Management theorists suppose that top management has different motivations and firms’ shareholders. They claim that management strives to maximize shareholder wealth but management’s strategic decisions are subject to the discipline of the capital market. From their perspective management’s choices are directed by the corporate rate of return on investment compared to the cost of that capital in the public markets. Some critics suppose that the top managers in these large, mature companies seek to minimize their dependence on the external capital market. Top managers work to make their companies financially self-sustaining. Thus their goals reflect the characteristics of an internal capital market in which the demand for funds reflected in growth objectives must be balanced against the available supply provided primarily by retained earnings and secondarily by that borrowing available on a true arm’s length basis. These top managers are not involved in investor reactions and expectations. Thus, top managers reach choices that also assure that they will maintain or enhance their position in their product markets as well as meet the expectations of their fellow employees for stability and growth in career opportunities.
According to Arogyaswamy and Simmons (1993), top managers are influenced in their decision-making by short-term considerations. They believe that this short-term orientation has led to the competitive inferiority of many companies. In addition, there are some pressures on management for quick results, top managers are primarily concerned with long-term corporate survival. In those instances where they have failed to adapt their company’s strategy to a changing competitive environment, the explanation lies not in a short-term focus but rather in their inability to read environmental trends accurately or in their adherence to traditional beliefs about consumer preferences and competitive practices (Cronqvist et al 2001).
These beliefs are often a major barrier to strategic change because top managers have become so emotionally committed to them that they are unwilling—or unable—to alter practices that have been successful in the past. Events that transform the conditions under which a particular industry or firm operates are therefore difficult to accommodate (Cronqvist et al 2001). These weaknesses can come in many guises, including foreign competition and the rise in raw materials costs. Companies and even some industries can experience a period of stagnation, as their corporate leaders struggle with the constraints of their beliefs to fashion strategies that will promote recovery. Consequently, Rumelt (1974) argues that the ability to manage these psychological constraints is an important key to the success of individual companies and to the economy as a whole. Another popular misconception concerns the place of diversification in corporate strategy. The facts are often different, and diversification can be an essential part of a good corporate strategy. All but one of the companies studied had undertaken some diversification into different industries. Moreover, many of these firms had moved into new international markets as well. In both cases, the logic behind such decisions is the same. In the main, these choices reflect top management’s clear recognition of the organizational vulnerability created by excessive dependence on single products, markets, or technologies. Such choices seek to assure that the corporation will survive even as industries mature and decline.
Following Fred (1980) top managers have to weigh the economic factors in a decision and make a logical choice. From this perspective, major changes in strategy are effected easily and rationally, in one fell swoop. But once again we have found a very different picture. Major shifts in strategy do not occur suddenly or rapidly. On the contrary, the process of strategic change is basically an incremental one, and each step is relatively small. Thus it takes many years for the management of a company to achieve major strategic changes. Moreover, strategic decisions are not the product of simple economic logic alone. Because these decisions often depend on forecasts of future events, they involve considerable uncertainty and ambiguity. To analyze these complexities top managers draw upon their experience and judgment—a judgment that has been shaped by the shared beliefs passed on to them by their predecessors. Thus to some extent, their decisions always reflect nonrational considerations, because they have been filtered through their belief systems (Cronqvist et al 2001).
In some situations, the executives can be more risk-averse because of emergency situations and environmental changes. Operating within the limits of their unique belief system, corporate managers strive, with varying degrees of urgency, to relax the objective constraints imposed on them: to minimize the potential for dominance by major constituencies; to increase the potential for managerial discretion; and to assure personal and corporate success. This means top managers are trying to be as financially self-sufficient as possible to reduce their dependence on the capital market. They are seeking diversification to reduce their dependence on one industry. Executives try to develop a committed and loyal employee force to minimize the chance of dominance from this quarter. The specifics of these choices vary among the twelve companies studied because of differences in objective and psychological constraints. The final objective is the same: to assure the perpetuation of the enterprise to which these managers have dedicated their lives. These conclusions are derived from an empirical study of twelve mature, successful industrial companies (Cronqvist et al 2001).
