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At the turn of the 21st century, The Stanley Works (Stanley) appeared to be in excellent position. Founded in the mid-19th century as a small family business, the firm—which specialized in hand tools for the construction industry—had blossomed into a multi-national company with approximately $2.7 billion in annual revenue. Nonetheless, Stanley officials feared that the firm was not positioned to thrive in the next century. One concern was that the company’s product and distribution base was not diverse. Another was that Stanley’s emphasis seemed incongruent with a market and client base that would increasingly prize digital technology and automation. In short, even though the firm was stable and profitable, company officials felt vulnerable.
Rather than wait for the market to shift, Stanley officials swung into action. In 1999, they initiated a multi-pronged, long-term reform strategy that prioritized solidifying the company’s foundation by strengthening the firm’s operating model, diversifying its product-line, and developing the capacity to generate breakthrough innovations. More broadly, undergirding these efforts was the belief that the firm needed to undergo a cultural shift and adopt an activist mentality—a willingness to examine the firm’s strengths and weaknesses and identify paths to improve before the company was compelled to do so. “Let’s disrupt ourselves,” CFO Don Allan recalled company officials thinking, “…before somebody else does it to us.”
While adopting this activist mentality required coordination across the firm, it hinged heavily on the finance department, which had traditionally fulfilled a standard accounting function but now needed to play a leading role in conversations surrounding risk and innovation. Thus, Allan, his team, and his C-suite colleagues had to confront difficult questions: How could they craft a business development strategy that balanced risk and stability? How could they leverage shared services, digital technology, and innovations to help bring the company’s operating system into the 21st century? How could they contribute to building an activist culture?
“One of the concepts behind this was let’s disrupt ourselves, let’s disrupt our industry before somebody else does it to us.”
Chief Financial Officer, Stanley Black & Decker
In 1999, when Stanley embarked on its reform effort, company officials anticipated the necessity of acquiring other firms and embracing an activist mentality; they also understood that before taking these steps, the firm had to solidify its foundation. Thus, over the next five years, the company undertook stabilization measures focused on streamlining operations and manufacturing and introducing methods, such as Lean Six Sigma, to minimize waste and optimize current business value. “It probably wasn’t the most exciting part of the transformation,” Allan said, “but it was a necessary foundation to create for us to be successful.”
Having established that base, the firm then began embracing an “activist mentality” and started exploring ways to generate new business value over the long term. Company officials concluded that one of the major changes Stanley needed to make was diversifying its product base. At the time, Stanley was heavily dependent on hand tools used in the construction industry, a field that tended to contract quickly during recessions. Employing a proactive mindset, company leaders therefore started to seek out alternative industries that were likely to be more resilient during a downturn. Stanley officials soon discovered an attractive opportunity in electronic security for private companies. That field had become heavily fragmented, with Tyco controlling approximately 30 percent of the domestic market share and the rest of the market divided fairly evenly among dozens of other firms. In addition, the market had what was widely agreed to be horrendous customer service. Taken together, this meant that Stanley could consolidate the myriad of small competitors and offer a differentiating factor: improved customer service. Thus, Stanley sought to acquire a substantial number of electronic security providers.
As Stanley began to explore these acquisitions, some of the company’s investors expressed concern and confusion about why a company that had traditionally focused on hand tools was now trying to enter the security market. Much of the responsibility for assuaging their concerns fell to the C-suite team. This was indicative of how the finance team—which had historically fulfilled a traditional accounting function—now had to continue to execute on its core responsibilities while also serving as the face of the firm for investor relationships and a key player in business development. The Stanley leadership therefore emphasized to investors the opportunities they saw in the securities field—possibilities that were realized when, after becoming the second-biggest player in the electronic security industry, Stanley had $2.5 billion in additional revenue and a stock price that had risen by approximately 50 percent.
In 2009, the economy plunged into recession. Stanley was able to weather the effects of this downturn in part because, as anticipated, the electronic security industry did not stall. Meanwhile, Black & Decker—a company that had long operated adjacent to Stanley in the power tools industry—was suffering. Maintaining an activist mentality, Allan and his C-suite colleagues saw an opportunity for a historic merger. This resulted in the creation in 2010 of Stanley Black & Decker (SBD), an $8.5 billion juggernaut.
The Black & Decker merger generated significant benefits. One was that the firm was able to diversify its product base further. Black & Decker had specialized in not only power tools but also industrial fastening technology—an approximately $2 billion industry. The merger also produced approximately $500 million in cost synergies that came from consolidating the companies’ sales organization and infrastructure. As a result, SBD not only weathered the recession; it came out of the downturn stronger than it had been beforehand.
