—take the valves guy, take the auto industry guys—may just yank [you] on price every chance they get. That’s why it’s important to know who your best customers are.
Best, in my view, is whether they are more loyal to you. Are they willing to pay a premium for your product or for some bundle of service and products that you provide? If [they] were willing to buy Tide when it was on sale and [they] were also willing to buy it when it was at regular price. [They] pretty much decided that [they] weren’t going to compromise on laundry detergent. It’s a good value; [it] performs for me.