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( 3 )CHAPTER 4
STAGE 5: STRATEGIC MANAGEMENT:
Most of what we have discussed so far centers on strategic planning as if it were the sole administrative process available for managers to reach a better understanding of the issues they are facing. This is certainly not the case. Although planning is, in our opinion, the key process to properly define critical tasks of the organization, it is also, perhaps, the simplest one to develop. It has the attractive characteristic of being a highly rational and analytical process which, as we have indicated many times, serves as a most appealing communicational device. Planning alone, however, will never produce the massive mobilization of resources and people, and will never generate the high quality of strategic thinking required in complex organizations. For that to happen, planning should be carefully integrated with other important administrative systems, like management control, communication and information, and motivation and rewards. Moreover, all of these systems are supported by the organizational structure, which provides a necessary definition of authority and responsibilities to guide and regulate relationships among members of the firm, mainly in the upper levels of management. Finally, these basic expressions of managerial infrastructure - administrative systems, and organizational structure - must be well-balanced with the culture of the firm, which adds a much broader and subtler set of dimensions to the management problem. Strategic management has , as an ultimate objective, the development of corporate values, managerial capabilities, organizational responsibilities, and administrative systems which link strategic and operational decision-making, at all hierarchical levels, and across all businesses and functional lines of authority in a firm. Institutions which have reached this stage of management development have eliminated the conflicts between long-term development and short-term profitability. Strategies and operations are not in conflict with one another, but they are inherently coupled defining the managerial tasks at each level in the organization. This form of conducting a firm is deeply anchored in managerial style, beliefs, values, ethics, and accepted forms of behavior in the organization, which make strategic thinking congruent with the organizational culture. These basic characteristics of strategic management are illustrated in Figure 5.1, which shows the interaction among the administrative systems, the organizational structure and its culture. All need to be fitted for the organization to be really effective. For example, the best planning system will take the firm to nowhere if it is not adequately complemented by the management control system. The creation of a future implied by an active planning system requires follow up and close monitoring provided by the management cotrol system for the firm to succeed in this kind of effort. Also, this figure shows the required integration with the organizational culture, in order to generate a climate conducive to the achievement of the organizational objectives, and to the satisfaction of individual needs. In this chapter we discuss some fundamental concepts of strategic management, concentrating our attention around the following issues: - The need for integration among administrative systems and the organizational structure. - The need to conduct this integration in two modes: strategic and operational, and - The need to seek congruency between the managerial infrastructure and the corporate culture.
INTEGRATION AMONG ADMINISTRATIVE SYSTEMS
Integration Between Planning and Management Control
One could argue that planning and control are indivisible activities; two sides of the same coin. The process of planning - formulating objectives, programs, and budgets - cannot be terminated properly without defining appropriate procedures for monitoring, analyzing, and controlling the planning activities. Otherwise planning simply becomes an abstract expression of too general and broad commitments, with little, if any, implementation qualities. In other words, a well designed planning process should include the definition of performance measurements which are the essence of management control. There is a clear continuity between planning and management control. The focus of attention of planning is the next fiscal year. In the planning process we look ahead in order to get the entire organization prepared to confront successfully the challenges laying in the future. Management control takes over after the planning effort has been completed. It focus of attention is the current year, and it simply monitors, diagnoses, and evaluates the actual results against the targets developed by the plan, and take corrective actions when needed. Thus, planning involves a great deal of control and control involves a great deal of planning. Figure 5.2 represents the essence of integration between planning and control processes. This figure emphasizes the role of budgeting as a bridge between planning and control. From this perspective, budgeting can be viewed as a part of both the planning process and the management control process. From a planning standpoint, the budget produces a set of financial statements identical to those used in financial accounting: balance sheet, income statement, and a statement of changes in the financial position. The basic difference is that budget figures are estimates of the intended future results rather than historical data of what has happened in the past. From a management control standpoint, the budget provides all necessary support for monitoring, analyzing, and programming the development of strategic and operational programs. The figure also illustrates that an important element of the management control process is to incorporate revisions in either budgets, strategic programs, or the strategic objectives whenever the deviations between proposed plans and actual results are so significant, so as to warrant the incorporation of those changes prior to beginning a new planning cycle.
Integration Between Planning, Management Control, and the Organizational Structure
The planning and management control systems are intended to guide and support managers at all hierarchical levels, in their definition of meaningful tasks and in the specification of procedures to monitor their completion. The organizational structure provides the hierarchical definition of responsibilities and authorities for the firm. Responsibility has to do with the nature of the task entrusted to each manager. Obviously, the planning process is a primary vehicle to identify,in a coordinated manner, the major tasks faced by the firm. Likewise, management control deals with the issue of segmenting the organization into responsibility centers which allow for proper decentralized accountability at all levels of the firm. Authority represents the means available to the manager for the effective execution of the tasks under his responsibility. Again, both the planning and control process are directly concerned with the issue of balancing responsibility and authority, as well as allocating resources and monitoring its use.
