BUS 599 Week 5 DQ

Journal of Leadership & Organizational Studies 20(4) 394 –407 © Baker College 2013 Reprints and permissions: sagepub.com/journalsPermissions.nav DOI: 10.1177/1548051813475484 jlo.sagepub.com

Game-changing strategies occupy a central and distinctive place in companies’ quest for competitive superiority. These strategies center on fundamentally changing the rules of competitive rivalry in an industry (Markides, 2008). They also help companies create new industries, redefine (un) profitable niches, redraw and reconfigure industry boundar- ies, and alter the basis of competition. These strategies often introduce new competitive paradigms that fuel innovation that reshapes the domain and dynamics of competition. Applying these game-changing strategies has allowed as different companies as Apple, Google, Microsoft, and Face- book to fundamentally change their business ecosystems and environments, gaining and sustaining market promi- nence. Yet despite their popularity, we know little about the approaches companies take to craft game-changing strate- gies. We know even less about how leaders execute and institutionalize these strategies and create organizational contexts that promote new ways of thinking, organizing, and competing. Leaders define these strategies, making them an epicenter of their efforts dedicated to transforming their business ecosystems and industries. These issues are the focus of this article.

Objective and Contribution In this article, we focus on the role of senior leaders in developing, supporting, and implementing game-changing

strategies that bring about radical industry transformation, while achieving and sustaining a firm’s competitiveness. These leaders determine the quality and novelty of the stra- tegic choices companies make (Elenkov, Judge, & Wright, 2005; Ireland & Hitt, 1999), including where and how they compete. Game-changing strategies require distinct entre- preneurial skills that allow companies to visualize their industries, markets, and competitors in fundamentally new ways. Leaders develop, hone, and deploy their companies’ various skills to develop an organizational-wide entrepre- neurial capability (EC). This capability, which works across organization’s levels and functional units, becomes the mainspring of innovation that spurs and helps sustain game-changing strategies and resultant competitive advan- tage. EC assists in developing and shaping a company’s ecosystem and encourages the creation of new capabilities, rather than simply keeping or upgrading existing ones, allowing the firm to venture into new arenas.

475484 JLO20410.1177/1548051813475484Journal of Leadership & Organizational Studies 20(4)Zahra et al. © Baker College 2013

Reprints and permission: sagepub.com/journalsPermissions.nav

1University of Minnesota, Minneapolis, MN, USA 2ESADE-Ramon Llull University, Barcelona, Spain 3Copenhagen Business School, Frederiksberg, Denmark

Corresponding Author: Shaker A. Zahra, Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis, MN 55455, USA. Email: [email protected]

Strategic Leadership and Entrepreneurial Capability for Game Change

Sondos G. Abdelgawad2, Shaker A. Zahra1, Silviya Svejenova2,3, and Harry J. Sapienza1

Abstract In this article, we introduce the concept of entrepreneurial capability (EC) to capture a firm’s capacity to sense, select, and shape opportunities, and synchronize their strategic moves and resources in pursuit of these opportunities. We define EC and explain its dimensions, highlighting its role in achieving and sustaining a firm’s competitive advantage. We also propose that EC is instrumental for realizing a firm’s game-changing strategies, that is, those strategic moves that fundamentally alter the nature, domain and dynamics of competition. Furthermore, we propose that strategic leadership plays an essential role in honing a company’s EC and aligning it with its game-changing strategy by creating an organizational context where transforming the business ecosystem becomes feasible. Finally, we articulate the implications of EC for managerial practices and for advancing future research at the intersection of entrepreneurship, leadership, and competitive strategy.

Keywords entrepreneurship, business ecosystem, competitive game, entrepreneurial capability, strategic leaders

Article

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

Zahra et al. 395

Interest in game-changing strategies and EC is growing because competition is becoming system based. Companies located around the globe have to simultaneously compete and collaborate to ensure continuous innovation that posi- tions their products as their industry’s standard (Adner & Kapoor, 2010). As a result, companies need to develop their business ecosystem by creating hospitable environments in which they gain access to the knowledge, resources, ideas, and discoveries of other firms. An ecosystem is “the com- munity of organizations, institutions, and individuals that impact the enterprise and the enterprise’s customers and suppliers” (Teece, 2009, p. 16). It is within such business ecosystem that the competitive game unfolds, involving multiple players that differ in strategies, capabilities, and resources.

We contribute to the literature by highlighting the central role of strategic leaders (i.e., a company’s senior execu- tives) in realizing game-changing strategies by aligning them with the firm’s EC. Recent research focuses on the content of competitive strategies and the conditions that enhance their success, frequently overlooking the role that senior leaders play in conceiving, crafting, and executing these strategies (Elenkov et al., 2005). We draw attention to these issues by linking EC, strategy, and leadership. To us, senior leadership is the driving force that ensures the align- ment between a company’s EC and its game-changing strat- egies. This link becomes evident when we consider EC and its implications for the realization of game-changing strate- gies. Finally, we discuss the conditions under which EC is likely to succeed in creating a strategic advantage. In so doing, we underscore the fact that not all game-changing strategies are the same; some are more creative and entre- preneurial while others are not. Some are simple whereas others are more complex. Some unfold quickly while others take years to pay off. These variations stem from the differ- ences that exist in senior leaders’ cognitions, skills, and styles as well as the content of these strategies and their effect on company performance.

In the remainder of this article, we discuss the link between senior leadership and competition. Then we define EC and its dimensions, distinguishing from other dynamic organizational capabilities. We then focus on the mecha- nisms through which EC operates and evolves, and articu- late the conditions under which EC may trigger game changes. Finally, we reflect on the intersection of entrepre- neurship, strategy, and leadership as a fertile area for future research and study.

Strategic Leadership and Competition Companies such as Apple, Pixar, 3M, Google, Carrefour, Zara, and Virgin have consistently been at the forefront of radical change in their industries, constantly revising the

nature of competition. This radical change involves funda- mental redefinition of industry boundaries, reconceptual- ization of the relationship between the firm and its external environment (e.g., its main stakeholders), and the employ- ment of different and bold strategies that reset the dynamics of competition. These activities often require new thinking that comes from challenging industry assumptions, engag- ing the firm and its employees in a process by which they envision a new competitive landscape. As Hamel and Parahlad (1994) have compellingly shown, strategic shifts that lead to game changes require visionary (even revolu- tionary), innovative, daring, and capable leadership.

In this context, EC, organizational capability for ongoing opportunity exploration and exploitation, becomes a key engine that strategic leaders use to trigger industry-wide game changes. Unleashed, EC can bring about internal changes in how firms operate, thereby allowing them to proceed to alter the domain, nature, and scope of their com- petitive arenas, the type of competitive game, and the way in which it is played. Companies that fail to inculcate such capabilities throughout their operations may miss on major opportunities to transform and evolve their operations and industries. Such failures reflect poor senior leadership that can undermine a company’s market position. This requires us to discuss the nature and content of EC.

