StratChat 14 December 2021: Transparency in Business Strategy

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StratChat is conducted under Chatham House Rules. Consequently, the summary below is presented without any attribution of who said what. As such, it is an agglomerate of views - not necessarily just those of the writer or indeed of any one individual.

On 14 December 2021, we talked about Transparency in Business Strategy.

Sun Tzu said: "All warfare is based on deception". This notion has carried forward into at least some of our thinking about business strategy. Yet it does not sit well with our modern liberal values.

Sometimes, we have no choice

Much strategy is done in secret behind closed doors. Sometimes this is done for commercial advantage. Other times regulators demand it. For example, market-sensitive information must be withheld or released only as certain conditions are met or not met. This is to prevent insider trading.

Other times, regulators demand transparency. For example, large publicly traded companies and/or dominant providers of utility services are usually expected to be very transparent. This may be enforced by competition or anti-trust regulators. But smaller private companies can operate largely under the radar.

In countries like France, the Unions may require transparency from employers on any actions which may impact workers. Germany goes further, demanding worker representation on company boards.

Impact on operating models

All of these requirements (above) come with criteria. As soon as you meet those criteria you must either disclose the information or keep it secret (depending on the requirement). So, organisations must constantly monitor their own activities to see when the criteria are met. Sometimes organisations may dance around the criteria. They defer particular actions or conversations in order to defer triggering the requirements for disclosure or confidentiality.

Organisations must then embed the mechanics for secrecy or disclosure throughout their operating models. This can involve simple administrative tasks like maintaining "insiders lists" and requiring staff to sign project-specific NDAs. (Insiders lists list all the people who are allowed to know about certain things. If your name is not on the list, it must be kept secret from you. NDAs are Non-Disclosure Agreements.) And it can extend to complex cybersecurity protocols and private data rooms.

The impact on staff can be significant. For example, analysts are paid to analyse things. But if information has been withheld from them, their analysis will be incomplete.

Other organisations have gone out of their way to build transparency into their operating models. For example, Ray Dalio introduced a system of "radical transparency" at hedge fund Bridgewater. His objective was to encourage independent thinking and build trust (source). However, at least one employee has likened it to a "cauldron of fear and intimidation" (source).

Multiple strategies

Organisations often have multiple strategies. They may have:

1. A relatively closely held strategy known only to a few senior executives. Let's call that the hidden strategy.
2. A strategy which is known within the organisation and given as the basis for resource allocation decisions. Let's call that the internal strategy.
3. A strategy which is communicated to the outside world, including customers. Let's call that the public strategy.

You can imagine these as a dartboard with concentric circles. Or perhaps as the layers of an onion.

The hidden strategy may be held closely for regulatory reasons (as above) or because it reflects the personal ambitions of the decision-makers. Those personal ambitions could be good or bad. A bad motivation would be, for example, to maximise their bonus by taking actions which were not in the best interests of the company.

The internal strategy is the one given to staff to explain what they are being asked to do. For example, one participant told of having worked at an organisation where they could not reconcile the decisions being made with the internal strategy. They later found out that the executives had been secretly preparing the business for sale. Suddenly, the decisions started to make sense.

The public strategy manifests itself, for example, in the vision and mission statements and marketing collateral which organisations post on their websites. They may be aimed at the organisations' customers but written in the knowledge that their competitors will also see them. As a result, these often appear relatively bland and sanitised. And they seldom give any clues as to what the organisation is about to do next.

There is almost certainly a hierarchy of specificity. The hidden strategy is likely to be much more specific than the internal strategy which is likely to be much more specific than the public strategy.

In an ideal world, this would be the only way in which they differ. They would be different levels of detail of an otherwise perfectly aligned plan. But for the reasons outlined above, this is often not the case.

A stakeholder-oriented view

One reason for these apparent inconsistencies is that the different messages are prepared for different stakeholder groups. For example, senior decision-makers, workers, customers, shareholders, etc.

