CH-11-13 Organizational Structure and Controls – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Book Guide

This Document Contains Chapters 11 to 13 Chapter 11 Organizational Structure and Controls ANSWERS TO REVIEW QUESTIONS 1. What is organizational structure and what are organizational controls? What are the differences between strategic controls and financial controls? What is the importance of these differences? Organizational structure specifies the firm’s formal reporting relationships, procedures, controls, and authority and decision-making processes. Influencing managerial work, structure essentially details the work to be done and how that work is to be accomplished. Organizational controls guide the use of strategy, indicate how to compare actual and expected results, and suggest actions to take to improve performance when it falls below expectations. When properly matched with the strategy for which they were intended, structure and controls can be a competitive advantage. Strategic controls (largely subjective criteria) and financial controls (largely objective criteria) are the two types of organizational controls used to successfully implement a firm’s chosen strategy. Both types of controls are critical, although their degree of emphasis varies based on individual matches between strategy and structure. Strategic controls are concerned with examining the fit between what the firm might do (as suggested by opportunities in its external environment) and what it can do (as indicated by its competitive advantages). Effective strategic controls help the firm understand what it takes to be successful. Strategic controls demand rich communication between managers responsible for using them to judge the firm’s performance and those with primary responsibility for implementing the firm’s strategies. These frequent exchanges are both formal and informal in nature. Strategic controls are also used to evaluate the degree to which the firm focuses on the requirements to implement its strategies. For a business-level strategy, for example, the strategic controls are used to study primary and support activities to verify that those critical to successful execution of the business-level strategy are being properly emphasized and executed. With related corporate-level strategies, strategic controls are used to verify the sharing of appropriate strategic factors such as knowledge, markets, and technologies across businesses. To effectively use strategic controls when evaluating related diversification strategies, executives must have a deep understanding of the involved businesses. Partly because strategic controls are difficult to use with extensive diversification, financial controls are emphasized to evaluate the performance of the firm following the unrelated diversification strategy. The unrelated diversification strategy’s focus on financial outcomes requires the use of standardized financial controls to compare performances between units and managers. When using financial controls, firms evaluate their current performance against previous outcomes as well as their performance compared to competitors and industry averages. 2. What does it mean to say that strategy and structure have a reciprocal relationship? Strategic competitiveness can be attained only when the firm’s selected structure is congruent with its formulated strategy. As such, a strategy’s potential to create value is reached only when the firm configures itself in ways that allow the strategy to be implemented effectively. Thus, as firms evolve and change their strategies, new structural arrangements are required. Additionally, existing structures influence the future selection of strategies. Therefore, the two key strategic actions of strategy formulation and strategy implementation continuously interact to influence managerial choices about strategy and structure. Regardless of the strength of the reciprocal relationships between strategy and structure, those choosing the firm’s strategy and structure should be committed to matching each strategy with a structure that provides the stability needed to use current competitive advantages as well as the flexibility required to develop future advantages. This means, for example, that when changing strategies, the firm should simultaneously consider the structure that will be needed to support use of the new strategy. Research suggests that most firms experience a certain pattern of relationships between strategy and structure. Chandler found that firms tended to grow in somewhat predictable patterns—i.e., in the following order: (1) volume, (2) geography, (3) integration [vertical, horizontal], and (4) product diversification (see Figure 11.1). Chandler interpreted his findings to indicate that the firm’s growth patterns determine its structural form. As shown in Figure 11.1, sales growth creates coordination and control problems that the existing organizational structure can’t efficiently handle. Organizational growth creates the opportunity for the firm to change its strategy to try to become even more successful. However, the existing structure’s formal reporting relationships, procedures, controls, and authority and decision making processes lack the sophistication required to support use of the new strategy. A new structure is needed to help decision-makers access the knowledge and understanding required to effectively integrate and coordinate actions to implement the new strategy. 3. What are the characteristics of the different functional structures used to implement the cost leadership, differentiation, integrated cost leadership/differentiation, and focused business-level strategies? A functional structure is used to implement the cost leadership, differentiation, and integrated cost leadership/differentiation strategies. The functional structure consists of a chief executive officer and limited corporate staff with line managers in dominant functions such as production, accounting, marketing, R&D, engineering, and human resources. This structure allows for functional specialization, thereby facilitating knowledge sharing and idea development. Because the differences in orientation among organizational functions can impede communication and coordination, the central task of the CEO is to integrate the decisions and actions of individual business functions for the benefit of the entire corporation. This organizational form also facilitates career paths and professional development in specialized functional areas. The structural characteristics of specialization, centralization, and formalization play important roles in the successful implementation of the cost leadership strategy. Specialization refers to the type and numbers of job specialties that are required to perform the firm’s work. For the cost leadership strategy, managers divide the firm’s work into homogeneous subgroups. The basis for these subgroups is usually functional areas, products being produced, or clients served. By dividing and grouping work tasks into specialties, firms reduce their costs through the efficiencies achieved by employees specializing in a particular and often narrow set of activities. Firms using the differentiation strategy produce products that customers perceive as being different in ways that create value for them. With this strategy, the firm wants to sell nonstandardized products to customers with unique needs. Relatively complex and flexible reporting relationships, frequent use of cross-functional product development teams, and a strong focus on marketing and product R&D rather than manufacturing and process R&D (as with the cost leadership form of the functional structure) characterize the differentiation form of the functional structure (see Figure 11.3). This structure contributes to the emergence of a development-oriented culture—a culture in which employees try to find ways to further differentiate current products and to develop new, highly differentiated products. Continuous product innovation demands that people throughout the firm be able to interpret and take action based on information that is often ambiguous, incomplete, and uncertain. With a strong focus on the external environment to identify new opportunities, employees often gather this information from people outside the firm, such as customers and suppliers. Commonly, rapid responses to the possibilities indicated by the collected information are necessary, suggesting the need for decision-making responsibility and authority to be decentralized. To support creativity and the continuous pursuit of new sources of differentiation and new products, jobs in this structure are not highly specialized. This lack of specialization means that workers have a relatively large number of tasks in their job descriptions. Few formal rules and procedures are also characteristics of this structure. Low formalization, decentralization of decision-making authority and responsibility, and low specialization of work tasks combine to create a structure in which people interact frequently to exchange ideas about how to further differentiate current products while developing ideas for new products that can be differentiated to create value for customers. Firms using the integrated cost leadership/differentiation strategy want to sell products that create value because of their relatively low cost and reasonable sources of differentiation. The cost of these products is low “relative” to the cost leader’s prices while their differentiation is “reasonable” compared to the clearly unique features of the differentiator’s products. The integrated cost leadership/differentiation strategy is used frequently in the global economy, although it is difficult to successfully implement. This difficulty is due largely to the fact that different primary and support activities must be emphasized when using the cost leadership and differentiation strategies. To achieve the low-cost position, emphasis is placed on production and process engineering, with infrequent product changes. To achieve a differentiated position, marketing and new-product R&D are emphasized whereas production and process engineering are not. Thus, use of the integrated strategy results when the firm successfully combines activities intended to reduce costs with activities intended to create additional differentiation features. As a result, the integrated form of the functional structure must have decision-making patterns that are partially centralized and partially decentralized. Additionally, jobs are semi-specialized, and rules and procedures call for some formal and some informal job behavior. The focus strategy is best implemented by means of the simple structure. The simple structure is most appropriate for firms that follow a single business strategy and offer a line of products in a single geographic market and for firms implementing focused cost leadership or focused differentiation strategies. A simple structure is an organizational form in which the owner-manager makes all major decisions directly and monitors all activities, while the firm’s staff merely serves as an extension of the manager’s supervisory authority. It is characterized by little specialization of tasks, few rules, little formalization, unsophisticated information systems, and direct involvement of the owner-manager in all phases of day-to-day operations. At some point, however, the increased sales revenues resulting from success will necessitate changing from a simple to a functional structure. The challenge for managers is to recognize when a structural change is required to coordinate and control effectively the firm’s increasingly complex operations. 4. What are the differences among the three versions of the multidivisional (M-form) organizational structures that are used to implement the related constrained, the related linked, and the unrelated corporate-level diversification strategies? The three variants of the multidivisional or M-form structure that should be used to implement corporate-level strategies are the cooperative form, SBU form, and competitive form. The related constrained strategy is best implemented using the cooperative form of the multidivisional structure. This bears out in practice because the cooperative form is an organizational structure that uses many integration devices and horizontal human resource practices to foster cooperation and integration among the firm’s divisions. The cooperative form (see Figure 11.5) emphasizes horizontal links and relationships more than the two other variations of the multidivisional structure. Cooperation among divisions that are formed around either products offered or markets served is necessary to realize economies of scope and to facilitate the transferring of skills. Increasingly, it is important for these links to allow and support the sharing of a range of strategic assets, including employees’ “know-how” as well as tangible assets such as facilities and methods of operations. Firms implementing a related linked strategy usually employ the SBU (or strategic business unit) form of the multidivisional structure. The SBU form consists of at least three levels, with the top level being corporate headquarters; the next level, SBU groups; and the final level, divisions grouped by relatedness (either product or geographic market) within each SBU (see Figure 11.6). The firm’s business portfolio is organized into those related to one another within a SBU group and those unrelated in other SBU groups. Thus, divisions within groups are related, but groups are largely unrelated to each other. Within the SBU structure, divisions with similar products or technologies are organized to achieve synergy. Each SBU is a profit center that is controlled by the firm’s home office. An important benefit of this structural form is that individual decision makers, within their strategic business unit, look to SBU executives rather than headquarters personnel for strategic guidance. Firms implementing the unrelated strategy seek to create value through efficient internal capital allocations or by restructuring, buying, and selling businesses. The competitive form of the multidivisional structure is used to implement the unrelated diversification strategy. The competitive form (see Figure 11.7) is an organizational structure in which the controls used emphasize competition between separate (usually unrelated) divisions for corporate capital. To realize benefits from efficient resource allocations, divisions must have separate, identifiable profit performance and must be held accountable for such performance. The internal capital market requires organizational arrangements that emphasize competition rather than cooperation between divisions. To emphasize competitiveness among divisions, the home office maintains an arms-length relationship and does not intervene in divisional affairs except to audit operations and discipline managers of poorly performing divisions. 