Corporate Becoming and Strategic Leadership
Corporate Becoming and Strategic Leadership
Abstract and Keywords
This chapter highlights corporate becoming, an open-ended ongoing process for which there is no grand ex ante plan possible and which unfolds through a series of transformations in the course of the strategic evolution of long-lived companies. It develops a strategic leadership framework to examine the role of successive CEOs in the process of corporate becoming. This framework involves defining the key tasks of strategic leadership; identifying four key elements of the company’s strategic leadership capability (adopting a strategic leadership regime that integrates top-down and bottom-up strategy processes; managing the often tortuous interplays between a changing corporate strategy and the existing corporate culture; balancing strategic resource allocation between fit with the existing product-market environment and evolvability in terms of the capacity to seek out new viable product-market environments) in the internal ecology of strategy-making); and maintaining constructive relationships in the dynamic interactions between the CEO and the board of directors.
A Thought Experiment
Suppose Bill Hewlett and Dave Packard came back from the Elysian fields today and visited the two new corporations that bear their names: HP Inc. and Hewlett Packard Enterprise. How would they feel about how HP has evolved and what it has become since their departures?
Chances are that the founders would hardly recognize the two new companies. For one thing, gone are the original core test and measurement (T&M) businesses— the direct descendants of the products the two engineer-entrepreneurs developed and manufactured in that famed garage. Those assets were already spun off from HP in 1999 and owned by a public company called Agilent, and some were spun off again by Agilent in 2014 (in particular, the core T&M business that the founders started in the garage so that Agilent could focus on life sciences). Hewlett and Packard might ask why HP’s corporate management did not continue to capitalize on these leading-edge technology-based T&M businesses that dominated their segments and ended up generating far greater return on investment than most of HP’s other businesses.1
The founders, however, probably would be favorably impressed that HP’s gigantic size of yesterday (before 2015) had been cut in half to form the two new companies. And while they might be somewhat disappointed to find that the consumer-oriented new HP Inc. company is now positioned in mostly commodity-type businesses, they would be encouraged by its leadership’s intent to re-energize its capacity to innovate. They would probably also be impressed by the enterprise-oriented new company Hewlett Packard Enterprise’s efforts to become a leading player in the new computing paradigm called “cloud.”
Poignantly, it is easy to imagine the founders one more time attempting to get a feel for the culture of the new HP companies by “walking around,” as they did regularly at company plants and offices all over the world. They would probably be disappointed to find that transaction-oriented values, imported from acquisitions and leaders from outside of HP, have largely replaced the relationship and innovation-oriented values of the old “HP Way,” and that the old culture of solidarity and meritocracy they built over decades has too often given way to opportunism and careerism. Hewlett and Packard would surely wonder what they could have done differently to preserve (p.4) more of their values at the company they created. Flipping through HP’s annual reports and news clippings, they might think about the kind of boards of directors they assembled and the impact these had on the company and its culture after they retired. They would probably also wonder what they could have done differently to not make it necessary for the company to go outside the company for CEO leadership four times in a row.
And yet, hard-headed businessmen and solid engineers that they were, they probably would be impressed that HP is still around in the form of two new independent companies. Moreover, they would probably be gratified to see that while these new HP companies are struggling to get back to growth, they are still profitable, still attract excellent people, still have a bedrock of very strong technological competence and human capital, and still evoke in many in Silicon Valley the feeling that they have the potential to continue to be great companies.
The founders would probably admit that it does not really matter what they think and feel about the company that was once theirs. What really matters is that HP’s longevity be preserved in two new companies that continue to offer employees highly valued jobs and are a source of innovation and contribution that makes the country and the world a better place. Rooted in science and engineering, as their thinking always had been, they would probably return to the Elysian fields with fresh questions about the forces that drive the evolution of long-lived companies, shape them in ways not anticipatable by their founders, and about new ways to think about what makes such companies great.
Inspired by the idea of Hewlett and Packard returning to visit their long-lived company, this book addresses several questions that they probably would take back with them: Why do some companies survive over long periods of time while others do not? What makes some long-living companies great, and what does “great” really mean? What is the role of strategy and culture in helping a company live for many decades over the tenures of successive CEOs? How does top management of long-lived companies balance strategic resource allocation between exploiting existing business opportunities and generating new ones? What is the role of the board of directors in helping top management secure the future of the company? And, in light of recent developments at HP, when does it make strategic sense for a company to secure its continued longevity by reducing its size through splitting itself into multiple companies?
Corporate Longevity and Greatness
Few companies survive as independent entities for very long periods of time. Of the top one hundred US-based industrial companies listed in Fortune magazine in 1983, the year HP first cracked into that elite group, only twenty-one of those companies remained in the top one hundred in 2013, the rest having been acquired, dropping in relative size, or going out of business. But not HP; it continued to rise. This is shown in Figure 1.1. (p.5)
The rapid turnover in the Fortune 100 list shows the highly dynamic external environments that most large corporations face. It is a tough world out there, especially for tech companies. This dynamism results from industry players, sometimes incumbents but more often upstart new entrants, changing the rules of the game. Whether implicit or explicit, these rules of the game usually remain unchallenged for extended periods of time, giving leading companies enough room to get comfortable and set in their strategies until their worlds are turned upside down.2
The rapid turnover in the Fortune 100 shows how short life can be for even very large companies. Contrast this with religious, political, and educational institutions, which often are imbued with time-transcending values, and sustained by the faithful efforts of successive generations of members who want them to continue to exist, for rational and emotional reasons, beyond their stewards’ own lifespans. This is also true in many family-owned companies.3 Corporate longevity for its own sake, however, can feel out of step in publicly owned companies that focus on maximizing shareholder value, particularly in our time of global competitive dynamics, transient corporate relationships, and transaction-motivated interactions between employers and employees that have lost much appreciation of the value of loyalty.4 (It should be noted, however, that finance scholars have begun to develop the idea of “loyalty shares” to reward long-term investors and to counter the short-term financial performance pressures that cause corporate underinvestment.5)
If longevity is hard to achieve; what about enduring corporate greatness? The bestselling book Good to Great defined “great” companies as those eleven that for a period of fifteen years after a major transition were able to achieve average cumulative stock returns at least three times those of the overall stock market.6 The book concluded that such enduring greatness depends on a certain type of leadership style. Corporate greatness, however, appears to be even more fleeting than corporate longevity. By 2007, only three of the eleven great companies profiled in Good to Great remained great, with the eight others either no longer existing as independent institutions or now performing at levels below greatness.7 This seems consistent with the fact that some companies get lucky for an extended period of time.8 But even companies that are identifiable as great through the statistical analysis of sustained superior (p.6) performance still face the question of whether their success is based on superior capabilities or on benefiting from a process of cumulative advantage (e.g., increasing returns to adoption, or network effects, that create nonlinear winner-take-all strategic dynamics).9
This raises the question of what “greatness” really means. In the end greatness is unavoidably subjective, since the objective measures used to demonstrate it are a matter of choice. Corporate greatness should perhaps always be considered in terms of performance measured against the best relevant competitors along multiple dimensions, such as stock price performance, market share, profitability, customer and employee satisfaction, and the like. A company only lives long enough to become great if it continues to be able to satisfy its customers to generate the resources necessary for staying afloat, and can only remain independent if the majority of its shareholders want it that way.
Company greatness is also somewhat similar to optimal firm size; that is, it is basically a static measure that is determined at a particular moment in time and is ephemeral because in the next moment, as the data suggests, any given firm can (and often will) fall from greatness. It may therefore be more useful to view company greatness, like optimal firm size, as the byproduct of a dynamic process.10 Similarly, corporate greatness can be viewed as the byproduct of a company’s continued strategic efforts to remain—in the words of Microsoft’s CEO Satya Nadella—relevant to customers and investors.11 Remaining relevant to customers and shareholders can then be viewed as the necessary and sufficient condition for corporate longevity.
With this in mind, greatness—admittedly subjectively—is redefined in this book as a company’s capacity to transform itself throughout its lifetime so as to remain relevant by being able to make fundamental contributions that are highly valued by its evolving customer base, and that in turn generate sufficient value for its shareholders to want to support the company’s continued independence. Later in this chapter, we will see that Dave Packard had deeply grasped this strategic imperative and tirelessly communicated it to his executives.
A Typology of Company Founding
Company-building efforts can be characterized in terms of two dimensions. The first dimension concerns the initial founders’ purpose: whether the venture’s initial purpose is short-term instrumental (primarily serving the financial objectives of the founders and early employees) or long-term institutional (primarily geared toward building a long-living company). It is important to note here that a founder’s initial purpose may of course change over time. For instance, it is reasonable to assume that most founders probably start with high hopes of building a company for the long term, but end up cashing out simply because it does not work out the way they had envisaged.12 The second dimension concerns adaptive capability: whether the venture relatively quickly succumbs to the pressures of the external environment or is able to stay ahead of these pressures (stay relevant) and survives for the long term. This is shown in Figure 1.2. (p.7)
Figure 1.2 shows four generic types of company-building efforts. Failing companies are ventures that serve (or end up serving) an instrumental purpose but have low adaptive capability. The vast majority of start-up companies, unfortunately, fall into this category. Short-lived companies are ventures that serve an instrumental purpose but have sufficiently high adaptive capability that they can survive long enough to secure a successful exit for the founders and investors. A fairly recent example is Instagram, a start-up company with thirteen employees that was sold to Facebook in 2011 for $1 billion.13
Live-to-be-acquired companies originate with an institution-building purpose but over time lose the adaptive capability necessary to sustain their independence in the long run, and eventually get acquired (or fail and disband). HP’s acquisition of Compaq in 2002 remains a major example. Long-lived companies originate from an institution-building purpose and are able to continue to develop the adaptive capability necessary to sustain themselves as independent economic institutions for the long term, sometimes hundreds of years.14 These long-lived companies are able to transform themselves multiple times to weather the turbulence of environmental change and often absorb some of the short-lived ventures and live-to-be-acquired companies, which add diversity and growth opportunities and increase their ability to survive. These long-lived companies and their process of “corporate becoming” is the phenomenon of interest of this book.
This book focuses on HP’s process of becoming. By 2016, HP had existed as an independent company for seventy-seven years and had been able to acquire major companies such as Compaq, which previously had absorbed large companies such as Tandem Computers and DEC, and EDS. Also, by 2015 HP had been able to transform itself six times and in 2016,15 was working through a seventh, truly watershed transformation.
Context Dynamics and Corporate Becoming
Looking at a company’s history involves understanding the continuities, contingencies, and changes in external and internal contexts that the company faces over time. (p.8) Continuities are patterns that extend for a long time; by contrast, contingencies are events that do not form a pattern.16 External continuities (e.g., technological forces, regulatory laws) as well as internal ones (e.g., the imprint of founders’ values and approaches beyond their own tenures, the unresolved issues and challenges left to a successor CEO by his or her predecessor) extend beyond the tenure of any CEO in the evolution of the firm. Contingencies—unexpected good luck or bad luck events—unavoidably confront CEOs during their tenures.
Context is formed by the set of changing external and internal forces within which strategic leadership must operate. Context does not cause events, but determines its consequences; for instance, slipping on a path in a flat field may result in a strained ankle or broken leg, but slipping on a path along a hundred-foot cliff may result in death.17 As the statesman and historian Henry Kissinger has insightfully observed:
Leaders cannot create the context in which they operate. Their distinctive contribution consists in operating at the limit of what the given situation permits. If they exceed these limits, they crash; if they fall short of what is necessary, their policies stagnate. If they build soundly, they may create a new set of relationships that sustains itself over a historical period because all parties consider it in their own interest.18
Kissinger’s view about context could be interpreted to imply that leaders must always take the context as unalterably given, but this would of course be too limited an interpretation.19 Also, leaders must be able to simultaneously take into account and deal with both the internal and external dimensions of context. Once a leader takes strategic actions that change the context, however, the consequences, as is widely understood, usually cannot be fully anticipated.20
One important implication of the importance of context is that strategic leadership must be able to operate in unstructured, or at best ill-structured, situations.21 The corporate environment is messy: key executives often undertake strategic actions that may not be well aligned; a company’s most threatening competitor may not be apparent in advance; the players in any industry can make a multitude of strategic moves; and the results of competitive interaction between industry competitors are not always predictable. The functioning of the strategic leadership in large, complex organizations is therefore likely to be relatively untidy, and difficult to capture in relatively simple analytical models.
Changes in internal and external context make useful milestones for studying the role of strategic leadership in the evolution of a company over time. The changes can be subtle and hard to perceive as they occur, or they can be glaringly obvious. They are usually caused by changes to the rules of the game that govern the context in which firms operate. There are several different types of rules that shape the context dynamics over time.
