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lOMoARcPSD|7864644 Growth Strategies and Organizational Challenges Lectures 1 -4 Growth Strategies and Organizational Challenges (Vrije Universiteit Amsterdam) Scannen om te...
lOMoARcPSD|7864644 Growth Strategies and Organizational Challenges Lectures 1 -4 Growth Strategies and Organizational Challenges (Vrije Universiteit Amsterdam) Scannen om te openen op Studeersnel Studeersnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Lecture 1: Business planning vs. Effectuation strategies................................................. 2 Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepeneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning-performance relationship in small firms............................................................... 2 Sarasvathy, S.D. (2001): Causation and effectuation; toward a theoretical shift from economic inevitability to entrepreneurial contingency........................................................ 4 Lecture 2: Growth versus survival in international markets..............................................5 Sapienza, H.J., Autio, E., George, G., & Zahra, S.A. (2006). A capabilities perspective on the effects of early internationalization on firm survival and growth. Academy of Management Review, 31(4), 914-933................................................................................ 5 Lu, J. W. & Beamish, P. W. (2004). International diversification and firm performance: The S-curve hypothesis. Academy of Management Journal, 47(4), 598-609.................... 9 Lecture 3: Organic vs. non-organic growth....................................................................... 11 Which Resources Matter how and where? a Meta-analysis on firms’ foreign establishment mode choice. Klier, Schwens, Zapkau, & Dikova 2017............................. 11 Puranam, P., Singh, H., & Chaudhuri, S. (2009). Integrating acquired capabilities: When structural integration is (un) necessary............................................................................ 15 Lecture 4: Growing through innovation or imitation?...................................................... 19 How to capture value from innovation: shaping intellectual property and industry architecture (Pisano & Teece, 2007)................................................................................ 20 How firms capture value from their innovations. James, Leiblein and Lu (2013)............. 22 Formal and informal appropriation mechanisms: the role of openness and innovativeness. Zobel, Lokshin & Hagedoorn (2017).......................................................24 Lecture 5: Stakeolder- vs. shareholder-oriented growth................................................. 26 Misery loves companies: rethinking social initiatives by business. Margolis, Walsh (2003) 27 Jones, T. M., Harrison, J. S., & Felps, W. (2018). How applying instrumental stakeholder theory............................................................................................................................... 29 can provide sustainable competitive advantage...............................................................29 Bosse, D. A., Phillips, R. A., & Harrison, J. S. (2009). Stakeholders, reciprocity, and firm performance..................................................................................................................... 31 Lecture 6: Pyramid writing style.........................................................................................33 The Value of Self-Service: Long-Term Effects of Technology-Based Self-Service Usage on Customer Retention. Scherer, Wunderlich and Wangenheim (2015)..........................34 Giving back the ‘self’ in self-service: customer preferences in self-service failure recovery: Joel E. Collier, Michael Breazeale, and Allyn (2017)........................................35 Lecture 7: Related vs. unrelated diversification strategies............................................. 35 The link between resources and type of diversification: theory and evidence. Chatterjee, Wernerfelt (1991)............................................................................................................. 38 Curvilinearity in the diversification-performance linkage: an examination of over three decades of research. Palich, Cardinal and Miller (2000)..................................................38 Lecture 8: Growing with products vs. services................................................................ 41 Solution providers’ strategic capabilities (Huikkoala and Kohtamaki, 2017).................... 42 Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Lecture 1: Business planning vs. Effectuation strategies Brinckmann, J., Grichnik, D., & Kapsa, D. (2010). Should entrepeneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning-performance relationship in small firms Research interest - Universities, competitions and investors all focus on BP’s Two opposing theoretical perspectives: - Helps in decision making → effective steps to realize goal - But can lead to cognitive rigidities and limited strategic flexibility - Incosistent findings in empirical research - Existing research is heterogeneous: based on new and established firms → Meta analysis could explain inconsistent findings Method Literature search - Keyword search in scientific journals en articles - Only studies selected if: emperical based on small firms, after a review of the abstract/title, studies with non operational performance measures and long-term planning Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Results - H1: not rejected → positive effect BP on performance - H2: not rejected → The effect is stronger for established firms - H3: rejected - H4: not rejected → High uncertainty avoidance has a negative effect on BP on performance Conclusion Overall BP is a value creating activity (despite the need for a lot of resources). But BP is more beneficial is certain circumstances. It challenges the idea it is especially useful for new firms. High uncertainty and missing info reduce the effect of BP for new firms. A higher uncertainty avoidance reduces the benefits of BP, by adhering to BP limits strategic flexibility and openness to changes. The benefits of BP stem from both the symbolic and the learning effects of BP. Implications Basic BP activities are sufficient in the initial years - Allocate the resources to information gathering and uncertainty reduction, and learning - Long pre-planning activities detached from market interaction and feedback appear detrimental Mental preparation and willingness to adjust BPs