5. What organizational structures are used to implement the multidomestic, global, and transnational international strategies? The multidomestic strategy is one in which strategic and operating decisions are decentralized to business units in each country to facilitate tailoring products to local markets. However, it is sometimes difficult for firms to know how local their products should or can become. Firms implementing the multidomestic strategy often attempt to isolate themselves from global competitive forces by establishing protected market positions or by competing in industry segments that are most affected by differences among local countries. The worldwide geographic area structure (see Figure 11.8) is used to implement the multidomestic strategy. This structural form emphasizes national interests and facilitates managers’ efforts to satisfy local or cultural differences. Because the multidomestic strategy requires little coordination between different country markets, there is no need for integrating mechanisms among divisions in the worldwide geographic area structure. As such, formalization is low and coordination among units in a firm’s worldwide geographic area structure is often informal. Given its emphasis on international scale and scope economies, the global strategy is a strategy in which standardized products are offered across country markets and where competitive strategy is dictated by the firm’s home office. The worldwide product divisional structure (see Figure 11.9) is used to implement the global strategy. This structure represents an organizational form in which decision-making authority is centralized in the worldwide division headquarters to coordinate and integrate decisions and actions among disparate divisional business units. This form is the “structure of choice” for rapidly growing firms seeking to manage their diversified product lines effectively. Integrating mechanisms also create effective coordination through mutual adjustments in personal interactions. Such integrating mechanisms include direct contact between managers, liaison roles between departments, temporary task forces or permanent teams, and integrating roles. As managers participate in cross-country transfers, they are socialized in the philosophy of managing an integrated strategy through a worldwide product divisional structure. A shared vision of the firm’s strategy and structure is developed through standardized policies and procedures (formalization) that facilitate implementation of this organizational form. The transnational strategy is an international strategy through which a firm seeks to provide the local responsiveness of the multidomestic strategy while achieving the global efficiency of the global strategy. The combination structure has characteristics and structural mechanisms that result in an emphasis on both geographic and product structures. Thus, this structure has the multidomestic strategy’s geographic area focus and the global strategy’s product focus. The structure used to implement the transnational strategy must be simultaneously centralized and decentralized, integrated and nonintegrated, and formalized and nonformalized. These seemingly opposing structural characteristics must be managed by a structure that is capable of encouraging all employees to understand the effects of cultural diversity on a firm’s operations. Accordingly, a strong educational component is needed to change the whole culture of the organization. If the cultural change is effective, the combination structure should allow the firm to learn how to gain competitive benefits in local economies by adapting capabilities and core competencies that often have been developed and nurtured in less culturally diverse competitive environments. 6. What is a strategic network? What is a strategic center firm? How is a strategic center used in business-level, corporate-level, and international cooperative strategies? A strategic network is a group of firms that has been formed to create value by participating in multiple cooperative arrangements, such as strategic alliances. An effective strategic network facilitates the discovery of opportunities beyond those identified by individual network participants. A strategic network can be a source of competitive advantage for its members when its operations create value that is difficult for competitors to duplicate and that network members can’t create by themselves. Strategic networks are used to implement business-level, corporate-level, and international cooperative strategies. Commonly, a strategic network is a loose federation of partners who participate in the network’s operations on a flexible basis. At the core or center of the strategic network, the strategic center firm is the one around which the network’s cooperative relationships revolve. Because of its central position, the strategic center firm is the foundation for the strategic network’s structure. Concerned with various aspects of organizational structure, such as formal reporting relationships and procedures, the strategic center firm manages what are often complex, cooperative interactions among network partners. The strategic center firm is engaged in four primary tasks as it manages the strategic network and controls its operations: Strategic outsourcing is one of the strategic center firm’s key functions. In addition to outsourcing more than do other members of the strategic network, the center firm also encourages member firms to go beyond contracting to solve problems and to initiate competitive courses action that the network can pursue. The competence-related role of the center firm is to build or develop the core competencies of other network member firms and encourage them to share capabilities and competencies with other network partners. Technology aspects of the center firm’s role include managing the development and sharing of technology-based ideas among network partners. Emphasizing the race to learn implies that the strategic center firm must encourage positive rivalry among partner firms that strengthen each partner’s as well as the network’s value chain. The effectiveness of the center firm is related to how well it learns how to manage learning processes among network partners. Taken together, the effective management of all aspects of the network by the strategic center firm is critical to the network’s ability to successfully implement business-level, corporate-level and international cooperative strategies. MINI-CASE Unilever Cooperates with Many Firms and Nonprofit Organizations to Implement Its Strategy While Creating a More Sustainable Environment Unilever is a European-based global consumer products company with a strong sustainable environment strategy. To improve efficiencies, Unilever has adopted a worldwide product structure. The company emphasizes the geographic areas using a transnational strategy while implementing the combination structure to address local market conditions and improve efficiencies. Unilever has adopted what it calls its Sustainable Living Plan – increasing sales while decreasing its environmental footprint. It also has a campaign to improve the well-being of 1 billion people. Part of this will be done by partnering with key companies and expanding/improving operations at its facilities around the world. It is also implementing a market initiative to produce health/nutrition innovations and strengthen its brand. Unilever works with several NGOs to improve sustainable living, facilitate solutions for suppliers, and reach customers who need information to improve their sustainability approaches to life. Teaching Note: The mini-case provides insight into Unilever’s global cooperative strategy. Most students will appreciate the emphasis that Unilever is placing on sustainability and its objective to help improve the lives of so many people. The mini-case clearly shows how the company is executing its business strategy through an appropriate organizational structure to achieve both business and social objectives. ANSWERS TO MINI CASE DISCUSSION QUESTIONS 1. Why have consumer product companies headquartered in Europe historically used the multidomestic strategy? In your view, is this an effective choice of international strategy for these firms? Why or why not? Companies will use the multidomestic strategy to customize offerings to different cultures. It makes sense that this is more common in European companies as there is a large concentration of different cultures in a smaller amount of land, and cultural awareness is very common. The effectiveness is difficult to determine as there are pros and cons. A pro is the product offerings will be customized for each culture, which in theory will increase revenue. But, a con is the supply chain capabilities and the lack of efficiencies of large amount of small operations instead of a mass production. The effectiveness will be determined by the scope and ability to scale. 2. To implement its “sustainable business model,” what types of strategies is Unilever considering for us and why? Unilever is considering cooperative strategies by forming alliances to facilitate efficiencies of the capital improvement projects. Both companies will “work as a team to insure their sustainable growth model,” implement cost reductions, and “drive co-innovation and implement the harmonization and cross-category standardization of designs.” The alliance will also work with supply chain team members to increase speed to market with designs that “reduce carbon, water, and waste footprints across its manufacturing sites.” Unilever is doing this so that they can use each other’s core competences to improve their processes. They realize that, on their own, they would not be able to reach their goals, or exceed them, without outside assistance and alliances. 3. What organizational structure will Unilever need to use to reach its sustainability objectives? The organizational structure that Unilever will need to use to reach their sustainability objectives is a transitional strategy. The transnational strategy calls for the firm to combine the multidomestic strategy’s local responsiveness with the global strategy’s efficiency. Firms using this strategy are trying to gain the advantages of both local responsiveness and global efficiency. 4. What issues about organizational structure surface as a result of Unilever’s proposed strategies and objectives regarding sustainability? An issue that surfaced is aligning the new, long term focuses strategy to the short term focuses shareholders. To sway priorities, Unilever no longer gives quarterly earnings guidance reports. This was an issue as the CEO and Board of Directors duties are to satisfy shareholders interest. If the shareholders were not happy with the new structure and strategy, the projects would have failed. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Why do firms experience evolutionary cycles in which there is a fit between strategy and structure, punctuated with periods in which strategy and structure are reshaped? Have students provide examples of global firms that have experienced this pattern. Evolutionary Cycles of Strategy and Structure: Firms experience evolutionary cycles because they must adapt their strategy and structure to the dynamic environment in which they operate. As firms grow, their structure typically evolves to match the changing demands of their strategy, but over time, the structure may become inefficient or outdated, necessitating a reshaping of both. This cyclical process often occurs during times of industry change, technological innovation, or shifts in market conditions. For example, General Electric (GE) has undergone several evolutionary cycles, reshaping its structure and strategy as it moved from being a diversified conglomerate to focusing on specific sectors like energy and healthcare. Another example is IBM, which shifted from a hardware company to a services and software-oriented firm, reshaping its organizational structure to accommodate these changes. 2. Ask students to select an organization (for example, an employer, a social club, or a nonprofit agency) of which they currently are members. What is this organization’s structure? Is the organization using the structure that is appropriate, given its strategy? If not, what structure should it use? Assessing Organizational Structure: To analyze the structure of an organization, students should consider whether it aligns with the firm’s strategy. For example, a nonprofit organization focused on community outreach may use a functional structure with departments for fundraising, marketing, and service delivery. If the organization’s strategy changes to prioritize international expansion, it might need to adopt a geographical structure to manage operations across different regions effectively. Students should assess if the current structure supports the strategy or if a change in structure is necessary to achieve the organization’s goals. 3. Have students use the Internet to find a firm that uses the multidivisional structure. Which form of the multidivisional structure is the firm using? What is there about the firm that makes it appropriate for it to use the M-form? A company like Johnson & Johnson uses the multidivisional structure (M-form), where different divisions operate as semi-autonomous units based on product lines (e.g., pharmaceuticals, medical devices, consumer health products). The M-form is appropriate for J&J because it has diverse product categories that require specialized management and control. The structure allows for better decision-making at the division level, while the corporate headquarters provides strategic oversight. Companies with multiple business units in unrelated or semi-related industries often find the M-form effective because it decentralizes operations while maintaining control and synergy. 