Key 1: Determining Strategic Direction
The Nature of Strategic Direction
Determining strategic direction involves specifying the vision and the strategies to achieve this vision over time.
The strategic direction is framed within the context of the conditions (i.e., opportunities and threats) that the strategic leadership team expects their firm to face in roughly the next three to five years.
The strategic direction could include a host of actions such as entering new international markets and developing a set of new suppliers to add to the firm’s value chain.
The ideal long-term strategic direction has two parts: a core ideology and an envisioned future.
The core ideology motivates employees through the company’s heritage while the envisioned future encourages them to stretch beyond their expectations of accomplishment and requires significant change and progress to be realized. The envisioned future serves as a guide to many aspects of a firm’s strategy implementation process, including motivation, leadership, employee empowerment, and organizational design.
Obstacles to Strategic Direction
Sometimes, the work of strategic leaders does not result in selecting a strategy that helps a firm reach its vision.
This can happen when top management team members and, certainly, the CEO are too committed to the status quo. While the firm’s strategic direction remains rather stable across time, actions taken to implement strategies to achieve the vision should be somewhat fluid, largely so the firm can deal with unexpected opportunities and threats that surface in the external environment. An inability to adjust strategies as appropriate is often caused by an aversion to what decision-makers conclude are risky actions. An aversion to risky actions is common in firms that have performed well in the past and for CEOs who have been in their jobs for extended periods of time.
Some CEOs are erratic or even ambivalent in their choices of strategic direction, especially when their competitive environment is turbulent, and it is difficult to identify the best strategy.
Of course, these erratic or ambivalent behaviors are unlikely to produce high performance and may lead to CEO turnover. Interestingly, incentive compensation in the form of stock options encourages talented executives to select the best strategies and thus achieve the highest performance. However, the same incentives used with less talented executives produce lower performance.
Fostering Strategic Direction
In contrast to risk-averse CEOs, charismatic ones may foster stakeholders’ commitment to a new vision and strategic direction.
Nonetheless, even when being guided by a charismatic CEO, it is important for the firm not to lose sight of its strengths and weaknesses when making changes required by a new strategic direction. The most effective charismatic CEO leads a firm in ways that are consistent with its culture and with the actions permitted by its capabilities and core competencies.
Finally, being ambicultural can facilitate efforts to determine the firm’s strategic direction and select and use strategies to reach it.
Being ambicultural means that strategic leaders are committed to identifying the best organizational activities to take particularly when implementing strategies, regardless of their cultural origin. Ambicultural actions help the firm succeed in the short term as a foundation for reaching its vision in the longer term.
Key 2: Effectively Managing the Firm’s Resource Portfolio
The firm’s resources are categorized as financial capital, human capital, social capital, and organizational capital (including organizational culture).
The most effective strategic leaders recognize the equivalent importance of managing each remaining type of resource as well as managing the integration of resources (e.g., using financial capital to provide training opportunities to the firm’s human capital).
Most importantly, effective strategic leaders manage the firm’s resource portfolio by organizing the resources into capabilities, structuring the firm to facilitate using those capabilities, and choosing strategies through which the capabilities can be successfully leveraged to create value for customers.
Exploiting and maintaining core competencies and developing and retaining the firm’s human and social capital are actions taken to reach these important objectives.
Exploiting and Maintaining Core Competencies
Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals.
Typically, core competencies relate to skills within organizational functions, such as manufacturing, finance, marketing, and research and development. Strategic leaders must verify that the firm’s core competencies are understood when selecting strategies and then emphasized when implementing those strategies.
Core competencies are developed over time as firms learn from the results of the competitive actions and responses taken during the course of competing with rivals. On the basis of what they learn, firms continuously reshape their capabilities for the purpose of verifying that they are, indeed, the path through which core competencies are being developed and used to establish one or more competitive advantages.
Developing Human Capital
Human capital refers to the knowledge and skills of a firm’s entire workforce. From the perspective of human capital, employees are viewed as a capital resource requiring continuous investment.
Bringing talented human capital into the firm and then developing that capital has the potential to yield positive outcomes. As the dynamics of competition accelerate, people are perhaps the only truly sustainable source of competitive advantage.
Human capital’s increasing importance suggests a significant role for the firm’s human resource management function. As one of a firm’s support functions on which firms rely to create value, human resource management practices facilitate selecting and especially implementing the firm’s strategies.
Effective training and development programs increase the probability that some of the firm’s human capital will become effective strategic leaders.
Increasingly, the link between effective programs and firm success is becoming stronger because the knowledge gained by participating in these programs is integral to forming and then sustaining a firm’s competitive advantage. In addition to building human capital’s knowledge and skills, these programs inculcate a common set of core values and present a systematic view of the organization, thus promoting its vision and helping form an effective organizational culture.
Effective training and development programs also contribute positively to the firm’s efforts to form core competencies.