In theory, each of these different stakeholder groups is given a slightly different view of the same strategy. However, that is not always the case.

One explanation of the role of management is that they are there to strike a long-term mutually-beneficial deal between all stakeholders. That is predominantly between customers, workers, suppliers and shareholders, but also government, regulators, unions and various special interest groups. In an ideal world, each stakeholder group would (1) get enough of what they wanted, whilst (2) understanding what all the other stakeholders were getting and (3) feeling that that distribution was fair.

At different times in history, different stakeholder groups have assumed greater prominence relative to other stakeholder groups. In the 80s and 90s, there was a lot of focus on shareholders. In the 90s and 2000s that started to shift towards customers. And in more recent years, employees have grown in perceived relative importance. Perhaps there will always be shifts in this balance. Or perhaps we will finally settle on a view which recognises the importance of all.

In any event, it remains difficult to strike that balance between different stakeholders' perspectives. Different stakeholder groups lack the ability or motivation to understand the other stakeholder groups' perspectives. And, of course, they may simply be greedy to increase their own share of the spoils. And so conflict arises.

If management is unable to balance those conflicts, there is a temptation to distort the message to each stakeholder group. Instead of a single strategy presented consistently to all stakeholders, we get a number of slightly different, not quite reconcilable strategies!

Perhaps one of the challenges we face, as strategists, and working with the marketing and internal and external communications teams, is how to maintain internal consistency whilst presenting views which are of necessity different to different stakeholder groups.

In order to achieve that, do we need to be more transparent about what we are and aren't disclosing to each stakeholder group, together with the reasons why?

Non-profit organisations often find it harder to achieve this balance. Many struggle to even agree who their customers are! (Is customer even the right concept to use here?) The definition of value is also more complex. In for-profits, value is more easily and commonly expressed in monetary terms. For a non-profit, it is more likely to be a somewhat harder to quantify societal benefit.

This may be because we've invested more time in understanding for-profits, and because there is more variety in the nature and purposes of non-profit organisations. However, with increasing business model innovation, even for-profits are becoming more diverse and complex. Think, for example, of business models like Facebook, where the apparent consumer is often described as the product!

Stepping back towards this more generic stakeholder model and working from first principles may provide an easier route forward for them.

In order to enable transparency, we need to get to a situation where each stakeholder group understands each other stakeholder groups stake and is comfortable with it.

In a well-known example, Facebook users trade their personal data for free access to the services Facebook provides. For this to remain sustainable, they must understand and be comfortable with what Facebook does with that data. Without that transparency, trust will be broken.

This level of transparency is not easy to achieve. Information asymmetry often means that one stakeholder group knows much more than another. Organisations have been known to leverage this by burying terms and conditions in legalese and small print. And consumers are known to respond by simply signing up to things without reading or understanding them. Regulators are then required to step in to try and close this gap. Could organisations do better of their own accord - and would it be to their own benefit?

Stakeholder size and power

This stakeholder view may also explain why larger and more public organisations generally have to be more transparent than smaller more private organisations. Larger, more public organisations tend to have larger, more powerful and better-organised stakeholder groups.

A public company may have thousands of shareholders. Shareholders may engage through tightly controlled stock exchanges. They may be under constant review by rating agencies and stockbrokers.

A utility company may have millions of customers.

Larger companies may also have fewer competitors and greater barriers to entry for new ones. This may lead to greater regulatory scrutiny.

Small private companies, on the other hand, may have a few investors who all know each other, and fewer customers who have more competitors to choose between. As a result, they naturally face less scrutiny.

Access to information

Whilst information asymmetry may be an inevitable fact of life, it is also true that we now have the ability to access more information than we ever have before.

And so, whilst most consumers (or other stakeholders) may not be inclined to look too deeply into what organisations and other stakeholder groups say, at least some will.

And when they do, they now have greater means to publish their findings on social media and in blogs, podcasts, etc.

Which came first: do we now have more information about organisations ESG (environmental, social and governance) performance because it became more important to us? Or did it become more important to us because we were exposed to more information about what organisations were actually up to?