4. Through reading the business press, students should identify a firm implementing the global strategy and one implementing the multi-domestic strategy. What organizational structure is being used in each firm? Are these structures allowing each firm’s strategy to be implemented successfully? Why or why not? Companies pursuing a global strategy, such as Coca-Cola, tend to have a global functional structure, where functions like marketing, finance, and production are centralized at the headquarters, with minimal adaptation to local markets. This structure supports the company’s strategy of offering standardized products across the globe. On the other hand, firms using a multi-domestic strategy, such as Nestlé, often have a geographical structure, where subsidiaries in different countries or regions have more autonomy to adapt products to local tastes and preferences. The organizational structure should align with the strategy, and companies that tailor their structures to their strategic needs tend to perform better. For example, Coca-Cola's centralized structure allows it to maintain brand consistency, while Nestlé's decentralized approach lets it adapt to local demands more effectively. 5. Students should define strategic and financial controls for a businessperson in the local community. Ask the businessperson to describe the use of each type of control in his or her business. In which type of control does the businessperson have the greatest confidence? Why? Strategic controls focus on ensuring that a business is pursuing the right goals and objectives, while financial controls focus on monitoring the financial performance of the business. For example, a small local restaurant owner might use strategic controls like customer satisfaction surveys or tracking sales trends by dish to ensure the business is meeting its goals. The financial controls might include monitoring profit margins, expenses, and cash flow. The businessperson may have greater confidence in financial controls because they are more concrete and directly tied to the business's performance. Strategic controls, though important, are often more qualitative and harder to measure, especially for small businesses. 4o mini Ethics Questions 1. When a firm changes from the functional structure to the multidivisional structure, what responsibilities does it have to current employees? Responsibilities When Changing from Functional to Multidivisional Structure: When a firm changes from a functional structure to a multidivisional structure, it has several responsibilities to its current employees. The transition may lead to shifts in roles, responsibilities, and reporting relationships. Employees may experience job reassignments, changes in authority, and sometimes layoffs, depending on the firm's strategic goals. The firm has an ethical obligation to ensure clear communication about the reasons for the change, provide adequate training to employees for new roles, and offer support for those who may be displaced. Transparency, fairness, and efforts to minimize negative impacts on employees are essential. 2. Are there ethical issues associated with the use of strategic controls? With the use of financial controls? If so, what are they? Ethical Issues with Strategic and Financial Controls: Strategic Controls: Ethical issues can arise when strategic controls are manipulated to meet short-term goals at the expense of long-term value creation. For example, setting unrealistic targets or focusing on only certain performance metrics (e.g., market share or customer satisfaction) can lead to unethical behavior like manipulating data or overlooking quality and compliance standards. Financial Controls: Ethical concerns with financial controls typically revolve around financial manipulation, such as earnings management or fraudulent reporting. Executives might be tempted to inflate financial results to meet short-term financial goals or to mislead shareholders and regulators. The key ethical issue is ensuring that financial data is transparent, accurate, and reflects the true performance of the business. 3. Are there ethical issues involved in implementing the cooperative and competitive M-form structures? If so, what are they? As a top-level manager, how would you deal with them? Ethical Issues in Cooperative and Competitive M-form Structures: Cooperative M-form: In a cooperative M-form, different divisions work together to create synergies and share knowledge. Ethical issues might arise if there is unequal sharing of resources or knowledge, leading to some divisions receiving more benefits than others. There could also be concerns about a lack of transparency or accountability if the different divisions are not monitored effectively. Competitive M-form: In a competitive M-form, divisions are more independent and often compete against each other for resources and market share. Ethical issues here may involve internal competition leading to unhealthy behaviors such as undermining colleagues, withholding information, or setting divisions against each other to the detriment of the organization’s overall goals. As a top-level manager, dealing with these ethical issues requires setting clear guidelines, fostering a culture of collaboration or healthy competition, and ensuring fairness in resource allocation, performance evaluation, and rewards. 4. Global and multi-domestic strategies call for different competitive approaches. What ethical concerns might surface when firms attempt to market standardized products globally? When they develop different products or approaches for each local market? Global Strategy: Ethical concerns may arise when firms attempt to market standardized products globally. These concerns include cultural insensitivity, disregard for local consumer needs, and potentially harmful environmental or health impacts. For example, marketing a product globally without adapting it to local regulations or cultural preferences may lead to negative consequences for the brand and consumers. Multi-Domestic Strategy: When firms develop different products or approaches for each local market, ethical concerns may include the exploitation of local labor, environmental degradation, or the prioritization of profit over local welfare. There could also be issues with unequal pricing, where consumers in different markets pay significantly different prices for the same product. Ethical marketing and ensuring that local teams operate in line with the company’s values are crucial in these situations. 5. What ethical issues are associated with the view that the “redesign of organizations throughout a society—indeed, globally—entails losses as well as gains”? The view that organizational redesign entails both losses and gains raises ethical issues concerning job displacement, cultural disruption, and the potential harm to local communities. For example, when a company restructures to increase efficiency or expand globally, it may lead to job losses, increased workload for remaining employees, or the erosion of job security. The ethical concern is balancing the firm's pursuit of profit and growth with the well-being of employees and communities. Companies must consider the broader social impacts of organizational changes and take steps to mitigate negative outcomes, such as providing retraining or offering support to displaced workers. 4o mini INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR DIRECTED CASE Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. Principled Entrepreneurship and Shared Leadership: The Case of TEOCO [The Employee Owned Company] This case features a company that has a very interesting organizational structure. That company is The Employee Owned Company, or better known as TEOCO. Atul Jain, the founder of TEOCO, wanted to base his company on the people who help run it, the stakeholders that he feels are most important. This shared ownership has caused the culture of TEOCO to be very impressive. The company is known as a tight knit group, and its leadership is very selective when bringing on new hires, extending their probationary period to one full year. TEOCO is also very selective on who they partner with and make strategic alliances with as they do not want to change the way their business is run and the priorities of always keeping the workers interests as a top priority. However, TEOCO and TA Associates have assets and resources that are complementary to their respective core businesses. The directed case will allow students to analyze this real life situation and predict the probability of success and evaluate how this partnership was handled. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Building a Better Mousetrap: The Relationship between Strategy and Structure This experimental exercise is intended to give students a scenario that applies directly to this chapter and the knowledge gained with the previous chapters in a problem solving setting. The purpose of this exercise is to show how organizational structure works in alignment with strategy to improve business performance. The students will act as a consultant to a firm that recently changed its structure as a counter measure to declining performance. Research indicates that firms tend to change structure when declining performance forces them to do so. Effective managers anticipate the need for structural change and quickly modify structure to better accommodate the firm’s strategy when evidence calls for that action. Students will be asked to: • Identify a firm that has recently changed structure due to declining performance. • Research the strategy the company is pursuing and the changes the company made to is structure. • Prepare a background report to identify how the firm is impacted by answering the following questions: • What type of structure did the firm utilize before its performance declined? • Describe the situation the firm was experiencing that caused it to change structure. • What structural adjustments did the firm make? • What additional steps did the firm change to create value? • A proper match between strategy and structure can lead to a competitive advantage. How did the changes at your firm create a competitive advantage? • Analyze and describe how your firm has changed during this time in terms of structure and strategy. • Create an oral presentation that summarizes how the organization’s efforts are or are not paying off. You can make this exercise for individual students by limiting the scope of the research to be less in depth and/or to the factors that the instructor feels is most important. Guide a discussion during the research and help the students discover why the firm performed those exact actions, instead of possible alternatives. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Title: Interview with former Google CEO Eric Schmidt RT: 5:35 Topic Key: Organizational Structure, Strategic Management, Google has recently undergone an organizational change, its first change in ten years. For the past decade, Eric Schmidt has been the CEO. He has now declared that he is releasing the role of CEO, and moving to Chairman of the Board, and giving the chief position to co-founder Larry Page. Speculation is that this change was in recognition that Google has lost its edge with innovation and needed to get back to their roots, which Larry Page could inspire. There will be challenges with this reorganization, but with the high tech’s priority on innovating and being the leader in the market, this new structure should help with the speed of decision making. Also check out https://www.google.com/about/company/ Suggested Discussion Questions and Answers 1. Many speculate that Schmidt decided to release his role as CEO to Larry Page, the co-founder, to capitalize on what was previously a core competency – innovation. How would the change of CEO impact Google and inspire innovation? Schmidt is known the baby sitter of Google, often telling the co-founders to look up and pay attention at meetings. This type of attitude could be hindering thought and ideas from being addressed because of his demeanor. Simultaneously, Larry Page is a co-founder with a track record of innovation. Page could shift the Google culture and inspire innovation much more easily than Schmidt. 2. Speed and decisiveness is one of the reasons Schmidt thought that becoming Chairman of the Board and releasing the CEO role was the best decision. What change may also be recommended for Google if speed and decisiveness are issues? The organization needs to delayer. Lack of speed and decisiveness is often a symptom of a company that has become more tall than flat. Other symptoms are a lack of innovation and entrepreneurial spirit. Schmidt deciding to take himself away from the day-to-day may be early signs of Google’s restructuring. Chapter 12 Strategic Leadership ANSWERS TO REVIEW QUESTIONS 1. What is strategic leadership? Why are top-level managers considered important resources for an organization? Strategic leadership is a complex form of leadership in organizations. It means that the leader must have the ability to manage through others. Being a strategic leader requires the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary. Top executives are important to effective strategy formulation and implementation. A key reason for this is that the strategic decisions made by top managers influence the firm’s design and performance outcomes. Thus, having a top management team with superior managerial skills is a critical element of organizational success. In addition to determining new strategic initiatives, top-level managers also develop the appropriate organizational structure and reward systems of a firm. Furthermore, top executives have a major effect on a firm’s culture. Research suggests that managers’ values are critical in shaping a firm’s cultural values—i.e., top executives have an important effect on organizational activities and performance. The significance of this effect should not be underestimated. 