Strategic Leadership in the Context of Digital Transformation (Part 2)

Our modern world, increasingly accelerated by innovative technologies, demands constant adaptation from companies. Digital transformation is now omnipresent. At the latest since the beginning of the Corona outbreak, even the last latecomers have begun to transform their business models. In the first part of this article, which is based on my master’s thesis “Strategic renewal in the form of digital transformation through business model innovation – a multi-layer governance perspective”, I described the four situations that require transformation and explained the necessary measures that an affected company must take to adapt to a changing environment (Figure 1).

Figure 1: Managerial responses to conditions of decline (Cameron & Zammuto, 1983)

In fact, the Corona crisis is a case of environmental contraction, triggered both by a shortage of supply due to the lockdown and the consequent business closures, and by a subsequent decline in demand due to the restriction of the shopping experience by new hygiene rules and the fear of possible contagion.

Now, every transformation also means business model innovation. This involves changing at least two dimensions of the business model, such as the value proposition and value creation, but potentially also the target group or the earnings logic in the case of larger-scale transformation projects. This innovation can either be developed internally or integrated into the company through external acquisitions. Which of these options is selected depends, on the one hand, on the expertise available within the company and, on the other hand, on the prevailing management system, i.e. on the type of guidelines by which the board of directors sets targets for top management and against which it evaluates its performance. There are basically two options available to the board of directors: strategic or financial control.  In this part, we will now look at the advantages and disadvantages of these two management systems and which of them is better suited to sustainable innovation and transformation, the prerequisites for long-term success in business today.

Innovation and leadership

Strategic leadership uses qualitative, often intuitive criteria to evaluate management, which requires a deep understanding of markets and business logic. An important part of this is the flow of information between the different hierarchical levels. Changes in the market are often recognized from the bottom up and accordingly passed on to higher hierarchical levels, which can test and improve their strategic assumptions based on this information.

Financial management is based on quantitative indicators, such as ROI targets or, in the case of digital transformation, specific targets for digital EBITDA, and focuses on minimizing the deviation between target and actual figures.

While strategic control encourages management to make long-term investments in order to achieve the company’s goals and to put them above the short-term maximization of financial ratios, financial control tends to lead to a more risk-averse behavior that is more focused on generating profits within the current business model and favors innovations that pay off within a few years. Since radical or even disruptive innovations take many years to reach market maturity, such innovations usually exceed the planning horizon of companies that are managed purely on the basis of financial ratios. They must therefore be acquired externally at a later date. M&A activities, in turn, require a high degree of financial resources as well as time and attention on the part of the higher hierarchical levels, making them not only unavailable for internal innovation activities, but also impairing a deeper engagement with the current business activities of their own company and the company to be acquired. M&A activities are therefore not only the result of financial control, but also a trigger for this management style, a self-reenforcing circle that leads to a weakening of the internal innovation capacity of the company. Whether a company can remain innovative through acquisitions alone is questionable. The prospects of success of a portfolio strategy, for example, are considered much more promising in more mature markets with a strong focus on efficiency than in a market where the company’s success depends on continuous innovation. For the initial acquisition of know-how in a new line of business, however, individual acquisitions may also make sense in innovative markets, as long as a strategic management system can be implemented subsequently.

Particularly in innovation-intensive markets, it is recommended that the board of directors manage the company by setting strategic targets.  To do this, it must be aware of relevant developments, correctly interpret their impact on business activities and recombine existing and new resources and skills accordingly. The use of information from the environment and from lower levels of hierarchy is of considerable importance in  order to constantly revise one’s own forecasts and adjust the assumptions on the market on which they are based. In view of the speed of technological development, it is likely that in order to fulfil this task successfully, the Board of Directors will have to change, strengthen its professional expertise and the exchange of information with lower hierarchical levels, and also meet more often than in the past.

Sources

Cameron, K., & Zammuto, R. (1983). Matching managerial strategies to conditions of decline. Human Resource Management, 22(4), 359–375. https://doi.org/10.1002/hrm.3930220405

Floyd, S. W., & Lane, P. I. (2000). STRATEGIZING THROUGHOUT THE ORGANIZATION: MANAGING ROLE CONFLICT IN STRATEGIC RENEWAL. Academy of Management Review, 25.

Gassmann, O., Frankenberger, K., & Csik, M. (2014). The business model navigator: 55 models that will revolutionise your business. Harlow, England ; New York: Pearson Education Limited.

Gupta, A. K. (1987). SBU STRATEGIES, CORPORATE-SBU RELATIONS, AND SBU EFFECTIVENESS IN STRATEGY IMPLEMENTATION. 25.

Hitt, M. A., Hoskisson, R. E., & Ireland, R. D. (1994). A Mid-Range Theory of the Interactive Effects of International and Product Diversification on Innovation and Performance. Journal of Management, 20(2), 297–326. https://doi.org/10.1177/014920639402000203

Hitt, M. A., Hoskisson, R. E., & Moesel, D. D. (1996). THE MARKET FOR CORPORATE CONTROL AND FIRM INNOVATION. Academy of Management Journal, 37.

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