Grey 1
Effectiveness of Rational Strategizing: Exploring Sustainability Implications on Graduate Business Education
Gary A. Grey
March 1, 2017
Ateneo de Manila University
Ateneo Graduate School of Business
Abstract
This paper explores sustainability for its implications on graduate business education using analysis made on selected Philippine companies for the effectiveness of its use of rational strategizing. The analysis of rational strategizing proved that there is a positive outcome resulting from the proper execution of a rational strategizing process. The hypothesis of rational strategizing having a positive outcome is proven to be valid given the empirical evidence using the Chi-Square test. The strength of this positive outcome is dependent on the interaction among the three components of change management: the change agent (the leader), the change element (the strategy process of formulation and execution), and the change target (the organization). The outcome is measured by a credit risk measure, specifically the Altman Z-score for emerging markets. The basis for measuring the outcome is through selecting samples of implemented strategic management (STRAMA) papers from AGSB’s almost 3,700 digitized strategic management papers. Specifically, papers from AGSB’s MBA Regis program and MBA Health programs were selected with the cut-off year of implementation of 2004-2005 to allow for a 3-year performance window for analysis of the before and after implementation Altman Z-score outcome measure. A literature review was conducted to scan and review strategizing methodologies within the scope of the components of change management resulting in creating a Strategy-Organization-Leadership model that explain the positive outcome of implemented STRAMA paper using left-brain strategizing processes. Cross-tabulation analysis and literature review on the types of leadership, their strategies, and implementation show the link between sustainable leadership and transformational leadership and their impact on the organization as measured by the Altman Z-score.
The insights provide a template for graduate business education to incorporate sustainable strategy formulation in the teaching of its courses. . Through strategic and systemic thinking embedded in the Strategic Management integrative course of AGSB and the recommendations and conclusions emanating from the study, a guide is provided for future research directions and improvement of the strategizing process for higher education to assure sustainability.
Key Words: Rational Strategizing, Change Management, Strategy, Change Agent, Change Element, Change Target, Data Mining, Leadership, Organization, Strategy Management, Sustainable Strategic Management, Sustainable Higher Education, Emerging Market
1Introduction
This paper explores sustainability for its implications on graduate business education using analysis made on selected Philippine companies for their effectiveness of rational strategizing. Rational strategizing or “left brain” strategizing is the andragogical approach used by the Ateneo Graduate School of Business (AGSB) in its integrative course called Strategic Management (STRAMA). The strategy formulation tools employed are part of the Fred David framework used in the course Strategy Management[1] where the output of the graduate student is the STRAMA paper . The analysis done on the selected Philippine companies showed that theSTRAMA paper as applied in the business world once the students graduate has a positive outcome. The hypothesis of rational strategizing having a positive outcome is proven to be valid given the empirical evidence using the Chi-Square test. The strength of this positive outcome is dependent on the interaction among the three components of change management: the change agent (the leader), the change element (the strategy process of formulation and execution), and the change target (the organization). The outcome is measured by a credit risk measure, specifically the Altman Z-score for emerging markets. The basis for measuring the outcome is through selecting samples of implemented strategic management (STRAMA) papers from AGSB’s almost 3,700 digitized strategic management papers. Specifically, papers from AGSB’s MBA Regis program and MBA Health programs were selected with the cut-off year of implementation of 2004-2005 to allow for a 3-year performance window for analysis of the before and after implementation Altman Z-score outcome measure.
The paper starts offby presenting a Conceptual and Analytical Framework of the paper which includes the Change Management Process, the Altman Z-Score as Measurement of Outcome, Sustainability, Types of Leadership and the Strategy-Organization-Leadership Scoring System. A summary of the survey results and analysis of the study “Effectiveness of Rational Strategizing”[2]is presented followed by simple cross tabulation analysis to discover new insights in the incorporation of the sustainability dimension. . Finally, the paper comes out with the implications for Graduate Business Education when sustainability is incorporated to the Triple Bottom Line perspective of Profit, People, and Planet as embedded in the Leader (Change Agent), Strategy (Change Element), and Organization (Change Target).
