• Strategy
  • CFO.com | US

Instead of Best Practice, Next Practice

A strategy expert encourages finance chiefs to cut back on benchmarking and focus on the future.

For the most part, CFOs have forgotten an oft-repeated lesson learned in grade school: keep your eyes on your own work and don’t pay attention to what your peers are doing.

Of course, companies can’t afford not to keep tabs on their competitors. However, they may be spending too much time benchmarking their current performance against other companies rather than working on the future viability of their businesses, according to Vijay Govindarajan, a professor at Tuck School of Business at Dartmouth College, who spoke earlier this week at the 2010 CFO Rising conference in Orlando.

Indeed, most U.S. multinationals are stuck in the present, contended Govindarajan. They should instead be thinking about the opportunities the next two decades will present to them. “Strategy is about creating next practices and not adapting to best practices in the industry,” he said.

He gave examples of companies that didn’t think outside the box in terms of expanding their product lines to win over untapped markets. For instance, benchmarking may have tripped up Ford in the 1990s when it tried to enter the Indian market by offering cars based on the needs of America’s middle class. What Ford failed to realize, said Govindarajan, is that India’s middle class is a world apart from that of the United States, while Indian car owners tend to be rich and have expensive tastes. As a result, Ford’s Indian cars failed to find buyers, even though they were slightly cheaper than the American versions.

By contrast, Tata Motors has been successful in India, said Govindarajan, by selling the world’s cheapest vehicle: a $2,000 two-wheeler that can accommodate a four-person family. The vehicle was a game-changer, he said, effectively creating a new market. The takeaway: companies should master “reverse innovation” by launching services tailored for developing countries.

Govindarajan’s message comes as companies in general are beginning to emphasize growth over cost cutting. For instance, Michael Devine, CFO of Coach, told attendees at the conference that he recently moved from “a cost focus to a growth focus.” The luxury-brand retailer is particularly invested in growing its international business, mainly in China.

As drivers of innovation, finance chiefs should be thinking about what their businesses will look like 20 years from now, said Govindarajan, who recently served as an in-house consultant for General Electric. Indeed, they should implement projects in 2010 that will have an effect on the businesses’ relevance in 2030, he said.

Of course, CFOs still have to keep the businesses running. It’s up to them, said Govindarajan, to figure out how to allocate resources between closing the “performance gap” (by creating current internal efficiencies) and closing the “opportunity gap” (by focusing on innovation, new customers, and new competencies). “If you want to get your company to 2030 and your company has a bigger opportunity gap than performance gap, what are you doing in 2010 to address that opportunity gap?” he challenged the conference attendees.

 

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