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Band 7
Peter Ruhwedel (Hrsg.)
Band
7
Balanced Governance
Combating complexity through managing critical
to success fields of conflict
~
KCU Schriftenreihe
Peter Kinne
KCU KompetenzCentrum
für Unternehmensführung & Corporate Governance
der FOM Hochschule für Oekonomie & Management
Peter Kinne
Balanced Governance
Combating complexity through managing critical to success fields of conflict
KCU Schriftenreihe der FOM, Band 7
Essen 2015
ISSN 2195-2922
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KCU Schriftenreihe Band 7, Kinne:
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Preface
Since the early 1990s companies have been faced with massive internationalization and globalization of markets and hence corporations, leading to a significant increase in complexity of organizational strucutures and business processes. Additionally, managing the consequence of the financial and economic crisis
in combination with a tremendous shift in global workshare and the digitalization
of the economy, this trend towards complexity has even been increased as well
as accelerated. Proven business models are more and more challenged, leading to the question if companies are able to pursue their business successfully
or to start a major transformation process.
The tremendous need for change is paralleld by a significant increase in uncertainty for the companies. The so called Black Swan phemenomen, i.e. the occurrence of events which could not be imagined in the past, put an additional
risk on decision making processes leading to an even increased complexity for
management and supervisory boards.
Complexity inside and outside company boundaries in combination with increasing risk triggered the development of the current volume of the “KCU
Schriftenreihe” at hand. In this paper Peter Kinne pays attention to the Balance
Governance approach as a potential instrument supporting board members in
the need to reduce complexity and hence come to sound decisions.
I am sure that the research of Peter Kinne will be noticed broadly in praxis and
theory, helping corporations to manage the upcoming transformation processes
succesfully.
Duisburg, October 2015
Prof. Dr. Peter Ruhwedel
FOM University of Applied Sciences
KCU Schriftenreihe Band 7, Kinne:
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Summary
In efforts to secure the existance of organizations, one of the biggest challenges
for executives today is complexity. Responses such as retreating to the familiar,
relying on the let´s keep it short and simple-principle or unsystematically augmenting an organization's intrinsic complexity is not appropriate means to combat complexity. A more promising way however is expanding options for action
and simultaneously limiting the perceived complexity to what is needed to run a
business successfully, based upon a holistic understanding of an organization
as a system. Balanced managing fields of conflict that arise from contradictory
but critical to success features extends options for action and directs the focus
to what really matters. For implementing this strategy, four fields of management need to be integrated: Learning, Guidance, Control and Cooperation. It
can be supported by paying attention to one of the most fundamental operational principles in business: stakeholder preference 1.
1
This paper is a short version of the study „Balanced Governance - Komplexitätsbewältigung durch ausgewogenes Managen im Spannungsfeld erfolgskritischer Polaritäten“, issued 2013 as FOM Arbeitspapier Band 32, MA Akademie Verlags- und
Druck-Gesellschaft mbH Essen, ISSN 1865-5610.
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Table of Contents
1 Organization-related Complexity and its Sources ...........................................1
2 Combating Complexity ....................................................................................3
3 More than Exploration versus Exploitation ......................................................5
4 Stakeholder View ............................................................................................8
5 Stakeholder Differences ................................................................................13
6 Balanced Governance Value Cockpit ...........................................................15
7 How to implement Balanced Governance .....................................................18
7.1 Learning ...................................................................................................18
7.2 Guidance ..................................................................................................19
7.3 Control ......................................................................................................21
7.4 Cooperation ..............................................................................................22
References ……………………………………………………………………..…….26
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Table of Figures
Figure 1: Categories of complexity ...................................................................... 2
Figure 2: Polarities from the literature ................................................................. 7
Figure 3: Subsystems of the system organization in its environment ................. 8
Figure 4: Balanced Scorecard Perspectives ..................................................... 10
Figure 5: Transformation Process ..................................................................... 11
Figure 6: Stakeholder roles ............................................................................... 13
Figure 7: Balanced Governance Value Cockpit ................................................ 15
Figure 8: Interrelation of key fields of action...................................................... 18
Figure 9: Integrated control system ................................................................... 22
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Organization-related Complexity and its Sources
Who today has been entrusted with leading an organization is faced with complexity. This term is used in different disciplines: the natural sciences, engineering, computer science and systems theory. Since the focus in this paper is on
organizations and organizations are systems, complexity in this context refers to
the systems theory.
Complexity in a system arises from the variety of possible states and events. Its
technical expression is variety.i It primarily depends on the number and diversity
of elements in a system, the number of relationships between these elements
and the variability of elements and interrelationships. ii Organizations are open,
socio-technical systems with a more or less widely ramified network of functions
and processes, consiting of subsystems and interacting with systems beyond
their system boundaries.iii Systemic openness further increases the complexity
of organizational occurrences due to the number of elements involved. iv
Complexity becomes a problem when its extent is affecting the ability of decision-makers to do the right things any time. This condition is reached now. The
quantity and scope of competitors in a globalized economy, strong dynamics of
change, rising needs for sustainable use of natural resources, escalating technical connectivity through the internet of things along with fast growing importance of interactional processes and boosting heterogeneity of customers
and employees are realities that bring completely new challenges for executives. Moreover, companies are currently acting in a jungle of legal restrictions
and under highly volatile socio-economic conditions.