2. What is a top management team, and how does it affect a firm’s performance and its abilities to innovate and design and implement effective strategic changes? The top management team includes the key managers responsible for formulating and implementing the organization’s strategies. Typically, the top management team includes the officers of the corporation as defined by the title of vice president and above and/or by service as a member of the board of directors. The quality of the strategic decisions made by a top management team affects the firm’s ability to innovate and engage in effective strategic change. Given the challenges, it is imperative that firms try to form a top management team with the appropriate knowledge and expertise to operate the internal organization, yet also deal with external stakeholders. This normally requires a heterogeneous top management team, one composed of individuals with different functional backgrounds, experiences, and education. The more heterogeneous the team, the more capacity it has to provide effective strategic leadership for the formulation of strategy. Members of a heterogeneous top management team benefit from discussing varied perspectives, which increases the quality of decisions. This is especially true when a synthesis emerges from the conversations generated from diverse ideas, which is generally superior to individual perspectives. The net benefit of these actions is market share gains and above-average returns. In sum, heterogeneity among top management team members promotes effective debate, which leads to better strategic decisions and, in turn, higher firm performance. Heterogeneous top management teams are also positively associated with innovation and strategic change. Heterogeneity may force the team or some of its members to “think outside the box” and thus be more creative in their thinking and decisions. Therefore, firms that need to change their strategies are more likely to do so if they have top management teams with diverse backgrounds and expertise. A top management team with various areas of expertise is more likely to identify environmental changes (opportunities and threats) or changes within the firms (strengths and weaknesses) that require a different strategic direction. 3. What is the managerial succession process? How important are the internal and external managerial labor markets to this process. The managerial succession process is the process that firms undertake to select a new CEO to lead the firm. The succession process is a primary responsibility of the firm’s board of directors and should involve the incumbent CEO as well. Succession planning is important to ensure that the board’s expectations of the CEO and his/her top management team are realized. There are two types of managerial labor markets (internal and external) from which organizations select managers and strategic leaders. An internal managerial labor market consists of the opportunities for managerial positions within a firm, whereas an external managerial labor market is the collection of career opportunities for managers in organizations outside of the one for which they currently work. Several benefits accrue to firms using the internal labor market to select a new CEO. Because they have experience with the firm and the industry environment, insiders are familiar with company products, markets, technologies, and standard operating procedures. Additionally, internal hiring produces less turnover among existing personnel, many of whom possess valuable firm-specific knowledge. Therefore, if the firm is performing well, internal succession is more likely to lead to knowledge retention and sustained high performance. Employees usually prefer using the internal managerial labor market to select top management team members and the CEO. The selection of insiders to fill top-level management positions reflects a desire for continuity and a continuing commitment to the firm’s current vision, mission, and chosen strategies. In contrast, valid reasons exist for a firm to select an outsider as its new CEO. For example, research suggests that long tenure with a firm seems to reduce the number of innovative ideas top executives are able to develop to cope with conditions facing their firm. Given the importance of innovation for firm success in the 21st century competitive landscape, an inability to innovate and/or to create conditions that stimulate innovation is a liability for a strategic leader. In contrast to insiders, CEOs selected from outside the firm may have broader, less limited perspectives and usually encourage innovation and strategic change. 4. What is the effect of strategic leadership on determining the firm’s strategic direction? Determining the strategic direction of a firm refers to the development of a firm’s long-term vision, normally looking at least 5 to 10 years into the future. Whereas the core ideology motivates employees through the company’s heritage, the envisioned future encourages employees to stretch beyond their expectations and requires significant change and progress. The envisioned future serves as a guide to many aspects of a firm’s strategy implementation process, including motivation, leadership, employee empowerment, and organizational design. Nonetheless, it is important not to lose sight of the strengths of the organization in making changes required by a new strategic direction. The goal is to balance the firm’s short-term need to adjust to a new vision while maintaining its long-term survivability by managing its portfolio of resources effectively. 5. How do strategic leaders effectively manage their firm’s resource portfolio to exploit its core competencies and leverage the human capital and social capital to achieve a competitive advantage?) Strategic leaders manage the firm’s portfolio of resources by organizing them into capabilities, structuring the firm to use the capabilities, and developing and implementing a strategy to leverage those resources to achieve a competitive advantage. In particular, strategic leaders must exploit and maintain the firm’s core competencies and develop and retain the firm’s human and social capital. Typically, core competencies relate to an organization’s functional skills, such as manufacturing, finance, marketing, and research and development. Firms develop and exploit core competencies in many different functional areas. Strategic leaders must verify that the firm’s competencies are emphasized in strategy implementation efforts. In many large firms, and certainly in related diversified ones, core competencies are effectively exploited when they are developed and applied across different organizational units. Firms must continuously develop or even change their core competencies to stay ahead of the competition. Additionally, firms must guard against the competence becoming a liability such that the firm is unwilling to change. Human capital refers to the knowledge and skills of a firm’s entire workforce. Investments in human capital are productive; in fact, people are perhaps the only truly sustainable source of competitive advantage. Human capital’s increasing importance suggests a significant role for the firm’s human resource management activities. Effective training and development programs increase the probability that a manager will be a successful strategic leader. These programs have grown progressively important to the success of firms as knowledge has become more integral to gaining and sustaining a competitive advantage. Additionally, such programs build knowledge and skills, inculcate a common set of core values, and offer a systematic view of the organization, thus promoting the firm’s strategic vision and organizational cohesion. The programs also contribute to the development of core competencies. Furthermore, they help strategic leaders improve skills that are critical to completing other tasks associated with effective strategic leadership. Thus, building human capital is vital to the effective execution of strategic leadership. Strategic leaders must acquire the skills necessary to help develop human capital in their areas of responsibility. When human capital investments are successful, the result is a workforce capable of learning continuously, which minimizes the risk of making errors. Strategic leaders tend to learn more from their failures than their successes because they sometimes make the wrong attributions for the successes. Learning and building knowledge is important for creating innovation in firms, and innovation leads to competitive advantage. Social capital involves human relationships that help the firm accomplish tasks and create value for customers and shareholders. Social capital is a critical asset for a firm. Inside the firm, employees and units must cooperate to get the work done. In multinational organizations, units often must cooperate across country boundaries on activities such as R&D to produce outcomes needed by the firm (e.g., new products). External social capital has become critical to firm success in the last several years. Few firms, if any, have all the resources they need to compete in global (or domestic) markets. Thus, they establish alliances with other firms that have complementary resources in order to gain access to them. These relationships must be effectively managed to ensure that the partner trusts the firm and is willing to share the desired resources. 6. What must strategic leaders do to develop and sustain an effective organizational culture? An organizational culture consists of a complex set of ideologies, symbols, and core values that is shared throughout the firm and that influences the way it conducts business. Evidence suggests that a firm can develop core competencies both in terms of the capabilities it possesses and the way the capabilities are used to produce desired outcomes. In other words, because it influences how the firm conducts its business and helps regulate and control employee behavior, organizational culture can be a source of competitive advantage. Thus, shaping the context within which the firm formulates and implements its strategies—that is, shaping the organizational culture—is a central task of strategic leaders. Organizational culture often encourages (or discourages) the pursuit of entrepreneurial opportunities, especially in large firms. Successful outcomes derived through employees’ pursuit of entrepreneurial opportunities are a major source of growth and innovation for firms. Five dimensions characterize a firm’s entrepreneurial mind-set—autonomy, innovativeness, risk taking, proactiveness, and competitive aggressiveness. Changing organizational culture is more difficult than maintaining it, but effective strategic leaders recognize when change is needed. Incremental changes to the firm’s culture typically are used to implement strategies. However, more significant and sometimes even radical changes to organizational culture are designed to support the selection of strategies that differ from the ones the firm has implemented historically. Regardless of the reasons for change, shaping and reinforcing a new culture requires effective communication and problem solving, along with the selection of the right people (those who have the values desired for the organization), effective performance appraisals (establishing goals and measuring individual performance toward goals that fit with the new core values), and appropriate reward systems (rewarding the desired behaviors that reflect the new core values). Evidence suggests that cultural changes succeed only when the firm’s CEO, other key top management team members, and middle-level managers actively support them. One catalyst for change in organizational culture, particularly for critical changes, is the selection of new top management team members from outside the corporation. 7. As a strategic leader, what actions could you take to establish and emphasize ethical practices in your firm? Strategic leaders are challenged to take actions that increase the probability that an ethical culture will exist in their organization. One means of doing this that is gaining favor in companies is to institute a formal program to manage ethics in the organization. While these formal ethics programs operate much like control systems, they help inculcate values throughout the organization as well. Therefore, when these efforts are successful, the practices associated with an ethical culture become institutionalized in the firm; that is, they become the set of behavioral commitments and actions accepted by most of the firm’s employees and other stakeholders with whom employees interact. Other actions that strategic leaders can take to develop an ethical organizational culture include: (1) Establishing and communicating specific goals to describe the firm’s ethical standards (e.g., developing and disseminating a code of conduct), (2) Continuously revising and updating the code of conduct, based on inputs from people throughout the firm and from other stakeholders (e.g., customers and suppliers), (3) Disseminating the code of conduct to all stakeholders to inform them of the firm’s ethical standards and practices, (4) Developing and implementing methods and procedures to use in achieving the firm’s ethical standards (e.g., use of internal auditing practices that are consistent with the standards), (5) Creating and using explicit reward systems that recognize acts of courage (e.g., rewarding those who use proper channels and procedures to report observed wrongdoings), and (6) Creating a work environment in which all people are treated with dignity. These actions increase in effectiveness when they are taken simultaneously, making them mutually supportive. 