is critical, close execution is not per se. Limitations - Possible overlaps between new and established firms - Hofstede’s four dimensions concept of culture is a simplication of reality in aspect to cultural diversity (power distance index, individualism versus collectivism, masculinity versus femininity and the uncertainty avoidance index) - Meta analysis estimates the strength of a relationship, but cannot determine its causality → Could be the reason behind the positive effect between BP and performance Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Sarasvathy, S.D. (2001): Causation and effectuation; toward a theoretical shift from economic inevitability to entrepreneurial contingency. Effectuation versus causation Causation: The causator takes a particular effect as given and focuses on selecting between means (middelen) to create that effect → so there is a given goal Effectuation: The effectuator takes a set of means as given and focuses on selecting between possible effects that can be created with that set of means → thinking from the means and effect second Effectuation: basic principles 1. Bird in hand - given means - Entrepreneurs seeking to build a new venture start with the given means (what do i know?) - Combining these means, they start imagining the possibilities and take actions - Goals result from the process of testing - They dont think in risks but in affordable losses 2. Affordable los - Decide what they are willing to lose - This depends on the person not the venture Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - They stop depending on prediction and focus on cultivating opportunities - New venture opportunities are difficult to value opfront, while time, money, and other resources are quantifiable and controllable 3. Lemonade principle - Dealing effectively with changing circumstances - Take advantage of surprises - In most BP’s surprises are bad, but because entrepreneurs are not tied to any theorized or preconceived market, it can lead to valuable opportunities → innovations are solutions in search of a market → also, willingness to kill former darlings 4. Crazy quilt principle - Focus on building partnerships rather than beating competitors - Competitive analysis have little value since it is not a predetermined market - Entrepreneurs take the product to the nearest potential customer - The expanding network of strategic partners determines which market the firm ends up entering or creating 5. Pilot in the plane - Focus should be on the controllable aspects of the environment - The future is shaped by human actions, so its useful to understand and work with the people that are engaged with these actions. Lecture 2: Growth versus survival in international markets Uber: a story of early internationalization A capabilities perspective on the effects of early internationalization on firm survival and growth. - Strong capabilities makes sure a firm can renew itself continuously. The ability to adapt can develop particularly in the early stages. Sapienza, H.J., Autio, E., George, G., & Zahra, S.A. (2006). A capabilities perspective on the effects of early internationalization on firm survival and growth. Academy of Management Review, 31(4), 914-933. Research interest Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Early internationalization, organisation that are born global and go abroad shortly after their inception, challenge traditional theories on internationalization - Process theory of internationalization (johanson & Vahle, 1977, 1990) - Internationalization as an incremental process that starts late in firms’ lifecycle - Potentially negative outcome of early internationalization on firms survival - Early internationalization of firms in dynamic and technology intensive sectors as an accelerator for growth Traditional view: process theory of internationalization (PTI) - PTI (Johanson & Vahlne, 1990): internationalization is a process in which firms incrementally increase their international involvement. - Interplay between the development of knowledge about foreign markets and an increasing commitment of resources to foreign markets International new venture theory (INV) - Specific new ventures do not follow incremental internationalization patterns (Oviatt & McDougall, 1994) - They derive competitive advantages from the use of resources and the sale of outputs in multiple countries from their inception Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Conclusion Both theories provide explanations for the timing of firms their international entry but dont explain the implications of early internationalizations for the growth and survival of the organization. Paper of Zahra, 2005: tries to resolve some of the theoretical and empirical contradictions - Develops a framework based on the dynamic capabilities view of the firm, which influence the effect of internationalization on the survival and growth of the company - Explains why early internationalization has different effects on new firms their growth and survival perspective - Builds on the organizational survival literature and theorizes that 1) age at internationalization, 2) managerial experience, and 3) resource fungibility (ability of a good or asset to be interchanged with goods of the same type: basketball, oil barrel, dollar bill) moderate the influence of internationalization on survival and growth Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Implications for theory - Extant internationalization frameworks emphasize the importance of experience, learning and knowledge: - PTI: constraining factors, which lead to gradual internationalization - INV: enablers for early internationalization - Diffrentiation between growth and survival as outcomes of young firms’ internationalization - Early stages: costs and the lack of positional advantages threaten firm survival - Later stages: Capabilities developed during the internationalization process create an organizational imprint for adaptability and growth - Early capability development and imprinting enable rapid growth - Managers use routines from other settings to reduce time / costs of capability development in the absence of joint orgnizational experience - Managerial experience substitutes for organizational experience Implications for practice - early internationalization is risky for creating a venture that provides long-term self employment - Internationalization improves the chances of building a venture of great potential Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Failures before creating a winner provide experience which improves the odds of future succes - Older firms havve