People represent a special form of system element. As stakeholders, they incur
exchange relationships with the organization and thereby act based upon individual conceptions of value that are volatile and not completely transparent.
People´s behavior and effects from this behavior therefore cannot entirely be
calculated. People in a sense form a subject-based „source of uncertainty“ that
contributes significantly to the variety of possible states and occurrences in
organizations. The subjective component at the micro level of organizations, the
level of the individual, is often underestimated in management processes. Evidences come from high proportions of change projects that failed due to errors
in treating employees.v Doerner defines complexity as a subjective phenomenon. The perception of whether a situation is complex or not therefore depends
on the experience and knowledge of peoplevi (Fig.1).
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Categories of Complexity
Dimensions
Reference Areas
Perception
 Number and variety
of elements involved
 External sphere
 Objective
(number etc.)
 Relationships among
elements
 Internal sphere
 Subsystems
 Variability of elements
and relationships
 Subjective
(Interpretation,
motives etc.
„felt complexity“)
Fig. 1: Categories of complexity
In the last four decades, organization-related complexity has still boosted due to
the dramatic loss of importance of tangible assets for value creation. Tangible
assets can smoothly be evaluated in financial terms and therefore constitute the
assets side of a balance sheet, including cash and inventory, land, buildings
and equipment. In contrast, intangibles cannot be evaluated in financial terms
but are in fact the key drivers of economic value today. They include the intellectual, emotional and social capabilities of the people in an organization. For
properties like that, no market price exists.vii Accordingly, intangible assets cannot be hold under control in a traditional sense. Even today, in many firms the
command and control-principle, which is derived from a tayloristic, mechanistic
understanding of value generation, prevails. Organizations who follow that principle today are hardly in a position to fully capitalize on the capabilities of their
knowledge workers.
Moreover, the organization-related behavior of stakeholders, in particular of
customers and employees, is based on complex and largely opaque value hierarchies emerging from a mix of cognitive and affective motives that determine
action. Holbrook, who has dealt with consumer value, describes it as an interactive relativistic preference experience.viii This description does not only apply for
customer values, but also for values of employees who can freely choose
among organizations as far as they are endowed with capabilities organizations
require. With growing impact of intangible resources, the variety of unpredictable conditions in organizations has significantly increased. Thus, success factors today are multi-dimensional, which means complex.
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Combating Complexity
Complexity has become an ubiquitous accompaniment of economic activity. But
how can executives tackle complexity in a way that an organization's purpose
can be fulfilled any time, and goals can fully be achieved? In this sense, combating means to limit possible states and occurrences in the organization to
those that are desirable.
How executives are dealing with complexity, is still poorly understood. However,
studies indicate inadequate handling through omission, ignorance or simplication. In a study on pathological patterns in companies, most respondents
agreed to the statement that companies try to combat complexity by issuing
more regulations. This, however, augmented the intrinsic complexity, thus complicating management processes. ix Müller-Stewens & Fontin adress the phenomenon of simplification: "Companies try to reduce complexity by simplifying
organizational processes, but just these simplifications induce more complex,
more confusing processes, not at some point, but right at the point where complexity should be reduced.“ x Schwaninger adresses the tendency toward negligent reduction of complexity: "The strongest cognitive attenuators of variety are
prejudice and ignorance, but they are counterproductive in the long run". xi Levinthal and March describe three forms of „learning myopia“ in organizations:



Ignore the long run
The near neighborhood is priviledged
Tendency to overlook failuresxii
In the face of escalating complexity in organization´s sphere of influence, the
need for orientation is forced up. Traditional benchmarks of business such as
productivity, profitability and growth rate are material in nature but do not reflect
immaterial, complex causalities of value creation. Immaterial variables however,
such as acting in accordance with customer demand, remain economically irrelevant as long as they are only used symbolically but not thoroughly operationalized in the firm´s value creation process. One-sided orientation and shortcomings in operationalization easily become sources of failure.
In combating complexity, basically two strategies have proved successful: expansion and limitation. As we know from cybernetics (Ashby´s law: only variety
can destroy varietyxiii), the only way to cope with complex tasks emerging from
conditions that cannot easily be simplified is expanding the variety of options for
action. A promising way to do that is balancing conflicting but critical to success
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pairs of benchmarks, such as short- term orientation versus long-term orientation. These management paradoxes or even management dilemmas emerge
from poles that principally are equivalent, providing guidance for both-and- rather than either-or-solutions. This kind of solutions not only expand horizons,
but also options for action.
The second strategy of combating complexity is limiting the perceived complexty, which can be done through abolishing redundancies of functions and
resources and discrepancies among vision, strategy, structures, standards,
quality requirements, processes and behaviour. Redundancies and discrepancies augment the system´s intrinsic (Eigen-) complexity, which in this case impairs its productivity. However, limiting the perceived complexity can also be
done by setting the focus on „doing the right things“. An exhaustive set of critical
to sucess polarities does not only force up the variety of options for action, but
also provides strategic orientation based upon a holistic framework for sound
leadership. This effect can be supported by focusing on basic principles of operation in exchange situations, one of which is stakeholder preference. Without
preference, exchange relationships do not come into existence under conditions
of true competition. Reasons for preference should thus be thoroughly explored
and relentlessly met for each stakeholder group.
