CH-12-13 Strategic Leadership – Strategic Management: Concepts and Cases: Competitiveness and Globalization-2 : Chapter Notes

This Document Contains Chapters 12 to 13 Chapter 12 Strategic Leadership LEARNING OBJECTIVES 1. Define strategic leadership and describe top-level managers’ importance. 2. Explain what top management teams are and how they affect firm performance. 3. Describe the managerial succession process using internal and external managerial labor markets. 4. Discuss the value of strategic leadership in determining the firm’s strategic direction. 5. Describe the importance of strategic leaders in managing the firm’s resources. 6. Explain what must be done for a firm to sustain an effective culture. 7. Explain what strategic leaders can do to establish and emphasize ethical practices. 8. Discuss the importance and use of organizational controls. CHAPTER OUTLINE Opening Case: Can You Follow an Icon and Succeed? Apple and Tim Cook after Steve Jobs STRATEGIC LEADERSHIP AND STYLE THE ROLE OF TOP-LEVEL MANAGERS Top Management Teams MANAGERIAL SUCCESSION Strategic Focus: Trial by Fire: CEO Succession at General Motors KEY STRATEGIC LEADERSHIP ACTIONS Determining Strategic Direction Effectively Managing the Firm’s Resource Portfolio Strategic Focus: All the Ways You Can Fail! Sustaining an Effective Organizational Culture Emphasizing Ethical Practices Establishing Balanced Organizational Controls SUMMARY KEY TERMS REVIEW QUESTIONS MINI-CASE: A Change at the Top of Procter & Gamble ADDITIONAL QUESTIONS AND EXERCISE MINDTAP RESOURCES LECTURE NOTES Chapter Introduction: This chapter deals with the importance of strategic leadership, its effects on organizational outcomes, and the great challenges faced by strategic leaders. This indicates that effective strategic leaders must be able to use the strategic management process (illustrated in Figure 1.1) effectively by • Guiding the firm in ways that result in the formation of its vision and mission • Facilitating the development of appropriate strategic actions • Providing guidance that results in strategic competitiveness and above-average returns OPENING CASE Can You Follow an Icon and Succeed? Apple and Tim Cook after Steve Jobs Tim Cook, Apple’s current CEO had some iconic shoes to try to fill, Steve Jobs’ shoes. Apple’s success has been the fruit of Job’s “genius” and leadership. Jobs is responsible for the iPod, iTunes, iPhone and other products that are still driving the record breaking revenue. Because of this, it is hard to know how effective Tim Cook actually is. One reason why most thought Cook was set up for failure was the extremely different leadership style from Jobs. Jobs was very impulsive and a bit selfish with the spotlight. Cook takes a much less emotional approach than Jobs. Some refer to it as a “measured emotional approach to leadership”. He empowers his team to manage their functional areas, a delegating approach and sharing the spotlight. Cook is starting to have his hand in developing innovative products. His Apple watch was introduced in 2015 and initial reports suggest that demand is exceeding supply, a good sign. But, it will take more than just one success to fill the shoes of Jobs. Time will tell if Apple will remain as innovative as in the past. Teaching Note Ask students to brainstorm potential issues Tim Cook may have had when taking over for Steve Jobs. What are some of the obstacles Cook would have to overcome? How could Apple have become weaker or lose what makes Apple so great? Then think about the advantages Cook may bring with this new leadership style. Debate with the students who may be better for Apple as a leader. Demanding Jobs or collaborative Cook?
1 Define strategic leadership and describe top-level managers’ importance.
STRATEGIC LEADERSHIP AND STYLE Strategic leadership entails the ability to anticipate, envision, maintain flexibility, and empower others to create strategic change as necessary. Strategic change is change brought about as a result of selecting and implementing a firm’s strategies. In other words, strategic leadership represents a complex form of leadership in organizations. A manager with strategic leadership skills exhibits the ability to guide the firm through the competitive landscape by • Managing an entire enterprise • Influencing the behavior, thoughts, and feelings of coworkers • Managing through others • Successfully processing or making sense of complex, ambiguous information by successfully dealing with change and uncertainty The strategic leader has several responsibilities, including the following: • Establishing a context for efficiency • Attract and then managing human capital (perhaps the most critical of the strategic leader’s skills) • Effectively managing the firm’s operations • Sustaining high performance over time • Being willing to make candid, courageous, yet pragmatic, decisions • Soliciting feedback from peers, superiors, and employees about their difficult decisions and vision • Developing strong partners internally and externally to facilitate execution of their vision Primary responsibility for effective strategic leadership rests at the top of the organization – in particular the CEO. Others commonly recognized as strategic leaders include: • Board of directors • Top management team • Divisional general managers Figure Note The role of strategic leadership in the strategic management process is illustrated in Figure 12.1. FIGURE 12.1 Strategic Leadership and the Strategic Management Process As illustrated in Figure 12.1, effective strategic leadership • Shapes the formation of the firm’s vision and mission Which influences the • Development of successful strategic actions • Formulation of strategies • Implementation of strategies Which lead to: • Strategic competitiveness • Above-average returns Strategic leaders are those at the top of the organization (in particular, the CEO), but other commonly recognized strategic leaders include members of the board of directors, the top management team, and division general managers. The style used to provide leadership often affects the productivity of those being led. The most effective leadership style used by strategic leaders is a transformational leadership style, which encourages followers to exceed expectations and place the organization above self-interests. The strategic leadership skills of an organization’s managers represent resources that can affect the firm’s performance. These resources must be developed for the firm’s future benefit. THE ROLE OF TOP-LEVEL MANAGERS Top-level managers represent an important resource for organizations as they attempt to formulate and implement strategies effectively because of top-level mangers’ roles in designing the organization and the performance outcomes that result from using that design. Thus, it is important for organizations to have a top management team with superior managerial skills. Three factors can be viewed as determining a strategic leader’s decision discretion: • External environmental sources • Organizational characteristics • Managerial characteristics Figure Note: Figure 12.2 shows three factors that affect/determine managerial discretion. FIGURE 12.2 Factors Affecting Managerial Discretion Managerial discretion is a function of three factors: external environment, organizational characteristics, and an individual manager’s characteristics. External Environment (especially the competitive environment) • Industry structure • Rate of market growth • Number and type of competitors • Nature and degree of political/legal constraints • Degree to which products are differentiated Organizational Characteristics • Size • Age • Organizational culture • Availability of resources • Patterns of interaction among employees Managers’ (Individual) Characteristics • Manager’s tolerance for ambiguity • Commitment to the firm and its desired strategic outcomes • Interpersonal skills • Level of aspiration • Degree of self-confidence Other critical roles played by top-level managers include: • Implementing an appropriate organizational structure • Implementing the organization’s reward systems • Shaping the organization’s culture • Influencing organizational activities and performance Teaching Note Remind students that for top-level managers to make a difference—or enhance a firm’s ability to achieve a competitive advantage—they generally must possess superior knowledge and skills. While all organizations have strategic leaders, the top management team’s portfolio of skills must be rare, valuable, difficult for other top management teams to imitate, and not be readily substitutable if they are to result in a competitive advantage for the firm (as suggested in Chapter 1).