Integration with the Communication and Information Systems
Information and comunication are ubiquitous in a firm. After all, every administrative system is information based and managers are coordinated primarily via information-driven mechanisms. Most of the managerial time and energy are spend processing massive amounts of very dissimilar information and establishing significant communications with interested parties, external and internal to the firm. This makes clear that an effective information and communication system cannot be independent of planning, management control, and the organizational structure. One more time, there should be a clear balance and integration among all of them. We attach the label information system to the more formal process of gathering, digesting, filtering, and distributing the information relevant to managers at all hierarchical levels. The term communication is reserved to mean a more sophisticated and elaborate managerial activity, implying the ability to transmit at all organizational levels, as well as the relevant external stakeholders, the messages that managers think should be given to interested parties related with the organization. Rather than submitting large volumes of unprocessed data, which tend to saturate managers' ability to digest a large number of trivia, a proper information system should be intelligent enough to discriminate the essential from the secondary at each level, and to provide supporting detail only by means of exceptional reporting. And third, managers should have the ability to translate that information into meaningful messages to relevant audiences, by developing clear and well-defined communicational actions.
Integration with the Motivational and Reward Systems
To a great extent, the motivational and reward systems are responsible for shaping behavior in the organization and assuring, if properly done, congruency between individual and corporate objectives. People tend to behave according to the explicit or implicit mechanisms which regulate their rewards; therefore, if we want the commitments identified in the planning process to become vivid realities, certainly we have to assure the establishment of a well-designed management control system, consistent with the assignment of responsibilities and authorities reflected in the organizational structure, and able to provide the right clues for problem solving and managerial decision-making. But this is not enough, we have to make sure that the motivation and reward systems reinforce the implementation of those planned commitments. Otherwise, planning will become again a worthless exercise.
A Brief Comment on the Role of Planning Departments
A relatively common pitfall in some organizations is to rely on a centralized planning department as the major force behind the development of a balance system. This is normally a serious pitfall on two accounts. First, planners should not plan. Planning, as we have stressed throughout, is an inherent managerial responsibility that cannot be delegated to staff units. A legitimate role for planners is the gathering of information, primarily external to the firm, to enlighten managerial decision-making. Also, they should act as catalysts, inquirers, educators, and synthesizers to guide the planning process in an effective manner. But planners do not plan, this is done by the line executives. The second potential pitfall of having a centralized planning department is that it tends to isolate the planning activity from the remaining administrative systems. No wonder then that, in many instance, planning becomes a yearly ritual, conducted by staff members, which culminates in a thick book that gathers dust on the shelves of those managers who were not involved in their preparation, but whose tasks the book is intended to define. Most of the benefits of the planning process, if properly done, accrue in the realization of the process itself. Planning is a decision-making activity, and the planning books are simply subproducts for refreshing our memory and documenting the decisions made. They are certainly not the final aims of the planning process.
INTEGRATION IN STRATEGIC AND OPERATIONAL MODES
This issues that we have discussed in the previous section, regarding the requirements for integration among the administrative systems and structure are only half the story. That integration should be conducted to assure continuity, not only in an operational mode, but also in the strategic thinking across all administrative systems and across all hierarchical levels present in the organizational structure. Let us review again each one of the elements in Figure 5.1 having now the strategic concerns in mind.
Planning and Management Control in the Strategic Mode
Regarding the planning system, it is hard to find organizations even with some minor degree of complexity, which do not embark, in one way or another in some form of strategic planning. The intensity of competition, both domestic and foreign, and the turbulence of the external environment in which most firms operate, have made strategic planning almost universally adopted by American firms. The strategic interest, however, seems to stop there. What happens with management control ? Very often firms resort to the budgeting and financial control mechanisms which we outlined in state 1 of the evolution of strategic planning systems, thus falling into the trap of short-term accounting-driven control instruments. There is very little, if any, strategic control under those conditions. Therefore, the ability of the firm to implement, monitor, evaluate, and correct strategic commitments is almost entirely lost. A strategic control system shares the same conceptual requirements as an opterational control system; namely, it has to identify a unit which will be a focus of control [the so-called responsibility center], and the definition of key quantifiable variables to measure the performance of those units. The difference resides, however, in the distinct nature of these two entities. While operational control tends to look at responsibility centers as either expense, profit or investment centers, strategic control should be based on the notion of an SBU. When both, responsibility centers and SBU coincide with one another, there is no conflict for overlapping of measurements, but when this is not the case, much more careful design is required to implement sound management control practices, leading very often to double or matrix accountability. Regarding key variables used as performance measurements, an operational control system tends to center managerial attention on fairly straightforward financial results, such as those presented in Figures 1.2, 1.3, and 1.4. This is not necessarily the case with strategic control systems. Much more creativity is required for quantifying the long-term impact of the chosen strategic plan. Now, we have to observe and closely monitor strategic programs, as well as the deployment of strategic funds. There are several ways of expressing in the reporting system this dichotomy between operational and strategic accountability. One of the first firms to adopt this separation of funds was Texas Instruments,whose simplified profit and Loss Statement, for a given PCC [Product-Customer Center] is presented in Figure 5.3 Normally, a PCC manager is expected to wear "two hats", the first as an operating manager concerned with today's operating results, and the second as a strategic manager concerned with longer range results. As Figure 5.3 shows, operating results are being measured through operating profits; strategic results are measured by how effectively a manager utilizes the strategic expenses at his disposal. In TI, those strategic expenses are centrally assigned through the OST [Objective-Strategies-Tactics] System.] It is interesting to notice that the allocation of strategic expenses results from allocating resources to specific projects which finally will become the responsibility of the PCC manager. Figure 5.4 shows a seemingly very similar reporting document for the decentralized departmental manager at GE, who is also a profit center. The three categories of expenses listed beneath the contribution margin are collectively called "base Costs". Readiness-to-serve costs are the fixed expenses of the operating component stemming from its current capacity. It includes depreciation, other manufacturing costs, and sales and administrative overhead. Program expenses are discretionary expenses intended to increase future profits through specific strategic programs [developing new products, entering new markets, or improving productivity]. Assessment