Participation of lower-level employees in the strategy process

(1)

“Participation of lower-level employees

in the strategy process”

Thesis for the Executive Programme in Management Studies – Strategy track (MSc Bedrijfskunde in deeltijd)

Written by: Chantal van de Scheur

Student number: 10684581

Due date: 31 January 2016

Submitted: 31 January 2016

Supervisor: Dr. ir. Jeroen Kraaijenbrink

(2)

2

Statement of Originality

This document is written by Chantal van de Scheur, who declares to take full responsibility for the contents of this document.

“I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.”

(3)

3

1. Abstract

This study examined the effect of participation of lower-level employees in strategy

formulation on the successfulness of strategy execution. A case study was conducted under 8 top- and middle-managers in the Financial Services industry and 4 strategic change experts. Results show that participation of lower-level employees in strategy formulation leads to more successful strategy execution. This positive relationship is influenced by several

variables. First, participation leads to higher engagement and this increases acceptance of the new strategy. Second, knowledge of lower-level employees leads to better achievable/more realistic strategies. Higher acceptance of the strategy by lower-level employees and better achievable/more realistic strategies both positively influence strategy execution. Although it was expected that the limitation of lower-level employees to see the whole perspective as well as possible sensitivity of strategic directions would negatively influence this relationship, the case study did not provide any evidence thereof. Besides the effects of participation, the study also revealed what participation methods are most used in the Financial Services industry and which employees should preferably be chosen to participate in the strategic renewal process. A conversational approach to strategy making is regarded very desirable. Based on the results of this research, middle- and top-managers are advised to include lower-level employees in strategy formulation. The study explains why participation is advisable and how it can be achieved based on existing theory and case study results. The study ends with

recommendations for future research on this subject.

(5)

5

2. Introduction

The modern organization was created during the first Industrial Revolution when mass productivity required larger organizations and higher capital needs. Because most

organizations could not finance the capital needs themselves, they were driven to financial markets where shareholders bought shares and became the new owners of organizations. These shareholders were not involved in the daily operations and as a result, separation of management and ownership evolved (Chandler, 1990). Management was given the task to optimize organizational performance and shareholder returns. The biggest concern for managers at this time was to improve efficiency of operations. The second Industrial

Revolution brought the emergence of even larger corporations that increased their scale and scope through diversified businesses (Baaij, 2014). Organizations started to compete with each other to achieve superior performance through competitive advantage and strategy became an important instrument to realize superior shareholder returns. The strategic process can be divided into strategy formulation and strategy execution. Strategy formulation is the process in which a competitive strategy is developed and/or the existing strategy is adapted based on the changing external, competitive environment and the organization’s resources and core competences. Strategy execution is the process in which the competitive strategy is implemented by adapting the organization’s people, processes, systems etc. to the new strategy. Many research has been done on both strategy formulation and strategy execution. There are authors who argue that strategy execution is more difficult than strategy formulation and that many organizations fail because they are unable to execute their successfully

formulated strategies. According to Hrebiniak (2013), some of the obstacles to effective strategy execution are: an inability to overcome resistance to change, poor or inadequate information sharing, lack of feelings of ownership of strategy among key employees, and a poor or vague strategy. This research describes how strategy execution can be improved by allowing lower-level employees to participate in strategy formulation. Participation is considered useful to improve strategy execution. It has a positive influence on feelings of procedural fairness and engagement which leads to feelings of recognition, shared goals, higher commitment, attachment and trust (Korsgaard et al, 1995; Ackermann & Eden, 2011; Kim & Mauborgne, 2008). Furthermore, participation enhances knowledge, leads to shared understandings, goal convergence and higher motivation & energy levels. Participation of lower-level management in specific is expected to lead to more realistic strategies and ignore choice paradigms of top-management. (Westley, 1990; Bourgeois, 1980; Woolridge & Floyd,

(6)

6 1990; Westley, 1990; Mangaliso, 1995; Ketokivi & Castañer, 2004; Eisenhardt & Zbaracki,

1992; Hart, 1992; Mintzberg, 1994). All this facilitates implementation and it is thus believed that participation will increase the successfulness of strategy execution. The focus of this research is on the effect of participation of lower-level employees. In the existing research about the strategic renewal process, the focus has been on either the direction of strategic renewal (top-down or bottom-up) (Huy & Mintzberg, 2003; Burgelman, 1983; Floyd & Lane, 2000) or the role of top-, middle- and lower management (Floyd & Lane, 2000; Hart, 1992; Bourgeois & Brodwin, 1984; Floyd & Woolridge (1992); Woolridge and Floyd (1990); Regnér (2003). There has not been any research on the role of lower-level employees, while including them early in the strategy process might help to overcome resistance to change, increase information sharing and ownership, and create a more solid strategy (obstacles that according to Hrebiniak (2013) limit successful strategy execution) .What this research will thus examine is whether participation of lower-level employees in strategy formulation has a positive effect on strategy execution. The study distinguishes itself from previous studies by focussing on lower-level employees. While participation in strategy execution has been encouraged by many scholars, little has been written about the possibility to involve lower-level employees in the early process of strategy formulation. The main research question addressed in this study is: “How does participation of lower-level employees in strategy

formulation influence strategy execution?” This question will be answered by combining a

review of the existing literature with a case study. The research starts with an overview of the existing literature, this leads to propositions regarding the relationship between participation of lower-level employees in strategy formulation and strategy execution. The research then continues with an explanation of the research design. The case study focuses on the Financial Services industry from which 8 top- and middle-managers and 4 strategic change experts were asked to give their opinion on and share their experience with participation of lower-level employees in strategy formulation. Results of the study are described by means of careful analysis and are followed by a discussion of these results. The research concludes with an overview of the conclusions and recommendations.

(7)

7

3. Theoretical framework

In this chapter, an overview of the existing literature is given in order to explain the context and relevance of the research question. This is done by first explaining how the process of strategic renewal is related to strategic advantage and which modes or approaches to strategic renewal are known. Next, the actors and their roles in the strategic renewal process are described, with a focus on the roles of middle- and lower-level management.

The second part of the literature review focuses on participation. The effects of participation are discussed in general by viewing strategy development as a conversation instead of a top-down process. The importance of procedural fairness and engagement is considered as well and is followed by a description of the effects of participation on strategy development and execution. Finally, the effectiveness of different communication types in relation to participation is discussed.

