Tinkering is Fine in R&D, but Not in the Boardroom
November 26, 2014
Case categories include: Entrepreneurship Leadership Strategy & Planning
By Robert Sher
In theory, an entrepreneurial CEO is a dream. What executive wouldn’t want a boss who gets excited about good new ideas and is willing to back them? But in reality, an entrepreneurial CEO can be a nightmare, especially at midsized companies. They simply lack the resources that a Forbes 400 company has to experiment with multiple strategies at once. In fact, as I’ll explain, a CEO of a midsized company who continually tinkers with the company’s strategy can be a disaster, as one online publishing firm found out. Conversely, the story of skin care products company Rodan + Fields shows the benefits of a CEO who resists the tendency to tinker with the core direction. I’ll tell that story too, and it’s a happy one: nearly 10-fold revenue growth since 2010 to a $200 million run rate this year.
But let’s start with a story that shows the downside of strategic tinkerers. Consider an online publisher whose CEO was highly innovative and very in tune with his market. Every month, he would dream up two or more “fantastic” ideas (as he referred to them). He’d walk in all wound-up, ordering the team to give his ideas top priority. When his staff would ask him about his previous month’s priorities, he gave them no guidance. He just jumped up and down about his new ones.
This forced his team to steer from guardrail to guardrail as they focused on what he told them last. Of course, they couldn’t implement any of the new ideas. About once a quarter, the CEO realized nothing was bearing fruit and would get angry, demanding explanations. They suffered from strategy tinkering. The team was demoralized, and the CEO’s most talented executives fled. The firm stagnated.
Some of his “fantastic” ideas were in fact fantastic. Too bad they never got executed. But no-one – not the board, the management team, or investors -- should ever try and stop the CEO from generating ideas. Instead, create a process to select the best ideas from the CEO and test them without diverting the business’s operating team from their core mission.
Strategy tinkering becomes traumatic when the company and its leadership are driving hard toward a specific goal or mission. Complete focus on execution is required. Hard decisions must be made on allocating resources to the primary goal. Then comes talk of a different objective. Of a new competitive threat. Or a new opportunity. Some of the teams scatter to reconnoiter the new strategy. Another team thinks the core goal has already been replaced, so begins work on the new one. Everyone feels upset about all his or her hard work being wasted. Progress toward the core objective is slowed or stopped, and significant effort will be required to get everyone reoriented in the proper direction.
Such CEO strategy tinkering can be a bad habit, perhaps product of an overactive urge to chase squirrels or pick up shiny objects. In addition, it may be a reaction to seemingly intractable problems like inconsistent revenue generation or low profitability. The story of Rodan + Fields shows the right way to balance new strategies with existing ones.
In 2010 Lori Bush, CEO of the San Francisco-based skin care company, worried about revenue. The company’s growth programs in some U.S. regions were highly successful, while others were struggling--without a clear reason. This discrepancy endangered plans to invest heavily in scaling the business first nationally, then globally. It had only just launched in 2008 in the direct selling channel—like Mary-Kay, Avon or Herbalife—and was founded by Dr. Katie Rodan and Dr. Kathy Fields, the dermatologists who developed and had great commercial success with Proactiv, the leading anti-acne regimen. These doctors had long held as their mission “changing skin and changing lives”. As a direct selling company, that meant enabling tens of thousands of independent businesspeople (mostly women and called “consultants”) to change their lives by selling skin care products that would supplement, and in some cases replace their household income. Yet while many consultants loved the products, too high a percentage of them seemed unable to sell enough product to make a difference to them, or to Rodan + Fields.
Tinkering with the underlying strategy of a business is bad. But even worse is chasing ideas or opportunities that are outside the original company vision, which do not support the mission of the organization. When Chairman Amnon Rodan negotiated the buy back of the company from Estée Lauder in 2008, pulled out of department stores and chose direct selling as their go-to-market strategy, the company created a vision and mission that would remind the organization that it is about delivering value by changing lives and changing skin—not about taking shortcuts to quick, but unsustainable profits.
Some direct selling companies (also known as multi-level marketing—“MLM” companies) address the challenge of finding many high performance consultants by creating rich monetary bonuses for their sales teams that derive more from the recruitment of more salespeople and from self-consumption of product by those salespeople, rather than focusing on selling product. This attracts serial multi-level salespeople who care more about their own income than the products they sell, who tend to jump from company to company, always looking for a more lucrative host. A common management practice for MLM companies is to reward and coach only the highest performers, and to discourage the high number of consultants who can’t scale—but who sell product to a small circle of friends and family—since they become a distraction and management burden.