from corporate headquarters and allocations of corporate overhead are based on the department's cost of operations and are expressed as a proportion of such costs in all departments - roughly 1% of sales [General Electric Company, Background Note on Management Systems, 1981]. There are two basic differences between the TI and GE reporting systems. One, at GE, the department manager himself proposes what he considers to be a desirable amount for operating and strategic expenses. This amount is modified or accepted at the Sectoral level according to the position of the business within the corporate portfolio. This represents an allocation of resources in terms of overall strategic attractiveness, rather than an assignment in a project by project basis conducted at the corporate level, as is done by TI. The second difference resides on the bottom line accountability used by GE, forcing managers to absorb their share of interests and taxes prior to determining the net income generated by each department. This seems to contradict some sound basic principles of accountability that requires a manager to be made responsible only for expenses which are truly under his control. However, by making managers responsible for the true bottom line, one begins to instill the utmost sense of managerial accountability, and thus provides a genuine training ground for general managers development. A third form of splitting operational and strategic expenses reporting is illustrated in Figure 5.5. The conventional statement column shows the profit and loss statement which is generated by applying the generally accepted financial accounting principles. The two additional columns break every expense category into operational expenses [efforts supporting the ongoing business], and strategic expenses [efforts applied to the development of a future position for the firm]. Notice the remarkable difference in terms of managerial accountability when comparing the conventional statement to the revised breakdown, in terms of operational and strategic expenses. In the conventional statement, a division manager is supposed to generate 10 units of profit. When the business conditions get rough, it is entirely possible for the manager to deliver those 10 units by curtailing severely strategic expenses, and thus jeopardizing the future development of this unit. However, in the breakdown statement, the manager is entrusted with a much more difficult task, he is expected to deliver 35 units of divisional profit from its existing business base, and to wisely use 25 units in strategic expenses intended to strengthen the future development of this unit. Each entry in the strategic expense column identifies strategic action programs, whose purpose is to reinforce the competitive position of the firm in the long term, as opposed to simply deliver short-term profitability.
Organizational Structure in the Strategic Mode
Again we find that a large number of firms adopt an organizational form whose major objective is to facilitate the day to day operational activities. Very often, it is hard to identify who are the true strategic managers in those organizational settings. In other words, responsibility and accountability are formally expressed in terms of relatively short-sighted operational issues. Chandler [1962], in his now classic historical analysis of major American firms, was the first to draw the attention on the significance of strategy in prescribing a sound organizational structure, by enunciating the principle "structure follows strategy", meaning that an organization should be designed in such a way as to facilitate primarily the pursuit of its strategic commitment. When addressing the question of organizational design, we are confronted with two primary issues: how to divide the tasks of the organization in an effective way [the issue of segmentation and differentiation], and how to assure that those tasks are properly coordinated [the question of coordination and integration]. Simply stated, when seeking congruency between strategy and operations, we need to address those tasks not only by looking at the day to day operational requirements, but rather, and most significantly, by reflecting upon the strategic commitments the organization is seeking to fulfill. Pragmatically, this means that the organizational structure should: 1] Facilitate the allocation of resources among the various businesses of the firm. 2] Support the implementation of preferred strategies for each business. 3] Permit the adaptation of existing businesses to a changing environment. 4] Allow for the efficient execution of short-term operational tasks. When the organizational structure is segmented according to SBUs, we find no real conflict between strategic and operational performance. A given manager simply has to wear two hats and becomes accountable in these two modes. When this is not the case, significant coordinational pressures are exercised upon the organization to maintain a degree of alertness in both strategic and operational responsibilities. Some business firms face a fairly complex dilemma. On the one hand, they find themselves competing in a variety of markets which forces them to identify several SBUs in order to conduct an appropriate strategic process. However, because of pressures to share resources and seek economies of scale to achieve operational efficiencies, the organization cannot be structured according to independent SBUs. Rather, the SBUs become simply a planning focus, which cut across several organizational units, insofar as the development and implementation of its corresponding strategic programs. We have found there are just a few alternatives available as coordinating mechanisms to address these issues: Assign to the SBU Manager a Permanent Coordinating Role. This is as a minimum, there are two conditions that should coexist for the SBU manager to have a meaningful chance for success. One, there should be a full understanding and complete support on the part of the CEO and top operating managers, on the significance of the SBU coordinating manager's tasks. Second, the SBU manager should have full authority over strategic component of the SBU budget, which constitutes his only meaningful weapon for exercising some leverage over operating managers. We have found some misconceptions with regard to how these organizational solutions are perceived in practice. Many people tend to associate a matrix form with this organizational structure. This is clearly not the case. Under this scheme, the SBU manager does not have direct authority over the individuals working in various organizational units. Therefore, there is no duality of bosses, which is an essential attribute of a matrix organization. The SBU manager is strictly a coordinating manager. Assign to a Top Management Committee the Responsibilities for SBU's Management. This second coordinating mechanism consists of assigning a committee, normally composed by the CEO and the top operational managers, the task of developing and implementing the necessary SBUs' strategic programs. Adopt a Matrix Form of Organization for Dealing with Operational and Strategic Responsibilities. Normally the operational side of the matrix is represented by functional managers, who are responsible for expense centers while the strategic dimensions correspond to SBU managers. [See Figure 5-6] For the matrix to operate effectively, it is important that each functional unit is segmented according to SBU lines. Under those conditions, the SBU manages would have clear access to functional resources, thus avoiding some of the inherent ambiguity of the matrix form. Moreover, it is necessary to establish a coordinating committee, chaired by the SBU manager, and composed by one representative from each functional specialty linked to the SBU, thus institutionalizing the necessary coordination that has to take place among the various functional units from a business dimension. Finally, every administrative system [planning, control, information, and reward systems] should be designed so as to support the matrix structure. One, however, has to recognize from the outset that the matrix implies an exceedingly complex form of management. It is much more than an organizational structure; it has overwhelming cultural, behavioral, and administrative implications, all of which should be properly balanced for the matrix to be viable. The effectiveness of a given organizational structure depends on situational characteristics such as the environment that the firm faces, the nature of the tasks the organization is to undertake, and the people involved in the performance of those tasks.