8. Why are strategic controls and financial controls important aspects of the strategic management process? Organizational controls have long been viewed as an important part of strategy implementation processes. Controls are necessary to help ensure that firms achieve their desired outcomes of strategic competitiveness and above-average returns. Defined as the formal, information-based procedures used by managers to maintain or alter the patterns of activities within the organization, controls help strategic leaders build credibility, demonstrate the value of strategies to the firm’s stakeholders, and promote and support strategic change. Most critically, controls provide the parameters within which strategies are to be implemented as well as corrective actions to be taken when implementation-related adjustments become necessary. Financial controls focus on short-term financial outcomes. In contrast, strategic controls focus on the content of strategic actions, rather than their outcomes. Some strategic actions can be correct, but poor financial outcomes may still result from external conditions such as economic problems, unexpected domestic or foreign government actions, or natural disasters. Therefore, an emphasis on financial control often produces more short-term and risk-averse managerial decisions because financial outcomes may be due to events beyond managers’ direct control. Alternatively, strategic controls encourage lower-level managers to make decisions that incorporate moderate and acceptable levels of risk because outcomes are shared between the business-level executives making strategic proposals and the corporate-level executives evaluating them. Successful strategic leaders balance strategic controls and financial controls with the intent of achieving more positive long-term returns. In fact, most corporate restructuring is designed to refocus the firm on its core businesses, thereby allowing top executives to reestablish strategic control of their separate business units. Thus, both types of controls are important. The balanced scorecard approach underscores this essential notion. MINI-CASE A Change at the Top at Procter & Gamble: An Indication of How Much the CEO Matters? The mini-case describes how CEO succession at P&G has had a detrimental effect on firm performance. The successor, Bob McDonald, assumed the position in 2009 but lasted a little under four years. During his tenure, P&G failed to keep up with rivals’ sales and share price growth. He was criticized for ineffective responses to competitor actions, failure to control costs, employees’ loss of confidence in his leadership, not understanding the effects of the recession on customers, and cutting R&D to focus on reformulating existing products (as opposed to create new product categories). The board brought back McDonald’s predecessor, A.G. Lafley, to turn things around and return the company to its ‘glory days’ of 2000-2009 (in which share price increased in value 63 percent while the S&P fell 37 percent). Part of Lafley’s strategy for the turnaround includes increased emphasis on product innovation to create new product categories and restructuring P&G’s multiple brands and products into four sectors, each of which will be headed by a president. Each sector will be formed to reflect synergies between the various businesses. Teaching Note: The mini-case underscores the importance of the CEO in organizational success. In the case of P&G, students should realize that McDonald’s problems stemmed from both poor strategy and ineffective execution. As McDonald was Lafley’s handpicked successor, ask students what this might say about Lafley’s perception. Ask them if they believe P&G should have gone outside for its CEO and to discuss some of the pros and cons for doing so. The case speculates that the next CEO will also come from the inside. Ask students to identify the skill sets that are necessary to lead a multiproduct global company such as P&G. ANSWERS TO MINI CASE DISCUSSION QUESTIONS 1. What makes a CEO’s job so complex? Use the mini-case to provide examples that help support your answer. A manager’s job is so complex because of the many factors they are responsible for. R&D, marketing, production, etc. both on a domestic level and an international level. All of this, with the weight of the company solely on their shoulders. With an abundance of factors, it is hard to determine what the next best move is. 2. Is it a good practice to rehire a former CEO who has retired? Please explain the potential advantages and disadvantages of doing so. The advantage of hiring a former CEO who has retired is that they know the business. If the CEO was successful, and the company was successful when they left, when they come back they will easily see what went wrong. However, the CEO has been out of the business. Especially in this day and age, with technology and globalization, things move and change very fast. The CEO will have a steep learning curve to be up to speed to the world as it is today. 3. What should P&G do to replace Lafley when he retires for a second time? What actions should they take to prepare for the succession? To replace Lafley a second time, there needs to be a strong vetting system and a mentorship. The new CEO needs to be appointed before Lafley leaves so that he may go into a type of shadowing and training in order to learn firsthand what it takes to be successful and hander the obstacles that a CEO of a fortune 500 faces every day. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Have the students choose a CEO of a prominent firm that they believe exemplifies the positive aspects of strategic leadership. What actions does this CEO take that demonstrate effective strategic leadership? What are the effects of those actions on the firm’s performance? CEO Exemplifying Positive Strategic Leadership: Ask students to select a CEO they believe demonstrates effective strategic leadership. They should look for actions such as: •Vision: The CEO communicates a clear, forward-looking vision for the company that aligns with market trends and the firm's capabilities. •Decision-Making: The CEO makes bold, well-informed decisions that prioritize long-term success over short-term profits. •Innovation and Adaptation: The CEO fosters a culture of innovation, enabling the firm to stay ahead of competitors and adapt to changes in the industry. Students should discuss the effects of these actions on the firm’s performance, such as increased market share, improved financial results, or enhanced brand reputation. 2. Now have the students select a CEO of a prominent firm that they believe does not exemplify the positive aspects of strategic leadership. What actions did this CEO take that are inconsistent with effective strategic leadership? How have those ineffective actions affected the firm’s performance? Ask students to choose a CEO who they believe has demonstrated ineffective strategic leadership. They should examine actions like: •Short-Term Focus: The CEO prioritizes immediate financial returns over the company’s long-term health, leading to unsustainable practices. •Poor Decision-Making: The CEO fails to adapt to changing market conditions, ignores employee input, or makes overly risky decisions without adequate consideration. •Lack of Vision: The CEO fails to communicate a compelling future direction or vision for the company, resulting in confusion or misalignment within the organization. Students should analyze how these actions negatively impacted the company’s performance, such as declining market share, employee turnover, or financial losses. 3. What are managerial resources? What is the relationship between managerial resources and a firm’s strategic competitiveness? Managerial resources refer to the capabilities and expertise of a firm’s leadership team, including their ability to make decisions, lead effectively, manage operations, and communicate with stakeholders. These resources include: •Human Capital: The skills, knowledge, and experience of the firm's managers. •Social Capital: The relationships and networks the management team builds with stakeholders, including customers, suppliers, and investors. •Organizational Capital: The systems, structures, and processes that enable the firm to operate effectively. The relationship between these managerial resources and a firm’s strategic competitiveness lies in how well the leadership can leverage them to drive innovation, make informed strategic decisions, and create a culture that sustains the firm’s long-term success. 4. Have students examine some articles in the popular press and select an organization that recently went through a significant strategic change. They should collect as much information as they can about the organization’s top management team. Is there a relationship between the top management team’s characteristics and the type of change the organization experienced? If so, what are the nature and outcome of that relationship? Students should examine organizations that recently underwent significant strategic changes, such as mergers, acquisitions, or major restructurings. They should gather information about the top management team, focusing on: •Experience: How the background and experience of the management team align with the type of change implemented. •Leadership Style: Whether the team’s leadership style facilitated or hindered the change process. Students should analyze if there’s a relationship between the management team’s characteristics (such as vision, expertise, or adaptability) and the success or failure of the strategic change. 5. Ask students to read some articles in the popular press and identify two new CEOs, one from the internal managerial labor market and one from the external labor market. Why do they think these individuals were chosen? What do they bring to the job, and what strategy do students think they will implement in their respective organizations? Students should research two new CEOs, one from the internal labor market (promoted from within the company) and one from the external labor market (hired from another company). They should consider: •Reasons for Selection: Why was the CEO chosen (e.g., experience, fresh perspective, or ability to lead change)? •What They Bring to the Job: What skills, strategies, or insights do they bring to their new role? •Strategy: What strategy do students think these new CEOs will implement, and why? The students should analyze the potential advantages and challenges of promoting from within versus hiring externally. 6. Based on this chapter and accounts in the popular press, each student should select a CEO who has exhibited vision. Has this CEO’s vision been realized? If so, what have its effects been? If the vision has not been realized, why not? Ask students to select a CEO known for having a strong vision. They should evaluate whether the vision has been realized, considering factors like: •Long-Term Success: Has the firm grown, innovated, or evolved as envisioned? •Challenges: If the vision hasn’t been realized, what obstacles did the firm face (e.g., market changes, leadership turnover, or misaligned resources)? Students should explore whether the CEO's ability to communicate and implement the vision played a role in the outcome. 7. Students should identify a firm in which they believe strategic leaders have emphasized and developed human capital. What are the effects of this emphasis and development on the firm’s performance? Students should identify a firm where strategic leaders have emphasized developing human capital (through training, mentorship, or talent recruitment). They should explore the effects of this focus on: •Employee Engagement and Retention: Has the firm been able to attract and retain top talent? •Innovation and Productivity: How has investing in human capital contributed to the firm’s ability to innovate or improve performance? They should also analyze how this investment in human capital supports the firm’s overall strategy. 8. Have students select an organization that has a unique organizational culture. What characteristics of that culture make it unique? Has the culture had a significant effect on the organization’s performance? If so, what is that effect? Ask students to identify a company with a unique organizational culture (e.g., Google’s innovation-focused culture or Zappos’ customer service culture). They should examine: •Cultural Characteristics: What makes the culture unique (e.g., employee empowerment, flexibility, customer focus)? •Impact on Performance: How has the culture contributed to the firm’s success or competitive advantage? Students should assess whether the culture aligns with the firm’s strategy and contributes to long-term performance. 9. Why is the strategic control exercised by a firm’s strategic leaders important for long-term competitiveness? How do strategic controls differ from financial controls? Strategic control is the process of monitoring and adjusting strategies to ensure the company remains aligned with its goals and competitive environment. Financial control focuses on ensuring financial performance aligns with expectations. The key differences include: •Strategic Controls: Focus on qualitative measures such as customer satisfaction, innovation, and market position. •Financial Controls: Focus on quantitative measures like profit margins, ROI, and revenue growth. Strategic control is important for long-term competitiveness because it allows leaders to adapt and ensure that the strategy remains relevant. Financial control is necessary for ensuring short-term financial health but doesn’t provide insight into the firm’s long-term strategic direction. Ethics Questions 1. As discussed in this chapter, effective strategic leadership occasionally requires managers to make difficult decisions. Is it ethical for managers to make these types of decisions without obtaining feedback from employees about the effects of those decisions? Be prepared to justify your response. Ethics of Making Difficult Decisions Without Employee Feedback: It is generally considered more ethical for managers to gather feedback from employees when making difficult decisions, as it promotes transparency, inclusivity, and respect for employees' perspectives. Failing to do so may lead to decisions that negatively impact morale, trust, and engagement. Ethical leadership involves considering the interests and well-being of employees, especially when decisions affect their work and livelihood. However, there might be situations where immediate or confidential decisions (e.g., layoffs due to financial instability) cannot wait for extensive feedback. In such cases, managers should explain the rationale behind their decisions and strive to maintain open communication channels post-decision. Students should justify their responses by referencing examples where feedback could have made a positive impact on decision outcomes or the opposite when feedback was ignored. 2. As an employee with less than one year of experience in a firm, what actions would you pursue if you encountered unethical practices by a strategic leader? As an employee with less than a year of experience, it’s important to first understand the organization’s ethical guidelines and reporting mechanisms. If unethical practices by a strategic leader are encountered, employees should: •Document the unethical behavior: Keep clear records of instances of unethical behavior. •Report the issue through appropriate channels: Utilize internal reporting mechanisms (e.g., HR, an ethics hotline, or a compliance officer). •Seek advice from a trusted mentor: Discuss the situation with a more experienced colleague or mentor to understand the potential consequences of reporting. Employees should consider whether the issue affects their personal values or the company’s long-term integrity. However, they must also be aware of potential risks such as retaliation and know the steps for protecting themselves in such situations. 