Section audio
So far, we have looked at the complexity of an organization. We started by contemplating the individual’s wisdom, then the group, and later by collections of interacting groups. Organizations, however, do not operate in isolation, but rather in vast networks of organizations that include unions, competitors, suppliers, governments, consumers, communities, and so on.
Therefore, individuals within an organization must manage the internal dynamics within their organization while also dealing with external pressures exerted by other organizations. Fun times.
This textbook uses the word ‘strategic’ to refer to this high level of complexity since many of the decisions at this level involve strategically positioning the company in this network of stakeholders to achieve the organization’s goals.
As you might imagine, acting wisely in this sea of complexity is challenging. In the absence of wisdom, firms fall back to utilitarianism. This, in turn, leads firms to reduce their decision-making to simple cost-benefit and return-on-investment analyses. This reliance on utilitarianism is problematic on three fronts:[1]
- Not everything valuable can be measured. These analyses tend to ignore or undervalue these intangible benefits.
- Such utilitarian approaches lead individuals to focus on what is measured rather than what is valuable.
- Different stakeholders pursue different benefits, so one organization’s cost-benefit analysis may be irrelevant to other stakeholders.
Through utilitarianism, the multiple purposes of an organization become reduced to profit maximization. Focusing solely on profits benefits some stakeholders, such as investors, but may negatively impact others.
For example, employees generally find the pursuit of profit maximization to the exclusion of all else lacks meaning.[2] Exclusive focus on profit maximization further ignores the firm’s impact on society.[3] The following example demonstrates this.
An Extreme Example of a Utilitarian Approach to Decision-Making
The following video presents a well-known case of the Ford Motor Company. In the 1970s, it sold a vehicle it knew had severe safety issues. It justified this action after determining that the costs of fixing the problem were higher than the costs they attributed to the deaths and injuries caused by the safety issue.
Organizations that aspire to act wisely do not ignore profit maximization but rather focus on harmonizing multiple values.[4] Its leaders use knowledge and experience to make choices that appeal to multiple stakeholders.[5] Achieving this requires leaders to embody the virtue of phronesis.
Phronesis is the capacity to do what is realistic. Those in possession of phronesis are adaptive, understand the ethics of a given situation, and commit to act.[6] They focus on doing the ethically practical in a given situation. They can work in conditions of uncertainty and develop skills to manage incompatible and incommensurate values between stakeholder groups.[7][8][9]
Rather than succumb to utilitarianism, leaders exhibiting phronesis recognize that the goals organizations strive to achieve cannot be separated from the means used to achieve them. They recognize that even though a goal may be highly valued, if the means needed to achieve it are undesirable, then perhaps the pursuit of that goal is unjustified.
Operating wisely at this strategic level requires leaders who consider which goals are valuable in light of the means they and other stakeholders use to achieve them.[10]
Achieving this level of insight requires leaders who combine knowledge, experience, and spirituality.
- Knowledge refers to knowing about things and knowing how to do something. Though this is a critical attribute, it is insufficient because our knowledge is often limited and flawed.
- Experience gives individuals a broader understanding of specific situational environments and facilitates integrating new knowledge into existing knowledge. Experience gives individuals the confidence to make decisions with incomplete information and hones their intuition.
- Spirituality refers to an individual’s moral maturity and ability to use universal principles such as integrity, compassion, honesty, and justice to justify their actions.[11]
Key Takeaways
- At the strategic level, acting wisely requires leaders who recognize their organization is embedded in a network of stakeholders, each of whom pursues their values.
- Rather than undermining others’ value-positions, wise leaders harmonize the values of all stakeholders as much as possible.
- Wise leaders do the ethically practical given their situation and can operate in environments of complexity and uncertainty.
- Freeman, R. E., Dunham, L., & McVea, J. (2007). Strategic Ethics--Strategy, Wisdom, and Stakeholder Theory: A Pragmatic and Entrepreneurial View of Stakeholder Strategy. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 151–177). Thousand Oaks, CA: Sage Publications Inc. ↵
- Grant, R. M. (2005). Contemporary Strategic Analysis. Malden, MA: Blackwell Publishing. ↵
- Bierly III, P. E., & Kolodinsky, R. W. (2007). Strategic Logic--Toward a Wisdom-based Approach to Strategic Management. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 61–88). Thousand Oaks, CA: Sage Publications Inc. ↵
- Freeman, R. E., Dunham, L., & McVea, J. (2007). Strategic Ethics--Strategy, Wisdom, and Stakeholder Theory: A Pragmatic and Entrepreneurial View of Stakeholder Strategy. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 151–177). Thousand Oaks, CA: Sage Publications Inc. ↵
- De Meyer, A. (2007). Strategic Epistemology--Innovation and Organizational Wisdom. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 357–374). Thousand Oaks, CA: Sage Publications Inc. ↵
- Freeman, R. E., Dunham, L., & McVea, J. (2007). Strategic Ethics--Strategy, Wisdom, and Stakeholder Theory: A Pragmatic and Entrepreneurial View of Stakeholder Strategy. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 151–177). Thousand Oaks, CA: Sage Publications Inc. ↵
- Flyvbjerg, B. (2001). Making Social Science Matter: Why Social Inquiry Fails and How It Can Succeed Again. New York, NY: Cambridge University Press. ↵
- Freeman, R. E., Dunham, L., & McVea, J. (2007). Strategic Ethics--Strategy, Wisdom, and Stakeholder Theory: A Pragmatic and Entrepreneurial View of Stakeholder Strategy. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 151–177). Thousand Oaks, CA: Sage Publications Inc. ↵
- Sternberg, R. J. (2003). WICS: A Model of Leadership in Organizations. Academy of Management Learning & Education, 2(4), 386–401. ↵
- Freeman, R. E., Dunham, L., & McVea, J. (2007). Strategic Ethics--Strategy, Wisdom, and Stakeholder Theory: A Pragmatic and Entrepreneurial View of Stakeholder Strategy. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 151–177). Thousand Oaks, CA: Sage Publications Inc. ↵
- Bierly III, P. E., & Kolodinsky, R. W. (2007). Strategic Logic--Toward a Wisdom-based Approach to Strategic Management. In E. H. Kessler & J. R. Bailey (Eds.), Handbook of Organizational and Managerial Wisdom (pp. 61–88). Thousand Oaks, CA: Sage Publications Inc. ↵
The theory that the morality of an action is judged by the effect of that action.
A financial analysis that adds the benefits of an action together and then subtracts the costs.
Also known as ROI. This is a financial analysis that calculates the ratio of profits an action will generate relative to the investment cost needed to perform the action.
Ancient Greek for practical wisdom; prudence; mindfulness
Incommensurate objects have no basis of comparison with each other. For example, a person's age is incommensurate with the weather. There is no meaningful basis of comparison between the two.