learning disadvantages and their costs of capability development are higher - they face rigidities and structural inertia, which hampers their ability to learn about new markets and to chance routines - Hiring managers with international experience enhances venture growth and survival prospects Lu, J. W. & Beamish, P. W. (2004). International diversification and firm performance: The S-curve hypothesis. Academy of Management Journal, 47(4), 598-609. Research interest Unclear performance implications of a firms internationaliation, as geographix expansion entails a set of costs and benefits over time → what is the relationship between multinationality and firm performances? research aim Develop a theoretical framework integrating asset-based internalization advantages with other internationalization costs / benefits across time (H1) Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Explore how internationalization motives (intangible assets) affect the performance implications of geographic diversification strategy → Moderating influence of a firms intangible assets (H2) - intangible assets positively moderate the exploitation benefits of a firms internationalization strategy - Such as: technological know-how, patents, management skills, brands, goodwill, etc. - Development of intangible assets requires considerable resources, but the value does not depreciate - Firms with more intangible assets generate higher returns from their foreign investment by realizing scale and scope economies in the exploitation of their intangible assets Moderator analysis Empirically test the theoretical model with longitudinal data comprising 1,489 japanese firms and their internationalization activities Implications for research & theory - Intangible assets augment the benefits from firms’ geographic expansions - Managers should take a long-term view of internationalization (Inital negative returns should not stop foreign expansion, benefits arise after overcoming the liabilities of newness / foreignness) Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Managers should develop capabilities for managing complexity (to extend phase 2) Lecture 3: Organic vs. non-organic growth Acquisition full or partial purchase of an existing firm’s equity Greenfield investment Firm builds a new subsidiary from scratch Entry mode model Which Resources Matter how and where? a Meta-analysis on firms’ foreign establishment mode choice. Klier, Schwens, Zapkau, & Dikova 2017 Research interest Establishment mode choice (EMC): acquisition vs. greenfield investment → both entry modes are resource attentive (Dikova & Brouthers, 2015) Current gaps in establishment mode choice research: - Firms posses different types of resources, but current studies focus only on single resources Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Diverse theoretical arguments and inconclusive empirical findings regarding the influence of resources on firms their EMC - Unclear boundary conditions under which resources affect firms their EMC Resource based view (RBV): Distinctive resources provide firms with a sustainable competitive advantages (and long-term superior performance) Context dependency of the RBV is that unfamiliar environments cause ‘information deficits’. This partly caused by cultural differences. Certain types of resources, such as international expertise, become particularly valuable in the presence of cultural differences Firms choose strategies which either exploit existing resources or acces new resources VRIN Framework: Resources have to be valable, rare, inimitable, and non-substitutable to provide a sustainable competitive advantage Valuable: exploit opportunities and neutralize threads Rare: not widely held among competitors (bv: patents, reputable brand) Inimitable: not easily replicable or obtainable by competitors Non-substitutable: no equivalent resources available to competitors (bv: experience) Research aim - Examine the influence of knowledge-based and experience-based resources on a firm their establishment mode of choice - Examine how the relationships vary with cultural differences Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Conduct a meta analysis to draw a conclusion based on broad empirical evidence Contribution - Develop a resource based view framework explaining how firms exploit existing and seek new resources through their establishment mode of choice - Reduce the inconclusive findings by studying an important boundary condition of the relationship between different types of resources and a firm their establishment mode of choice Theoretical background: resources and establishment mode choice Research model Data 31 eligible studies analyzing 13,559 establishment mode choices Methods - Used correlation coefficients as effect-size indexes - Tested for bias, outliers and heterogeneity - Used Hedges and Olkin meta analysis to estimate the meta analytic mean-correlations and the corresponding confidence intervals - Meta-analytic regression analysis to analyze moderator effects Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Measurements Results H1: confirmed → Knowledge-based resources lead to more greenfield establishment mode of choice H2: confirmed → Experience-based resources lead to more acquisitions as an establishment mode of choice H3a: confirmed → Cultural distance decreases the effect of knowledge based resources on the establishment mode choice H3b; not confirmed Implications - The value of resources varies with the resource type and also with the context - Managers should take the firms their resources and cultural differences into account when choosing establishment mode choice - Centrality of the resource based view for firms their establishment mode choice Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Limitations - Limited number of studies in some recourse sub-categories - Study does not differentiate between full and partial acquisitions / greenfield investments - Focus only on two specific types of resources and on one contextual factor Puranam, P., Singh, H., & Chaudhuri, S. (2009). Integrating acquired capabilities: When structural integration is (un) necessary Structural integration The combination of formerly distinct organizational units into the same organizational unit following an acquisition Research interest & conceptualization - Post-merger integration can destroy the innovative capabilities of the acquired organization - Interdependence motivates structural integration, but pre-existing common ground offers acquirers an alternate path to achieving coordination - Prior research on post merger interaction has focused more on