technology in business

How Managers’ Everyday Decisions Create or Destroy Your Company’s Strategy

by Joseph L. Bower and Clark G. Gilbert The Idea in Brief Top leaders’ formal strategies determine how business gets done in your firm—right? Wrong, say authors Joseph Bower and Clark Gilbert: It’s other managers’ decisions about where to commit resources that really drive strategy. Sometimes these choices support corporate plans. Other times, they don’t. Who’s Driving Key Decisions General Managers translate broad corporate objectives into specifics that operating managers execute. They also define plans, programs, and activities they believe are essential for their division’s performance. Then they decide which proposals to send upward for corporate review. We are using the GM-Opel Case to show the way they translate strategy—and the proposals they choose to present—may or may not align behind the enterprise-level strategy. Operational managers make choices that either support the company’s high-level plans or contradict them—as our Case of Toyota Echo reveals. Senior executives overlook these managers’ impact at their peril. Bower and Gilbert identify four key players in resource-allocation choices: Customers can powerfully affect strategy. Example: Newspaper company Knight Ridder redirected its corporate strategy to focus on the Internet. But existing advertising customers in the newspaper business shaped how actual strategy was carried out. These advertisers weren’t interested in online ads, so sales reps kept selling them traditional print ads. Result? Knight Ridder had difficulty tapping into the new revenue stream. Capital markets can dramatically reshape corporate strategy. For instance, earnings pressure causes a company to exit a new market too soon. Or a dip in stock price compels a firm to sacrifice long-term strategy for short-term fixes that improve immediate performance. Actively Manage Resource Allocation Understand the people whose names are on the proposals you read. When you read a proposal to commit scarce resources, calibrate what you’re reading against the track record of the proposal’s sponsor. If he or she has a near-perfect record of proposals implemented, there’s probably little downside to approving the request. Make sure managers address the strategic issues. In evaluating requests for resources, spend more time discussing the question “Should we support this business idea?” with managers than examining the question “Is this proposal the best way to implement the idea?” Also，it is important to connect the dots for managers. Frame questions about resource allocation in ways that reflect the corporate perspective. Meet with division managers together and ask, “What’s best for the company?” This is especially important when large sums are involved, conditions are highly uncertain, and multiple divisions are involved in the strategy question under consideration.

1-How Strategy Gets Made, and Why A somewhat longer case story will help illuminate the connection between resource allocation and corporate strategy. It involves Lou Hughes, who took over as chairman of the executive board of Opel, General Motors’ large European subsidiary, in April 1989. Just seven months later, in November 1989, the Berlin Wall came down, and shortly thereafter, Volkswagen, Germany’s number one automobile producer to Opel’s number two, announced a deal with East Germany’s state automotive directorate to lock up all of that country’s car manufacturing capacity and to introduce an East German car in 1994. A corporate view of strategy making in response to the tectonic crash of the Berlin Wall would have Hughes’s staff gather information to be relayed to corporate staff, who would then develop a plan that fit GM’s overseas strategy. (At the time, this strategy was to make cars in large, modern, focused factories in low-wage countries such as Spain). The plan would be debated and then possibly approved by the board of directors. The process might take a year—especially since very little concrete data was available on the East German market, and East Germany was still a sovereign country with its own laws and currency guarded by 400,000 Soviet soldiers. Instead, Hughes did as an energetic, entrepreneurial manager running a large subsidiary in a foreign country would do: He worked vigorously to secure a place for Opel in the East German market, in ways that did not fit with corporate strategy and would not have been approved by corporate planners. Rather than waiting to gather data, he created new facts. Acting on an introduction from an Opel union member to the management team of one of the directorate’s factories, Hughes negotiated the right to build new capacity in East Germany. He allowed the local factory leader to publicize the deal, induced then-chancellor Helmut Kohl to subsidize the new plant, and drew on talents from other operating divisions of GM to ensure that the facility would be state of the art. GM Europe and corporate headquarters were kept informed, but local decisions drove a steady series of commitments. Despite the apparent contradiction between Opel’s plans and corporate strategy, Hughes proposed the commitment of resources, and his proposal was approved first by the European Strategy Board and then by the corporation. Top management (over corporate staff’s objections) endorsed Lou Hughes’s bottom-up action—and his vision for the future—because he was the local manager, because he had a good track record, and because he was thought to have good judgment. It was more an endorsement of Hughes than of his plan per se. Does the Opel case demonstrate how resource commitments shape strategy, or is it just an example of an organization out of control? Traditionally minded strategy planners may assume the latter. In fact, the Opel story highlights what we have found to be near universal aspects of the way strategic commitments get made. These fall into two categories： 2-Organizational structure The fact that, at any company, responsibility is divided up among various individuals and units has vital consequences for how strategy gets made. Knowledge is dispersed. For any given strategic question (such as how Opel should enter the East German market), relevant expertise resides in scattered, sometimes unexpected parts of a corporation. When the wall tumbled, managers in the West understood almost nothing about the East German market. The first GM managers to develop any useful knowledge, not surprisingly, were the ones on the spot: Opel’s marketing staff. Meanwhile, the GM employees with deep knowledge about lean manufacturing techniques, which would be needed for the new venture, were in California and Canada. Those with the deepest knowledge of overseas strategy and profitability overall were in Detroit, Michigan—but European strategy was developed in Zurich, Switzerland.