The literature review will conclude by proposing if and how lower-level employees might be included in strategy formulation to increase successful strategy execution. This will be the basis for further research.

3.1. Strategic renewal

3.1.1 The process of strategic renewal

The process of strategic renewal has received much attention from the angle of innovation and change. Innovation is one of the methods to achieve competitive advantage and is based on Schumpeter’s (1950) view that performance differentials are based on a firm’s ability to innovate. This vision stems from the belief that business models are subject to creative destruction; firms launch innovative actions to gain advantage in the marketplace, but this advantage is eroded by their rivals’ competitive moves. Because of this, constant innovation is necessary to maintain a competitive position (Conner, 1991).

There are several authors who focus on the process of innovation and change in organizations. Dunphy & Stace (1988) claim that the process of strategic renewal depends on the fit of the organization with the external environment and the available time and support for change within an organization. When the organization is in ‘fit’ with the external environment but needs minor adjustment, incremental change strategies are preferable. When the organization is out of ‘fit’ with the external environment, transformative change strategies are preferable. If there is sufficient time and support available in the organization to support the strategic

(8)

8 change, collaborative change modes should be chosen (participative evolution or charismatic

transformation). However, when key stakeholders oppose change, there is no time available and/or radical change is necessary to organizational survival, coercive modes should be chosen (forced evolution or dictatorial transformation). This is further explained in below figure:

(Source: Dunphy & Stace, 1988)

Huy and Mintzberg (2003) described the process of strategic renewal slightly different from Dunphy & Stace in 1988. According to the ‘rhythm of change’ model of Huy and Mintzberg (2003), new ideas can be initiated from the top (dramatic change), emerge unintentionally (organic change) or develop in a more orderly fashion (systematic change). Dramatic change is frequently initiated in times of crisis or of great opportunity when power is concentrated and there is great slack of resources. Organic change tends to develop in the lower parts of an organization without being formally managed. Systematic change is generated horizontally, more focused and more carefully constructed and sequenced than dramatic change.

Huy and Mintzberg (2003) argue that lasting, effective change arises from the combination of organic and systematic change with the accent of dramatic transformation. This is in line with the logical incrementalism view of Burgelman (1983) who also argues that firms need both induced and autonomous strategic behaviour. He sees induced strategic behaviour as intended & planned, leading to order & stability. Autonomous strategic behaviour on the other hand is

(9)

9 unplanned, related to corporate entrepreneurship, brings diversification though internal

development and is the true basis for innovation.

This research addresses the question if lower-level employees should play a role of

importance in strategy formulation in order to improve strategy execution. In the organic and autonomous change processes such as described by Huy & Mintzberg and Burgelman, lower-level employees are usually involved. Dunphy and Stace call this ‘participative evolution’. Dramatic, induced change processes are commonly assigned to top and middle-management. This is best reflected in Dunphy and Stace’s ‘dictatorial transformation’. The focus of this research is on systematic and induced change processes, based on the idea that these are commonly used to set long-term goals and a strategic agenda when there is time available. According to Dunphy & Stace, participation, or as they call it: a collaborative mode, is only possible when there is an initial support for change. One of the aims of this research however, is to find out whether participation could be used to create support for change instead of being perceived as a condition for collaboration. (Huy & Mintzberg,2003; Burgelman, 1983;

Dunphy and Stace, 1988).

3.1.2 Modes/approaches to the strategic renewal process

There are also several researchers who wrote about modes or approaches to the strategic renewal process, reflecting the broader views discussed in the last paragraph. An overview of this research is given to explain what methods are known and which individuals are

commonly involved. As will become clear from the text below, there are variances in the actors and their roles per strategy making mode, approach or competence sub process.

Floyd & Lane (2000) described the different modes/approaches to strategic renewal per competence sub process with a focus on the role of middle-management. They describe

competence deployment as the process where managers deploy resources to venture new

product market arenas or to reinforce an existing product market position. Competence

modification is the process where managers recognize the need for change; question the

organization’s existing strategy and/or competencies; and encourage emergent, adaptive behaviour. And competence definition is where managers encourage experimentation with new skills and exploration of new market opportunities. Within each of the three competence sub processes, the roles of top-, middle and operating level managers differ in their time horizon, information requirements and core values. Based on the top-down direction, competence deployment could be linked to dramatic/induced change while competence

(10)

10 definition could be linked to organic/autonomous change based on the bottom-up approach.

The process of competence modification is both induced and autonomous, and reflects systematic change which develops in a more orderly fashion. The differences between each competence sub process is best seen in the figure from Floyd & Lane shown below.

Source: Floyd & Lane, 2000

Before Floyd & Lane created their view on the strategic renewal process, Hart (1992) developed 5 modes of strategy making in which roles of top-managers and organizational members are explained. These 5 modes are:

1. Commander: strategy is based on careful analysis and consideration of alternatives by

the CEO/top-management. Lower-levels are required to execute the strategy.

2. Symbolic: top-management creates a long-term vision and mission for the organization

(strategic intent). Organizational members are motivated and inspired.

3. Rational: there is a high level of information processing and a formal strategic

planning system. There is a formal system of (upward) data sharing.

4. Transactive: strategy making is based on interaction and learning. Cognitive limits and

environmental uncertainty limit top-management to separate strategy formulation from strategy implementation and thus strategy is created through an ongoing dialogue between key-stakeholders (employees, suppliers, customers, governments, regulators).

5. Generative: strategy is made through entrepreneurship (autonomous behaviour).

(11)

11 These modes of strategy making developed by Hart (1992) somewhat refer to the approaches

to strategy implementation designed by Bourgeois & Brodwin in 1984. In their research, Bourgeois & Brodwin argued that where implementation used to follow formulation, formulation is now seen as a method of gaining prior commitment through coalitional

decision making or as a method to achieve involvement through corporate culture. Of the five approaches that Bourgeois & Brodwin apply to strategy making (commander, change,

collaborative, cultural and crescive), the collaborative model best describes how strategy making can become a product of all organizational members. Bourgeois & Brodwin advise that the CEO should employ group dynamics and ‘brainstorming’ techniques to obtain different inputs to the strategic process and extract ‘group wisdom’.