its consequences than its causes The costs of structural integration in tech acquisitions Short-term costs → the costs of processes by which structural integration is achieved Long-term costs → Loss of autonomy effect, lower productivity and motivation, free-riding - Agency theory: structural intergration weakens the link between reward and effort, because the numbers of agents influencing performance increases → Changes can alter valuable organizational routines within the acquired company, which can undermine its innovative capabilities Levels of interdependency (Thompson, 1967) Pooled interdependence: Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Sequential Reciprocal Hypothesis 1: component technology vs standalone product Structural integration is more likely in technology acquisitions, when the acquisition is motivated by obtaining a component technology (rather than a standalone product) Common ground “the sum of mutual, common or joint knowledge, beliefs and suppositions” In contrast to structural integration, which enables coordination primarily through the use of formal mechanisms such as common authority, procedures, and goals, common ground can give rise to tacit or informal coordination Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 → important: Coordination based on pre-existing common ground is not subject to the disruption effects that accompany structural integration, because no substantial changes to the formal organization are necessary Theoretical model Hypothesis 2: common ground does not lead to disruption The existence of high levels of common ground between individuals from the acquiring and acquired organizations lowers the likelihood that component technology acquisitions will be structurally integrated. Method Data: - The acquisition of small (1000) established firms - Sample of acquirers from the information technology hardware industries for two reasons: - Sector has been frequently profiiled in popular publications as being extremely active in technology acquisitions - Able to obtain acces for ectensive interviews at three major firms in this sesctor: Intel, Cisco Systems, and Hewlett Packard - 207 acquisitions by 49 acquires Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Structural integration, cross validation through press releases & primary data from top 3 acquirers Other measures - Common ground: existence of pre-acquisition patenting activity by both targets and acquirers in the same technology classes - Control variables: controlled for several characteristics that could influence interdependence, common ground and structural integration decisions - Target size and age, quality, product market relatedness, size, acquisition experience, R&D intensity Results H1: confirmed Structural integration is more likely in technology acquisitions, when the acquisition is motivated by obtaining a component technology (rather than a standalone product) H2: confirmed The existence of high levels of common ground between individuals from the acquiring and acquired organizations lowers the likelihood that component technology acquisitions will be structurally integrated. Implications - Interdependence helps explain why acquirers pursue post-merger integration in technology acquisitions despite the significant disruptions it is known to cause - Prior literature does not focus on the antecedents of structural integration decisions - Much like absorptive capacity, common ground represents an instance in which some degree of knowledge overlap helps with the acquisition of non-overlapping knowledge and capability → developing common ground reconciles the dilemma of structural integration versus providing autonomy Limitations - The authors assume that the only relevant form of interdependence between the target and the acquirer is their technological interdependence. They also assume that the coordination requirements with the product development teams of the target dictate the organizational treatment of the entire target firm. Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Reliance on patenting data to measure common ground is also not free of problems Lecture 4: Growing through innovation or imitation? The focus is on how to appropriate the value from innovation. → Appropriation of value: how are the benefits from innovation distributed Why is it always difficult to make money with innovation? 1. R&D has a cost 2. Pioneering may have its disadvantages a. Most first movers are solutions in search of a market b. Nobody gets it right the first time c. Fast-followers and late entrants enjoy all the free iterative learning that happens while the first mover is: - distracted by providing customer support - Burning its brand due to quality issues and feature-needs mismatches 3. (The suggestion of) imitation at favorable prices 4. The lack of complementary assets: the PFI framework (Teece, 1986) Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Appropriability regimes - If a particular innovation, or the knowledge on which it rests, can be completely “appropriated”, it means that no one else can use it or copy it. - Allows a large “share” of the pie to be retained by the “supply” side - Offers innovators enormous bargaining power in the value chain How to capture value from innovation: shaping intellectual property and industry architecture (Pisano & Teece, 2007) Innovations dilemma Innovation is often seen as a key driver for growth, profitability and competitive advantage, but there is no guarantee that innovators will reap the rewards (Netscape browser or Hydrox Cookie → orea) → the challenge is not just creating value, but capturing it Appropriability regimes Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 The protection afforded to innovators through legal mechanisms (patent, copyrights) and natural barriers of imitation. Industry architecture vertical → firm designs and manufactures all components of a system horizontal → where firms specialize in particular layers or components of a system Re-engineering appropriability regimes Under certain circumstances, firms can shape the appropriability regimes and industry architecture to their advantage. Asset types Existing asset positions → This determines whether a firms has a strong or weak appropriability regime, or a modular or integral architecture. Complementary assets → To provide value to users form innovation, it requires complementary products, technologies and services. Bottleneck assets → The profiting from innovation framework highlights that one of the key factors for capturing value through innovation is controlling the bottleneck assets in the value