The finance chief’s role in managing products through a downturn

The expected fanfare greeted the launch of Apple’s newest version of the iPad in March. Some lauded its new features. Others wondered when Apple was going to reveal its next big “disruptive” product.

But the latest tablet, with its vivid screen and 4G technology, illustrated another point: Apple still sees mileage in the iPad’s product cycle and is set on wringing more value from it.

Apple’s launches–particularly those in recent years–tend to spark introspection among those who float in the flow of product development. One of the more pressing questions: How do you best manage the product cycle in a downturn, and what is the finance chief’s role in making sure the product is a success?

After all, if you back the wrong products, you could be signing the company’s death warrant. Look at what happened to Kodak.

Everyone knows the classic product cycle: Introduction to the market, growth, maturity, saturation and decline. The costs are high during the launch period, but economies found during the growth and maturity stage mean that’s where the margins are made. Saturation and decline are the stages that company managers hope will never come, but they must recognise that they are inevitable.

In a bull market, product cycles run largely as expected. But when the environment changes, say stagnating or declining, then product cycles may need to adapt, as does the role of finance directors, CFOs and other finance leaders.

Ajay Bhalla, professor of global innovation management at Cass Business School in the UK, says that the current economic circumstances are not conducive to the launch of new goods.

Bhalla sees companies either offering new versions of existing products or attempting to enter multiple product categories in what he calls a “tiered” approach to product management.

But the other main route forward will be to extend the maturity stage of the product cycle by adding value to an existing portfolio. This, he says, is where finance executives can play a key role in product management. “The role of the finance director is one that can make a difference, by being both visionary and strategic,” he adds.

That’s an idea backed by Paul Lantsbury, a consulting finance director who previously was finance director at UK greeting card company He says a company’s finance leaders are given the task of understanding the product range, how important each product is to driving a company’s profitability and where each product is in its life cycle. It’s then their job to help target investment to the right product.

Evolving role of finance chief
Brenda Morris, CFO of Love Culture, a women’s fashion chain in the US, says the key to understanding where your product is in its cycle is to have clear and up-to-the-minute data on how your products and customers are behaving.

It also means some serious analysis of the data because the explanation may not mean that any particular product is running out of steam. There may be other reasons for its performance. Having good information—and using it proactively—is key, she said.

“For a good executive team, it’s about analysis and understanding consumer trends, coming from a customer’s standpoint,” Morris said. “Do we see blips on the radar? And what do they mean?”

Aiding the effort are key performance indicators (KPIs), which can be mixture of standardised indicators applicable to any industry, such as sales, accounts receivables, inventory, plus more tailored measures relevant to a specific industry, such as value per transaction and units per transaction.

The key to mustering the data is good technology, such as business performance software that can create a dashboard of graphics showing the development of core indicators in real time. Users of such systems “are not waiting for someone to compile and make sure it’s accurate,” Morris says.

So difficult economic times place a premium on having such systems and information. “It’s short-sighted to think that by not investing in making your business better that you will get ahead... if you can’t measure it, you can’t manage it,” Morris says.

KPIs (or metrics) have to be married to the company’s strategy. “A lot of companies put in KPIs, but they don’t have a strategic driver that they correlate to,” Morris says.

Understanding that relationship and the implications the KPIs have for the strategy is where the CFO steps in and where the role is being transformed.

“The role of the CFO has evolved. It didn’t used to be that the CFO was involved with strategy,” Morris says. “But because people are making the connection with financial wellbeing, it links back to having a real, valid and agreed upon strategy.

“The data doesn’t mean much if you are not using that information to help drive the business,” she adds.

Extending the life of a product is not just about adding value. It may also be about finding new markets.

New markets

Lantsbury and Bhalla point to emerging economies as potential destinations for products that have already entered the saturation and decline stages of the product cycle at home. This not only gives the products a fresh lease on life, but also has the potential to create a much better return on investment. The major cost associated with such a move will be marketing; the hard graft of R&D is already done.

Of course, all product cycle management is aimed at getting the best possible return on the upfront development costs. That’s why so much of the effort in challenging economic times is to wring more return out of mature products. Some of the risk can be dealt with by changing the way products are developed or delivered.

“Companies are now much more willing to work in partnership with other companies, and introducing new products in that way,” Bhalla says. He cites the way UK supermarkets have come to sell insurance products, or the way that Google has worked with mobile phone manufacturers on its Android platform in what is called an “open innovation approach”.

Sixty-one per cent of manufacturers expect greater collaboration with key customers over the next two years, and 60% plan more cooperation with suppliers on initiatives such as product design, according to a recent KPMG report.

For example, Greif, a US-based manufacturer of rigid industrial packaging, works with key customers that are forward-thinking in their packaging needs to test new products, the report says.

At the same time, manufacturers are becoming more service-oriented. “Customised solutions” trailed only “new products” in the KPMG survey among features respondents expected customers to find most important over the next two years.

Participation in partnerships means a company understanding where it adds value, and that goes back to finance executives helping other parts of management develop a deeper understanding of what their businesses do.

CFOs, FDs and other finance leaders, Bhalla says, “are playing a key role in helping executive teams think through what and where their companies are creating value.”

Related CGMA content: