Bioss

Value Appreciation

The essence of strategic leadership is to take responsibility for the whole and for its future. But strategy holds different meanings for different people: for some it is cost efficiency, for others responsiveness to external/internal relationships. At first glance these can seem irreconcilable so that leaders must choose one or the other. A second glance shows glimmers of a way forward. The third glance is a graphic summary of what can be done.

First glance: irreconcilable?

Leadership has been described as a paradox of strategy [1]. The purpose of strategy is to identify and sustain competitive advantage in the communities and markets an organisation serves both now and in the future. Some people see strategy as the 'vertical synergy' of cost efficient operations, others as the 'horizontal synergies' of being responsive to - even proactive towards - relationships and external opportunities.

Vertical synergies are concerned with economics, costs, structures, overheads, namely those aspects of organisation that need constant attention and adjustment in order that the organisation can operate efficiently and create wealth. This strategy makes sense in a business where cost leadership is the prime lever to compete.

In considering vertical synergies it is important to be aware that all cost carries two dimensions:

  • it is deductible from revenue and thus reduces profit - at the extreme lie costs that are wastes in that they do not result in any benefit.
  • it is an essential prerequisite to generate profit earning revenue - at the limit lie the high return investments that create value.
A comment by the chairman and chief executive of a bank illustrates: 'Being efficient is a permanent part of life, and the programmes to contain and reduce costs will continue over the next two years.... Costs are the bedrock on which returns ...... manifest themselves.'

By contrast horizontal synergies are concerned with issues of quality, being responsive to market needs, providing a service, being sympathetic to the requirements of customers and other agencies externally and to staff and management internally. Horizontal synergies require a consultative management style, effective teamwork, open dialogue and an attitude of sharing and co-operation, in order to be responsive to shifting external demands.

Why pursue a horizontal strategy? Because the organisation is competing on service and quality as well as price and margin.

So how can the leadership of an organisation control costs and prune expenses, and at the same time promote external and internal environments of relationships, trust, co-operation and high levels of customer satisfaction? How can they cope with the fact that the intangible cost is almost always greater than the tangible, easily calculated expense? How balance the shorter-term need to contain costs with longer-term considerations of research and relationships?

It could be argued that top management can lead effectively but separately for costs and relationships. But the alternative pursuit leads to a gap in leadership that can be filled by strife, tension, fundamental differences of view concerning the future, buck passing upwards and people losing sense of responsibility for their leadership role. Left unaddressed, the gap widens (see graphic below)

Synergies

An analyst's comment re BA is a good example - 'Had BA's cost cutting zeal not led it into a damaging and morale sapping dispute with its cabin crew, then perhaps standards of service, customer satisfaction and hence profits would have held up better.'

Second glance: a way forward?

Two other authors argue for 'the genius of the "and"' - controlling costs and investing in relationships [2].

They studied 18 corporate companies that had outperformed the US stock market by a factor of 15 since 1926. The most interesting finding was that 'maximising wealth' or 'profit maximisation' were not the dominant driving force or the primary objective through the history of these companies. The companies seek profits and are equally guided by values and a sense of purpose beyond making profit. To discover this purpose companies ask themselves - 'Suppose we had not created this company? What would the world lose? What would we lose?' And they answer those questions in a way that is valid for now and for a hundred years hence.

These companies appear to have found a way of going beyond the apparent paradox of vertical and horizontal synergies to hold together cost control and quality, service, responsiveness to customers. And they have done that by taking full account of people's need for guiding values and a sense of purpose that gives meaning to their work.

Third glance: sustaining and

Successful organisations do not brutalise themselves with the tyranny of 'or' - they embrace the genius of the 'and'. Slippage into either/or can be minimised by sustaining the and at each level through coherent leadership. At any level, and can all too easily slip into either/or: costs or quality, today or tomorrow, efficiency or purpose, costs or people. Either/or seems to be the default state for human nature: 'This is urgent/appealing, that's where I'll put my energies for the moment. That's less urgent/attractive, I'll put it aside for now.'

Sustaining and in the face of these strong tendencies to go for one or the other depends on each person using his or her best judgement in the light of their coherent understanding of purpose. People at all levels will use their judgement to make robust decisions when they are treated as people - makers of decisions and of meaning. Their judgements release the energy and agility needed for performance and for sustainability.

Coherence provides the touchstone for confident and competent judgements about the dilemma of costs and relationships. Coherence clarifies the conditions for review and thus viability and is key to reputation.

The graphic below shows the and at each level and the conditions of coherence, judgement and review that sustain and and minimise slippage into either/or.


(Click here to view larger image)


Level 1
with its theme of quality is the key level for cost reduction - achieved through individual judgements about using individual skills efficiently, in-process problem-solving, routine operating, controlling waste and producing what the client sees as good quality.

A supervisor within this level extracts and controls costs by for example:

  • deciding which work has priority
  • making sure that the specific type of work is within the capacity of the person and/or the equipment
  • improving methods to overcome specific difficulties
Taking responsibility for working capital includes attention to waste/rework, proper use of self and tools, attention to stocks, debtors, creditors. And responsibility for providing information to level 2 about wastes/slacks/customer needs/difficult debtors, obsolete stock.

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Level 2 with its theme of service is the key level for exercising cost control via lower cost options. Technical/professional staff and first line managers can control costs to produce/serve. These people are both valuable and vulnerable: they hold a delicate threefold balance between the best possible response to each situation, customer, employee, supplier and the cost and feasibility of that response and the core purpose of the organisation.

