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Planning and the Organizational Environment – Part I

One of the distinctive characteristics of an “emerging” company is the significant level of “innovation” associated with its business model, with innovation being thought of as the process of successfully acquiring and implementing new ideas within a business organization.  Successful innovation increases the likelihood that a company will achieve the extraordinary growth and stakeholder value necessary for emerging status; however, not surprisingly, most new business ideas are never achieved.  While the reason may be a lack of commitment or resources, another major obstacle to successful innovation is lack of planning.  A substantial amount of literature exists on the importance of strategic planning and it generally is accepted that implementing and maintaining formal planning processes at the appropriate time during the development of the company is an essential element in creating and maintaining competitive advantage.  While the strategic planning approach is fairly well embedded with larger firms, the record is less clear about the role that planning plays in small- and medium-sized enterprises.  For example, some studies of strategic planning practices in the US and the United Kingdom concluded that only a small fraction of small- and medium-sized companies, as few as one in six, had a strategic plan and that such companies were often naïve about planning and development of strategy.  However, other studies of successful high growth small companies in the US indicate that almost 90% of those firms engaged in an assessment and review of their business strategies at least annually. 

A number of aspects of strategic business planning are related to the way in which the company deals with the environment in which the company must conduct its activities.  This environment, which may be usefully referred to as the “organizational environment,” consists of two distinguishable, albeit often related, layers—the specific environment, which includes the forces (e.g., stakeholders) that can be expected to have a direct impact on the ability of the specific company to obtain the scarce resources required for the company to create value for its owners and other stakeholders; and the general environment, which includes the forces that typically will have an impact on the shape and design of all organizations, including the company and other organizations who may be part of the stakeholder network of the company.  Companies do have some options in the way that they structure their specific environments based on the decisions made by management regarding the desired “organizational domain” of the company.  Probably the most important choices that a company makes will be the scope of the goods and services that the company will produce or otherwise make available and the customers that the company expects to serve, since that will largely determine the stakeholders, in addition to the customers, who will be in a position to influence the pursuit of scarce resources by the company (i.e., the specific environment)—suppliers, distributors, employees, unions, special interest groups, governmental agencies and competitors.  General environmental factors may be more difficult for companies to control, although they certainly can and must anticipate changes relating to those factors that will impact future strategic business planning.  Examples of general environmental factors include economic forces; technological forces; political and environmental forces; and demographic, cultural and social forces.

The relationship between the “environment” and strategic business planning is not a new idea and, in fact, it is common for management to integrate some form of environmental analysis into the strategic business planning process.  The usual approach was to determine where the business activities of a particular company stood along a continuum that spanned from very stable (i.e., predictable) at one extreme to very unstable (i.e., unpredictable and risky) at the other end.  Companies that operated in a stable environment typically enjoyed the benefits of a loyal customer base, limited and stable competition, slow and infrequent changes in the technology underlying their basic products and services and a predictable body of laws and regulations. Ironically, the environment for US car manufacturers, and many manufacturers of consumer goods, could be characterized as stable for most of the first part of the 20th Century and the same can be said for service industries such as banking and securities.  In contrast, companies that entered new and uncharted fields such as computers and software, telecommunications and biotechnology found themselves in unstable and rapid changing environments that were difficult to navigate and predict.  Certainly, many well-known companies—IBM, Microsoft, Hewlett Packard, Intel, Apple and Genentech—overcame the challenges of an unstable environment to become some of the major economic players in recent years; however, many, many more companies with promising business ideas failed, at least in part, because of their inability to navigate the choppy waters of the modern global business environment.

Obviously, if they had their choice the managers of any new business would choose a stable business environment provided that they could reasonably expect to realize a sufficient return on the company’s investment in resources to meet or exceed the expectations of their stakeholders.  Unfortunately, there is now little doubt that more and more businesses, including small businesses looking to operate in a limited market niche, must deal with and attempt to manage an unstable business environment.  The developments behind this change are well documented and publicized—improvements in information processing, telecommunications and transportation; rapid changes in technology; growth and development of markets in foreign countries; and growing discernment in consumer tastes that have caused customer loyalty to almost disappear.  The Internet, for example, has created thousands of potential niche markets and enabled a number of new strategies for creating customer relationships.  As a result, companies are now compelled to be part of an international marketplace in which competition can emerge suddenly from anywhere in the world and the search for the resources that are necessary for competitive advantage—raw materials, technology, low-cost manufacturing—must be conducted globally.  The dramatic, and likely permanent, turn toward instability in the business environment places makes strategic business planning and even higher priority for companies of all sizes.  I'll be using a couple of future posts to provide more details about how an understanding of the business environment should be integrated into the business planning process.


Why Corporate Governance Matters

For a number of reasons, corporate governance
has been “front page” news all around the world over the last two decades.  Unfortunately, one of those reasons has been
the proliferation of scandals and financial crises that trace their roots to
apparent shortcomings in corporate governance systems in countries dispersed
widely around the world including the US, Russia, Brazil and Japan and other
parts of Asia.  The response has been a
plethora of changes to laws and regulations as well as countless reports and
model codes of conduct.  In the US, for
example, the Sarbanes-Oxley Act and directives issued by the Securities and
Exchange Commission through the national securities exchanges have
substantially changed the landscape for duties and responsibilities of
directors, officers, outside auditors, attorneys, and investment bankers.  The focus of these corporate governance
initiatives varies from place-to-place and time-to-time and has included
attempts to reduce the perceive lack of transparency in corporate governance
systems and an unwillingness to integrate independence into the board rooms,
improving the diversity and functioning of boards of directors and identifying ways
to enhance the engagement and participation of shareholders. In addition, the
perceived need to improve corporate governance has attracted the interest of
global economic and political organizations working on development programs.  To learn more about "why corporate governance matters", see this month's report.


Compensation Committees & Compensation Consultants

the New York Stock Exchange and the Nasdaq Stock Market have imposed requirements on their listed companies with respect to how they
are expected to determine executive officers’ compensation and have promulgated
various rules relating to the establishment and composition of compensation committees,
the purposes of such committees and procedures that they are expected to follow
in discharging their duties.  This issue of the Business Counselor Advisor summarizes changes in those listing requirements and outlines other areas that counsel should consider when advising companies on forming and operating compensation committees.


Smart Blog on Leadership: Recruiting Directors

During the month of May I continued to expand my
relationship with SmartBrief to get my content in front of non-lawyers
including executives, managers, entrepreneurs and investors.  The article I posted on SmartBlog on
discussed how a company's board of directors should be a tool used
to establish competitive advantage and not just a group that meets on occasion
and provided tips on how CEOs and company founders can recruit directors
tailored to the firm's strategic needs.