What we learn from the literature above is that while the ‘Commander’ modes clearly reflect dramatic/induced change that Floyd & Lane describe as competence deployment, the

‘Generative/Crescive’ modes reflect organic/autonomous change that Floyd & Lane label competence definition. The other modes are more ‘in between’; they are characterized by a combination of autonomous and induced change and develop in a more orderly fashion as recognizable in competence modification. (Huy and Mintzberg, 2003; Burgelman, 1983; Floyd & Lane, 2000; Hart, 1992; Bourgeois & Brodwin, 1984). To provide an overview of the relation between the different concepts from the literature, these are displayed in below table.

Huy & Mintzberg (2003) Organic change Systematic change Dramatic Change

Burgelman (1983) Autonomous change Combination: autonomous

and induced change

Induced change

Floyd & Lane (2000) Competence definition Competence modification Competence deployment

Hart (1992) Generative Symbolic, Rational,

Transactive

Commander

Bourgeois & Brodwin (1984) Crescive Change, Collaborative,

Cultural

Commander

Both the ‘Transactive mode’ as described by Hart (1992) as well as the ‘Collaborative model’ described by Bourgeois & Brodwin (1984) see strategy making as a systematic, two-way process of competence modification in which all key-stakeholders should participate. The effects of participation will be discussed in more detail in the second part of this literature review.

(12)

12 3.1.3 Role of middle-management in the strategy process

Middle-managers are often regarded as the ‘linking pin’ between top-management and lower-level employees. Burgelman (1983) sees the importance of their role reflected in supporting initiatives from operating levels, combining these with firm strengths and conceptualizing new strategies.

Floyd & Woolridge (1992) developed four typologies of middle-management involvement which are shown in the figure on the side. Championing alternatives is defined as the persistent and persuasive communication of strategic options to upper management; Synthesizing information is defined as the interpretation and evaluation of information and affects top-management perceptions; Facilitating adaptability is defined as

developing flexible organizational arrangements; and Implementing deliberate

strategy is defined as managerial interventions that align organizational action with strategic

intentions. Floyd & Lane (2000) used these roles of middle-managers described by Floyd & Woolridge to explain the different managerial roles in strategic renewal sub processes as described under 3.1.2 Modes/approaches to the strategic renewal process. In their article, Floyd & Lane also argue that environmental change may create role conflicts when individual managers are required to play multiple strategic roles or when change erodes the trust needed for relationships between managers who are playing different roles. To prevent the negative effects of role conflicts (opportunistic behaviour, damage to the quality of information shared, disruption of the firm's knowledge development the adaptive process) a firm should learn to recognize the consequences of external conditions for managerial behaviour and learn to adopt organizational controls to support the strategic renewal sub processes.

How middle-management involvement in strategy might improve organizational performance is described by Woolridge and Floyd (1990). According to these authors, performance will be improved along two ways: through improving the quality of strategic decisions and through increased levels of consensus. Their research showed that quality of strategic decisions (measured through organizational performance) does increase when middle-managers are involved in the process of generating strategic options. Middle-managers acknowledged that they prefer to have influence on how objectives are reached rather than setting the objectives themselves. The influence of involvement on levels of consensus appeared to be significant

(13)

13

through increased levels of understanding. There however was no proof of increased

involvement leading to more commitment to a strategy.

3.1.4 Role of lower-level management in the strategy process

The differences between lower-level and top-management in strategy making have been researched by Burgelman and Regnér. In his 1983’ study, Burgelman explained how the ideas of lower-level managers can help adapt organizational strategies to changing environments. According to his vision, top-level managers are highly-experienced and have a very reliable frame of reference to evaluate business strategies. However, because their strategic premises are unlikely to change, their focus will be on keeping strategic behaviour in line with the current concept of strategy. This carries the risk that strategy-making takes on a planning mode and other organizational members could help to break through this predictability.

Regnér (2003) also focused on the differences in strategy creation and development on varying managerial levels. The study of Regnér reveals that lower-level management and top-management differ considerably in terms of their intrinsic strategic activities. Strategy making by lower-level managers can be described as inductive; strategy is developed through

externally oriented and explorative activities involving trial and error, informal contacts and noticing, experiments and heuristics. Based on suggestions from these activities new strategic knowledge, including a new knowledge structure is established. Top-managers, in contrast, have a more deductive approach in developing strategy, including an industry and exploitation focus involving planning, analysis, formal reports and intelligence, and routines. Here,

strategic knowledge is generated on the basis of these activities and the existing knowledge structure attached to them. Regnér shows that the more inductive and explorative approach of lower-level management was dominant in developing and progressing the strategies forward in complex and ambiguous external contexts. In contrast, the activities by top-management primarily supported the adaptation, cultivation and perfection of prevailing knowledge. While improving the existing strategy, this does not provide much help in developing new strategic directions. There is thus a good reason to include lower-level managers in strategic renewal processes that focus on innovation and/or change.

(14)

14

3.2. Participation

3.2.1 Strategy development as a conversation

Beer and Eisenstat (2004) argue that a conversation about strategy needs to move back and forward between advocacy and enquiry. Managers and employees look to leaders to show them a point of view about where the business is going, a point of view to which they can respond. Leaders therefore need to promote, then question the strategy, and repeat as needed. According to the authors, the conversation has to be about the issues that matter most, has to be collective and public, has to be structured and has to allow employees to be honest without risking their jobs.

This view is in line with the research on collective sensemaking by Gioia & Chittipeddi in 1991. Gioia & Chittipeddi claim that collective sensemaking of new strategies is achieved through a process in which the CEO/top-management first tries to make sense of the intended strategic change for themselves. Then, the CEO/top-management attempt to influence the sensemaking and meaning construction of others toward a preferred redefinition of organizational reality. Stakeholders will revise their understanding through their personal sensemaking and eventually try to influence its form and accept the new strategy. The processes are interrelated and reciprocal and stakeholders have the opportunity to provide feedback.