chain. Intellectual property → such as patents, copyright and trade secrets Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 How firms capture value from their innovations. James, Leiblein and Lu (2013) There are four exogenous conditions in the selection of value capture mechanisms: institutional environment, industry, firm, and innovation/technology. Identifying and Defining Value Capture Strategies There are four appropriability mechanisms: Patents = legally granted rights to exclude others from making, using, selling, or importing an invention, for a limited time, within a given country. Secrecy = a firm’s efforts to protect the uniqueness of an innovation by withholding its technical details from public dissemination. Lead time advantages = result from early timing of developing and introducing an innovation. Complementary assets = supplementary assets such as manufacturing, distribution, marketing, or service that are used in conjunction with the know-how underlying a focal innovation to deliver value. Identifying and Defining Contextual Conditions There are four contextual conditions that affect the selection of specific value capture strategies: Institutional = factors such as enforcement of intellectual property laws Industry = characteristics associated with competitive intensity, including the degree of product differentiation, the speed and uncertainty of technological change, and the extent to which innovation is cumulative. Firm = attributes such as the level and focus of R&D, stock of technological capabilities, and innovation activity of the organization. Technology = characteristics that capture the degree of complexity and/or tacit nature of the knowledge embedded in the innovation Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Identifying and Defining Performance Outcomes Innovations generate value for society by increasing the gap between willingness to pay and the expected costs of delivering this value to a particular market segment, value capture mechanisms influence how much of this value innovating firms will appropriate. Prominent performance outcome measures are competitive advantage, profits, and economic performance Intelectual property protection measures Formal IP protection: - Patens - copyrights - Design rights - Breeders rights - Trademarks Informal IP protection Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Complexity - No possibility of reverse engineering - Lead-time advantages - Trade secrets - Human resources - Reputational assets - Design-in switching costs - Lock-in raw materials/suppliers - Cannibalization concerns Conclusions and Future Research Directions There are five key contributions and insights from the literature on how firms capture value from their innovations: 1. Much of the existing work emphasizes a single value capture mechanism (patents) 2. The propensity of firms to use these mechanisms varies with the institutional appropriability regime, industry, firm, and technological characteristics. 3. There are differences in the effectiveness of each mechanism across industries and types of innovation. 4. Value capture strategies drawing on source of firms-specific appropriability may be more effective than relying on patents alone. 5. Firm-specific innovation capabilities may enable firms to capture value from their innovations, and this potential effect is independent of the contextual factors. Formal and informal appropriation mechanisms: the role of openness and innovativeness. Zobel, Lokshin & Hagedoorn (2017) The search breadth & depth of open innovation: “An obvious risk associated with such openness lies in the fact that resources are made available to others to exploit.” External search breadth Refers to the diversity of external sources of knowledge that firms tap into for their innovative activities. External search depth Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Represents the intensity or importance of these external sources of knowledge.So, how deeply does a firm engage with these sources? → firms increasingly collaborate with a variety of external partners and make greater use of external knowledge: open innovation Incremental versus radical innovation Incremental innovations only offer minor improvement for markets (close to the firm current market) → more likely to rely on formal appropriation mechanisms Radical innovation implies the creation of advanced, distant knowledge (away from the current market) → more likely to rely on informal appropriation mechanisms Findings Search breadth and depth → has a positive effect on the use of informal appropriation measures Search breadth → has a positive effect on the use of formal appropriation measures Firms degree of radical (or incremental) innovation orientation → has no influence on the use of formal appropriation measures Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Firms that engage in external breadth and depth are more likely to use both formal and informal appropriation mechanisms. Lecture 5: Stakeolder- vs. shareholder-oriented growth Stakeholder Individual, group or organization that has direct or indirect stake in an organization because they can affect or be affected by the organiation’s actions, objectives and policies Internal: employees, shareholders, management External: competitor, consumer, government, community Shareholder Individuals or institutions (including corporations) that legally own any part of a share of stock in a public or private corporation Institutional investors: investment firms, insurances, bank Individual investors: individuals who buy shares with their personal savings Milton Friedman’s traditional view of a firm - Primary goal of a firm is profit maximization - Shareholders are the firm’s economic engine, and the only group to which the firm must be socially responsible - Firms return a portion of their profits to their shareholders as a risk reward Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Shareholders can decide for themselves what social initiatives to support (instead of the executives decide for them) → Coca Cola example: used to be shareholder orientated, but has moved to shareholder orientated (community) Stakeholder theory (Freeman, 1984) - Challenges the conventional capitalist view of the firm - Firms cannot macimize value if they ignore the interest of their stakeholders - Firms rely on contribution of a much wider set of constituents - Firms need to take the interest of these stakeholders into account to ensure sustainable profitability and survival Identifying and managing stakeholders: porters five forces Misery loves companies: rethinking social initiatives by business. Margolis, Walsh (2003) The neoclassical view on organisations Firms as a Nexus of Contracts; the firm is a legal entity that can contract with many parties and enforce these contracts in courts of law Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Labor contracts - Supply contracts - Customer contracts - Finance contracts → This view of the firm challenges the legitimacy of corporate responses to social misery - Only free elected governments are legitimate actors to act on social misery - If shareholder wealth is maximized then social welfare is maximized as well → Two central concerns: misappropriation & misallocation Three types of stakeholder theory (Donaldson and Preston, 1995) 1. Descriptive: to what extent do managers do, in fact, attend to various stakeholders and act in accordance with their interests? 