Think Functionally, Act Strategically

Deniz Caglar, Namit Kapoor, and Thomas Ripsam.S+B February 26, 2013

 / Spring 2013 / Issue 70

Illustration by Keith Negley

When a company competes on capabilities, its specialist leaders—in HR, IT, finance, and elsewhere—play a new, influential role.

What should the role of the corporate support function be in business strategy? Until recently, the answer was relatively straightforward. System-wide, service-oriented functions existed to carry out the many specialized tasks that every corporation needs to have done. Human resources (HR) recruited employees, managed benefits transactions, and oversaw evaluation and promotion practices. Information technology (IT) ran and helped support the company’s computer systems. Finance carried out all processes related to accounts, debts, and taxes. Learning and organizational development offered training programs tagged to the skills the company needed. Legal vetted contracts and managed issues related to compliance. And so on.

The New Functional Leaders: Gaining a Stronger Seat at the Table

Find out how functions like HR, IT, and finance can balance a new strategic role while still managing their own house.

Though much has been written over the years about the strategic importance of HR, IT, finance, and other support functions, in most companies their roles have been primarily transactional. They fulfilled day-to-day needs, met legal and regulatory requirements, accommodated requests from business units, and put out the inevitable fires that erupted when there was a conflict or urgency. When functional leaders were asked to make improvements, it meant doing the same things more efficiently and at a greater cost savings.

Recently, however, there has been a leap in expectations. Over the past few years, CEOs, business unit leaders, and functional leaders themselves have been asking support functions to deliver more value to the organization at large. Instead of balancing services among all business units equally, or striving to be best in class in everything, support functions such as HR, IT, and finance are asked to be “fit for purpose”: more closely aligned to the enterprise strategy. Functions that are more directly related to individual brands and business units—which may include operations, sourcing, marketing, sales, and R&D—have also been affected, though not always in the same way as their counterparts at corporate headquarters. This leap is occurring for several reasons.

First, market environments and patterns have become less stable, and competitive intensity has increased. Many companies—facing changes in customer demand, the emergence of innovative new competitors from around the world, and greater macroeconomic uncertainty—are raising expectations accordingly. Today’s functions must provide a far more complex set of activities and expertise than they ever had to manage in the past. For example, IT must design systems that mine “big data” to support real-time consumer offers that change on the fly; HR must recruit a broad range of people from around the world and design flexible career tracks to match their diversity.

There is also a new opportunity to raise the return on discretionary investment. Over the past decade, through outsourcing and process improvement, many functions have become more efficient in performing their day-to-day activities. Therefore, the resources dedicated to routine, transactional tasks—managing HR benefits, dispensing IT equipment, resolving finance discrepancies, maintaining mailing lists, and so on—have been dropping. Such tasks now consume perhaps 35 percent of staff time, whereas they once consumed 70 percent. This development enables functional leaders to allocate more time, attention, and money to discretionary activities, the strategic tasks that can make an organization more competitive.

In addition, the pressure to execute flawlessly is increasing. Most functional departments have made great strides in maximizing efficiency and improving operations. But they usually still have a lot of room for improvement, forcing many functional leaders to look for new paths to operational excellence and greater value, usually while reducing costs.

Finally, many companies have become aware of the power of distinctive capabilities, that is, the advantage held by companies that do only a few things in the market, but do them exceptionally well. Amazon’s success is based on its skill with online user interfaces, logistics, and technology. Coca-Cola’s success depends on its prowess in beverage creation, brand proposition, and global consumer insight. Hyundai gained its enviable foothold in the U.S. automobile market through stylish car design and marketing combined with disciplined quality improvement . Functional leaders face the difficult challenge of supporting these complex new capabilities while not compromising what they already do.


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