The above is has recently been confirmed once more by Groysberg & Slind (2012) who also argue for a less top-down process as this would not be effective. According to Groysberg & Slind, the process should be more dynamic, sophisticated and conversational. In their model, they have identified four elements of organizational conversation; intimacy, interactivity, inclusion and intentionality. Inclusion can be seen as participation and has everything to do with expanding employee’s roles and enabling them to act as content providers. They argue that leaders who are capable of turning employees into mature conversation partners raise the level of emotional engagement of employees. Engaged employees can adopt important new roles, create content themselves and act as brand ambassadors, though leaders and storytellers.

3.2.2 Procedural fairness and engagement in relation to participation

The following section focuses on how participation improves the implementation of strategic plans through increased feelings of procedural fairness and engagement.

(15)

15 influence a decision lead to higher feelings of procedural fairness. This, in turn, leads to

higher commitment to the decision (course of action outlined in the strategy), attachment to the group (more cooperation and more diligence) and trust in the leader (needed to maintain direction over the process of making and implementing strategic decisions). One could thus say that procedural fairness facilitates implementation. Procedural fairness has also been discussed by Brockner in 2006. He discusses fairness in the change process and argues that process fairness can be a performance booster as it can minimize costs and increase value (operational autonomy leads to innovation & creativity). Elements of process fairness that are discussed Brockner (2006) are: voice, consistency of information/decisions, accuracy, lack of bias, correctability and advance notice/transparency of the process.

A framework to enhance engagement was developed by Ackermann & Eden in 2011. The engagement framework consists of three features: participation, leadership behaviour and communication. The aspects that Ackermann & Eden relate to participation are: voice & choice, consistency and clear promises. This is closely related to procedural fairness described above. Ackermann & Eden argue that participation builds engagement when team members gain recognition, trust and a positive sense of their individual worth. This leads to increased identification with the group and acting in consistency with the group’s common goals.

Like Ackermann & Eden did with their engagement framework, Kim & Mauborgne (1998) also tried to find out how voluntary cooperation of individuals can be obtained in the formulation and implementation of strategic decisions. Again, procedural fairness plays an important role in their intellectual and emotional recognition theory. According to this theory,

“when individuals feel recognized for their intellectual and emotional worth, they demonstrate a willingness to act out the new role demanded of them as entrepreneurs, to cooperate with others, and to give their all. They are inspired to engage in voluntary cooperation and active knowledge” (source: Kim & Mauborgne, 1998).

3.2.3 The effects of participation on strategy development & execution

The modes/approaches to strategic renewal, the specific roles of middle and lower-level management, the importance of developing strategy through a conversation, and the influence of procedural fairness & engagement have been discussed previously. In this subchapter, the effects of participation on strategy development and execution will be described.

(16)

16 Collier, Fishwick and Floyd (2004) found that managers who report a higher level of

involvement in strategy tend to perceive the strategy process as one that incorporates a stronger vision, more rationality and greater adaptiveness. Those who report more

involvement also tend to see the process as less top-down, less influenced by political and cultural interests and less constrained by external factors. This in contradiction to the believe that involvement would lead to increased political behaviour, cultural inertia and greater number of internal and external constraints. The findings of Collier, Fishwick and Floyd demonstrate that involvement contributes to success in the development of strategy and support the idea that participation complements to goal alignment and coordination across managers. In addition, King & Zeithaml (2001) argue that middle-managers are in a better position than top-managers to form shared understandings about an organization’s core

capabilities. As a group, therefore, they are likely to serve as important catalysts for exploiting existing firm capabilities and for exploring the development of new ones.

Participation also has effect on motivation and energy levels. For example, Westley (1990) found that a lack of participation leads to dissatisfaction and demotivation among those who are excluded while inclusion leads to higher motivation and energy levels. According to Westley, whose research focused on middle-managers, inclusion and energy is reached through giving managers access to the framing rules in a strategic conversation and opening strategic discussions to middle-management. Furthermore, cross-functional coalitions should be formed and there should be a shared ideology/vision. But he also warns for the inefficiency that can evolve from inclusion of (too many) middle-managers. This is agreed upon by several other researchers who claim that middle-managers come with a functional and/or subunit orientation that may influence their perceptions and turn their behaviour toward pursuit of goals that are suboptimal from the perspective of the organization’s overall strategy (Kiesler & Sproull, 1982; Markoczy, 2001; Walsh, 1988).

Strategy execution benefits from participation in several ways. There is considerable evidence to suggest that manager’s involvement in strategy process enhances their knowledge,

understanding and support of strategy. When there are shared understanding of strategic goals, middle-managers may use their influence to integrate with the efforts of top-managers. It is believed that shared strategic thinking by managers improves the coordination and integration of their collective efforts, leads to smoother implementation of strategy and

(17)

17 enhances organizational performance. (Bourgeois, 1980; Woolridge & Floyd, 1990; Westley,

1990; Mangaliso, 1995; Ketokivi & Castañer, 2004).

Controversially, a lack of participation leads to alienation, lack of motivation to implement strategies, and intra-organizational conflict (Westley, 1990). The relationship between a lack of participation and difficulties in the implementation of strategies is further researched by Mintzberg (1994). Mintzberg argues that non-senior managers have a better understanding of what strategies are realistic. This is confirmed by other researchers who argue that the ideas of lower-level managers are key to organizational knowledge creation. Both Eisenhardt &

Zbaracki (1992) and Hart (1992) argue that top-managers have choice paradigms that

influence strategic decisions. One of these paradigms is bounded rationality; instead of being fully rational actors have cognitive limitations, decision paths are influenced by complexity & conflicts, and these paths may not follow the sequential order of identification – development – selection. Other choice paradigms affecting strategic decisions are politics and power and individual assumptions. Because of these paradigms, it is very important to involve other organizational members in the strategy process to prevent strategies from becoming too detached from the organization and impossible to execute.

3.2.4 Communication types hindering or promoting participation

In chapter 3.2.1 Strategy development as a conversation the value of two-way strategic conversations has been highlighted. Mantere & Vaara (2008) took this a step further in their research and found out what types of communication may hinder or promote participation in the strategy process. They found that communication types promoting participation are:

self-actualization (focuses attention on the ability of people as individuals to outline and define

objectives for themselves with regard to the strategy), dialogization (integration of top-down and bottom-up approaches; paying attention to the roles and rights of various groups of people) and concretization (establish clear processes and practices in and through strategizing to ensure meaningful social and organizational action). Communication types hindering participation are: technologization (tends to hinder participation by commanding a technological system to govern the activities of individuals), disciplining (expansive

construction of organizational hierarchies and command structures that hinder participation in strategy processes.) and mystification (complication of the activity so that its meaning is only meaningful to a certain group of people).

