knowlege base

Knowledge Base


Guru Theory and Shareholder Benefit

Dr Jack Jacoby
Managing Director - Jacoby Consulting Group


It is becoming increasingly common to hear shareholders and directors discuss their difficulty in maintaining control over their organisations, particularly in ensuring that their organisation delivers what its owners expect. The consequences of the excesses of the 1980s have drawn attention to the importance of this issue and reinforce the need for a mechanism to ensure that organisations more reliably reflect the interests of shareholders and directors. In other words, that the vision and goals of corporations when fulfilled, satisfy owner goals.

Business has undergone many changes in style and practice during the 20th Century. Most of the changes have promised increased effectiveness and efficiency.

The focus has traditionally been on management, because management has been perceived as the controllers of corporate destinies. When most business was small and operated with the daily involvement of its owners, this was an appropriate perspective as the distinction between owners and managers was minimal.

However, the face of industry has changed, as has the average corporation which has grown in size and complexity. The relationship between owner and manager has therefore also changed. For all intents and purposes, and notwithstanding employee share structures, owners, particularly owners of large corporations, are rarely the same individuals who make the daily management decisions which impact on the performance and destiny of organisations.

It is not uncommon for directors of medium-to-large corporations to complain that management has "hijacked" the organisation and that the direction management has set is not consistent with that of the Board's (let alone that of the shareholder's) vision, even though the board is the final arbiter of organisational policy and direction.

There are many reasons for the disparity between owner, directors and manager interests. For example, directors are generally part-time and have other diversions, while managers are totally focused on the corporation. While management has a range of specialist skills to call on when making the decisions that it presents to the board for ratification, it is difficult for the board to verify in detail the assumptions, calculations and the conclusions made by management, because they do not have ready access to the same resources. The difficulty therefore faced by owners is even more acute. Recent initiatives in the corporate governance sphere, however, are beginning to address this issue.

An owner's, or even a director's call for a second opinion or detailed questioning on assumptions and figures, is perceived by management as a vote of no-confidence, or distrust, even though management will concede that it is the directors' responsibility to question and probe and an owners' right.

The dilemma facing directors is real. Directors are there to protect and further the interest of the shareholders and other stakeholders in the corporation's legal and regulatory context, and are seen in law as having this responsibility. Yet they are not always fully in control of the information flows and deliberation processes, which makes their responsibilities difficult to execute and, in certain circumstances, fraught with personal risk.

What then is the appropriate relationship between the owners of a corporation and the managers they appoint to operate it? Is it possible to identify a solid relationship between the two groups that enables both to fulfil their roles and perform to expectations? How do we divide their responsibilities? And what impact does this relationship have on setting the vision and goals for a corporation and on the outcomes achieved? Does strategy theory help us find these answers?

The planning process, and the assumptions that underpin it, is the process which either enables or hinders the relationship between owners and managers and the fundamental mechanism which facilitates the fulfilment of a corporation's core objectives.

Within the planning process, the structure, orientation and commitment to an organisation's future is made. It is against these plans that an organisation's performance is managed and measured. And it is against the skill sets identified within plans that personnel are recruited, retained, rewarded and removed; resources, systems and processes developed, acquired and managed; contingencies planned for; and opportunities capitalised upon. An integral part of the planning process - the expected and actual performance of the organisation - attracts or repels investors and financiers.

An organisation is ultimately assessed by what it has achieved and the probability of attaining that which it is striving to achieve. The business/corporate/strategic plan is the document that encapsulates organisational striving - the process which tells employees, owners and other interested parties how past and current difficulties will be overcome and how future goals will be achieved. It should be the definitive reference for assessing an organisation's performance against its promises, and for assessing its skill in pre-empting and determining its future.

Those who control the planning process, and its underlying assumptions, are inevitably those who control the destiny of the organisation. Owners want a plan that enables their goals and needs to be satisfied while managers want a plan which enables them to manage the business and control its resources and contingencies.

This paper then, reviews a range of approaches to strategic planning and organisational management. The intention is not to determine the "rightness" or otherwise of each of the proposed models to achieve what they purport to achieve, but rather to determine how each contributes to an organisation's ability to deliver shareholder satisfaction and whether each recognises the primacy of shareholders (as contended here). Will any of these models, if adopted, help the organisation bridge the gap between management and shareholders?

The approaches to be examined within this paper include the writings of:

Kenneth Andrews


Kenneth Andrews (1980) argues that corporate strategy is the pattern of corporate decisions that determine its objectives, purposes or goals and produces the key policies and plans that lead to the delivery of those objectives and goals. (p.39) The strategy process also defines the company's business, structure and composition and establishes the outcomes that its shareholders, employees, customers and others are to receive.

The process that manages corporate strategy has two distinct elements: that of strategy formulation and the other of strategy implementation.

Strategy formulation relies on the identification of opportunities and threats; appraisal of strengths and weaknesses, particularly of existing and available resources; and the identification of opportunities and risks. From this analysis comes a set of strategic alternatives. The formation thus far represents what a company "might do".

Andrews states that the analytical process is then subjected to the opinion and attitudes of management when he states that "the determination of strategy also requires consideration of what alternatives are preferred by the chief executive and perhaps by his or her immediate associates as well, quite apart from economic considerations. Personal values, aspirations, and ideals so, and in our judgement quite properly should (my emphasis), influence the final choice of purpose." (p.41)

The key issues from Andrew's strategy planning process with regard to the relationship between management and owners include:

  • Management (the CEO) defines both the direction of the organisation as well as the outcomes that the organisation will deliver.

  • Management's subjectivity is deliberately used to refine, enhance or amend decisions made on the basis of deliberate analytical process.

  • Existing organisational competencies define the alternatives available to that organisation.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

In the corporate context, most observers of, and participants in business would agree that the raison d'etre of corporations (ie. where a corporation "starts" and from where it gets its legitimacy) is identified within its mission statement. And it is from this mission statement that organisation's develop an enabling vision and extract from it a set of enabling objectives and strategies that will deliver this vision and fulfil its mission.

In Andrew's model the development of mission and definition of corporate deliverables is undertaken entirely by management. And it is management who make subjective assessments as to those objectives, and incorporate them into the organisation's strategies and plans. In other words, managers decide what it is that their organisation will do and what their organisation will deliver.

Since shareholder objectives vary significantly, management's subjective value assessments are therefore often not aligned with owner desires. The corporation's mission then, is a statement of organisational deliverables which, because it has been subjectively derived, often diminishes the probability for owner satisfaction.

A key element of the organisation in which management defines the mission statement is that management sets the performance criteria against which it will itself be measured. These criteria may not be the criteria needed to drive toward owner objectives and owner satisfaction. Interestingly a recent but undated LEK study found that there was an increasing shift towards shareholder based value measures and that organisations and their strivings must focus on superior shareholder returns. (LEK) This change may be caused by greater shareholder dissatisfaction with management performance in relation to the delivery of shareholder satisfaction; or by management who might be recognising that it is easier to deliver to shareholders what they want rather than try to deal with shareholder dissatisfaction.

The question therefore is whether an organisation's mission statement is the fundamental reason why an organisation exists. Strictly speaking, the mission statement does provide the rationale for an organisation's existence and context to its operational and investment strategies.

However, the issue for those organisations where management subjectively develops the mission statement, is that as long as a mission statement fails to address the satisfaction of owner objectives in tangible, quantifiable and measurable ways, then the mission statement is not accurately defining the corporation's purpose. The mission statement will provide the necessary direction for the corporation as long as it is not a statement of subjective or uninformed management, but is an accurate representation of the outcomes desired by owners.