2. Normative: explores whether managers should attend to stakeholders other than shareholders, and if so, on what grounds these various stakeholders have justifiable claims on the firm. - Employee dignity and self-efficacy - Principles of fairness and reciprocity - fundamental rights - Respect for the intrinsic worth of human beings 3. Instrumental: delineates and investigates the consequences of attending to various stakeholders. Exploring the antinomy: Does the successful business try first to profit or to serve Normative theory of the firm: “while acknowledging the conflict between social misery and economic efficiency, an inductive normative theory seeks not to resolve the conflict, but to clarify the competing considerations, probe what gives them weight and explore their relationship” Five areas of inquiry descriptive research 1. Appraising the stimuli: Which social ills garner attention by which firms? 2. Generating response options: How do firms generate response options? (behavioral or cognitive approach) Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 3. Evaluating options: What assessment criteria are applied to corporate efforts to ameliorate (make something better) social ills? 4. Implementation: How do firms implement responses to social misery a. Equivocal: uncertain, ambiguous, open to two or more interpretations b. Ambivalent: having two opposite feelings simultaneously or being uncertain how you feel c. Ambidextrous: Two different types of responses, left and right side responding. 5. Consequences: How do corporate efforts to redress social misery actually affect their interned beneficiaries? Three forms of the duty to aid and respond When a company: 1. contributes to the conditions that necessitate a response 2. benefits from deleterious or unjust conditions 3. duty of beneficence: the duty to act in the best interest of the client How a company should respond will be a function of features of: - The problem (Depth & Breadth) - The company (contribution, proximity, benefits) - The companies relation to the problem - The impact the company’s response would have (boundary conditions, permitted vs prohibited) Jones, T. M., Harrison, J. S., & Felps, W. (2018). How applying instrumental stakeholder theory can provide sustainable competitive advantage. The core hypothesis of the instrumental stakeholder theory (IST) is that developing stakeholder relationships governed by the norms of traditional ethics (fairness, trustworthiness, loyalty etc) will lead to improved financial performance. But fails to answer a vital question: If the performance effects of ethical relationships with stakeholders are positive, according to both theory and empirical studies, why do so many firms treat stakeholders selfishly at best and unethically at worst? Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Contribution of the paper 1. Are the resources that result from IST-based stakeholder treatment also rare and difficult to imitate? 2. “Sunny side” bias of the ethical treatment of stakeholders, but what about the costs of close relationships with them? 3. Context dependency of ethically grounded stakeholder management strategies’ association with higher financial performance They use relational models Arm's length relationship → A loose relationship between companies that is characterized by low relational investment and trust. Integrated relationship → relationship between companies that is tightly connected, with linked processes across and between firm boundaries. To argue that a CSRE strategy can lead to a CR capability A communal sharing relational ethics strategy is characterized by an intention to rely on relational contracts, joint wealth creation, high levels of mutual trust and cooperation, and communal sharing of property. Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Linking a communal sharing relational ethics strategy to sustainable competitive advantage Bosse, D. A., Phillips, R. A., & Harrison, J. S. (2009). Stakeholders, reciprocity, and firm performance. The self-interested maximizer of economic theory ‘who grabs what he can for himself, is an inaccurate depiction of typical behavior’. Instead, most people assess the fairness of others and reciprocate by (1) rewarding those they deem fair, and (2) incurring costs to punish those they deem unfair. Bounded self-interest The reciprocity assumption does not suggest that people do not seek to maximize their utility; it suggests people seek to maximize their utility while conforming to the norm of reciprocity → Firms create value by distributing it to those stakeholders who behave fairly, and therefore the reciprocity of fairness is the engine of value creation (Google; Fridays off) Fairness Distributional fairness: fair share (amount of money) Procedural fairness: fair process (promotion) Interactional: fair enough (equal chance in interaction) Conclusion: Based on the assumption of reciprocity, firms should distribute (surplus) value to Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 a broad group of stakeholders to create value. Arm’s length relational ethics (ALRE) strategies It is defined as a shared intention to relate to a stakeholder group based on the norms of arm’s length relationships Why close relationship capability is rare 1. Arm’s length relationships with stakeholders tend to be the default position in stakeholder management strategies 2. Several factors can reduce managers’ motivation to adopt CSRE norms in pursuit of close relationship capability (incentives) 3. CSRE strategies are difficult to implement (50% of all individuals have social dispositions that are either self-regarding or competitive) 4. Difficulties with finding suitable stakeholder partners Why a close relationship capability is difficult to imitate 