Normative rules are based on law, cultural norms, ethics, and administrative principles. For instance, consider the rule of “fair use” that governed the way in which consumers could copy and share their copyrighted material such as music. Technological rules are based on the available technical solutions at a particular moment in time. (p.9) Consider here how, because of the Internet and the availability of broadband, the start-up company Napster made it possible to share music files electronically and thereby induced many consumers to violate the fair use normative rule. Economic rules form the foundation for the business models adopted by industry players. For instance, consider how software as a service (SaaS) is changing the business model of enterprise software companies such as SAP AG and Oracle. Economic rules usually also reflect the relative bargaining power of different industry players (often apparent in contracts). Cognitive rules are judgments about critical success factors that are widely shared among senior executives of incumbent companies in an industry. For instance, think about how senior executives in major American automotive companies during the 1950s through the early 1960s thought about key success factors until the entry of Toyota, with its completely different innovative manufacturing and supplier relation strategies.22 Innovation, a major force in the evolving contextual dynamics, involves changes in some or all of the rules, and has a big impact (positive or negative) on the strategic position and distinctive competencies of different industry players.
Changes in context create strategic challenges for CEOs during their tenures: positive ones in the form of opportunities that beckon to be pursued, and negative ones in the form of threats to be neutralized. To see the impact of past shifts in the context, it is helpful for researchers to trace events back in time to where the context significantly changed, and to look for changes in rules that caused the shift. To try to forecast how prospective shifts will impact a company’s external and internal contexts, researchers can use “critical event horizons”—the informed estimate of the time that it will normally take for a particular event to be completed and its impact felt (for instance, the time it takes to develop and bring to market a new product or service)—to estimate how long to look, real-time, for the expected change.23
This book combines the historical perspective gained from years of research, experience, and interviews with more than sixty former and current key HP executives (including all of HP’s living CEOs) with grounded theorizing: an inductive method that uses the rich field research data in combination with relevant existing and novel theoretical concepts and frameworks to generate deeper insights into why and how HP has survived and most of the time thrived in the face of major context changes, well beyond most of its competitors (see appendix 1).
The book’s novel and distinct focus is on the strategic leadership efforts of successive CEOs to stay on top of context dynamics and to guide HP to continued survival and economic performance through turbulent times. The capacity to stay on top of external and internal context dynamics, and to stay relevant to its shareholders, determines a company’s capacity for “becoming”: an open-ended evolutionary process for which there is no ex ante teleological vision and which unfolds through a series of epochs and transformations in the course of the company’s history. Studying this process of corporate becoming involves examining how strategic leadership of corporate transformations makes it possible to morph earlier epochs into later ones, including how it handles conflict between early and later epochs as the company evolves.24
This book intends to show that sustaining HP’s process of becoming has depended on the effectiveness of the company’s strategic leadership throughout its history. Effective strategic leadership results in the company remaining in control of its destiny;25 that is, able to provide fundamental contributions to customers that form the foundation for creating sufficient shareholder value to keep the company independent in the long run.
Strategic Leadership Involves Executives Throughout the Organization
While this book focuses on the contribution of HP’s founders and successive CEOs to its process of becoming, strategic leadership in large, established organizations such as HP involves key executives throughout the company.26 House and Price, in their comprehensive narrative of HP’s history until early 2009, for instance, list several hundred names of HP senior executives that made a strategic contribution during the company’s evolution.27
Carlos Brito, the CEO of AB-Inbev, the largest brewing company in the world, points out that companies need to be able to maintain a core membership, around 65 percent of the employees at any given time, that views itself as the “torch bearers” sustaining the company’s continued existence, and that these are held together by around 15 percent of the employees that form a company’s “critical leadership” that helps the company stay relevant in its changing environment.28 Also, the desire and drive to maintain a company’s relevance, longevity, and greatness are enhanced if, as luxury goods company LVMH’s Managing Director Antonio Belloni put it, the critical leadership thinks of itself as the guardian of some timeless brands: “We are guardians of the temple for a relatively small or short period in the life of these brands.”29
Substitute “HP” for “brand,” and a similar desire and drive to sustain the company’s relevance, longevity, and greatness may be observed in the study of HP’s critical leadership.30 Bill Brownell, former Chief Strategy Officer of HP, offered the interesting observation that in his experience, “the critical leadership group does not match the company hierarchy exactly. Rather, it is a group of senior leaders who share a common passion for the company, many have ‘grown up’ together in the ranks, they have some ‘social glue,’ they have pivotal (and usually more generalist) roles, and they are the CEO’s front line in driving the company forward).”31
Strategic Leadership Exploits Existing Opportunities and Creates New Ones
To be effective in the long term, a company’s strategic leadership must be able to exploit existing business opportunities in its familiar environment. To do so, top management creates a top-down strategy process that aligns strategic actions by the critical leadership deeper in the organization (who significantly commit key resources of the (p.11) company) with the company’s strategy in the pursuit of clearly defined growth opportunities. This is called here the induced strategy process, which aligns strategic action with corporate strategy in the pursuit of a major growth opportunity. Another way to put it is that strategic leadership in the induced process seeks to achieve tight fit with the company’s familiar product-market environment. Intel’s Andy Grove has called this strategic leadership task “vectoring” the organization. Strategy vectors, however, run the risk of turning momentum into inertia, and often create lock-in with the familiar environment.32 In a way the company chains itself to the specific environment it selects, especially if the company is extraordinarily successful in that environment, as has been the case, for instance, with Intel and Microsoft in the PC industry. Also, major growth opportunities in familiar environments usually eventually diminish (e.g., the decline of PCs relative to tablets) or may even vanish (e.g., minicomputers, chemistry-based photography, fax machines).
Companies fortunately usually have a reservoir of entrepreneurial employees who try to create new business opportunities in newly emerging environments, in a mostly bottom-up process. This is called here the autonomous strategy process.33 Through the autonomous strategy process the company pursues new opportunities that are outside of the scope of the existing corporate strategy, relate to new environmental segments, and often emerge through unanticipated novel applications or extensions of the company’s distinctive competencies by entrepreneurial employees. Another way to put it is that strategic leadership through the autonomous process seeks to maintain the company’s capacity to evolve. Autonomous strategic initiatives can be complements to the company’s existing businesses or provide early signals of the emergence of potential substitutes; for example, “disruptive technologies.”34 To sustain the autonomous strategy process and spur the generation of initiatives outside the scope of the corporate mainstream companies use a variety of approaches, such as the famous “15 percent rule” at 3M and the “one day a week” rule at Google. At HP, according to Bill Brownell, former Chief Strategy Officer, HP Labs (the corporate R&D group) had a “skunkworks” budget within some broad theme areas for that purpose.35
Autonomous strategic initiatives, however, pose different strategic leadership challenges than induced strategic initiatives. Often such initiatives take on the form of projects that are dispersed in several parts of the organization and need to be brought together to create a new, sufficiently large business thrust that is relevant from the corporate point of view (we describe three important HP examples here).36 This agglomeration and scaling effort needs to be performed by a company’s senior executives, who are able to formulate a strategy for a new business area that is convincing enough to get peers to surrender control of autonomous projects that may be “orphans” in their part of the operations. In addition, these senior executives also need to be influential enough to secure top management support to make complementary or supplementary acquisitions, if needed, to further scale the new business.37
Senior executives championing autonomous strategic initiatives need to work hard to convince top management to amend the corporate strategy, thereby integrating the autonomous initiatives into the induced process going forward. A powerful example is provided by former IBM CEO Lou Gerstner’s recall of how Dennie Welsh, the senior (p.12) executive in charge of IBM’s Integrated Systems Services Corporation (ISSC), which was at the time only a subunit of the sales force, convinced him that global services was a tremendous new growth opportunity for IBM. In Gerstner’s words:
My mind was afire. Not only was he describing something I’d wanted when I was a customer (for example, I had tried unsuccessfully to outsource the running of RJR Nabisco’s data centers), here was a man who understood what customers were willing to spend money on, and he knew what that meant—not just the business potential for IBM, but the coming restructuring of the industry around solutions rather than piece parts.38
Another powerful example concerns the development of “multitouch” for the iPad in the extremely tightly top-down-run Apple. Whereas Steve Jobs reportedly told his biographer that he asked his team to come up with a multitouch screen, Jonathan Ive, the team leader, had a different memory of the development:
He said his design team had already been working on a multi-touch input that was developed for the trackpads of Apple’s MacBook Pro, and they were experimenting with ways to transfer that capability to a computer screen. They used a projector to show on a wall what it would look like. “This is going to change everything,” Ive told his team. But he was careful not to show it to Jobs right away, especially since his people were working on it in their spare time and he didn’t want to squash their enthusiasm. “Because Steve is so quick to give an opinion, I don’t show him stuff in front of other people,” Ive recalled. “He might say, ‘This is shit,’ and snuff the idea.”39
Capitalizing on autonomous strategic initiative depends critically on the strategic recognition capacity of the company’s senior leadership. Strategic recognition means that some senior executives (at first usually only one or a few) are able to see the strategic implications for the company of pregnant actions and events that have started to happen inside or outside the company, and signal emerging opportunities or threats. These executives are willing and able to bring those insights into conversations with other senior executives and top management before everybody agrees about them, which broadens support for action to deal with the changes.40 A simple and powerful example of strategic recognition at HP was provided by one scientist from HP Labs when he said, “Dick Hackborn played a critical role in Inkjet: ‘He said this was the kind of thing that suits HP.’ ” Three examples of new business development briefly reported below (see Evolvability section) highlight how senior executives such as Richard (“Dick”) Hackborn, Joel Birnbaum, Willem (“Wim”) Roelandts, and John Brennan, among many others, performed these critical leadership activities over multiple decades at HP.
Companies with strong strategic leadership, like HP, are aware of the important role of both induced and autonomous processes in strategy-making, tolerate a sufficient level of uncommitted resources and looseness in control to continue to maintain a portfolio of autonomous initiatives, and are able to select at the right time (when the viability of an autonomous initiative has been demonstrated) to integrate those (p.13) initiatives into the induced process in order to exploit the changing environmental dynamics. Because many autonomous initiatives are likely to fail, it is important to develop the appropriate strategic leadership discipline that helps leaders decide which ones to stop, and when. Without the discipline of stopping autonomous strategic initiatives that do not work, the company dissipates its resources and ruins the careers of its entrepreneurial employees.
Strategic context determination is the part of the autonomous strategy-making process through which these disciplining strategic leadership activities are performed. Strategic context determination helps resolve the tension that exists between newly emerging autonomous strategic initiatives and the corporate strategy in force at that time.41 (Appendix 2 shows a schematic of the induced/autonomous strategy processes framework. It also discusses how the induced/autonomous strategy processes can be related to the idea of becoming in complexity theory.)
Strategic Leadership: The Key Role of the CEO
As noted above, a company’s critical leadership involves executives throughout the organization. In contrast to more pluralistic organizations, however, where power is often widely diffused and objectives can widely diverge,42 business organizations usually have a “peers-plus-one” mechanism in place to force change on the organization.43 The “one” is the CEO. With the help of the strategy diamond framework, this book focuses on the key strategic leadership role of HP’s successive CEO in sustaining the company’s process of becoming. The strategy diamond framework views strategic leadership in terms of mastering the alignment of five dynamic forces that drive a company’s evolution: (1) the company’s strategy; (2) its chosen product-market position; (3) its distinctive competencies; (4) its strategic actions; and (5) its internal selection environment.44 This integrative theoretical framework simultaneously considers the links between product-market position and distinctive competence, and between strategy (formulation) and strategic action (execution). The effectiveness of a company’s strategic leadership is determined by the CEO’s ability to use these five forces to keep the company viable in the face of highly dynamic external and internal contexts. (See appendix 3 for a schematic representation of the strategy diamond framework.)
Key Tasks of the CEO’s Strategic Leadership
This book’s chapters focus on the contribution of successive CEOs to HP’s process of becoming, and will document how they discharged the key tasks of strategic leadership. This will involve examining how clear each CEO was about the company’s strategy; that is, clear about the businesses the company wanted to be a winner in, what winning means, and what competitive advantage the company would rely on to be a winner during their tenure. Clarity about strategy is important, because it helps guide positioning the company in its product-market environment and gives it a roadmap to navigate the nonmarket and capital market environments as well. To get this strategic clarity, successive HP CEOs had to truly understand what it takes to win (the basis of (p.14) competitive advantage) in their desired product-market position. Clarity about the strategy also provides the basis for identifying what the company’s distinctive competencies are: what the company has got that allows it to occupy the desired product-market position, defend it, and leverage it. Through formulating the corporate strategy and the implied product-market position and distinctive competence, successive HP CEOs stated their intent about how to shape the company’s future.