A way to bridge this chasm between management perception and owner objectives is to quantify owner objectives in a way that enables the organisation to determine what it needs to deliver over time. Once quantified, a mission statement for an organisation needs to be "no more" than a statement of quantified owner objectives since the organisation "merely" exists to satisfy those objectives. What the organisation chooses to publicise to its various constituencies and term as its mission statement may be something else entirely and may be used for other purposes, such as motivation, promotion, communication, change management, etc. The latter use of the mission statement is quite legitimate.

On the matter of existing competencies, Andrews believes that "the way to narrow the range of alternatives of new possibilities, is to match opportunity to is this combination which establishes a company's economic mission and its position in its environment." (p.47)

This approach has a serious impact on shareholder satisfaction. If I am limited by the competencies or resources I currently have, then options that provide me with satisfactory or better benefits but rely on new, enhanced or different skills are closed to me. It also assumes that the current combination of resources and competencies are optimal and are the elements that will provide me with satisfaction in the long term.

Companies who undertake SWOT analyses and automatically look to enhance the competencies and resources they are currently good in, risk investing in competencies and resources that may not be required in the longer term, or missing opportunities for building competencies and resources that will be required in the future but may be weak today.

Lessons from successful entrepreneurs are timely here. Entrepreneurs have a vision and seek competencies and resources that will deliver a specific outcome. They generally don't have the competencies and/or resources needed to achieve their vision, but do so by using other parties to "fill in the gaps" for them. They never accept the primacy of resources or competencies because they can secure what they need from elsewhere. The same principles apply to corporations. Competencies and resources are merely enablers for the achievement of a higher-level outcome. A corporation should secure (internally or by alliance) those competencies and resources it needs to deliver an outcome and should never be fixated by a corporation's existing resource and competency profile.

Is the "way an organisation plans" likely to impact owner outcomes?

There are two serious limitation to Andrews' planning structure, notwithstanding Mintzberg's plethora of concerns (Mintzberg 1990) . Firstly, there appears to be only four key inputs into the strategy formulation stage: assessment of opportunity and risk, SWOT analysis, management values, and noneconomic responsibility to society.

Although these four elements are important and form part of most planning methodologies, there are other inputs into the process that have been ignored. As an example, the relationship with shareholders and other stakeholders appears to be missing. In the context of Andrews paper, this has important implications.

In diagram 2.1 (p.42) he states that the Formulation phase of the process is "deciding what to do". By implication then, the four inputs he has identified must be sufficient inputs to determine a corporation's strategy and direction (and therefore outcomes).

Also by implication, one can deduce that what shareholders want is not an input into the formulation process. The result of this mind-set is that managers ignore shareholder objectives as part of the strategy formulation process. For reasons discussed above, the outcomes delivered by the organisation are unlikely to be aligned with those of the shareholders.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Andrews' doesn't deal with board members at all, and maintains that the particularly subjective attitudes and perceptions of management are necessary for the strategic planning process. This supports, from Andrews' perspective, the notion that managerial subjectivity is a "positive" rather than a "negative" that needs to be compensated for.

Many organisations would disagree with Andrews judging by the effort and expense applied by them to ensure consistent, replicable, reliable, predictable and fair outcomes from decision making processes. Andrews' insistence that managerial values are a key "Formulation" element, hinders the consistency, replicability, reliability, predicability and fairness of decisions and strategies since values carry with the individual. The "value" which prevails at any time is usually an outcome of a number of influences including power relationships, charisma, politics, or the ability to be heard or be persuasive.

Andrews' differentiation between formulation and implementation as two parts of the strategic process has little impact, per se, on shareholder outcomes. Where it will impact shareholders is when implementation is poor or misaligned to objectives, but this risk applies to all planning models. The separation of formulation from implementation, does not of itself impact shareholders.

In summary, I find that the Andrews' model seriously jeopardises the ability of shareholder to influence the outcomes from their investments in a way that ensures their satisfaction.

Henry Mintzberg


The term 'emergent strategy" was developed by Henry Mintzberg based on the idea that most of what organisations intend to happen, does not happen and is eventually rejected along the way.

Mintzberg argues that only about a third of strategy that has been operationalised was originally intended. The balance is an emergent strategy that is a product of culture, efforts to correct what was perceived as incorrect or inappropriate and of miscommunications.

He further argues that strategy is crafted where "skill, dedication, perfection through the mastery of detail" are key characteristics. He further maintains that the strategy development process "is not so much (about) thinking and reason, as involvement, a feeling of intimacy and harmony with the materials at hand, developed through long experience and commitment." (1991, p.105) In this way, strategies "can form as well as be formulated." (1991, p.107)

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

A reader of Mintzberg's (1990) criticism of Andrews' planning process, and the resultant invective between Mintzberg (1991a) and Ansoff (1991) might be surprised by the degree of apparent commonality between the two on issues that relate to shareholders.

Although Andrews saw the strategic planning process as a mechanistic and structured one, and Mintzberg saw it as emergent and intuitive-based on experience; both have identified the role of management values (subjectivity).

Although Andrews argues the importance of this subjectivity, and Mintzberg argues the inevitability of it and as a responsibility of management; both see it as an instrumental element in the formulation of strategy. Mintzberg (1991b, p. 40) states that it is the "leader's responsibility to define the mission of the enterprise". This is not too different from Andrew's view of the active role that the CEO must take in imposing his/her views over the alternate scenarios before the organisation.

Probably much to Mintzberg's chagrin, he suffers from similar limitations to that of Andrews: namely, that management are expected to vision a corporation's destiny at the apparent exclusion of the over-riding objectives of shareholders. The discussion above in relation to Andrews equally applies to Mintzberg in relation to impacting shareholders.

Is the "way an organisation plans" likely to impact owner outcomes?

The emergent character of Mintzberg's model gives no greater confidence that shareholder objectives will be recognised as key inputs into strategic deliberations over Andrews' model of a 'one-stop' formulation process. Both models omit any reference to the corporation's owner and both support the subjectivity of management in determining the direction of the corporation.

A philosophy which accepts the principle of shareholder primacy would see the planning process reflect this orientation irrespective of the specific planning model chosen.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Much the same as Andrews' model, Mintzberg's model of emergence and crafting have little (positive) impact on shareholder outcomes.

The fact that strategies emerge over time due to impacting influences does not proscribe from where the emergent strategies obtain their guidelines from. Similarly, the fact that the strategies are lovingly crafted does not proscribe the source of the guidelines.

In Andrews' case, one can develop a wonderfully strong, but fundamentally misguided corporate strategy based on his four key inputs. Similarly in Mintzberg's case, one can develop a wonderfully dynamic strategy that was developed with great care, love and intuition that is also misguided in terms of shareholder objectives.

Summary: Mintzberg provides us little joy in terms of providing a strategic planning process which enhances shareholder well-being.

Bartlett and Ghoshal


Bartlett and Ghoshal (1994) contend that the traditional "M-form" of strategic processes in organisations is dated and is no longer adequate for organisation growth and vibrancy and needs refinement.

They maintain that the "large global corporations are creating a new organisational model in the 1990s that is significantly different from the M-form organisation that has dominated corporate structures over the preceding five decades and that has provided the context for much of current management theory." (p.24)

In essence, and quoting Chandler (1962, p.7), they believe that a new theory of the firm is needed "from the point of view of the busy men responsible for the destiny of the enterprise." (p.25)

Bartlett and Ghoshal see the fundamental characteristic of the future corporation as being entrepreneurial and comprising three key core elements:

the entrepreneurial process which drives the opportunity-seeking, externally-focused ability of the firm to create new businesses.

the integration process which allows it to link and leverage dispersed resources and competencies to build a successful company.

and the renewal process which maintains its capacity to challenge its assumptions, beliefs and practices and to continuously revitalise itself so as to develop an enduring organisation.

