LEADERSHIP.

Corporate leaders can adopt different strategies, which can be classified into Transactional and Nurturing leadership strategies.

There are two essentially different strategies that can be adopted by corporate leaders - to direct the enterprise as though it is made up of assets which can be increased in value by being bought, sold, manipulated and added to; or to treat the enterprise as though its central core is a productive human community, and to act on the business through close involvement with the organisation.

In making this distinction, we realise that some will feel that we are being too simplistic, but we believe that it is a distinction well worth making, because it highlights fundamentally different philosophies of doing business - one of which is currently dominant in the financial markets, press and business academe.

Transactional Strategies.

Fundamental assumptions driving management behaviour

What transactional managers do.

Managers who fit the profile above are likely to engage in the following activities as their primary means of getting things done:

Nurturing Strategies.

Practitioners of this philosophy do not often capture the headlines - in fact, they tend to be categorised as 'boring' in some quarters. Because the essential focus of such managers will tend to be on the organisations that they lead, and the customers that those organisations serve, most of their work will be invisible to external observers and the signs of their success or failures difficult for such observers to directly measure, especially as results come as a consequence of the efforts and quality of the whole organisation, rather than a few high profile actors. Also, there will usually be a time delay between the actions of such managers and the results achieved.

Some examples of the practise of this philosophy might help understanding.
Henry Mintzberg of Mc Gill University described the behaviour of John Cleghorn, CEO of the Royal Bank of Canada as follows:

"John Cleghorn's style of management is unusual for someone in his position; he is very involved in the operational details of the bank. He's been known to call from the airport to report that an automatic teller machine is not working. He sold the corporate jet - he says that he was uncomfortable with it - as well as the chauffeured limousines. All senior executives, Cleghorn included, are expected to spend at least 25 per cent of their time with customers and front line employees."

"In his meetings with employees, Cleghorn aimed to gather information, but also to send signals about the organisation, whether by encouraging long-term employees, congratulating people for their presentations, infusing his energy into the organisation, or constantly describing the values that he finds important. Rarely did he exercise the CEO's prerogative to control on this particular day. Rather, his role was to encourage and enable, with the individual (motivating and coaching), the unit (team building), and the organisation at large (culture building)."

"His strategy approach appeared to be one of crafting: to foster a flexible structure and open culture, to see the strategic implications of initiatives, and to integrate them with the overall vision. That requires his detailed, nuanced knowledge of the organisation.

"Of course, this approach, based on rich, grounded information, does not make someone a strategist: that depends on one's capacity for creative synthesis. But, I believe that such a style of managing is a prerequisite for developing strategic insights. It is the ability to move between the concrete and the conceptual - not only to understand the specifics but also to be able to generalise creatively about them - that makes a great strategist".

Mintzberg concludes, "Such is the practise of management as a craft - low key, involved, warm, focused.......It may not make the headlines, but it seems to work."

Are Mintzberg's insights invalidated by the fact that they seem to be very much at odds with the popular conception of the practise of top management as put about by those who dominate the channels of communication to the public and who make the most noise?

Well, it seems that serious researchers who have tried to find out what the managements of the most successful long-term performers really do come to just about exactly the same conclusions.

John Kotter, in his famous study of senior leaders that resulted in "The General Managers' concluded that what he saw in the behaviour of the most successful was:

Porras and Collins in their book, "Built to Last", describe the same range of behaviours in the best and most durable companies - commenting additionally that, in general, the best corporate managers are not charismatic superheroes, travelling from one challenge to the next, but dedicated corporate careerists who are closely bonded with the organisations that they lead and know so well. They observe that Jack Welsh, the much-feted CEO of GE, was only one in a long line of extremely capable leaders of that company, and probably not even the best.

Closer to home, 'Management To-day recently interviewed Sir Terry Leahy, the CEO of Tesco, one of Britain's diminishing group of great big companies, observing exactly the same patterns of behaviour, to wit:

In fact, commented the interviewer, Mr. Leahy seemed to be a rather serious, ordinary sort of fellow with a great determination that Tesco should do well - not at all in the heroic mould, even a mite 'boring'!

Last, we had the privilege of working closely with Jim Fifield, who led EMI Music from being a sorry industry loser to an industry leadership position.
Again, Fifield demonstrated many of the characteristics described in others, to wit:

One of his maxims was that a good subordinate would know what he, Fifield, valued, and act autonomously in line with this understanding - with the proviso that the subordinate would also call him when it mattered because they both knew the few critical matters which they needed to discuss before acting.
A second was that he valued "Words, not numbers - and the most important words were verbs." He wanted to know what people were doing, because if they did the right things, the numbers would follow.