2 Define top management teams and explain their effects on firm performance.
Top Management Teams The complexity of the challenges faced by the firm and the need for substantial amounts of information and knowledge require teams of executives to provide the strategic leadership of most firms. Use of a team to make strategic decisions also helps avoid managerial hubris. A firm’s top management team is composed of individuals that are responsible for making certain the firm uses the strategic management process, especially for the purpose of selecting and implementing strategies. In the case of large organizations, members of the top management team usually can be identified as those individuals with the title of vice president or above and/or individuals who serve on its board of directors. Teaching Note
Strategic actions taken by a firm’s top management team will have an impact—positive or negative—on firm performance. Research indicates that there seems to be a link between the configuration or mix of expertise and skills of members of a firm’s top management team and firm performance. Top Management Team, Firm Performance, and Strategic Change The job of top-level executives is complex and requires a broad knowledge of the firm’s operations, as well as the three key parts of the firm’s external environment—the general, industry, and competitor environments (see Chapter 2). Thus, firms try to form a top management team that has the appropriate knowledge and expertise to operate the internal organization, yet also can deal with all the firm’s stakeholders as well as its competitors. Research into the relationship or link between top management team composition and firm performance generally indicates that team heterogeneity is important. A heterogeneous top management team is composed of individuals with different functional backgrounds, experiences, and education. The more heterogeneous a top management team is the more varied its expertise and knowledge, the more capacity it has to provide effective strategic leadership in formulating strategy. Members of a heterogeneous top management team benefit from discussing the different perspectives advanced by team members, and these discussions can increase the quality of the top management team’s decisions. The net benefit of the actions of heterogeneous teams tends to be positive in terms of market share and above-average returns. Research suggests that the path of causality goes something like this: heterogeneity among top management team members  increased debate  better strategic decisions  increased firm performance. It is also important that the top management team members function cohesively. In general, more heterogeneous and larger top management teams find it more difficult to implement strategies effectively. Research indicates a positive relationship between higher levels of a top management team’s heterogeneity, firm innovation, and strategic change. Thus, a team with diverse backgrounds and expertise is more likely to: • Change strategies when it is necessary to do so • Identify internal and external environmental changes that require the firm to change strategic direction • “Think outside of the box” and thus be more creative in making decisions Other factors that are important to top management team effectiveness include: • Members with substantive expertise in the firm’s core businesses • Members with a good understanding of international markets • Characteristics of top management and even CEO personalities The CEO and Top Management Team Power Although the composition of a firm’s top management team is important, a team that is too powerful may negatively affect firm performance. As noted in Chapter 10, the involvement of outsiders as members of a firm’s board of directors also has an impact on firm performance. In fact, involvement of outside directors in shaping the firm’s strategic direction normally results in higher firm performance than when they are not involved. Teaching Note Inside directors (part of management) can affect CEO power because they • Report to the CEO • Have a greater understanding of firm operations (information they control) • Can control the flow of information to outside directors However, in some cases, a firm’s CEO and members of the top management team may “overpower” the firm’s board of directors. This can happen when: • The CEO appoints members of the board (insiders or sympathetic outsiders) • The CEO also holds the title of Chairman of the Board (sometimes called “CEO duality”) It varies across industries, but duality occurs most commonly in the largest of firms. Increased shareholder activism, however, has brought CEO duality under scrutiny and attack in both US and European firms. Historically, an independent board leadership structure—in which the same person did not hold the positions of CEO and chair—was believed to enhance a board’s ability to monitor top-level managers’ decisions and actions, particularly in terms of the firm’s financial performance. Teaching Note It should be noted that a recent investigation of the relationship between CEO duality and firm performance found that the stock market was indifferent to changes in duality status. Such changes have a negligible effect of financial performance, and there is weak evidence that duality has an effect on long-term performance. Top management team members with longer team and organization tenure have an increased ability to influence the board of directors. However, long tenure restricts an executive’s knowledge base, which then limits the number of alternatives evaluated when strategic decisions are being made. The net impact is that these individuals may be able to forestall or avoid board involvement in strategic decisions. Because an unhealthy relationship between the board of directors and the top management team can potentially have a negative effect on an organization’s strategic competitiveness: • Boards are challenged to develop an effective relationship with the firm’s top management team • Relative degrees of power between the board and the top management team should be examined with respect to the individual firm’s situation (including firm resources and environmental volatility) Teaching Note One solution to this dysfunction is to get members of the firm’s management team to have a significant ownership interest in the firm. Though this may provide the team with additional power, a significant level of ownership also should encourage team members to act more in the interests of shareholders, because they also are shareholders.