Bartlett and Ghoshal take a more humanistic view of the corporation and the people within it, particularly compared to earlier paradigms, such as of Williamson (1975). Williamson took a relatively pessimistic view of organisations suggesting that people were basically opportunistic, free riding and shirked responsibility and therefore needed to be controlled and monitored; and the organisation was perpetually in a state of inertia.

Bartlett and Ghoshal see the organisation as "fundamentally a social structure. Even though actions of and within organisations may be motivated by a variety of economic and other objectives, they emerge through processes of social interactions that are shaped by the social structure." (p. 43)

Bartlett and Ghoshal's view is that the organisation should revolve around initiative, creativity, collaboration and learning. They maintain that their model "is very different from currently dominant theories of the firm which are grounded in the perspectives and languages of different social sciences...(Their) model is at least as useful for illuminating organisational phenomena as those generated by economists describing the firm in the context of market failure or social psychologists describing it as a higher order aggregation of individual and group behaviour that are typically their focal level of analysis." (p.46)

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

Bartlett and Ghoshal's model states that top management creates the purpose of the organisation while lower level management integrate knowledge and resources and drive entrepreneurial opportunities. (p.44)

Once again, as with Andrews and Mintzberg, it appears that organisational destiny is driven by management with no acknowledged reference to the organisation's owners.

Bartlett and Ghoshal's identification of the elements of initiative, creativity, collaboration and learning assist management to become more effective in handling the challenges of the 1980s and 1990s, but are largely internally focused. In other words, these elements merely help management to manage against a set of outcomes they have determined (or determined by the social dynamic within the firm), rather than help management deliver an outcome that is desired by shareholders. However, were management to recognise the need to satisfy owner objectives as the principal organisational driver, then it would not be difficult to refine their model to support such an external driver.

But I suspect that Bartlett and Ghoshal's, like Andrews and Mintzberg, have apparently assumed that the organisational outcomes defined by management are the same as the outcomes desired by owners. A recent study (Jacoby 1997) has suggested that this assumption is not supported by evidence.

From a planning perspective, the model suggested here reinforces management obligation to seek external opportunities to satisfy the vision defined by itself. As such, it has an important impact on the ability of the organisation to deliver owner satisfaction, which will only occur if shareholders want what management is striving to achieve; rather than management striving to achieve what shareholders want.

Is the "way an organisation plans" likely to impact owner outcomes?

The key elements of the model relate to the role "front-line" managers have in identifying entrepreneurial opportunities. Using the ABB example, Bartlett and Ghoshal state that "front-line managers - the heads of the 1300 little companies - have evolved from their traditional role of implementors of top-down decisions to become the primary initiators of entrepreneurial action, creating and pursuing new opportunities for the company." (p.29)

According to Bartlett and Ghoshal, middle management's role is to become a "key resource to the front-line manager, coaching and supporting them in their activities." (P. 29). Senior management's role is to delegate responsibility and develop a broad set of objectives.

Were one to accept that senior management's setting of objectives was based on shareholder objectives, then it is conceivable that this model could prove beneficial to satisfying owner objectives. However, Bartlett and Ghoshal's emphasis on the "autonomy" of lower-management and on the social milieu determining organisational outcomes suggests that the model does not recognise the primacy of shareholders determining organisational direction.

The fact that major activity is determined at the "grass-roots" of the organisation is problematic in that the decision of what needs to, or can be, undertaken is far removed from the owners of the organisation and their over-riding goals. That in itself, is not the ultimate determinant of the suitability of this model, but without a clear emphatic statement of the alignment of the organisation to the delivery of a "higher-level outcome, it is hard to image how the "front-line" manager remains focused on such higher-level goals.

Pragmatically, one would expect that "front-line" managers would seek opportunities that enhance their own performance, irrespective of the bigger picture. The ability to make sensitive distinctions between competing objectives such as risk and reward, for example. An opportunity that may be suitable for one of the 1300 companies in ABB example, may not contribute to overall shareholder well-being.

Planning under this model would reinforce the philosophy that the company is the sum of its parts, and that shareholder benefit was a sum of what each of its components could produce. The alternative philosophy is that the company exists to deliver shareholder satisfaction, so each component of the firm, must in one way or another, contribute to that high-level and over-riding set of outcomes.

Although proponents of this model would argue that the sum of its parts do deliver shareholder satisfaction, this is based on the premise that management knows exactly what shareholders want, which as previously mentioned, is arguable.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

In this area, and in relation to shareholder satisfaction, this model is problematic. As with Andrews and Mintzberg, this model vests in senior management the obligation to define the organisation's purpose. As discussed earlier, this is problematic because of the subjectivity of individuals. In Andrews' case, he saw this subjectivity as a positive influence on the decision making process. To some extent this was reiterated by Mintzberg.

Bartlett and Ghoshal see outcomes emerging through processes of social interactions that are shaped by the social structure of the organisation. These are necessarily people-based, and as such, determined by individual perspectives, perceptions, attitudes and experiences. On this level, there is little difference between Bartlett and Ghoshal and Andrews and Mintzberg.

This is not to suggest that these influences don't exist - because they do. The issue here is whether an organisation should allow its destiny to be driven by such subjectivity rather than by a higher-order of desired outcomes which is suggested by this writer. Bartlett and Ghoshal seem to imply that because outcomes emerge through processes of social interactions and shape the social structure of the organisation, then that should remain unchallenged as an appropriate state of affairs.

The counter view, and that of this writer, is that social interactions are a reality of all organisations, and that some of these interactions support the higher-level desired outcomes of shareholders while other form barriers to achievement of these outcomes. Management must manage the interactions to ensure they don't impede shareholder satisfaction: to do this management can't accept social interactions as a given but rather must be prepared to change them as necessary to achieve desired outcomes.

Hamel & Prahalad


Hamel and Prahalad (1994) maintain that not enough effort is devoted by management in developing a view of their industry in the longer term. They believe that with a clear view of the future of the industry, corporations are able to adapt their own directions and thus secure leadership in the industry.

According to Hamel and Prahalad, industry foresight is defined as a "deep insight into the trends in technology, demographics, regulations and lifestyles which can be harnessed to rewrite industry rules and create new competitive space." Such companies are "rebels" and are willing to break the rules that have governed both the industry and the value chain between the customer and the supplier.

Hamel and Prahalad maintain that a company's attempt to meet the articulated needs of its customer base is insufficient. A company needs to pre-empt customer needs and actually create the future by changing the value proposition between them and the customer.

Hamel and Prahalad identify three types of corporations: those which attempt to lead customers where they don't want to go; those which listen to their customers and then respond to their articulated needs; and those which lead customers where they want to go but aren't yet aware of it.

The essence of Hamel and Prahalad's thesis is that companies need to create their own future rather than be reactive to the environment around them.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

To some extent, it is possible to say that the Hamel and Prahalad's model is neutral to strategic planning issues because you can "create" your own destiny focused on shareholder objectives or not focused on shareholder objectives. The key issue here is the intent.

However, the key concerning issue about their model, is the implication that all companies should "reinvent" themselves, because that is the way that Hamel and Prahalad see corporations continuing to exist in the future and continuing to add value. This is a concern because the time, costs and expertise needed for a corporation to reinvent themselves may not be in the best interest of shareholders.

This, like a score of other "motherhood and apple pie" strategies is dangerous if adopted unquestioningly. Strategies such as the following appear in the mission statements of many of the world's major corporations: "We will become the biggest", or the "best", or have the "largest market share", or "we adopt TQM principles", or "we are here to maximise customer satisfaction", or "we are here to create sustained competitive advantage", or "we need to reinvent ourselves."