Limiting the perceived complexity, extending the scope of action and integrating
crucial fields of management constitute the conduct in combating organizational
complexity. As later will become quite clear, the fields of management that need
to be integrated in order to implement a balanced management strategy properly are Learning, Guidance, Control (in the sense of steering), and Cooperation.
The strategy that results from this bundle of measures is named Balanced Governance - a conceptual synthesis of both the Balanced Scorecard and Corporate Governance. These management approaches differ greatly in content and
methodology but nevertheless share the same target: improving the sustainability of organizations.
However, the challenge was to find critical to success polarities that cover a
firm´s value creation process holistically. It was done through literature research
an further reasoning based upon new system models.
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More than Exploration versus Exploitation
In recent years, a significant amount of management research has been done
on the effects of ambidexterity in organizations. This line of research has been
especially on the polarity exploration versus exploitation of knowledge. xiv While
exploration is about gaining new knowledge by searching, learning, experimentation and change processes, exploitation is about capitalizing on existing
knowledge through refining and specialization. Exploration relates to the future
because it creates new opportunities. Accordingly, exploration requires a longterm horizon, featuring a learning process of constant questioning and selfcorrecting of supposedly stable premises, a concept which Argyris & Schön
named double-loop learning.xv Pure exploitative behavior thus is based more on
short-term orientation, with organizations focusing on existing skills and technologies as well as on existing networks. The refinement of methods while
maintaining its premises expresses single-loop learning.xvi
There is empirical evidence that organizations who manage to bring exploration
and exploitation in a balance ratio at least in the long run will be more successful than others. Evidence has been provided for example by He & Wong, Gibson & Birkinshaw, Lubatkin et al., Rothaermel & Alexandre and Uotila et al.
Some researchers suggest that a positive effect on performance can be expected especially under conditions of strong competition pressure and high
dynamics of change. Such conditions, however, are most organizations facing
today.
Levinthal & March describe the negative effects of unilateral orientation: „An
organization that engage exclusively in exploration will ordinarily suffer from the
fact that it never gains the returns of its knowledge.“xvii Organizations that are
dedicated mainly to exploration of new knowledge are in risk of getting lost in an
existance threatening infinite loop of trial, error, new trial. However, organizations that rely on the use of existing opportunities may expect predictable income but are not necessarily sustainable: „An organization that engage exclusively in exploitation will ordinarily suffer from obsolence“ xviii Rothaermel & Alexandre in their study on ambidexterity highlight the importance of absorptive capacity for balancing internal versus external sourcing of knowledge.xix Cohen &
Levinthal define absorptive capacity as “the abiliy of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial
ends.“xx
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Balancing exploration and exploitation of knowledge requires sophisticated cultural, structural and process adaptions. But there are economic dependencies
between these orientations: Resources required for exploration can only be
created by exploitation, for example by consumption of capital reserves (internal) or use of funds (external). Exploration on the contrary creates the
knowledge that can be used in the future by exploitation.
However, the polarity exploration versus exploitation does not include all success factors of organizations who seek sustainable value creation, even if propositions for realizing a balanced conduct in this area indirectly point to other
polarities. Thus, additional polarities had to be explored. This task was firstly
pursued by literature research, resulting in 35 polarities that had been emphasized by authors of management science from 1976 to 2009. Fig. 2 shows
these polarities, grouped into overriding criteria.
Authors
Polarities
Authors since Duncan (1976)
exploration – exploitation
Pascale (1990)
maximize – metamize
Hamel & Prahalad (1995)
leverage – stretch
Levinthal & Raisch (1993)
the short run – the long run
Brown & Eisenhardt (1997)
linking past, presence and
future
Dodd & Favaro (2006)
short terms - long terms
Schwaninger (2006)
short term views – long
term views
Pascale (1990)
mandatory - discretionary
Brown & Eisenhardt (1997)
order – chaos
De Wit & Meyer (2005)
control – chaos
Pascale (1990)
elitist - pluralist
Müller-Stewens & Fontin (1997)
centralization - decentralization
Dodd & Favaro (2006)
centralization - decentralization
Overridung Criteria
Knowledge Policy
Time Horizon
Level of Organisation
Decision Rights
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Polarities
Thompson (1967)
efficiency – flexibility
Müller-Stewens & Fontin (1997)
Stabilität – Flexibilität
Gibson & Birkinshaw (2004)
alignment – adaptability
Probst & Raisch (2005)
stability – dynamism
De Wit & Meyer (2004)
evolution – revolution
O´Reilly & Tushman (2007)
efficiency – innovation
Raisch et al. (2009)
static – dynamic
Grant (2005)
internal - external environment
Sullivan (2000)
internal – external realities
Raisch et al. (2009)
internal – external
Rothaermel & Alexandre (2009)
internal - external sourcing
Probst & Raisch (2005)
consolidation - expansion
Dodd & Favaro (2006)
profitabiliy – growth
Raisch (2008)
efficiency – growth
Pascale (1990)
collegiality - individuality
Probst & Raisch (2005)
community - competition
De Wit & Meyer (2004)
cooperation - competition
Probst & Raisch (2005)
participation - autocracy
Schwaninger (2006)
heterarchical-participative hierarchical-authoritarian
Pascale (1990)
managerial - transformational
Minzberg & Waters (1985)
deliberate - emergent
Pascale (1990)
planned - opportunistic
Overridung Criteria
Degree of Change
Systems Focus
Economic Effects
Culture
Leadership Behaviour
Strategy Process
Fig. 2: Polarities from the literature
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Stakeholder View
The polarities gained from the literature have significantly augmented the selection of meaningful polarities but still not completely covered all critical success
factors. The reason is that functions and views of stakeholders, whose behaviour is certainly an key factor, were not included in the list. To remedy this deficiency, the entire system organization in its environment had to be considered
in order to gain insights into important functional principles. This way of conduct
follows another basic principle for governing organizations: The Conant-AshbyTheorem. It states that the result of an organizational process cannot be better
than the model on which the management of that process is based, except by
chance.xxi
External
sphere
Past
Presence
Future
(Identity)
(Performance)
(Sustainability)
Politicalsocio-economicecological environment
Market
Income source
Internal
sphere
Power source
Current and potential customers, potential employees,
suppliers, investors, competitors, strategic partners,
trends etc.