3 Describe the managerial succession process using internal and external managerial labor markets.
MANAGERIAL SUCCESSION Because of the impact that members of a firm’s top management team—especially the CEO—can have on the organization’s performance, the selection of new top managers requires effective screening systems. Organizations can select their strategic leaders from one of two labor markets. • Internal managerial labor markets represent future promotion or transfer opportunities for managerial positions within the firm. • External managerial labor markets represent the collection of managerial career opportunities outside of a manager’s current firm. Because of insiders’ experience within the firm and the industry in which it completes, the benefits of using the internal managerial labor market include: • Familiarity with the organization’s products, markets, technologies, and standard operating procedures • Less turnover among existing personnel with valuable firm-specific knowledge • A desire for continuity and commitment to the firm’s vision, mission, and strategic actions Because of the perceived value of selecting an insider to succeed a CEO (or other top management team member), selection of an outsider is unusual. But there are instances that call for selecting an outsider. • Executives with overly long tenure with the firm may become stale, which reduces the number of innovative approaches developed to help the firm cope with changing conditions that the firm faces. • Insiders may have less of an ability to innovate or create innovation-stimulating conditions, which can be a detriment to the firm’s long-term success in the 21st century competitive landscape. • Outsiders generally have broader, less limited perspectives, which may mean that innovation and strategic change are encouraged. Teaching Note Outsiders are limited in firm-specific knowledge and/or industry experience. Figure Note Figure 12.3 is helpful to discuss the relationships among the sources of a successor-CEO, top management team membership, and firm strategy. FIGURE 12.3 Effects of CEO Succession and Top Management Team Composition on Strategy Figure 12.3 illustrates relationships between the source of the successor, top management team heterogeneity/homogeneity (or team makeup), and firm strategy. • Internal CEO Succession: A homogeneous top management team generally results in a stable strategy. A heterogeneous top management team generally results in a stable strategy with continued innovation. • External CEO Succession: A homogeneous top management team often results in changes in both top management team membership and strategy. If the top management team is heterogeneous, strategic change is likely. Teaching Note Ask students to compare characteristics of successor CEOs in turnaround situations with key managerial resources presented earlier in this chapter. Key differences that should be recognized are that in a turnaround situation, industry-specific knowledge is less important than the ability to radically change the organization, and perhaps its strategy. To have an adequate number of top managers, firms must take advantage of a highly qualified labor pool, including one source of managers that has often been overlooked: women. Firms are beginning to utilize women’s potential managerial talents with substantial success. A few firms have gained value by using the significant talents of women leaders. But many more have not done so, which represents an opportunity cost to them. STRATEGIC FOCUS Trial by Fire: CEO Succession at General Motors The new CEO of GM, Mary Barra, has not had an easy transition into her role after Dan Akerson, the previous CEO, stepped down in an untimely manner due to family illness. As soon as she stepped in, she hit the ground running. She changed the corporate governance system and implemented a new efficient way to engineer cars. Also, she was made aware of an ignition switch problem that has been causing wrecks, injuries, and even deaths for years. Even worse, GM has been aware of the issue, but neglected to take action. These issues, along with many others, are what contributed to Mary Barra’s trial by fire. She has navigated these issues and trials with success and is currently planning or the long term success of GM. Teaching Note Ask the students about how they would have handled the situation. Under all the scrutiny that she was, ask if they would have made the same decisions she made. In what way did she make GM a better company? In what ways did she potentially cause harm? Are there any other actions she could have taken, or not taken that would have benefited GM and their shareholders even more? KEY STRATEGIC LEADERSHIP ACTIONS Figure Note The characteristics of successor CEOs also can be related to the six critical actions required for the effective exercise of strategic leadership (highlighted in Figure 12.4). FIGURE 12.4 Exercise of Effective Strategic Leadership Figure 12.4 highlights the six most critical actions that strategic leaders must perform. • Determining strategic direction • Establishing balanced controls • Effectively managing the firm’s resource portfolio • Sustaining an effective organizational culture • Emphasizing ethical practices Figure 12.4 sets the stage for the balance of Chapter 12.
4 Discuss the value of strategic leadership in determining the firm’s strategic direction.
Determining Strategic Direction Determining the strategic direction of the firm refers to developing a long-term vision. This means that a firm’s managers must think beyond the current period to develop a “future” direction for the firm (normally 5 to 10 years forward). The ideal long-term vision has two parts—core ideology and envisioned future. Core ideology motivates employees through the company’s heritage, but the envisioned future encourages employees to go beyond their expectations and requires significant change and progress. The envisioned future serves as a guide to the firm’s strategy implementation, including motivation, leadership, employee empowerment, and organizational design. A charismatic CEO may foster stakeholder commitment to a new vision and strategic direction. It is important that strategic leaders also recognize that, though gaining employee commitment to a new vision and strategic direction is important, factors such as the following must not be overlooked: • The firm’s strengths must be considered when making strategic changes for a new strategic direction. • The firm’s short-term needs must be balanced with long-term growth and survival. • The firm can maintain long-term survivability by effectively managing its portfolio of resources.
5 Describe the importance of strategic leaders in managing the firm’s resources.
Effectively Managing the Firm’s Resource Portfolio Probably the most important task for strategic leaders is effectively managing the firm’s portfolio of resources. Firms may have multiple resources that can be categorized into the following categories: • Financial capital • Human capital • Social capital • Organizational capital Strategic leaders manage the firm’s portfolio of resources by • Organizing them into capabilities • Structuring the firm to use the capabilities • Developing and implementing a strategy to leverage those resources to achieve a competitive advantage Exploiting and Maintaining Core Competencies As a reminder, core competencies are those capabilities of the firm around which a competitive advantage may be built (as defined and discussed in Chapters 1 and 3). Core competencies relate to an organization’s functional skills, such as manufacturing, finance, marketing, and research and development. The key is that core competencies must enable the firm to produce and deliver products and services to customers in ways that create value for them. Teaching Note Before core competencies can serve as building blocks for a firm’s competitive advantage, they must be distinctive. Remind students that the following conditions must be satisfied for core competencies to be classified as distinctive: • Unique to the firm • Valuable • Difficult for competitors to imitate • Nonsubstitutable This means that core competencies must be emphasized as the firm implements strategy. To ensure that core competencies identified as distinctive (and potential sources of competitive advantage) remain distinctive for longer periods of time, firms must recognize the importance of developing their human capital. Developing Human Capital and Social Capital Human capital refers to the knowledge and skills of the firm’s workforce. This means that employees must be viewed as capital resources and as deserving of investment. Teaching Note An important point to bring out in this section is that people and people-related competencies—the workforce and its capabilities (a firm’s human capital)—historically have contributed more to firm (and economic) success than investment in capital equipment. Teaching Note One significant problem that firms face is inadequate human capital to run an organization effectively. As a remedy, many firms hire temporary employees, whereas others are trying to improve their recruiting and selection techniques. However, solving the problem requires more than “temp hiring” since this limits management’s ability to build effective commitment to organizational goals. Hiring star players is also insufficient. It requires building effective commitment to organizational goals as well. Effective training and development programs are important because these efforts: • Recognize that knowledge has become more integral to gaining and sustaining a competitive advantage • Help build knowledge and skills • Inculcate core values • Establish a systematic view of the organization • Promote the firm’s vision • Develop organizational cohesion • Contribute to the development of core competencies • Improve strategic managers’ capabilities in the skills that are critical to effective strategic leadership (e.g., determining the firm’s strategic direction, exploiting and maintaining core competencies, and developing an organizational culture that supports ethical practices) When human capital investments are successful, a workforce is capable of learning continuously. Learning continuously and leveraging the firm’s expanding knowledge base is linked with strategic success. It is also important to promoting innovation, which is the foundation of competitive advantage. Layoffs can result in a significant loss of the knowledge possessed by a firm’s human capital. Research has shown that moderate-sized layoffs may improve firm performance, but large layoffs produce stronger performance downturns in firms because of the loss of human capital. Although it is also common for restructuring firms to reduce their spending on training and development programs, restructuring may actually be an important time to increase investments in these programs. Restructuring firms have less slack and cannot absorb as many errors; moreover, the employees who remain after layoffs may find themselves in positions without all of the skill or knowledge they need to perform the required tasks effectively. Viewing employees as a resource to be maximized rather than a cost to be minimized facilitates the successful implementation of a firm’s strategies. The implementation of such strategies also is more effective when strategic leaders approach layoffs in a manner that employees believe is fair and equitable. Social capital involves relationships inside and outside the firm 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). STRATEGIC FOCUS All the Ways You Can Fail! This case shows three examples of how companies can fail due to poor decisions. One example is NBC News and its trouble with the popular news anchor, Brian Williams. Williams embellished roles in several news stories which compromised his credibility along with the credibility of the station. Poor hiring of Jamie Horowitz prevented NBC from getting back on track. NBC soon let Horowitz. Another example in failure of leadership was Nokia. Nokia in 2009 had touchscreen technology and was the leader in the smart phone market. But, they failed to take the risk and implement the new technology. Soon after, Apple and Samsung took the majority of the marketshare, now Nokia is not even a rival. The lack of leadership and proper decision making hindered the company. The third example is that of Standard Charter bank. The bank took too many risks, unlike Nokia, and found itself in major trouble. The bank has had substantial fines in the hundreds of millions because of their poor decision making. Teaching Note: Ask the students to analyze each situation individually. What was needed in order for each scenario to end differently? Were these problems avoidable or something beyond anyone’s control? Then, ask how these cases are linked? Is there a common thread between each case that is the root of the problems?