3. Are firms ethically obligated to promote employees from within, rather than relying on the external labor market to select strategic leaders? What reasoning supports your position? While firms are not ethically obligated to promote employees from within, doing so can be seen as more ethical when it aligns with the company’s values of fairness, opportunity, and loyalty. Promoting internally helps provide career growth for existing employees and signals to the workforce that hard work and loyalty are valued. On the other hand, promoting externally may bring fresh perspectives and expertise but could also be perceived as overlooking internal talent. Ethical reasoning supports internal promotions, especially when the organization has invested in employees’ development and has fostered a culture of inclusivity and growth. However, firms should also be transparent about the criteria for promotion and ensure that employees have equal opportunities to advance. 4. What ethical issues, if any, are involved with a firm’s ability to develop and exploit a core competence in the manufacture of goods that may be harmful to consumers (e.g., cigarettes)? There are clear ethical issues when a firm develops core competencies around products that may harm consumers, such as tobacco, alcohol, or other harmful substances. While businesses have a right to pursue profit, their responsibility extends to ensuring that their products do not cause undue harm or suffering. Ethical concerns arise from: •Consumer Protection: Firms should not prioritize profits over public health, especially if their products pose significant health risks. •Transparency: Companies should clearly communicate the risks of their products and avoid misleading marketing tactics. •Corporate Social Responsibility: There’s an ethical obligation to engage in actions that benefit society, including considering alternatives to harmful products. Firms involved in such industries should be transparent, contribute to health education, and explore ways to minimize harm, such as developing safer alternatives or investing in research on the social consequences of their products. 5. As a strategic leader, would you feel ethically responsible for developing your firm’s human capital? Why or why not? Do you believe that your position is consistent with the majority or minority of today’s strategic leaders? As a strategic leader, developing human capital is not just an operational or financial responsibility; it is also an ethical one. Leaders have a duty to invest in their employees’ growth, ensure fair compensation, and provide opportunities for career advancement. Failing to do so can lead to employee disengagement, high turnover, and a lack of organizational commitment. Ethical leadership involves recognizing that human capital is a valuable asset, and fostering a culture that promotes learning, respect, and mutual growth. Most strategic leaders understand the importance of human capital development, but the extent to which they prioritize it may vary. While many leaders may see it as part of their ethical obligation, others may focus more on short-term financial results, which could neglect long-term human capital development. 6. Select an organization, social group, or volunteer agency of which you are a member that you believe has an ethical culture. What factors caused this culture to be ethical? Are there any events that would cause the culture to become less ethical? If so, what are they? Ethical cultures are often shaped by several factors, including: •Leadership Example: Ethical leadership by executives and managers sets the tone for the entire organization. •Clear Ethical Guidelines: Having well-defined ethics policies and practices ensures that everyone understands the expectations and consequences. •Open Communication: An ethical culture thrives in an environment where employees feel comfortable raising ethical concerns without fear of retaliation. •Training and Awareness: Ongoing ethics training ensures employees understand and can apply ethical principles to their work. Events that could cause a culture to become less ethical include: •Leadership Failures: If top leaders engage in unethical behavior, it can set a bad precedent. •Poor Organizational Policies: Lack of proper ethical guidelines or failure to enforce them can lead to ethical lapses. •Financial Pressure: When financial or market pressures push employees or leaders to compromise ethics for profit, it can erode the culture. The ethical culture can shift if these influences are not addressed and mitigated. INSTRUCTOR'S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR BRANCHING EXERCISE Branching Exercises are real-world activities that allow each student to work through challenges by choosing from different decision-making options. These exercises provide students with the opportunity to practice strategic management in a business scenario utilizing company case studies. Students are placed in the role of a decision maker and asked to consider the needs and priorities of stakeholders as they determine strategy recommendations for a company. Krispy Kreme Krispy Kreme, the doughnut restaurant, is in need of a strategic overhaul. In recent years, Krispy Kreme has seen its market share and profitability fall due to a lack of innovation and flexibility to adapt to market demands. With a population that is more health conscious and seeking a variety of options, Krispy Kreme has not answered. But rivals with similar product offerings were able to adapt successfully and continue to grow while Krispy Kreme is fighting static revenue. This lack of adaption can be blamed on internal governance failures, but now Krispy Kreme is ready to move on and take on a new strategy to bring the 75+ year old brand to the 21st century. The students will act as the board of directors in order to innovate the company. The students will use skills in strategic management and take concepts learned in this and in previous chapters to approach this business challenge. Students will review these concepts: • CEO duality • Managerial succession • Internal/External labor markets • Transformative leader qualities The ideal path that earns a perfect score is the following: • Choose to end the CEO duality that is currently held in Krispy Kreme that would hinder change. The current CEO is known to fight changes in strategic direction. • In order to make a larger change to Krispy Kreme’s strategy, a candidate needs to be found in the external managerial labor market. The external candidate will bring in outside expertise of other industries and will be more likely to change strategy. • The new CEO, in order to be affective, needs to be charismatic. The charisma will be more likely to inspire the other managers and the company to implement the strategic changes without many challenges. The leader will also need to be transformational. A transformational leader is more likely to be effective. This style motivates followers to exceed the expectation others have of them, to continuously enrich their capabilities, and place the interest of the company above their own. With this quality, Krispy Kreme can turn their ill fate around. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES Strategic Leadership: Glass Ceiling or Glass Cliff? This chapter of the book deals with managerial succession. An interesting study has come out of Michelle K. Ryan and S. Alexander Haslam that suggests that women typically confront a ‘glass ceiling’ while men seem to have a ‘glass elevator’. While women are now achieving more high profile positions, they are more likely to find themselves on a ‘glass cliff’ or being set up for failure, The purpose of this exercise is to examine the effects of strategic leadership and change on large firms who appoint women leaders. As displayed in the chapter, a change in executive leadership can have a profound effect on the performance of the company. But what happens when women do achieve leadership roles? And what sorts of positions are they given? The students will be asked to: 1. Read the study of The Glass Cliff 2. Choose a female CEO from a predetermined list 3. Determine if they had navigated the glass cliff or fallen off 4. Research and analyze the tenure of the women while answering specific questions to their situation. 5. Create a 3-5 page report on the findings 6. Present their findings to the class. To modify this project as an individual assignment, consider requiring just one deliverable -- a presentation to the class or just the paper. To enhance the project, the instructor may challenge the students to find more situations or a ‘glass cliff’ or to find arguments that counter this argument. Discuss how/ why women are put into this situation and how that can be handled in the future. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES Title: Humble CEO RT: 2:04 Topic Key: Strategic leadership, Top management team, Human Capital, Social Capital, Organizational culture The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Haruka Nishimatsu, the Japan Airlines CEO, is known as the world’s most humble CEO. Nishimatsu values the company more than his gain, unlike many CEOs. He doesn’t have a corporate jet, fancy clothes, or fancy meals. He puts himself in the shoes of his employees, and the results are astounding. Suggested Discussion Questions and Answers 1. Describe why Haruka Nishimatsu’s leadership style is effective and why his employees adore him. Japan Airlines employees adore Nishimatsu because he cares about their well-being and the fate of the company, not his personal desires or gain. They believe he will do whatever he can to make sure the company improves and then the employees and their families will be well off. He cares more about well-being and culture than profits. 2. What facet is Nishimatsu focusing on to turn Japan Airlines around? Why is he focusing his efforts on that one area? Haruka Nishimatsu is focusing on culture. This was needs as the economic downturn had the company in trouble. He knew that if moral was low, he would not be able to make the changes necessary to help the company grow. He believes that all other facets of the company will fall into place if the culture driving success. 3. Should other CEO’s perform this same type of actions? Can they perform these actions to the degree of Nishimatsu? Other CEO’s should perform these same types of actions. Countless times you have heard about CEOs receiving bonuses or raises even though they had losses, or a number of layoffs. That is not correct and morally questionable. Can they perform these actions? It is unlikely. CEOs have worked very hard to be in the positions that they are in. To take tremendous pay cuts or lower their personal standard of living maybe too much to have the CEOs follow suit. Chapter 13 Strategic Entrepreneurship ANSWERS TO REVIEW QUESTIONS 1. What is strategic entrepreneurship? What is corporate entrepreneurship? Strategic entrepreneurship is taking entrepreneurial actions using a strategic perspective. When engaging in strategic entrepreneurship, the firm focuses on finding opportunities in its external environment that it can try to exploit through innovation. Identifying opportunities to exploit through innovation is the entrepreneurship part of strategic entrepreneurship, whereas determining the best way to manage the firm’s innovation efforts is the strategic part. Thus, strategic entrepreneurship involves firms integrating their actions to find opportunities and to successfully innovate as a primary means of pursuing them. In the 21st century competitive landscape, firm survival and success increasingly is a function of a firm’s ability to continuously find new opportunities and quickly produce innovations to pursue them. The focus in Chapter 13 is on innovation and entrepreneurship within established organizations. This phenomenon is called corporate entrepreneurship, which is the use or application of entrepreneurship within an established firm. An important part of the entrepreneurship discipline, corporate entrepreneurship is widely thought to be linked to the survival and success of established corporations. Indeed, established firms use entrepreneurship to strengthen their performance and to enhance growth opportunities. Of course, innovation and entrepreneurship play a critical role in the degree of success achieved by start-up entrepreneurial ventures as well. 2. What is entrepreneurship, and what are entrepreneurial opportunities? Why are they important for all aspects of the strategic management process? Entrepreneurship is the process by which individuals or groups identify and pursue entrepreneurial opportunities without being immediately constrained by the resources they currently control. Entrepreneurial opportunities are conditions in which new goods or services can satisfy a need in the market. These opportunities exist because of competitive imperfections in markets and among the factors of production used to produce them and when information about these imperfections is distributed asymmetrically across individuals. Entrepreneurial opportunities come in a host of forms (e.g., the chance to develop and sell a new product and the chance to sell an existing product in a new market). Firms should be receptive to pursuing entrepreneurial opportunities whenever and wherever they may surface. The contemporary competitive landscape presents firms with substantial change, a global marketplace, and significant complexity and uncertainty. Because of this uncertain environment, firms cannot easily predict the future and must therefore develop strategic flexibility to have a range of strategic alternatives that they can implement as needed. They can do this by acquiring resources and building the capabilities that allow them to take necessary actions to adapt in a dynamic environment. In this environment, entrepreneurs and entrepreneurial managers design and implement actions that capture more of existing markets from less aggressive and innovative competitors while creating new markets. In effect, they are trying to create tomorrow’s businesses. 