Mapping the future of organization through Strategy : The Role of the Board of Directors in Strategy Development and Execution _ Part 1

Clever Matigimu

Most organizations whose years follow the Gregorian Calenda are now in their last quarter of the year. This is a very critical period where the organizations look back on the journey travelled during the year and also cast their minds into the following period. It is a period characterized by the following activities:
• Preparation for the financial statements for the year and external audits
• Board meetings to review performance for the year
• Strategy formulation retreats and budget preparations
Organizations find themselves extremely busy to close off their year properly and pressure mounts mostly towards November/December periods, with last Board meetings for the year, where it is expected that the organization submit the strategy and budget for approval by their board to enable smooth start to the ensuing year.
It is universally accepted that the success of an organization is centered on a good strategy, consolidated by effective execution of the same. As such, the process of strategy formulation and execution becomes a critical function in determining the success of the organization. This paper seeks to remind organizations and individual readers what strategy is all about and the role of the board, if any, in strategy formulation and execution.

What is Strategy
Countless publications, in the form of articles and books on strategy by business leaders and business theorists, have been issued yet there is no definitive answer about what strategy really is. This is because people think about strategy in different ways:
 some people believe that you must analyze the present carefully, anticipate changes in your market or industry and from this, plan how you’ll succeed in the future.
 others think that the future is just too difficult to predict and that its best for strategy to evolve organically, supported by the notion that there is no more business as usual – “Usual” keeps moving. Hence the need for adaptation of strategy and business model in the advent of disruptions
Johnson and Scholes (2005), defined strategy as that process which determines the direction and scope of an organization over the long term. It should determine how resources should be configured to meet the needs of markets and stakeholders.

Michael Porter emphasizes the need for strategy to define and communicate an organization’s unique position, and says that it should determine how organizational resources, skills and competencies should be combined to create competitive advantage.

While we cannot rule the evolutionary element of strategy, planning for success in the marketplace remains important and this calls for organizations to anticipate and prepare for the future at all levels.
Emphasis of matter needs to be made on the need for strategy at ALL levels in the organization. This requires us to define these levels and how the various members of the organization are involved with special focus on where and how the Board of Directors comes in if they should ever be involved.

Levels of Strategy in an Organization
Strategy can be formulated at three levels shown below:

At the Corporate level, this is where the overall strategy of an organization, that is made up of multiple business units, operating in multiple markets, is formulated. This involves integrating and managing the diverse businesses and realizing synergy at the corporate level.

At the business level, strategy is formulated to convert the corporate vision into reality, formulated for specific strategic business units and relates to a distinct product market area.

At the functional level, strategy focuses on how to realize the business unit level goals and objectives using the strengths and capabilities of the organization. The different functional areas which a strategic business unit has, such as marketing, production and operations, finance, and human resources produce their own strategies.

The McKinsey Horizon Model on strategy
McKinsey coined a 3 horizon model on strategy, where each of the horizons focuses on specific bigger picture views to strategy and organizational reliance, transformation and sustainability in the advent of unpredictable disruptions.

The 3 Horizons Framework helps organizations manage:
1. Horizon 1 (H1): Core business activities that generate current revenue and profit, Optimize existing operations.
2. Horizon 2 (H2): Emerging opportunities that extend or diversify the business, Invest in near-term growth areas.
3. Horizon 3 (H3): Future innovations that could transform the industry or organization – long-term innovations and organizational transformation.

Because initiatives across the three horizons yield returns at different timelines, executives tend to put Horizon 2 and Horizon 3 initiatives on the back burner. This is a dangerous mistake and goes against how the three horizons should be managed.
Each horizon requires a different focus, tactics, tools, and goals. The inter relationship between these three horizons and their intended response to the prevailing macroeconomic environment are what defines the organization’s sustainability and resilience. To remain competitive in the long run, a company must simultaneously allocate its management attention, R&D dollars, and resources across all three horizons.
We will discuss these horizons in more detail in the next publication to underpin the deep insights that organizations should keep mindful of.

The Role of the Board
There is general agreement that boards face three interrelated roles:
*monitoring senior executives, including selecting and dismissing top management, evaluating their performance, designing compensation packages, and supervising internal and external auditing.

* defining, selecting and implementing corporate strategy.

* linking the company to its external environment and performing ceremonial functions enhancing the company’s legitimacy
However, discussions on how boards behave, how effectively they fulfil these three roles and hence, on how they affect the development of an organization’s strategy, are ongoing. There is no consensus on the extent of the board’s involvement in each of the three. Other views favor more focus on the oversight role of the board and less involvement in strategy formulation.
Corporate Governance has had an oversight role as the board’s core function due to the desire to address the Agency Problem and protect the shareholders’ and indeed stakeholders’ best interest. The character of most board agendas reflects more emphasis on their monitoring role more than strategy development. The boards seem to be preoccupied more with the review of performance and less on the prospects and how to capitalize on opportunities and mitigate risks.
I must, however, hasten to say that there is a revised interest on interrogating the future and repositioning of corporate strategies as they get implemented in response to emerging risks and opportunities.
Most boards tend to delegate the strategy formulation process to the CEO and Senior management, with the board taking a review and approval role ahead of implementation. Then the board would monitor and evaluate, in most cases, the approved strategy which would have been reduced to a great extend into budgets. Very little attention, by way of time spent in board meetings, is devoted to scrutinizing the strategy implementation and how it shapes the future. The tendency is for the board to be satisfied with financial performance regardless of the approved strategy and hence decided long term sustainability.

There is an emerging trend which now required boards to consider Environment, Social and Governance (ESG) and Governance, Risk and Compliance (GRC) as part of their key responsibilities.

Sustainability agenda has become a buzzword the world over and organizations, and indeed their boards, are required to take particular attention to their activities and how they ensure compliance with set standards. In part 2 of this publication, we will explore the role the board should play in strategy formulation in their quest to balance between remaining independent and ensuring the balance of attention between the three horizons of strategy that we introduced in this edition. We will also marry the three levels of strategy with the three horizons and where the board should get involved.