Entrepreneurial Capability A capability refers to a firm’s capacity to perform a task or activity in pursuit of its mission. EC enables a company’s transformation through sensing and shaping opportunities as well as providing specific heuristics for opportunity evalua- tion, selection, and exploitation (e.g., Bingham, Eisenhardt, & Furr, 2007; Teece, 2007). Limited research exists on EC and whether it differs from other types of dynamic capabili- ties (Burgelman, 1983; Burgelman & Grove, 2007; Phan, Wright, Ucbasaran, & Tan, 2009). It is important, therefore, that we define EC and its key dimensions.

The literature suggests that firms develop substantive and dynamic capabilities (Bingham et al., 2007). Substantive capabilities typically encompass operating routines that are aimed at the efficiency and effectiveness of value chain activities. Dynamic capabilities integrate and update sub- stantive routines that trigger and enable internal change (Zahra, Sapienza, & Davidsson, 2006; Zollo & Winter, 2002), sometimes in unforeseen ways.

Some firms develop a special type of dynamic capabili- ties that extends beyond the blending or integrating of sub- stantive routines. Rather, this set of capabilities usually focuses on synchronizing and orchestrating the coincidence of such changes with moves and efforts emerging beyond the firm’s boundaries; we refer to this as EC. The develop- ment and use of EC in the pursuit and creation of opportuni- ties stretches the influence and actions of a firm beyond the

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

396 Journal of Leadership & Organizational Studies 20(4)

resources that it currently controls (Stevenson & Jarillo, 1990). Consequently, EC refers to firm’s overall capacity to sense, select, shape, and synchronize internal and external conditions and resources for the exploration (recognition, discovery, and creation) and exploitation of opportunities. Exercising this capacity increases, but does not guarantee, that a firm’s game-changing strategy will materialize and will be successful.

Like other dynamic capabilities, EC centers on anticipat- ing and realizing forthcoming change (Zahra & George, 2002). However, unlike other dynamic capabilities, EC’s primary contribution lies in inducing change into a firm’s environment to gain an advantage (Burgelman & Grove, 2007), a key objective of entrepreneurial initiatives in established companies (Zahra, 2008). Though both seren- dipity and external events (e.g., leadership succession) can pave the way to a game change, EC often results from the conscious actions that managers undertake, whether the desired strategic or financial outcomes are realized or not.

Three other qualities distinguish EC from other dynamic capabilities. First, EC is characterized by the interplay of cor- porate entrepreneurs’ (managers’ and employees’) abilities to envision new courses of action and success in mobilizing resources for their pursuit (Prahalad & Krishnan, 2008). EC typically involves judgments and actions of a multiplicity of entrepreneurs with different roles and contributions through- out the process of reshaping and using a firm’s capability port- folio (Adner & Helfat, 2003; Augier & Teece, 2009; Teece, 2007). For EC to eventually lead to game change, knowledge, skills, and perspectives of leaders and their followers matter. Senior leaders typically integrate these diverse views in a coherent manner, potentially facilitating desired strategic change (Burgelman & Grove, 2007; Phan et al., 2009).

Second, EC resides at the intersection of leaders’ cogni- tion and action. EC emerges and develops from the actions that entrepreneurs undertake to reconfigure conditions within and outside their organization in accordance with their mental models (Finkelstein & Peteraf, 2007; Foss, Klein, Kor, & Mahoney, 2008). Thus, our notion of EC is distinguished from recent cognitive approaches to dynamic capabilities (Bingham, Eisenhardt, & Furr, 2007; Gavetti, Levinthal, & Rivkin, 2005; Tripsas & Gavetti, 2000), where we add an action orientation to the definition of such capa- bilities while emphasizing the unique mental models of individual leaders as they seek to shape a collective vision for the desired types of capabilities.

Third, EC involves both the exploration and exploitation of opportunities to synchronize and shape emergent condi- tions internal and external to the firm. This places a premium on leaders’ role in the identification, evaluation, realization, and creation of opportunities. This makes EC different from dynamic capabilities (e.g., absorptive capacity) that are knowledge centered but strictly focus on converting external knowledge to internal knowledge exploitation. This

distinction is at the heart of the game-changing potential role of EC, which represents a capacity to extend the boundaries of the firm, influence the convergence of internal and exter- nal conditions, and spark external change—a pillar of entre- preneurship within a company.

Furthermore, by acknowledging the role of senior lead- ers’ conjecture and uncontrollable organizational as well as environmental forces, we avoid an overemphasis on per- cipience as a precondition to the recognition or creation of opportunities through EC (Alvarez & Barney, 2007; Zahra, 2008). Still, EC requires senior leaders and entrepreneurs within a company to view opportunity realization in ways that reach beyond the transformation and exploitation of internal capabilities to the dynamic creation and shaping of new knowledge, a key source of innovativeness.

Our discussion suggests that EC resembles ambidexter- ity as a dynamic capability that centers on simultaneous exploration and exploitation (O’Reilly & Tushman, 2008). However, the role of EC differs from that of ambidexterity, which breeds organizational change (i.e., adaptation to the external environment) but ignores game-changing strategic moves. Ambidexterity focuses on balancing exploration with exploration, whereas EC enables the concurrent recog- nition, discovery, and creation of opportunities (Alvarez & Barney, 2007; Miller, 2007). As a result, EC allows for the simultaneous reaction to external environmental jolts and the discovery and creation of opportunities.

Dimensions of Entrepreneurial Capability Integrating the literature, EC consists of four distinct but interrelated dimensions that are anchored in the pursuit of opportunities: sensing, selecting, shaping, and synchroniz- ing. In Table 1, we provide an overview of each of these dimensions, the mechanisms through which their operate, their outcomes, and supporting references that relate to it.

The sensing dimension of EC centers on seeing or envi- sioning market and technological opportunities, within as well as beyond the confines of an industry, as in the case of cross-boundary disruptors (Burgelman & Grove, 2007; Felin, Zenger, & Tomsik, 2009; Teece, 2007). As Table 1 indicates, key mechanisms for the sensing dimension of EC include alert scanning and searching (March & Simon, 1958; Tang, Kacmar, & Busenitz, 2012), experimenting (Dyer, Gregersen, & Christensen, 2009), and imagining (Felin et al., 2009; Klein, 2008).