Information and Communication Systems in the Strategic Mode
When analyzing the information and communication system of a firm, searching for their strategic quality, again one observes serious deficiencies. A most common one is the excessive reliance on internal sources, mainly the accounting base, as the primary vehicle for supplying information to managers. Needless to say, accounting-driven sources have little relevance for guiding strategic decision-making and strategic performance. From a strategic point of view, it is not enough to know our own cost structure; rather, it is the industry cost structure and our relative position in it that is relevant. The same can be said about every other financial measure of performance that could be originated from internally-driven data. In particular, the cost accounting system must be designed to permit the breaking down of expenses into strategic and operational concerns, to support the strategic control system we alluded to in a previous section. We will comment briefly on two of the leading contenders to satisfy executive information needs: the key performance indicator method, and the critical success factor method. The key performance indicator method requires the selection of a set of key variables, meaning a stable set of indicators that allows managers to detect and monitor the competitive position of all businesses the firm is engaged in. [See Figure 5-7] The critical success factor method [CSF], the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization. They are the few key areas where 'things must go right' for the business to flourish. [See Figure 5-8] Rockart considers that there are four primary sources of CSFs: - The structure of the particular industry. - The company's competitive strategy, its industry position, and its geographical location. - Environmental factors. - Temporal factors, which refers to areas or activities that become significant for an organization for a limited period of time. The primary differences between the key performance indicator method and the CSF-method is that the former tends to be more permanent and uniformly applied to all organizational units of the firm, as stated in the GE example, while the latter is tailor-made to fit each manager, and the characteristics of his units, and it is constantly adapted to reflect changes taking place in the organization or its environment. More recently, Rockart and Treacy have proposed a framework for the development of an Executive Information System [EIS]. This system is supported by a common core of data, identified as the "Data cube" [Figure 5.9] which contains important business indicators [dimension one], through time [dimension two] for all businesses of the firm, competitors, customers, and industries [dimension three]. These data can be used in two modes: Status access, which provides simple displays of the data in the cube; and personalized analysis, which permits a more advanced manipulation of data through special statistical programs and other kinds of models. Let us now turn our attention to the requirements for a strategic communication system. We define as the primary thrust of the communication process, the articulation of the central objectives and programs the organization is intending to pursue in a way which is amenable to key external and internal audiences, with the purpose of increasing the level of understanding and the degree of commitments of the firm to its stakeholders. When viewed from this perspective, the central roles of the CEO appears to be that of communicating the basic strategic roles of the organization. Every publicly owned firm needs to keep external groups informed of the main strategic direction the organization is following. Particularly, providing sound information to the financial community is a most relevant task, since the market value of the stock of the firm develops from the expectation of future cash flows derived not only from assets the firm has already in place,but also from those it intends to deploy in the future. Appropriate external communications,therefore, are essential to achieve the warranted market value of the firm. Likewise, internal communications fraught with strategic content are essential to mobilize all the individuals working in the firm in the same desired direction. Everybody, even the most modest workers, has a role to play in shaping up the future of the organization. If strategy is treated as if it were a top secret and highly confidential matter that can be trusted only to a select few, it will never become a real driving force.It is a central role of the CEO, not only to serve as the key architect for shaping the strategy of the firm, but equally important to effectively communicate it to all levels in the organization.