6 Explain what must be done for a firm to sustain an effective culture.
Sustaining an Effective Organizational Culture Organizational culture represents a set of complex ideologies, symbols, and core values that is shared throughout an organization and that influences the way that it conducts business. Because it influences how the firm conducts its business and helps regulate and control employee behavior, organizational culture can be a source of differentiation and, thus, competitive advantage. Entrepreneurial Mind Set An organization’s culture will either encourage or discourage (and, in some cases, even penalize) employee efforts to tap into entrepreneurial opportunities. Teaching Note IBM produced a handbook designed to infuse an entrepreneurial spirit into its culture. The handbook, Changing the World, is filled with tips designed to break mental barriers and to help employees be more creative in their jobs. Gerald Haman took a different approach. He developed a process, called the Thinkubator, to help firms build a stronger entrepreneurial orientation and boost creativity in their employees. According to Haman, the Thinkubator helps people rediscover their gifts for creativity. One way that the pursuit of entrepreneurial opportunities might be promoted is to invest in opportunities as real options. That is, invest in an opportunity to provide the potential of exercising the option of taking advantage of the opportunity at some point in the future. Firms might enter strategic alliances for this reason. For example, they might do so to have the option of acquiring the partner later or of building a stronger relationship (e.g., developing a joint new venture). Corporate culture characteristics and managerial actions that encourage an entrepreneurial mindset include: • Autonomy – enabling employees to be self-directed in the pursuit of entrepreneurial opportunities • Innovativeness – encouraging the pursuit of new ideas, experimentation, and creative processes that will find new ways to add value • Risk-taking – promoting the willingness of both employees and the organization to accept risk in the pursuit of new market opportunities • Proactiveness – being a market leader rather than a market follower by anticipating the market’s future needs and being the first to satisfy them • Competitive aggressiveness – taking actions that enable the firm to consistently and significantly outperform the competition Changing the Organizational Culture and Restructuring As noted in the text, incremental changes to the organization’s culture typically are used to improve the effectiveness of strategy implementation. A dramatic shift in strategy from the firm’s historical pattern of strategy often means that major changes in the organization’s culture are required, and perhaps even the selection of a new CEO or top management team. Teaching Note No matter why an organization’s culture must change, the shaping and reinforcing of the new culture requires: • Effective communication and problem solving • Selecting people with the values that managers wish to be infused throughout the organization • Developing an effective performance appraisal process that establishes goals and measures individual performance toward achieving goals that fit with the new core values • implementing reward systems that encourage behaviors that reflect the new core values Teaching Note It is helpful to show students that effective strategic leadership is reinforced by an appropriate corporate culture. This can be done using video interviews of a CEO that also profile the firm (e.g., any of the many reports on Herb Kelleher and Southwest Airlines, when he was CEO there, will work well for this assignment). As they watch the video, have students write down in separate columns on a piece of paper the clues they find of two things: leadership approaches taken and corporate culture employed. Upon debriefing, they will quickly see that these are mutually reinforcing in successful companies. For cultural changes to be effective, they must be supported fully and actively by the CEO and other members of the top management team. And if large-scale change is needed, support and involvement of mid-level managers is required as they generally are adept at energizing people and aligning their interests and actions. If the required cultural change is major or critical, new top management team members may need to be brought in from outside of the firm to act as a catalyst for the change.
7 Explain what strategic leaders can do to establish and emphasize ethical practices.
Emphasizing Ethical Practices The effectiveness of strategy implementation processes increases when they are based on ethical practices. Ethical companies encourage and enable people at all organizational levels to exercise ethical judgment, but unethical practices become like a contagious disease if they evolve in an organization. To properly influence employee judgment and behavior, ethical practices must shape the firm’s decision-making process and be an integral part of an organization’s culture. Research has found that a value-based culture is the most effective means of ensuring that employees comply with the firm’s ethical standards. In the absence of ethical requirements, managerial opportunism allows managers to make decisions that are in their own best interests, but not in the best interests of the firm or its stakeholders (as discussed in Chapter 10). Teaching Note Recent research reports that a many top-level executives and business students appear to be willing to commit either illegal or unethical actions. For example: • 47 percent of upper-level executives, 41 percent of controllers, and 76 percent of graduate-level business students were willing to misrepresent their firms’ financial statements. • 87 percent of managers made one or more fraudulent decisions out of seven total decision situations. • The probability of a fraudulent decision was greater when the individual valued a comfortable life and/or pleasure and placed less value on self-respect. • When cheating was observed, there was a reluctance to report it. Recent ethical lapses at high-profile corporations suggest firms need to employ ethical strategic leaders—ones who include ethical practices as part of their long-term vision for the firm, who desire to do the right thing, and for whom honesty, trust, and integrity are important. Strategic leaders who display these qualities inspire employees to develop/support an organizational culture in which ethical practices are the expected norm. Firms must employ ethical strategic leaders who will infuse ethical values into the organization’s culture by: • Establishing/communicating the firm’s ethical code of conduct to describe the firm’s ethical standards • Continuously revising and updating the code of conduct based on stakeholder input • Disseminating the code of conduct to stakeholders, informing them of the firm’s ethical standards/practices. • Developing/implementing methods and procedures that can be used to achieve the firm’s ethical standards • Creating and implementing explicit reward systems that recognize individuals that use the appropriate channels to report wrongdoing • Creating a work environment that treats all people with dignity The effectiveness of these actions increases when they are taken simultaneously, which makes them mutually supportive. When managers/employees do not engage in these actions, perhaps because an ethical culture is lacking, problems are likely to occur. Formal organizational controls may be needed to prevent more problems.