These are all admirable pursuits, but only when they are in context, and then only when they are seen as enablers to achievement rather than the purpose for striving. In other words, they are the tools used to get to where you want to go. No owner who invests in a corporation does so because it has, for example, re-invented itself per se. Rather, the owner invests because of the benefit that "re-invention" delivers.

It is a truism that not all organisations are alike; they have different needs and aspirations and similarly, the expectations of their owners are different. Therefore the adoption of a particular management theme or tool-set, may not be equally appropriate for all organisations.

Re-invention, much like sustained competitive advantage, in most contexts implies on-going investment in product design and modification, a quality orientation, new channel development, research and development, and other strategies and techniques which continuously review and revitalise products, services and delivery mechanisms in order to maintain a competitive advantage. Most of these techniques have a "longer-term" benefit rather than "shorter-term". Commencing a re-invention or sustained competitive advantage strategy is often appropriate when shareholders are content with longer term pay-back of expected benefit. It is, however, often in conflict with shareholders who have a short-term expectation of benefit.

As an example, a manufacturing company may have a flexible ability to tool-up quickly to manufacture a certain range and quality of product. A new product hits the market which is well within the capability of the company to produce. In the short-term, and in the early stages of the product's life-cycle, demand is well in excess of supply so quality and efficient channels are not critical. The company is not very liquid and therefore has little capital resource to draw on for upgrades and investment in plant and machinery. Historically, the company has provided good short-term dividend return to a loyal group of shareholders with little to no long-term debt.

As the product becomes accepted in the marketplace and becomes more mature, new suppliers enter the market. In order to stay in the market, suppliers must start differentiating their product, concentrate on quality and invest in efficient distribution channels. Due to the cost of such investment, one would only contemplate such a strategy if one was prepared to remain in the market long enough to enjoy the benefits from this investment and strategy.

It is clearly inappropriate for the company in question to even contemplate "re-invention or sustaining advantage" as they don't have the capital, it isn't what their shareholders want, and they would risk losing the flexible opportunistic character that has served them well.

Re-invention, like most strategies, needs to be moulded to suit the context and objectives. It should never be regarded as a "given". Re-invention within a corporation's mission statement is therefore a commitment to certain long term strategies, investments and shareholder outcomes. It is never a panacea for shareholder satisfaction.

Is the "way an organisation plans" likely to impact owner outcomes?

An organisation determined to re-invent themselves is committed to change. As such, its planning process is focused on transitions, new skills and competencies. It tends to view existing assets and competencies as limitations because they represent a form from which the corporations wishes to move.

Although change, and rapid change at that, is an increasing characteristic of modern global business, it is a state that is not a necessary requirement to satisfy shareholders in every instance.

Reasonably consistent change to an organisation's ability to compete in the future is often a pre-requisite to the continuity of that corporation. However, to achieve this change, as stated earlier, a corporation needs to invest significant amounts of shareholders funds (either direct equity infusion or undistributed profits). The return on those funds may be at a time or form that does not satisfy shareholders, particularly if those shareholders have a short-term horizon for securing their benefits.

Therefore the concept of, a priori, under-going significant change may negatively impact shareholders. As such, the planning process underpinned by an ethos of change, risks under-valuing a corporation's existing assets and competencies, and severely risk short-term shareholder benefits.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Hamel and Prahalad contend that managers, due to the pressures of dealing with urgent operational imperatives, fail to devote time to consideration of the future, thus causing the reactionary posture in most corporations. They contend that "difficult questions (about the future) go unanswered because they challenge the assumption that top management really is in control, really does have more accurate foresight than anyone else in the corporation, and already has a clear and compelling view of the company's future." They go on to state that "the urgent drives out the important; the future is left largely unexplored; and the capacity to act, rather than to think and imagine, become the sole measures of leadership." (p. 123)

From Hamel and Prahalad's perspective, this humanistic attribute of management is a clear negative and limits the ability of the corporation to cope with the future. The treatment of managements' humanity (albeit very curtly) by Hamel and Prahalad differs markedly to that of Andrews and Mintzberg who would regard this subjectivity as generally beneficial for the corporation.

Hamel and Prahalad, through their model of re-invention, attempt to place over the organisation a context from which it takes its bearing: that of re-invention and re-creation in order to ensure the long term viability of the organisation.

This writer believes however that the organisational context should have been shareholder satisfaction, and that re-invention and re-creation are merely means to that end, of which not all companies share a common need.

Michael Porter


Michael Porter (1990) states that competition in an industry depends upon five basic forces which help to assess the long-term attractiveness of that industry. A corporate strategist must find a position within the industry where the company can best defend itself against these forces and then choose one of three strategic directions.

The five forces which comprise "The Five Forces Model" comprise:

  • The intensity of competitive rivalry which measures the level of product differentiation, switching costs and concentration of the forces.

  • The threat of new entrants which determines the possible barriers to entry, the role of government policy and any expected retaliation from competitors.

  • The threat of substitutes which examines price positioning, the likelihood that buyers will provide substitute products and the changes in technology.

  • The bargaining power of suppliers which analyses the presence of substitute inputs, the concentration in the supplier's industry and the impact of the inputs on the total cost of the product.

  • The bargaining power of buyers considers the concentration of firms in the buyer's industry, the buyer's volume, the availability of substitutes and the incentives that the buyer may have to purchase from one firm or another.

According to Porter, when the characteristics for each of the five forces within an industry are identified, one of the following three strategies must be selected:

  • Low Cost Production. If accomplished consistently, increased profits will enable a company to undercut the competition, if necessary.

  • Product Differentiation. In doing so, a company can successfully distinguish itself from other products or services on the market, thereby charging a premium.

  • Focus Strategy. Concentrating on a market niche and developing specialist skills will distinguish the organisation in terms of reputation and pricing.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

Porter's model is essentially a macro-economic view of industry dynamics at the national and international levels and does not provide much insight into the relationship between the corporation and the shareholder. However, it is possible to identify some important corporate-level insights that help us understand the implications in this area.

Porter believes that "companies achieve competitive advantage through acts of innovation. They approach innovation in its broadest sense, including both new technologies and new ways of doing things." (p.74) Much in the same way that Hamel and Prahalad appear to chase innovation as a way to ensure corporate survival and growth, so does Porter. In his view, "once a company achieves competitive advantage through innovation, it can sustain it only through relentless improvement." (p.75) Since Porter's thesis revolves around the competitive advantage of nations, and since innovation resides at the corporate level, it is reasonable to conclude that innovation is the desired (required!) practice that corporations must adopt in order to remain competitive.

As such, and in exactly the same way as Hamel and Prahalad, there is an exhortation to adopt innovation as a corporate strategy in order to "thrive". Such innovation, and the corollary strategy of continuous improvement (p.75) have both a time and cost perspective that impacts shareholders as discussed earlier with reference to Hamel and Prahalad's thesis.

It is conceivable that the shareholders of a corporation with little access to the capital or retained earnings required to fund innovation, change and continuous improvement, are not able or interested to invest in either innovation or continuous improvement. They may only be interested in taking a short-term cash benefit rather than defer their benefit. Although a short-term cash benefit may not be in the "company's best long-term interest", shareholders are not necessarily prepared to assume that the company's long-term survival is in their best interest. Some companies are worth more "dead" than "alive" to shareholders when liquidation value of assets exceeds on-going operational value.

Although this may apply to only a small number of small to medium size companies, it does suggest that a strategy of innovation and continuous improvement is not necessarily a panacea for all companies. Innovation, as all "strategies" must be context based. Shareholder objectives, provides the context

Is the "way an organisation plans" likely to impact owner outcomes?