Sensing ideas and insights that may become profitable opportunities can originate both from individuals within an organization such as middle managers or employees as well as from a company’s dedicated collectivities such as its R&D function or unit (Teece, 2007). It can also originate outside, through suppliers, customers, or other members of the company’s network. Users are also a frequent source of

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

Zahra et al. 397

new opportunities’ identification (Shah & Tripsas, 2007). Sensing requires avoiding “vigilance gaps” by developing a strong peripheral vision that is sensitive to distant, weak, and unclear signals. To develop this capability, the attitude of leadership toward the periphery is essential as is its role for fostering of curiosity and sharing of insights.

Whereas sensing can be heightened by gaining access to new knowledge and exposure to contradictory information, it can be hampered by selective learning. Leaders adept at promoting sensing of opportunities are usually alert to con- tradictory information, viewing it as a potential signal of new, hitherto unanticipated sources of new directions. Contradictory information can stretch the mind-set and imagination of the firm’s managers, encouraging them to look into formerly unattended or even controversial sce- narios. This contradictory information often causes discom- fort and dissonance for senior leaders. To counteract this, firms with well-embedded EC often encourage individuals to question the collective wisdom of their company’s domi- nant mind-set. Strong leaders realize that the sensing dimen- sion of EC is strongest when it contains elements that allow or create processes that require the collision of new possi- bilities with established “taken-for-granted” views and practices (Burgelman, 1991; Phan et al., 2009). Although this collision can be paralyzing, senior leaders can safe- guard against this risk by establishing milestones, criteria, and timetables. They can also define the situation, provid- ing meaning and assigning accountability.

Selecting, a second EC dimension, denotes the firm’s ability to comprehend and choose what ideas and insights have the potential to become viable opportunities. Effective EC involves openness to new ideas, and the willingness to forego some possibilities. Selecting is most directly linked to senior leaders’ thinking and decision-making processes. The selection capability can flourish within a firm through internal competition or could be left to market forces (Birkinshaw, 2001; Burgelman, 1994). Selection demands the evaluation of competing strategic proposals to decide which are of interest and provide senior executives with scenarios for further action (Burgelman, 1983). Regardless of the approach taken, there is a need to consider as many ideas for innovation as possible, then subject them to rigor- ous analysis and evaluation (O’Connor & Rice, 2001; Phan et al., 2009) or prototype and test them.

Shaping, the third dimension of EC, refers to transform- ing and connecting internal and external elements to allow for opportunity probing and realization. As Table 1 shows, key mechanisms for shaping an opportunity are reconfigur- ing, transposing, and meaning making. Reconfiguring is a mechanism through which familiar elements are combined in new ways. Transposing refers to creating an opportunity by taking the underlying logic or practices and/or elements from a more distant domain and bringing them in into another (Powell & Sandholtz, 2012) such as importing prin- ciples and practices from fashion into the field of mobile telephony (Djelic & Ainamo, 2005). Both reconfiguring

Table 1. Entrepreneurial Capability Dimensions: Nature, Mechanisms, Outcomes, and Leadership Role.

Dimension Nature Mechanisms Outcome Key Sources

Sensing Seeing possibilities within and beyond the confines of a firm and an industry

Scanning and searching

Experimenting Imagining

Ideas and insights for further exploration

Burgelman and Grove (2007), Dyer, Gregersen, and Christensen (2009), Felin, Zenger, and Tomsik (2009), Klein (2008), Teece (2007)

Selecting

Comprehending and choosing what ideas and insights to focus on and pursue given a firm’s strategic priorities and resources

Interpreting Evaluating Judging

Opportunities for shaping

Bingham, Eisenhardt, and Furr (2007), Burgelman and Grove (2007), Day and Schoemaker (2006), Dyer et al. (2009), Tang, Kacmar, and Busenitz (2012)

Shaping Transforming and connecting internal and external elements for opportunity probing and realization

Reconfiguring Transposing Meaning making

Prototypes of products/ services and business models for opportunity evaluation

Alvarez and Barney (2007), Augier and Teece (2009), Djelic and Ainamo (2005), Felin et al. (2009), Lévi-Strauss (1962), Powell and Sandholtz (2012), Teece (2007), Zahra (2008)

Synchronizing

Orchestrating temporal and spatial correspondence of

internal and external resources, capabilities, and activities for

reaching markets

Temporal heuristics Procedural heuristics Priority

heuristics

Processes of internal and external organizing

for opportunity realization

Adner and Helfat (2003), Bingham et al. (2007), Brown and Eisenhardt (1997),

Burgelman and Grove (2007)

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

398 Journal of Leadership & Organizational Studies 20(4)

and transposing involve some degree of bricolaging where internally and externally available resources and capabili- ties at hand are mobilized regardless of their original pur- pose (Baker & Nelson, 2005; Lévi-Strauss, 1962). Finally, meaning making involves reasoning and justification in which managers and entrepreneurs become proponents of new courses of action (Felin et al., 2009). Meaning making is an essential capacity of successful leaders (Podolny, Khurana, & Besharov, 2010), which allows them to con- nect new opportunities with the larger purpose of the orga- nization and its strategy. These different mechanisms highlight the critical importance of leaders in the organiza- tion, especially senior managers. Shaping requires a vision that uplifts the conversation in a company to a level where the concept of the organization is refined or crafted anew.

Finally, synchronizing means temporally and spatially orchestrating the correspondence among internal and exter- nal elements of EC. Internal alignment involves simultane- ous exploration and exploitation of opportunities. External alignment is about harmonizing a firm’s actions with the speed of the environment and the opening and closing of the windows of opportunity. Furthermore, this may also require a dynamic reconfiguration of organizational talent (Prahalad & Krishnan, 2008). For example, executive teams’ fast decision making is essential for succeeding in high-velocity environments (Eisenhardt, 1989). In these environments, synchronizing involves both understanding the speed of the different elements requiring alignment as well as the inte- gration and actions to harmonize their “arrival.” Although capabilities themselves may be enduring, the co-occurrence of conditions in optimally matched states may be highly transient. Thus, one of the keys to actual game changing may be synchronizing the skills of the focal individuals or groups in the firm with those outside.

As Table 1 shows, synchronizing operates through three mechanisms. The first is using temporal heuristics that specify sequence, pace, and timing. The second is proce- dural heuristics that articulate process or actions for oppor- tunity execution. The third is applying priority heuristics that articulate the ranking of opportunities in terms of their importance for the firm (Bingham et al., 2007).

