Beyond Control: Managing Strategic Alignment through Corporate Dialogue / Edition 1 available in Hardcover
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Technology has made it possible to apply a new management philosophy. Leaders can let go and still be in control. They can involve key people without losing momentum. Companies can consistently measure organizational capability over time, and accurately benchmark 'soft' management areas, and a virtual CEO office really does work. Founded on three key insights (the operating arena; managing by pull and push; and the web-based dialogue centre), Beyond Control offers a revolutionary model for shifting the management focus from structured control to guided interaction. Using this approach companies can build a participative operating system that creates space for managers to excel, and avoids the unpleasant surprises that can lead to corporate scandals.
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About the Author
Fred Lachotzki has thirty years of experience as manager, president and non-executive director in Europe, the USA and the Far East. As a Professor of business policy he has been teaching strategy formulation and execution for many years. He has served or is serving on a number of boards in an executive as well as a non-executive capacity, both nationally as well as internationally.
Robert Noteboom is an independent strategy consultant, prior to which he was Associate Director Customer Value Management at PricewaterhouseCoopers. He is also lecturer for e-Business Strategy at Nyenrode University, the Netherlands.
Both authors were involved in the founding of MeyerMonitor, a management consulting company dedicated to improving organizational effectiveness by helping global companies focus on their strategic agenda via a ‘digital dialogue’. Since its founding in 1998 MeyerMonitor has applied the models and methodologies on which this book is based in various projects, serving many large multinational companies and generating a wealth of positive research data.
Read an Excerpt
By Fred Lachotzki
John Wiley & SonsISBN: 0-470-01152-1
Chapter OneStrategic Alignment: Is a New System Needed?
Companies should be able to endure and grow far beyond the lifetime of individual CEOs. Endurance requires more than a few years of excellent financial results. It demands strategic alignment. In this chapter, we examine why so many large companies during the last decades have had trouble aligning their execution with the board's strategic initiatives. Why have so many leaders drifted away from the heart of their companies? What has gone wrong?
Opening up the operational 'black box' is a first step towards achieving corporate dialogue, transparency and accountability.
The profitability equation
Sustainable profit is realized when a business possesses the core competencies to outperform its industry peers because of a unique value proposition and/or operational excellence. A leadership team's responsibility is to conduct its business so that direction and execution are aligned, monitored and followed over time.
There should be the right mixture of key performance indicators, oriented both to organizational capability as well as to profitability, where relatively short-term investments and results are balanced with longer-term aspects. Managers should be held accountable not only for financial results, but also for the creation of support systems that enable their subordinates to excel. This approach will lead to greater checks and balances, and will have the potential to create a more stable flow of profits.
Sustained profitability = Financial results x Strategic alignment
The antithesis of this equation is represented by all those companies - e.g. Enron, Tyco, Ahold, Parmalat - that have been so well publicized in the last few years after they were 'suddenly' hit by bad results. It turned out that they had no infrastructure in place to manage their fast growth in a sound way.
Several quarters and even years of great financial results x bad strategic alignment = lack of sustained profitability
Companies like these go out of control because they lack sufficient strategic alignment.
A company can create the necessary level of stability by sharing with its most important stakeholders the status of all parts of the equation - including its continual efforts to strengthen its organizational capability. Regularly sharing such data with analysts who are following the company might also help to create a discussion that is focused more on the long term than just on the following quarter. Once a corporation becomes appreciated for these more fundamental investments in its future, it is half way to creating sustainable profits.
Moving beyond control
We need a model that is based on the right set of indicators to reassure managers that they are in control. What is required is the kind of control over the corporation that does not restrict people or create bureaucratic obstacles. We need a system that can be managed 'beyond control'.
How things can go out of control
Reflecting on 30 years in business and academia, one of the authors (Fred) is quite willing to admit that he focused too much on operational outcomes. If, instead, the alignment between strategy and execution had been managed, and if today's technology and knowledge had been available, several of the instruments that we will discuss in this book could have been used. Although successes were celebrated, Fred also faced disappointments. Quite a few of the mistakes, inefficiencies, failed experiments and integrity issues encountered in his career could have been avoided.
Fred will now describe four examples from his career, first to illustrate the kind of problems to which we are referring and second to show how creating strategic alignment through corporate dialogue could have helped. In one or two examples, for reasons of discretion, certain parts of the description have been changed.
The liquor store
Early in my career I was running a small but fast-growing chain of liquor stores, which at the time had 40 outlets. We had introduced a private-label Campari equivalent, called Campagne Amari, the label for which read almost like Campari. Campari sued us. We lost the case and the court ordered us to pay a large amount of money for any bottle found after a specific date set in the near future.
As I was about to attend Harvard's Program for Management Development for four months and was scheduled to leave Europe a week after the court's decision, I directed the operational manager (following the normal hierarchical structure) to make sure that there wouldn't be any bottles on the shelves after the designated date. In addition, I wrote an instruction in our weekly information bulletin for the stores. Then I left for Boston.