Much like Hamel and Prahalad, and without wishing to belabour the point, a corporation determined to innovate and continually improve will necessarily have impacts on what an organisation does and how it uses its assets and resources.

Notwithstanding that a process of innovation might create new asset capital for shareholders, it also discards or devalues existing assets by virtue of their inability to deliver the state and form envisioned by management. The dynamic of re-casting asset value and equilibrium may not, at any point in time, be to the shareholders' best interests at that point in time. Newly created assets or benefit flows, may be less than what would have been at that point of time without the changes instigated by the search for innovation and continual improvement.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

As a result of the macro perspective of his thesis, the human characteristics and foibles of management are largely not considered. The implication that one might deduce from Porter's macro view is that personnel within corporations must be prepared to accept and adopt innovation, be able to handle dynamic and ambiguous environments, and be prepared to change established mind-sets and methods of operations.

Any human characteristic that implies stability or unpreparedness to change is a barrier to the corporation innovating and improving and therefore a barrier to the corporation being competitive and "staying in business".

This view would contradict other strongly held views that suggest that the characteristics of leaders vary according to the needs of the corporation: there are times when the leader must be a visionary and agent of change, while at other times the leader must be able to consolidate and bind the corporation.

In Porter's view, there would only be one type of leader: one who can be visionary, a change agent and agent provocateur. However, leaders who try to change when consolidation is needed or try to consolidate when change is needed both threaten the strength and vibrancy of the corporation and thus threaten shareholder interests. The Porter model may thus, when applied in the wrong context, be dysfunctional to shareholders and may compromise their best interests.

John Moore


John Moore's (1993) takes an ecological view of corporations when he borrows the anthropologist Gregory Bateson's definition of co-evolution. Co-evolution "is a process in which interdependent species evolve in an endless reciprocal cycle - in which changes in species A set the stage for the natural selection of changes in species B and vice versa." (p. 75)

Moore maintains that companies are part of a cross-industry "business ecosystem" in which:

  • companies co-evolve capabilities around a new innovation

  • they work cooperatively and competitively to support new products - invest in a shared future

  • satisfy customer needs

  • eventually incorporate the next round of innovations

The key elements of the eco-system are competition and cooperation. Competition with companies and other ecosystems, and cooperation with a company's own ecosystem.

Moore also recognises that business communities are social systems in that they are made of people, choices, ideas and perceptions. A change in any of these elements changes the system.

The lifecycle of the eco-system, according to Moore has four key stages: birth, expansion, leadership and renewal or death.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

Moore offers an interesting alternative to the "company dominant" or "industry dominant" options commonly used to explain the focus of economic activity and influence.

He contends that corporations cooperate with other corporations who together share a common set of objectives and operate in the market place on the basis of enhancing their common good.

Innovation plays an important role in the eco-system, but unlike Porter, Hamel and Prahalad, one senses that innovation for Moore is an environmental and commercial option rather than an operational imperative. Because competitive eco-systems are evolving by innovating their offerings or the way they do business, one needs to consider innovation if it suits the purposes of the eco-system. There appears no proscriptive to innovate in Moore's environment compared to that of Porter, Hamel and Prahalad. Innovation for Moore, appears to be more an enabler to achieve a "greater" outcome, rather than the cornerstone of corporate strategy.

In that respect, Moore's typology is much more palatable from a shareholder perspective. However, in that Moore doesn't discuss the principal motivations of the individual corporations within an eco-system, it is hard to assess whether the eco-system, or the corporations within it, are driven by manager-centric or shareholder-centric motivations.

Moore's typology, at least at this early level of its development, could easily accommodate a diverse spread of "centricities" to explain the motivations of the eco-system constituents without seriously harming the essence of his approach. For Moore, it would matter little whether the motivation to co-join with others into an eco-system was due to the subjective assessments of management, or from an attempt to optimise shareholder benefit. The outcome of both, and the focus for Moore, is that they do co-join.

Is the "way an organisation plans" likely to impact owner outcomes?

The way that a company in an eco-system plans (or how the eco-system as an entity plans) will not directly impact shareholders. However, where a company makes planning and strategic decisions that are driven by a need/desire to optimise its relationship with its eco-system, then such a decision may have the potential to conflict with shareholder outcomes. A decision to align with another corporation may be a positive when viewed from the well-being of the eco-system, but may be disadvantageous when viewed from the shareholder as it may limit flexibility and compromise the company's ability to seek more advantageous prices or products.

What is of greater importance, is of establishing the driver that stimulates the corporation to formalise its place in the eco-system. If driven by shareholder benefit, then the eco-system may be the best means for doing so. If driven by, say, managements' insecurity about the future or inability to manage in a chaotic market, then the outcomes may be in conflict with shareholder objectives.

The conclusion that one draws here is that if membership of the eco-system is driven by shareholder optimisation, then the eco-system becomes a means to that end. When it is driven by any motivation other than shareholder optimisation, then there is the potential for shareholder interests to be compromised.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Although Moore recognises the basic humanity of corporations (p. 85), the context of this "humanity" is in relation to a company's ability to keep up with or keep ahead of its eco-system or competing eco-systems. The subjectivity of management, and people in general, can contribute to a corporation's aim or can detract from them. Aligning both is important, but in any case, is a variable that can influence outcomes: shareholder or otherwise. Intuitively, this approach appears more sympathetic to the real nature of people and the way they relate to and impact organisational outcomes.

Bromiley and Cummings


Bromiley and Cummings (1995) argue that "trust is an important variable in organisations and that trust can be used to extend transaction economics. ...differing levels of trust ...have implications for internalisation versus use of market transactions, design and application of control system, clarity and bias in communications systems, the development of inter-divisional joint ventures, and overall corporate performance." (p. 25)

The core argument of Bromiley and Cummings is that trust in organisations reduces the transaction costs necessarily incurred by that organisation. They take a fundamentally different view of the individual to Williamson (1975) who regarded people as essentially untrustworthy, self seeking and requiring to be controlled and monitored.

Bromiley and Cummings maintain that one can determine trustworthiness and that essentially behaviour is trustworthy.

The implications for organisations are many, according to Bromiley and Cummings. They maintain that a lack of trust in an organisation increases control costs; restricts change and the ability to change; demands control systems and the resources needed to manage them; reduces inter-organisational co-operation; and hinders managers in undertaking change.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

From a shareholders' perspective, Bromiley and Cummings's thesis has some important implications principally in the area of corporate governance. Shareholders who have cause to doubt the motivations (as distinct from abilities) of management are likely to insist on rigorous governance tools and techniques. The excesses of the 1980s have certainly heightened the sensitivities of shareholders to this issue.

An environment of trust between management and shareholder provides management with the context which enables them to openly and honestly canvas options, initiatives, opportunities and problems without being accused (overtly or covertly) of ulterior or self-seeking motivations. This can only happen when shareholders are reasonably satisfied that management's focus is on shareholder satisfaction rather than some other purpose.

Conversely, lack of trust generates additional activity at every level of the organisation. Management reporting systems attuned to pre-empting Board concerns or questions, or satisfying them on issues that have historically been problems involve more time, cost and resources in their preparation. The pressure to be accountable is pushed down the organisation and impacts every corner of it.

Additionally, an environment of distrust adds great pressure to Board members who are being made increasingly accountable for the performance and decisions of their management and staff.

The costs, both direct and indirect, of dealing with or accommodating an environment based on distrust is significant and will ultimately be a cost borne by shareholders through decreased profits and therefore distributions of benefits.

Is the "way an organisation plans" likely to impact owner outcomes?