Successive CEOs’ strategies, however, become reality as opposed to mere rhetoric when taking strategic action (or not taking action). Strategic actions are consequential; they commit the company to a particular position in its environment, and deploy and develop competence in support of that position. These actions (or their absence when the changing environment requires them) are difficult to reverse. Through getting the company’s executives to execute the strategy, successive CEOs actually determined HP’s future, which then became the past with associated path dependencies for their successors. The chapters that follow will examine to what extent the strategic actions that a new CEO had to take were constrained by the strategic actions of his or her predecessors.
The CEO’s Role in Developing the Company’s Strategic Leadership Capability
The strategy diamond framework defines the role of the internal selection environment in terms of helping top management discharge the key tasks of strategic leadership in the face of external and internal context dynamics: (1) defining and redefining the businesses the company wants to be a winner in and the required corporate strategy; (2) aligning and realigning strategic positioning with distinctive competence; and (3) aligning and realigning strategic action with corporate strategy (see appendix 3). In the remainder of this book the internal selection environment is cast in terms of the company’s strategic leadership capability, and its development viewed as an important CEO responsibility.
The chapters that follow will examine how HP’s founders and successive CEOs developed the four key elements of the company’s strategic leadership capability: (1) developing the strategic leadership regime (integrating top-down and bottom-up strategic leadership); (2) managing dynamic interplays between corporate strategy and corporate culture; (3) balancing strategic resource allocation for fit (exploiting existing product-market opportunities) and evolvability (developing new product-market opportunities); and (4) managing dynamic interactions with the board of directors. These four elements are further discussed in the following section.
Developing a Strategic Leadership Regime
Integrating Top-Down and Bottom-Up Strategy Processes
A company’s strategic leadership regime can be characterized in terms of the strength of top-down and bottom-up strategic leadership processes, which suggests four (p.15) distinct types. Bottom-up strategic leadership can only be strong, of course, if the CEO consistently encourages and supports it. Also, companies will seldom, if ever, show an exact fit with any one of these four pure types. However, given the external and internal context dynamics, the typology can serve as a diagnostic tool to help the CEO better assess the direction in which the strategic leadership regime is evolving (if left unattended) and so be better able to make sure it continues to integrate bottom-up with top-down strategic leadership to maintain the effectiveness of the strategy-making process. The four types are shown in Figure 1.3.
If top-down and bottom-up leadership are both weak, the company has a strategic leadership regime characterized by “Brownian motion”: it is one where employees, like particles suspended in a liquid, go through motions following a random path. Here, the induced strategy process lacks direction, and the autonomous strategy process pursues new ideas haphazardly and without the ability to scale potential winners and stop losers. It is difficult to see how this regime could effectively sustain the process of corporate becoming.
If top-down leadership (and the induced strategy process) is weak and bottom-up leadership (and the autonomous strategy process) is strong, the company has a strategic leadership regime characterized by “drifting.” Here, the company will possibly face increasing complexity because of unchecked proliferation of businesses and business models that cannot all be sustained, or radical innovation may in fact become stifled because strong-headed, business-level leaders focus almost exclusively on the short-term and compete vigorously among each other for the company’s resources. In either case, the company is likely to progress more or less in a zigzag fashion without clear corporate strategic direction. Here too it is difficult to see how this regime could effectively sustain the process of corporate becoming.45
(p.16) Where top-down leadership is strong and bottom-up leadership weak, the company has a strategic leadership regime characterized by “lock-step.” Here, the top-down induced strategy process imposes a clear direction, but the bottom-up autonomous strategy process receives no consistent corporate support and is likely to atrophy over time. Conflict remains latent or is suppressed, and everybody is expected to march full speed in the same strategic direction, so the direction better be the right one. This regime is closely related to the “great leader” theory of strategic leadership. (In recent times Steve Jobs immediately comes to mind as the exemplar of this model.) Charismatic leaders are very closely associated with the periods of extraordinary success in a company’s history that they oversee. Sometimes, the company’s board of directors will try to “routinize the charisma” of such a CEO by attempting to codify the leader’s strategic leadership intuition and idiosyncratic approaches such that it becomes institutionalized and presumably helps successors to continue to benefit from the great leader’s extraordinary talent.46
Strong top-down leadership combined with strong bottom-up leadership creates a strategic leadership regime characterized by constructive confrontation. Here, the CEO encourages lower level leaders to use the expert knowledge and information that they obtain from being exposed to signals coming from internal and external environmental change to challenge upward to be able to get clarity about the strategic situation facing the company at critical times in its evolution. This regime presumably enables the company to deal quicker and better with external and internal context dynamics. In particular, with this regime the top-down induced strategy process provides clear direction for the core businesses, but it also provides room for the bottom-up autonomous strategy process to make the case for initiatives that are able to scale to become integrated in the corporate strategy going forward.
Constructive confrontation is a term adopted from the Intel Corporation, where it took root as a result of the founding triumvirate (Robert Noyce, Gordon Moore, and Andy Grove), who insisted that “position power” (read more senior, usually older executives) should not shut up “knowledge power” (read less senior, usually younger employees).47 Since the term “confrontation” implies the potential for disagreement— which, especially in today’s multicultural organizational settings, may evoke negative connotations in many people—it is worth keeping in mind former managing director of Infosys Consulting Raj Joshi’s nicely put advice to “disagree without being disagreeable.”48 The terminology used is, of course, less important than the strategic leadership regime that it intends to describe, and different organizations might wish to use their own terminology for characterizing a strategic leadership regime that tries to capitalize on the best information about the situation facing the company that is available in the organization.49
Furthermore, given the diversity of national and regional social cultures in the global corporate context, strategic leaders adopting constructive confrontation must be able to translate the ways in which it is applied to those cultures. In Japan, for instance, the very sound of constructive confrontation will come across as incompatible with the Japanese culture, and strategic leaders will have to find other terminology to communicate the model while making sure that its purpose—which is to get to the (p.17) unvarnished truth of the strategic situation facing the company at a particular moment in time—will not get diluted or adulterated.50
Maintaining constructive confrontation as the organization evolves and successive CEOs, all with their distinctly different personalities and approaches, take charge of the company’s strategic leadership, is extremely difficult. Over time, there is the danger that a new CEO will send powerful signals that debating strategic decisions is no longer particularly valued, and strategic leadership moves in the direction of lock-step. Alternatively, a new CEO’s indecisiveness allows debates to go on too long and without resolution (e.g., the same issues come up time and again, or criteria of functional excellence that are no longer externally relevant keep fueling endless debates), which drives strategic leadership regime in the direction of drifting or even Brownian motion.
Context Dynamics and Strategic Leadership Regimes
Context dynamics create strategic inflection points that are usually signaled by strategic dissonance: senior executives no longer have a shared understanding of the strategic situation facing the firm and disagree about the fundamental actions to take. Strategic dissonance must be resolved before the company can transform itself as it tries to find a viable path while traversing the “valley of death” associated with a strategic inflection point, but it is usually not clear in advance what the ultimate shape of that transformation will be.51
A strategic leadership regime based on constructive confrontation (or equivalent culturally acceptable terminology) is best able to deal with strategic dissonance because it values dissent and genuinely encourages open debate. It makes it possible to capitalize on top and senior executives’ strategic recognition capacity; that is, their ability to quickly recognize important changes in the external context, to determine how much time there is take strategic action, and to persuade others to help them adjust to exploit the changes. This, in turn, helps bring the debate to a conclusion by reaching general agreement on a new strategic direction necessary to realign action with strategy.
Managing Dynamic Interplays Between Strategy and Culture
A company’s process of becoming also depends critically on how well the company’s strategy and culture continue to support each other throughout the company’s evolution. While some management experts caricature strategy and culture as alternative sources of corporate success, often belittling the importance of strategy (“culture eats strategy for breakfast”),52 a more enlightened view is that strategy and culture complement each other. As I like to point out in my lectures on strategic leadership at Stanford Business School, “strategy without culture is powerless, but culture without strategy is aimless.” In the happy days of a company’s history, culture and strategy are (p.18) mutually supportive. Happy days, however, are not forever, so it is useful to consider various dynamic interplays between strategy and culture in light of changing context dynamics.
A recent treatise on “good” versus “bad” strategy posits that the kernel of a good strategy contains three elements:53 (1) a diagnosis that simplifies the complexity of a situation and identifies critical aspects that define the challenge facing the CEO; (2) a guiding policy for dealing with the challenge that helps overcome the obstacles to meeting the challenge; and (3) a set of coherent actions to execute the guiding policy. These three elements are highly valuable for helping to ex ante ascertain the potential effectiveness of a corporate strategy, one of the five forces in our strategy diamond framework (discussed earlier).
However, to get enacted by a sufficiently large proportion of the company’s senior executives (i.e., the critical leadership), the strategy must also engage these leaders both rationally and emotionally. They must feel compelled to execute it. This fourth element is crucially important. This is powerfully illustrated by a recollection former Intel CEO Andy Grove shared with me after Intel top management had decided to transform the company from a semiconductor memory maker to a microprocessor-for-PCs company. Grove said:
The “Grove leadership approach” consisted of trying to persuade and sell the new strategic approach to the management team … . After some period of time, the new strategy had traction with some managers and did not have traction with some others. The people who did not get traction—they may have provided lip service to the new strategy, but their actions were not supportive—the approach was to remove these people from positions where they could choke progress … . As a top manager you have to have a high level of understanding and then let people do the implementation. They do or they don’t … . It was not that some didn’t understand the strategy, or even that they disagreed with it; it was more like they didn’t get excited about it.54
A critically important condition for Grove’s successful intervention was of course that the new strategy was clear in his own mind. In other words, if the strategy is not clear or is not clearly communicated to the critical leadership, it is not possible for the CEO to judge whether it is being implemented or not.
In light of this, the corporate strategy at a particular moment in the company’s evolution can be considered compelling if it is clearly articulated and communicated by top management (meets the three core elements of strategy) and acted upon by the critical leadership because they accept it both rationally and emotionally as necessary to deal with strategic change, or as noncompelling if many senior executives are unclear about what it really means and why they should care about acting upon it.
(p.19) Corporate Culture
The research of HP’s process of becoming suggests that to better understand the dynamic interplays between corporate culture and corporate strategy it is useful to distinguish the hard part of corporate culture, which is called here the operating model (employees’ beliefs about “how we execute strategy in this company”) from the soft part, which is called here the core values (employees’ beliefs about how people ought to be treated and treat each other while we execute strategy in this particular company). This research also discovered that there are latent potential conflicts between the operating model and the core values, which sometimes becomes apparent when external context dynamics necessitate a change of the corporate strategy.55
Another potentially important factor related to culture in long-lived companies, like HP, is that they often have been able to acquire other companies with their own well-established cultures. As a result there continue to exist within long-lived companies what Bill Brownell calls “cultural sediment layers,” which employees who work there can see and feel. For instance, HP Labs, the printer business units, and some parts of the enterprise hardware business units, still have more of the feel of the old HP Way; the PC business and industry-standard server business have more of the Compaq transactional culture; and some of the newer areas in software and cloud have more of the “go fast” Silicon Valley entrepreneurial culture. Knowing the sediment layers of the culture provides the CEO with different leverage points (e.g., sources of symbols and examples) and perhaps more complexity in how to move the company along. Also, according to Brownell, across the sediment layers there is still a long reach of the founders, which permeates especially the soft side of the culture and can also be a helpful rallying point.56
In light of these insights, corporate culture during a particular CEO’s tenure can be compatible with his or her corporate strategy—that is, is viewed by the critical leadership as generally consistent with the existing operating model and with the existing core values—or incompatible, with many senior executives no longer sure about how the strategy should be executed with the existing operating model. Further, they might experience significant conflict with the company’s existing core values.57
Managing Dynamic Interplays
Combining the compelling and noncompelling dimension of corporate strategy with the compatible and incompatible dimension of corporate culture defines four different types of dynamic interplays between culture and strategy that a CEO may potentially face when dealing with changing context dynamics. Managing these interplays is the second key element of strategic leadership capability associated with corporate becoming. This is shown in Figure 1.4. (p.20)
The combination of a compelling corporate strategy with a compatible corporate culture is likely to produce commitment. Here, the CEO faces little difficulty in getting employees to forcefully try to execute the strategy. This type of interplay is most congruent with constructive confrontation based on strong top-down and strong bottom-up leadership (Figure 1.3). A compelling corporate strategy combined with an incompatible corporate culture, on the other hand, is likely to produce conflict. Here the CEO is likely to face starkly different views among key employees, probably some old-timers who are steeped in the culture that worked well in the past and engage in passive-aggressive “hunkering down,”58 and some newcomers who advocate new ways of doing things, about what the best way is to execute on the strategy. This situation can be viewed as most congruent with lock-step based on strong top-down leadership to impose the new strategic direction and keeping conflict suppressed, but with weak bottom-up leadership (Figure 1.3).