3. What are invention, innovation, and imitation? How are these concepts interrelated? Peter Drucker argued that “innovation is the specific function of entrepreneurship, whether in an existing business, a public service institution, or a new venture started by a lone individual.” Moreover, Drucker suggested that innovation is “the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth.” Thus, entrepreneurship and the innovation resulting from it are important for large and small firms, as well as for start-up ventures, as they compete. In fact, firms failing to innovate will stagnate. Indeed, the realities of competition in the 21st century competitive landscape suggest that “No company can maintain a long-term leadership position in a category unless it is in a continuous process of developing innovative new products desired by customers.” This means that innovation should be an intrinsic part of virtually all of a firm’s activities. Innovation is a key outcome firms seek through entrepreneurship and is often the source of competitive success, especially in turbulent, highly competitive environments. For example, research shows that firms competing in global industries that invest more in innovation also achieve the highest returns. In fact, investors often react positively to the introduction of a new product, thereby increasing the price of a firm’s stock. Innovation, then, is an essential feature of high-performance firms. Furthermore, “innovation may be required to maintain or achieve competitive parity, much less a competitive advantage in many global markets.” The most innovative firms understand that financial slack should be available at all times to support the pursuit of entrepreneurial opportunities. In his classic work, Schumpeter argued that firms engage in three types of innovative activity. Invention is the act of creating or developing a new product or process. Innovation is the process of creating a commercial product from an invention. Innovation begins after an invention is chosen for development. Thus, an invention brings something new into being, whereas an innovation brings something new into use. Accordingly, technical criteria are used to determine the success of an invention, whereas commercial criteria are used to determine the success of an innovation. Finally, imitation is the adoption of an innovation by similar firms. Imitation usually leads to product or process standardization, and many times products based on imitation are offered at lower prices, but without as many features. Entrepreneurship is critical to innovative activity in that it acts as the linchpin between invention and innovation. 4. What is an entrepreneur, and what is an entrepreneurial mind-set? Entrepreneurs are individuals, acting independently or as part of an organization, who see an entrepreneurial opportunity and then take risks to develop an innovation to pursue it. Often, entrepreneurs are the individuals who receive credit for making things happen! Entrepreneurs are found throughout an organization—from top-level managers to those working to produce a firm’s goods or services. Entrepreneurs tend to demonstrate several characteristics, including those of being optimistic, highly motivated, willing to take responsibility for their projects, and courageous. In addition, entrepreneurs tend to be passionate and emotional about the value and importance of their innovation-based ideas. Evidence suggests that successful entrepreneurs have an entrepreneurial mind-set. The person with an entrepreneurial mind-set values uncertainty in the marketplace and seeks to continuously identify opportunities with the potential to lead to important innovations. Because it has the potential to lead to continuous innovations, individuals’ entrepreneurial mind-sets can be a source of competitive advantage for a firm. Entrepreneurial mind-sets are fostered and supported when knowledge is readily available throughout a firm. Indeed, research has shown that units within firms are more innovative when they have access to new knowledge. Transferring knowledge, however, can be difficult, often because the receiving party must have adequate absorptive capacity (or the ability) to learn the knowledge. This requires that new knowledge be linked to existing knowledge. Thus, managers need to develop the capabilities of their human capital to build on their current knowledge base while incrementally expanding that knowledge to facilitate the development of entrepreneurial mind-sets. 5. What is international entrepreneurship? Why is it important? International entrepreneurship is “the process of creatively discovering and exploiting opportunities that lie outside a firm’s domestic markets in the pursuit of competitive advantage.” As the practices suggested by this definition show, entrepreneurship is a global phenomenon. A key reason for this is that in general, internationalization leads to improved firm performance. Nonetheless, decision makers should recognize that the decision to internationalize exposes their firms to various risks, including those of unstable foreign currencies, problems with market efficiencies, insufficient infrastructures to support businesses, and limitations on market size, among others. Thus, the decision to engage in international entrepreneurship should be a product of careful analysis. Because of its positive benefits, entrepreneurship is at the top of public policy agendas in many of the world’s countries, including Finland, Germany, Ireland, and Israel, as well as others. Placing entrepreneurship on these agendas may be appropriate in that some argue that regulation hindering innovation and entrepreneurship is the root cause of Europe’s productivity problems. In Ireland, for example, the government is “… particularly focused on encouraging new innovative enterprises that have growth potential and are export oriented.” Some believe that entrepreneurship is flourishing in New Zealand, a trend having a positive effect on the productivity of the nation’s economy. 6. How do firms develop innovations internally? Increasingly, successful R&D results from integrating the skills available in the global workforce. Firms seeking internal innovations through their R&D must understand that “Talent and ideas are flourishing everywhere—from Bangalore to Shanghai to Kiev—and no company, regardless of geography, can hesitate to go wherever those ideas are.” In the years to come, the ability to have a competitive advantage based on innovation may accrue to firms able to meld the talent of human capital from countries across the world. In the 21st century competitive landscape, R&D may be the most critical factor in gaining and sustaining a competitive advantage in some industries, such as pharmaceuticals. Larger, established firms, certainly those competing globally, often try to use their R&D labs to create competence-destroying new technologies and products. Being able to innovate in this manner can create a competitive advantage for firms in many industries. Although critical to long-term corporate success, the outcomes of R&D investments are uncertain and often cannot be achieved in the short term, meaning that patience is required as firms evaluate the outcomes that result from their R&D efforts. 7. How do firms use cooperative strategies to innovate and to have access to innovative capabilities? It is difficult for a firm to possess all the knowledge required to compete successfully in its product areas over the long term. Complicating this matter is the fact that the knowledge base confronting today’s organizations is not only vast, but also increasingly more specialized. Therefore, the knowledge needed to commercialize inventions is frequently embedded within different corporations. Strategic alliances are partnerships between firms whereby resources, capabilities, and core competencies are combined to pursue common interests and goals—namely, to gain either competitive parity or competitive advantage relative to rivals. Used with increasing frequency, one important reason firms form alliances is to produce or manage innovations (including sharing knowledge and skill sets between partners). Forming alliances for this purpose can yield value creation. Because of the importance of alliances, particularly in the development of new technology and in commercializing innovations, firms are beginning to build networks of alliances that represent a form of social capital to them. This social capital (in the form of relationships with other firms) helps them obtain the knowledge and other resources necessary to develop innovations. Knowledge from these alliances helps firms develop new capabilities. Some firms now even allow other companies to participate in their internal new product development processes. On the other hand, alliances formed to innovate are not without risks. One important risk is that a partner will appropriate a firm’s technology or knowledge and use it to enhance its own competitive abilities. To discourage this outcome, a firm needs to select its partners carefully. The ideal partner is one with complementary skills as well as compatible strategic goals. 8. How does a firm acquire other companies to increase the number of innovations it produces and improve its capability to produce innovations? Firms complete strategic acquisitions in an effort to continuously strengthen their ability to innovate. By integrating the capabilities of acquisitions with those it already owns, firms can continue producing and managing innovations in ways that create value for customers. Firms often seek innovation through more than one of the three approaches available to produce and manage innovations (i.e., internal corporate ventures, alliances, and acquisitions). Thus, firms can use alliances and acquisitions to appropriate what it hopes will be full value from its innovation activities. As with internal corporate venturing and strategic alliances, acquisitions are not a risk-free approach to producing and managing innovations. A key risk of acquisitions is that a firm may substitute an ability to buy innovations for an ability to produce innovations internally. Research suggests that this substitution may not be in the firm’s best interests. For example, firms gaining access to innovations through acquisitions risk reductions in both R&D inputs (investments in R&D) and R&D outputs (e.g., number of patents). Additional research shows that firms engaging in acquisitions introduce fewer new products to market. These relationships indicate that firms substitute acquisitions for internal corporate venturing processes. This substitution may take place because firms lose strategic control and emphasize financial control of original (and especially acquired) business units. Reduced innovation may not always be the result, but managers in acquiring firms should be aware of this potential outcome. 9. How does strategic entrepreneurship help firms create value? Newer entrepreneurial firms often are more effective than larger firms in identifying opportunities. Some believe that these firms tend to be more innovative as well because of their flexibility and willingness to take risks. Alternatively, larger and well-established firms often have more resources and capabilities to exploit opportunities that are identified. So, younger, entrepreneurial firms are generally opportunity seeking and more established firms are often advantage seeking. However, to compete effectively in the landscape of the 21st century, firms must identify and exploit opportunities, but do so while achieving and sustaining a competitive advantage. Thus, newer entrepreneurial firms must learn how to gain a competitive advantage and older more established firms must relearn how to identify entrepreneurial opportunities. The concept of strategic entrepreneurship suggests that firms can be simultaneously entrepreneurial and strategic, regardless of their size and age. Many entrepreneurial opportunities remain in international markets. Thus, firms should seek to enter and compete globally. Firms can learn new technologies and management practices from international markets and diffuse this knowledge throughout the firm. Furthermore, the knowledge learned can contribute to a firm’s innovations. Research has shown that firms operating in international markets tend to be more innovative. Small and large firms are now regularly moving into international markets. Both types of firms must also be innovative to compete effectively. Thus, with resources (human and social capital), taking advantage of opportunities in domestic and international markets and using the resources and knowledge gained in these markets to be innovative, firms achieve competitive advantages. In so doing they create value for their customers and shareholders. Firms that practice strategic entrepreneurship contribute to a country’s economic development. In fact, some countries such as Ireland have made dramatic economic progress by changing the institutional rules for businesses operating in the country. This could be construed as a form of institutional entrepreneurship. Likewise, firms that seek to establish their technology as a standard, also representing institutional entrepreneurship, are engaging in strategic entrepreneurship because creating a standard produces a sustainable competitive advantage for the firm. Research shows that because of its economic importance and individual motives, entrepreneurial activity is increasing across the globe. Furthermore, many women are becoming entrepreneurs because of the economic opportunity it provides and the individual independence it affords. In future years, entrepreneurial activity may increase the wealth of less affluent countries and continue to contribute to the economic development of more affluent countries. Regardless, the companies that practice strategic entrepreneurship are likely to be the winners in the twenty-first century. ADDITIONAL QUESTIONS AND EXERCISES The following questions and exercises can be presented for in-class discussion or assigned as homework. Application Discussion Questions 1. Is the term “corporate entrepreneurship” an oxymoron? In other words, can corporations—especially large ones—be innovative? The term "corporate entrepreneurship" is not an oxymoron, although it can be challenging for large corporations to innovate in the same way smaller, more agile firms do. However, it is entirely possible for large firms to foster innovation and entrepreneurial spirit. Corporate entrepreneurship refers to the practice of encouraging employees within a corporation to think and act like entrepreneurs, which can lead to the development of new products, services, and processes. Large firms may face challenges, such as bureaucracy, risk aversion, or rigid structures, but they can still encourage innovation through leadership, dedicated innovation teams, and resource allocation for new ideas. Examples of this include the creation of separate innovation labs or adopting a more flexible organizational structure to facilitate creative thinking and risk-taking. 