The rational model in more detail

We return now to the rational model, and consider each of its elements in more detail. This chapter deals with the starting points: the organisation’s mission — its purpose, vision and values — the leaders who are responsible for strategy, and the stakeholders whose expectations any strategy must satisfy.

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1 The mission

An organisation’s mission is what it perceives its purpose to be. It could be an airline, a hospital, a chain of supermarkets or a school — but all need to know why they exist and what they are for.

It is now common for organisations to publish mission statements: short documents (rarely more than a page) that set out the organisation’s purpose and its position. A supermarket specialising in lower-cost goods and one specialising in higher-priced luxury goods will hint at those positions in their mission statements — one making reference to value for money, the other to quality and choice. Most mission statements also contain paragraphs dealing with values, culture, ethics and, increasingly, sustainability commitments.

A mission statement is both an external and an internal document. Externally, it tells stakeholders what the organisation is about. Internally, if top management genuinely pushes the stated values, employees absorb them — and staff who share the organisation’s values need less detailed supervision.

Being clear about the mission is crucial when the organisation comes to set objectives, design performance measurement systems, prioritise tasks and make long-term choices. The mission should feed through everything: how does the organisation create value for its customers? For example:

• Company A might have a mission to produce products of the highest possible quality and reliability. It should then set objectives for quality and assess performance in ways that measure quality. Long term, its strategy might rely on developing products with better performance characteristics.

• Company B might have a mission to produce products with low unit costs for customers. It should then set objectives that measure cost performance, perhaps against competitors. Long term, its strategy might rely on automation or on moving production to a low-cost environment.

• A not-for-profit hospital would have a mission emphasising health care, and this inevitably shapes its objectives, its performance measures and its long-term decisions about how care is delivered.

2 Purpose, vision and values

In addition to ‘mission’, the syllabus uses three related terms — and asks you to understand how they link to each other and to strategy:

Whether agonising over the precise wording of these terms improves performance is debatable — the mission statement will often embody all of them. What matters for the exam, and in practice, is the linkage:

• Purpose → vision. The vision is the purpose projected into the future: if we succeed in our purpose, this is what the world will look like.

• Values → both. Values constrain how the purpose and vision may be pursued. A strategy that would achieve the vision by violating the values should not survive the evaluation stage.

• All three → strategy. Objectives should be derived from the purpose; options should be generated with the vision in mind; and every option should be screened against the values. Performance measures and rewards then reinforce the same messages. When this chain is broken — targets that reward behaviour the values forbid — you get results like the Volkswagen emissions scandal in Chapter 1.

3 Who is responsible for strategy?

Strategy does not simply happen; particular people are responsible for it, and good governance defines who does what:

Governance and ethics are not a separate, box-ticking subject: they shape the strategy process itself. Governance determines who may take which strategic decisions and how they are held accountable; ethics determines which options are even considered. An organisation with a clear ethical stance will rule out certain strategies at the option-generation stage — not discover, after the event, that it pursued one it should never have contemplated. Chapter 18 develops governance, ethics and corporate social responsibility in full.

4 Stakeholders

Stakeholders can be defined as anyone affected by the organisation. It is important to know who your stakeholders are and what they want, because if stakeholders are unwilling to co-operate you may find it difficult to put a strategy into action.

Stakeholders include shareholders, employees, managers and directors, suppliers, customers, competitors, the government and the local community. They are conventionally classified as:

• Internal — directors, managers and employees.

• Connected — parties outside the organisation but linked to it by some form of contract: shareholders, lenders, suppliers, customers.

• External — government, the local community, pressure groups, trade unions, non-governmental organisations, regulatory agencies.

The important thing to realise is that what stakeholders want is often in conflict. Shareholders want higher profits; employees want higher wages. Customers may want service 24 hours a day, seven days a week; employees might want to work eight hours a day, five days a week. Customers want lower prices and higher quality; shareholders want lower costs. Regulators want compliance; employees might prefer to cut corners.

Management therefore has to try to keep most people happy most of the time, through a series of negotiations. What is the minimum pay rise that will attract and keep employees? What is the maximum price and minimum quality customers will accept before they go elsewhere? If local people are inconvenienced by our operations, what can we do to keep them onside? There are no easy answers; management has to recognise the conflicts and manage them as best it can.

Stakeholders also matter when strategies are being chosen. A strategy must be one the shareholders want to pursue — but it must also be one that other stakeholders are willing to live with. There is no point adopting a strategy that causes customers to abandon you, employees to leave, or a pressure group to generate damaging publicity.

Rather than perceiving stakeholders as nuisances (complaining customers, pernickety regulators, employees quick to take industrial action), it can be better to build alliances in which potential conflicts are subordinated to a common cause and mutual dependence:

• The company needs customers; customers need reliable suppliers they can get on with.

• Regulators are there to ensure the law is upheld. If the company dislikes the regulations, the answer is to seek change through legislation, not a stand-off with the regulator.

• The company needs to attract and retain good employees; employees want work that pays reasonably, offers decent conditions and holds out the hope of advancement.

None of this means a company should immediately give in to every demand — only that managed relationships beat running battles.

5 Mendelow’s matrix

The standard tool for analysing stakeholders is Mendelow’s matrix. It classifies each stakeholder on two dimensions:

• Power — what the stakeholder can actually do to the organisation. Power can come from being a large shareholder, from the operation of law (government), from charisma (the head of an influential pressure group) or from financial muscle (a major customer).

• Interest — how likely the stakeholder is to act: how active or passive they are. High interest means the stakeholder will create a fuss if displeased with what the organisation is doing.

• Key players (high power, high interest). Management really needs to keep these people happy: they have the power to act and the willingness to use it. They can stop a strategy in its tracks, so their needs must be central to strategy formulation. A highly unionised workforce, or a government closely interested in the industry, can be a key player.

• Keep satisfied (high power, low interest). These stakeholders have plenty of power but are unlikely to act — perhaps from habit, or for professional or ethical reasons. Give them enough to keep them onside. Beware, though: treat them too badly and you provoke them into becoming key players. Historically passive bank customers, for example, will eventually switch banks if pushed far enough.

• Keep informed (low power, high interest). They cannot do much directly, but they are vocal and engaged — pressure groups are typical. Keep them informed: it is courteous, it maintains dialogue, it can correct exaggerated fears, and it matters because they may influence key players to act on their behalf.

• Minimal effort (low power, low interest). These stakeholders can largely be left alone — they come last in the queue for management attention.

Two cautions. First, positions in the matrix are not fixed: stakeholders move between quadrants as circumstances change, so the analysis must be refreshed. Second, the matrix analyses stakeholders one at a time; in the networks and platforms introduced in the next chapter (and developed in Chapter 7), participants are interdependent, and stakeholder analysis has to consider the health of the whole ecosystem, not just each player’s power and interest.

6 Test your knowledge

Two short exercises close the chapter in the online notes: ten flashcards on the terms and frameworks above, and ten practice questions with worked feedback on every option. Work through the cards first, then the questions.