The combination of a noncompelling corporate strategy with a compatible corporate culture is likely to produce contention. Here the CEO is likely to be faced with competing factions each supporting a different strategic direction, while claiming that their preferred strategic direction is more consistent with the corporate culture. This type of interplay is most congruent with drifting based on weak top-down and strong bottom-up leadership (Figure 1.3). A noncompelling corporate strategy combined with a noncompatible corporate culture, on the other hand, is likely to create confusion. Here the CEO is likely to be at a loss about what to do and how to do it, and change events may simply take over. This interplay can be viewed as most congruent with Brownian motion based on weak top-down and weak bottom-up leadership (Figure 1.3).
Balancing Strategic Resource Allocation for Fit and Evolvability
Fit and Evolvability in the Internal Ecology of Strategy-Making
Large companies like HP can be viewed as ecological systems within which strategic initiatives emerge and compete for the company’s resources through the induced and autonomous strategy processes.59 As noted earlier, the company’s strategic leadership (p.21) orchestrates the overall strategy-making process by (1) providing guidance for the induced process (usually through the regular strategic planning process) to improve fit with the existing product-market environment; and (2) activating strategic context determination processes to decide which autonomous (unplanned) initiatives to continue to support in new environmental segments to maintain evolvability (see appendix 2).
The internal ecology of strategy-making plays a crucial role in the process of corporate becoming because it serves to define and protect, but also to redefine the company’s identity in relation to its external ecosystem. This is so for two related reasons. First, the induced and autonomous strategy processes involve competing claims by senior executives about the allocation of the company’s resources, which directly affects their interests and therefore concentrates their efforts to influence top management’s strategic decisions about how the company should define itself (e.g., HP as an instruments company or a computer company). Second, initiatives emerging in the autonomous strategy process challenge the concept of strategy that drives the induced strategy process. Either the CEO ultimately refers to the existing concept of strategy to maintain the focus on fit and rejects the autonomous initiative, and thereby also reaffirms the current identity of the company in its external ecosystem, or the CEO integrates the autonomous initiative to pursue evolvability into the corporate strategy going forward and thereby redefines the company’s identity. In this way, induced and autonomous strategy processes “mutually specify each other “so that they constitute the company as “a self-perpetuating entity in relation to its evolving ecosystem.”60
While it is difficult to predict how a company will evolve over long periods of time with this type of strategy-making process, it also offers it the best chance to remain adaptive in the face of external context dynamics, which is the very meaning of corporate becoming.
Three HP Examples of Evolvability
The three sidebars briefly report three previously mentioned new business development initiatives within HP that emerged through the autonomous strategy process and shaped the company’s process of becoming. They highlight the importance of strategic recognition on the part of senior executives; as well as of strategic integration: their ability to bring together various autonomous strategic initiatives that are dispersed throughout the company but need to be brought together to focus and scale a new business development effort for the company. (p.22) (p.23)
(p.24) The stories of the development of the computer, inkjet printers, and networking businesses summarized in the sidebars provide compelling examples of how the autonomous strategy process of HP’s internal ecology of strategy-making helped the company evolve from an electronic instrument company to a computer and (later) also a networking company.
Strategic Leadership Skills for Evolvability
As these stories also show, pursuing evolvability in the internal ecology of strategy-making highlights the messiness of the process of corporate becoming and depends critically on sophisticated strategic leadership skills. In particular, they underscore the importance of strategic recognition and strategic integration on the part of senior executives in the strategic context determination process to set the stage for resolving the indeterminacy between autonomously started new business developments and the existing corporate strategy going forward; that is, for resolving whether top management should go ahead and embrace this new strategic direction.
(p.25) Indeed, while the autonomous new business opportunities originated from interrelated distinctive competencies developed by entrepreneurial employees in bottom-up fashion rather than through top-down strategic direction setting, ultimately HP’s top management had to legitimize the new strategic direction by fully embracing it and further strengthen it through major resource allocation commitments (computers, printing), sometimes also involving major acquisitions (networking), and driving necessary changes in the corporate culture (computers, networking).64
All of this also indicates that the CEO’s ability to balance fit and evolvability in the internal ecology of strategy-making depends on creating a strategic leadership regime that effectively integrates top-down and bottom-up strategic leadership and on securing continued commitment by managing the dynamic culture–strategy interplays unavoidably triggered by initiatives related to evolvability. Critical here is the key role of the CEO in effectively managing the potential tradeoffs between speed and scale. Evolvability requires an operating model (hard part of the culture) biased toward speed; that is, one ready to move fast and experiment. This, however, may lead to ignoring the importance of scale in the process, which can create tremendous back-end and infrastructure problems in the large, complex firm like HP. A bias toward scale, however, such has happened at HP under Fiorina and Hurd, may make it harder for the company to evolve.65
Patterns of Balancing Strategic Resource Allocation for Fit and Evolvability
Previous research has identified the strategic leadership challenges associated with balancing strategic resource allocation to fit and evolvability: (1) exploitation of existing opportunities to the fullest (through pursuing fit); (2) the generation of entirely new opportunities (through pursuing evolvability); and (3) the balancing of exploitation and generation over time (because resources are limited).66
Strategic Leadership Resource Allocation
The reality that the company’s reservoir of strategic leadership resources (skills and efforts) is limited at any given time determines the possibilities frontier for the CEO to optimally pursue different possible combinations of fit and evolvability.67 The possibilities frontier is shown in Figure 1.5.
The horizontal axis in Figure 1.5 represents the percentage of total available strategic leadership resources that could be allocated to fit (with current product markets—maximum 100 percent); the vertical axis the percentage that could be allocated to evolvability (seeking out new product markets, again, maximum 100 percent). On the possibilities frontier, the tradeoffs between allocating strategic leadership resources to fit and evolvability are binding. In other words, if the CEO decides to allocate a certain percentage of the company’s strategic leadership resources to fit, for instance point A on the possibilities frontier, this also determines the remaining percentage of the resources available for evolvability, and conversely.68 (p.26)
Interestingly, the perceived availability of strategic leadership resources at a particular time may be below the actual one, for instance points B and C in Figure 1.5. At point B, the strategic leadership resource allocation to evolvability is less than would be possible if the company were operating at point A on its possibilities frontier (as a result, total allocation of actually available strategic leadership resources is less than 100 percent). At point C, the strategic leadership resource allocation to fit is less than would be possible if the company were operating at point A (total allocation of actually available strategic leadership resources again less than 100 percent). Such gaps indicate underutilization of the company’s actual potential of strategic leadership resources, which may be due to ineffective integration of bottom-up and top-down strategic leadership and/or poorly managed interplays between strategy and culture. It is the responsibility of the CEO, if necessary sometimes nudged by the board of directors, to show the senior leadership team the existence of these sorts of gaps between the perceived and actual availability of strategic leadership resources and how they can be bridged.
Financial Resource Allocation
In practice, balancing fit and evolvability also depends on the availability of financial resources for innovation. The key financial resources are associated with corporate R&D and concern two aspects: (1) the ratio of R&D expenditures to yearly total revenues, which determines the absolute amount of available resources (often 10 percent or more of total revenues in leading high-technology companies); and (2) how that amount is allocated for fit (innovation in the core businesses) and evolvability (new business development). As financial resources are limited in relation to claims for their use the allocation process can be characterized in terms of the relative amounts absorbed by fit-related (induced strategy process) and evolvability-related (autonomous strategy process) initiatives.
The way the company’s available financial resources for R&D are allocated between fit and evolvability at any given time can be reasonably assumed to correlate (p.27) with the allocation of the strategic leadership resources on the possibilities frontier (Figure 1.5). Any point on this frontier may then also be viewed to roughly correspond to the relative amount of R&D resources allocated to fit (associated with the induced strategy process) and evolvability (associated with the autonomous strategy process) that the CEO considers optimal.69
At some times, the CEO’s rhetoric about the importance of evolvability may not be reflected in the pattern of financial resource allocation (point B again in Figure 1.5) or about fit (point C again in Figure 1.5). Also, during any CEO’s tenure, the relative allocations to fit and evolvability may be adjusted, usually in incremental ways as a function of external and internal context dynamics. Furthermore, successive CEOs may adopt quite different allocation patterns.
Managing Dynamic Interactions with the Board of Directors
The Key Tasks of the Board
The board is responsible for the hiring and firing of the CEO and the creation of a long-term CEO succession plan. Effective boards are able to select the type of CEO who fits the challenges and opportunities associated with the context dynamics that a company faces or is likely to face at particular times in its evolution, and it is crucial that the selected CEO can assume that he or she has the board’s confidence.
In light of this, the board must provide support for how the CEO intends to discharge him- or herself of the key tasks of strategic leadership, and for the strategic leadership capability that he or she develops during their tenure. In particular, the board must encourage the balancing of top-down and bottom-up strategic leadership, and can do so by familiarizing itself with levels of strategic leadership below the CEO and the rest of top management. The board also must review and then support changes in the corporate strategy proposed by the CEO and the difficult cultural adjustments that it may imply. Furthermore, the board can play a very important role in making sure that strategic resource allocation balances fit and evolvability. Research has shown that pursuing a narrow business strategy makes it possible for the CEO to credibly commit to aligning incentives for employees to pursue that strategy.70 But this favors fit and the induced (top-down) strategy process. Evolvability, however, requires the development and support of new business initiatives through the autonomous (bottom-up) strategy process that broaden the scope of the corporate strategy. Further research has shown that the board can play a critical role in helping the CEO support such new business initiatives.71
Ultimately, the board must evaluate the CEO’s performance and decide on his or her commensurate compensation. But the board is also responsible for making sure that its members have the right skills for evaluating the company’s evolving strategic leadership capability, and for its own effective functioning and management of the interactions with the CEO. (p.28)
These interactions will depend on the extent to which the CEO is able to develop a good and compelling corporate strategy and, on the other hand, on the extent to which the working of the board of directors is more or less functional. These two dimensions generate another simple diagnostic tool for assessing the CEO–board of directors interactions. This is shown in Figure 1.6.
As shown in Figure 1.6, the best situation is where the CEO has a compelling corporate strategy and works with a highly functional board. This creates constructive dynamic relations that further the prospects of the company’s becoming. A CEO’s noncompelling corporate strategy combined with a well-functioning board may lead to corrective dynamic relations in which either the CEO is encouraged to strengthen the corporate strategy, or he or she is replaced.
In case the CEO’s corporate strategy is compelling but he or she is faced with a dysfunctional board, the relations are likely to become disruptive. This is a difficult and probably time-consuming situation for the CEO that may impede efforts to sustain the company’s becoming. Finally, the combination of a noncompelling corporate strategy and a dysfunctional board is likely to produce destructive relations that materially put in jeopardy the company’s continued becoming.
Successive CEOs’ Strategic Leadership Performance Shapes the Process of Corporate Becoming
How to Evaluate CEO Performance?
Both HP founders were always unequivocally clear that the performance of public companies is ultimately measured in terms of financial results; that is, profitable growth, not just growth for growth’s sake. They also were deeply convinced that the company’s financial results depend critically on the effectiveness of its strategic leadership. This book proposes that the effectiveness of HP’s strategic leadership can be examined in light of how its successive CEOs have taken advantage of the company’s (p.29) internal ecology of strategy-making by discharging the key tasks of strategic leadership and developing the company’s strategic leadership capability to sustain the company’s process of becoming. However, this still leaves open the question by what criteria the strategic leadership contributions of each of HP’s successive CEOs to that process need to be evaluated.
Late in his professional life, Dave Packard provided important insights to answer this question. He did so, in one of his final company speeches, by distilling HP’s ability to achieve continued success into three principles that he admonished the current and future HP critical leadership to continue to adhere to. In addition—and far more surprisingly—in his last speech he also admonished HP’s critical leadership to help the company avoid the fate of “the wonderfully constructed one-hoss shay,” which was constructed to perfection but unable to evolve. Carly Fiorina, reflecting on her experience as HP’s first externally recruited HP CEO, provides an additional insight that helps complete a reasonable answer to the question.
