Strategy

Managers and directors alike face tough choices as they decide on the quality and quantity of information that the board receives and uses in its governance and fiduciary roles. As the fallout from recent crises such as the subprime mortgage debacle illustrates, both sides must address the problem of “information asymmetry” & #8212; the gap between the information available to management and to the board. The authors’ research suggests that tomorrow’s boardroom will be reshaped by three related forces: First, they face a thorough rethinking, brought on by concerned stakeholders, of directors’ information needs. In responding to these pressures, boards and management must overcome several impediments: caution about altering the dynamics of the present manager-director relationship; directors’ lack of needed skills for interpreting the new information; and the inertia of cultural norms. Second, they face dramatic improvements in the performance assessment approaches used to guide boards’ decision making. The core of a healthy information relationship between managers and directors is their agreement on the most useful performance metrics to track and assess. This selection enables the building of trust and an eased and more pertinent workload for the board (having been freed from the need to decode reams of data while also gaining some independence from management’s sometimes self-serving evaluations). Finally, boards and managers face the adoption of technologies that support critical board functions. Once access to such information is granted, new technologies can help directors obtain and use it. Board members may apply tools that, for example, enable improved visualizations and helpful alerts. And directors may engage in electronic “what-if” analyses, using company data as well as outside information & #8212; related, say, to competing firms & #8212; which is becoming increasingly available online.

To understand the financial crisis, view it as a systems accident.

Although top managers must project an image of professionalism and strength, they still require networks of individuals they can trust. The development of trust depends on the degree to which the executives perceive the presence of three critical attributes & #8212; ability, benevolence and integrity & #8212; within their support networks, and on their ability to match these qualities with the type of support they are seeking in any particular situation. We model the support being sought as having high or low informational complexity and high or low emotional demand. The combinations correspond to four types of support requested: raw information (low, low), actionable advice (high, low), emotional support (low, high), and strategic or political help (high, high). Meanwhile, the three critical attributes (each with either a high or low rating) translate into eight kinds of support providers: Trustworthy Partner, Harsh Truthteller, Moral Compass, Loyal Supporter, Star Player, Average Joe, Dealmaker and Cheerleader. Executives in need of actionable advice will most often turn to Trustworthy Partners or Harsh Truthtellers, given their high levels of ability and integrity. For strategic or political help, Trustworthy Partners will be sought because of their high levels of ability, benevolence and integrity. Seekers of emotional support will look to Loyal Supporters and Trustworthy Partners because they offer high levels of benevolence and integrity. And when the three facets of trust are less critical, executives will be willing to go to virtually any of their contacts for raw information, though most often they seek out Average Joes. These and other matches were observed, useful data was gathered and valuable insights were obtained when we tested our model on vice presidents, directors, general managers and other executives at a Fortune 50 technology firm.

R&;D alliances with suppliers or universities are more likely to be fruitful.

In buyer-supplier relationships in which companies depend on one another, performance may improve.

Providing support, training and opportunities from day one is critical.

The way we think about strategy is woefully incomplete, the authors contend. The traditional idea of focusing on the positioning of products (or services) underplays much of what most would agree makes a company truly competitive. Not only does it give short shrift to what a company knows, it ignores completely the fact that in today’s dynamic economy, organizations have to continually reinvent who they are and what they do in large and small ways. And one important means of doing so is through innovation. An effective strategy, then, is comprised of three key components: product/market, knowledge and innovation positions. But even if a company masters the three strategic positions of product/market, knowledge and innovation independently, it is still at risk. Only when all three positions are aligned and mutually reinforcing can a strategy succeed. In adopting the notion of alignment, organizations need to view each position & #8212; product/market, knowledge and innovation & #8212; as aspects of an organization’s overall strategy. Creating an integrated strategy thus requires focusing not on each position separately, but rather on all three positions simultaneously. The authors introduce the notion of competing based not only on what an organization makes or the service it provides, but on what it knows and how it innovates. Each aspect represents a competitive position that must be evaluated relative to the capabilities of the organization and to others in the marketplace battling for the same space. And each component must not only be aligned with the other two, but it needs to be adjusted as circumstances warrant. When done correctly, organizations & #8212; such as Buckman Laboratories, which is profiled here & #8212; thrive. When done badly, the company can suffer, and perhaps fatally so, as the history of Polaroid points out.

