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Boards & Strategy: Discovering interdependencies
“If you ask a hundred or so directors whom I know well what they conceive their function to be, 99½ percent will say, ‘To advise the management’…”
- Mace (1971, pp. 179) quoted in Coles et al. (2022)
The role of boards in companies is changing. Boards spend most of their time on strategy related issues. However, faster competitive shifts require much more and much better board engagement on strategy. As a result, boards are increasingly working to enact real change by asking probing questions and defining or refining the path forward. At the same time, boards are focusing the organization on the long-term perspective and protecting the commitment to long-term strategy and innovation, making sure that the course is clear and maintained, even in turbulent times. Nevertheless, board members often question whether they understand the industry’s dynamics and the structure and the economics of the business well enough for this changing role.
Boards intervene in many decisions of the organization. However, not all of these decisions are strategic. To guide boards in their activities related to strategy, we should first define which decisions are “strategic decisions” and what the role of the board in strategy should be for the organization.
The defining characteristic of a strategic decision is the interdependencies that are created with other decisions. A decision that creates these interdependencies with other decisions has the potential to guide these other decisions, i.e. the choice of this decision becomes strategic. As a result of this choice, other decisions need to be aligned to realize the strategy (Van den Steen, 2017; Leiblein et al. 2018).
Unfortunately, the current state of the art of strategy discussion is not very well suited for guiding boards about understanding the critical interdependencies between actions. Therefore, an important task of the board related to the strategy of the organization is exactly understanding and clarifying the actual importance of these interdependencies in order to advise the top management team. As Rumelt (2011) mentions: “A great deal of strategy work is trying to figure out “what is going on”. Not just deciding what to do, but the more fundamental problem of comprehending the situation.”
Leiblein et al. (2018) characterize the interdependencies of a strategic decision along three dimensions:
- interdependencies with other contemporaneous decisions faced by a focal economic actor;
- interdependencies with other economic actors, possibly external to the firm, and,
- intertemporal interdependencies indicating that the decision guides future choices.
These different dimensions of interdependencies relate to different types of strategic decisions.
First, interdependencies with other contemporaneous decisions faced by a focal economic actor are the decisions that Porter (1996) already considers when discussing the fit and trade-offs that Southwest Airlines or Ikea need to take into account when deciding on their activity set in order to minimize costs. These decisions are typically internal to the firm under the direct control of the top management team and require a fair amount of coordination.
Second, the interdependencies of decisions across different actors become critical in situations where actors from other organizations need to respond. These actors could be competitors that respond to a decision from the firm, but in today’s interconnected economy, these actors are as likely to be suppliers, customers or complementors that need to respond to the focal firm and coordinate their decisions to jointly create value.
Finally, intertemporal interdependencies are critical in resource allocation decisions as earlier decisions affect the future flexibility of the organization in the decisions that can be made. Earlier decisions create irreversibilities and commitments that are difficult to undo at later moments in time (Ghemawat, 1991). Jeff Bezos from Amazon famously categorized decisions into one-way and two-way doors: You can only go through a one-way door in one direction, you cannot undo your decision and come back (Alberg, 2021). These are the decisions Jeff Bezos would urge his management team and board to focus on.
Understanding these interdependencies between different decisions is an important part of the strategic role of the board to advise the management team. These interdependencies between decisions make experimentation very difficult as the success of a strategic move depends on executing on all decisions simultaneously. The upside is that these interdependencies between different activities lead to more complex and harder-to-copy strategies and might be the source of a (more) sustainable competitive advantage (Rivkin, 2000, Porter and Siggelkow, 2000).
Unfortunately, these interdependencies are often implicit and poorly understood. Uncertainty and changes in the environment obscure their importance and the management team might consider different time horizons to complete the strategic decisions. Boards can help the management team clarify the critical interdependencies before strategic decisions are executed on. As a result, interdependencies tend to provoke conflict within an organization. This is where boards often can weigh in with their advice. Resolving conflict requires debate and judgement (Eisenhardt et al. 1997). Boards can add different points of view and offer alternative solutions to these conflicts and uncertainties in understanding how to manage these interdependencies.
As a result, boards are becoming more important in the value creation process as these interdependencies become more relevant and important but are not very well understood. In organizations where interdependencies are well understood, the role of the board limits itself to the selection of the top management team and monitoring the results over time. In environments where these interdependencies are not well understood or might shift, the board gets involved in the strategy process on a continuing basis. Therefore, it is not surprising that the role of boards is changing when geopolitical tensions rise and disrupt global value chains, generative AI is changing how we work in and across organizations, and climate change is affecting businesses all over the world.
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By Bruno Cassiman, KU Leuven, IESE Business School
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