So far, we have simply assumed that resources can be switched on and off, but in many cases, resources may develop through a series of states. Sometimes this happens entirely within an organization, such as products being moved through stages in the R&D process. For some items, though, development may extend outside the organization, such as the growing awareness and interest of potential customers, and the continued influence of former customers.
How does this influence strategic thinking?
Staff developmentThe promotion of staff from junior to senior positions provides a clear example of a resource (people) moving from state to state (junior to senior) in many organizations. In figure 1, lawyers are hired and promoted to partner along a simple two-stage chain. (There may of course be more than two levels of staff in an organization or department.) This figure shows both an issue of concern — the rising lawyer attrition at the bottom of the diagram — and the reduced rate of promoting lawyers to partner that has been one cause of the problem.
Figure 1: Two-level staff chain in a law firm.
Previous briefings explained how the math in stock-and-flow relationships is vital to the quest for a rigorous causal explanation of performance, and emphasized in particular the mathematical identity between the quantity of a resource at any point in time and the cumulative history of all resource gains minus all resource losses. The same principle applies equally to each state in a developing resource chain. Here, the number of 180 lawyers below the partner level is entirely explained by the firm’s history of all lawyers who were ever hired, promoted and lost. Similarly, the number of 28 partners at quarter 12 is precisely explained by the sum of all lawyers ever promoted to partnership minus all partners who ever left. There could in practice be a third flow affecting partner numbers — experienced people who are hired directly into the partner grade, rather than being promoted up through the firm — but that has not been happening in this particular firm.
| Start of quarter | Lawyers hired | Lawyers | Lawyers leaving | Lawyers promoted | Partners | Partners leaving |
| 12 | 30 | 180 | 19 | 1 | 28 | 1 |
| 13 | 32 | 190 | 23 | 2 | 28 | 2 |
| 14 | 30 | 197 | 19 | 1 | 28 | 1 |
This stage-by-stage development of staff and other resources has important implications for strategy, since it extends the timescale over which cause and effect are separated. In this case, for example, no more than 4% of lawyers have ever been promoted in any quarter (in quarter three, when four were promoted out of a population of 107). This means that a newly hired lawyer cannot expect to be promoted to partner in less than 25 quarters, or about six years. More recently, the expected delay between being hired and promoted has extended still further – one of the major reasons lawyers are leaving. An important consequence of this delay is that promotion rates in any year are in part dependent on the number of lawyers hired many years previously — if the firm hired no new lawyers six years ago, then there will be no lawyers today with six years’ experience. If this resulted in a shortage of partners today, and if this shortage were to cut the firm’s ability to win work from clients, the resulting performance reduction would have been caused by the firm’s hiring failure six years previously.
Until next time…
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When staff develop too quickly
Many senior executives express concern at the difficulty of finding enough of the people they need and the challenging war for talent into which they are drawn. Yet it is easy to overlook the converse problem, namely that staff hierarchies are in effect powerful “breeding machines” for management.
Consider a company starting and developing different retail businesses over about 10 years. Groups of stores in each chain are controlled by area managers, who report to a few regional vice-presidents, who report in turn to a head of operations. Whilst each business is growing, there is a continuing need for more area managers, and thus a good prospect of promotion for store managers. There is also a continuing need for regional VPs, and thus opportunities for area managers to be promoted. As growth opportunities slow down, there is no need for more area managers and regional VPs, so promotion rates fall sharply.
The problem is reduced if the organization invents new retail store formats and starts to grow more new businesses. A manager in a mature business can then be offered an equivalent position or a more senior post in one of the new businesses. Some professional firms solve the problem a different way – with an ‘up or out’ policy, in which staff must seek promotion after a certain number of years in their current grade. If they succeed in winning promotion, all well and good. If they fail, they are asked to leave.
This briefing summarises material from chapter 5 of Strategic Management Dynamics, pages 203-308.
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