The role of procurement within global companies has changed dramatically over the past 25 years from that of simply buying goods and services to overseeing an integrated set of management functions. This brings new challenges and opportunities to procurement. Offshoring and the increased emphasis on specialization and fragmentation of production enhance the strategic character of procurement decisions. Increasingly, procurement decisions have become intertwined with strategic management in general. In this article, the authors discuss the changes in procurement from the perspective of transaction cost economics. They separate transaction costs into “soft” and “hard” costs and differentiate between the internal and external factors that affect these costs. In making procurement decisions, the authors argue, managers need to consider the full range of cost elements. In addition to traditional transaction costs such as transport costs and tariffs, managers need to recognize such elements as cultural and legal differences, government regulation, social preferences, environmental issues, political stability and risks involved in unethical business behavior. The authors argue that knowing the risks and opportunities of the different exposures is a critical management competence. Although management decisions originate in many different parts of the company, procurement managers need to keep a close eye on the various cost exposures and flag concerns as they arise. Procurement, therefore, will need to become more closely connected with strategic decisions throughout the company. This broader view represents a major extension of the concept of total cost of ownership in procurement decisions. Global sourcing creates many new opportunities for value creation, which well-run companies must learn to take advantage of.

Many Western managers were introduced to lean production in 1990, with publication of The Machine That Changed the World, based on a five-year study of Toyota by MIT's International Motor Vehicle Program. Since then, thousands of managers have been drawn to the principles of lean management as a way to achieve faster cycle times, reduced defect rates and sharp gains in on-time deliveries. Lean management permits a marked reduction in inventory levels required across the supply chain. These changes should result in better financial performance, especially because companies achieve simultaneous declines in manufacturing and service costs. But, as the authors point out, the transition takes time, and it is full of obstacles. One of the biggest and most predictable hurdles is the crisis in confidence that occurs when management isn't able to improve financial performance quickly enough. Lean transformations generally have short-term adverse impacts on the company's bottom line (that is, things get worse before better). Management needs to anticipate these challenges and explain them clearly. To help managers overcome the financial hurdles on the path to lean, the authors offer new tools for anticipating the deterioration in financial performance that invariably occurs as a mass producer goes lean and for understanding the real performance improvements that take place during this period. Their approach, which they call "value-stream accounting," helps managers plan for the short-term financial impact, monitor progress, understand the operational improvements and develop strategies to maximize the longer-term benefit. Traditional accounting systems are not designed to show the causes of adverse impacts or reveal the future benefits that will accrue from improved operational processes. Managers need to understand that the "bad" news isn't really bad -- it's part of the necessary process of establishing a stronger, more productive organization. The authors' approach replaces the traditional cost-accounting system with a transparent accounting system that tracks the company's value streams, which incorporate all of the value-adding and non-value-adding activities required to bring a product or service from start to finish.

In recent years, researchers and consultants have advanced a number of customer metrics to explain the connections between customer behavior and growth. But these efforts have generated more smoke than heat. Despite claims to the contrary, the authors argue that the most popular metrics have shown only modest correlations to growth. None of them have shown themselves to be universally effective across all competitive environments. Early customer metrics tried to explain why people buy. To many companies, it came down to marketing. Yet, as the authors explain, the issues that affect customer loyalty are complex and go beyond standard marketing. This gave rise to a new category of metrics aimed at understanding the customer experience. Although managers have learned a lot about the components of service quality (including reliability, responsiveness and empathy), the approach doesn't point managers to specific actions they can take. Beginning in the 1990s, many managers began paying closer attention to customer retention -- in particular, understanding what makes for dissatisfaction and satisfaction. But as the authors note, the linkages among satisfaction, customer behavior and positive financial outcomes have been modest. Today's most popular metric, the Net Promoter Score, focuses on how customer word of mouth -- both negative and positive -- can advance growth. Developed by Bain & Company Inc. consultant Fred Reichheld, it claims the ability to predict future growth from customer replies to one question: "How likely is it that you would recommend this company to a friend or colleague?" The authors found that the linkage between the Net Promoter Score and subsequent customer behavior was modest at best; models based on multiple variables consistently outperformed models based on Net Performer. The authors are skeptical that there can be a single metric that reduces complex, multifaceted constructs to one or two dimensions; if there is, they write, "there's a good chance it will ignore one or more important aspects of the equation."