To summarize, as we suggest in Table 1, each dimension of EC provides senior leaders with unique, though intercon- nected, information (e.g., ideas to explore, opportunities to pursue, prototypes to evaluate, and alignment processes to fine tune) that is useful in conceiving, selecting, evaluating, and co-aligning opportunities. This process is generated and sustained both by the firm’s human capital which is embed- ded in individuals and collective skills, talents, feelings, attitudes, and judgments as well as the organizational sys- tems and practices. The four dimensions we have outlined in Table 1, therefore, transcend individual contributions. Instead, they form important organizational-level activities and skills. In fact, these dimensions may not occur

sequentially or in strict order because the dimensions of EC both coexist and affect one another in a variety of patterns that are difficult to predict in advance. This unpredictability makes game-changing strategy harder for competitors to anticipate, as discussed in the text.

Entrepreneurial Capability Integration and Game-Changing Strategies

Game-changing analogies have proliferated the strategy and entrepreneurship literatures, as revealed by the plethora of titles that use them (see, e.g., Gray, Brown, & Macanufo, 2010; Lafley & Charan, 2008; Markides, 2008; Osterwalder & Pigneur, 2009). Authors have used the metaphor of a “game” as a gainful activity that involves rivalry and strat- egy (“Game,” n.d.). The objective is to identify ways of improving the odds and outsmarting other players in pursuit of profit and growth. In explaining the logic of these com- petitive games, authors have focused on established and newly created markets as the “playing field” but have rarely considered the broader context of economic activity that occurs within them (Dacin, Ventresca, & Beal, 1999).

We believe that there are two main mechanisms that con- tribute to a firm’s initiating steps for game-changing strate- gies: the integration of EC dimensions (Table 1) and their organizational embeddedness. Below, we discuss these mechanisms in relation to the processes of novelty genera- tion, transformation, and opportunity realization, all of which can spark radical strategic change.

Integration of Entrepreneurial Capability Dimensions and Game Change. Generally speaking, all higher order organizational capabilities aim to create or secure the long-term viability and welfare of the firm’s business. Thus, the central mission of EC is to sense, shape, select, and synchronize activities (internal and external to the firm) in order to realize oppor- tunities that enhance the viability and welfare of the firm. The outcomes of developing and exercising EC are far from predicable. Therefore, in the figures that follow, we present three different but realistic paths of such potential out- comes. As Figure 1 depicts, the direct object of EC (Box 1) is to enact an opportunity realization process (Box 2) which, in turn, enhances the ongoing performance of the firm (Box 3). The performance implications of these efforts will rein- force or alter EC (Box 1). Opportunity realization means the proactive pursuit of those opportunities selected through senior leaders’ judicious deployment of organizational resources, skills, and capabilities.

Sometimes, as shown in Figure 2, EC (Box 1) leads directly to radical innovations that are manifested in the opportunity pursuit process (Box 2), which influences a firm’s performance (Box 3). In this context, EC may have

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

Zahra et al. 399

some moderate effects on the way others connected to them “play the game” (Box 5). At the same time, performance effects of radical changes are rather unpredictable (Box 3). If the performance effects are negligible or negative, we cannot always expect much impact on the behavior of com- petitors, suppliers, customers, or other companies. However, if the desired positive effects are unusually strong, we can expect game-changing strategies to emanate from two sources. First, the positive feedback on the focal firm will enhance its determination to change the game in a manner that reflects and leverages the innovations in its opportunity realization process to change the game (Box 5). Second, such strong performance will draw the attention and response of other players and companies’ leaders to either imitate or otherwise leverage the radical innovations for themselves (Box 4). These efforts center on copying or leveraging the focal firm’s efforts, further accelerating changes occurring in the way the competitive game is being played (Box 5). Finally, not only will the performance of the focal firm alter its EC but the changing game will also drive changes in its EC (Box 1)—eventually restarting and altering the entire cycle.

The game change processes depicted in Figure 2 are a by-product of the focal firm’s efforts to realize opportunities. The firm’s intention may not be to alter the game at all, but rather to take advantage of an existing weakness, which it hopes others will not copy or will be unable to copy effec- tively. As noted, the greater the focal firm’s success with its

innovations, the greater the likelihood that the game will be changed as others hasten to keep up and learn. It is possible, too, that the game is altered in ways that undermine the long- run stability and competence of the focal firm despite the early successes it might achieve. Failures can also inform other players in ways that change the competitive game.

Our discussion indicates that unintended game change is most likely to evolve out of radical changes that meet with significant success. Success encourages these firms’ leaders to persist, repeat, and refine their efforts. They will also likely redouble their efforts to encourage external firms to cooperate with them and make changes that more fully leverage what they are doing. Success also encourages both competitive responses and imitation that quicken game change. At this point, a self-reinforcing pattern is embedded in multiple actors in the field (e.g., companies’ senior lead- ers) as they adjust their own processes and capabilities to meet the emerging new game.

Figure 3 depicts another, but less common, way in which game change emerges. Here, the focal firm proactively attempts to change the game as a precondition for realizing an opportunity that it has envisioned. In this process, the firm’s leadership might have concluded that a promising opportunity can be brought into existence only if the way the game is played is altered first. For example, a regulatory or financial barrier may have to be removed if the firm’s innovation is to succeed. For the most part, unless firms are “missionary”-type organizations, business firms will not

Entrepreneurial Capability [1]

Opportunity Realization Process

[2] Performance [3]

Figure 1. Entrepreneurial capability, opportunity realization, and performance primary path.

Entrepreneurial Capability [1]

Radical Opportunity Realization Process

[2] Performance [3]

Competitive Response/ Imitation

[4]

Game Change [5]

Figure 2. Entrepreneurial capability, radical opportunity realization, and unintended game change.

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

400 Journal of Leadership & Organizational Studies 20(4)

seek to change the competitive game for the sake of change. Changing the game means synchronizing or creating those conditions that allow the firm to realize an opportunity.

This path (depicted in Figure 3) begins in a manner very different from the ordinary process shown earlier in Figures 1 and 2. Here, a firm takes actions to change aspects of the competitive game (Box 2). If this action is met with suc- cess, the alteration of the game allows the focal firm to engage its intended opportunity realization process (Box 3). This new realization process, then, affects the performance of the firm (Box 4). Furthermore, because the competitive game has been altered in some small way, other firms in the industry may also be affected (Box 5). Again, if the results are positive, others will imitate or respond (Box 4) and this will further encourage game-changing moves (Box 2). These changes and performance itself will feed back into the firm’s EC (dotted lines in Figure 3).

We believe that this latter, intentional process is proba- bly less common because inertial forces constrain what firms can do and what they believe they can do. All else being equal, however, we would expect that firms with very strong EC are more apt to attempt to alter the fabric of an entire ecology. Given the number of forces at play and the unpredictability of even the near future in dynamic environ- ments, we doubt that firms can reliably and predictably “control” the consequences of such efforts. Rather, we sus- pect that those that use this aspect of game changing do so through collective action that enables them to take small, “affordable” risks. Although we cannot deny that some firms have honed their judgment and knowledge to high levels of expertise, constrained experimentation and trial- and-error learning rather than percipience is a likely explanation.