The values behind nurturing strategies.

We hope that readers will recognise fundamental differences between the two philosophies that we have described. As a postscript, we would observe that it is almost impossible to move successfully from a predominantly transactional strategy to a nurturing one, whereas it is quite possible to weave transactional threads into a predominantly nurturing approach.

The effects of adopting nurturing or transactional strategies

We have contrasted two different philosophies of running businesses. We made the contrasts quite sharp, because we believe that, whilst there may be many variations of the two philosophies, there are only two basic choices available to managers - to develop a business using predominantly transactional means, or to build it from the 'inside', by concentrating primarily on investment in product, marketing, people and organisation. We did however comment that adopting a nurturing or 'Building' style allowed for the use of transactional strategies, whilst he opposite was not the case. To illustrate what we mean: BP made a massive transactional move when it acquired Amoco. It seems that this acquisition has been very successful, thus justifying a transactional strategy. But, what is seldom pointed out is that BP had previously concentrated on building a very strong organisational platform, with a distinctive high-performance culture for at least ten years before the acquisition. Dick Olver, a recently retired BP director, is convinced that the assimilation of Amoco would not have been successful were it not for the priority given to building a really strong and distinctive organisation, capable of absorbing another company efficiently.

So, what are the consequences of adopting the two philosophies?

We will start with Transactional Strategies.
In 1993, Robert Napier, who had recently been appointed CEO of Redland plc, a company that had grown rapidly through the 1980's and early 1990's through a stream of acquisitions, called a conference of senior managers from Redland's businesses across the world. The conference was convened at a critical time, as the company had just acquired Steetley plc, a major competitor, and Napier was aware that attempting to raise more money from the markets would be difficult before the benefits of the many acquisitions were demonstrated to the market. So, no more deals.

In his opening address, he asserted that the Steetley acquisition had marked Redland's coming of age, as it had moved into the top 50 British companies, with a market capitalisation that far exceeded its industry competitors.
Redland, stated Napier, had "A great collection of assets across the world", dominant shares in many markets, its top management were widely respected where it mattered and the company enjoyed strong support from the financial community.

The assembled managers, most of whom were non-British and drawn from Redland's operations across the world, were asked to give the executive board feedback on what they thought of the company and what they saw as the priorities.

Napier and his corporate colleagues were shocked by the results.

The managers said:

It is to Napier's credit that he understood and took seriously what his managers said and initiated extensive programmes aimed at building an organisation that could generate decent returns from the acquisitions. Unfortunately for Redland, it was too late. The consequences of ill-judged and over-priced acquisitions together with a weak organisation were too much to overcome. Performance deteriorated, investor support rapidly evaporated and Redland was acquired by the French Groupe Lafarge.
The point of this story? That it is typical of the effects of adopting transaction-led strategies.
Let us examine why. Strategies that are primarily transactional are based on the assumption that the value of a business lies in its assets.
'Assets' include market shares, intellectual property, physical property, financial assets and other tangibles that are capable of having a value placed on them. This makes people a rather dubious asset - their costs can be accurately measured, but their potentials cannot.

The primary means of increasing the value of an enterprise is to increase the value of its assets, and the most straightforward way of doing this is to buy and sell them. Companies, and there are many, that follow this philosophy will be very active in the M&A markets, will constantly shuffle and change their portfolio of businesses, and will tend to be impatient for results - thus frequently buying and disposing of senior people.
Well-executed transactional strategies will grow the value of enterprises over quite long periods, as the stories of Hanson Trust, Tyco, World Com, Redland and many, many others will tell.
Poorly conceived and badly executed transactional strategies can still draw enthusiastic support from investors, provided that the economic climate is bullish and companies have a convincing tale to tell. See Enron, Marconi and Invensys. But the only real difference between well and badly executed transactional strategies is that the underlying results will become evident sooner.

In either case, companies that rely on predominantly transactional strategies will have the worm of their own destruction in their entrails. Understanding this fundamental fact may be helped by considering the case of one of Britain's most praised companies, Hanson Trust. Hanson was the darling of the financial markets and press. The deal-making abilities of Lords Hanson and White were legendary. Hanson bought and sold assets that were slackly managed and extracted the last vestiges of juice by stringent financial control. Acquisition followed acquisition and the share price soared. Only a few small voices commented that the performance of acquired businesses followed a pattern - profits and cash flow initially soared, but after a few years peaked and declined. The small and mainly ignored voices postulated that the reasons for decline were a lack of investment.