(18)

18

3.3 Summary of the literature review

The literature review explained that strategic renewal is important to maintain a competitive position in the market and that renewal can take place through several processes. Dunphy & Stace (1988) claim that the process of strategic renewal is subject to the type of change that is needed (incremental or transformational change) and that lower-level employees should play a role only when there is time available and an initial support for change. The systematic change process as described by Huy & Mintzberg (2003) is a combination of autonomous and induced change (Burgelman, 1983) and comparable to the process of competence

modification (Floyd & Lane, 2000) whereby operating-level managers are involved by adjusting or responding to challenges. When there is time available, strategic renewal is commonly approached in a systematic way by setting long-term goals and a strategic agenda. This process seems reserved to top- and middle-management, while sometimes operating-level management is included as well. That contradicts with the approaches that Hart (1992) and Bourgeois & Brodwin (1984) call ‘transactive’ or ‘collaborative’ where strategy making is a process in which all key-stakeholders of an organization should participate (including lower-level employees). Middle-management is traditionally seen as the ‘linking pin’ between the organization’s operating core and top-management (Burgelman, 1983). Woolridge & Floyd (1990) further specify the role of middle-management by explaining how their

knowledge can increase the quality of decisions and how shared understandings can increase consensus. The involvement of lower-level management on the other hand, is specifically interesting to break-through predictability of top-management (Burgelman, 1983) and to stimulate an inductive process of strategic renewal that allows to create new strategic opportunities instead of building on existing knowledge (Regnér, 2003).

The second part of the literature review shows how participation can influence the strategic renewal process. To start, the relevance of a two-way strategic conversation and collective sensemaking has been described. Beer & Eisenstat (2004), Gioa & Chittipeddi (1991) and Groysberg & Slind (2012) all agree that strategy development should start with top-management but the process of sensemaking, creating an understanding of the strategic direction, should be something that is shared between top-management and lower-levels. The communication types that promote participation in a strategic process are those where there is focus on the individual, support for a dialogue between top-management and groups of

(19)

19 Participation has a positive influence on feelings of procedural fairness and engagement. This

leads to feelings of recognition, shared goals, higher commitment, attachment and trust, and thereby facilitates implementation (Korsgaard et al, 1995; Ackermann & Eden, 2011; Kim & Mauborgne, 2008). But there are many other positive effects that participation has on strategy development and execution. Participation supports strategy development because it leads to stronger visions, more rationality, greater adaptiveness and it limits the influences of internal and external factors (Collier, Fishwick and Floyd, 2004). But it also enhances knowledge, leads to shared understandings, goal convergence and higher motivation & energy levels. All this facilitates implementation and increases organizational performance. Participation of lower-level management in specific is expected to lead to more realistic strategies and ignore choice paradigms of top-management. Westley, 1990; Bourgeois, 1980; Woolridge & Floyd, 1990; Westley, 1990; Mangaliso, 1995; Ketokivi & Castañer, 2004; Eisenhardt & Zbaracki, 1992; Hart, 1992; Mintzberg, 1994). Some negative aspects that might be expected from participation is that it may become inefficient if too many persons are involved or if the persons involved have too narrow orientations to form an organization-wide perspective. Westley, 1990; Kiesler & Sproull, 1982; Markoczy, 2001; Walsh, 1988).

3.4 Research question and propositions based on the literature review

From the literature review, one could conclude that participation in the strategy process, more specifically in the systematic change process or competence modification, is desirable for many reasons. However, the literature looks at participation mainly from the perspective of middle-management. There is some evidence indicating that including operating/lower-level managers in strategy formulation would be useful to break through predictability of top-management and stimulate the inductive process to create new but more realistic strategic opportunities. However, there is nothing written about the opportunity to include lower-level employees in strategy development. This is inconsistent with the transactive and collaborative modes of strategic renewal that argue that all organizational members should participate in strategy development. Based on the positive effects that participation of middle- and lower-level managers has on the strategy process, it is expected that participation of lower-lower-level employees in strategy formulation will lead to more successful strategy execution.

The research question that needs to be answered to both confirm and further explain the relation between participation of lower-level employees in strategy formulation and more

(20)

20 successful strategy execution is: “How does participation of lower-level employees in strategy

formulation influence strategy execution?”

While answering this research question, dependence on several factors is expected. First of all, it is proposed that there are several mediator variables that explain why participation of lower-level employees in strategy formulation leads to more successful strategy execution.

Based on the findings from the literature, participation is expected to increase engagement and acceptance. Woolridge & Floyd (1990) explained how participation of middle-managers increases consensus through higher levels of understanding and how this positively influences organizational performance. It is also argued that participation has a positive influence on feelings of procedural fairness and engagement and that this facilitates implementation through more recognition, shared goals, higher commitment, attachment and trust (Korsgaard et al, 1995; Ackermann & Eden, 2011; Kim & Mauborgne, 2008). Above positive effects of participation are expected to be true for the participation of lower-level employees as well. Therefore, the first proposition is:

1. Participation of lower-level employees increases engagement; this leads to higher

acceptance of strategic changes which in turn leads to more successful strategy execution

It is argued by Woolridge & Floyd (1990) that knowledge of middle-managers can increase the quality of decisions. Mintzberg (1994) agrees to this by stating that non-senior managers have a better understanding of what strategies are realistic. The practical knowledge of lower-level managers is expected to create an opportunity to break through choice paradigms and predictability of top-management and create strategic opportunities based on new knowledge structures (Hart, 1992; Zbaracki, 1992; Burgelman, 1983; Regnér, 2003). According to the transactive strategy making mode developed by Hart (1992), the cognitive limits of top-management are one reason why strategy formulation cannot be separated from

implementation. Based on the above and the assumption that lower-level employees have knowledge that middle- and lower-level managers do not possess, the second proposition is formulated:

2. Participation of lower-level employees during strategy formulation will lead to better achievable/more realistic strategies because of their knowledge and this in turn leads to more successful strategy execution

(21)

21 Above propositions regarding the positive relation between participation of lower-level

employees in strategy formulation and more successful strategy execution are expected to be influenced by at least two moderator variables. These moderator variables might negatively affect the strength of the relation between participation and outcome by reducing the positive effects of the mediator variables.