Millennials place a much greater emphasis on 'social good' when they evaluate organisations as employees or as customers. Is this because they are more benevolent? Or is it because they are more aware - more informed - about the costs and opportunities inherent in commerce. Clearly, some companies have been pursuing social good from the outset. But there are fewer and fewer places left to hide for those that do not. Either way, it is changing what organisations must do to succeed.

Increased access to information may be shaping what customers think is important. But it may also have more direct impacts on organisations strategies. For example, the direct availability of information may be squeezing middlemen out of some markets. We can now access the information they once monopolised for ourselves. And we can access computer systems which replicate some of their functions for ourselves. It may even be changing the way organisations compete by making it easier and quicker for competitors to copy each other.

Increased access to information also brings with it increased access to disinformation. That is a subject we've discussed, at least in part, at a previous #StratChat.

Anti-stakeholders

Stakeholders, by definition, want an organisation to succeed. They have a stake in its success.

But competitors, again by definition, don't want the organisation to succeed. They want to outpace the organisation at least. Or perhaps even crush it entirely.

And then there are 'anti-clients'. Anti-clients have an active interest in curtailing your product or service altogether. Think about people who want to ban smoking or nuclear power generation.

Whilst we may be able to make a case for greater transparency with stakeholders, it is hard to see the organisational benefits of greater transparency with competitors and anti-clients. (Even if there are societal benefits.)

Even then, it is hard to share information with some groups but not with others. "Information wants to be free", they say. Inevitably, it leaks out. So do we have to embrace greater transparency even here?

The impact on trust

Secrecy undermines trust. The benefits of involving people in strategy formulation in various ways are well rehearsed. If strategy is done in complete secrecy and then just imposed on people, they tend to feel 'done to'. A little bit of secrecy can undo the trust build up over a long period of substantial transparency.

But transparency can also undermine trust. We used to rely on trust. Increasingly, however, we don't. Instead we rely on direct access to information. We don't trust organisations to provide us with healthy food, we expect them to prove it by providing detail of what's in it and how its made. That seems like a good thing. But information can be both manipulated, misrepresented and misunderstood. Does it allow organisations to abdicate their responsibility? "We provided you with the information, you bought the product/took the job, and so the onus is on you." Could transparency be used as a smokescreen for untrustworthiness?

Can an organisation be too transparent? The CEO od discount UK jewellery retailer Rattners was once asked how they managed to keep prices so low. His answer was: "because it's total crap" he went on to comment that their earrings were "cheaper than an M&S prawn sandwich but probably wouldn't last as long." The company lost £500m and only survived after a change of leadership and a rebrand. (Source) It's unlikely anyone had thought that Rattners was a high-end retailer. But Rattners' over-transparency on the point was clearly a bridge too far.

Conclusion

So, what is the right balance between transparency and secrecy? Can and should we deploy any of Sun Tzu's deception in a modern business context?

The answer, it seems, may depend on a deeper understanding of stakeholders, information asymmetry and trust.

Transparency with stakeholders, where allowed, is generally good. But it must be tempered against each the stakeholder groups' desire and ability to process the information required. Although this is maturing, there are many cases where it may still need to be intermediated by activists or regulators. With careful analysis and understanding, positive outcomes are possible. Without it, conflict, inconsistencies and contradictions will continue.

Transparency with anti-stakeholders may be less desirable. But given how easily information is shared, it may be becoming harder to avoid. So perhaps we need to look for new ways to address this challenge.

Epilogue: Implications for StratNavApp.com

This has implications for StratNavApp.com itself. At the moment, the tool is built in such a way as to create total transparency within each project team using the tool. Obviously, the team is then free to decide how transparent it wants to be with the broader organisation and outside of the tool. But we do face calls for different levels of transparency within projects, which we review on an ongoing basis. (If you have any thoughts on the subject, please feel free to share them with us. Simply click on the question mark icon top right and either log a support ticket or submit an idea.)