What happened? Several bottles were found in a particular store after the designated date. The amount we had to pay was so much that we lost more than half our profit for that year.
The restaurant experiment
Managing a restaurant division was my next assignment and during my time there we wanted to test some new concepts.
One was the idea of sophisticated pancakes in one of the high streets of downtown Amsterdam. In addition to sweet crepes, the idea was to offer main-meal crepes stuffed with fish, meat or vegetables. The profitability of a restaurant is very much dependent on the gross profit per table and so having main meals was important. You need a high average bill and quick table turnover. The whole concept was conceived at company headquarters and investment was duly allocated. Fortunately, a good location was available: a high-street restaurant that our company had run for more than 25 years, but which for the last few years had been losing money. It had a very old clientele, who came in for coffee and cake.
We remodelled the restaurant and immediately noticed that it was well occupied. Nevertheless, at the end of the first week sales were low, and they didn't improve in the second, third or fourth week. We found this strange because the restaurant was always full of people. Shortly afterwards we ended the experiment and sold the building to avoid losing more money.
The faraway supermarket
As a newly appointed management board member of a large German retail firm, I was asked to be our liaison with a supermarket chain that we owned 50/50 with another German retailer. This chain, which operated in the southern United States, had a mostly German management team and a positive bottom-line: it had recently acquired a large group of stores from another chain, had opened some very large new stores, and was considered to be extremely successful. I decided to travel to the US and visit at least 60% of the stores (about 75), including all those that had opened during the previous three years. Up to that point, the supermarket chain had been supervised mainly by four board meetings a year during which board members were shown around selected stores.
My first three weeks were interesting. The language of the management team was mainly German, not English. Several (very dusty) German products were to be found on the supermarket shelves. Although the new stores were extremely pleasant and luxurious, they had few customers. The real estate of several stores had recently been sold to investors (i.e. asset profits had been generated) and then rented back. I returned to Germany upset and worried. After a period of hard work, some firing and repositioning, the company was sold.
The nonexecutive board member
One of the boards I sat on was that of a fast-growing company operating in many countries around the world. The board was presented with a strategic agenda built around an aggressive acquisition programme, supplemented by autonomous growth through existing and new clients. The managing members of the board convinced us that the acquisitions would be in related businesses. A key argument was that one-stop shopping would create large synergies. We would acquire companies whose offerings could be added to ours and consequently offered to the existing client base.
Two years later we missed profit targets several quarters in a row, our stock had fallen sharply, and shortly thereafter we divested most of our acquisitions.
How problems were caused by the operations being 'black boxed'
Let's have another look at these four real-life cases. Could money have been saved, embarrassment avoided or failing experiments stopped earlier?
The liquor store
In this case the strategy was clear: consolidating the retail liquor market by applying a discount concept while making money. When I returned from the US, my boss on the board asked if I had learned the lesson: that an effective executive knows his priorities - when to go into detail and when not to. With such potentially large losses at stake, I should not have followed the regular hierarchy, but instead had a direct dialogue with store managers.
I should have put myself in the middle of the operation and taken the time to call every store manager personally and have them check whether any bottles were present in the stores. The smallish size of the company made that possible. Of course, if electronic digital communication had been available, it would have taken me no more than half an hour to notify everyone. So it was a question of experience and scope/time. Did things go wrong because I had put the store operation into a black box, accessible by the operational boss but not by me?
The restaurant experiment
In the second case, the problem was that the marketing concept was developed centrally. We kept the strategy for the concept close to our chests (for security reasons). The crucial fact was that we needed an average bill per table that could only be reached if a high percentage of customers ordered a full meal (i.e. dinner crepes) and if the average seating time did not exceed 45 minutes. Only later did we discover that the old clientele usually stayed in the restaurant for an average of one hour and fifteen minutes and mostly only ordered coffee. People who had worked at store level knew this, but because they were unaware of our assumptions and agenda they could not warn us in advance.
Possibly the company lacked a 'listening' culture and structure. The leadership team was so convinced and enthusiastic about the new concept that operations may have thought it better to keep quiet and avoid irritating the leadership - and in any case we might not have wanted to hear what they had to say. We also later found out that after the new restaurant had been open for two days, the store manager noticed that almost all his old customers were visiting and staying for two hours with just coffee and one simple sweet crepe. As he didn't know our strategic agenda (average bill, seating time), he didn't report this to us. When I visited the location during the first few days, I saw only a full restaurant.
If we had shared the agenda with more key people, the difficulty of meeting the goal for the average bill might have come out into the open much earlier. If we had had a culture where people were used to giving input or critically addressing marketing issues with the leadership, we might at least have given them the opportunity to react more quickly. In this situation we didn't take any action until the company's controller had done the analysis two months later, which was too late. Again, the operation was too much of a black box.
