Indeed, Enron executives increasingly viewed the company’s lack of direction as a strength. The individuals who developed new businesses in Enron were encouraged “to go in whichever direction they wanted to go,” Ken Rice, the former head of Enron Capital & Trade Resources, is quoted by Gary Hamel in Leading the Revolution (Harvard Business School Press, 2000).
Enron is far from alone in allowing entrepreneurship to take it off course. Back in the late 1980s, Hewlett-Packard Company lost direction as it allowed country operations to invest in their own pet development projects — a policy that kept local customers very happy, but detracted enormously from HP’s ability to focus resources on big new opportunities. Following a review by ex-chairman David Packard, this funding model was stopped, and the divisions were given sole responsibility for development.
More recently, many companies allowed the Internet revolution to derail them. For example, Emap PLC, a London-based media company, created a separate division, Emap Digital, for its Internet activities. Traditional funding rules were temporarily thrown out the window as the division invested large sums in dozens of new digital offerings, many of which were far from the company’s core business of magazines and radio stations. Eighteen months and tens of millions of dollars later, the division was closed down, and the company refocused on its core business.
Too much rigidity in direction setting, however, is equally dangerous. Consider the case of one U.S. minicomputer manufacturer we studied, which we will call Datakom (a fictitious name). Despite the emergence of PCs and networked computing, Datakom was continuing to push its minicomputer hardware well into the 1990s because its strategic direction was stated internally in terms of “selling boxes.” Despite repeated attempts in several of its European subsidiaries to get into the services and maintenance business, Datakom stuck with its traditional strategy. Even when faced with outright revolt by its Swedish operation (which began selling a competitor’s machines in order to generate a base for a service business), senior executives chose to turn a blind eye rather than investigate the cause of the insurrection. After 10 years, Datakom finally created a services and solutions business, but it took many losses and three CEOs to achieve this shift in strategy. Essentially, Datakom’s direction choked off many potentially lucrative initiatives.
How does one get the balance right in direction setting? Looking at companies that got it right and companies that have struggled suggests several guidelines for senior executives:
- First, set broad direction, and then reevaluate it periodically as new information comes to light about changes in the business environment and the products and markets in which the firm is competing. Datakom had a very clear direction, but failed to reevaluate even when faced with strong evidence that its approach was no longer working. The Intel Corporation famously went through such a reevaluation process in the late 1980s, when it finally exited the memory chip business and focused its full energies on microprocessors.
- Second, reinforce efforts across the company that fit within the existing direction. Senior executives are constantly iterating strategy, making continual adjustments based on their beliefs about where the company should be going and the feedback they receive from business units experimenting with a variety of new products and services. So a central role for senior executives is to magnify and reinforce those business unit initiatives that most clearly fit their stated goals.
Consider how executives at the Oracle Corporation lead. They avoid too much formalization, but still give people aggressive targets and a clear idea of objectives. Indeed, the business works in a surprisingly centralized way, with CEO Larry Ellison very quick to throw extra resources behind promising opportunities that he sees in the business units. The software company’s sense of direction comes unambiguously from Mr. Ellison, but at the same time, he recognizes the importance of devolving responsibility to ensure that things happen quickly. As one executive commented during my research, “Moving at this high rate of speed makes it impossible to maintain formal processes. Instead, a lot of people are making unilateral decisions.”