A trust-based environment invests less in control and monitoring processes. As parts of the organisation feed up their planning requirements or recommendations, less checking or re-work is required in a trusting environment than a less trusting one. This generally makes planning faster, cheaper and often more flexible and attuned to the corporation's environment. The reason for this is that a less trusting organisation employs systems and processes which necessarily sanitise out of the process individual intuition and judgement. A trusting environment, is more prepared to accept the individual perspectives of its people because it accept their motivation, and based on their experience, is prepared to accept their judgement.

Naturally, there are times when such trust and faith prove misplaced. But some would argue that the cost associated with poor judgement in such cases have a lesser impact on the organisation (and shareholder outcomes) than the cost of the control systems employed in less trusting organisations and opportunities lost through not trusting the motives of the proponents of those opportunities.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Bromiley and Cummings's thesis is largely about people and their relationship with the organisation in which they work. The planning implications of the trusting corporation imply that the trusting organisation reduces transaction costs within it. This lowers the overall operational costs and complexities of organisational operations which increases bottom-line advantages to shareholders. However, Bromiley and Cummings would acknowledge that being a trusting organisation, in and of itself, is an insufficient theoretical perspective to account for and guide all organisational performance and strivings. Certainly, trust helps but is not enough by itself.

Birger Wernerfelt


Birger Wernerfelt (1984, 1985) by using a resources based perspective, explored the usefulness of analysing firms from the resource rather than product side.

He maintained that firms are generally not viewed as a collection of resources due to the difficulty in modelling them. Broad categories such as labour, capital and land are often used, but other less tangible resources (such as management skill, intellectual property and brand names) may be more difficult resources to quantify.

Wernerfelt felt that a resource view could be used to identify those resources that would lead to high profits. Strategy, according to Wernerfelt, involved the optimal exploitation of existing resources and balancing them against the cost and benefit of acquiring new resources.

In considering resources, Wernerfelt took the broad view that resources were anything that could be thought of as a strength or a weakness of a firm; included both tangible and intangible assets which are tied semi-permanently to a firm; and included efficient procedures, machinery, capital, skilled personnel, etc.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

Wernerfelt's states that "by specifying the size of the firm's activity in different product markets, it is possible to infer the minimum necessary resource commitment. Conversely, by specifying a resource profile for a firm, it is possible to find the optimal product-market activities." (p.171).

This relationship is problematic because it assumes in both cases that the firm controls or owns those resources. It appears to ignore the ability to achieve outcomes using resources owned by other corporations through such strategies as licensing, franchising, brokerage, arbitrage, etc. To assume that one is limited by the resources one owns, limits one to those resources and distracts from other market and commercial relationships that create economic outputs but which don't rely on the ownership, control and management of resources.

Shareholders of corporations which take a resource-based view of the corporation risk not benefiting from non-resource based strategies.

A further limitation of the perspective is the assumption that the outcome from the optimisation of resources is an improvement in "returns over longer periods of time". (p.172) This seems to assume that all organisational outcomes must lead to returns over the longer term. Some shareholders are more intent on short term dividend while others are focused on capital growth, asset growth, modest but very secure growth, share price growth, etc. In other words, Wernerfelt appear to have assumed for all shareholders what is good for them and assumes that the optimisation of resource usage will deliver that outcome. The reality elsewhere discussed, is that shareholders have a diversity of objectives, some of which may support Wernerfelt's view, while others may not.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

In that Wernerfelt defines "resources" as just about anything and everything within the firm, then people are included. He states that "by a resource is meant anything which could be thought of as a strength or weakness of a given firm. More formally, a firm's resources at a given time could be defined as those (tangible and intangible) assets which are tied semi-permanently to the firm... examples of resources are: brand names, in-house knowledge of technology, employment of skilled personnel, trade contacts, machinery, efficient procedures, capital, etc." (p. 172) Except for being treated as a chattel of the firm, Wernerfelt does not recognise the foibles and differences of managers except where their differences may add to, or detract from their value as an asset.

Avinoah Dixit and Danny Nalebuff


Dixit and Nalebuff (1991) take a game theoretical perspective on strategy in which they maintain that for every action there is a reaction. One cannot assume, they maintain, that when one changes behaviour, everything else remains constant. (p. 27) Therefore, strategy is about the ability to estimate/guess/predict the actions and reactions of competitors to the manoeuvres that you might make.

The essence of strategy, according to Dixit and Nalebuff, is the interdependence of players' decision. Each player needs to forecast how his current actions will affect the actions of others and his subsequent actions in turn. (p. 33)

Dixit and Nalebuff maintain that there are three core rules for behaviour in situations where players are forced to make simultaneously moves without the benefit of time or knowledge of the others' behaviour.

  • If you have a dominant strategy, then use it (p.66)

  • Eliminate any dominated strategies from consideration, and go on doing it successively (p. 69)

  • Having exhausted the simple avenues of looking for dominant strategies or ruling out dominated ones, the next thing to do is to look for an equilibrium of the game (p.76)

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

Game theory is largely a tool that does not directly impact the relationship between managers and shareholders. The tool, as with most tools, can be well applied and misapplied. Game theory presumes that the players in the "game" have an objective they wish to fulfil and the game is only the context in which elements (competitors) are managed in order to deliver the objective.

Therefore, when the players in the "game" have shareholder objectives as their principal motivation then game theory may enhance the likelihood of the outcome (assuming the game is well played and/or won). On the other hand, when managers determine the outcome of the "game" as something that is not aligned to shareholder best interest, then their shareholders may be compromised in the same way as the misuse of any management tool will ensure.

Shareholder best interests may also be compromised when/if managers play the game because they see playing the game as the objective rather than the outcome that the game delivers. In other words, managers, particularly if they are competent game players, become mesmerised with the need to out-strategise competition, even at the expense of the objective.

A good example is the adoption of best practice used in a game theory context. In this context, best practice is the way to out-flank competitors by providing a product or service that can be presented as market leaders, and which force competitors to lift their expenditure and investment in their own products/services to "keep up". However, to achieve best practice is generally expensive, risky and involves a longer term payback. As such, when shareholders would have been happy with an outcome that could be delivered without best practice, the pursuit of best practice therefore compromises their interests. In this case, management might win the battle by playing an exception game, but ultimately lose the war through the non-delivery of shareholder objectives.

A further risk to shareholders in the adoption of a game theory approach to strategy is that of seeing "everything as a game" when it may not be. Some business, market and strategy decisions will not illicit a competitor reaction - particularly when the player is relatively small, or when the market is highly distributed with a large number of players.

By adopting a "game" perspective on everything, there is a risk that management might make things much more complicated than they really need to be, or are. This may result in additional time and resources invested in collecting information and brainstorming options and possibilities, or even building contingency solutions when such solutions are highly unlikely or improbable.

Lastly, shareholders may be impacted when in the name of game-based strategic process, urgent decisions are slowed in order to "deliberate". Such deliberation may, in certain circumstances, contribute to lost opportunities or a significant opportunity cost.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Interestingly, the examples used by Dixit and Nalebuff draw heavily on the unacknowledged humanistic characteristics of individuals in making decisions. In their discussion of the examples Dixit and Nalebuff attempt to restate the game dilemmas with rules that have almost mathematical precision in their application.

Such objective discipline to the application of game theory can be accept only when objective discipline dictates when and how the tool will be used in the first place. As previously discussed, the subjectivity of management may direct the use of the tool in a way that may compromise shareholder best interest.

