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Apologies for cross-posting, but thought this post to the BPS list would be of interest to the Management Development and Consulting communities ...

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We had a great post in December from Richard Whittington [below], drawing attention to a series of articles on this topic, so thought we might see an avalanche of responses – maybe from younger folk in the field worried about its future [and theirs], or from more experienced figures vigorously refuting that there is a problem. So the subsequent silence is puzzling.

The evidence may be mostly anecdotal, but it seems increasingly recognised that students see little value in strategy classes, recruiters don't value what those students learn in those classes, and executives and consultants don't use the tools that have been so painstakingly put together. Why does no-one dare mention this 'elephant in the room'?

If "there is nothing so useful as good theory" and our tools are not used, the conclusion seems inescapable – we have little useful theory! If we accept that there actually is a big problem here – where has it come from? I will probably get beaten up for this, but here goes with two suggestions ...

-          Most of the tools, whether external or internal oriented, originate from efforts to explain profitability [rents], when that is of little interest to either investors or managers. It has been axiomatic to those in Finance for decades that investors value growth in free cash flows .. which does not correlate with maximising rents. Profitability needs to sufficient to either fund growth or enable funds for growth to be raised, and growing companies are likely to be less profitable than they could be if not growing. How long have we known this? – since Penrose in the 1950s! [ In some cases e.g. Amazon  'sufficient' profitability can even be negative for many years so if sustained superior profitability is the goal, where are the case studies exploring how UNsuccessful Amazon has been?!].

-          Most of the tools offer ways to find  a good strategic 'position' for a firm vs. rivals .. but this question only arises at start-up or at major cross-roads in a company's history [most of the great case study companies we use in class have sustained essentially the same 'position' for decades [IKEA, Southwest Airlines, eBay ...] , or else made just one or two major changes [IBM, Nokia ...].. so what does 'strategic management' actually do in between these once-in-a-lifetime events? If we were honest we would rename our classes, if not our whole field 'Strategic Positioning' instead of Strategic Management.

The consequences of having no useful tools for the continuing strong strategic management of organizations are serious. We are experiencing right now the result of incompetent strategic management of many of our major corporations, especially but not exclusively the banks of course. So – are we going to continue ignoring this elephant and keep churning out research and tools that no-one values, or really try to do something about it?

... excuse me while I go hide under the table.

Kim Warren

Dear All

This topic came up earlier this year, and Joe Bower mentioned a relevant Dialog forthcoming in the Journal of Management Inquiry. The Dialog has now been published under the heading: 'Directions for a Troubled Discipline: Strategy Research, Teaching and Practice', JMI, 17, 4, 265-286, 2008.

The three main papers are:

Joe Bower, 'The Teaching of Strategy: From General Manager to Analyst, and Back Again?'

Rob Grant, 'Why Strategy Teaching should be Theory Based'

Paula Jarzabkowski and Richard Whittington, 'A Strategy-as-Practice Approach to Strategy Research and Education'.

The link is http://online.sagepub.com/cgi/searchresults?src=selected&andorexactfulltext=and&journal_set=spjmi&fulltext=jarzabkowski

Some thoughts in response to Fred, Paulo, Chandru.

-    Fred, you reversed what I suggested. To clarify ... the critically important task is the on-going strategic management of organizations and most existing strategy tools only deal with the rare, once-in-many-years 'positioning' decisions

-    I don't know enough about agency theory to say how an executive or consultant might use it for the strategic management of their organization

-    The issues of governance sure seem important – but don't address the basic problem. Just maybe, though, if we knew what constitutes professional strategic management, the governance problems would be reduced. [Here in the UK we are just now abusing our banks for failures of governance .. but if neither those who messed up nor those supposed to oversee them understand  competent strategic management, how would better governance help?]

-    Not sure we can hope for much success from telling the market it's wrong – 'customers' usually seem buy into what's offered if they find it useful, and that would seem to require that they know what 'it' actually is. How do we prove to them that we do indeed give people abstract critical thinking skills and that those will help successfully deliver strong and sustained performance?

A glimpse of what strategy consultants think about the strategy methods on offer can be found in 'Bringing discipline to strategy' summarising the results of a 2-year effort by Mckinsey to find anything useful and reliable in the strategy literature. [URL = http://www.mckinseyquarterly.com/Bringing_discipline_to_strategy_1054]. I believe others have made similar efforts, with similar results.  

Just came across a further possible explanation for the chasm of understanding between investors and management – Most young would-be professionals in the investment community now seek the qualification of the global Chartered Financial Analyst Institute, a rigorous 3-year course that I believe some 100,000 people have achieved, and another >100,000 are currently studying. In that entire program, the only element of strategy is a tiny segment on industry forces. How, then,  might investment analysts and thus investors have any clue about the link from strategic management to business performance, or know whether a particular choice by management is right or wrong?