Westley (1990) warns for the inefficiency that might results from including too many middle-managers in strategy formulation. This inefficiency is believed to be caused by the fact that middle-managers have a functional or subunit orientation that influences their perceptions and turns their behaviours towards a pursuit of divergent instead of common goals (Kiesler & Sproull, 1982; Markoczy, 2001; Walsh, 1988). Lower-level employees are expected to have a higher functional or subunit orientation than middle-managers. Whereas middle-managers are expected to share ideas with other middle-managers and to some extent be aware of the

strategies in different functional areas or subunits, lower-level employees are expected to have a more limited perspective. This might negatively influence the positive effects of their

participation on strategy execution as formulated in the third proposition:

3. Participation of lower-level employees during strategy formulation might work counterproductive when they fail to see the whole perspective

The previous proposition led to the question if lower-level employees should also be involved in strategy formulation when the strategic direction is sensitive to them. This subject is not covered in the literature review but based on the assumption that lower-level employees might not be able to see the whole perspective, it is interesting to know if participation is desirable when the strategic direction is sensitive to them. An example of this would be when the new strategic direction is expected to lead to a reorganization with job reductions. The assumption is that participation is not desirable in this circumstance, this is covered in the fourth

proposition:

4. Participation of lower-level employees during strategy formulation might negatively influence strategy execution when the strategic direction is sensitive to them

(22)

22 The research question and all four propositions are visualized in the conceptual model below.

How the research question and propositions will be answered is explained in the next chapter ‘Research Design’. Participation of lower-level employees in strategy formulation More successful strategy execution Engagement Acceptance

Knowledge Better achievable/more _{realistic strategies} Failure to see the

whole perspective

Sensitive strategic direction

(23)

23

4. Research design

In this chapter, the research design is the central theme. First, the case study and sample will be described. Then, the research instrument and procedure will be outlined as well as the analysis strategy. The chapter will conclude with a summary of the strengths and limitations of the research design.

4.1 Description of case study and sample

A combination of an inductive and deductive approach is used to investigate the research question and propositions given in the previous chapter. This approach was chosen to leave room for possible adjustments or expansion of the propositions. The research leads to suggestions if and how first line employees can be involved in strategy-formulation, when they should (not) be involved and what moment is best suitable to include them.

Data is gathered by a case study in which the influence of participation of lower-level employees on strategy execution is explored within a number of real-life contexts (Saunders et al, 2012). The case study strategy is an embedded, multiple cases design with the aim to find out whether results can be replicated across cases and organizations (Yin, 2014).

For several reasons, it is decided to keep the research area relatively narrow and focus on one industry. As concluded from the literature review, there are no results known about involving lower-level employees in strategy formulation. By focussing on one industry, primary

conclusions can be drawn which may in a later stage be tested in other industries. Another reason to focus on one industry is that differences might apply per industry because of cultural differences; e.g. some industries are led in a more top-down fashion than others. This is very interesting to test in a later stage but is not possible when there are no primary conclusions from at least one industry.

It is decided to focus on the Financial Services industry because this industry is generally seen as an industry with much hierarchy and a top-down culture. Since the financial crisis started in 2008, the industry has been under a lot of pressure for change. It is expected that

participation of lower-level employees in strategy formulation can positively influence the successfulness of strategy execution when it comes to organizations in the Financial Services industry. Cases are chosen from the industry using non-probability sampling. A case is defined as a medium-large corporate (>250 employees) which is/has been subject to significant strategic change in the past 5 years. The sampling technique used to select the

(24)

24 cases is purpose sampling meaning that the researcher’s judgement is used to select cases that

allow to answer the research question (Saunders et al, 2012). The purpose sampling technique used to select the cases is homogeneous sampling. The exact type of company will differ but, as mentioned before, all cases are or have been subject to strategic change.

An additional case is PwC (PriceWaterhouseCoopers). PwC Advisory guides many

organizations, including those in the Financial Services industry, through strategic changes. The reason to include PwC as a case on itself is her involvement in strategic change processes for many organizations; the respondents (see below) have more extensive experience with the subject than those respondents driving strategic change at one single organization. The broad experience of PwC is thus used to support the information received from the other cases.

Respondents are chosen based on their involvement in strategic change processes in the organizations selected as cases. Management/directors who are generally leading strategic changes are asked to give their professional opinion on the research question and

propositions. At PwC, consultants in the field of Strategy and/or Change & Leadership are selected as respondents. These consultants have guided many organizations through their strategic change processes.

An overview of the cases and respondents is given in the table below, more information can unfortunately not be shared as respondents were promised anonymity of their participation:

Case Organization Respondents

1 Bank A – Regional office • Manager corporate clients

2 Bank B – Headquarters • Senior business manager

• Project manager

3 Credit information/data specialist •_• Chief Executive Officer

Group Marketing Director

4 Pension administrator •_• Chief Financial & Risk Officer

Head of Strategy

5 Claims expert • Commercial Director

6

PwC – Change & Leadership •_• Director

Senior director

PwC – Strategy •_• Manager

(25)

25

4.2 Description of research instrument and procedures

The research instrument that is regarded most suitable to retrieve in-depth information is semi-structured/in-depth interviews (Saunders et al, 2012). A set of identical questions is used to discover fixed patterns/routines in the answers of respondents. The structure of the

interview is however limited to a list of themes and key-questions to be covered. Saunders et al (2012) advise a minimum sample size per research instrument but, more importantly, one should only stop collecting data when data saturation is reached: when no new information is gained from additional research. In this research, the point of data saturation was reached after 12 interviews. Interviews are held one-to-one, either face-to-face or by telephone conference (depending on the availability of the interviewees), lasted approximately 45-60 minutes, and are audio-recorded. To increase reliability, the interviews were transcribed. Transcribing interviews helps to reduce researcher error and bias and improve consistency of the findings. The transcriptions were the basis for further analysis with the aim to discover fixed patterns, insights or concepts (see 4.3 Analysis interview results).