Furthermore, the programs help strategic leaders improve skills that are critical to completing other tasks associated with effective strategic leadership, such as determining the firm’s strategic direction, exploiting and maintaining the firm’s core competencies, and developing an organizational culture that supports ethical practices. Thus, building human capital is vital to the effective execution of strategic leadership.
When investments in human capital (such as providing high-quality training and development programs) are successful, the outcome is a workforce capable of learning continuously.
This is an important outcome in that continuous learning and leveraging the firm’s expanding knowledge base are linked with strategic success.
Learning also can preclude errors. Strategic leaders may learn more from failure than success because they sometimes make the wrong attributions for the successes.
The effectiveness of certain approaches and knowledge can be context-specific. Thus, some best practices may not work well in all situations. Using teams to make decisions can be effective, but sometimes it is better for leaders to make decisions alone, especially when the decisions must be made and implemented quickly. As such, effective strategic leaders recognize the importance of learning from success and from failure when helping their firm use the strategic management process.
When facing challenging conditions, firms may decide to lay off some of their human capital, a decision that can result in a significant loss of knowledge.
Moderate-sized layoffs may improve firm performance primarily in the short run, but large layoffs produce stronger performance downturns in firms because of the loss of human capital.
Although it is not uncommon for restructuring firms to reduce their investments in training and development programs, restructuring may actually be an important time to increase investments in these programs.
The reason for this is that restructuring firms have less slack and cannot absorb as many errors. Moreover, the employees who remain after layoffs may find themselves in positions without all the skills or knowledge that they need to create value through their work.
Viewing employees as a resource to be maximized rather than as a cost to be minimized facilitates successful implementation of a firm’s strategies, as does the strategic leader’s ability to approach layoffs in a manner that employees believe is fair and equitable.
A critical issue for employees is the fairness in the layoffs and how they are treated in their jobs, especially relative to their peers.
Developing Social Capital
Social capital involves relationships inside and outside the firm that help in efforts to accomplish tasks and create value for stakeholders.
Social capital is a critical asset given that employees must cooperate with one another and others, including suppliers and customers, in order to complete their work. In multinational organizations, employees often must cooperate across country boundaries on activities such as R&D to achieve performance objectives (e.g., developing new products).
External social capital is increasingly critical to firm success in that few if any companies possess all of the resources needed to successfully compete against their rivals.
Firms can use cooperative strategies, such as strategic alliances, to develop social capital. Social capital can be built in strategic alliances as firms share complementary resources. Resource sharing must be effectively managed to ensure that the partner trusts the firm and is willing to share its resources. The social capital created this way yields many benefits. Firms with strong social capital are able to have access to multiple capabilities, providing them with the flexibility to take advantage of opportunities and to respond to threats.
The success of many types of firms may partially depend on social capital.
Large multinational firms often must establish alliances in order to enter new foreign markets; entrepreneurial firms often must establish alliances to gain access to resources, venture capital, or other types of resources.
Key 3: Emphasizing Ethical Practices
The Nature of Ethical Practices
The effectiveness of processes used to implement the firm’s strategies increases when they are based on ethical practices.
Ethical companies encourage and enable people at all levels to act ethically when taking actions to implement strategies. In turn, ethical practices and the judgment on which they are based create social capital in the organization, increasing the goodwill available to individuals and groups in the organization.
Alternatively, when unethical practices evolve in an organization, they may become acceptable to many managers and employees.
Once deemed acceptable, individuals are more likely to engage in unethical practices to meet their goals when current efforts to meet them are insufficient.
To properly influence employees’ judgment and behavior, ethical practices must shape the firm’s decision-making process and be an integral part of organizational culture.
In fact, a values-based culture is the most effective means of ensuring that employees comply with the firm’s ethical standards. However, developing such a culture requires constant nurturing and support in corporations located in countries throughout the world.
Some strategic leaders and managers may occasionally act opportunistically, making decisions that are in their own best interests.
This tends to happen when firms have lax expectations in place for individuals to follow regarding ethical behavior. In other words, individuals acting opportunistically take advantage of their positions, making decisions that benefit themselves to the detriment of the firm’s stakeholders. Sometimes executives take such actions due to their own greed and hubris. However, when there is evidence of executive wrongdoing, such as having to restate the financial earnings, stockholders and other investors often react very negatively. In fact, it is not uncommon for new CEOs to be hired when wrongdoing comes to light.
Strategic leaders as well as others in the organization are most likely to integrate ethical values into their decisions when the company has explicit ethics codes.
Ethics codes are the codes that are integrated into the business through extensive ethics training, and shareholders expect ethical behavior. Thus, establishing and enforcing a meaningful code of ethics is an important action to take to encourage ethical decision-making as a foundation for using the strategic management process.
Facilitation of Ethical Organizational Culture
Strategic leaders can take several actions to develop and support an ethical organizational culture.
