Target is promoting CFO John Mulligan to COO. On the one hand, he probably deserves it and this is the most common path to becoming a Fortune 500 CEO. As Jeffrey Saunders laid out in this publication, 30% of CEOs started in finance and 20% started in sales and marketing. The issue is that marketing and sales-minded executives tend to focus on innovation-fueled top-line growth while finance-minded executives tend to focus on discipline-fueled bottom-line growth. The latter spells the end of Target as we know it – sooner or later.
This is not meant as a shot at John Mulligan in any way. He’s done great things in his almost 20 years at Target. He did a fine job as interim CEO. He may very well end up as one of Target’s next CEOs. He’s a fine choice for the job.
The issue is that this moves foreshadows an unfortunate long term strategic choice.
The Two Generic Meta-Strategies
There are essentially two generic meta-strategies getting at the two winning edges of the performance U-Curve.
- One meta-strategy is to pursue innovation to deliver superior products and service that can be sold at premium prices. This strategy generally produces fewer unit sales with higher margins resulting in relatively high profits.
- The other generic meta-strategy is to deliver the minimally viable product with the minimally viable service at a lower price than anyone else. This strategy general produces higher unit sales with low margins resulting in relatively high profits.
- Everyone in the middle loses money as they either aren’t quite innovative enough to justify their premium prices or aren’t quite disciplined enough to drive their costs low enough to be profitable at their discounted prices. Hence the u-shaped profits curve.
Matching Culture With Strategy
Winning at the edges requires matching strategy and culture.
The culture required to support an innovation strategy is marked by:
- A bias to risking more to gain more versus protecting what is
- Open/shared learning versus more directed learning
- Leading with ideas out (what customers will need) versus customer needs in (what they say they need)
- A more proactive posture (versus fast follow or responsive)
- Messier, diffused and debated decision-making versus more efficiently controlled decision-making
- Informal, verbal, face-to-face discussions versus more formal, directed and written communication
- Fluidity and flexibility versus more structure and discipline
- Seeking out and rewarding surprising breakthroughs and big leaps versus recognizing and rewarding reliable, repeatable steady progress.
The culture required to support a low-cost strategy is the mirror image of this.
Financial Officers Vs. Sales And Marketing Officers
In general people that have grown up in the finance function are more suited to driving the more financially and operationally focused, more disciplined low-cost strategy. People that have grown up in sales and marketing tend to have been trained to be more customer-focused and better suited to driving a more customer-focused, innovation-driven, service-oriented strategy.
The generic strategies apply in retail. Organizations like Bergdorf-Goodman, Saks and Neiman-Marcus deliver superior service in elegant surroundings. Organizations like Wal-Mart and Marshal’s deliver lower prices.
Target has been winning by being one click above Wal-Mart with prices almost as low with nicer surroundings and better service. Arguably, they’ve been delivering superior service and experience within the discount retail niche – cheap chic.
The promotion of its CFO to COO signals that Target is going to move closer to Wal-Mart. As Mulligan said, “Achieving operational excellence is foundational to Target’s long-term success.”
The Race To The Bottom
The trouble with racing to the bottom is that you might win. At some point the ultimate way to reduce your costs is to go out of business like Borders and Circuit City and the like. It doesn’t seem like Target can beat Wal-Mart and Amazon on the low-cost game. It may be years before this plays out. Target may change direction. But this promotion may very well signal the beginning of the end for Target.