Organization
Products and services, processes and structures, goals and
strategies, collective knowledge and core competencies, culture,
technical systems, results
People
in the organization
Personality, feelings and preferences, knowledge and capabilities,
relationships, learning, interaction and decision behaviour
Fig. 3: Subsystems of the system organization in its environment
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As Fig. 3 shows, subsystems of the entire system are the market in the external
sphere, the organization as an "institutional entity", and the people in this entity,
who together with the organization form the system´s internal sphere. Relevant
groups in the external sphere are summarized in the subsystem market. The
subsystems are embedded in a political-socio-economic-ecological environment
that impacts the organization´s external and internal sphere since companies
operating in the market itself are part of this environment.
A crucial aspect of running an organization is the dimension of time, including
past, presence and future. An organization´s history and identity are based upon the past, forming the fundament of an unique competitive position, a strong
brand and, as Grant puts it, „a collective understanding of what is presumed
core, distinctive, and enduring about the character of an organization.“ xxii In the
presence, performance expectations have to be met, while strategic plans and
efforts to gain sustainability are made for the future. Accordingly, the list of polarities includes the criterion Time Horizon. The subsystems differ in attributes,
functions and interests of the stakeholders who interact with the organization via
exchange processes. In the market, it´s all about winning customers, but increasingly also powerful employees, against competitors.
Organizations seek to create marketable products and services based on collective knowledge and core competencies. A major task is providing customers,
who are the income source of an organization, things that correspond with their
expectations, which are part of her hierarchy of values relevant for this particular relationship. Expectations often include combinations of attributes. A new car
for example is not only expected to be comfortable, but also powerful yet fuel
efficient. Its dealer certainly should offer services friendly and reliably in order to
tie her customer. Kaplan & Norton noted: „Choosing the customer value proposition is the central element of strategy.“ xxiii With this statement they suggest that
strategies that include only financial targets (doubling sales within five years,
increasing pre-tax profits by 50 %, etc.), are incomplete. A company´s financial
objectives do not motivate customers to buy. Porter wrote: „Strategy becomes a
set of activities that is focused on a particular mix of values for a selected group
of customers.“xxiv
In the Balanced Scorecard, Kaplan & Norton have distinguished four organizational perspectives that are interconnected by cause-and-effect relationships.
Starting from intangible, non-financial resources in the learning and growth perspective, which includes human resources, organizational characteristics and
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IT-systems, cause-and effect relationships run to internal processes, link them
with value propositions in the customer perspective and finally generate finance
data in the financial perspective (Fig. 4). Later the authors introduced the term
strategic readiness to indicate the firm´s ability to align intangible resources to
the firm´s corporate strategy. xxv
Financial Perspective
Customer Perspective
Internal Process Perspective
Learning and Growth Perspective
Fig. 4: Balanced Scorecard Perspectives
Kaplan & Norton´s Balanced Scorecard is presumably today the most popular
integrated tool for resource control. However, a crucial point is missing in the
scorecard, which may be a reason why many firms avoid using it. xxvi In contrast
to customers in the market, people in the organization are the power source of
the organization, as Fig. 2 indicates. They interact, learn, decide, develop and
perform, individually and in groups. They are carriers of corporate culture and
influence even the firm´s external perceptablity by acting as face or voice of the
company, in sales and services. Properties of people certainly belong to the
firm´s resources. But, however, organizations can not exercise property rights
on people themselfes as they can do on tangible asstes or patents. People´s
motivation to perform greatly depends on the extent to which organizations provides them with things that are important to them - values. So of course will both
employees and customers expect getting "the right values“ transmitted.
Equipped with a free will and the power to choose, employees will pick an organization to work in that sustainably provides values that are in correspondance with their own value hierarchy. Businesses who value dedicated employees and accordingly invest in them achieve better results than organizations
with other orientations. As has been proved, practicing employee orientation
inspires even company´s share prices. Grant notes: “If human beings are not
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just concerned with material reward but with pursuing meaning in their lives,
organizations that can help instill a sense of purpose will have an advantage
over those that do not.“xxvii
Since the preference behaviour of stakeholders, especially of customers and
employees, has paramount impact on organization´s survival, the author earlier
introduced an alternative model of transforming immaterial assets, the nonfinancial input, into material assets, the financial output. In this model, both customers and employees are clearly separated from the organization due to their
power of taking free choices. Thus, a key factor in this model is the distinction of
two interfaces one of which is inside the organization, the others outside. xxviii
Interfaces of preference: exchange of values
People
in the
organization
Knowledge,
capabilties,
readiness to
cooperate etc.