I am still hoping for answers to the two original challenges [a] that strategy research is mostly looking for answers to the wrong question – profitability, rather than growth in cash flows and [b] that the methods on offer only relate to the rare choosing of strategic position. It's a bit depressing that of the many hundreds of strategy teachers on these discussion lists, few seem interested in these deeply troubling issues or [apart from the handful of responses so far] have any constructive proposals to offer.

Kim Warren

-----Original Message-----
From: Management Education and Development Discussion [mailto:MG-ED-DV@AOMLISTS.PACE.EDU] On Behalf Of nickols@att.net
Sent: 14 February 2009 15:12
To: MG-ED-DV@AOMLISTS.PACE.EDU
Subject: Re: Directions for a Troubled Discipline

Carolyn Fausnaugh's comment about "agency theory" prompts a few remarks in relation to that comment and to Kim Warren's earlier post.

Agency theory is a quaint but wide-of-the-mark concept.  It perhaps traces to a time when the owners of large companies truly owned and managed them and it might have been somewhat true in such times.  But, with the separation of management and ownership, which accompanied the diffusion of ownership among hundreds or even thousands of shareholders, agency theory ceased to be true or relevant - if it ever was.  As Adolf Berle, Jr and Gardiner Means pointed out in The Modern Corporation and Private Property back in the 1930s, the separation of ownership and management, means that corporate executives are free to serve their own interests and have little incentive to do otherwise.  They have observably done so.

So as to Kim Warren's concept about the irrelevance of strategic management and much of what is peddled under that and related headings - and his notion that we should focus on strategic positioning instead of strategic management - perhaps the field of management education and development might strategically position itself so that executives would see it as serving their real ends instead of imaginary ends such as those set forth by agency theory and most of management theory.  Just think of the possible B-school courses that might crop up:

How to beat Sarbanes-Oxley without getting caught.

Ten legitimate ways of safely defying the Feds.

Stacking the deck: How to interlock boards of directors.

Creative accounting and making it invisible to auditors (with a companion course dealing with ways of co-opting the corporate auditors).

Manipulating the public - when they're relevant (subtitled "Let them eat cake when they're not").

Ripping off stockholders with impunity.

Achieving and maintaining an image of quality.

How to saddle others with the blame for wrongdoings.

Self-aggrandizement and personal wealth accumulation via corporate mechanisms.

And, finally, "How to retire with at least $700 million in secure off-shore accounts"

--

Regards,

Fred Nickols

Managing Partner

Distance Consulting, LLC

nickols@att.net

www.nickols.us

"Assistance at A Distance"

-------------- Original message ----------------------

From: Carolyn Fausnaugh <cfausnau@FIT.EDU>

> 

> 

1.  Agency theory posits that in a "market driven economy" the market will

discipline managers whose companies perform poorly.  But our current experience

illustrates that 1) time frames are very long;  and 2) the overall cost to

society in jobs and social dislocation is viewed as too high and a majority of

> voters expect the government to smooth out wide swings caused by market forces.

Romie and all:  perhaps part of the reason that there are so many BAD management decisions is that the managers use the wrong 'tool' for the job.  The old story goes like this:  Worker  to apprentice: "Bring me a wrench (spanner)!  Apprentice:  "What kind of  a wrench to you want, Sir?" Worker:  I don't care, I'm going to use if for a hammer anyway."

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Carter,

We often forget "frameworks" (how something works) that are located (and often lost) somewhere on a continuum between "tools" (what works) and models (why it works). An illustrative explanation of frameworks is provided by Michael Porter in  Porter, Michael. 1991. Towards a dynamic theory of strategy, Strategic Management Journal, vol. 12, WINTER,  pp. 95-117 (see the key excerpt below my signature). Curiously, while we have developed myriad sophisticated means to assess whether a model is properly specified, I am not aware of an accepted set of criteria to assess the rigor and relevance of a framework.