Motivational and Rewards Systems in the Strategic Mode
Naturally, people tend to act in a way consistent with the performance measures which are exercised upon them, and which in turn determine future career paths in the organization. Therefore, if we are seeking a strong organizational commitment in the pursuit of an agreed upon strategy, there is no more central administrative system to seek congruency with that than establishing individual rewards and motivations. Yet, it is thus lack of congruency that is perhaps the most appalling when one performs an audit for American Corporations. Most U.S. firms suffers significantly from the use of short-term, accounting-driven measures of performance to establish the reward mechanism for high-level managers, who are mainly responsible for implementing strategic actions. Particularly, the exceeding reliance on return on investment [ROI] has been singled out as a primary cause for discouraging investments in industrial firms, and as a strong determinant for the continuous erosion of the US presence in world markets. There have been organizations which have used ROI as a sole performance measurement for assigning bonuses to their top managers. This is a dangerous practice. In an inflationary economy, total investment inaction could be translated into a short-term increase in ROI. Profits would tend to increase numerically, simply because of the inflationary effects. Moreover, the lack of investment commitments would reduce the investment base significantly since its replacement value would not be updated, accordingly to the existing accounting practices in the US., and depreciation would further decrease it. A manager who is forced to match an ROI target, might temporarily reach it while contributing to the destruction of the long-term development of the firm. Another common faulty design in the reward system of some American firms resides in creating internal competition by rewarding different divisions within a firm in accordance with the relevant ROI-performance. Not only does this procedure have the disadvantages of short-term responses to which we already alluded, but it creates a parochial attitude of divisiveness, aggressiveness, and conflict among units that might benefit from working together against their real competitors, which are the other firms participating in the industry. The two critical dimensions for establishing a well-balanced reward system: the observed results, as measured by individual and group performance, and the period of observation, defined as short or long term. [See Figure 5-10] In our previous comments,we have addressed situations where almost all the weight resides on observed individual performance in the short term, defined by the ROI, which tends to create myopic and aggressively dysfunctional behavior in the organization. The great challenge is how to expand the performance measurement and reward system into the other three cells of the matrix. The basic idea behind this scheme is to align the compensation of a given manager with the overall performance of the organization, so as to make his final monetary compensation increase whenever the entire firm shows a sustained profit generating capability. It seems obvious that an individual should benefit from the performance of the group in which he belongs. What kind of behavioral responses does such a system generate? It is an attempt to create a reasonable broad attitude; thus, when a good manager is confronted with a decision that could affect favorably on his own group, but could be dysfunctional to the overall corporation, he has the proper kind of forces acting upon him, so that he could decide more objectively on the tradeoffs of that decision. In any event, it is important to identify which is the relevant group, and what percentage of the individual reward will be determined by the group performance in the short term. Regarding the long term, it is relatively easy to measure group performance in that mode. What is normally done is to take the corporation as the relevant group, and to use mechanisms such as stock options to reward executives for the improvements of corporate performance at a future date. Stock options is a financial arrangement by which managers are offered the right to purchase corporate stock at a future date, and at a price agreed upon when the option is granted [normally the current market price or a slightly lower figure]. The most difficult task involves measuring individual performance in the long term. People normally do not stay indefinitely in a given job, inherit conditions shaped by others, and leave conditions to their successors for which they should receive full credit or blame. If the manager has been responsible for developing and implementing strategic commitments for his business units, it might be feasible to keep track of his performance record. Many different schema for compensating managers for the long-run impact of his decisions have been instituted. Regardless of the allocation of weights to be used on individual versus group, and short versus long term performance, it is imperative to find mechanisms for obtaining a better integration of management incentives and strategic plans. Rappaport proposes three approaches addressing that issue: - The extended performance evaluation approach. - The strategic factors approach, and - The management accounting approach. In the extended performance evaluation approach, the firm rewards managers for achieving certain performance levels over a multi-year period, by awarding him with deferred stock or stock options according to his ability to fulfill various strategic goals over the agreed upon planning horizon. The strategic factors approach involves the identification of the critical success factors governing the future profitability of the business, and the assignment of proper weights depending on the inherent characteristics of the business unit, and its agreed upon strategy. This approach allows for establishing congruency in terms of the performance measurements to be used, and the position of the business within the corporate portfolio. Stonich [1981] proposes the use of four measurements of performance [Return on Assets [ROA], Cash flow, Strategic Funds programs, and market share increase], receiving different weights depending on the expected growth of the corresponding business unit. Figure 5-11 illustrates his suggestion. In different situations, and according to the nature of the SBU, many other factors could be used, such as productivity levels, product-quality measures, product-development measures, and personnel-development measures. The management accounting approach considers the motivation and implications of accounting measurements, and therefore, adjusts, rather than adopts, the financial accounting model for the company's internal usage. All of these commends amount to one single lesson,and that is financial accounting, which intends to provide objective information to external parties to the firm, might tend to discourage some sound managerial actions, particularly if the reward system stresses short-term operational performance. Managers could benefit from changing some of these rules if necessary, to create conditions that support the desired strategic directions of the firm. [See Figure 5-12]
INTEGRATION BETWEEN THE MANAGERIAL INFRASTRUCTURE AND THE CORPORATE CULTURE
So far, we have dealt entirely with administrative processes and structure. This might lead one to believe that strategic management is a rather mechanistic and abstract activity. Obviously, this is far from true. There are no quick recipes and universal rules of thumb on how to plan, control, organize, inform, and set rewards for a business firm. What makes these tasks immensely challenging is people and what is usually referred to as the culture prevailing in the organization. We have purposely left to the very end of these reflections on the requirements for strategic management, the most subtle of all integration demands. Strategy does not need only to be congruent with the organizational structure and the key administrative processes; but, most centrally, it has to be integrated within the corporate culture.