Customers
in the market
The Organization
Operational interfaces: exchange of information
Collective
knowledge
Non-financial input
Corecompetencies
Products
& services
Transformation into
marketable offers
Marketing,
sales,
logistics
Buying decision,
loyalty
Incomestatement
Financial output
Fig. 5: Transformation Process
The organization box in Fig. 5 includes organizational characteristics, such as
collective knowledge, core competencies, products and services and marketing,
sales and logistics. In between, there are operational interfaces where information is exchanged. Outside the organization there are the company´s key
stakeholders, people working in the organization and customers buying from the
organization, based on free choices. The interface between the organization
and its stakeholders accordingly is an interface of preference, where values are
exchanged to keep the process running. At the interfaces of preference, again
balance is required. The organization´s characteristics that are relevant for
these relationships and mediated by executives, products and services, systems, processes, projects, behaviour etc. have to match the stakeholder´s value
system to a higher degree than corresponding characteristics of competitors.
Otherwise, the effect of preference did not occur and the transformation process
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broke down. According to Porter, a differentiation strategy would then backfire.xxix
From these considerations, another critical to success polarity can be derived:
Employees versus Customers, grouped to the criterion Key Stakeholders. This
is justified because both stakeholder groups are directly involved in the transformation process, albeit in different phases. Therefore, the action-guiding motives of both sides require balanced attention. However, all too often stress is
caused by conflicting objectives with respect to the transmission of values to
one or the other group. The reason can be scarce resources and narrow mental
models of executives, causing one-sidedness. The study orientation in management, earlier done by the author together with the German Fraunhofer Institut für Produktionsanlagen und Konstruktionstechnik, IPK, has shown that in
many organizations today, customer orientation still clearly dominates. xxx This
can affect at least the emotional retention of employees in the company. Low
emotional bonding promotes a lack of commitment, reducing people´s readiness to bring in creativity and to share knowledge. The prospect of steadily
refilling an organization´s innovation pool, resulting from a combination of permanently expanded collective knowledge and stretched core competencies,
would certainly be troubled, impairing an organization´s competitive position.
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Stakeholder Differences
The purpose of organizations is closely interrelated to stakeholders, and economic objectives cannot be achieved without them. However, stakeholders are
often just "lumped" even in management theory, diluting their specific role in the
organizational context. Customers are outside the organization but influence
operations directly since they in most cases are the only regular source of income. People in organizations, both top management and staff with and without
management responsibilities, certainly impact day-to-day operations directly,
too.
Stakeholders include owners and external investors who are shareholders (the
often-cited antipode shareholder versus stakeholder orientation is incorrect
insofar). These groups do not generally impact operations directly, nor do suppliers, strategic partners and the society (Fig. 6). However, in particular suppliers and strategic partners, who share similar economic interests with the organization, can be an easy accessible external source of knowledge that can foster
both exploration and exploitation. Thus, the second polar stakeholder group has
been Suppliers versus Strategic Partners, with the term External Source of
Knowledge as the group´s overriding criterion.
Position in the system of organization
indirect
Owner,
Owner Family
(Internal Investors)
external
External Investors
Suppliers
Strategic Partners
Society
Top Management
direct
Impact on day-to-day operations
internal
Employees with and
without management
responsibilities
Customers
KeyStakeholders
Fig. 6: Stakeholder roles
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The third polar stakeholder group is Investors versus Society. Between these
stakeholder groups, tensions exist due to conflicting expectations. While investors legitimately expect a return from their investment from the company, the
society expects contributions to the social community and the environment.
Organizations need financial resources that they often get from external investors. These however might come off if sustained poor yields were achieved,
unlike people who feel emotionally connected with the organization regardless
of economic success since they are founder, conductor and capital source in
personal union.
But the society is a serious claim group, too. Its importance basically emerges
from the fact that all the organization's stakeholders belong to it. Whats more,
the society today is executing its role as an organization´s reputation space
stronger than ever. Highly networked communication channels such as blogs,
Facebook and Twitter can be established within a very short time, shifting assessment-power over firms from inside to outside the organization. The transmission of social values, such as through the use of fair trade, investments in
the expansion of school systems to support socially disadvantaged groups or in
the environment, has become an economic success factor due to effective response options of the society. The criterion for this pair of stakeholders therefore has been Legitimation.
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Balanced Governance Value Cockpit
Organizational
Characteristics
Relationshiprelated Values
Primary Orientation
According to these considerations, the polarities gained from both literature
research and reflections on organizations as systems can be summarized to the
Balanced Governance Value Cockpit (Fig. 7). To those polarities with different
terms but identical meaning, one single pair of terms has been distributed. The
criteria have been divided into three categories. The parameter values of some
criteria are more or less based on individual tastes and preferences of senior
executives who decide on claim and direction of the organization.