2Conceptual and Analytical Framework
This paper views the change management model as the starting point of the analysis. A measure used to determine the interaction among the model’s components, the Altman Z-score, provides a useful indicator to determine different component outcomes, particularly sustainability.
2.1 Change Management Process
The conceptual framework (Figure 1) employs the change management paradigm of the three components of change, viz., Change Agent (the Leader), Change Element (Strategy), and Change Target (Organization).
Figure 1: Change Management Framework
The appropriateness of using Change Management as the theoretical framework is perhaps best expressed through this comment from Robert Kaplan and David Norton, creators of the Balanced Scorecard: “Managing strategy is synonymous with managing change.”[3]
Figure 2: Interaction among Change Management Components
The interaction amongst various parameters within each overlapping individual component is shown in Figure 2. It can be seen that strategy planning, decision-making, and implementation, along with the creation of vision, mission, objectives, key result areas (KRAs) and performance indicators (PIs), interface with the leader with his innate capabilities and attitudes, providing motivation, evaluation, control, and reward, coupled with leading, staffing, relating, and supporting activities that will enhance organizational structure, systems, and resources.[4] The change element which is the rational strategizing process and the elements of leadership and organization with the Altman Z-Score Outcome can thus be visualized in Figure 3.
Figure 3: Strategy-Organization-Leadership Interaction Diagram
2.2 The Altman Z-Score as a Measure of Outcome
The three major components of change interact with each other; as represented by the double-headed arrows and yield an outcome. The outcome is measured by the Altman Z-score which is also a measure of risk, particularly credit risk, as used by the banking community.,36The literature on the Altman Z-Score and various literature on modeling and data mining became the basis for determining the use of the Altman Z-Score for Emerging Markets. Specifically, these concepts are found in the various articles by Edward Altman that pertain to the Z-Score, Bruce G. Carruthers and B. Cohen on Credit Rating in the 19th Century, Nikolai Chuvakhin and L. Wayne Gertmenian on Bankruptcy Prediction in the WorldCom Age, David Loshin’s book on Business Intelligence, Armando Veira et al. on Model Selection and Feature Ranking for Distress Classification, Raymond Anderson’s The Credit Scoring Toolkit,and Linda Allen, Gayle L. de Long, and Anthony Saunders work on Issues on the Credit Risk Modeling of Retail Markets.[5]
Ideally, the best tool for outcome measurement is the balanced scorecard, analyzing the four areas of outcome, viz., financial perspective, internal business perspective, customer perspective, and learning and growth perspective. It would be impractical to use these as the measurement of effectiveness as this would entail having a monitoring system within the AGSB academe that will track the outcomes of companies operating in the corporate world. For practicality, therefore, the Altman Z Score is used as the preferred benchmark measure.
2.3 Sustainability
The Triple Bottom Line (TBL) concept developed by John Elkington has changed the way businesses, nonprofits and governments measure sustainability and the performance of projects or policies. Business sustainability is often defined as managing the TBL- a process by which companies manage their financial, social and environmental risks, obligations and opportunities. However, this approach relies on an accounting based perspective and does not fully capture the time element that is inherent within business sustainability. A more robust definition is that business sustainability represents resiliency over time – businesses that can survive shocks because they are intimately connected to healthy economic, social and environmental systems. These businesses create economic value and contribute to healthy ecosystems and strong communities.These concepts can be found in the papers of Joana Radomska “ The Concept of Sustainable Strategy Implementation”, Wikipedia’s “Triple Bottom Line”, and Timothy Slafer & Tanya Hall’s “The Triple Bottom Line: What is it and How Does it Work?”[6]
Beyond the foundation of measuring sustainability on three fronts—people, planet and profits—the flexibility of the TBL allows organizations to apply the concept in a manner suitable to their specific needs.
2.4 Types of Leadership
There are three types of leadership, viz., Transformational, Transactional, and Laissez-faire, which the paper considered in surveying the STRAMA students who implemented their papers. The paper used theMultifactor Leadership Questionnaire (MLQ) factors, a survey which identifies different leadership characteristics based on examples and provides a basis for leadership training.[7]
Transformational leadershipis a style ofleadershipwhere a leader works with subordinates to identify needed change, creating avisionto guide the change through inspiration, and executing the change in tandem with committed members of a group.