Dave Packard’s Three Principles
In August 1990, in one of his last speeches to company personnel, Dave Packard highlighted what he called the three principles that had guided HP over the years:
First, that the company had always worked on fundamental contributions rather than “me-too” products; second, that the company had always worked as a team focused on its competitors rather than fighting about internal issues; and finally, that the company had been lucky to choose electronics as a field of endeavor because years ago there was a lot of room for contribution and it wasn’t so hard to make a mark.72
Packard’s guiding principles are remarkable in their simplicity and power. What they basically imply is that the foundation of long-lived companies—ones that can continue to transform themselves over time in the face of contextual change—resides in their being able to continue to make fundamental contributions that are valued by their evolving customer base and that, in turn, help generate sufficient value for their shareholders so that they want to indefinitely support the continued independence of the company.
In order to continue to make such fundamental contributions, however, a company must be ready to sell or drop businesses in which it can no longer make fundamental contributions, as well as to buy or build different ones where it can make new types of fundamental contributions.73 Carefully picking target markets was actually one of the objectives in the official “HP Objectives” document that was a key part of the HP Way. It defined the area of new markets as “fields of interest” and described how HP leaders should approach the entering such new fields. These sorts of internal selection processes, associated with the internal ecology of strategy-making, are required to meet Packard’s third principle, and they make it possible for a company to reduce its dependency on the vagaries of the external context dynamics.74 (p.30)
Multibusiness Corporate Strategy Considerations
Strategic leadership in the internal ecology of strategy-making, however, is different depending on where a multibusiness company like HP is situated on the continuum between highly focused ones (e.g., Intel) and conglomerate ones (e.g., GE). This can be illustrated as follows:
In a focused company, the CEO determines the content of the (single) business-level strategy, what the contribution is that the company intends to make, and the main task of the critical leadership is to effectively execute this strategy (Andy Grove’s statement about removing managers from position where they could choke the strategic change he was trying to instill mentioned above is an example). In a conglomerate company, the CEO cannot determine the content of the strategy for the different business in the portfolio. Instead, the CEO must select and develop strategic leaders for each of the businesses, who will determine that business’s strategy. (Jack Welch at GE is an outstanding example of a successful conglomerate CEO.)
In a multibusiness company with more tightly linked businesses like HP, the CEO must formulate a corporate-level strategy that determines the contribution that the company will be able to make by having these different businesses in its portfolio over and above the contribution that each business can make on its own. This depends on the extent to which the adaptive requirements of the different businesses remain commensurate with each other (and therefore not too difficult to manage within the same organization) and on the ability of the company to take advantage of relatively unique business opportunities through cross-business collaboration. Chapter 2 will revisit the issue of strategic integration at HP with the help of a new framework of drivers of strategic integration challenges in multibusiness firms—the evolving interbusiness complementarity and the intrabusiness complexity of the businesses in the corporate portfolio—and relate it to the antifragility of the corporate strategy; that is, whether the potential performance upsides associated with positive external context dynamics are higher than the potential performance downsides associated with negative environmental dynamics.75 Correctly ascertaining all of this requires a high level of strategic acumen that few CEOs have demonstrated. As we shall see, Lew Platt and Meg Whitman had to squarely face these sorts of strategic integration challenges as HP CEOs.
Capital Market Considerations
The stock market values company growth together with profitability. As companies get very large, however, high growth rates are hard to sustain. For instance, a company like HP with almost $120 billion in revenues that wants to grow at a yearly rate of 10 percent needs to grow revenue by almost 12 billion dollars, and the number keeps (p.31) growing as company size increases. This makes it difficult for the stock market to value very large companies.76 Nevertheless, it is a key role of each successive CEO in the company’s process of becoming to satisfy the stock market; that is, to be able to maintain the belief among the majority of shareholders that the value-creating potential of the company as an independent institution for the foreseeable future is higher than if it would be acquired by another one. This may sometimes require reducing the size of the company. CEO Lew Platt’s decision to spin off HP’s Test & Measurement businesses (chapter 5) and current CEO Meg Whitman’s decision to break the company in two in 2015 (chapter 9) are dramatic instances of this necessity to sustain HP’s process of becoming.77
Avoiding the One-Hoss Shay Trap
Besides articulating the three principles, Packard also gave one last speech to all of the HP general managers, roughly one year before he died, in which he recited (to the consternation among some of the attendees) a long poem by Oliver Wendell Holmes Sr. called “The Deacon’s Masterpiece: Or The Wonderful One-Hoss-Shay.”78 Holmes’s poem recounts the efforts of a fictional deacon to craft a horse-drawn carriage (one-hoss shay) “in such a logical way” that it could endure for exactly one hundred years. On its one-hundredth anniversary the shay collapses all at once, as planned.
This story is not what Packard had in mind for HP. The metaphor of the one-hoss shay that is built to last for one hundred years is the opposite of what in this book is called corporate becoming. In a poignant way, Packard was warning his general managers that a company must continue to change in order to be able to remain relevant and viable. From the perspective of this book, without of course using its terminology, he is admonishing his general managers one final time that they must think of HP in terms of corporate becoming. Keeping that drive alive in the organization, Packard was basically saying, is the ultimate challenge and responsibility of each of the company’s successive CEOs’ strategic leadership.
Carly Fiorina’s Maxim
Dave Packard’s three principles and his warning about the one-hoss shay trap are powerful criteria for evaluating whether the strategic actions of the critical leadership of a long-lived company will enable it, in the face of significant internal and external context dynamics, to continue the process of corporate becoming. Carly Fiorina, HP’s fifth CEO and the first externally recruited one, articulated a maxim that succinctly captures what this requires on the part of successive CEOs:
A leader who respects the people and the institution he or she is privileged to lead strives for sustainable performance that will continue long after the leader is gone.79
But how? This book proposes that deep understanding of how to discharge the key tasks of strategic leadership and develop the company’s key elements of strategic (p.32) capability helps successive CEOs stay ahead of internal and external context dynamics. This, in turn, may help successive CEOs deal more confidently with the reality that strategic leadership that was effective for dealing with a particular set of contextual conditions almost certainly will not ensure the company’s success in the long run, when the context will be different in unpredictable ways. This implies that the process of becoming will involve metamorphosis: transformative changes that alter extensively the company’s general form and life (think GE at the time of Edison and GE in 2014).80 Corporate transformation, however, is not governed by deterministic physical laws or biological constraints. The process of becoming remains open-ended, with no ex ante teleological vision determining what its future will be.
Conclusion, Implications, and the Road Ahead
Packard’s three principles and his warning to avoid the one-hoss shay trap, together with Fiorina’s maxim, provide helpful performance criteria for guiding the strategic leadership of successive CEOs of a long-lived company like HP. Given these performance criteria, this chapter has developed a conceptual framework encompassing the key tasks of strategic leadership and key elements of the company’s strategic leadership capability in support of discharging the key tasks of strategic leadership to examine and evaluate in the chapters that follow the contributions of HP’s successive CEOs to HP’s process of becoming.
The key tasks of strategic leadership encompass (1) formulating the corporate strategy in terms of what the game is the company wants to be a winner in (and what wining means); (2) aligning product-market position with distinctive competence to achieve competitive advantage; and (3) aligning strategic action with corporate strategy, all in the face of external and internal context dynamics.
Each successive HP CEO faced the challenge of meeting Packard’s three principles by discharging the key tasks of strategic leadership; in the first instance, by formulating and executing a “good” and “compelling” corporate strategy. Importantly, a good and compelling strategy must also meet the criterion of “antifragility,” which in a multibusiness company like HP, is related to meeting evolving challenges of strategic integration.
The four key elements of the company’s strategic leadership capability are:
(1) Adopting a strategic leadership regime that integrates top-down and bottom-up strategy processes;
(2) Managing the interplays between a changing corporate strategy and the existing corporate culture;
(3) Balancing strategic resource allocation between fit and evolvability in the internal ecology of strategy-making;
(4) Maintaining constructive relationships between the CEO and the board of directors.
(p.33) These four elements of the company’s strategic leadership capability help the CEO to effectively discharge the strategic leadership tasks to meet Packard’s three principles, avoid the one-hoss shay trap, and apply Fiorina’s maxim. This is so because first, integrating top-down and bottom-up strategic leadership helps maximize the relevant information about context dynamics that informs the CEO’s strategic decision-making and the company’s ability to continue to make significant contributions to its customers (Packard’s first principle).
Second, managing the potentially intense tensions between the existing corporate culture (especially the operating model) and corporate strategic change will speed up the difficult adjustments necessary to effectively execute it, importantly by keeping the company’s leadership focused on the external competition rather than on internal competition (Packard’s second principle).
Third, balancing fit and evolvability involves the willingness of the CEO to allocate resources to new business initiatives in the autonomous strategy process that are beyond the scope of the current corporate strategy and whose financial results may be achieved beyond his or her own tenure, which will invariably require tradeoffs with allocating resources to improve fit for mainstream businesses in the induced strategy process. Doing so, however, helps the company find new fields of technologies and markets where it can make new significant contributions (Packard’s third principle, avoiding the one-hoss shay trap, and Fiorina’s maxim).
Fourth, maintaining constructive interactions with the board of directors is likely to reinforce the CEO’s ability to continue developing the other three key elements of the company’s strategic leadership capability; for instance, in gaining support of the board for materially increasing R&D spending to support evolvability.
Finally, it seems reasonable to propose that to the extent that these four key elements mutually support each other, the company’s strategic leadership capability will be better able to support the CEO’s efforts to sustain its process of becoming.
The Key Role of the CEO: A Caveat
While the importance of the strategic leadership role of the CEO for the company’s process of becoming is examined and extolled in this book, it is good to keep in mind Nobel Laureate Daniel Kahneman’s observation that the correlation between the success of the firm and the quality of its CEO might be only as high as .30, which implies “that you would find the stronger CEO leading the stronger firm in about 60% of the [generally similar firms], an improvement of a mere 10 percentage points over random guessing.”81 Nevertheless, to the extent that a company could select successive generations of superior CEOs, the compounded effect of these relatively small differences (for any CEO’s tenure) throughout the firm’s history would be potentially highly significant. In other words, the potentially small differences in corporate performance generated by superior CEOs compared to good enough CEOs, and their contributions to strategic leadership capability, add up over time.
(p.34) An Empathic Account
The research for and writing of this book is based on the reasonable assumption that boards of directors always intend to appoint CEOs that are smart and well intentioned. It therefore also seems reasonable to start with the belief that each of HP’s CEOs were indeed smart and wanted the best for the company according to their points of view. Consistent with this belief, the chapters that follow intend to provide an empathic account of each of HP’s CEO’s efforts to maintain the relevance and greatness of the company.
Keeping Henry Kissinger’s insight in mind, the chapters objectively describe the changing external and internal contexts within which each of HP’s CEOs had to act in order to shape the company’s process of becoming during their tenures. Each chapter will start by showing that each CEO at the beginning of their tenure was dealt a hand—sometimes a favorable one but at other times one less so—that they had to play. It will report how each CEO subjectively defined and discharged the key strategic leadership tasks in light of the forces that shaped the external and internal context dynamics during their time running the company. Finally, the chapters will explain how each CEO’s perception of these forces influenced the type of strategic leadership capability that he or she chose to develop to sustain the company’s process of becoming.
Reconstructing the stories of strategic leadership of HP’s successive CEOs provides a deeper appreciation of the challenges that all of them faced in coming to grips with the limits of their power, as well deeper insight into the occasions when they were able to take advantage of the opportunities offered by various contextual changes while at the same time sidestepping potential pitfalls. This, hopefully, will also instill a sense of empathy on the part of the readers for the different protagonists that they are about to encounter.
Chance or Necessity? A Second Caveat
The remainder of this book intends to highlight the important role of strategic leadership in HP’s process of becoming. The analysis, however, must also keep in mind two important questions raised earlier in this chapter. First, is HP’s seventy-seven-year existence as an independent company the result of a strategic leadership process of becoming, or simply the manifestation of a random process? Second, even if HP has survived so far as the result of the process of becoming, to what extent can this be attributed to superior strategic leadership capabilities, or has the company simply been benefiting from a process of cumulative advantage? The data and analysis provided in the chapters that follow will provide the foundation for offering a reasoned answer to these questions.