Time Horizon
Short term oriented
Long term oriented
Systems Focus
Internal
External
Knowledge Policy
Exploitation
Exploration
Strategy Process
Deliberate
Emergent
Leadership Behaviour
Autocratic
Participatory
Culture
Community
Internal competition
Economic Effects
Profitability
Growth
Key Stakeholders
Customers
Employees
External Sources
of Knowledge
Suppliers
Strategic Partners
Legitimation
Investors
Society
Centralized
Dezentralized
Fully organiszed
Unorganized
Stable
Dynamic
Decision Rights
Level of Organisation
Degree of Change
Fig. 7: Balanced Governance Value Cockpit
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These criteria have been grouped into the categoty Primary Orientation and
arranged in a reasonable logical order: The Time Horizon is a guiding dimension even for the criteria Systems Focus, Knowledge Policy, Strategy Process,
Leadership Behaviour and Culture. A sort of „resulting criterion“ is Economic
Effects. The second category has been named Relationship-related Values,
including values that are relevant for the stakeholders including customers,
employees, suppliers, strategic partners, investors and the society. Further criteria characterise more or less appearances of the organization: the distribution
of Decision Rights, the Level of Organization, and finally, the Degree of
Change. These criteria are grouped into the category Organizational Characteristics.
The Balanced Goverenance Value Cockpit thus contains 3 categories with 13
criteria and 26 poles. Among these, cause-and-effect relationships exist. Simultaneity of growth and profitability can over a longer period hardly be realized
without balance in Time Horizon, and without a balanced Systems Focus, a
balanced Knowledge Policy will not be possible. Growth requires a long-term
perspective, and profitability can hardly be achieved without a certain degree of
stability, central control and regulated processes. Dynamic change (meaning
here proactively driven change) will not succeed without exploration of new
knowledge. Values that correspond to the value system of customers, suppliers,
strategic partners and society will not be placed without external orientation,
whereas an reasonable measure of inner guidance is needed to develop competitive advantages that are difficult to copy. The Structural Characteristics of
the organization are likely to be influenced by both industry and company size,
as possibly also is Primary Orientation. Raisch et al. write: "Personal and organizational factors may be closely interrelated. For example, organizational contexts that provide managers with decision-making authority are likely to stimulate richer sense-making and cognitive processes at the personal level. Conversely, Individually ability to act ambidextrously will have a cumulative effect on
the organization's ambidexterity."xxxi A balanced Systems Focus will be a prerequisite for transmitting values to the stakeholders effectively and efficiently,
which in turn leverages sustainably balanced Economic Effects. With respect to
Organizational Characteristics, urgency and extent of balance requirements will
to some degree depend on industry, business models and further contextdependent conditions. Highly dynamic industries like the IT involve other dynamics than the cole mining. In knowledge-intensive industries with high mobili-
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ty of employees, the leadership feature Participatory is certainly more important
than in industries where proven routines and many years of service prevail.
The poles in the cockpit should be understood as benchmarks that prevent organizations from being one-sided for an unacceptable length of time, and thus
endanger their future viability. Dodd and Favaro express their findings from the
study of more than 1000 companies as follows: "The common factor behind the
bad numbers is that managers tend to use effective management tools to focus
on only one-side of a tension [...]. Our research tells us that emphasizing one
performance objective at the expense of another - except in special cases such
as start-ups, exits, or performance crises - is not the route to better performance." xxxii But regardless of balance requirements will already the criteria
associated with the polarities improve the strategic orientation, by directing the
managerial focus on crucial factors which reduces the perceived complexity.
Therefore, using the Balanced Governance Value Cockpit should belong to the
personal armamentarium of responsible leaders.
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Balanced Governance
How to implement Balanced Governance
Having a powerful framework for strategic orientation may be a strong basis for
sound and sustainable leadership. However, how can the cockpit´s conflicting
factors be realized in a balanced way? What actions have to be considered and
possibly combined? In fact, the Balanced Governance Value Cockpit can entirely only be realized through integrating four fields of action: Learning, Guidance,
Control and Cooperation (Fig. 8). Due to the paramount importance of this areas for an organization´s viability, they deserve a closer look.
Guidance
Learning
Making balanced decisions,
providing orientation and
sustainalbly developing
the organization
Control
Acquiring knowledge
as a basis of reasonable
and balanced decisions
Cooperation
Using resources
effectively and efficiently
to implement strategies
and transmit values
Exploiting economical, quality
and innovation potential through
smart usage of diversity
Fig. 8: Interrelation of key fields of action
7.1
Learning
A proper handling of the Knowledge Policy in the tension field between exploration and exploitation is a key competence since acquisition and use of relevant
knowledge is an important foundation of balanced leadership decisions. However, knowledge arises from learning. A basic question of learners always is
what knowledge is relevant. Today's information overload forces up selection
needs. Schwaninger writes: "Managers suffer less from a lack of relevant data
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than from in excess of irrelevant data".xxxiii Relevant knowledge domains include
operational results, quality benchmarks, a differentiated picture of priorities and
perceptions of customers and employees, the state of knowledge in industryrelated technologies, technological, political and socio-demographic trends, best
practices in core processes, integral controlling features, intercultural peculiarities among employees and customers, market trends and patterns of behavior
of competitors, compliance rules, regulations and information on current and
potential partners. By combining ideas management and continuous improvement both product/process optimization and innovation processes can be integrated, therefore becoming much more effective.