The faraway supermarket
The third example was a large company with divisions run as separate businesses by 'independent' executives operating in a different culture far away from headquarters. The objectives were clear (mainly financial), board meetings were about financial budgets and held a maximum of four times a year (often less), and local management staged store visits. It turned out that executives were not sensitive enough to the culture, and that there were issues of integrity in both financial and purchasing decisions: for instance, real-estate profits were mixed with operational results. There was an evident problem of marketing competence (the wrong size and wrong type of store), and all this was concealed from the German headquarters.
If there had been an open dialogue throughout the organization, managers could have questioned store concepts and raised issues of store size and investments, and employees might have pointed out the integrity issues. These were only some of the aspects that would have come up if there had been a regular dialogue and a clearly understood agenda, as well as shared objectives. If everything had been transparent and people accountable for the creation of a really supportive organization, how different matters would have been. Once again, we had simply black boxed this international operation.
The nonexecutive board member
The fourth case was about supervision. Many had been added to the group within just two years, some in the same industry, some in slightly related industries. Some were small, some large. Some were in the home country, some far away. Most were bought from entrepreneurs and although some were quite profitable, others weren't. Some were bought with stock, others for cash or a combination of cash and stock. Several were acquired with an earn-out provision. But all these companies required management attention as, due to strong growth, did the existing operations to an ever-greater degree. The anticipated one-stop shopping, however, was not really taking place.
Most of the acquired companies were underperforming by the second year. After the management teams of the acquired companies had taken their earn-outs and left, we stepped in and were faced with some terrible surprises. Only after we had fired our CEO and CFO and read the report of the consultant we had hired to analyse the strategy did we realize that one-stop shopping had not materialized. It turned out that many managers deep in the organization knew that it would not work. They had talked about this, but it had never reached the board. Or had the CEO heard it but left us in the dark?
Furthermore, it emerged that managers had been afraid of the CEO. People had complained about his top-down budgeting style as well as his inaccessibility. In addition, the growth targets, stringent budgets and many acquisitions had asked too much of the organization's resilience. Fortunately, not all was bad. The core business had a willing market and a good reputation.
If over time we had developed structured, quantitative insight into the organizational capabilities of the corporation, including the acquired companies, wouldn't we have reduced the number of companies we bought? If there had been a structured (anonymous) internal dialogue between key people and the company's leadership team, wouldn't the one-stop shopping idea have been challenged more strongly? Were we just hoping for good results to emerge out of the black box? (See Figure 1.1).
Opening up the black box
It is every CEO's nightmare to wake up in the middle of the night agonized by fear of failure, fear of not being in control, fear of losing his grip, fear of shattering his reputation. CEOs realize all too well that they need to have a sufficient understanding of what is happening behind the figures that their subordinates deliver to them.
Leaders expect that the managers reporting to them are allocating enough resources to create and support an effective infrastructure of the business unit they are running. But many are not always certain that this is the case. They expect that their subordinates are not destroying established customer, partner or employee relationships. Certainly they expect that their factories do not needlessly damage the environment - but how can they be sure?
Despite their expectations, leaders still notice divisions not performing to standard, market share slipping, talent leaving and some acquisitions not performing. They appreciate how important it is to have a deep understanding of the industry, to not be dependent on anecdotes, truly to see the whole reality of the firm, and to have a deep insight into the company's overall performance.
They are painfully aware that to manage you need to measure more than merely financial objectives. Leaders realize that in order to operate in a perfectly transparent and accountable way, they have to open up the organizational black box and find a better way to measure and manage strategic alignment as well as financial results. They are in need of a different approach: a new management system (Figure 1.2). But, first, we need to understand the recent history of corporate development - how did we arrive at the current state of affairs?
Excerpted from Beyond Control by Fred Lachotzki Excerpted by permission.
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Table of Contents
Part I: Moving Beyond Control: A New Concept.
1. Strategic Alignment: Is a New System Needed?
2. The Corporate Black Box: Understanding History.
3. The Operating Arena: Aligning the Space.
4. Leadership Beyond Control: Creating the Push.
Part II: Creating Alignment: The Continuous Dialogue.
5. The Corporate Dialogue: Activating the Agenda.
6. The Executive Dialogue Centre: Installing the Toolbox.
7. The Fundamentals: A Mindset for Pull and Push.
Part III: Managing Alignment: Leading, Rewarding and Reporting.
8. The Chief Executive Officer: Believer-in-Chief.
9. The Chief Financial Officer: Guarding the Equation.
10. The Human Resource Director: Aligning Talent.
11. The Communications Director: The Coherent, Consistent Storyline.
Appendix I: Gap Analyses.
Appendix II: Campaign Invitations and Protocols.
Appendix III: A Case Study on Measuring – ABN AMRO.
Appendix IV: A Case Study on Matching – Numico.
Appendix V: A Case Study on Managing – Sara Lee/DE.
Appendix VI: How Aligned Is Your Company?