The individual dimensions of EC (Table 1) may matter little if they are not interwoven and coordinated with one another to create momentum in a company’s pursuit of a chosen opportunity. Sensing the environment may be excit- ing and informative. Yet unless linked to selecting, shaping, and synchronizing, sensing becomes little more than an aca- demic exercise and the firm will fail to realize competitive

advantage. The emergence and evolution of EC depends on honing and coordinating organization-level capabilities. This is why active integration by managers of the various EC dimensions is crucial. This integration confers potency on the various dimensions of EC, a value that goes well beyond the contribution of each individual dimension. Our discussion suggests the following propositions:

Proposition 1a: Individual dimensions of EC are weakly but positively related to opportunity real- ization.

Proposition 1b: Integration moderates the positive relationship between the individual dimensions of EC and opportunity realization such that in the presence of integration, the positive relationship between EC and opportunity realization will be stronger.

The integration of EC dimensions also allows for con- tinuous novelty generation within a company’s operations. Novelty refers to actions that fall typically outside an organi- zation’s existing strategic repertoire. Novelty is conducive to firms’ long-run viability as contexts and competitive require- ments change. However, there is no reliable way to accu- rately predict which of them will succeed (March, 2010). Hence, persisting in the pursuing novelty and game change requires a strong organizational culture that tolerates failure and provides the slack resources needed to endure its effects. For instance, Pixar offers its employees “opportunities to fail together and to recover from mistakes together” (Taylor & LaBarre, 2006). If failure is an outcome of pursuing novelty in the organization, senior leadership also needs to handle the cases of losers whose technologies, products, or business models do not get adopted. With careful management, fail- ure could be demotivating for both managers and employees (Birkinshaw, 2001).

To ensure novelty generation, the various dimensions of a firm’s EC need to operate at the intersection of creation and destruction. As some research suggests, this is difficult for incumbents who usually fail to pursue novel paths and are

Entrepreneurial Capability [1]

Radical Opportunity Realization Process [3]

Performance [4]

Competitive Response/ Imitation

[5] Game Change [2]

Figure 3. Game change as an intended instrument of the opportunity realization process.

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

Zahra et al. 401

phased out, though sometimes they persist and even displace intruders (Tripsas, 1997). Because new entrants are less restricted by dominant standards or taken-for-granted rules (Autio, Sapienza, & Almeida, 2000), game-changing strate- gies are often championed by newcomers, who are willing to cross industry boundaries to initiate something new (Burgelman & Grove, 2007). Some newcomers bring into the industry new mental and business models, and reframe indus- try dynamics and boundaries around these different mind- sets. Newcomers also make use of their ECs, which have been honed in other domains, to identify key points of entry and how best to build solid positions that give them market lead. This discussion suggests the following proposition:

Proposition 2: Integrated EC is positively related to the creation of new opportunity realization paths, thereby increasing organizational novelty.

Novelty generation contributes to imagining the reshap- ing of the organization’s processes, systems, resources, and capabilities necessary to realize and address the envisioned external disruption. When focused externally, EC can be channeled toward envisaging changes in an industry’s architecture (Jacobides, Knudsen, & Augier, 2006) and the business ecosystem (Teece, 2009, p. 16). Industry architec- ture denotes the evolving relationships among value chain participants and determines how labor and surplus are divided among the types of players involved (Jacobides et al., 2006). This architecture facilitates those interactions that allow firms to identify opportunities for and con- straints to radical transformation and change. Knowledge of this architecture is essential to identifying who does what (the roles) and to what norms (the rules). The busi- ness ecosystem usually incorporates architecture across multiple industries.

Attending to industry architecture and the business eco- system (Moore, 1993; Teece, 2007) expands the firm’s playing field beyond the boundaries of its industry value chain. By interacting with various existing players in its ecosystem (e.g., customers and suppliers) and proactively seeking new players (e.g., boundary disruptors), a firm can bring about ecosystem transformation. An example of this success is P&G’s “Connect and Develop” initiative, which has established more than 1,000 active agreements with partners in its ecosystem. These agreements have facilitated P&G’s opportunity realization by creating new markets and applications, developing technologies that build on conver- gence, and thus gain access to innovation. These benefits will be greater when the firm’s leadership has developed an integrated and coherent EC able to capture knowledge, resources, and ideas from diverse groups. This discussion suggests the following proposition:

Proposition 3: Integrated EC is positively related to the transformation of a firm’s business ecosystem.

Entrepreneurial Capability Integration and Game-Changing Strategies. When a firm’s EC is embedded in and distributed across its different units, the company can more easily engage in game-changing strategies. Though a company can choose to centralize access to information to ensure unity and clarity of command and expedite information retrieval and processing, centralization has serious draw- backs for EC. It can deprive the organization of gaining access to the rich and often soft information that permeates intraorganizational networks and informal innovation hubs that grow naturally in the decentralized firm’s operations.

With dispersed EC, a firm can capture and synthesize information within and outside the organization. As EC becomes embedded in the firm’s operations, it becomes easier for its leaders to glean insights that enrich organiza- tional intelligence and foster creativity. Members of the organization often have different views about the industry’s evolution, how the firm fits within the industry’s existing social structures, and where potential changes may occur. Organizational members also pay differential attention to diverse sources, leading to multiple (and oftentimes con- flicting) views about how to “upset the applecart” by taking risks and pursuing innovations. Integrating, and learning from, different views can enhance EC.

A highly embedded EC allows challenging deeply ingrained and strong organizational mental models about how to exploit emerging opportunities, as they can hamper the generation and adoption of new ideas (Markides, 2008). It also permits bringing together different and even diver- gent interpretations that may serve as a basis for novelty. These interpretations frequently serve as the foundation for conceiving and developing new strategies that bring funda- mental changes in perceptions and views of the competitive arena and consider how to shape this arena in ways that create a competitive advantage. These observations suggest the following propositions:

Proposition 4a: The higher the organizational embed- dedness of EC, the greater the novelty a firm will generate internally.

Proposition 4b: The higher the organizational embed- dedness of EC, the more likely the firm will initi- ate game-changing strategies.