Examples of these actions include:
- Establishing and communicating specific goals to describe the firm’s ethical standards (e.g., developing and disseminating a code of conduct)
- Continuously revising and updating the code of conduct, based on inputs from people throughout the firm and from other stakeholders
- Disseminating the code of conduct to all stakeholders to inform them of the firm’s ethical standards and practices
- Developing and implementing methods and procedures to use in achieving the firm’s ethical standards (e.g., using internal auditing practices that are consistent with the standards)
- Creating and using explicit reward systems that recognize acts of courage (e.g., rewarding those who use proper channels and procedures to report observed wrongdoings)
- Creating a work environment in which all people are treated with dignity.
The effectiveness of these actions increases when they are taken simultaneously and thereby are mutually supportive. When strategic leaders and others throughout the firm fail to take actions such as these, problems are likely to occur.
Key 4: Establishing Balanced Organizational Controls
Concepts of Organizational Controls
Organizational controls have long been viewed as an important part of the strategic management process. Controls are necessary to help ensure that firms achieve their desired outcomes.
Defined as the formal, information-based procedures used by managers to maintain or alter patterns in organizational activities, controls help strategic leaders build credibility, demonstrate the value of strategies to the firm’s stakeholders, and promote and support strategic change. Most critically, controls provide the parameters for implementing strategies as well as the corrective actions to be taken when implementation-related adjustments are required.
Major Types of Organizational Controls
Strategic leaders are at least responsible for helping the firm develop and properly use these two types of controls: strategic and financial.
Financial control focuses on short-term financial outcomes. In contrast, strategic control focuses on the content of strategic actions rather than their outcomes.
Some strategic actions can be correct but still result in poor financial outcomes because of external conditions, such as an economic recession, unexpected domestic or foreign government actions, or natural disasters.
Therefore, emphasizing financial controls often produces more short-term and risk-averse decisions because financial outcomes may be caused by events beyond leaders’ and managers’ direct control.
Alternatively, strategic control encourages lower-level managers to make decisions that incorporate moderate and acceptable levels of risk because leaders and managers throughout the firm share the responsibility for the outcomes of those decisions and actions resulting from them.
The challenge for strategic leaders is to balance the use of strategic and financial controls for the purpose of supporting efforts to improve the firm’s performance. The balanced scorecard is a tool strategic leaders use to achieve the sought-after balance.
The Balanced Scorecard
The balanced scorecard is a tool firms use to determine if they are achieving an appropriate balance when using strategic and financial controls as a means of positively influencing performance. This tool is most appropriate to use when evaluating business-level strategies; however, it can also be used with the other strategies firms implement.
The underlying premise of the balanced scorecard is that firms jeopardize their future performance when financial controls are emphasized at the expense of strategic controls.
This occurs because financial controls provide feedback about outcomes achieved from past actions but do not communicate the drivers of future performance. Thus, an overemphasis on financial controls may promote behavior that sacrifices the firm’s long-term, value-creating potential for short-term performance gains. In effect, managers can make self-serving decisions when they focus on the short term.
Thus, decisions balancing short-term goals with long-term goals generally lead to higher performance. An appropriate balance of strategic controls and financial controls, rather than an overemphasis on either, allows firms to achieve higher levels of performance.
Four perspectives are integrated to form the balanced scorecard.
They are as follows:
- Financial (concerned with growth, profitability, and risk from the shareholders’ perspective)
- Customer (concerned with the amount of value customers perceive was created by the firm’s products),
- Internal business processes (with a focus on the priorities for various business processes that create customer and shareholder satisfaction)
- Learning and growth (concerned with the firm’s effort to create a climate that supports change, innovation, and growth).
Thus, using the balanced scorecard finds the firm seeking to understand how it responds to shareholders (financial perspective), how customers view it (customer perspective), what processes to emphasize to successfully use its competitive advantage (internal perspective), and what it can do to improve its performance in order to grow (learning and growth perspective).
Firms tend to emphasize strategic controls when assessing their performance relative to the learning and growth perspective, whereas the tendency is to emphasize financial controls when assessing performance in terms of the financial perspective.
Firms use different criteria to measure their standing relative to the balanced scorecard’s four perspectives. The firm should select the number of criteria that will allow it to have both a strategic and financial understanding of its performance without becoming immersed in too many details.
Strategic leaders play an important role in determining a proper balance between strategic and financial controls, whether they are in single-business firms or large diversified firms.
A proper balance between controls is important, in that wealth creation for organizations where strategic leadership is exercised is possible because these leaders make appropriate investments for future viability (through strategic control) while maintaining an appropriate level of financial stability in the present (through financial control). In fact, most corporate restructuring is designed to refocus the firm on its core businesses, thereby allowing top executives to reestablish strategic control of their separate business units.
Successfully using strategic control frequently is integrated with appropriate autonomy for the various subunits so that they can gain a competitive advantage in their respective markets.
Strategic control can be used to promote the sharing of both tangible and intangible resources among interdependent businesses within a firm’s portfolio. In addition, the autonomy provided allows the flexibility necessary to take advantage of specific marketplace opportunities. As a result, strategic leadership promotes the simultaneous use of strategic control and autonomy.
Article thanks to onestrategy.org.