The Increasing Awareness of the Importance of Corporate Culture:
Perhaps the most important element which triggered the interest of American managers in the issue of culture was the emergence of Japanese competition. As Japan began to take a leading role in one basic industry after another, the question of cultural differences emerged as a causal factor to explain Japanese superiority. There are those who signal the deterioration of sound cultural values as the central reason behind the slippage of America as a worldwide industrial power. They suggest that Americans have gotten too fat, demanding too much from society without imposing any equivalent internal demands on themselves, and they they seem to have lost a sense of pride and self-satisfaction derived from a job well done. When contrasted with their Japanese counterparts, the gap seems to be enormous and still growing. Somehow, there is a basic erosion of standards of excellence that seems to undermine the basic fabric of American society. This is a message of gloom, and the popular press, as well as the academic writers, when contrasting American and Japanese management styles have been repeatedly conveying that message in recent years. The most notable exception, which might be the cause of its enormous popularity, has been the book in Search of Excellence by Peters and Waterman [1982], where they emphasize the lessons to be derived from America's best run companies. Paradoxically, it is interesting to observe that the best compliment that can be made to an American firm is that it resembles a Japanese company. We will not attempt to summarize Peters and Waterman's findings. What is more meaningful in this discussion is to reflect upon the framework they use to evaluate the best managed companies, which has become known as the McKinsey's Seven S model (Figure 5.13] According to that model, there are seven basic dimensions which represent the core of managerial activities. These are the "levers" which executives use to influence complex and large organizations. Obviously, there was a concerted effort on the part of the originators of the model to coin the managerial variables with words beginning with the letter S. so as to increase the communication power of the model. The Seven Ss are: 1] Strategy. A coherent set of actions aimed at gaining a sustainable advantage over competition, improving position vis-a-vis customers, and allocating resources. 2] Structure. The organization chart and accompanying baggage that show who reports to whom and how tasks are both divided up and integrated. 3] Systems. The processes and flows that show how an organization gets things done from day to day. [Information Systems, capital budgeting systems, manufacturing processes, quality control systems, and performance measurement systems all would be good examples]. 4] Style. Tangible evidence of what management considers important by the way it collectively spends time and attention and uses symbolic behavior. If it is not what management says is important, it is the way management behaves. 5] Staff. The people in an organization. Here it is very useful to think not about individual personalities, but about corporate demographics. 6] Skills. A derivative of the rest. Skills are those capabilities that are possessed by an organization as a whole as opposed to the people in it. [The concept of corporate skills as something different from the summation of the people seems difficult for many to grasp; however, some organizations that hire only the best and the brightest cannot get seemingly simple things done, while others perform extraordinary feats with ordinary people]. 7] Shared Values. The values that go beyond, but might well include, simple goal statements in determining corporate destiny. To fit the concept, these values must be shared by most people in an organization. Pascale and Athos [1981], in their book The Art of Japanese Management, use this framework to contrast American with Japanese firms. They argue that when things go wrong, Americans tend to manipulate the so-called three hard Ss - Strategy, Structure, and Systems. These have been a major center of concern up to this point. Perhaps the most important set of variables, however, is that describing the soft Ss - Style, staff, Skills, and Shared Values. This last one - Shared Values or Superordinate Goals - is centrally responsible for providing a core mission to the organization, used as an umbrella which embraces all the other managerial activities. We have addressed those concepts under the label "The Vision of the Firms" in Chapter 5. These four soft Ss are the primary forces which shape the culture of the organization. One more time, we should emphasize that the quality of strategic management depends on the goodness of fit among all those key managerial dimensions.The best run companies have been able to develop Strategies, Systems, and Structures which are not only centrally congruent, but also support and enrich the organization's Superordinate Goals, Style, Skills, and Staff.
Toward a Definition of Corporate Culture
In spite of the central importance that organizational culture has in shaping up corporate performance and individual satisfaction, it is still a subject highly misunderstood. To trace any scientific foundation for the definition of culture, one would have to resort to the anthropological approach. Ed Schein [1981] has made a significant contribution to the study of management culture drawing from the anthropological work. He proposes a framework for studying culture, presented in Figure 5.14, which includes three interconnected levels. According to it, the culture of a group is made visible in the artifacts and creations produced, like language, technology, art, stratification, and status system, and rules regarding sex and family. There is a high level of awareness on these issues. They correspond to things we can see, use, or clearly perceive. But they are no more than the reflection of a more primary and underlying set of values, which are defined in terms of ideals, goals, and means to achieve them. The student of a culture cannot be satisfied with the description and cataloging of artifacts, but should probe into the underlying set of values which are more deeply buried in the formulations that only "old-timers" of the group can provide. They have been able to arrive at a higher level of abstraction in the preservation of cultural traditions and they know about the more profound meaning of visible artifacts. A final representation of the culture of a group goes even deeper, and is constructed on only a few basic assumptions regarding the rules of interaction between man and nature, among members of the group, within a time framework, and subject to the use of space in physical and social terms. This is a more demanding task because basic assumptions are not consciously held. They are invisible and taken for granted. It is only through a series of observations and abstractions that an acceptable formulation for these basic assumptions can emerge. Kluckhohn and Stodtbeck [1961] suggest that these basic assumptions can be traced back to only four types: - Relationship between the group and the environment. Kluckhohn and Stodtbeck [1961] propose three different orientations which determine how members of a group respond to environmental forces: One, a basic belief that the group can master the environment. Two, a basic belief that the group is subjugated to a powerful and immutable environment. Three, a basic belief that the group should neither master nor be subjugated by the environment, but it should harmonize with it. - Relationships among members of the group. There are two dimensions within this assumption. First, the number of ways in which relationships may be arranged, including: Strict hierarchy, solidarity and integrity, and individual achievement. Second, the group's assumptions about human nature, including whether man is ultimately good, evil, or neither, whether man can be perfected or is doomed to imperfection; as well as the meaning of birth and death, heroic ideas, taboos and sins in how people relate to each other. - Group's orientation to time. Kluckhohn and Stodtbeck [1961] suggests that all societies have some conceptions of the past, present, and future, but they will be primarily oriented toward one of them at a particular point in