EC embeddedness also facilitates and expedites data col- lection, analysis, interpretation, and absorption. It also spurs the rapid development of new ideas or knowledge. When the firm has systems that effect speedy information processing and which are open to regeneration of ideas, it is less suscep- tible to “paralysis by analysis,” where managers become captive of competing interpretations that they cannot resolve (Zajac & Bazerman, 1991). Resolving complexity in a coherent manner becomes a major challenge for senior exec- utives when the EC is highly diffused throughout the organi- zation, and different groups of people hold divergent visions

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

402 Journal of Leadership & Organizational Studies 20(4)

of things to come. To ensure rapid adaptation, executives need to develop their company’s EC in a way that quickly considers rival interpretations and attendant scenarios; they may integrate these views or simply select one path to pur- sue. Forming a habit of quickly choosing a resolution path allows senior managers to move ahead of their rivals and reshape the competitive game. Time itself may thus become an important means of creating successful game change. These observations suggest the following proposition:

Proposition 5a: The higher the organizational embe- deddness of EC, the faster the firm will engage in game-changing strategies.

A highly embedded EC results in speedy action in recog- nizing and pursuing opportunities. It can also increase the radicalness of game change strategies that the firm could undertake. EC brings to focus multiple, divergent, and often radical views of the competitive arenas, their context, and the agenda of different players. This allows senior leaders to theorize about the radical changes they might wish to initi- ate to “shuffle the cards” and introduce a new regime in the industry. Leaders can also visualize a new landscape where they can capitalize on their firm’s resources, skills, and capabilities as they redefine the core competencies essential to success in the new arena. By changing a few of the key industry taken-for-granted assumptions or fundamentals, a firm’s senior leaders can dramatically alter the ecology of competition in profound ways. Clearly, changing the ecol- ogy of the game is harder and riskier than simply upgrading products, changing pricing policies, or joining alliances. A well-honed and organizationally embedded EC makes it possible to recognize the potential for radical change, even when signals of pending transitions are weak. These obser- vations suggest the following proposition:

Proposition 5b: The higher the organizational embed- dedness of EC, the more likely the firm will engage in radical game-changing strategies.

Game-changing strategies also differ in pattern, magni- tude, and pace. They unfold through sudden, sweeping dis- ruptions or through minute alterations that build up momentum over time to amount to a radical transformation. Whether EC paves the way to game-changing strategies and of what nature and magnitude can only be determined ex post. These strategies can initially involve a disruption by creating and introducing into the market a revolutionary new product or a novel way of doing things that goes against the prevailing industry’s dominant model or logic. This type of disruption opens up a new space of possibilities in the taken-for-granted industry architecture. If these efforts are deepened, industry disruption can grow into transformation whereby some important aspects of the playing field and the

system of roles, rules, and relationships among players are preserved, whereas others are simply altered. Transformation occurs as a result of the opportunities emerging after a new competitive game is introduced through experimentation by players, both established and new.

Game-changing strategies also involve the creation of a new game by envisioning and realizing a new playing field and related system of roles, rules, and relationships. This, however, requires both “meaning making” (Table 1) and mobilization of collective action across a range of stake- holders, within and outside the industry, as well as lobbying efforts at the institutional level to legitimize the new game (Aldrich & Fiol, 1994). It also demands careful sequencing and timing of orchestration and negotiation activities so that a new industry architecture and business ecosystem can come into being (Jacobides et al., 2006; Teece, 2007).

Entrepreneurial Capability Integration and Game-Changing Strategies. Finally, for EC to maintain and strengthen its game-changing potential, it should be kept current through constant renewal. As we indicate in Figures 1 to 3, such renewal can occur in three main ways: by continuous incor- poration of up-to-date knowledge from the environment (mostly via the sensing dimension of EC), through the feed- back obtained in the opportunity realization process, and from how the game-changing process itself unfolds.

EC coevolves with the environment (Lewin & Volberda, 1999; Volberda & Lewin, 2003). Similar to other capabilities, EC can be honed through experience and reflection (Bingham et al., 2007). This allows senior leaders to reconceptualize their environments, identifying emerging changes and corre- sponding opportunities. EC is a constellation of dimensions or subcapabilities that might change over time, in relation- ship to the dynamics of the ecosystems and opportunities being explored or used. For example, the ecosystem in which a competitive game is embedded provides clues about the appropriate tipping point where fit with the prevailing game should be abandoned and action toward a transformed or new, more vibrant ecosystem should be initiated.

The dynamism of EC makes it especially invaluable in defining the genesis of variety that breeds novelty and sparks entrepreneurial action. Thus, EC promotes the continuous pursuit of novelty in the presence of con- straining forces that pull a firm toward exploitation (March, 1991). The heterogeneous knowledge introduced into the firm on an ongoing basis, the diverse perspectives and insights of managers and employees at all levels, their differential access to different types of knowledge, and their different ways of organizing and processing this knowledge induce variety which can be harvested in the form of novelty. Capturing, comprehending, absorbing, and exploiting these diverse types of knowledge is a daunting challenge (Adner & Helfat, 2003; O’Reilly & Tushman, 2008). As such, EC can become a powerful

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

Zahra et al. 403

organizational engine that uses this knowledge in the rec- ognition, definition, refinement, and evaluation of oppor- tunities as well as their realization. Perpetuating novelty requires the creation of a strong organizational culture that tolerates failure and can sustain its energy for simul- taneous exploration and exploitation.

Discussion: Senior Leadership and Entrepreneurial Capability for Game Change

As we have argued throughout this article, game-changing strategies introduce new competitive dynamics into an industry or a business ecosystem. While the characteristics and skills of senior leaders shape a company’s strategic choices (Finkelstein, Hambrick, & Cannella, 2009), they are more likely to influence game-changing strategies that reconceptualize the competitive arena anew. As such, EC becomes an important means by which senior leaders exploit the collective intelligence, abilities, and skills of other managers and employees throughout their organiza- tion. Therefore, in this article we have defined EC and discussed its dimensions. We also highlighted ways in which it could change the competitive arena and rules of competition, and sequence of competitive moves. This dis- cussion places senior leaders at the heart of the entrepre- neurial processes that underlie the creation, maintenance, and renewal of EC. The discussion also underscores senior leaders’ role in connecting entrepreneurial activities with a firm’s strategic choices, especially those focused on game change. In this depiction, entrepreneurship gives birth to competitive strategies (especially game-changing strate- gies) which, in turn, ignite entrepreneurial activities.

For years, entrepreneurship researchers have argued that prior knowledge and alertness are key antecedents of oppor- tunity recognition. In this mode of discovery, the recogni- tion of opportunities is tantamount to the firm’s leaders connecting the dots (Baron, 2006). Although insightful, some believe that this focus has overlooked “creation” types of opportunities (Alvarez & Barney, 2007). Others have suggested that discovery and creation form an ongoing cycle, with each stimulating the other (Zahra, 2008). Though such depictions of opportunity recognition and dis- covery/creation are useful, their power is limited when companies find themselves in the throes of fundamental changes in their competitive landscapes. Some firms respond by becoming more rigid, others spring into action unleashing a myriad efforts that end up more or less per- petuating the status quo. Yet some firms engage in entrepre- neurial initiatives as they foresee opportunities to shape their industries and change the competitive game, making effective use of their EC.