1. Path dependence: history matters. past persists because of resistance to change (qwerty) 2. Causal ambiguity: unclear cause of relationship capability 3. Social complexity Limitations - Stakeholder management strategies modeled as dichotomy (CSRE vs ALRE) - Cultural feasibility (collectivistic vs individualistic) - Measurement problems - Focus on dyadic relationships (intense relationship between two people) and stakeholder groups Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Lecture 6: Pyramid writing style Ensure that your pyramid is mutually exclusive and collectively exhaustive (MECE) - Mutually exclusive: means that all items in each category belong only to that category - Collectively exhaustive: means that all the possibilities have been covered Deductive logic Inductive logic Summary Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 The Value of Self-Service: Long-Term Effects of Technology-Based Self-Service Usage on Customer Retention. Scherer, Wunderlich and Wangenheim (2015) Technology-based self-service (TBSS) Refers to services that allow customers to produce a service independent of direct service employee involvement. Customer retention The ability of a company or product to retain its customers over a specified period Main findings Customer retention While SST’s can increase efficiency, they might not always foster deeper customer-firm relationships. Especially at the beginning of the relationship, it is not recommended to use self-service. Balancing high tech with high touch: The research underlines the significance of striking a balance between technology-driven services and human touchpoints Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Giving back the ‘self’ in self-service: customer preferences in self-service failure recovery: Joel E. Collier, Michael Breazeale, and Allyn (2017) The research aims to explore the dynamics of self-service technologies, especially concerning how customers respond to failures within these systems. Findings The customer reactions to such failures are influenced by: 1. Whom they perceive as the cause of the failure (machine or customer) 2. The method of recovery (whether an employee intervenes or solve it themselves) 3. Environmental factors, such as the presence of other customers 4. The type of self-service setup Additionally, personal traits such as susceptibility to embarrassment and self-monitoring capabilities are factors in how customers perceive and handle self-service failures. Lecture 7: Related vs. unrelated diversification strategies Diversification A corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market Oracle corporate strategy: combining vertical integration and diversification Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 → Vertical integration: within the same product category, can be backward or forward → Diversification: can be related or unrelated Why do firms diversify? - When they have excess resources, capabilities, and core competencies that have multiple uses - Diminishing growth prospects in the present industry - Cost-saving opportunities - Capture strategic fits - Capture financial economies - Spread business risk - Leverage brand name Economies of scope This exists when a firm expands the variety or scope of its activities (selling chipped bark as a lumber company, for lawn decorations) Strategic fit Expresses the degree to which an organization is matching its resources and capabilities with the opportunities in the external environment Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Building shareholder value - Ultimate justification for diversification - A diversification move must pass three tests - The industry attractiveness test - The cost-of-entry test - The better-off test → Decision to diversify requires two additional decisions - Level and degree of diversification - Number and relatedness - Mode of diversification - Acquisition, internal development, joint venture What is related diversification This means that there is technological similarity between the industries. The company could seek new products with technological or marketing synergies with existing product lines, appealing to a new group of customers. (Example Proctor and Gamble) Strategic appeal of related diversification - Capture strategic fits/synergies/scope economies - Strategic fits along the value chain - Cost reductions - Spread investor risks over a broader base - Preserves strategic unity in its business activities - Achieve consolidated performance greater than the sum of what individual businesses can earn operating independently What is unrelated diversification? Involves diversifying into businesses with no strategic fit, no meaningful value chain, and no unifying strategic theme. This approach is to venture into any business in which we think we can make a profit. Firms that pursue unrelated diversification are often referred to as conglomerates. (example Textron) Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Attractive acquisition targets for unrelated diversification - Companies whose assets are undervalued - Companies that are financially distressed (purchase at a bargain price) - Companies with bright prospects but limited capital → Dominant logic: any company that can be acquired on good financial terms & offers good prospects for profitability is a good business for diversification The link between resources and type of diversification: theory and evidence. Chatterjee, Wernerfelt (1991) The papers build a theoretical foundation to identify systematic factors that influence the type of diversification. Their claim: the resource profile explains partially the type of diversification the firms in the sample engage in. Hypotheses and control H1: Excess physical capacity will lead to related diversification H2: Presence of intangible (R&D intensity and advertising intensity) assets will lead to related diversification → found to be true H3A: Availability of internal funds or unused debt capacity will favor more unrelated diversification H3B: Availability of equity capital will favor more related diversification → not found Higher performing firms supported the model better Curvilinearity in the diversification-performance linkage: an examination of over three decades of research. Palich, Cardinal and Miller (2000) The linear model: three assumptions Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 1. Market power advantages through a. Predatory pricing b. Cross subsidization - a firm with deep pockets uses its asymmetric financial strength to drive a rival with shallow pockets from the market c. Constructing a reputation for predatory behavior, which may also deter market entry d. Reciprocal buying and selling 2. Internal market efficiencies The diversified firm has much greater flexibility in capital formation a. Access to external sources and internally generated resources b. The head office can allocate investment cheaply and efficiently, directing capital away from slow-growing, cash-generating operations c. This is especially true for relatively new ventures which lack a track record and for which limited information is available to external resources. d. However, to what extent may managers be drawn to overinvest in undeserving projects? 