time. - Group's orientation toward the use of space. Here we distinguish among the various assumptions a group has about the use of physical space [design of physical facilities, closeness to others, and so forth] as well as social space [arrangements reflecting social positions, status, and power]. Schein suggests that a cultural analysis should have as an ultimate objective the unveiling of the basic assumptions of cultural values in a firm, and that we can "structure our observations around the question of how the organization relates to its environment,how it manages time, how it deals with space, and what can be observed about the relationships of people to each other". Borrowing from this anthropological perspective, Schein has suggested the following definition of culture; Culture is the set of basic assumptions which members of a group invent to solve the basic problems of physical survival in the external environment [adaptation] and social survival in the internal environment [internal integration]. Once invented, these basic assumptions serve the function of helping members of the group to avoid or reduce anxiety by reducing anxiety and cognitive overload. Once invented, those solutions which work are passed on to successive generations as ways for them to avoid the anxiety which may have motivated the invention in the first place. There are several elements of this definition which are worth discussing. First, culture is expressed as a way of responding to external environmental pressures through the process of adaptation, by designing rules, perspectives and ways of thinking, which are internalized as norms of behavior for the group. Not surprisingly, these are the same central dimensions of strategic planning: adaptation towards the external environment, and integration in terms of internal commitments. Next, if properly executed, these norms of conduct represent explicit or implicit ways of affecting communication within the group, which develops a sort of character or personality for an institution. Finally, there is the element of permanence of accepted solutions, which are passed from one generation to the next. This means that there is some degree of molding of values and ethics which are recognized and become acceptable patterns of conduct in a given organization. In his concluding remarks, Schein suggests some recommendations on how to study organizational culture. First, he advises to look for units that have a reasonably long history and stable membership. For analytical purposes, he distinguishes sharply between artifacts, which are "the visible creations of the culture", values, which are, "the stated operating principles of the culture", and basic assumptions, which are "the essence of the culture, a pattern which permits us to decipher the significance of values and artifacts". He also suggests that the best model for studying organizational culture is a combination of anthropology and clinical psychology. In an independent study, Schwartz and Davis [1981] provide a definition of culture which is fairly consistent with Schein's: "a pattern of beliefs and expectations shared by members of an organization. These beliefs and expectations produce rules for behavior - norms - that powerfully shape the behavior of individuals and groups in the organization". They proceed to distinguish between corporate culture and climate. This last is a measure of people's expectations about what it should be like to work in an organization, and the degree to which they are being met. They also indicate that: What climate really measures is the fit between the prevailing culture and the individual values of the employees. If the employees have adopted the values of the prevailing culture, the climate is "good". If they have not, the climate is "poor" and motivation and presumably performance suffer... While climate is often transitory, tactical, and can be managed over the relatively short term, culture is usually long-term and strategic. It is very difficult to change. Culture is rooted in deeply held beliefs and values in which individuals hold a substantial investment as the result of some processing or analysis of data about organizational life. No wonder then, that influencing the climate of an organization by means of changes in the administrative systems appears as much more likely than modifying the prevailing culture. To alter the culture is, undoubtedly, a tough undertaking.
We have discussed already the anthropological and clinical approach proposed by Schein on how to conduct a cultural audit. We will review now some more pragmatic frameworks for structuring a process of finding out the underlying cultural characteristics of a firm. Likert [1967] proposes an approach to describe an organization from the perspective of its human side, and the quality of interaction affecting its members. He argues that an organization can be described through eight basic processes: 1] Leadership, 2] Motivation, 3] Communication, [4] Interpersonal interactions and influence, [5] Decision-making [6] Goal-setting or ordering, [7] Control, and [8] Performance goals and training. The nature of each of these characteristics can be located in a continuum spanning four general types of organizational management systems: - System one, Exploitive Authoritative, provides an environment where there is low motivation, little interpersonal support and participation, only downward communication, and authoritarian control. - System Two, Benevolent Authoritative, is similar to system one but it is more paternalistic. - System three Consultative, provides an environment having upward and downward communication, supporting leadership, a certain degree of self-regulation, and consultative goal-setting. - System Four: Participative, provides an environment with more emphasis on self-regulation and mutual support, openness and trust, high performance goals, and more involved participation at all levels. What is important to emphasize here is that he has provided a well structured process, supported with detailed questionnaires, to categorize an organization within the continuum from system one to system four. Those questionnaires, which are reproduced in Likert's book, can greatly facilitate what otherwise would be a highly judgmental and subjective process. Figure 5.15 an illustration of what a profile might look like after applying Likert's methodology. There are two major benefits to be derived from assessing such a profile. One is the value of having a description of important cultural components of the organization, and second its conclusions might lead to undertaking some normative efforts intended to correct perceived inconsistencies among the managerial processes. Most organizations find themselves in system two or three. Schwartz and Davis [1981] suggest an approach for cultural audits, based on an assessment of the managerial tasks and their key relationships in the organization. They define six managerial tasks, somewhat reminiscent of Likert's which they believe are central for performing a cultural assessment: innovating, decision-making, communicating, organizing, monitoring, and appraising and rewarding. Each task should be described in terms of how it is handled within the context of four types of relationships; company-wide, boss-subordinate, peer, and interdepartmental. This results in a matrix, such as the one presented in Figure 5.16, which serves both as a checklist to conduct a cultural analysis, and as a framework in interpreting the meaning of the artifacts, in which much of the data about organizational culture is reflected. For an example on how to use the matrix, the reader is referred to Schwartz and Davis's original paper. The final framework which we consider useful when performing a cultural audit is the Rockwell International Culture Analysis described in the Appendix of Ouchi's book Theory Z [1982]. Rockwell uses five categories to describe the cultural profile: short-versus long-term environment, communication, information sharing, individual orientation, and job security. Each of these categories is represented in terms of past, present, and future characteristics, according to the form illustrated in Figure 5.17 The most significant contribution of this approach is that it forces the cultural description to span a time dimension showing the evolution of cultural changes.