Power is dispersed. Lou Hughes’s formal authority was limited. He could fund studies and negotiate with East German counterparts, but he could not command his manufacturing director to work with California, nor insist that California work with Opel. The right to approve a plant in a new country lay with the board of GM. For permission to present to the board, Hughes would need to go through GM Europe; in addition, financial and other corporate staff could (and would) provide evaluations of their own. Nonetheless, Hughes’s negotiations with the local factory manager and Helmut Kohl could virtually commit GM. Roles determine perspectives- Miles’s Law—the notion that where you stand is a function of where you sit—is central to how strategy gets made in practice. All the managers who would need to cooperate to make an East German initiative possible had different sets of responsibilities for resources and outcomes (like specific levels of sales by model and in total) that shaped their perspectives about what success in a new, eastern European market would look like and what it would be possible to achieve. They all considered a different set of facts, usually those most pertinent to success in their individual operating roles. Hughes’s triumph was to convince a group of managers with limited authority that they could deliver on a radical idea. 3-Decision-making processes. Just as important, the way decisions are made throughout an organization has vital consequences for strategy. Processes span multiple levels; activities proceed on parallel, independent tracks. The notion of a top-down strategic process depends upon central control of all steps in that process. That level of control almost never exists in a large organization—quite the reverse: At the same time that corporate staff is beginning to plan for and roll out initiatives, operating managers invariably are already acting in ways that either undercut or enhance them. Hughes was developing a strong relationship with Helmut Kohl and obtaining funding for a new East German plant even as GM’s corporate staff was looking over sales forecasts and planning GM’s next moves in Europe: focused factories in countries that probably would not include East Germany. At the same time that corporate staff is beginning to roll out initiatives, operating managers invariably are already acting in ways that either undercut or enhance them. 4-Who’s in Control? A leader can announce a strategy to become global, change core technologies, or open new markets, but that strategy will only be realized if it’s in line with the pattern of resource allocation decisions made at every level of the organization. 5-General managers. Strategic decisions are critically affected not just by senior corporate managers, but also by midlevel general managers, their teams, and the operating managers who report to them. These intermediate-level general managers run the fundamental processes that make multi-business, multinational companies feasible. They are general managers who report to other general managers. Their jobs involve translating broad corporate objectives such as earnings and growth into specifics that operating managers can understand and execute on. They provide corporate management with an integrated picture of what their businesses can accomplish today and might achieve in the future by determining the package of plans, programs, and activities that should drive the strategy for that business. One of the most obvious ways that these managers in the middle affect strategy is through their decisions about which proposals to send upward for corporate review. One top executive we interviewed communicated his surprised realization of this role: “One fascinating moment came as

I met with a key midlevel manager. I had mapped out on a piece of paper the resource allocation process and its effect on the intended and emergent strategies. As we talked, this manager proudly told me that he was the one who set the strategy, not the CEO or board of directors. According to him, he owned the resource allocation process because his boss, who was president of the largest business unit, would not approve anything without his recommendation.” 6-Operational managers. Most strategy analysts ignore the role operating managers have on strategy outcomes, assuming that these managers are too tied to the operational requirements of the business to think strategically. Senior executives overlook the very real impact of operating managers at their peril. Let’s study another typical case - in 2000, Toyota launched the Echo, a no-frills vehicle designed partly to protect Toyota from low-cost competition. But deep inside that organization sat salespeople in local retail operations. Because margins (and, more important, sales commissions) were higher on other Toyota vehicles, customers were repeatedly steered toward higher-priced models. Even though the corporate office placed a high priority on the new product, the day-to-day operating decisions of the organization directed the realized strategy of the firm elsewhere. How to avoid such scenarios? Understand who’s driving resource-allocation decisions. For example, is a division manager only sending you proposals for projects that will expand his turf? Is an R&D manager giving a large customer too much say over product development decisions? Then step in as needed: Prompt unit managers to ask, “What’s best for the company?” (not their divisions). Form cross-divisional teams to discuss strategic options. By managing your company’s resource-allocation process, you align bottom-up actions with top-down objectives. And you drive your company in the right direction. From the Toyota-Echo example, one might conclude that operating managers (salespeople, in this case) constrain innovation because they are not aligned with the strategy of the firm. However, operating managers can redirect and improve strategy in very innovative ways. Manage It Anyway! The implication of these six recommendations is really a meta-recommendation. Once you realize that resource allocation decisions make your strategy, then you know you can’t rely on a system to manage the resource allocation process. No planning or capital-budgeting procedure can substitute for the best leaders in the company making considered judgments about how to allocate resources. No system of incentives will align divisional objectives so that new opportunities will be studied with the corporate interest in mind. Because of its impact on strategy, the corporate senior management has to engage itself—selectively, to be sure—in the debates that mark inflection points in the process.