The interview questions did differ slightly between the cases in the financial services industry and PwC. This is caused by the fact that PwC respondents were not only asked to evaluate their own organization but also those organizations which they guided through their strategic change processes. In general, the interviews were divided into two parts. The interviews started with general questions about the organization and the respondent to give them a comfortable feeling and to analyse their knowledge of- and experience with the research topic. Subsequently, questions focussed on how the strategic change process is structured in their organizations and whether lower-level employees play a role in either strategy

formulation or strategy implementation/execution. An explicit question is asked on whether the respondents think involving lower-level employees in the strategy process has a positive or negative influence. The factors through which participation in strategy formulation is proposed to positively influence strategy execution (see chapter 3.4 Research question and

propositions based on the literature review) are covered in the research questions. If not

already mentioned by the respondents themselves, questions are posed to reveal if

participation of lower-level employees in strategy formulation increases engagement and acceptation on one hand, and knowledge and more realistic/better achievable strategies on the other hand, and whether this leads to more successful strategy execution. The possible

(negative) effects on the above propositions caused by sensitivity of strategic changes or the difficulty for lower-level employees to see the whole perspective are also covered in the

(26)

26 interview questions. Questions that were posed to reveal other interesting information focused

on how and when employees should be involved, which employees should be involved, how these employees should be chosen and whether employees should have influence over strategic decision making. A complete overview of the interview questions (in Dutch) can be found in appendix 1.

4.3 Analysis method

The method used to analyse the information received in the interviews is ‘relying on theoretical propositions’. The propositions described above shaped the interview questions and also guided the analysis. Pattern matching is used to compare the outcomes of the case study with the propositions. This analytic technique is useful to increase both internal and external validity. Internal validity is the concept of seeking to establish a causal relationships and external validity is the generalizability of the case study’s findings. Internal validity is positively influenced by applying pattern matching because the empirical and predicted patterns are exposed and compared in a structural manner. External validity is positively influenced because replication logic is used to compare patterns between the different cases. There are no precise comparisons possible because the interviews do not reveal any

quantitative or statistical criteria. This means that pattern matching is subject to the researcher’s interpretation. The key concept of the study is that successfulness of strategy execution is a dependent variable, influenced by several independent variables related to participation of lower-level employees. Where data allows, explanatory techniques are additionally used to build explanations about causal relationship between the participation of lower-level employees in strategy formulation and the successfulness of strategy execution. (Yin, 2014)

To be able to apply pattern matching to the interview transcripts, a code tree is developed. Coding is applied to the interviews with help of a computer-assisted tool (QDA miner) that helps to analyse data in a structured manner. The basis for the code tree were the research question and propositions that were established from theoretical findings in the literature review. This is called a directive approach to data analysis. Besides pre-determined codes based on theory or relevant research findings, coding categories were also derived directly from the text (conventional data analysis). Once all data was analysed using these two techniques, it was decided which concepts would be further explored by summative content

(27)

27 analysis which is the counting and comparing of data to interpret the underlying context.

(Hsieh & Shannon, 2005)

The type of coding that was first used is open coding. In this phase, all relevant pieces or fragments of data were labelled. Open coding is the ‘process of breaking down, examining, comparing, conceptualizing and categorizing data’ (Corbin & Strauss, 1990). Open coding is followed by axial coding which is the process of splitting and merging codes and adding new ones if applicable. Axial coding (re)establishes connections between (sub)categories that might have gone lost or were not visible during the process of open coding. At last, selective coding was used to find exceptions, establish relations and build on the researcher’s theory; the positive effects of participation of lower-level employees in strategy formulation on the successfulness of strategy execution (Corbin & Strauss, 1990; Kendall, 1999).

4.4 Strengths and limitations of the research design

The strength of the research design is the access to some very interesting cases and respondents; the answers from the interviews provide highly valuable information on the research topic. The greatest limitation is that, at most, answers will be generalizable for the Financial Services industry. The goal of the study therefore is to provide a basis for further research, for example in other industries or by deep-diving into one of the concepts that link participation of lower-level employees in strategy formulation to the successfulness of strategy execution.

In the forthcoming results chapter, the results from the case study will be described. In the conclusion chapter, evidence from existing research on strategy processes and participation (literature research) is compared with the outcome of the interviews (case study).

(28)

28

5. Results

As explained in chapter 4.3 Analysis method, the data gained from the interviews is analysed through pattern matching with help of a code tree. The code tree that resulted from the interviews is reflected in Appendix 2: code tree. The computer-assisted tool used to code and analyse the data (QDA miner) only offered the possibility to split codes into one sublevel of categories. Therefore, the code-tree seems relatively ‘flat’. Nonetheless, this did not influence the quality of the data analysis.

The results chapter starts with an overview of the participation methods most mentioned by the respondents. This is followed by a summary on the respondents’ views on which

employees should participate in the strategy process and when this should occur. The chapter continues with the results on the propositions and the research question “How does

participation of lower-level employees in strategy formulation influence strategy execution?”

5.1 Participation methods

After the respondents felt comfortable and their knowledge of- and experience with the research topic was identified, questions first focussed on how the strategic change process is currently organised in their organizations and whether lower-level employees play a role in the process. During the interviews many different kinds of participation methods were discussed. A summative content analyses reveals which participation methods are most commonly used in the selected organizations and results can be found in the chart below:

(29)

29 The two most frequently mentioned participation methods (working groups/workshops and

validation) as well as the most remarkable participation method (through stock options) will be discussed in more detail to explain how the respondents perceive these methods. In addition, communication will be discussed because it is quite surprising that the respondents see this as a participation method on its own besides being a tool within the different

participation methods.

The most frequently mentioned participation method is organizing working groups and/or

workshops in which lower-level employees are asked to participate in the strategy process.

The difference between working groups and workshops is that working groups may have a longer-term character and workshops may be held just once. There are many forms how participation is achieved in this method. A creative example that was given by one of the respondents is through brainstorm sessions where employees write their ideas on post-its and stick these to a wall. Together, the ideas are grouped and prioritized resulting in something that is supported by the whole group.

Validation has also been mentioned by quite a few respondents. This means that employees

are asked to validate (and complement) a strategy which was first created by

top-management. Although employees are not involved in the initial creative process, this can be an effective way of using their knowledge to come to a successful strategy.