Congruency Between Strategy and Corporate Culture
From the perspective of strategy formulation and implementation, we cannot be satisfied by a mere description of the cultural characteristics of the firm. Having done that, the major question still remaining is whether or not the proposed strategies are congruent with the culture, and if not, what to do about it. In order to address the first part of this question, we should decompose the overall strategy into its major tasks, which is what we have referred to as broad strategic action programs. Having those tasks as a central focus of analysis, we can address one, the importance of each task to the success of the strategy, and two, the degree of compatibility that exists between the strategy and the organizational culture. Schwartz and Davis [1982] propose a matrix to portray these two dimensions of cultural risk assessment, as illustrated in Figure 5.18. Their approach requires positioning each task in the matrix, by exercising crude managerial judgment. The result of this effort should serve as a guide to start reflecting upon what ought to be done when serious incompatibilities arise. Actions taken to make the implementation of the strategy more compatible with culture will tend to decrease the cultural risk and , consequently, enhance the chances of a successful implementation. Schwartz and Davis offer four generic alternatives to deal with this question of strategy and cultural compatibility: 1] Ignore the culture, which is a dangerous and unacceptable alternative when significant inconsistencies still remain. 2] Manage around the culture by changing the implementation plan. This alternative is based upon recognizing the cultural barriers which represent serious obstacles for the implementation of the desirable strategy, and offering alternatives approaches to bypass the cultural obstacles, but without changing the intended strategic focus. Figure 5.19 reproduces a list of examples suggested by Schwartz and Davis on how to accomplish this task. 3] Attempt to change the culture to fit the strategy. This is an extremely difficult task to accomplish, requiring a lengthy process and significant resources. There are, however, situations where this could be a central determinant for the long term success of a firm. One of the clearest illustration of this case is represented by AT& T. Due to the dramatic change in AT&T's external and internal environment, it will be hard to conceive that a successful strategy will not call for a deep and permanent change in its culture. When a cultural change is explicitly intended, it should be coordinated with all the necessary internal changes in management systems and organizational structure to seek a mutual and positive reinforcement of overall strategic management infrastructure. 4] Change the strategy to fit the culture, perhaps by reducing performance expectations. The lessons to be derived from these brief comments on cultural and strategic compatibility is that every effort should be made to minimize the cultural risk inherent in a proposed strategy. When this cannot be avoided,either because of structural changes in the industry in which the firm is located, or because of critical and serious lack of performance, a combination of the last three alternatives - managing around the culture, changing the culture, and modifying the strategy - should be used to bring cultural risk to an acceptable level.
Merits and Limitations of Strategic Management
Strategic management represents the most advanced and coherent form of strategic thinking. Not only does it attempt to extend the strategic vision throughout all the operational and functional units of the firm, but it also encompasses every administrative system recognizing the central role to be played by the individual and groups within an organization, and its resulting culture. Stated in this form, it is hard to argue against strategic management. In itself, it is a mature and overall-encompassing concept which embraces most of what we know about the practice, art, and science of management. The first overwhelming fact that one encounters when analyzing a large number of organizations is that very few have reached the quality of excellence that would be naturally resulting from a fully implemented strategic management system. Occasionally, one wonders why such an obviously desirable managerial state, so easily describable in conceptual terms, is so hard to accomplish. The answer to this question can be argued in many different ways. First and foremost, as we have said in the opening paragraphs of this book, management is a very complex social activity which cannot be comprehended by a simple set of rules and normative processes. We lack now, and probably will always lack, a well developed body of knowledge which will provide the scientific foundation for the development of a managerial methodology to facilitate the implementation of strategic management. We are left with broad concepts and pragmatic responses based on experiencial perceptions, rather than undisputable principles. We are forced to admit, therefore, that strategy is an ad-hoc process and that there is no single way to guide us into the realizations of this ultimate goal which is represented by the strategic management ideal. If we admit this concept of strategic management as an ideal, it is not hard to explain that we only see it, at best, partially realized in most organizations. Therefore, we will be forced to strive constantly and endlessly toward the pursuit of this form of management. Implicit in this search is the constant development and learning which provides an enrichment and maturity for all members in an organization. That is why it is hard, if not impossible, to skip stages or greatly accelerate this process. Time is of the essence to consolidate the goal for integration, which is so basic in strategic management. Integration which brings in its more methodological dimension, the quality of congruency of all the administrative processes with the organizational structure in strategic and operational mode. But most significantly, integration which consolidates a common strategic vision among all the members of the organization, supported by rich and highly shared values and beliefs creating a top quality of culural support.
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