Rumelt (1974) and Warner (2001) portray that in some organizations the top managers make almost all decisions themselves, after listening to the advice of subordinates. In other firms, the decisions are more clearly the result of a consensus among the senior officers. Yet in all these organizations critics find a core group of about seven senior managers involved in working together and with the top manager to shape corporate direction. Subordinate managers, board members, major stockholders, and past senior officers are all consulted from time to time, and they do have an impact (Culp, 2001). However, the corporate managers are the men who have the final say. Several historical trends have led to the emergence of corporate management as distinct from subordinate levels of operating general managers. One was the establishment in most large companies of a multidivisional organization structure. This organizational form has its genesis in strategies of diversification and geographic expansion that date back fifty years or more. As separate divisions are created, a corporate office also becomes necessary (Culp, 2001).
There are also striking differences between the common view of the way in which strategic choices are made and the actuality. Usually, it is argued that strategic choice is and should be an entirely rational matter: As top managers work within these objective constraints to choose goals and strategies to accomplish them, they also encounter a psychological constraint—their own beliefs (Gallagher and Nadarajah 2004). These beliefs, which evolve into an interrelated system throughout the history of each company, provide the managers with a shared commitment to a vision of their organization’s distinctive competence, the risks they are willing to take, and the degree of self-sufficiency they desire. As a result, these beliefs are themselves a powerful constraint on the options the executives will consider and the decisions they make makes clear. In fact, these beliefs can be so powerful a constraint that top management may miss opportunities presented by actual or potential changes in the objective constraints (Fred 1980).
For many years the corporate managers of a large and successful manufacturing company, operating in an energy-intensive industry, had allocated capital in a highly decentralized manner. Divisional managers are encouraged to accept responsibility for their own investment decisions, and they usually obtained whatever funds they requested from top management (Fred 1980). Profitability is such that all funding requirements could be met with very little dependence on long-term debt. The capital market constituency expects corporate managers to preserve and enhance the private wealth that it has placed, at risk, under their use and control. Because they have the opportunity to impose their expectations through their loan covenants, lenders have greater assurance that their wealth will be returned intact. Shareholders, on the other hand, must rely more heavily on management’s discretion and ability to represent their interests appropriately. Their wealth is directly enhanced or diminished by actual transfers of funds under management’s control. They are affected indirectly by changes in investor expectations based on corporate performance in relation to market value. In brief, they benefit from maximizing the increase in personal wealth per unit of corporate investment consistent with a defined level of risk (Arogyaswamy and Simmons 1993).
The organizational constituency includes the corporate managers who organize and direct the complex, day-to-day process of producing and delivering a product or service to a mass market as well as their employees (Fred 1980). Their principal goal is the preservation of a secure, dynamic, stimulating, rewarding career environment. Normally this means the continuity of the existing organizational power structure and chain of command as well as freedom from outside interference or control—that is, the preservation of the organization as they all know it. In addition, it also implies continuing growth to improve job security and provide upward mobility for all employees who seek it. Unlike the product and capital market constituencies, which tend to view any single business as one of several, or many, vehicles for satisfying their needs, the organizational constituency is more likely to have an exclusive commitment to the long-term future of the enterprise—whatever that future may hold (Rumelt, 1974).
In contrast, stockholders cannot withdraw funds already invested without management’s cooperation, and they may even find it difficult to refuse to make the further investment if called on to do so. Well-organized stockholders can put pressure on management in other ways (Warner 2001). They may express their displeasure by selling the stock, thereby depressing the market value. They may choose to stay and fight, by initiating a stockholder suit in order to try to change management behavior. Most ominous of all, they may prove willing to cooperate with an outside individual or corporation in a takeover bid or a vote to change the composition of the board as a means of changing top management (Rumelt, 1974). The needs of the product market are well known to management, for their day-to-day cooperation is vital, and management is highly sensitive to evidence of dissatisfaction. Customers, suppliers, union members—all can choose to end their association with the enterprise at any time, limited only by contractual commitments if any. However, this option does depend on the existence of more attractive alternatives. Thus the product market’s primary discipline lies in the existence of active competition to the firm’s activities and the firm’s need to match or exceed the competition in quality, price, wages, and all other terms of production or service. In this context, nothing in an enterprise is more powerful, persistent, or persuasive than its standard of performance relative to its most successful competitor. In considering the organizational constituency, this study does not distinguish sharply between employees and the members of top management. At times their priorities may differ, particularly if a new chief executive officer makes significant changes in the company’s direction (Warner 2001). However, most CEOs and other corporate executives are long-tenured, as we have seen, and they share a strong bond of self-interest with the organization as a whole. Speaking generally, therefore, top management’s own self-interest lies first and foremost with the organizational constituency, even though the managers’ position requires that they arbitrate among all constituent priorities. From top management’s day-to-day perspective, strategic turning points are infrequent and indistinct, except perhaps in retrospect. Rather, top managers are engaged in a long series of choices and decisions that over time may add up to a significant change in strategic direction. In this sense, even major change is an incremental process (Williams et al 2005). True, on occasion, there are dramatic management crisis points or significant board of directors’ meetings. Often these events ratify the results of many informal discussions and decisions that have preceded them. They are the milestones that mark the achievement of countless forgotten steps (Arogyaswamy and Simmons 1993).