8 Discuss the importance and use of organizational controls.
Establishing Balanced Organizational Controls Organizational controls—introduced in Chapter 11—are necessary to help ensure that firms meet desired outcomes: strategic competitiveness and above-average returns. Controls are the formal, information-based routines and procedures used by managers to maintain or alter patterns in organizational activities to help strategic leaders. These can be used to do the following: • Build credibility • Demonstrate the value of the firm’s strategies to stakeholders • Promote and support organizational change • Provide the parameters within which strategies are implemented and corrective actions taken when implementation-related adjustments are needed Teaching Note Strategic controls represent those control systems that focus on the content of actions rather than on outcomes. This is in contrast to financial controls that focus on short-term financial outcomes (or results) rather than on the appropriateness of strategic actions that have been taken. Strategic controls are important because they can encourage managers to make decisions that include moderate and acceptable levels of risk with a focus on the long-term impact of their decisions. The use of financial controls alone often results in managers making risk-averse decisions, taking only the short-term financial impact into account. The Balanced Scorecard The underlying premise of the balanced scorecard is that firms disadvantage their future performance possibilities when financial controls are emphasized at the expense of strategic controls. Financial controls provide feedback about outcomes achieved from past actions, but do not communicate the drivers of the firm’s future performance, which can promote organizational behavior that has a net effect of sacrificing the firm’s long-term value creating potential for short-term performance gains. An appropriate balance of strategic controls and financial controls, rather than an overemphasis on one or the other, allows firms to effectively monitor their performance. The following four perspectives are integrated to form the balanced scorecard framework: 1. Financial – concerned with growth, profitability, and risk from shareholders’ perspective 2. Customer – concerned with the value customers perceive to be created by the firm’s products 3. Internal business processes – concerned with the priorities for various business processes that create customer and shareholder satisfaction 4. Learning and growth – concerned with creating a climate that supports change, innovation, and growth Generally speaking, strategic controls tend to be emphasized when the firm assesses its performance relative to the learning and growth perspective, whereas financial controls are emphasized when assessing performance in terms of the financial perspective. Study of the customer and internal business processes perspectives often is completed through relatively equal emphasis on strategic and financial controls. Teaching Note: Firms use different criteria to measure their standing relative to the scorecard’s four perspectives. The important point is for the firm to select the number of criteria that will allow it to have both a strategic understanding and a financial understanding of its performance without becoming immersed in too many details. FIGURE 12.5 Strategic Controls and Financial Controls in a Balanced Scorecard Framework Figure 12.5 presents some samples of the criteria included when using the balanced scorecard approach. Teaching Note In diversified firms, successful strategic leaders also balance strategic controls and financial controls to make appropriate investments for future viability (through strategic controls), while maintaining an appropriate level of financial stability in the present (through financial control). 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 effective use of strategic controls by top executives is often integrated with appropriate autonomy for the various subunits so they can gain a competitive advantage in their respective markets. Strategic control can be used to promote sharing of both tangible and intangible resources among the firm’s interdependent businesses. The autonomy provided allows the flexibility needed to take advantage of specific marketplace opportunities. As a result, strategic leadership promotes the simultaneous use of strategic controls and autonomy. Chapter 13 Strategic Entrepreneurship LEARNING OBJECTIVES 1. Define strategic entrepreneurship and corporate entrepreneurship. 2. Define entrepreneurship and entrepreneurial opportunities and explain their importance. 3. Define invention, innovation, and imitation and describe the relationship among them. 4. Describe entrepreneurs and the entrepreneurial mind-set. 5. Explain international entrepreneurship and its importance. 6. Describe how firms internally develop innovations. 7. Explain how firms use cooperative strategies to innovate. 8. Describe how firms use acquisitions as a means of innovation. 9. Explain how strategic entrepreneurship helps firms create value. CHAPTER OUTLINE Opening Case: Entrepreneurial Fervor and Innovation Drive Disney’s Success ENTREPRENEURSHIP AND ENTREPRENEURIAL OPPORTUNITIES INNOVATION ENTREPRENEURS INTERNATIONAL ENTREPRENEURSHIP INTERNAL INNOVATION Incremental and Novel Innovation Strategic Focus: Innovation Can Be Quirky Autonomous Strategic Behavior Induced Strategic Behavior IMPLEMENTING INTERNAL INNOVATIONS Cross-Functional Product Development Teams Facilitating Integration and Innovation Creating Value from Internal Innovation INNOVATION THROUGH COOPERATIVE STRATEGIES INNOVATION THROUGH ACQUISITIONS Strategic Focus: What Explains the Lack of Innovation at American Express? CREATING VALUE THROUGH STRATEGIC ENTREPRENEURSHIP SUMMARY KEY TERMS REVIEW QUESTIONS MINI-CASE: An Innovation Failure at JCPenney: Its Causes and Consequences ADDITIONAL QUESTIONS AND EXERCISES MINDTAP RESOURCES LECTURE NOTES Chapter Introduction: This chapter helps identify ways in which entrepreneurial insights and activities can be harnessed in large firms. The principles identified here may certainly help students see how this can be accomplished. In many ways, students are very motivated by the topic, since it highlights the ways in which an attractive mind-set (entrepreneurship) can be applied to what some students see as the less exciting corporate world. OPENING CASE Entrepreneurial Fervor and Innovation Drive Disney’s Success The Opening Case describes how innovation is important to drive organic growth and generate sustained above-average returns. The Disney Company, best known for its cartoon characters and theme parks has, in recent years, acquired large companies such as Pixar, Marvel Entertainment and Lucasfilm, among others. The company has integrated and built on the innovative capabilities of these highly creative operations to make Disney one of the largest companies in the entertainment industry. In addition to spurring innovation within Disney, the acquisition of this diverse portfolio of firms has allowed the company to reach new markets and increase the overall visibility of the Disney brand. From developing new animated movies through Pixar to releasing a new Star Wars epic through Lucasfilm, Disney is finding innovative new ways to reach audiences. As an example, Disney signed a contract with IMAX Corp. to show the company’s animated and live-action movies in IMAX theaters. This gives Disney another outlet to deliver entertainment to the public and an opportunity to increase the company’s value. Disney has many ways to create profits. Most of them come from innovation and creativity in the way the company deals with and reaches the consuming public. Teaching Note The Opening Case makes the argument that strategic entrepreneurship can foster innovation. Through strategic entrepreneurship, companies find ways to create and/or improve products in ways that customers value. Strategic entrepreneurship and the innovations it leads to are recognized as an extremely important leadership activity. Ask students to identify examples of innovations from different industries and how they increase customer value. Students should realize that information obtained from environmental analysis is often an important input into the strategic entrepreneurship/innovation process.