In contrast to transformational leadership,transactional leadershipstyles focus on the use of rewards and punishments in order to achieve compliance from followers. Transformational leaders look towards changing the future to inspire followers and accomplish goals, whereas transactional leaders seek to maintain thestatus quo, not aiming for progress.
Studies have shown transformational leadership practices lead to higher satisfaction with leader among followers and greater leader effectiveness, while transactional practices lead to higher follower job satisfaction and leader job performance.
In a laissez-faire leadership style, a person may be given a leadership position without providing leadership, which leaves followers to fend for themselves. This leads to subordinates having a free hand in deciding policies and methods.
Studies have shown that while transformational leadership styles are associated with positive outcomes, laissez-faire leadership is associated with negative outcomes, especially in terms of follower satisfaction with leader and leader effectiveness.[8]
This paper‘s findings jives with the studies found in the literature review as will be discussed in the summary of findings and cross-tabulation analysis.
2.5 The Strategy-Organization-Leadership Scoring System
Based on the literature review, the variables inferred as part of the components of the interaction among the strategy-organization-leader are as follows (Table 1).
Table 1: Component Variable among the Strategy-Organization-Leadership Catogories
Variable Name / DefinitionSTRATEGY FORMULATION AND EXECUTION VARIABLES
Strategy Development
1 / Mission / Degree of clarity of mission
2 / Vision / Degree of clarity of vision
3 / Environment / Degree of correct identification of environmental factors that impact strategy
Strategy Mapping
4 / Scope / Degree of proper definition of where and how the organization will compete
5 / Model / Degree of development of a comprehensive integrated model of the strategy
6 / Target / Degree of conversion of strategic direction statements into measures and targets
7 / Action Plans / Degree of defining the portfolio of initiatives/action plans to close performance gaps
8 / Funding / Degree of providing a source of funding for strategic initiatives separate from operational budget
9 / Accountability / Degree of establishing accountability for execution of cross-business strategic themes
ORGANIZATIONAL ALIGNMENT ENABLERS
Cascading Strategy Structures
Horizontal-vertical alignment structures
10 / Cross-functional Teams / Degree of using teams, cross-functional groups, or a matrix/"grid" structure to share resources or knowledge
11 / Informal Communication / Degree of using informal communication (i.e., person-to-person contact)
12 / Formal Integrators / Degree of using formal integrators (e.g. a project management or quality assurance organization)
13 / Information reliability / Degree of information reliability (from unreliable/managers do not trust information outside own departments to reliable)
14 / Information enablers / Degree of information reaching those who need it (from "information falls through the cracks" to information gets acted on by people who need it)
15 / Decision-making/response time / Degree of speed in executing decisions (from slow response to high speed) (e.g. response to customer complaints)
16 / Bureaucratic waste / Degree of time or money being wasted because of inefficiency or bureaucracy in the execution process.
17 / Appreciation of change / Degree of appreciating strategy relevance to tasks (from none to seeing the whole picture of where the strategy fits)
Individual alignment structures
18 / Employee reluctance / Degree of sharing important information or knowledge with others (from none to whole-hearted collaboration)
19 / Political self-gain / Degree of "Playing politics" as more important than performance against strategy execution goals for gaining individual recognition (from high to low)
Operational Planning
20 / Translation / Degree of monitoring and managing the strategic initiatives and the Balanced Scorecard
21 / Resource Appropriate / Degree of ensuring that resource capacity, operational plans, and budgets reflect the directions and needs
Monitor, Learn, & Adapt
22 / Finance and Operations Management / Degree of monitoring and managing short-term financial and operational performance
23 / Balanced Scorecard / Degree of monitoring and managing the strategic initiatives and the Balanced Scorecard
24 / Feedback monitoring / Degree of periodically assessing results hypothesized in cause-effect diagrams are occurring as anticipated
LEADERSHIP VARIABLES
25 / Trust / Builds trust
26 / Integrity / Acts with integrity
27 / Inspiration / Inspires others
28 / Innovation / Encourages innovative thinking
29 / Coaching / Coaches people
30 / Rewards / Rewards achievement
31 / Mistakes prevention / Monitors mistakes
32 / Fight fire syndrome / Does not just fight fires
33 / Involvement / Does not avoid involvement
34 / Extra Mile / Generates extra effort
35 / Efficiency / Is efficient
36 / Satisfaction / Generates satisfaction
As can be seen in Table 1, there are 36 variables identified through the literature review. In order to assess the “before” and “after” implementation scores, these independent variables were used in the survey questionnaire administered to the selected STRAMA-implemented companies. Each category component (i.e., Strategy Formulation and Execution, Organizational Alignment Variables, and Leadership Variables) will have a total score summed up from the scores of the variables from each category. The total point is 1,000 for the three main categories, and the weight distribution (almost 1/3 per main category) is shown in Table 2.