Having achieved such tremendous benefits, SBD officials could have grown complacent. However, as Allan explained, he and his colleagues wanted to sustain their activist mentality. In particular, they tried to identify the core attributes of successful companies and figure out ways to emulate those traits. They arrived at four characteristics: having “best in-class operating systems, high-performing cultures, solid organic and acquisitive growth, and delivering or exceeding expectations.”
In perusing this list, company officials felt that SBD had room to improve in a number of areas, one of which was its operating system. Thus, in the years after the merger, SBD unveiled the Stanley Fulfillment System (SFS) 2.0, a revamped operating system that prized (among other things) sustaining the company’s “Core SFS” (earlier in the reform process, SBD had invested in improving supply chain and factory efficiency) along with pursuing digital excellence and functional transformation. From the finance department’s perspective, digital excellence was imperative because Information Technology (IT) had pervasive effects on the firm’s wellbeing and was critical for integrating newly acquired firms. At the same time, they sought to make the finance division and the company more efficient by investing heavily in shared services and initiating a partnership with an outside consultant that has helped the firm hone its finance and HR functions.
Even as SBD strove to reinforce its base, it also sought new forms of growth, most notably by exploring opportunities for “breakthrough innovation.” Over the preceding decade, the company had invested heavily in “core innovation,” which involved making incremental improvements to existing products. They now wanted to identify transformative innovations that would disrupt the entire industry. To gauge how to produce these ideas, SBD dispatched a team to Silicon Valley where they learned that it was not necessary to invest hundreds of millions of dollars in research and development, but that it was instead common for organizations to create small, quasi-independent units focused on innovation. Thus, SBD established a “special force” team of engineers that works at a non-descript location—a strip mall approximately five miles from corporate headquarters—and was charged with identifying ways to disrupt SBD.
Embracing this creative approach required a cultural shift across the company and in the finance division specifically. The firm was accustomed to a structured and disciplined engineering process, so SBD needed to become more open to trial and error. Similarly, the finance division had to be willing to invest in creative projects, even if they initially seemed far-fetched, lest they miss out on breakthrough ideas. “If you shut things down too soon,” Allan said, “you squash the creativity.”
Still, SBD has tried to balance this innovation with structure and a sense of urgency. In particular, they rotate the engineers participating in the special forces. This provides an opportunity to bring a range of perspectives into the process and avoid some staff developing feelings of jealousy. They have also created a cadence whereby their special forces teams are expected to report on and ideally share a prototype of a product within five or six months of conceiving it. This is critical from the perspective of the finance team, which is then able to gauge whether the investment is paying dividends. As Allan emphasized, the finance division is not designed to operate like a rules committee, but SBD has “to be smart enough to know, ‘we tried that long enough, we need to try something different.’”
If recent evidence is any indication, the firm’s innovative approach is working. In June 2016, SBD unveiled a breakthrough that is expected to transform the construction industry—“the world’s first lithium-ion battery [that] automatically changes voltage to fit the tool it’s plugged into.” This is illustrative of the progress that the firm as a whole and the finance division in particular have made over the course of the now 17-year transformation effort. Among other signs of progress, SBD's revenue has increased from approximately $2.7 billion to $11.2 billion in 2015, and the value of its stock has climbed from $31 to $99 over the same period. Meanwhile, the finance division has reinvented itself from having been responsible almost exclusively for typical finance functions, to serving as a key voice in shaping and implementing the firm’s activist approach.
As Allan emphasized, room for improvement remains. To cite a few examples, he believes that his team can be more efficient when partnering with other groups in the firm on shared services. He also would like to see the firm do more with data and analytics, particularly when it comes to gathering and analyzing data on end users—a task that is challenging because the firm typically sells its products through distributors (e.g., Home Depot). Finally, the finance division is still striving to complete a functional transformation—including decreasing the number of Enterprise Resource Planning functions and IT applications—that will help it to carry out core functions more efficiently.
Yet even as room for progress remains, Allan and his colleagues can take comfort in the fact that they have dramatically transformed their firm and their field. They have achieved their goal of disrupting themselves, rather than waiting to be disrupted.
“[The] finance function in general can set a tone in a company that can be negative, pessimistic, conservative or can be supportive, balanced, constructive, [and] helpful.”
Chief Financial Officer, Stanley Black & Decker
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