Another example where this might occur is in the area of performance measurement. Where a corporation is not overtly seen as working toward and delivering shareholder outcomes, it will need to find a substitute measure. Often industry benchmarks are used to determine the relative performance of players in the same industry. The relationship that a Board, CEO or management may take to competition in the industry may vary, particularly where the company needs to "defeat" the competitor so that it can "look good". Game theory will help the company defeat other players, but may not assist a company in cooperatively joining with competitors for their mutual advantage (ala Moore's eco-system). Seeing the competitor "win" will not help the company unless it can "win" by much more, in order for the outcome to be reflected in industry performance measures. One-upmanship, a basic principle of game theory, may therefore detract from a win-win situation and only allow a win-lose situation, thus potentially compromising shareholders.

Richard Rumelt


Rumelt (1991) studied the total variance in rate of return among FTC Line of Business reporting units into industry factors, time factors, factors associated with the corporate parent and business-specific factors.

His core finding was that variations in rates of return on assets across business units within an industry are much greater than variations across industries. Specifically he found that:

  • Corporate effects on return on asset variations did not exist.
  • Market share effects were negligible.
  • Industry effects did explain 20% of the variance in business-unit returns, and
  • Industry effects accounted for at least 75% of variance in industry returns.
  • Large business-unit effects indicate considerable intra-industry heterogeneity.
  • Market share appears to make little contribution to observed variations even allowing for measurement errors.
  • It is difficult to identify factors underlying the observed heterogeneity.
  • Industry returns are a poor measure of long-term industry effects.
  • Due to the random distribution of high and low-performing business units across industries, few industry Return on Assets can be identified as arising from stable industry settings.
  • There appears to be no "synergy" amongst business units related to a common corporate umbrella.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

In the discussion under Game Theory earlier, the dangers of using industry ratios as a corporate performance measure was discussed. Rumelt has strongly reinforced this view.

Managers will more readily look for explanations of performance among those areas and factors that they understand and feel comfortable with. Therefore, companies attempt to explain their performance in the context of the industry in which they operate, rather than look at ways they can improve their own corporate performance by taking a cross-industry perspective.

The experience of the writer reinforces the contention that managers are often crippled by the paradigms of operations and strategy that exists in their industry. This blinkered view seriously restricts the way they perceive their options and alternatives and therefore limits the ability of such organisations to satisfy shareholder objectives.

Rumelt's view begs the question therefore, that if one's industry is not the place from which to gauge performance, then where will such perspective come?

As will be discussed later, perhaps it is time to suggest that a new perspective is needed on the way organisations view themselves and from where they get their stimulus and bearing?

Is the "way an organisation plans" likely to impact owner outcomes?

Adopting Rumelt perspective, based on his research findings, will enhance the strategic options and alternatives available to the corporation to satisfy shareholder objectives. This assumes of course, that that is what managers wish to do. As discussed elsewhere, the adoption of Rumelt's perspective is not a guarantee that shareholder objectives will be enhanced if management have determined its own objectives. However, given the appropriate motivation, a non-industry specific perspective is beneficial for shareholders.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Rumelt's perspective does not cast any light, one way or the other, on the human aspects of managers. One aspect of the perspective that can be implied however, is that one suspects that managers will have difficulty in acknowledging that a non-industry perspective has more impact on corporate performance than their existing and historical views.

Asking managers (and Directors) to step out of their comfort zone will have a destabilising affect on them and may have a negative impact on short-term staff stability and performance - particularly as they struggle to identify issues and factors outside their own industry that may assist them. Over time, and with the appropriate change management and training programs, these issues should be overcome since they are largely transitional. Intuitively, one suspects that the most difficult areas in which to affect a change will be at senior management and Board levels, where old paradigms take a long time to change.

Jay Barney


Jay Barney (1991) examined the link between a firm's resources and sustained competitive advantage. More specifically, he examined the link between internal characteristics of a company and performance substituting the elimination of heterogeneity and immobility as possible sources of competitive advantage.

Barney argued that in general firms cannot expect to obtain sustained competitive advantage when resources are evenly distributed across firms and highly mobile. Therefore, firms must focus on resource heterogeneity and immobility to obtain sustained competitive advantage.

Barney differentiated three types of resources: physical capital (physical, technological, plant and equipment); human capital (training, experience, insights); and organisational (formal structure).

This model maintains that resources need to be valuable, rare, unable to be perfectly imitated and unable to be equivalently substituted in order for sustained competitive advantage to be maintained.

Barney contends that firms expect to purchase sustained competitive advantage on the open market. Sustained competitive advantage must be found in the rare, imperfectly imitable and non-substitutable resources already controlled by a firm.

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

There are two key issues with the Barney approach that will impact of shareholder outcomes: the reliance on assets, and ownership of them as the cornerstone of strategy; and the assumption that sustained competitive advantage (SCA) is a acceptable strategy for all companies in all cases.

The earlier discussion of Andrews' (and others') reliance on existing assets (resources) as one of the key determinants of strategy identified the ways that shareholders can be compromised through such a view. Although Barney explicitly talks about building the resources (rather than being content with what you've got) so that they satisfy the valuable, rare, imperfectly imitable and non-substitutable criteria of SCA, it assumes that the resources are owned by the company. As we have also seen in an earlier discussion, ownership of resource is a means to an end rather than an end in itself. A company may find it prudent to "outsource" certain resource requirements rather than own the resource themselves. Using someone else's resources in a strategically innovative way for example (eg though licensing, subcontracting, joint venturing, etc) may be a more effective and efficient way of delivering the sought outcomes compared to outright resource ownership, implied in Barney's thesis.

The discussion above regarding Hamel and Prahalad's model, identified the risks to shareholders of assuming the appropriateness of SCA (or any other strategic "principle"). SCA, in context, is a legitimate methodology. Out of context, if will detract from real shareholder objectives.

Is the "way an organisation plans" likely to impact owner outcomes?

There is no doubt that an acceptance of SCA as the strategic principle motivating a company, and the belief that the company must own and control all resources, will have a significant impact on the company.

How does the strategic planning paradigm handle the human characteristics and foibles of managers and board members in relation to the impact of these on owner outcomes?

Barney suggests "that sources of SCA are firm resources that are valuable, rare, imperfectly imitable and non-substitutable. These resources include a broad range of organisational, social, and individual phenomena within firms that are the subject of a great deal of research in organisational theory and organisational behaviour." (p.116)

That is about as far as he goes. The implication being that the model helps "integrate" the organisational and economic perspectives of the firm but Barney doesn't elaborate on the process of integration. Such an elaboration would identify how a resource based view of resources, particularly human resources, could quarantine peoples' subjectivity from the rigorous (and presumedly objective) assessment of resources and resource strategies.

Eugene Fama


In an Agency Theory-based approach, Fama's model (1980) explains how the separation of security ownership and control, typical of large corporations, can be an efficient form of economic organisation.

Fama sets aside the presumption that a corporation has owners in any meaningful sense. The entrepreneur is also laid to rest, at least for the purpose of the large modern corporation. The two functions usually attributed to the entrepreneur - management and risk bearing - are treated as naturally separate factors within the set of contracts called a firm.

The firm is disciplined by competition from other firms, which forces the evolution of devices for efficiently monitoring the performance of the entire team and of its individual members. Individual participants in the firm, and in particular managers, face both the discipline and opportunities provided by the markets for their services, both within and outside the firm. (p.288)

Is the strategic planning paradigm likely to impact the way managers (and boards) relate to owners/shareholders, and will this impact outcomes?

There are many issues in this model that are problematic from a shareholders' perspective.

The separation of ownership and control, for most large corporations, is a reality borne by the changing character of corporations over the last 100 or so years and in reaction to the demands and rigours of modern business. But to imply that the conventional concept of ownership should be put aside reinforces the view that the modern corporation is at the crossroads.