The Road Ahead: A Guide for the Chapters that Follow
Chapter 2 provides an integral process overview and analysis of HP’s history of becoming from 1939 till 2016. It provides an overarching picture of the external and (p.35) internal contextual dynamics that the company has faced in its seventy-seven-year history that have shaped the workings of its internal ecology of strategy-making. It conceptualizes the outcomes of HP’s internal ecology of strategy-making in terms of seven epochs in the company’s history of becoming, and it highlights the role of HP’s successive CEOs in strategically leading the corporate transformations that connect the different epochs. The chapter also examines the extent to which the performance of HP’s successive CEOs can be usefully evaluated in terms of the company’s stock price movements during their tenure. It identifies the paradox of HP’s process of corporate becoming, provides a framework for elucidating the evolving strategic integration challenges and their relationship to the antifragility of the adaptive capacity of HP’s strategy-making process,82 and highlights the existential situation faced by HP’s successive CEOs in contributing to the company’s process of becoming.
Chapters 3–9 document and analyze the differential contribution of HP’s successive CEOs to the company’s process of becoming. Each of these chapters is structured into eight parts. The first part describes the initial conditions faced by each CEO in terms of external and internal contexts, including the unresolved strategic challenges left by his or her predecessor. The second part describes how each CEO performed the key tasks of strategic leadership. The third part discusses the strategic leadership regime developed by each CEO in terms of how he or she integrated top-down and bottom-up strategic leadership (this traces the evolution of HP’s famous entrepreneurial culture throughout the successive CEO tenures). The fourth part describes how each CEO managed the often tortuous interplays between existing culture (the HP Way) and the changing corporate strategy. The fifth part describes how each CEO balanced fit and evolvability in strategic resource allocation. The sixth part discusses the strategic leadership challenges that were left unresolved during each CEO’s tenure, and that become part of the initial conditions faced by his or her successor. The seventh part describes the dynamic interactions of each CEO with his or her board of directors. The final part of these chapters presents an overall evaluation of the differential contribution made by each CEO to HP’s process of becoming. These chapters thus provide an unusually rich sequence of insights into the existential situation that each CEO faced because he or she had to deal with the unresolved strategic challenges left by his or her predecessor. Understanding the existential situation faced by HP’s successive CEOs motivates the adoption of an empathic approach to evaluating their strategic leadership performance and differential contribution top HP’s process of becoming.
Chapter 10 first revisits the paradox of corporate becoming and the conditions that govern it, as well as the existential situation facing the CEO, to alleviate concerns about overdetermination and tautology that could be raised in relation to the proposition that strategic leadership really matters for corporate becoming. With the methodological issues addressed, the chapter continues with reiterating the crucial role of the CEO and his or her ability to harness the company’s past while also driving its future, and with briefly recapitulating how each successive CEO sustained HP’s (p.36) process of becoming by discharging the key tasks of strategic leadership and by developing the four key elements of the company’s strategic leadership capability.
Building on the insights gained from the study of HP’s history of becoming, chapter 10 also suggests how the frameworks used to conceptualize the tasks of strategic leadership and the development of strategic leadership capability can serve as steps toward a dynamic theory of strategic leadership that animates an evolutionary framework of corporate becoming. This framework builds on and significantly extends the academic writings of the lead author of this book. It will be helpful for further theory development about the role of strategic leadership in long-lived companies. It also offers practical tools for founders of new companies and CEOs and boards of directors of existing companies who intend to create, run, or oversee companies built for continued relevance, longevity, and greatness. The chapter’s conclusion summarizes the book’s distinct empirical and conceptual contributions and their implications for practice. The chapter ends with closing thoughts about the somewhat surprising findings that the longitudinal research of the process of corporate becoming has produced.
Appendix 1 Research Method
In studying the role of strategic leadership and strategic leadership capability in HP’s process of becoming, the research for this book involved historical tracing of HP’s evolution between 1938 and 1999 and real-time longitudinal tracking of the company’s evolution since 1999 in combination with “grounded theorizing.”83
The longitudinal qualitative research combined grounded theorizing and insights from modern historical methods to generate novel conceptual frameworks that establish theoretical bridges between historical narratives and reductionist quantitative models. This methodology can be successfully situated on a spectrum of theory development between the historian’s “particular generalization” and the reductionist’s “general particularization.” Particular generalization is what historians do; they “generalize for particular purposes.” On the other hand, general particularization is what most social scientists typically do: “embedding narratives within generalizations.”84 The theory development spectrum is shown in Figure A1.
(p.37) At the history end of the spectrum of theory development, particular generalization involves carrying out case studies of particular, concrete, and experiential social phenomena characterized by complex, nonlinear causation. Mostly natural language is used to construct a coherent and complete representative and explanatory narrative. At the reductionist end of the spectrum of theory development, general particularization involves statistically-based models or axiom-based mathematical models. These types of theories are general, abstract, and nonexperiential.
In between the historian and the reductionist types of theory development, longitudinal qualitative research of complex social systems, with the help of substantive and formal grounded theorizing, seeks to go beyond particular generalizations by creating conceptual frameworks: boxes-and-arrow charts that show how the complex system hangs together and its operative logic. Such conceptual frameworks are specific (representative of a class of phenomena), substantive (capturing the essential/material part underlying the phenomenon), and suggestive (evoking the phenomenon indirectly). They provide deeper and more general insight into phenomena than is possible with the natural language of narratives.
Applied to this book’s research about HP, this longitudinal qualitative research method involved (1) documenting the role of strategic leadership in the process of corporate becoming, and the role of successive CEOs in developing and employing the four key elements of HP’s strategic leadership capability; (2) constructing comparative narratives (case studies) of both the evolving corporate-level context and the strategic leadership approaches of the successive CEOs; and (3) using the comparative case studies to generate a grounded theory about the role of strategic leadership in corporate becoming.
In light of this, the research method involved comparative case analysis performed at multiple levels of analysis. At the industry level, the analysis describes the evolving external context dynamics in terms of continuities, contingencies, and constraints that the company and its successive CEOs faced. At the organizational level, the analysis used the dimension of time to compare six corporate transformations in HP’s history to date and a seventh one in process. This involved close examination of the seldom studied intertenure dependencies and associated path dependencies that successive CEOs had to cope with, as well as how successive CEOs discharged the key tasks of strategic leadership and how they developed the company’s strategic leadership capability during their tenure. At the intraorganizational level of analysis, the research traced the composition of HP’s business portfolio in terms of the evolving relative importance of different core businesses, the generation of new ones and the exit of old ones.
Several case studies, referenced throughout the following chapters, capture the findings of the longitudinal research. Dozens of former and current HP executives were interviewed as well as several consultants who had been directly involved with the firm at certain times in its evolution. These interviews are also referenced throughout the following chapters.
Appendix 2 The Internal Ecology of Strategy-Making: Induced and Autonomous Strategy Processes
Through the induced strategy process, a company exploits opportunities in its familiar environment. To do so, top management sets the corporate strategy and induces strategic actions by executives deeper in the organization that are aligned with it. The induced strategy process limits actions that deviate from the corporate strategy for at least two reasons. First, the company survived environmental selection by satisfying its customers and other constituencies in reliable ways and wants to continue to abide by the rules. This reactive propensity constitutes a rational source of strategic inertia. Second, the company tries to successfully align all the forces at its disposition to reshape the environment (E) to its advantage, but this proactive propensity results in coevolutionary lock-in and becomes another rational source of strategic inertia.
Through the autonomous strategy process the company explores new opportunities that are outside the scope of the existing corporate strategy, relate to new environmental segments (e), and are often based, at least in part, on distinctive competencies that are new to the company. Autonomous strategic initiatives usually, but not necessarily, originate at operational or middle management levels. They often come about fortuitously and somewhat unexpectedly as a result of the company’s dynamic capabilities that coevolve with (E, e). To overcome the selective effects of the company’s structural context, which is set up to support initiatives that are aligned with the current corporate strategy, the initiators of these autonomous initiatives try to activate a process—which we call strategic context determination—to convince top management to amend the company’s corporate strategy, thereby integrating them into the induced process going forward. The key role of the autonomous process is to extend the boundaries of the company’s competencies and opportunities and to help it prepare for potentially disruptive competitive moves. On the other hand, resources can be spread thin if the company supports too many autonomous initiatives (and halts too few), perhaps at the expense of its core businesses. Most dangerously, autonomous initiatives may undermine the company’s existing competitive position without providing a secure new one.
In general, the effectiveness of a company’s internal ecology of strategy-making depends on maintaining its ability to exploit existing opportunities through the induced process, while simultaneously maintaining its ability to pursue new opportunities through the autonomous process.
From Being to Becoming
While working on a paper (in the fall of 1981) that intended to integrate strategic management and corporate entrepreneurship, I stumbled onto From Being to Becoming, a then-recent (1980) (p.39) book written by Ilya Prigogine, a famous fellow Belgian who had recently won the Nobel Prize in chemistry. Intrigued by the title and browsing through the highly mathematical chapter on self-organization, a topic of interest, its final paragraph struck me with the force of a bolt of lightning:
This “over creativity” of nature emerges naturally from the type of description being suggested here, in which “mutations” and “innovations” occur stochastically and are integrated into the system by the deterministic relations prevailing at the moment. Thus, we have in this perspective the constant generation of “new types” and “new ideas” that may be incorporated into the structure of the system, causing its continual evolution.85
The parallel between Prigogine’s conclusion and the model of induced (top-down) and autonomous (mostly bottom-up) strategic initiatives (see Figure A2) seemed immediately clear: Prigogine’s observation of “mutations” and “innovations” occurring stochastically mapped directly onto the autonomous process, and his observation that they can become integrated into the system by the “deterministic relations prevailing at the moment” mapped directly onto the induced process. It also seemed clear that the strategic context determination process (box 5 in Figure A2) provided the critical means through which the integration into the system is fostered. The framework thus could possibly provide a stepping-stone in developing a theory of organizational adaptation as “becoming”; a view of an open-ended, unpredictable, but potentially manageable future.
The finding that the strategic context determination helps maintain a balance between induced and autonomous strategy processes also provided a link to Kauffman’s theory about “adaptation at the edge of chaos.” Kauffman distinguishes between three regimes systems can exhibit: ordered, complex, and chaotic, and he views complex systems—poised between order and chaos—as the “natural culmination of selective evolution.”86 The importance of balancing induced and autonomous strategy processes seemed particularly clear in light of Gould’s succinct translation of the idea of adaptation at the edge of chaos. Gould observes
that a system must be adaptive, but that too much (and too precise) a local fitting may freeze a system in transient optimality with insufficient capacity for future change. Too much chaos may prove fatal by excessive and unpredictable fluctuation, both in external environments and internal states … . Adaptation at the edge of chaos balances both desiderata of current functionality and potential for future change, or evolvability.87
This book explains how strategic leadership capability shapes corporate becoming through balancing the simultaneous strategic challenges of fit (exploiting existing product-market opportunities) through the induced (top-down) process, and evolvability (generating new product-market opportunities through the autonomous (bottom-up) process).
Appendix 3 The Strategy Diamond Framework
The strategy diamond framework shown in Figure A3 below helps define the CEO’s key strategic leadership tasks and his or her responsibilities in developing the company’s strategic leadership capability. (p.40)
Official Corporate Strategy
Official corporate strategy concerns top management’s statements about the company’s intended strategy: the businesses it wants to be a winner in and its intended competitive advantage.
Basis of Competitive Advantage in the Industry
The basis of competitive advantage that the company faces depends on its chosen product-market position. Most industries, though not all, contain several viable positions that companies can occupy. Market and nonmarket forces determine the basis of competition that governs success in each of these positions. As any of these forces change in major ways the basis of competition—the external selection environment—changes as well.
Distinctive competence concerns the differentiated skills, complementary assets, and routines that the company possesses to meet the basis of competitive advantage in the industry. Distinctive competencies are viewed as intrinsic to the company’s identity and character. For instance, they very much determine the type of corporate strategy, such as differentiation or cost leadership that a company will pursue. They are not easy to change.
(p.41) Strategic Action
Strategic actions commit the company’s resources (human, financial, technological, reputational, and so on) in significant ways. They involve binding trade-offs and are difficult—sometimes impossible—to reverse. Strategic action in large companies is usually distributed over different levels of management and different, specialized groups. Leaders’ strategic actions respond to external and internal selection pressures as well as to the stated official strategy.
Internal Selection Environment
To appreciate the role of the internal selection environment, it is useful to think about an important difference between start-up and established companies. Most start-up companies fail because they cannot overcome the selective pressures of the external selection environment (e.g., not enough customers have an interest in its products, or customers are not willing to pay the company what it costs to develop and bring to market its products). An established company differs from start-ups by the fact that it has overcome the selective pressures of the external environment and can to some extent substitute internal selection for external selection. This implies the centrality of the internal selection environment in the company’s strategy-making process. The internal selection environment mediates the link between official corporate strategy and strategic action and between industry-level sources of competitive advantage and firm-level sources of distinctive competence.