2. Ask students for an example of a product champion supporting an innovation in a corporation. What were the results of the champion’s efforts? A product champion is a person within a company who actively promotes and advocates for a new product or innovation, often pushing through obstacles to ensure its success. An example might be Steve Jobs at Apple, who was a champion for the development of the iPhone. His dedication to innovation, attention to detail, and unwavering belief in the product’s potential helped propel Apple from a technology company to a leader in the consumer electronics market. His efforts led to the successful launch of the iPhone, which revolutionized the mobile phone industry and created new business opportunities for Apple, ultimately leading to massive commercial success. 3. The economies of countries such as Russia and China have historically been operated through centralized bureaucracies. What can be done to infuse such economies with a commitment to corporate entrepreneurship and the innovation resulting from it? In economies with historically centralized bureaucracies, like Russia and China, the transition to a more entrepreneurial mindset requires several structural and cultural changes. To infuse such economies with a commitment to corporate entrepreneurship: • Decentralize Decision-Making: Empower local managers and teams to make decisions and take risks, which fosters a culture of innovation. • Encourage Education and Skill Development: Focus on entrepreneurial education to cultivate innovative thinking among future leaders. • Support Risk-Taking: Develop policies that reduce the fear of failure and encourage experimentation with new ideas. • Foster Competition and Market Forces: Introduce competition in sectors that have been dominated by the state to encourage firms to innovate in order to stay competitive. • Provide Financial Incentives: Offer funding, grants, or tax incentives to businesses willing to invest in research and development. By addressing these areas, economies can become more adaptable and responsive to innovation, thus stimulating corporate entrepreneurship. 4. Have students use the Internet to find an example of two corporate innovations—one brought about through autonomous strategic behavior and one developed through induced strategic behavior. Which innovation seems to hold the most promise for commercial success and why? Examples of autonomous and induced strategic behavior innovations: • Autonomous Strategic Behavior: This type of innovation occurs when a firm develops new products or services independently, without direct influence from its existing strategic plans. An example might be Google’s development of Gmail. It was created by a small team within Google, not as part of a predetermined strategy, and grew into a highly successful innovation. • Induced Strategic Behavior: This innovation is driven by a company’s existing strategy, goals, and objectives. A good example is Coca-Cola’s development of Coca-Cola Zero. It was created in response to the company’s strategic goal to appeal to health-conscious consumers and to maintain its leadership in the soft drink industry. Comparing the two, autonomous strategic behavior may offer more potential for breakthrough innovations, as it often comes from less conventional or unstructured environments. However, induced strategic behavior can lead to more targeted, aligned innovations with the company’s current goals and can achieve commercial success more quickly. The promise for success depends on the market needs, timing, and alignment with the company’s resources. 5. Are strategic alliances a way to enhance a firm’s technological capacity, or are they used more commonly to maintain pace with technological developments in a company’s industry? In other words, are strategic alliances a tool of firms that have a technological advantage, or are they a tool of technologically disadvantaged companies? Strategic alliances can be used to both enhance a firm’s technological capacity and to maintain pace with industry developments. The primary distinction lies in the firm's current technological standing: • For Technologically Advanced Firms: Strategic alliances are often used as a tool to enhance their technological capabilities. These firms may seek out partnerships to access new technologies, share R&D costs, or expand into new markets. • For Technologically Disadvantaged Firms: Firms that are behind technologically might use strategic alliances as a tool to "catch up" with industry leaders. By partnering with firms that have superior technology, they can learn, access proprietary technologies, or leverage the expertise of others. In both cases, strategic alliances allow firms to reduce the risks and costs associated with technological development while benefiting from external knowledge and resources. Ethics Questions 1. Is it ethical for a company to purchase another firm to gain ownership of its product innovations and innovative capabilities? Why or why not? The ethics of acquiring a company for its product innovations depend on the approach taken in the acquisition. If the acquisition is done transparently, with fairness to all stakeholders involved (including employees, customers, and shareholders), and respects intellectual property rights, it can be considered ethical. However, issues arise if the acquisition is driven purely by the intent to stifle competition, suppress innovation, or take advantage of the other firm’s innovations without offering appropriate compensation or recognition. A key ethical concern would be whether the acquisition is being used to unfairly dominate the market or eliminate competition, which could be detrimental to consumers and the overall innovation ecosystem. 2. Do firms encounter ethical issues when they use internal corporate-venturing processes to produce and manage innovation? If so, what are these issues? Yes, ethical issues can arise in corporate venturing processes, particularly around: •Exploitation of Employees: If the firm uses internal corporate ventures to extract innovative ideas from employees without offering them due recognition, compensation, or a share of the profits, this can be seen as exploitation. •Intellectual Property (IP) Rights: Ensuring that the firm respects IP rights, particularly when ideas originate from individuals or teams within the organization, is essential. Failure to fairly compensate or credit the innovators can be an ethical issue. •Cultural and Organizational Pressure: Employees might feel pressured to participate in corporate venturing even if they are not motivated or are concerned about the ethical implications of certain projects, leading to potential ethical conflicts. 3. Firms that are partners in a strategic alliance may legitimately seek to gain knowledge from each other. At what point does it become unethical for a firm to gain additional and competitively relevant knowledge from its partner? Is this point different when a firm partners with a domestic firm as opposed to a foreign firm? If so, why? It becomes unethical when the firm intentionally uses a strategic alliance to acquire confidential or proprietary information outside the scope of the partnership agreement, or when it misuses that knowledge to gain an unfair competitive advantage. This can be done by exploiting the partner’s vulnerabilities or seeking to extract trade secrets without consent. The ethical considerations could differ when a firm partners with a domestic firm versus a foreign firm. In the case of foreign partnerships, the ethical boundary may be clouded by different legal and regulatory standards governing intellectual property, data sharing, or business practices. This might lead to a situation where one party could argue that they were unaware of certain ethical norms in a foreign country, but this is not a valid excuse for unethical behavior. Regardless of the location, ethical business practices should remain consistent and should be governed by mutual respect, fairness, and honesty. 4. Small firms often have innovative products. When is it appropriate for a large firm to buy a small firm for its product innovations and new product ideas? It is appropriate for a large firm to purchase a small firm for its product innovations when: Fair Acquisition: The small firm is willingly selling its products or ideas and is fairly compensated for its intellectual property and innovation. Respect for Employees: The employees of the small firm are treated ethically post-acquisition, with respect for their contributions and potential career advancement within the larger firm. Long-Term Benefit: The acquisition is intended to foster long-term innovation and growth, rather than merely eliminating competition or monopolizing a particular market. Protection of the Innovation Ecosystem: The acquisition does not lead to suppression of innovation, especially in cases where the small firm’s innovation could contribute significantly to advancing technology or societal welfare. INSTRUCTOR’S NOTES FOR MINDTAP Cengage offers additional online activities, assessments and resources inside MindTap, our online learning platform. The following activities can be assigned within MindTap for students to complete. INSTRUCTOR'S NOTES FOR DIRECTED CASE Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. Facebook Directed Case exercises are a series of multiple choice questions designed to focus on the concepts from the chapter utilizing the case study analysis steps, such as gaining familiarity, recognizing symptoms, identifying goals, conducting the analysis, making the diagnosis and doing the action planning. This case features the social media giant Facebook. Founded by Mark Zuckerberg while still attending Harvard University, the young entrepreneur’s successful startup company went public in 2012. The initial valuation of the company was $116 billion, the largest valuation for a newly public company at that date. However, the company immediately experienced a fair amount of criticism and investor uncertainty. Less than four months after its record-breaking IPO, the stock price sheared the valuation of the company nearly in half, making it one of the most disappointing IPOs in recent history. Since then, Facebook has been on a mission to build a strong economic engine that will ensure the company experiences financial growth that encourages investors. With strategies in place to monetize its user base of more than 680 million and directing significant amounts of cash flow into R&D, the company has experienced growth of around two percent quarterly. However, many analysts believe the company’s level of meaningful growth is beginning to plateau, and investors are anxious for the firm to develop more sustainable competitive advantages. INSTRUCTOR'S NOTES FOR EXPERIENTIAL EXERCISES The Slippery Slope of Strategic Entrepreneurship This Experiential Exercise presents the students with an opportunity to research and analyze both an established firm and an entrepreneurial firm and compare the strategies each utilized to successfully achieve and commercialize an innovation. The instructor should encourage students to clearly identify how strategic entrepreneurship strategies discussed in the chapter helped the two firms develop innovations that created value for each firm. INSTRUCTOR'S NOTES FOR VIDEO EXERCISES The media quiz offers additional opportunities for students to apply the concepts in the chapter to a real-world scenario as it is described in news reports. Students will answer multiple choice questions after viewing the Ford Innovation news story. Title: Ford Innovation RT: 4:04 Topic Key: Strategic entrepreneurship, Corporate entrepreneurship, Entrepreneurial opportunities, Innovation, Entrepreneurial mind-set, International entrepreneurship Sheryl Connelly is Ford Motor Company’s Manager of Global Trends. Her primary task is researching consumer behavior trends for the company to help it garner a competitive edge in the automotive industry. Because it is impossible to predict the future, Sheryl must offers insights that the company can use to innovate in ways that will appeal to a car-buying market that does not yet exist. It takes three years for Ford to bring a new model to market. Due to that large gap in time, current trends must be analyzed to provide a map for the company’s new model development that will appeal to future car-buyers. As an example, one of the identified trends in the video is “make way for Gen Z”. Gen Z is described as the generation after millennials and, as Ford’s research has found, is very different from former generations in ways that will drastically change the car market in the upcoming years. The population’s overall increase in obesity and sickness rates is another trend explored by Connelly, and innovations such as heart rate monitors built into car seats are in the development stages at Ford. With the time to market being a long, drawn-out process, Connelly’s look to the horizon will allow Ford to remain a successful automotive manufacturer for the distant future. Also check out http://www.ford.com/ Suggested Discussion Questions and Answers 1. Is there evidence, in this video about Sheryl Connelly, that strategic entrepreneurship exists at Ford? Text: Strategic entrepreneurship is taking entrepreneurial actions using a strategic perspective. In this process, the firm tries to find opportunities in its external environment that it can try to exploit through innovation. Sheryl Connelly: The fact that Connelly is monitoring current trends in order to ensure Ford is successful in future markets by offering customers desirable innovation is an example of Ford taking strategic entrepreneurial action. 2. Does Sheryl Connelly set the stage for corporate entrepreneurship? Text: Corporate entrepreneurship is the use or application of entrepreneurship within an established firm. Sheryl Connelly: Yes; Connelly recognizes that the automotive market is ever-changing and is taking active steps to ensure Ford is delivering innovative new products that will be in demand in a future market. 3. What entrepreneurial opportunities do you see ahead for Ford? Text: Entrepreneurial opportunities are conditions in which new goods or services can satisfy a need in the market. Sheryl Connelly: Because current trends such as Gen Z’s entry into the car-buying market, an increase in obesity and a population that generally lives longer than any other in history will take precedence in the car market of the future, Ford has a myriad of opportunities to innovate exciting new products that will satisfy customers’ needs. Solution Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838