1 Define strategic entrepreneurship and corporate
entrepreneurship.
Entrepreneurship is the economic engine driving many nations’ economies in the global competitive landscape. Entrepreneurship and innovation have become important for young and old, large and small organizations in all types of industries. Teaching Note Research conducted by the Center for Entrepreneurial Leadership at the Kauffman Foundation has shown that in recent years almost 100 percent of the new jobs in the US have been created by entrepreneurial firms of less than two years of age. Strategic entrepreneurship is taking entrepreneurial actions using a strategic perspective. More specifically, it involves engaging in simultaneous opportunity seeking and competitive advantage seeking behaviors to design and implement entrepreneurial strategies to create wealth. The focus in the chapter 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. Because of today’s uncertain environment (i.e., a complex global marketplace), firms cannot easily predict the future. As a result, they must develop strategic flexibility to have a range of strategic alternatives they can implement as needed. Creating tomorrow’s business requires a constant search for emerging opportunities.
2 Define entrepreneurship and entrepreneurial opportunities and explain their importance.
ENTREPRENEURSHIP AND ENTREPRENEURIAL OPPORTUNITIES Entrepreneurship is the process by which individuals or groups identify and pursue entrepreneurial opportunities without being immediately constrained by the resources they currently control. Teaching Note According to Schumpeter, entrepreneurship is a process of “creative destruction,” through which existing products or methods of production are destroyed and replaced with new ones. Thus, entrepreneurship is concerned with discovering and exploiting profitable opportunities. Entrepreneurial opportunities represent conditions in which new products or services can satisfy a need in the market. The essence of entrepreneurship is to identify and exploit these opportunities. After identifying opportunities, entrepreneurs take actions to exploit them and establish a competitive advantage. To do that, actions must be valuable, rare, costly to imitate, and nonsubstitutable.
3 Define invention, innovation, and imitation and describe the relationship among them.
INNOVATION Peter Drucker argues that innovation is a function of entrepreneurship, as well as the means that an entrepreneur uses to create wealth-producing resources or enhance the potential of existing resources for creating wealth. Entrepreneurship and innovation are important for large and small firms (and start-ups) as they compete in the new competitive landscape. These are central to creativity, economic growth, productivity, and job creation. Teaching Note Innovation has long been recognized as vital to competitive success. For example, Henry Ford, founder of Ford Motor Company, observed that, “The competitor to be feared is one who never bothers about you at all, but goes on making his own business better all the time. Businesses that grow by development and improvement do not die. But when a business ceases to be creative, when it believes it has reached perfection and needs to do nothing but produce—no improvement, no development—it is done.” Innovation has an impact on firm outcomes. • Innovation is a key source of competitive success for firms competing in turbulent, competitive markets. • Innovation is intended to enhance a firm’s strategic competitiveness and financial performance. • Research shows that firms in global industries that invest more in innovation also achieve greater returns. Schumpeter suggested that firms generally engage in three types of innovative activity: • Invention, the act of creating or developing a new product (good or service) or process idea • Innovation, the process of creating a commercializable product from invention • Imitation, the adoption of innovation by similar firms, which often leads to standardization of the product or process and lower prices—all of this while maintaining many of the same features In the United States in particular, innovation is the most critical of the three types of innovative activity. Many companies are able to create ideas that lead to inventions, but commercializing those inventions through innovation has, at times, proved difficult. This difficulty is suggested by the fact that approximately 80 percent of R&D occurs in large firms, but these same firms produce fewer than 50 percent of the patents.
4
Describe entrepreneurs and the entrepreneurial mind-set.
ENTREPRENEURS Entrepreneurs are individuals, acting independently or as part of an organization, who create a new venture or develop an innovation and take on the risks involved in introducing it to the marketplace. 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 innovation, individuals’ entrepreneurial mind-sets can be a source of competitive advantage for a firm. Top-level managers should try to establish an entrepreneurial culture that inspires individuals and groups to engage in corporate entrepreneurship. For example, Steve Jobs of Apple Computer believed one of his key responsibilities was to help Apple become more entrepreneurial and more like a start-up. In most cases, knowledge must be transferred to others in the organization (even in smaller ventures) to enhance the entrepreneurial competence of the firm. The transfer is likely to be more difficult in larger firms. Research has shown, however, that units within firms are more innovative if they have access to new knowledge. Managers need to develop the capabilities of their human capital to build on their current knowledge base while incrementally expanding that knowledge. Developing innovations and achieving success in the marketplace require effective human capital. In particular, a firm must have strong human capital throughout its workforce if employees are to develop an entrepreneurial mind-set.
5 Explain international entrepreneurship and its importance.
INTERNATIONAL ENTREPRENEURSHIP Entrepreneurship is a top priority in many countries of the world (e.g., India, Turkey, United States). A recent report reveals that there is a strong positive relationship between the rate of entrepreneurial activity and economic development in the country. Research indicates that there is a direct relationship between entrepreneurship and collectivism: when collectivism is emphasized, entrepreneurship declines. However, extremely high levels of individualism also can have a negative impact on entrepreneurship. Thus, it is important to balance individualism and collectivism (or the spirit of cooperation and group ownership of innovation). With increasing globalization, a growing number of new ventures are “born global” (i.e., started as an international concern). New ventures that enter international markets to increase their technological knowledge thereby enhance their performance. The probability of entering international markets increases when the firm has top executives with international experience. Furthermore, the firm has a higher likelihood of successfully competing in international markets when its top executives have international experience. Because of the learning and economies of scale and scope afforded by operating in international markets, both young and established internationally diversified firms often are stronger competitors in their domestic market as well. Additionally, as research has shown, internationally diversified firms are generally more innovative.