This book conceptualizes the internal selection environment in terms of the company’s strategic leadership capability, and developing this capability is viewed as an important responsibility of the CEO. Four key elements constitute the strategic leadership capability: (1) developing the strategic leadership regime; (2) managing dynamic interplays between strategy and culture; (3) balancing resource allocation for fit and evolvability; and (4) managing dynamic interactions with the board of directors.
This chapter is based on Robert A. Burgelman, “Built to Become: Corporate Becoming and Strategic Leadership,” Research Paper Series #3115, Stanford Business School, revised January 2016. I thank Philip Meza for helping create Figure 1.1 and Webb McKinney and Philip Meza for checking facts and helpful edits on early versions. I thank Bill Brownell, formerly chief strategy officer of HP, for providing detailed and very helpful comments on the complete draft of this chapter (reviewer notes, August 2015).
(1.) “Since the separation from H.P., Agilent investors have seen a 27 percent return on their investment, while investors in its former owner have seen about 30 percent of their value vaporize.” Robert Cyran, “Lessons for H. P. From Its Offspring,” New York Times, Dealbook, September 19, 2013.
(2.) R. A. Burgelman and A. S. Grove, “Let Chaos Reign, Then Rein In Chaos—Repeatedly: Managing Strategic Dynamics for Corporate Longevity,” Strategic Management Journal 28, no. 10 (2007): 965–979.
(3.) Stacy Perman, “Centuries-Old Family Businesses Share Their Secrets,” BusinessWeek, May 14, 2008.
(4.) Social scientists from different disciplines have different views on the importance of corporate longevity. Economists, who view companies as instruments for organizing economic transactions that cannot be performed with market mechanisms or for maximizing financial benefits for their owners, do not consider company longevity a goal per se. Sociologists, who view companies as institutions that inherently seek to survive study why and how they do so, primarily in terms of legitimacy as a determinant of longevity. Strategy scholars combine aspects of the economic and sociological perspectives by focusing on the determinants of a company’s economic performance and viewing this as a condition for its continued survival. See, for instance, O. E. Williamson, “The New Institutional Economics: Taking Stock, Looking Ahead,” Journal of Economic Literature 38, no. 3 (2000): 595–613; and R. W. Scott, Institutions and Organizations, 2nd ed. (Thousand Oaks, CA: Sage, 2001).
(5.) See P. Bolton and F. Samama, “Loyalty Shares: Rewarding Long-term Investors,” Journal of Applied Corporate Finance 25, no. 3 (2013): 86–97.
(6.) J. Collins, Good to Great (New York: HarperBusiness, 2001).
(8.) J. Denrell, J. “Random Walks and Sustained Competitive Advantage,” “Management Science 50, no. 7 (2004): 922–934.
(9.) A. D. Henderson, M. E. Raynor, and M. Ahmed, M. “How Long Must a Firm Be Great to Rule Out Chance? Benchmarking Sustained Superior Performance Without Being Fooled by Randomness,” Strategic Management Journal 33, no. 4 (2012): 387–406. Interestingly, using sophisticated mathematical modeling techniques applied to the extensive Compustat database to determine which companies achieved consistent superior performance that cannot be attributed to simple good luck, this study did not identify any of the “good to great” companies. See also J. Denrell, C. Fang, and Z. Zhao, “Inferring Superior Capabilities from Sustained Superior Performance: A Bayesian Analysis,” Strategic Management Journal 34, no. 2 (2013): 182–196. Also see S. J. Gould, “The Streak of Streaks,” in S. J. Gould (ed.), Bully for Brontosaurus: Reflections in Natural History (New York: Norton, 1991), 463–472.
(10.) In other words, even if a firm’s optimal size could be determined at a particular moment in time it would most likely be a fleeting optimum because of continuously changing external and internal conditions. Therefore, rather than trying to determine optimal firm size, top management should be concerned about optimally matching strategy and structure at each point along the firm’s growth trajectory, which would then produce “optimal size” as a byproduct at any moment in time of the company’s growth process. R. A. Burgelman, Optimale Grootte in Bedrijfseconomisch Perpspectief, unpublished Licenciate thesis, Antwerp University, Faculty of Applied Economics (UFSIA), 1969.
(11.) Léo Apotheker, who we will encounter as one of HP’s CEOs in chapter 8, raised the question of relevance as the critical one facing HP at the time of his appointment. Interestingly, Satya Nadella, when he was a candidate for the CEO position at Microsoft, points out: “What drives me every morning and what keeps me up every night is one thing: this business is not about longevity, it’s about relevance.” D. C1lark, M. Langley, and S. Ovide, “Microsoft’s CEO Pick: From India To Insider,” Wall Street Journal, February 1, 2014, A 1.
(12.) I thank Bill Brownell for pointing out that one could think of the founder’s purpose dimension in terms of “focus,” and focus can shift over time (reviewer notes, August 2015).
(13.) Derek Thompson, “Instagram Is Now Worth $77 Million Per Employee,” The Atlantic, April 9, 2012.
(14.) For a list of the oldest companies in the world, see Stacy Condrat, “The Quick 10: 10 of the World’s Oldest Companies,” Mental Floss, July 20, 2009.
(16.) J. L. Gaddis, The Landscape of History: How Historians Map the Past (Oxford: Oxford University Press, 2002).
(18.) H. A. Kissinger, On China (New York, Penguin, 2011), 215.
(19.) For instance, President Nixon’s 1972 trip to China significantly changed the context within which future geopolitical relations between the United States and China would take shape.
(20.) Again, in the case of President Nixon, his involvement with the Watergate affair, an example of the internal context of the US government and the domestic social-political system, was not anticipated and had enormous implications for his continued ability to deal with the external geopolitical context that he helped shape.
(21.) R. A. Burgelman, “Concept of Strategy and Organizational Evolution,” In M. Augier and D. J. Teece (eds.), The Palgrave Encyclopedia of Strategic Management (London, Palgrave Macmillan, 2014): 1–8. In well-structured situations, in contrast to ill-structured ones, all the competing players are known and each player is a rational actor whose strategic moves are drawn from a predetermined set. Particular combinations of players’ strategic moves have clearly defined, if sometimes probabilistic, payoffs. Such strategic situations lend themselves well to the quantitative methods of decision theory and game theory. See, for instance, G. Saloner, “Game Theory and Strategic Management: Contributions, Applications, and Limitations,” in R. P. Rumelt, D. E. Schendel, and D. J. Teece (eds.), Fundamental Issues in Strategy (Boston: Harvard Business School Press, 1994), 155–194.
(23.) R. A. Burgelman, “Bridging History and Reductionism: A Key Role for Longitudinal Qualitative Research,” Journal of International Business Studies 42 (2011): 591–601.
(24.) Here I draw strategic implications based on the definition of “becoming” offered by G. W. Allport, Becoming: Basic Considerations for a Psychology of Personality (New Haven, CT: Yale University Press, 1955), 28.
(25.) R. A. Burgelman, Strategy Is Destiny: How Strategy-Making Shapes a Company’s Future (New York: Free Press, 2002).
(26.) There exists an important literature on dynamic capabilities in the field of strategic management. See, for instance, D. J. Teece, “Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance,” Strategic Management Journal 28 no. 13 (2007): 1319. This article provides the most comprehensive review and explication of the “dynamic capabilities” perspective. It is important, however, to emphasize here that capabilitities are only potentially consequential to the extent that strategic actors actually deploy them. See R. A. Burgelman, “A Process Model of Strategic Business Exit: Implications for an Evolutionary Perspective on Strategy,” Strategic Management Journal (Summer Special Issue 17, 1996): 193–214.
(28.) Carlos Brito’s remark on “critical leadership,” registered during a videoconference presentation to the Stanford Executive Program in summer 2012, could be fruitfully related to “upper echelon” and “top management team” concepts on which there exists an extensive research literature in the field of strategic management. See, for instance, M. A. Carpenter, M. A. Geletkanyca, and W. H. Sanders, “Upper Echelons Research Revisited: (p.44) Antecedents, Elements, and Consequences of Top Management Team Composition,” Journal of Management 30, no. 6 (2004): 749–778; and also S. Finkelstein, D. C. Hambrick, and A. A. Cannella, Strategic Leadership: Theory and Research on Executives, Top Management Teams, and Boards (New York: Oxford University Press, 2009). Pursuing this further here, however, is beyond the scope of this book.
(29.) See D. Schifrin and R. A. Burgelman, “LVMH in 2013: Sustaining Leadership in the Global Luxury Industry,” Stanford Business School case SM-197 (2013): 2.
(30.) “Corporate becoming” could be fruitfully related to the concept of “corporate identity,” on which there also exists an extensive research literature in the field of organization theory. See, for instance, D. A. Gioia, “From Individual to Organizational Identity,” in: D. A. Whetten and P. C. Godfrey (eds.), Identity in Organizations. Building Theory through Conversations (Thousand Oaks, CA: Sage, 1998), 17–31; and also D. A. Gioia, K. N. Price, A. L. Hamilton, and J. B. Thomas, “Forging an Identity: An Inside-Outside Study of Processes Involved in the Formation of Organizational Identity,” Administrative Science Quarterly 55 (2010): 1–46. It could also be further related to the earlier-mentioned book on the relationship between becoming and personality by Allport titled Becoming (note 24). Pursuing this further here, however, is beyond the scope of this book.
(31.) Brownell, reviewer notes, August 2015.
(32.) R. A. Burgelman, “Strategy as Vector and the Inertia of Coevolutionary Lock-In,” Administrative Science Quarterly 47 (2002): 325–357.
(33.) The autonomous strategy process is a manifestation of the irrepressible human entrepreneurial spirit. John W. Kiser III, in his book Communist Entrepreneurs (New York: Franklin Watts, 1989) shows how even in the most repressive socioeconomic systems it was not possible to entirely eliminate the entrepreneurial drive. Eugene Lewis, in his book Public Entrepreneurship (Indianapolis: Indiana University Press, 1984) documents how autonomous entrepreneurial activity helped shape major government agencies. Edith Penrose, in her book The Theory of the Growth of the Firm (Oxford: Basil Blackwell, 1959) was among the first scholars to systematically examine the implications of internal entrepreneurship for the growth of the firm. It is important to point out, however, that autonomous strategic action can also be potentially dangerous. For instance, the autonomous development of a reduced instruction set computing (RISC) processor at Intel during the late 1980s—the i860, that CEO Andy Grove later called a “renegade” product—had the potential to undermine Intel’s powerful ecosystem built around its complex instruction set computing (CISC) microprocessor product line. See Burgelman, Strategy Is Destiny, 146–153.
(34.) C. M. Christensen and J. L. Bower, “Customer Power, Strategic Investment, and the Failure of Leading Firms,” Strategic Management Journal 17, no. 3 (1996): 197–218.
(35.) Brownell, reviewer notes, August 2015.
(36.) HP, according to Bill Brownell, has used cross-business unit strategic initiatives to link groups together, for instance to pursue opportunities on the Internet of Things. The company also used a “radar function” to rally people around coming market disruptions, which has helped “seed the ground” for support on certain initiatives (reviewer notes, August 2015).
(37.) R. A. Burgelman, “A Process Model of Internal Corporate Venturing in the Diversified Major Firm,” Administrative Science Quarterly 28 (1983): 223–244. Also see R. A. Burgelman and L. Valikangas, “Managing Internal Corporate Venturing Cycles,” MIT Sloan Management Review 46 (Summer 2005): 26–34.
(38.) L. V. Gerstner, Who Says Elephants Can’t Dance? (New York: HarperBusiness, 2002), 129–130. The strategic change was dramatic. In 1992, IBM’s total revenues of $59.9 billion were composed of $33.8 billion in hardware (56 percent of total), $11.1 billion of software (18.5 percent), and $15.0 in services (25 percent). In 2001, IBM’s $81.6 billion in revenues were now composed of $33.7 billion in hardware (41 percent of total), $12.9 billion in software (16 percent), and $35 billion in services (43 percent).
(39.) W. Isaacson, Steve Jobs (New York: Simon & Schuster, 2011), 468.
(40.) R. A. Burgelman, “Corporate Entrepreneurship and Strategic Management: Insights from a Process Study,” Management Science 29, no. 12 (1983): 1349–1364.