Some of the resources to be managed and thus the costs that can be controlled at this level are:

  • the time of people working at the first level, their skills and allocated equipment
  • the most effective use of the time of supervisors and contractors - a very important factor in cost control
  • a stock of material to care for and make cost conscious choices about (it is helpful if each manager is aware of the costs of the capital s/he is deploying).
Managing working capital includes sales forecasting, production planning, distribution planning, purchase planning, setting norms within the area. Helping people at the first level understand the impact of process on working capital; communicating norms/plan; signalling to level 3 cross-functional opportunities/difficulties in the supply chain.

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Level 3 with its theme of practice is the key level for ensuring cost effectiveness. The efficiency of the entire organisation depends on how effectively and economically resources are deployed at this level. While people at Levels 4 and 5 can set a framework for the use of existing resources, they cannot make those decisions that produce maximum efficiency in practice. Practice holds technical and people excellence together in the face of pressures that can turn an operating unity into a machine for controlling costs. Cost effectiveness is achieved by maximising cost/benefit ratio, recognising that every necessary expenditure inherently acquires a degree of waste or extravagance and ensuring the continuous work of 'cleaning up' that keeps this 'fat' out of Levels 1 and 2.

The resources to be managed - and thus the controllable costs - at this level include a set of people, equipment and premises and managers:

  • control budgets that relate directly to the flow of work, but only in exceptionable circumstances, vire between budgets
  • deal with fluctuations in workload and staff availability
  • introduce new methods, train staff and control costs of extra staff time, contractors, consultants.
In managing working capital people at this level set and deliver NWC norm for their unit, align NWC to business plans and Ebitda, optimise between processes. To Level 2 they communicate norms and information about the General Manager's costs and budgets. To Level 4 they communicate forecasts, trends and best practices.

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Level 4 with its theme of strategic development is the key level for developing value control. The emphasis shifts from costs incurred to value created in the marketplace. Strategic development creates value, releases latent value, removes value destruction and positions for the next three to five years. Value control includes targeting return on investment for a specific business or market segment, forecasting market/technology trends in the medium term, building and leveraging internal capability for competitive advantage.

One of the intrinsic vulnerabilities of this work is that it can be perceived as concerned only with figures, with no consideration for people. While management of costs is focused on the economics and not the techniques or the people aspects of production, the art of leadership is to convey an appreciation of what everyone is doing, while holding rigorously to a quantitative analysis of activity. When there is a heavy emphasis on cost management it is especially important for managers to create conditions that are seen to take account of both costs and people (inside and outside the organisation) so that Level 3 and Level 2 managers are strengthened to deliver the cost efficiencies only they can deliver.

The management of resources and control of costs must take detailed account of what might be done, as well as what is actually being done. Resources therefore include both the most concrete objects such as plant - and the most intangible - such as loyalty and goodwill. They include both what is most convertible - money - and what is least convertible - the business environment.

Detailed budgets are a primary tool. Costing and monitoring are absolutely essential because of the responsibility for balancing established and new operations. Without them, planning will become unrealistic, and implementation will get out of hand. The amount of unexpected variations over a year must also be managed and this requires defined powers of virement between budgets. Level 3 managers need to be supported by Level 4 setting policies and priorities, and controlling costs tightly.

Management of working capital tracks future trends of NWC in the context of the cost of and policy on finding it.

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Level 5 with its theme of strategic intent is the key level for enhancing value potential e.g. targeting value added growth, choosing and creating the product/market portfolio, foreseeing future trends in the industry and the corresponding economic value chain, identifying new entry and exit opportunities etc.

This level is the source of integration (or separation) of the vertical and horizontal synergies, and the coherencies and reviews needed to sustain individual judgements about and at each level.

The management of resources - and therefore the costs that can be controlled - includes:

  • controlling i) all capital and revenue expenditure, ii) reserves, and iii) limits to virement
  • monitoring and safeguarding existing capital assets
  • ensuring the development of a proper budgetary structure and financial regulations for the organisation as a whole.
Management of working capital becomes responsibility for adding economic value to the business as whole.

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At Level 6 the theme is corporate citizenship; this is the key level for building and sustaining the goodwill that generates confidence in all stakeholders - by balancing value with consistent standards a quality dimension is added to the monetary. Goodwill sustained and enriched through generations eventually becomes something like 'faith' - the essence of long-term reputation.

Where this level is in place, it is the source of core purpose and values, and of sensitivity and responsiveness to cultural, political, economic and religious differences. It creates and tends the Governmental and other relationships that frame the industry and provide its 'license to operate' for now and for the next twenty years.

The management of resources at this level includes:

  • overseeing profit and loss in a number of strategic business units and assessing their overall value
  • ensuring that there is transparency and reliability of information for investors, analysts and the market
  • assessing the needs of each strategic unit for increase/decrease in investment in light of long-term strategy
  • developing new businesses through acquisition, joint venture etc and embedding them in host cultures.
  • considering the portfolio from financial, socio-economic and geopolitical perspectives to judge priorities for investment.
Leadership through Value Appreciation

Leadership ensures that viability and reputation are sustained through coherence, review and individual judgements about and at each level. Judgement, coherence and review are in turn, sustained by tasking, trusting and tending. Trusting and tending ensure the coherence that people need to sustain their belief that the work is important. Trusting entrusts people with core purpose, tending keeps that understanding alive through communication - the outcome is a shared, coherent understanding of purpose so that every detail and decision is an expression of it. Tasking and trusting allow judgement to be exercised: tasking sets the limits, trusting encourages each person to use their judgement. Tasking and tending ensure review: tasking prepares for review by establishing completion times, tending prepares for review by keeping systems, practices and people heading in the right direction at the right pace and setting the tone for learning.

Leadership

The Optimal Tripod

© Gillian Stamp


Notes
[1] A. Kakabadse and N. Kakabadse, The Essence of Leadership, International Thomson Business Press, 1999.
[2] J. Collins and J. Porras, Built to Last, Century Business, 1996.