Knowledge about cause-effect-chains of value generation can provide valuable
guidelines for measures, enabling timely corrections in the right place. What
matters, is not so much a highly sophisticated but often also highly complicated
management of knowledge, but rather a solid work with and on knowledge.
Integrated knowledge work ca be an powerful early warning system to prevent
one-sidedness in the patterns of management. The aim must be to ensure essential learning effects, which certainly can be supported by appropriate ITsystems.
7.2
Guidance
The CEO or managing director of a company decides on claim and direction of
the organization. He od she also decides whether balance effects ever should
be created, and if so, at which criteria. Successful implementation of Balanced
Governance thus depends to a huge extent on the individual orientation of top
executives, represented by the first category of the Balanced Governance Value
Cockpit.
Probst & Raisch in their study of 100 multinationals have investigated the reasons for serious problems in certain phases of organizational existance. Examined firms include multinationals such as ABB (Asea Brown Boveri), AT & T
(American Telephone and Telegraph Com-pany), Enron, Worldcom and German companies like Allianz, Daimler-Chrysler and the German Telekom. The
authors found that failure emerges from either what they called the burnout
syndrome (70% of cases) or the pre-mature aging syndrome (20% of cases).
This is due to the one-sided focus on extremes.
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The burnout syndrome results from the following features:




Exessive Growth
Uncontrolled Change
Autocratic Leadership
Excessive Success Culture
Pre-maturely aged companies in contrast have missed important developments
due to opposite characteristics:




Stagnating Growth
Tentative Change
Weak Leadership
Lacking a Success Culture
xxxiv
Growth, change, culture, performance etc. are factors that are heavily affected
by leaders. They do create conditions that promote ambidextrous thinking and
acting, or they do not. Gibson & Birkinshaw in their study with more than 4,000
people in 41 business units found that balance leadership effects are particularly achieved by stretch, discipline, support and trust. xxxv While stretch and discipline indicate the will to achieve ambitious goals, express support and trust a
trust-based, cooperative attitude. The simultaneity of these characteristics certainly is a sign of balance: "Too much emphasis on discipline and stretch creates burnout and disillusionment among employees, but too much emphasis on
support and trust creates a "country club" atmosphere in which no work gets
done." xxxviThis is reminiscent of the burnout and pre-mature aging syndrome,
addressed by Probst & Raisch. The balance between these features must be
sought, obtained and maintained by leaders.
Balance-capable executives utilize a complex behavioral repertoire that combines features such as consistency, stability and control on the one hand with
passion, courage and enthusiasm on the other hand. They can bundle all forces
and enhance the capacity for self-organization through exploiting both internal
and external potential, consistent guidelines, communication of strategic objectives and measures, and through clarifying roles, requirements and perspectives. Perfect self-organization of operating units is not only a highly effective
lever of productivity, but also a prerequisit for organizations to survive in an
environment the complexity of which exceeds by far the control capacity of any
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central instance. In particular among knowledge workers, the opportunity to
work self-determined has high priority.xxxvii
Executive´s ability to provide orientation is however too often an underestimated
contribution to generating balance effects and optimizing productivity. The
productivity contribution arises from the fact that in business environments
where consistent orientation is mandatory, a lack of information, misunderstandings, useless meetings, latent resistances or even sense-crises occur much
less frequently. A superviser´s talk with subordinates that is based on mutual
trust can do much good!
7.3
Control
Communicating the claim and direction of an organization induces expectations
that must be met. Implementation of announced strategies and transmission of
promoted values can only be realized by utilization of the firm´s resources that
is in correspondance with the strategy and values. People, products and services, processes, tools, projects, regulations etc. are potential value transmitters.xxxviii In control, differences among these transmitters have to be considered. Quality management for technical products works unlike for processes or
even for employees. Often suppliers of technical products, which are used to
dealing with "hard" data, neglect controlling intangible factors, such as learning
and behavior.
A provider of video-monitoring-systems managed to operationalize customer
related values such as reliability, innovation power and investment protection.
They found that even for a „hard-stuff-provider“, the proportion of intangible
characteristics in mediating this values was three times higher than the proportion of product-related, tangible characteristics. xxxix Since the quality management function usually is concerned with technical features, blind spots of performance arise easily, jeopardizing the firm´s competitive position. Porter argues that service components that are beyond closely product-related features
can be an important source of differentiation, since many companies are dealing exclusively with physical product features. xl
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Phase 1: Operationalisation
Balanced Governance
Phase 2: Evaluation & Development
Value transmitters
People,
Products,
Processes etc.
Guiding dialogs
Quality audits
Requirements
Documents,
Evaluationsystems
Integrated
control
Development
programs
Optimization
prozess
Fig. 9: Integrated control system
Based on a two-phase process, an integrated control system firstly allows deriving concrete requirements for both tangible and intangible resources from strategies and target values by operationalization. The level of fulfillment of these
requirements can secondly be evaluated and optimized. xli Fig. 9 shows both
phases of an integrated control system.