Hanson's fall from grace was quite sudden. The company was limited to the US and Britain, its approach to business was unacceptable in continental Europe - asset stripping was not popular there. Hanson obviously needed bigger and bigger acquisitions to hide the underperformance of those already made and the 'big one' was ICI, which was rightly postulated to be a rather slackly managed collection of very different businesses. So Hanson made a tilt at ICI and failed, at which point the worm in its entrails became apparent. The group made a weak attempt to persuade the world that it was committed to some 'core businesses', but hardly sounded convincing. So, Hanson broke itself up, and is now a medium-sized brick, concrete and aggregate company.

So, we would strongly maintain that whilst transaction-led strategies may result in the collection of valuable assets, the underlying value of companies pursuing this route as their primary means of developing will inevitably decline over time.
The reason for this is glaringly obvious - assets are inert, inanimate collections of property. What gives companies life and long-term value is committed, skilful and purposeful human activity, pursued through a well-founded organisation. And this has to be built, developed and nurtured, it cannot simply be bought.

Nurturance and Business-Building.

So we come to the other basic philosophy, that businesses will be strongest if they are built over relatively long timescales. The building process requires dedicated attention to developing an organisation that is designed for its particular purpose - that has quality business processes, an adaptive and distinctive culture, in which there is a close community of purpose between leaders and led. Business-building also requires a priority to be placed on investment to develop and maintain a strong product/service base and close relationships with customers. The essential difference between the two philosophies is that building starts from the inside, focuses on progressive investment in people product and customer service, and organisations that pursue such philosophies will resort to transactional methods as a secondary means of business development.

The problems with the building philosophy are that it requires patience and skilful, dedicated leadership and that most of the work of top managers is relatively invisible to outsiders, as it is concerned with internal and customer relationships. To those who prefer deals and other forms of exciting action, such a style is boring.

Badly executed, building strategies will result in over-conservative, relatively inflexible organisations that are insensitive to their external environments.

Well-executed building strategies have produced all of the capitalist world's greatest and most durable industrial, commercial and financial enterprises.
These companies will contain skills that are not replicable, unusual combinations of capability that will produce premium and increasing value for customers and eventually, shareholders.

Such companies do not need to fall victim to the processes of 'creative destruction' beloved of some capitalist theoreticians, they can live, adapt and grow over long periods of time.

These convictions are not just our foibles, serious research into the roots of business success by Porras and Collins, Lorsch and Donaldson, Mintzberg and the core competence promoters such as Hamel, Prahalad, Doz and Bartlett are well worth investigating.

So why are transactional strategies so attractive? Simply because they are:

Some would also comment that the financial markets and world of big business are male dominated, testosterone-rich environments, where personal competition and dominance are important behaviours.

On the other hand, as already stated, 'building' is invisible to outsiders, making cause and effect obscure to those who rely on the 'Numbers' for their understanding. It is also perpetual, not time-bound or related to artefacts such as financial years, fund managers quarterly figures and the like.

Last, but by no means least, business-building is relatively unrewarding for investment bankers and speculators, who are increasingly calling the shots.

To summarise:

There is strong evidence that the prevailing trends towards speculation and short-termism in the financial markets; and as a consequence the transactional strategies pursued by top managers cause needless destruction of companies and industries.

Conversely, the pursuit of predominantly nurturing strategies, supplemented where appropriate by transactions that can be supported by strong organisations, are the origins of long-term value creation, provided that top management have the patience, and investors support them.

Proof of these assertions lies in the history of large companies in the US and Britain over the last 20 years. A rapid and rather cursory count of British companies will unearth the fact that at least 60 of the current top 200 have been in trouble of one sort or another as a result of pursuing transactional strategies, whilst many companies have simply disappeared and been forgotten.
Anyone remember the British and Commonwealth Group? It was once the darling of the City, but collapsed in a spectacular manner in the late 1980's, as the result of an excess of transactional activity. Or more recently Marconi, destroyed by an orgy of acquisitions and disposals? Or possibly the tragic story of Invensys, created from the merger of once-successful groups BTR and Siebe?

In the US, it has been calculated that M&A activity destroyed over $1 trillion between 1995 and 2000 - more than the entire dot com madness!
The size of US industrial economy makes it far more capable than absorbing such stupidity than the UK, where company failure is often terminal, resulting in foreign takeover.

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