6 Describe how firms internally develop innovations.
INTERNAL INNOVATION Most innovation is developed through Research and Development (R&D). In fact, R&D may be the most critical factor in gaining and sustaining a competitive advantage in some industries (e.g., pharmaceuticals). Effective R&D often leads to firms’ filing for patents to protect their innovative work. Increasingly, successful R&D results from integrating the skills available in the global workforce. In the years to come, the ability to have a competitive advantage based on innovation may accrue to firms that are able to meld the talent of human capital from countries across the world. Internal R&D programs often develop ideas outside the laboratory. Firms have learned that customers, external networks (e.g., scientists outside the company, published research, alliance partners, etc.), and even public knowledge, can be sources of innovation. Incremental and Novel Innovation Most innovations are incremental. That is, they build on existing knowledge bases and provide small improvements in the current product lines. Alternatively, novel or breakthrough innovations usually provide significant technological changes (breakthroughs) and create new knowledge. Novel or breakthrough innovations are rare because of the difficulty and risk involved in developing them. Internal corporate venturing represents the set of activities used to create inventions and innovations within a single organization. The internal corporate venturing process is illustrated in Figure 13.1 and should be used as a reference point by students during your discussion of the process. Figure 13.1 Model of Internal Corporate Venturing STRATEGIC FOCUS Innovation Can Be Quirky
Quirky is a unique new venture founded in 2009 that has been described by some as an innovation machine—their mission is to commercialize new product ideas. The company built a social network of inventors and others who were used to evaluate new products for their feasibility and potential commercial success. At its peak, Quirky received around 4,000 product ideas each week and, by 2015, the company had brought 400 Quirky-generated products to market. It received funding from some large venture capital firms and by one major corporate partner, GE, who invested $30 million. Given the response to its products, the company raised $185 million in venture capital and grew to 300 employees. Although there was much excitement, Quirky experienced problems. Some of its products failed to achieve their projected sales in the marketplace and other products had quality issues. Quirky tried to move its products to the market too quickly. As a result, it lost $120 million and had to reduce operations to avoid a cash shortage. This included laying off about 20 percent of its staff. The company decided to focus the brunt of its efforts on appealing almost exclusively to corporate partners, rather than individual consumers. It is currently trying to focus more of its efforts on products for the smart home. For example, Quirky’s Wink smartphone and tablet app provides a dashboard to link and control smart home devices. Quirky now has 15 corporate partners, among them are GE, Honeywell, and Philips, that will offer about 60 Wink-enabled products in the near future. Teaching Note
The Strategic Focus should make obvious the point that there is often considerable risk associated with innovation. Students should realize that innovation needs to be focused on those things that have a compelling customer value proposition that can be verified by market research. Ask students to identify companies that rushed products to market. Then ask them to speculate about why the innovations were introduced and what the company could or should have done before the innovations were introduced into the marketplace. Autonomous Strategic Behavior Autonomous strategic behavior is a bottom-up process in which new product champions pursue new product ideas—often through a political process—where they develop and coordinate the commercialization of a new good or service until it reaches marketplace success. A product champion is a member of an organization who has an entrepreneurial vision (or mental image) of a new good or service and seeks to create support for its commercialization. Product champions play a critical role in advancing innovations within the firm. Autonomous strategic behavior is based on a firm’s knowledge and resources that are the sources of a firm’s innovation, so a firm’s capabilities and competencies are the basis for new products and processes. FIGURE 13.1 Model of Internal Corporate Venturing This model illustrates the two approaches to internal corporate venturing: • Autonomous strategic behavior is a bottom-up process which enables product champions to pursue new product ideas and sponsor them through a political process until they achieve commercial success. • Induced strategic behavior is a top-down process where product and process ideas are developed within the context of a firm’s existing strategy, structure, and strategic vision. Whichever process is followed takes place within and is affected by the structural and strategic context of the organization. Teaching Note The following is another useful example on the topic. Using state-of-the-art technology and relying in part on autonomous strategic behaviors among some of the firm’s personnel, Callaway Golf Co. is known for reinventing industries. Callaway invented the oversize club segment of the golf club industry when it introduced its “Big Bertha” club, but the firm has also been seeking to reinvent the golf ball segment of the golfing industry. To be effective, an autonomous process for developing new products requires that new knowledge be continuously diffused throughout the firm. In particular, the diffusion of tacit knowledge is important for development of more effective new products. Induced Strategic Behavior The second approach to creating internal corporate venturing is induced strategic behavior, a top-down process where the current strategy and structure foster product innovations that are associated closely with the firm’s current strategy and structure. In other words, strategy is filtered through the firm’s existing structural hierarchy, a process that leads to internal innovations that are highly consistent with the firm’s current strategies. IMPLEMENTING INTERNAL INNOVATIONS Having processes and structures in place through which a firm can successfully implement the outcomes of internal corporate ventures and commercialize innovations is critical. Indeed, the successful introduction of innovations into the marketplace reflects implementation effectiveness. Effective integration of the various functions involved in innovation processes is required to implement the innovations resulting from internal corporate ventures. Increasingly, product development teams are being used to integrate activities associated with different organizational functions. Cross-Functional Product Development Teams Cross-functional teams facilitate efforts to integrate activities associated with different organizational functions (e.g., design, manufacturing, and marketing). In addition, new product development processes can be completed more quickly and the products more easily commercialized when cross-functional teams work effectively. Horizontal organization refers to changes in organizational processes where managing across functional units becomes more critical than managing up and down functional hierarchies. Teaching Note Cross-functional teams group product development stages into parallel or overlapping processes, which allows the firm to tailor its product development efforts to its unique core competencies and to the needs of the market. Some of the core horizontal processes that are critical to innovation efforts are formal; they may be defined and documented as procedures and practices. More commonly, however, these processes are informal—that is, these routines or ways of working evolve over time. Often invisible, informal processes are critical to successful product innovations and are supported properly through horizontal organizational structures more so than through vertical organizational structures. There are two primary barriers that may prevent the use of cross-functional teams as a means of integrating organizational functions: (1) independent frames of reference of team members and (2) organizational politics. Research suggests that functional departments vary along four dimensions: time orientation, interpersonal orientation, goal orientation, and formality of structure. Thus, individuals from different functional departments have different orientations on these dimensions and will view product development activities in different ways. Political activity may center on allocating resources to different functions. Interunit conflict may result from aggressive competition for resources among those representing different organizational functions. Facilitating Integration and Innovation Shared values and effective leadership are important to achieving cross-functional integration and implementing innovation. Highly effective shared values are framed around the firm’s vision and mission, and they become the glue that promotes integration between functional units. Thus, the firm’s culture promotes unity and internal innovation. Strategic leadership is also highly important for achieving cross-functional integration and promoting innovation. Leaders set goals and allocate resources. The goals include integrated development and commercialization of new goods and services. Effective strategic leaders also ensure a high-quality communication system to facilitate cross-functional integration. Creating Value from Internal Innovation The model in Figure 13.2 shows how value can be created for the firm from internal processes designed to develop and commercialize new goods and services. An entrepreneurial mind-set must be developed so that managers and employees will seek to identify and exploit opportunities for new goods and services and new markets. Cross-functional teams are important to promote integrated new product design ideas and commitment to their implementation thereafter. Effective leadership and shared values promote integration and vision for innovation and commitment to it. The end result for the firm is the creation of value for the customers and shareholders through development and commercialization of new products. Figure Note Figure 13.2 illustrates relationships discussed in the chapter that enable the firm to appropriate value from innovation: barriers to integration, integration facilitating methods, and the advantages of cross-functional integration. It can either be referred to in summary form or used to summarize the preceding discussion. FIGURE 13.2 Creating Value through Internal Innovation Processes The model in this figure shows how firms can create value from the internal processes they use to develop and commercialize new goods and services. • An entrepreneurial mind-set is necessary so that managers and employees will consistently try to identify entrepreneurial opportunities the firm can pursue by developing new goods and services and new markets. • Cross-functional teams promote integrated new product ideas and commitment to their implementation. • Effective leadership and shared values promote integration and vision for innovation and commitment to it. • The end result for the firm is the creation of value for the customers and shareholders by developing and commercializing new products. As the model in Figure 13.2 suggests, internal corporate ventures must be effectively managed to facilitate cross-functional integration so a firm will be able to gain maximum value from its product design and commercialization efforts.