The most remarkable employee participation method mentioned by one of the respondents is

through stock options. The respondent mentioned this against the perspective that there is a

growing imbalance between shareholder- and social responsibility. In order to be able to repair the imbalance, stock options for employees might be an option. In this, by the respondent called ‘Utopian’ view, the best way to actually grand employees saying in the strategic direction of an organization is when they have the same vote as shareholders.

Communication is seen as very important during the whole strategy process to increase

understanding and commitment (intellectual and emotional buy-in). However, it is also mentioned as a participation method on its own. In some instances, it is not needed or

desirable to personally include employees in strategy formulation. It is argued by at least one of the respondents that good, captivating and timely communication can give employees a feeling of being part of the process even if they are not personally involved.

(30)

30 Other participation methods that were mentioned in at least two interviews are self-organizing

teams, experiments, co-creation, individual/group conversations, townhall meetings, indirect methods (e.g. surveys), and pilots. It appeared that there are many context dependencies that influence which participation method is best applicable at what time. Examples of these dependencies mentioned by the strategic change experts of PwC are: the magnitude of the desired change, the size of the organization, the legacy of an organization, the organizational culture, the organizational structure etcetera. Because of the context dependencies, it is not possible to make recommendations about which method should preferably be used when.

5.2 Which employees have to participate

One of the questions asked to the respondents is which employees should participate. From the interviews, it can be concluded that this question is most often left to regional or

functional management as they know best which employees have the capabilities to provide valuable input during strategy formulation. There was one respondent who claimed that every employee should be involved. This respondent currently works in an organization with > 300 employees. On the contrary, there also was a respondent who firmly believes that people are personally responsible for their career and that they should proactively seek opportunities to participate instead of being asked or appointed.

The respondents answered that employees who are asked to participate should be talented, have a broad perspective and vision, be able to generate new ideas, and preferably belong to the ‘informal leaders’ within an organization so they can act as change catalysts. The CEO of a credit information/data specialist said: “Apart from the functional leaders I also look for the

informal leaders within an organization. Those are usually the employees who are most verbal during meetings, have a high status and a good track-record. The reason I try to get those people in my sphere of influence is that they can serve as leverage towards the rest of the organization.” Another characteristic is that the group should preferably be diverse;

employees from different functional areas, with diverse capabilities, from different

generations, and with different employment periods. According to the head of strategy of a pension administrator ”involving employees with different employment periods is important to

ensure that both very knowledgeable longer-employed persons are heard as well as new employees who recently came in with fresh ideas and who have a less biased view on the organization”.

(31)

31

5.3 When must employees participate

On the whole, respondents say that employees should participate in strategy formulation as early as possible. The overall feeling is that communication around the strategy process should start when top-management considers a new strategic direction. The commercial director of a claims expertise organization argued: “I believe that employees should be

involved and informed from the moment you start a strategic change process. Maybe more in a form of communication than involvement but in fact communication is also a form of involvement”.

Early involvement is promoted from the vision that employees can very well be used to analyse the current situation. A senior manager at PwC (Strategy) trusts that “lower-level

employees can be very useful to understand the competitive environment, the profitability of products and clients and the challenges the organization is facing”. As such, they should be

included during the internal/external analysis, before the first contours of a new strategic direction are known. However, the majority of the respondents do not see active two-way participation about a new strategy as very useful when there is not some kind of a strategic direction. The opinion of most respondents is that top-management should ask employees to participate in the formulation of a new strategy after they developed an initial, broad idea on the challenges they would like to address with the new strategy and a first perspective on how those challenges could be solved. A director at PwC Change & Leadership summarizes this as follows: ”senior management should first give a strategic direction or perspective. From

there, lower-level employees should be asked how this ambition should be achieved”.

Respondents were also asked if lower-level employees should have a formal role in strategic decision making. This question was unanimously answered negative; none of the respondents feel that employees should have a formal vote in strategic decision making. The respondents do claim that decision making should be fair and transparent and that people should feel understood and listened to. They should have the opportunity to give their advice but strategic decision making should, in the eyes of the respondents, remain with top- and

middle-management. One respondent said “Everyone may give his or her opinion, but we should not

take all decisions together” [Project manager, Bank B] and another respondent argued “If you let everyone participate in decision making, the sharp edges will disappear while you often need those sharp edges to come to a successful competitive strategy” [Group Marketing

(32)

32

5.4 Results on the propositions

The experience of the respondents with strategic renewal processes led to interesting findings on why including lower-level employees in strategy formulation leads to more successful strategy execution. Also, various reasons were addressed on why participation of lower-level employees in strategy formulation might not (always) be successful. These findings will be discussed next by linking them to the propositions that were formulated in chapter 3.4

Research question and propositions based on the literature review.

Proposition 1: Participation of lower-level employees increases engagement; this leads to higher acceptance of strategic changes which in turn leads to more successful strategy execution

The questions asked to the respondents were formulated to establish the effect of both engagement and acceptance on the successfulness of strategy execution.

The first fragment of this proposition argues that participation increases engagement. Respondents spoke about participation leading to increased ownership, recognition and appreciation which all advance engagement with the organization and her strategy.Three quotes underlining the importance of engagement and the influence on strategy execution are:

“That is when ownership of the strategy emerges. The moment where employees become engaged and see that the strategy is in line with their views, they will feel part of the strategic choice and become an important force towards executing, promoting and realizing the

strategy” [senior manager, PwC strategy consulting] and “The advantage for employees is that they can easier identify with the organization and will feel responsible, they have the possibility to ‘sign off’ on the strategy” [group marketing director, Credit information/data

specialist] and “If employees are involved from the beginning of the strategy process, this

might help to execute the strategy. When employees are asked to contribute, they will easier adopt a strategy than when the strategy is formulated by top-management and pushed into the organization” [senior business manager, Bank B].

The majority of the respondents mention an increase of acceptance and understanding of the strategy as one of the main reasons to include lower-level employees in strategy formulation. By the respondents this is often referred to as “creating buy-in”. The impact of buy-in has not yet been part of much research but Thomson et al (1999) argue that brand performance is enhanced when employees are aware of the strategy their brand should be following, and are

Participation of lower-level employees in the strategy process