Managerial Implications

Our discussion underscores that having a well-honed orga- nizational EC per se is not sufficient to effect radical strate- gic change. Senior managers’ vision, commitment to action, ability to articulate when and where to focus search for opportunities, and social skills are needed to build momen- tum for entrepreneurship and change. Managing the differ- ent dimension of EC requires different leadership skills that allow opportunity exploration that fosters exploitation.

Our definition of EC and our delineation of its mecha- nisms for sparking game change suggest a shift in perspec- tive in research. First, the locus of entrepreneurial activity is not solely the individual manager but lies in the interplay between individual insights and collective intelligence. Those companies intent on game change, therefore, need to develop their intellectual capital in ways that develop, inte- grate, and harvest that intelligence. Our approach shifts focus from the ongoing debate of discovery versus creation, to con- sidering their interaction. As we have noted, opportunity real- ization requires cognizance and recognition of the dynamic interplay between discovery and creation. An EC-centered approach also causes a shift in the conception of opportunity exploitation itself. We have expanded the view of balancing dynamic and operational capabilities to include attention to building and sustaining ECs. Hence, beyond being a distinc- tive type of dynamic capability, EC offers a means to revisit existing views on the nature of entrepreneurial opportunities.

By focusing on EC and its dimensions, we highlight a need to go beyond individual-centered explanations of a company’s entrepreneurial activities. EC offers an important means of defining (or creating) these opportunities, calling for collective intelligence rather than individual insight or foresight. Given these qualities, senior leaders should focus on creating, nurturing, and sustaining EC rather than simply motivating particular individuals to innovate. Leaders can also attend to the synchronization of EC’s various ele- ments across units and organizational levels. Synchronizing is a demanding task because different elements move at dif- ferent paces and their misalignment could result in missed opportunities or miscalculations about the viability of these opportunities or the skills needed to harvest them.

Perhaps, the greatest contribution of the process of engaging EC is stretching the firm’s leaders and managers’ thinking and frames. This can free leaders to consider “far- off” scenarios that are initially hard to justify or even to comprehend. EC requires managers to stretch beyond their familiar “search zone” (March & Simon, 1958) to explore distant signals of pending change (Zahra, 2008). For instance, senior leaders can explore scenarios that predict their own company’s demise, the convergence of distant and unrelated technologies and scientific paradigms, the occurrence of “black swan” events, politically radical

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

404 Journal of Leadership & Organizational Studies 20(4)

global shifts, and many other possibilities. Such “blue sky” exercises are familiar in traditional strategy models. However, when they are firmly embedded in the fabric of the company, they can have a profound educational role: they revise leaders’ and managers’ notions of what their industry (and company) is all about. The result is not only to upset the applecart but to grow new apples and get them to new markets in new carts.

Research Implications We have highlighted EC as a new category of dynamic capability, operating at the intersection of leaders’ mind- sets and actions. EC enables companies to anticipate game change, and, when feasible and necessary, induce it. Our discussion extends the capability approach to the study of entrepreneurship by offering insights into the content of dynamic capabilities, distinguishing a new category, and articulating a set of dimensions that allows a firm to engage and influence external change. Though the entrepreneurial aspect of dynamic capabilities has been acknowledged (Teece, 2007), to our knowledge this is the first attempt to distinguish EC as a distinctive capability.

We also advance the capability-based view of the firm by articulating a larger theatre of operations, beyond the boundaries of the internal organization of a firm (e.g., resources, processes, routines, and assets) to the competi- tive game. We emphasize the importance of the business ecosystem and how a firm can proactively transform it through entrepreneurial activities focused on industry game change. Thus, we add to the literature on entrepreneurial opportunities by suggesting how EC can contribute to the coevolution of opportunity exploration and exploitation. Thus, we enrich the discussion on industry emergence and evolution by highlighting the firm’s role in initiating game- changing strategies. This role should be empirically docu- mented in future research.

Another area to explore is the configuration of different ECs. Given the multiple elements that constitute EC, different and multiple types of capabilities might exist that differ across opportunities, across firms, and even within firms. By devel- oping taxonomies of these configurations, it would be possi- ble to study these types as well as how and when they change in their texture. We can then link these shifts to corresponding changes in the opportunities recognized and realized.

The literature also underscores the importance of using the firm’s capabilities to keep them current and productive (Zollo & Winter, 2002). Yet the literature weighs the benefits of fre- quent use of these capabilities against the costs involved. Being a portfolio of capabilities that is focused on opportunity identification, creation, and exploitation suggests that EC is continuously deployed in different forms and on different are- nas. The heterogeneity of these opportunities and the contexts create avenues for learning that keeps ECs current

and up-to-date. A question to explore is: How is this variety harnessed to maintain ECs’ vitality while avoiding dilution or decay? This is an important question for future research to tackle.

Having outlined our article’s contributions, we believe that it has several limitations that provide opportunities for further research. First, as it is a theoretical article, the valid- ity of our ideas needs to be empirically tested. For example, we need an empirical exploration of the generalizability of the EC dimensions across a variety of contexts. Once vali- dated empirically and connected to each other, we can use these dimensions to classify different capabilities and con- nect them to the different opportunities companies might pursue. We can also trace longitudinally the coevolution of capabilities and corresponding opportunities, which in turn also highlights the importance of multilevel research design.

By marrying EC and game-changing behaviors, we hope to minimize a bias that pervades existing research. It is usu- ally assumed that proactiveness and risk taking are essential for market success, even though there is some limited evi- dence to the contrary (Lumpkin & Dess, 2001). Of course, proactiveness, risk taking, and innovativeness are highly desirable attributes but it is possible to have “too much of a good thing.” It is possible that continually honing an EC might have some dysfunctional effects that should be explored empirically. The conditions under which such dys- functional effects occur also deserve investigation. For instance, by examining the innovative and financial perfor- mance of firms, we can better appreciate the implications of EC for evolutionary and technical fitness (Teece, 2007) and when (and how) ECs become an impediment to change.

Conclusion In this article, we have advanced the concept of EC as a means of sensing, selecting, shaping, and synchronizing internal and external conditions for the exploration and exploitation of opportunities. We have also proposed that each of these dimensions consists of several subcapabilities and has multiple dimensions. We have highlighted the importance of EC in, unintentionally and intentionally, changing the competitive game through entrepreneurial activities. Our discussion invites future empirical examina- tions of how some companies change the game and, by doing so, change the world. Future research should give special attention to the entrepreneurial dimension of senior leadership and how it brings about fundamental changes in the complexion, scope, and duration of game-changing strategies that redefine industries and business ecosystems.