On one hand, boards and management argue that shareholders have generic objectives, are not fully informed, have conflicting interests and suffer from a range of other attributes all of which contribute to their "inappropriateness" in determining the destiny of the organisation in which they hold ownership. This philosophy holds that the board and management are better placed to determine the destiny of the organisation and determine the outcomes that the corporation will deliver. Shareholders who don't like the way the company is run (so this philosophy goes) can quit the registry and take up ownership elsewhere.

The contrary view held by shareholders, regulators, and certain key associations, maintains that the organisation exists solely to deliver shareholder satisfaction. As such, the organisation is the servant of the owners and all that the organisation does, must in one way or another, enable those shareholder objectives to be fulfilled or enhanced.

Examples abound of management which has taken an organisation down a particular path for a range of seemingly admirable reasons only to find that its owners either flee the registry or whose best interests are seriously damaged.

The problem with boards and management who are beholden to no one except themselves is that they have no reference point against which decisions and strategies can be assessed and determined. An organisation whose principal accountability is to itself is not compelled to maximise owner benefit or even to avoid owner harm if it believes that such a course "is not in the best interests of the corporation".

The reality of course is, that in some instances, the best interests of the owners are served by the organisation ceasing to exist (sell, merge, divest, etc). Some of the defensive corporate plays recently seen in the US and largely engineered by boards and management, were no more than attempts to keep the organisation intact demonstrably for board and management purposes rather than in the best interest of the owners.

Corporations which act in other than the best interests of owners represent diminished probability of satisfaction and imply higher risk to their owners. Investors denied access and input will feel vulnerable to the character and machinations of management. They will tend toward other forms of investment where probability of outcome is stronger and where the investor is offered greater accountability from the chosen investment vehicle and less susceptibility to the foibles of individuals.

The implications of this on the entire equity structure of the economy promises to be profound if the crossroads decision leads to organisational empowerment from owners.

Corporations must ultimately be accountable to their owners and the outcomes delivered by those organisations must be unashamedly aimed toward satisfying and/or enhancing owner objectives. It is only through the establishment and enforcement of an external accountability on a corporation that owners can start to feel some comfort (but no guarantee) that their organisation is striving to achieve that which its owners intend or want.

Is the "way an organisation plans" likely to impact owner outcomes?

To a considerable degree Fama's contention that "the firm is disciplined by competition from other firms, which forces the evolution of devices for efficiently monitoring the performance of the entire team and of its individual members", is remarkably similar to Game Theory. Like Game Theory, Fama is postulating that whichever way the market dictates "the game" then that is the way that the company should go.

As earlier noted, this is a dangerous philosophy when viewed from a shareholder perspective. The ultimate issue here is that Fama's model suggests that the market dictates a corporation's direction, and the manager dictates the way that the corporation adapts to that direction.

Fama also contends, by implication, that the market disciplines the firm and not the owners. In reality, owners represent the capital market which extracts its own toll on misdirected and poorly performing companies.

A corporation which adopts Fama's view (and there are many [most?] particularly large corporations who are sympathetic to this view) does not recognise the primacy of the shareholder despite providing lip service recognition to their satisfaction.

Conclusions and Suggestions for a new Paradigm

This paper has examined a range of diverse strategic planning views and models. It has found that while some share some common attributes, they are by no means in agreement on most issues. Some are diametrically opposed to the views of others on many issues.

What is common amongst them however, is the desire to explain all/most corporate needs through the adoption of any particular strategic view or model - a "theory of everything" so to speak.

Perhaps their (and everyone else's) inability to successfully find one strategic theory or approach to encompass all corporate strivings is because no such beast exists.

Maybe this is due to people asking the wrong question in search of the unfindable.

If one critically examines these diverse and sometimes divergent views, one nearly always finds some aspect of the proposed theory that appears strong or valid, but is invalidated by other contexts or circumstances. If we could find a strategic framework that accommodated (or confines) each view to the context in which it has relevance and utility, then perhaps we could begin to make sense of all these disparities and differences.

As a suggested strategic framework to commence this process, it is proposed that the following model be considered:

  • The existing prevailing model that a corporation's mission is derived by management and boards based on their interpretation of what is in the corporation's best interest be replaced with a model that elevates shareholder objectives to primal position in all company strivings. In other words, dispense with the notion that a corporation has a life of its own outside its owner context.
  • To do this, corporations must quantify shareholder objectives in a way that provides each corporation with an explicit set of deliverables that the board and management are responsible to deliver. These objectives would normally be against the criteria of value, benefit, growth and risk.
  • It is the role of the board and management to deliver those specific outcomes and their performance is assessed against those outcomes, irrespective of industry or competitor performance.
  • The strategies employed by boards and management to achieve those outcomes are "objective" specific. A company will choose a strategy that will deliver a specified outcome, rather than a generalist strategy not tied to specific outcomes.
  • The role for strategic theory is for the theorist to postulate strategic models which will deliver specific outcomes (ie satisfy specific types of objectives, eg. ROI, RONA, risk minimisation, revenue growth, etc) in certain environments, industries, contexts rather than try to account for all circumstances and contexts.

In this way, managers will be able to match context-based strategies with outcomes and adopt those which assist the corporate aspirations, rather than choose those strategies which caress the corporate ego (eg. best practice, innovation, quality, empowerment, SVA, etc..) and distract from the real purpose.


Andrews, K., (1980), The Concept of Corporate Strategy, Irwin

Ansoff, H. (1991), "Critique of Henry Mintzberg's 'The Design School:...'", Strategic Management Journal, Vol 12, pp 449-461

Barney, J. (1991), "Firm Resources and Sustained Competitive Advantage", Journal of Management, Vol 17, pp 99-120

Bartlett, C. and Ghoshal, S. (1993), "Beyond the M-Form: Towards a Managerial Theory of the Firm", Strategic Management Journal, Vol 14 Special Issue pp 23-46

Bromiley, P. and Cummings, L. (1995). "Transaction Costs in Organisations with Trust", in Bies, R., Sheppard, B. And Lewicki, R. (eds), Research in Negotiation in Organisations, JAI Press

Chandler, A. D. (1962). Strategy and Structure, The MIT Press, Cambridge, MA

Dixit, A. And Nalebuff, B. (1991). Thinking Strategically, Norton, Ch 1-3

Fama, E., (1980). "Agency Problems and the Theory of the Firm", Journal of Political Economy, Vol 88, pp 299-307

Hamel, G. And Prahalad, C., (1994), "Competing for the Future", Harvard Business Review, July-August, pp 122-128

Jacoby, J., (1997). "Quantifying Shareholder Objectives To Secure Effective Investor Relations", Address to A.I.C.D. conference Driving Tomorrow's Company, Sydney, May 1997

LEK Partnership, RMIT, Performance Measurement in Australia

Mintzberg, H., (1990), "The Design School: Reconsidering the Basic Premises of Strategic Management", Strategic Management Journal, Vol 11, pp 171-195

Mintzberg, H. (1991a), "Learning 1, Planning 0: A reply to Igor Ansoff", Strategic Management Journal, Vol 12, pp463-466

Mintzberg, H. And Quinn, J. (1991b) The Strategy Process, (2nd Edition) Irwin

Moore, J. (1993), "Predators and Prey: A New Ecology of Competition", Harvard Business Review, May-June, pp 75-86

Porter, M., (1990). "The Competitive Advantage of Nations", Harvard Business Review, March-April, pp 73-90

Rumelt,, R., (1991), "How much Does Industry Matter?", Strategic Management Journal, Vol 12, pp 167-185

Williamson, O. E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. Free Press, New York.

Wernerfelt, B. (1984). "A resource-based View of the Firm", Strategic Management Journal, Vol 5 pp 285-305

Wernerfelt, B. (1995). "The Resource-based View of the Firm: Ten Years After", Strategic Management Journal, Vol 16, pp 171-174

< back

| top |