Best,

Milorad

Milorad M. Novicevic

Associate Professor of Management

University of Mississippi                                           

School of Business Administration

Management Department

236 Holman Hall, University, MS 38677

E-Mail address:  mnovicevic@bus.olemiss.edu

Phone: 662-915-1360

Fax: 662-915-5821

"There is a fundamental question about the approach to theory building that will most advance both knowledge and practice... On the one hand, one might approach the task of developing a theory of strategy by creating a wide range of situation-specific but rigorous (read mathematical) models of limited complexity. Each model abstracts the complexity of competition to isolate a few key variables whose interactions are examined in depth. The normative significance of each model depends on the fit between its assumptions and reality. No one model embodies or even approaches embodying  all the variables of interest, and hence the applicability of any model's findings are almost inevitably restricted to a small subgroup of firms or industries whose characteristics fit the model's assumptions. This approach to theory building has been characteristic of economics in the last few decades. It has spawned a wide array of interesting models in both industrial organization and trade theory. These models provide clear conclusions, Is well known that they are highly sensitive to the assumptions underlying them and to the concept of equilibrium that is employed. Another problem with this approach is that it is hard to integrate the many models into a general framework for approaching any situation, or even to make the findings of the various models consistent. While few economists would assert that this body of research in and of itself provides detailed advice for companies, these models, at their best, provide insights into complex situations that are hard to understand without them, which can inform the analysis of a particular company's situation. Given the goal of informing practice, the style of research in the strategy field, including my own has involved a very different approach. To make progress, it was necessary to go beyond the broad principles in the early work and provide more structured and precise tools for understanding a firm's competitive environment and its relative position. Instead of models, however, the approach was to build frameworks.

A framework, such as the competitive forces approach to analyzing industry structure, encompasses many variables and seeks to capture much of the complexity of actual competition.

Frameworks identify the relevant variables and the questions which the user must answer in order to develop conclusions tailored to a particular industry and company. In this sense, they can be seen as almost expert systems. The theory embodied in frameworks is contained in the choice of included variables, the way variables are organized, the interactions among the variables, and the way in which alternative patterns of variables and company choices affect outcomes. In frameworks, the equilibrium concept is imprecise. My own frameworks embody the notion of optimization, but no equilibrium in the normal sense of the word. Instead there is a continually evolving environment in which a perpetual competitive interaction between rivals takes place. In addition, all the interactions among the many variables in the frameworks cannot be rigorously drawn.' The frameworks, however, seek to help the analyst to better think through the problem by understanding the firm and its environment and defining and selecting among the strategic alternatives available, no matter what the industry and starting position.

These two approaches to theory building are not mutually exclusive. Indeed, they should create a constructive tension with each other. Models are particularly valuable in ensuring logical consistency and exploring the subtle interactions involving a limited number of variables. Models should challenge the variables included in frameworks and assertions about their link to outcomes. Frameworks, in turn, should challenge models by highlighting omitted variables, the diversity of competitive situations, the range of actual strategy choices, and the extent to which important parameters are not fixed but continually in flux. The need to inform practice has demanded that strategy researchers such as myself pursue the building of frameworks rather than restrict research only to theories that can be formally modeled. As long as the building of frameworks is based on in-depth empirical research, it has the potential to not only inform practice but to push the development of more rigorous theory."

----- Original Message -----

From: Romie Littrell

To: MG-ED-DV@AOMLISTS.PACE.EDU

Sent: Saturday, February 21, 2009 7:08 PM

Subject: Re: Directions for a Troubled Discipline

 

Business managers and executives do not use theories. They use tools. See http://www.bain.com/management_tools/home.asp Do not accustom yourself to use big words for little matters. -Samuel Johnson Romie F. Littrell, BA, MBA,PhD, FIAIR, An fánaí fiáin AUT Business School N.Z., romie.littrell@aut.ac.nz http://www.romielittrellpubs.homestead.com/ http://www.crossculturalcentre.homestead.com/ Facilitator, Leadership & Management in Sub-Sahara Africa Conferences Contents copyright Romie F. Littrell --- On Wed, 18/2/09, Jerrold Strong <JStrong@ACTRANSIT.ORG> wrote: From: Jerrold Strong <JStrong@ACTRANSIT.ORG> Subject: Re: Directions for a Troubled Discipline To: MG-ED-DV@AOMLISTS.PACE.EDU Date: Wednesday, 18 February, 2009, 6:42 AM Executives are under tremendous pressure in America to show growth and profit every 12 weeks. Short term thinking.  System pressures from shareholder greed, stock prices, government oversight, debt, and many other things I can't think of off the top of my head, severely limits corporate governance's willingness to make good strategic decisions.  To blame it on any one thing is simplistic and wrong headed.   Real leadership seems absent in most corporate board rooms.  Small business suffers from this as well.  Short term thinking, no clear mission or vision.   Jerry   Jerrold Strong, M.A. Adjunct Faculty Organizational Leadership Chapman University   "Everyone gets the experience; some get the lesson."                                                      T.S. Elliot     From: Management Education and Development Discussion [mailto:MG-ED-DV@AOMLISTS.PACE.EDU] On Behalf Of Joel Harmon Sent: Monday, February 16, 2009 8:38 AM To: MG-ED-DV@AOMLISTS.PACE.EDU Subject: Re: Directions for a Troubled Discipline I'm not sure that the problem is a lack of understanding of strategic management.  It seems more about executive greed overpowering what strategic analysis indicates is in the best mid to long-term interests of the firm (or of society, which gets put way down the list of strategic criteria).   Joel Harmon, Ph.D. Professor of Management Executive Director & Director of Research Institute for Sustainable Enterprise Fairleigh Dickinson University Madison, NJ 07940 US Cell: 732-672-2834 Fax: 973-443-8792

