Almost every textbook on strategy starts by emphasizing the need to establish a firm’s mission or vision. This is the strategic direction that guides all that follows in the formulation and implementation of a competitive strategy. Clearly, in a new company, the entrepreneur who is organizing the company has some clear mission in mind that sets the original strategic direction. And ongoing companies may have their missions defined by prior actions of prior managers.
Two important elements have to be considered. How is the strategic direction communicated to the other members of the organization to align them with it? And, how does that mission or vision evolve as the competitive environment changes? The answer to both is strategic leadership.
In the twentieth century, a strategic leader who was very effective in setting strategic direction was Jack Welch of General Electric (GE). It is important to think of the business environment in which Welch was competing over those years. It ranged from the very dark days of the early 1980s to the boom years of the late 1990s. Clearly, Welch had to have a different vision for what GE was going to do in those early years, when people were concerned about whether the firm could survive Japanese competition, compared to the later era, when GE’s stock price rose with the same vigor as that of a high-tech stock.
Welch understood while GE would have to do many things, there would need to be a single, clear theme coming from the corporate office. In the early years, it was to have all business units either first or second in their industries. This vision told managers that they needed to get their business units to that level if they were not there.
Preparing for the Future
Whether preventing declines triggered by product lines being superseded, customer needs changing, or tough, new competitors appearing, top-level management must see the problem and allocate resources sufficient enough to see the firm into the next generation of products and markets. This is not easy. Companies still have to beat current competitors in today’s markets. Top management has to provide the resources for both and then create incentive and control systems to see that both goals are pursued.
This may involve making some hard choices, but that is what top managers are paid to do. Investing in a present certainty is something people like to do, but excessive investment of that type has to be discouraged in firms that want to survive long into the future. It is also easy to see from this example why top management must lead on this issue. At any point in the managerial hierarchy, from the front lines to the CEO’s office, if there is a break in the chain of incentives and control, the firm’s managers will revert to pursuing the easier goals.
To build future potential for the organization, top management must insist that entrepreneurial activities be engaged in and that lower-level managers who do so are in no way punished in terms of career advancement. It also means that rewards and incentives have to move down to those taking entrepreneurial risk.
Role of the Board of Directors
The shareholders have a set of agents in the corporation—the board of directors. The board is elected by the shareholders to be their representatives and to oversee the major strategic decisions of the top management team. The board, however, is often strongly under the influence of the very party it is supposed to monitor—the top managers.
Top managers can control a board through the nomination of insiders to board membership. These are most often members of the management team who end up effectively overseeing themselves. Outside directors who are supposed to be more objective are often selected for participation on the board because of their close association with the top management team of the firm. These are related outsiders, and once again their willingness to hold management to tough standards or to ask difficult questions about managers’ strategic decisions is suspect in many cases. Only independent outsiders are likely to be able to exercise oversight without conflicts of interest.
Looking at all this, one may wonder why stockholders allow their agents to be so co-opted by top management. The answer is that the shareholders, in many cases, have little power to determine who is nominated to sit on the board. Candidates officially come from a nominating committee set up by the board.
As expected, someone friendly to the current board, and hence to current management, is often the sole nominee. Because in most cases shareholders are only offered one formal candidate in an election, it is very difficult for someone other than the nominee of the top management team to join the board. One exception to this is proxy battles. One way in which proxy battles can be effectively mounted is through the action of institutional investors.