7 Explain how firms use cooperative strategies to innovate.
INNOVATION THROUGH COOPERATIVE STRATEGIES Virtually all firms lack the breadth and depth of resources (e.g., human capital and social capital) in their R&D activities to develop internally a sufficient number of innovations. Firms frequently use cooperative strategies to develop innovations and to quicken the pace at which some of their own innovations are distributed. In other instances, they use cooperative strategies to align what they believe are complementary assets with the potential to lead to future innovations. Teaching Note An alternative to internal innovation is to tap the resources available in other organizations for the following reasons: • Knowledge is increasing rapidly, making it difficult for firms to remain up-to-date. • This vast knowledge base is also becoming increasingly specialized. • Firms may not possess the knowledge needed to commercialize goods and services. • Some countries may have access to resources and capabilities that enable firms located there to create specialized products. Both entrepreneurial ventures and established firms use cooperative strategies (e.g., strategic alliances and joint ventures) to innovate. Entrepreneurial ventures, for example, may seek investment capital as well as established firms’ distribution capabilities to successfully introduce one of its innovative products to the market. Alternatively, more established companies may need new technological knowledge and can gain access to it by forming a cooperative strategy with entrepreneurial ventures. 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 (a form of social capital) to help them obtain the knowledge and other resources necessary to develop innovations. Some firms now even allow external firms to participate in their internal new product development processes. Alliances formed for the purpose of innovation 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 prevent or at least minimize this risk, firms, particularly new ventures, need to select their partners carefully.
8 Describe how firms use acquisitions as a means of innovation.
INNOVATION THROUGH ACQUISITIONS Firms sometimes acquire companies to gain access to their innovations and to their innovative capabilities. One reason companies do this is that the capital markets value growth; acquisitions provide a means to rapidly extend one or more product lines and increase the firm’s revenues. A key risk of acquisitions is that a firm may substitute an ability to buy innovations for an ability to produce innovations internally. In support of this contention, research shows that firms engaging in acquisitions introduce fewer new products into the market. STRATEGIC FOCUS What Explains the Lack of Innovation at American Express? American Express (AmEx) had a terrible year in 2014. During the course of the year, the company lost two large accounts and a major court case. First, AmEx lost its partnership as the exclusive co-branded credit card with the major retailer Costco. This was a problem for AmEx because this represented approximately eight percent of the company’s annual revenue. In addition, the company lost a major court case that ruled it was in ‘restraint of trade’ and therefore violated antitrust laws. As a result, AmEx may be forced to reduce the fees charged to merchants in the future, which is projected to reduce revenues even further. Amex also lost its partnership with Jet Blue in the same year. Furthermore, AmEx has failed to advance its purchasing technologies in some time; features such as facilitating customers’ car rentals or restaurant reservations has led to some of the company’s most notable and wealthiest customers switching to competitors’ cards for better rewards and other benefits. This has had a negative impact on AmEx’s brand image, as it is traditionally known for capturing and holding some of the wealthiest clientele in the industry. AmEx recently announced a renewed focus on affluent customers and more benefits for current cardholders. However, most analysts believe that AmEx revenues are likely to fall over the next year or two. It is clear that innovation and a new strategy are needed to revive the struggling credit card company. Teaching Note: The Strategic Focus should emphasize the necessity for innovation, especially among larger firms. Ask students to identify and discuss other instances when large firms failed to innovate and suffered substantial revenue loss as a result. Ask them to speculate about what the firms could or should have done to avoid the catastrophic loss of revenue.
9 Explain how strategic entrepreneurship helps firms create value.
CREATING VALUE THROUGH STRATEGIC ENTREPRENEURSHIP Newer entrepreneurial firms often are more effective than larger firms in identifying opportunities. 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. In general, entrepreneurial ventures need to improve their advantage-seeking behaviors whereas larger firms need to improve their opportunity-seeking skills. Teaching Note: It is interesting and certainly worthwhile to note that individual entrepreneurs and small firms are responsible for a significant amount of innovation as measured by the ratio of R&D input to R&D output. To wit: • 80 percent of R&D activity is concentrated in large firms (10,000+ employees). • Large firms account for less than 50 percent of technological activity (measured by patenting). To be entrepreneurial, firms must develop an entrepreneurial mind-set among their managers and employees. Managers must emphasize the management of their resources, particularly human capital and social capital. The importance of knowledge to identify and exploit opportunities as well as to gain and sustain a competitive advantage suggests that firms must have strong human capital. Social capital is critical for access to complementary resources from partners in order to compete effectively in domestic and international markets. By entering global markets that are new to them, firms can learn new technologies and management practices and diffuse this knowledge throughout the entire enterprise. Furthermore, the knowledge firms gain can contribute to their innovations. Research has shown that firms operating in international markets tend to be more innovative. By developing 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. Research shows that because of its economic importance and individual motives, entrepreneurial activity is increasing across the globe. Even large, well-known firms are experiencing significant competition that requires them to innovate if they wish to compete effectively and survive over time. Teaching Note: Large firms can take several measures to act small and increase their innovative capacity. These include the following: • Greater levels of individual autonomy can be created through the restructuring of a firm into smaller and more manageable units (see Chapter 7). • The additional amounts of creativity and innovation that tend to be witnessed among those granted more autonomy stimulates autonomous strategic behavior when a firm pursues innovation through internal corporate ventures. • A firm can reengineer its operations to develop more efficient work-related processes and to form channels through which customers’ interests can be expressed with greater clarity and intensity. • Cross-functional teams provide opportunities for workers to think and act creatively. • When handled effectively, downsizing can create arrangements through which a firm is able to focus efforts more on key tasks—e.g., those required for innovation. • Allocating significant levels of resources to R&D can stimulate innovation. • Cooperative arrangements can help spawn innovations in the firm. Instructor Manual for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838