(41.) R. A. Burgelman, “A Process Model of Internal Corporate Venturing in the Diversified Major Firm,” Administrative Science Quarterly 28 (1983): 223–244.
(42.) See for instance J. L. Denis, L. Lamothe, and A. Langley, “The Dynamics of Collective Leadership and Strategic Change in Pluralistic Organizations,” Academy of Management Journal 44, no. 4 (2001): 809–837.
(43.) A. S. Grove and R. A. Burgelman, “Modeling Nation-Level Strategic Change,” unpublished manuscript, April 2009.
(44.) This framework is called the “strategy diamond.” See R. A. Burgelman, “Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments,” Administrative Science Quarterly 39 (1994): 24–56. Also see R. A. Burgelman and R. E. Siegel, “Cutting the Strategy Diamond in High-Technology Ventures,” California Management Review 50, no. 3 (2008): 140–167.
(45.) I agree with Bill Brownell that “drifting” can occasionally be useful in situations “where a company experiments and evolves ‘amoeba like’ by multiplying cells in the domains where it works and then vectoring of that” (reviewer notes, August 2015). This is how the internal ecology of strategy-making actually works. But we would both also agree, I believe, that there is a time limit within which strategic leadership must start doing the vectoring.
(46.) Max Weber discusses the nature of charismatic authority and its routinization in “The Theory of Social and Economic Organization,” In A.H. Henderson and T. Parsons (translation) (Glencoe, Illinois: Free Press, 1947). It has been reported, for instance, that Apple has hired business historians to create case studies of Steve Jobs’s strategic leadership approaches, but for internal use only. In view of the process of corporate becoming examined in this book, however, Apple’s approach can be problematic if it assumes that what was adaptive in the past will also be adaptive in the future.
(47.) See A. S. Grove, “Breaking the Chain of Command,” Newsweek, October 3, 1983.
(48.) Personal communication with author at Stanford, July 2013.
(49.) At Intel today, for instance, the preferred terminology is “candor” rather than constructive confrontation.
(50.) Alan Mulally, former CEO of Ford Motor Company and famous for executing one of the greatest corporate turnarounds in recent history, introduced a “working together” strategic leadership regime that required all senior executives in weekly leadership meetings to list the key strategic plan implementation issues that they were facing in their area (functional, geographic, product group) and to characterize these by a traffic light system of green (all fine), orange (some issues), and red (major problems). Mulally also expected all members of the leadership team to help each other. B. G. See Hoffman, American Icon: Alan Mulally and the Fight to Save Ford Motor Company (New York: Crown Business, 2012). The traffic light system can of course be abused by middle level executives turning the lights from red (p.46) to green to hide problems. In the case of one major European company, for instance, the CEO threatened to fire on the spot any executive caught doing such a thing.
(51.) R. A. Burgelman and A. S. Grove, “Strategic Dissonance,” California Management Review 38, no. 2 (Winter 1996): 8–27.
(52.) This phrase is popularly but perhaps inaccurately attributed to management theorist Peter Drucker. In any event, it has taken on a life of its own.
(53.) See R. P. Rumelt, Good Strategy Bad Strategy: The Difference and Why It Matters (New York: Crown Business, 2011), 77 (emphasis in original).
(55.) A classic example of how latent conflict between the operating model and the core values can become manifest in the face of contextual change is offered by the Johnson & Johnson (J&J) company. J&J’s top core value always was to do what is best for the customers; its operating model, on the other hand, was based on very high decentralization, with the many division presidents being the company’s key executives. During the 1980s, in the face of great consolidation among hospital companies, J&J’s key customers increasingly wanted to deal with a limited number of J&J sales representatives, rather than with the sales representatives of the dozens of different J&J divisions. Corporate management created a Hospital Services Group, with the purpose of establishing a single sales interface for the customers, but this was strenuously resisted for many years by the division presidents.
(56.) Brownell, reviewer notes, August 2015.
(57.) Intel Corporation’s problem with the so-called “Pentium flaw” in 1994 powerfully illustrates how the latent conflict between a changed corporate strategy and the company’s core values can become manifest. One of Intel’s core values is “discipline,” as defined by engineers. Intel engineers in their disciplined approach to examining the functioning of the new chip discovered that the Pentium (like all new chips) had a flaw: it sometimes produced an error in so-called “floating point” calculations. But they also discovered that the probability of the error was extremely small (approximately 1 in 7 billion). As was their custom, they produced a white paper explaining this and shared it with their OEM customers. A non-Intel mathematician somehow got news of the flaw and used the Internet to widely broadcast it. This created a furor, especially after IBM recalculated the potential error and claimed that its probability of occurring was significantly higher (though still extremely low) than the estimate provided by Intel. Eventually, Intel had to offer to recall the flawed Pentiums and replace them with nonflawed ones at the cost of some $475 million, even though only the smallest number of users would ever have had to deal with the problem. Intel’s fundamental error? They did not fully appreciate that after having entered into consumer space with their extremely successful “Intel Inside” marketing campaign, they now faced a context in which “Reality = Perception,”” and their core value of discipline as defined by engineers in the relationship with OEM customers did no longer apply. See Burgelman, Strategy Is Destiny.
(58.) I am grateful to Bill Brownell for suggesting the potential importance of “hunkering down” as way in which conflict may remain latent, yet hinder strategy execution (reviewer notes, August 2015).
(59.) R. A. Burgelman, “Intraorganizational Ecology of Strategy Making and Organizational Adaptation: Theory and Field Research,” Organization Science 2, no. 3 (1991): 239–262.
(60.) This statement applies at the organizational level an insight of recent research at the individual level that integrates neuroscience, meditation and philosophy related to the (p.47) brain, mind and self-consciousness. See E. Thompson, Waking, Dreaming, Being: Self and Consciousness in Neuroscience, Meditation, and Philosophy (New York, Columbia University Press, 2015), chapter 10 (325).
(61.) Interview with Joel Birnbaum.
(62.) Interview with Wim Roelandts.
(63.) Interview with Wim Roelandts.
(64.) This form of diversification has been called “related constrained,” and was found to be associated with the highest economic performance among types of diversified firms. See P. R. Rumelt, Strategy, Structure, and Economic Performance (Boston: Harvard Business School Press, 1974).
(65.) I thank Bill Brownell for the elucidation of the speed-scale trade-offs (reviewer notes, August 2015).
(66.) These challenges were identified by Burgelman and Sayles thirty years ago. They wrote:
“The challenge for established firms, we believe, is not either to be well organized and act in unison or to be creative and entrepreneurial. The real challenge, it would seem, is to be able to live with the tensions generated by both modes of action. This will require top management’s exploitation of existing opportunities to the fullest (because only relatively few will be available), the generation of entirely new opportunities (because today’s success is no guarantee for tomorrow), and the balancing of exploitation and generation over time (because resources are limited). Strategic management approaches will have to accomplish all three concerns simultaneously and virtually continuously.”
See R. A. Burgelman and L. R. Sayles, Inside Corporate Innovation (New York: Free Press, 1986), 191, emphasis added. This quote from the epilogue anticipated large streams of important academic research that has built on James March’s distinction between “exploitation” and “exploration” in organizational learning (1991) and on the revival and elaboration of the idea of “ambidextrous” organizations by Michael Tushman and Charles O’Reilly (1997). See J. G. March, “Exploration and Exploitation in Organizational Learning,” Organization Science 2, no. 1 (1991): 71–87; and M. L. Tushman and C. A. O’Reilly, Winning Through Innovation (Boston: Harvard Business School Press, 1996).
(67.) Edith Penrose was the first to systematically identify and examine the managerial constraints that limit the rate of growth of a firm. See E. T. Penrose, The Theory of the Growth of the Firm (Oxford: Blackwell, 1959).
(68.) It is interesting to note that the possibilities frontier can be related to a typology of firms identified and defined by Raymond E. Miles and Charles C. Snow in their 1978 book Organizational Strategy, Structure and Process (McGraw-Hill). High fit/low evolvability seems to correspond to their “defender” type; low fit/high evolvability seems to correspond to their “prospector” type; high fit/high evolvability seems to correspond to their “analyzer” type; and low fit/low evolvability seems to correspond to their “reactor” type, who operates inside the frontier. On balance, HP would seem to be somewhat similar to the “analyzer” type.
(69.) Strong concern for fit and weak concern for evolvability is the strategic posture of highly specialized firms that are usually also dominant in their market. Intel Corporation, with its dominant position in microprocessors for PCs, is an example. Such dominant specialists face great difficulties in finding significant radically new growth opportunities. Weak (p.48) concern with fit and strong concern about evolvability is the strategic posture of firms that are highly innovative and able to move into new niches when competitive pressures in an existing one become intense. Maxim Integrated, an analog/digital microprocessor company, is an example. Such firms may face strategic difficulties if scale and scope (through consolidation) increase in importance. We expect that unsuccessful companies are characterized by weak concern for fit and weak concern for evolvability.
(70.) J. J. Rotemberg and G. Saloner, “The Benefits of Narrow Business Strategies,” American Economic Review 84, no. 5 (1994): 1330–1349.
(71.) J. J. Rotemberg and G. Saloner, “Visionaries, Managers, and Strategic Direction,” RAND Journal of Economics 31, no. 4 (2000): 693–716.
(73.) R. A. Burgelman, “Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments,” Administrative Science Quarterly 39 (1994): 24–56.
(74.) R. A. Burgelman, “Intraorganizational Ecology of Strategy Making and Organizational Adaptation: Theory and Field Research,” Organization Science 2, no. 3 (1991): 239–262.
(75.) N. N. Taleb, Antifragile: Things that Gain from Disorder (New York: Random House, 2012). While stridently dismissive of academic research and academic culture, this book provides glimpses of a remarkably lucid and perspective-shifting description of the role of strategy in coping with a disorderly world.
(76.) See for instance J. Sommer, “Trying to See Apple From a Different Angle,” New York Times, February 1, 2014.
(77.) HP CEO Lew Platt commissioned a study about the growth “stall points” that companies, such as HP, seemed to systematically encounter once they reached a certain size; see M. S. Olson and D. Van Bever, Stall Points (New Haven, CT: Yale University Press, 2008). It is important to point out, however, that great companies do not necessarily have to proceed on a sustained quantitative growth trajectory. For instance, HP under Lew Platt decided to spin off its Test & Measurement business in 1999 (renamed Agilent), and thereby reduced its size. In September 2013 Agilent announced it would split off its electronic measurement business from its life sciences and diagnostics businesses creating two publicly traded companies. The life sciences and diagnostics buinesses would retain the Agilent name. See “Agilent Technologies to Separate into Two Industry-Leading Public Companies,” Agilent press release, September 19, 2013. Earlier examples include the International Harvester company, which sold off its heavy construction equipment business and its agricultural equipment business in the 1980s to focus on its heavy truck engines business only and renamed itself Navistar. Several years ago IBM sold off its PC business to Lenovo, and in 2014 was planning to also sell off its low-end server business to Lenovo. In October 2015, Meg Whitman announced the decision to split HP in two. Chapter 2 of this book provides a conceptual framework that helps explain the conditions under which it makes strategic sense to split off businesses and to reduce the size of the firm.
(78.) The reference to Packard’s speech is based on a recollection of Webb McKinney, who was an employee of the company at the time. The poem was originally published in The Atlantic Monthly, September 1858, in Holmes’s regular “The Autocrat of the Breakfast Table” column for that magazine.
(79.) C. Fiorina, Tough Choices: A Memoir (New York: Portfolio, 2007), 320.
(80.) New Webster Encyclopedic Dictionary of the English Language.
(81.) D. Kahneman, Thinking, Fast and Slow (New York: FSG, 2011), 205.
(83.) B. G. Glaser and A. L. Strauss, The Discovery of Grounded Theory (Chicago: Aldine, 1967).
(85.) I. Prigogine, From Being to Becoming: Time and Complexity in the Physical Sciences (New York: W. H. Freeman, 1980), 128. Also see R. A. Burgelman, “Prigogine’s Theory of the Dynamics of Far-from-Equilibrium Systems Informs the Role of Strategic Entrepreneurship and Innovation in Organizational Evolution,” in C. E. Shalley, M. A. Hitt, and J. Zhou (eds.), Oxford Handbook of Creativity, Innovation, and Entrepreneurship: Multilevel Linkages (New York: Oxford University Press, 2015).
(86.) S. A. Kauffman, The Origins of Order: Self-Organization and Selection in Evolution (Oxford: Oxford University Press, 1993), 234, 235.
(87.) S. J. Gould, The Structure of Evolutionary Theory (Cambridge, MA: Harvard University Press, 2002), 1273–1274.