 

Sorry for X-posting ... thanks for the many open and off-line responses to this topic – lots of useful things to think about. One question asked off-line was whether in these times of devastated profitability, growth is now of little interest .. see a response to that below.

Unless I missed something, there seems little dissent that:

-          we have a problem with current strategy methods not being valued by the people who are supposed to use them,

-          ... which implies we have little useful theory [notably that seeking explanations for profitability is the wrong question], and

-          existing strategy tools focus on the rare issue of choosing strategic position, rather than what management actually does to steer strategy and performance continually through time.

If this is all about right, perhaps any firm's 'sustained competitive advantage'  shows up not in persistent higher profitability, but in stronger sustained growth in cash-flows. Perhaps this implies that the question strategy should be asking [in business cases at least] is 'what does management actually do to deliver sustained growth of cash flows ahead of others?' On this measure, performance of strong firms might be tens or hundreds of times greater than that of weaker ones, so an answer would seem to be of more interest to our customers .. executives, consultants, students .. than a few percentage points of ROIC or 'rent'.

It would be useful to hear more from the senior figures in the strategy field as to whether this is all way off-target – I would not want to stand accused of encouraging colleagues down a long, deep and dark blind alley. Maybe there is no problem with the reputation of Strategy in its market-place, with basic strategy theory, or with the utility of the tools and methods that are recommended and taught?

Kim

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As regards whether growth is still a relevant question in these recessionary times ...

Perhaps my original post was not clear enough – I meant it to say that, as I understand it, investors are interested in the present value of future cash-flows – not growth per se. There is no point in simply growing market share or revenues if it does not ultimately improve future cash flows [the error that followed misuse of the growth-share notions from BCG in the 70s]. But as we speak, companies are understandably trying hard to maintain revenues In the current recession [i.e. minimise negative growth] as well as hold up profitability.

If this is right, the recession makes no difference to the fundamental point. If cash flows with poor or average strategy would likely decline sharply, and good strategic management would lead to a better cash-flow trajectory, then that is what will be best for investors and what management should be pursuing. Profitability [ROIC or similar] is but one lever to achieve that – and one that comes with big dangers. If your ROIC was previously 10% and recession hits it down to -5%, then investors would no doubt like to see it back up to, say, 5% ... unless 5% and no subsequent growth was all they would ever see thereafter.

Percentages are not at all helpful in all this. If this scenario meant that your 10% ROIC corresponded to profits [or more strictly free cash-flows] of $10m/year, investors should prefer you to accept the minus-$5m if it meant that next year you get back to say, zero, then $10m, then $15m etc rather than $5m/year for ever.

Maybe the main reason firms pursue dangerous cost-cutting in a desperate attempt to prop up profitability is precisely because the naïve analysts who comment on their performance understand so little about the link from good strategic management to a firm's value, and constantly bully management for 'poor profitability', rather than asking whether current profitability is actually in investors' best interests. For an example, see my blog-post on what looks like a big strategic error by Starbucks, who are trying to sustain profitability by cutting costs sharply – including the costs of supporting exactly the 'sustained competitive advantage' that drove their historic strong growth in cash flows .. their unique investment in staff rewards and training which features in so many great case studies on the company. [URL http://www.kimwarren.com/2008/11/big-mistake-at-starbucks/ ]

To see a powerful and lucid explanation of why growth in free cash-flow is the right measure for investors and executives [and strategy researchers!] to focus on, see the statement from Jeff Bezos, founder and CEO of Amazon.com that opens the company's 2004 Annual Report ... at http://library.corporate-ir.net/library/97/976/97664/items/144853/2004_Annual_report.pdf . Prior to founding Amazon.com, Jeff was a star Wall St analyst .. to be distinguished from the more average folk in that world. Professional guidance on the same issue features in many finance reference books, e.g. Copeland, Koller, and Murrin, Valuation-Measuring and Managing the Value of Companies, Wiley, Chichester .. http://eu.wiley.com/WileyCDA/WileyTitle/productCd-0471702218.html . It's not perfect – e.g. the section on forecasting growth is way off, but as regards how firm performance is valued, it looks like essential reading for anyone planning to teach strategy.

Kim Warren