Table 2: Weight Distribution of Strategy-Organization-Leadership Score
Maximum PointsPoints / % to Total
Strategy / 350 / 35.00
Organization / 325 / 32.50
Leadership / 325 / 32.50
Total / 1,000 / 100.00
Each major category has a range of scores as shown in Table 3.
Table 3: Range of Scores by Category and Sub-Category
Category / Minimum / MaximumStrategy
Strong / 234 / 350
Medium / 118 / 233
Weak / 0 / 117
Organization
Strong / 218 / 325
Medium / 110 / 217
Weak / 0 / 109
Leadership
Transformational / 218 / 325
Transactional / 110 / 217
Laissez-Faire (None) / 0 / 109
The Strategy-Organization-Leadership Scoring system uses a 1,000 point system similar to a bank‘s. A common cut-off point for banks to accept or reject a loan application is 70% or 700 points.This decision point is also represented in the Altman Z-score’s distressed zone score, which is 1.1 and below.
The score per category becomes the basis for measuring the strength of outcome as measured by the Altman Z-Score, whose determination is based on the four financial variables for the Emerging Market Z-Score configuration.
The “expert”-determined SOL scoring system provides a fresh insight on the interaction of strategy, organizational alignment, and leadership in explaining the outcome not just in financial ratio vocabulary, but also in the multi-disciplinary language of other disciplines – strategy, organization, and leadership. Given sufficient historical data, the 1,000 point scoring system can eventually be calibrated to the Altman Z-score and can even be used for predicting the outcome without using the financial ratios.
2.6 Sustainable leadership
In order to do the cross-tabulation analysis of the results, it was necessary to find the link between transformational leadership and sustainable leadership. Sustainable leadership is defined as “individuals who are compelled to make a difference by deepening awareness of themselves in relation to the world around them”. In doing so, they adopt new ways of seeing, thinking, and interacting that result in innovative sustainable solutions. Some take the view that sustainability leadership or more precisely leadership for sustainability is not a separate school of leadership but a particular blend of leadership characteristics applied within a definitive context. A number of business leaders felt that the need to differentiate leadership from leadership in general may be a necessary but temporary phenomenon and really embedding it in the organization is the unique current set of challenges on a 10 year view. Beyond that hopefully it becomes business as usual.[9]
A recentCEO study on sustainabilityconductedby the UN Global Compact and Accenture – the third one of its kind – reached out tomorethan 1,000 executives from 27 industries in 103 countries around the world, asking for their views on the past, present and future of sustainable business. Thislargest-ever CEO study on sustainability offered a mixed picture of global movement in the positive direction juxtaposed with the frustration over slow progress.
In the previous edition of this study, conducted in 2010, CEOs were optimistic thatsustainability – understood as the active management of social, environmental,and governance issues as a part of core business – would soon become a normembedded into operations of companies worldwide, withleadership on sustainabilityincentivized and rewarded. In 2013,63 percent of CEOs still expect sustainability to transform theirindustry within five years and 76 percent believe that embeddingsustainability into core business will drive revenue growth andnew opportunities. However,the predominant feeling is that globalbusiness efforts on sustainabilitymay have plateaued, and despitedeeper awarenessand commitment levels manybusiness leaders deem the pace of change andthe scale of impact insufficient.