7.4
Cooperation
Exploiting a firm´s innovation, economical and quality reserves is a crucial factor
in maintaining competitiveness and requires both exploration and exploitation of
knowledge. This in turn requires knowledge workers inside and outside the organization (employees, customers, suppliers, strategic partners etc.) working
together. In terms of the criterion Systems Focus, both the external and internal
environment needs to be considered which particularly can be done by cooperation and collective learning. Realised synergies based on cooperation can
significantly leverage innovation, quality, effectiveness and efficiency. Hammer
describes process optimization in supply chains through interfunctional cooperation including scoping, organizing, redesigning and implementing.xlii
Good cooperation also belongs to the characteristics of effective leadership
teams. Lubatkin et al. stress the importance of behavioral integration generated
in management teams. This has proven as a critical success factor in their
study with 139 small and medium-sized companies (such businesses form also
in the United States the vast majority of enterprises). The researchers summarize their findings as follows: "By synchronizing the social and task processes
associated with collaborative behavior, quality of information exchange, and
joint decision making, a behavioral integrated Top Management Team can promote a more diverse and deeper understanding of the team's existing explicit
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knowledge base, as well as a better use of that base. xliii [...] In a climate of collaboration, where a general predisposition therefore exists to freely exchange
information and jointly make decisions, we expect that the top management
teammembers will be more receptive to a broad range of initiatives. And, from
an open discussion of existing and new market opportunities, coupled with a
willingness to share explicit knowledge and tacit insights, seeking a team will be
more apt to uncover ways to feasibly pursue new markets, while jointly expanding old ones." xliv These expectations were confirmed by the results of the investigation. However, a study that was done after the study this short version is
based upon has revealed that the major driver of success in cooperation is
smart usage of diversity. It can best be exploited in teams that are designed and
conducted properly.xlv
Integration counts
Employees receive orientation in particular by their superiors that are responsible for balanced decisions. The knowledge required for balanced decisions
arises from learning which is supported by cooperation. By controlling, decisions and strategies can be implemented and values can be transmitted. Since
these functions closely impact each other, appropriate interaction processes
should be implemented, combining technical and non-technical channels in a
reasonable manner.
Due to the strong implication of leader´s personal thoughts and actions, the
approach described in this paper may be regarded as a model or even as a
management philosophy. Objectives and measures to implement them however
are typically major parts of a strategy. In this case, the strategic objective is to
create balance effects in certain criteria with conflicting poles, realized through
integrated acting in defined areas. From these considerations, the following
definition ca be derived:
Balanced Governance is a management strategy aiming to improve an organization´s viability through managing critical to success fields of conflict. The
strategy can be implemented by integration of Learning, Guidance, Control and
Cooperation.
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Endnotes
i
ii
iii
iv
v
vi
vii
viii
ix
x
xi
xii
xiii
xiv
xv
xvi
xvii
xviii
xix
xx
xxi
xxii
xxiii
xxiv
xxv
xxvi
xxvii
xxviii
xxix
Ashby 1956: 121.
Luhmann 1980: 1065.
Beer 1981: 3-23
Bronner 1992: 1123
Kotter 1995: 59,60.
Dörner 2001:61.
In this context, the term intellectual capital is widely used (Sullivan 2000,
Edvinsson 2002, Andriessen 2004 etc.). The term however suggests that
only cognitive factors influence value creation. The importance of emotional
and social factors can easily be ignored (Kinne 2009: 130.).
Holbrook 1999: 5.
Klein 2008: 16-18.
Müller-Stevens & Fontin 1997: 6,7.
Schwaninger 2006: 16.
Levinthal & March 1993: 101.
Ashby 1970: 207
March 1991, Levinthal & March 1993, Gibson & Birkinshaw 2004, He &
Wong 2004, Lubatkin, Simsek, Ling et al. 2006, O’Reilly & Tushman 2007,
Raisch & Birkinshaw 2008, Raisch, Birkinshaw, Probst et al. 2009, Rothaermel & Alexandre 2009, Uotila, Maula, Keil et al. 2009, Vogel 2011.
Argyris & Schön 1978: 22.
Argyris & Schön 1978: 19.
Levinthal & March 1993: 105.
Levinthal & March 1993: 105.
Rothaermel & Alexandre 2009: 772.
Cohen & Levinthal 1990: 128.
Schwaninger 2006: 19.
Grant 2005: 522.
Kaplan & Norton 2004: 7.
Porter 2000: 18.
Kaplan & Norton 2004: 213.
Kohl, Kinne, Riebartsch 2012.
Grant 2005: 60.
Kinne 2011: 83.
Porter 2000: 181.
24
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xxx
xxxi
xxxii
xxxiii
xxxiv
xxxv
xxxvi
xxxvii
xxxviii
xxxix
xl
xli
xlii
xliii
xliv
xliv
Balanced Governance
Kohl, Kinne, Riebartsch 2012.
Raisch, Birkinshaw, Probst et al. 2009: 688.
Dodd & Favaro 2006. 9-12.
Schwaninger 2006 : 17.
Probst & Raisch 2005: 92.
Gibson & Birkinshaw 2004: 209.
Gibson & Birkinshaw 2004: 213.
Schabel, Stiehler, Rehm et al. 2012: 16, 25.
Kinne 2009: 162-163.
Kinne 2011: 139.
Porter 2000: 196.
Kinne 2011: 113-114, 184-186.
Hammer 2002: 218, 219.
Lubatkin, Simsek, Ling et al. 2006: 651.
Lubatkin, Simsek, Ling et al. 2006: 652.
Kinne 2014: 42-48.
25
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