Yet this industry-wide conventional wisdom seemed contrary to the values laid down by Rodan + Fields. In 2009 the company had more than doubled to $10 million in revenues, but it still needed a cash infusion from its founders. By 2010, Lori faced a dilemma: Should they sweeten up their compensation plans to attract the direct-sales mercenaries, or should they be content to work with the product ambassadors who sell retail to friends and family?
Lori didn’t like the choice. Her team was in favor of sticking to common industry practices and adjusting the compensation plan. Though reluctant, she allowed some testing of compensation changes in the way of short-term incentive bonuses to see if they could spur sales in a sustainable fashion.
But Lori and industry advisor Oran Arazi-Gamliel had a theory based on behavioral training, a novel approach to helping low performers improve and to identifying future high performers. They had noticed a few first time consultants excelling on their own, so they investigated to uncover the behaviors leading to the success of these individuals. The Rodan + Fields sales team was concerned about this approach, arguing that it was a distraction. But Lori, with Amnon’s support and encouragement, saw how this concept, if it worked, would keep them more aligned with their mission of changing lives (of their consultants who could earn more supplemental income) and changing skin (with more people focused on selling great products).
An important indicator of CEO strategic tinkering is resistance from the executive team. Hard headed, passionate CEOs often struggle to listen to the counsel of those around them—usually to their detriment. But in this case, Lori listened, and found a way to minimize the financial risk and the distraction factor.
She along with Oran decided to create a behavioral training pilot program in the summer of 2010 to test these ideal behaviors in one city, and they chose Atlanta, GA. This had minimal impact on the core organization, and Oran, an outside advisor, ran the program.
By YE 2010, the top line had grown to $22 million, some of it due to the compensation plan experimentation. But heady bonuses weren’t sustainable due to cost and the top line progress gained fell away as soon as they moved the compensation plan back to normal. With an ownership and management team committed to “changing lives and changing skin”, this compensation-bonus approach wasn’t tenable and was wound down. However, the behavioral training program tested in Atlanta had been a clear success, turning a stubbornly underdeveloped market into the top region in the US. Sales leapt 300% in Georgia in the fall of 2010, and the gains kept accelerating into 2011. The company has since replicated the process in numerous geographies across the U.S. including California,, Texas and Washington D.C.
Had Lori launched the behavioral training campaign nationwide without testing, she surely would have been guilty of CEO strategy tinkering. Even if she’d had her line management team drive the pilot, she would have been guilty as well. Likewise, if she’d allowed the team to fully implement the rich compensation program, that would have been tinkering too. Testing carefully selected hypotheses in a low risk manner—with minimal involvement of the core team—is good business practice for mid-sized companies.
Rodan + Fields had seen two useful results—one was negative (changing the compensation model) and one positive. Through the behavioral training, many consultants who might not have sold enough to stick with the program are now successful enough to noticeably boost family income. The program has also identified regional standouts with the capability to grow into high performing regional leaders, a critical group for growth. The company now has two tracks – the high performance track for consultants who started with a passion for changing skin and had desire to build a sizeable business—and a second track for consultants who want to bring skin care products to their network, but aren’t striving to scale their own business.
By March 2012, the company flew past the $100 million revenue run rate mark, and is just now crossing the $200 million run rate. Lori’s appropriate and careful experimentation with alternate strategies didn’t distract the company from its core business—instead it helped sort out the options, identifying one approach that didn’t work and another that is driving incredible growth.
As a CEO, restrain yourself from tinkering with your core strategy. Instead, funnel those great ideas through a process that helps vet the ideas without distracting your team from executing the current strategy. Once your winning ideas are confirmed and proven, then adjust the business plan to incorporate them.
Robert Sher is the founder of CEO to CEO and the author of MIGHTY MIDSIZED COMPANIES: How Leaders Overcome 7 Silent Growth Killers (Bibliomotion; hardcover; Sept. 16, 2014). A regular columnist on Forbes.com, Sher has worked with executive teams at more than 80 companies to improve the leadership infrastructure of midsized organizations.