3. Other advantages - Excess firm-specific assets that cannot be sold (brand reputation) - Tax and financial benefits associated with diversification: financial synergies - Portfolio effects > risk reduction > decreases the costs of capital > further tax - advantages The inverted-U model - focused businesses do not enjoy scope economies - Marketing economies of scope - Production economies of scope - Share R&D facilities - Asset amortization (accounting method for spreading out the costs for the use of a long-term asset over the expected period the long-term asset will provide value.) - Not only benefits accrue to diversification - Growing strain on top management Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Different dominant logics > increasing coordination costs - Internal capital market inefficiencies > decreasing responsiveness - Incompatible technologies - Marginal costs of diversification increase rapidly the intermediate model - To what extent do firms exploit the relatedness? - Holds risk reduction not predominantly for unrelated diversification? Measures Diversification - Herfindahl (measure of market concentration, used to measure market competitiveness) - Entropy - Count of industries Performance - Accounting-based - Market-based Conclusion The inverted-U shaped relationship is largely confirmed: The results indicate that moderate levels of diversification yield higher levels of performance than either limited or extensive levels of diversification. Thus, it provides support for the inverted u-model: performance increases as firms shift from single business strategies to related diversification, but performance decreases as firms change from related diversification to unrelated diversification. Wrap up There is a positive relationship between resource flexibility and unrelated diversification The diversification-performance relationship is curvelinear (inverted U-shape) Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Lecture 8: Growing with products vs. services Firm level challenges in servitization Shifting mindsets - Of marketing - from transactional to relational - Of sales - from selling multi-million dollar products to selling service contracts and capability - Of customers - from wanting to own the product to being happy with the service Timescale - Managing and delivering multi-year partnerships - Managing and controlling long term risk and exposure - Modelling and understanding the cost and profitability implication of long-term partnerships Business model and customer offer - Understanding what value means to customers (not producers and suppliers) - Developing the capability to design and deliver services rather than products - Developing a service culture - Embedding all of the above into a service organisation Why would manufacturers expand their portfolio with services? Or even replace products by services? Financial drivers - Higher profit margin - Less sensitive for price based competition - More resistant to economic cycles Strategic drivers - Differentiate manufacturing offerings - Sustainable competitive advantage Marketing drivers - Total cost of ownership Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 - Service tend to induce repeat-sale - Customer insights enable the development of tailored solutions The service opportunity matrix While temporally linked services deepen relationships with customers, spatially linked services broaden them. Spatial expansion by GM: leveraging expertise or reputation in adjacent activity chains How can existing customer interface be leveraged? Temporal reconfiguration at UPS Opportunities for temporal reconfiguration arise again on the primary activity chain. Companies do not add new services in this part of the matrix; they shift the boundary between the activities they perform and those done by customers Motivations for temporal reconfiguration 1. Companies are better at managing assets or performing business processes that are closely related to their core competencies but not those of customers 2. They can aggregate demand across customers to create economies of scale that they can pass on to customers 3. They can apply knowledge about best practices from the industries in which they provide such services Spatial reconfiguration: leveraging a brand name → Nike sport camps The service risk mitigation matrix Insert picture Solution providers’ strategic capabilities (Huikkoala and Kohtamaki, 2017) Research question: What determines the solution provider’s strategic capabilities? Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Strategic capabilities → Set of capacities, resources, and skills that create a long-term competitive advantage for an organization Dynamic capabilities → the ability of an organisation to renew and recreate its strategic capabilities to meet the needs for changing environments - Sensing - Seizing - Reconfiguring the capabilities of the organization Threshold capabilities → The capabilities needed to meet the necessary requirements to compete in a given market Distinctive capabilities → Capabilities that underpin competitive advantage and that others cannot imitate or obtain Resource based theory → The antecedents of sustainable competitive advantage, as advised by the resource based theory (picture) Strategic capabilities → emerge from the company’s effective use of its distinctive resources that are highly valuable to the firm’s key stakeholders Distinctive resources - Human assets - Intellectual capital - Financial assets - External assets - Physical and technological assets And Gedownload door Roos Snels ([email protected]) lOMoARcPSD|7864644 Strategic business processes - Productivity increasing business processes - Customer value-enhancing business processes - Innovation-enabling business processes Result in (Industrial solution provider’) strategic capabilities - M&A capability - Fleet management capability - Technology-development capability - Supplier network management capability Gedownload door Roos Snels ([email protected])