In order to improve the situation, they establish a sense of corporate identity, uniqueness, and legitimacy. They provide unity of purpose across a competitive organization and built consensus. They inspire and motivate management, set targets, and deadlines, and provided the basis for rewarding accomplishment. They set boundaries on management’s strategic choices and guided new initiatives. They set uniform standards for allocating scarce resources among competing demands. And they were used by vigorous and ambitious leaders to assert their leadership, to signal necessary changes in direction, and to stake out their territorial prerogatives within the firm and outside it (Williams et al 2005). Management’s financial planning records provide a more reliable source of evidence of real intent, however. In essence, these documents allow us to listen to the private communications of trusted colleagues as they discuss one of the most sensitive elements of corporate achievement—the management of scarce financial resources.
Another improvement should take place in schedules and responsibilities of top executives. Corporate managers’ working days start early—often with breakfast meetings—and they usually continue for ten or twelve hours. Many, if not most, of those hours, are occupied by unending series of meetings with colleagues and subordinates (Williams et al 2005). Such breaks as occur come from the need to attend to other responsibilities: meetings with government officials, phone calls and mail, speeches to employee audiences, or trade associations. Nor do the evenings and weekends provide much respite from these responsibilities, for corporate issues follow the managers home in the reports and memos that fill their well-stuffed briefcases. Thus throughout their demanding days, the strategic choices that are our focus are never very far from these executives’ minds. However, their comments also indicated some of the challenges that had to be met if they were to achieve the corporate survival they desired. Perhaps the most obvious of these is the need to maintain their independence from interference by dissident stockholders and avoid unfriendly takeovers (Wright and Robbie 1999).
Inevitably the effects of these changes were felt throughout the financial goals system as well as incorporate strategy. For one thing, such surges in investment are often accompanied by a near-term decline in the rate of return on investment, as the denominator increases immediately while the numerator does not. For another, the demand for funds puts pressure on the rest of the system as management increases debt, reduces dividend payouts, or shifts funds, at first instinctively, to balance the cash flow and later perhaps as they reexamine established beliefs. Significant changes in the organizational constituency will also affect management’s goals and strategy (Wright and Robbie 1999). The most visible of these occur when a new person becomes the chief executive, the chief financial officer, or a key member of the top management team. Obviously, such a change in individual officeholders does not by itself predict a change in financial goals or strategy, given what we have said about the corporate belief system and executive selection from within. In fact, even new men from outside the company will not necessarily ensure such sweeping changes, although they are more likely to make them and may have been chosen for exactly that purpose. However, new personalities inevitably do bring some new perspective, and sooner or later this may be reflected in the goals they emphasize (Arogyaswamy and Simmons 1993).
In sum, from this evidence about fundamental change in belief systems it is clear that the reshaping of corporate direction involves reshaping the underlying belief system. Basic changes in corporate strategy can and do happen; but they require a long lead time, a great deal of excellent administrative leadership, and above all, a shared personal conviction that the survival of the firm is the critical goal. Indeed, this last is the single most important element in top managers’ willingness to undertake the process of redirecting their corporate strategy. Even cash shortages may be insufficient to challenge management’s beliefs in a fundamental way. Instead the executives’ first response is likely to be an incremental change in beliefs and strategy. More systematic restructuring will come only when a number of such events and circumstances occur at the same time and so persistently that the corporate managers feel a clear and unequivocal discontinuity with the past.
References
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Wright, M., Robbie, K. (1999). Management Buy-Outs and Venture Capital: Into the Next Millenium. Edward Elgar.