Authors’ Note Parts of this article were presented at the Academy of Management and Annual Conference of the Academy of Entrepreneurship and Innovation held at Tsinghua University, Beijing, China.

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

Zahra et al. 405

Acknowledgments We are grateful for the support of the Robert E. Buuck and the Curtis L. Carlson Chairs of Entrepreneurship at the University of Minnesota and the Chair of International Entrepreneurship at University of Twente, the Netherlands. We thank Mike Wright, Lance Newey, and Patricia H. Zahra for their many useful suggestions.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding The authors received no financial support for the research, author- ship, and/or publication of this article.

References Adner, R., & Helfat, C. E. (2003). Corporate effects and dynamic

managerial capabilities. Strategic Management Journal, 24, 1011-1025.

Adner, R., & Kapoor, R. (2010). Value creation in innovation eco- systems: How the structure of technological interdependence affects firm performance in new technology generations. Stra- tegic Management Journal, 31, 306-333.

Aldrich, H. E., & Fiol, C. M. (1994). Fools rush in? The institu- tional context of industry creation. Academy of Management Review, 19, 645-670.

Alvarez, S. A., & Barney, J. B. (2007). Discovery and creation: Alternative theories of entrepreneurial action. Strategic Entre- preneurship Journal, 1, 11-26.

Augier, M., & Teece, D. J. (2009). Dynamic capabilities and the role of managers in business strategy and economic perfor- mance. Organization Science, 20, 410-421.

Autio, E., Sapienza, H. J., & Almeida, J. G. (2000). Effects of age at entry, knowledge intensity, and imitability on inter- national growth. Academy of Management Journal, 43, 909-924.

Baker, T., & Nelson, R. E. (2005). Creating something from noth- ing: Resource construction through entrepreneurial bricolage. Administrative Science Quarterly, 50, 329-366.

Baron, R. A. (2006). Opportunity recognition as pattern recogni- tion: How entrepreneurs “Connect the dots” to identify new business opportunities. Academy of Management Perspec- tives, 20(1), 104-119.

Bingham, C. B., Eisenhardt, K. M., & Furr, N. R. (2007). What makes a process a capability? Heuristics, strategy, and effec- tive capture of opportunities. Strategic Entrepreneurship Jour- nal, 1, 27-47.

Birkinshaw, J. (2001). Strategies for managing internal competi- tion. California Management Review, 44(1), 21-38.

Brown, S. L., & Eisenhardt, K. M. (1997). The art of continuous change: Linking complexity theory and time-paced evolution in relentlessly shifting organizations. Administrative Science Quarterly, 42, 1-34.

Burgelman, R. A. (1983). A process model of internal corporate venturing in the diversified major firm. Administrative Science Quarterly, 28, 223-244.

Burgelman, R. A. (1991). Intraorganizational ecology of strat- egy making and organizational adaptation: Theory and field research. Organization Science, 2, 239-262.

Burgelman, R. A. (1994). Fading memories: A process theory of strategic business exit in dynamic environments. Administra- tive Science Quarterly, 39, 24-56.

Burgelman, R. A., & Grove, A. S. (2007). Let chaos reign, then rein in chaos–repeatedly: Managing strategic dynamics for corporate longevity. Strategic Management Journal, 28, 965-979.

Dacin, M. T., Ventresca, M. J., & Beal, B. D. (1999). The embed- dedness of organizations: Dialogue and directions. Journal of Management, 25, 317-356.

Day, G. S., & Schoemaker, P. J. H. (2006). Peripheral vision: Detecting the weak signals that will make or break your com- pany. Boston, MA: Harvard Business School Press.

Djelic, M.-L., & Ainamo, A. (2005). The telecom industry as cul- tural industry? The transposition of fashion logics into the field of mobile telephony. In C. Jones & P. H. Thornton (Eds.), Transformation in cultural industries. Research in the sociol- ogy of organizations series (Vol. 23, pp. 45-82). Burlington, MA: Elsevier.

Dyer, J. H., Gregersen, H. B., & Christensen, C. M. (2009). The innovator’s DNA. Harvard Business Review, 87(12), 60-67.

Eisenhardt, K. M. (1989). Making fast strategic decisions in high- velocity environments. Academy of Management Journal, 32, 543-576.

Elenkov, D. S., Judge, W., & Wright, P. (2005). Strategic lead- ership and executive innovation influence: An international multi-cluster comparative study. Strategic Management Jour- nal, 26, 665-682.

Felin, T., Zenger, T. R., & Tomsik, J. (2009). The knowledge econ- omy: Emerging organizational forms, missing microfounda- tions, and key considerations for managing human capital. Human Resource Management, 48, 555-570.

Finkelstein, S., Hambrick, D. C., & Cannella, A. A. (2009). Stra- tegic leadership: Theory and research on executives, top management teams, and boards. New York, NY: Oxford Uni- versity Press.

Finkelstein, S., & Peteraf, M. A. (2007). Managerial activities: A missing link in managerial discretion theory. Strategic Orga- nization, 5, 237-248.

Foss, N. J., Klein, P. G., Kor, Y. Y., & Mahoney, J. T. (2008). Entrepreneurship, subjectivism, and the resource-based view: Toward a new synthesis. Strategic Entrepreneurship Journal, 2, 73-94.

Game. (n.d.) In Merriam-Webster’s online dictionary. Retrieved from http://www.merriam-webster.com/dictionary/game

Gavetti, G., Levinthal, D. A., & Rivkin, J. W. (2005). Strategy making in novel and complex worlds: The power of analogy. Strategic Management Journal, 26, 691-712.

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

406 Journal of Leadership & Organizational Studies 20(4)

Gray, D., Brown, S., & Macanufo, J. (2010). Game storming. Sebastopol, CA: O’Reilly Media.

Hamel, G., & Prahalad, C. K. (1994). Competing for the future. Boston, MA: Harvard Business School Press.

Ireland, R. D., & Hitt, M. A. (1999). Achieving and maintaining strategic competitiveness in the 21st century: The role of stra- tegic leadership. Academy of Management Executive, 13(1), 43-57.

Jacobides, M. G., Knudsen, T., & Augier, M. (2006). Benefit- ing from innovation: Value creation, value appropriation and the role of industry architectures. Research Policy, 35, 1200-1221.

Klein, P. G. (2008). Opportunity discovery, entrepreneurial action, and economic organization. Strategic Entrepreneurship Jour- nal, 2, 175-190.

Lafley, A. G., & Charan, R. (2008). The game-changer: How you can drive revenue and profit growth with innovation. New York, NY: Crown Business.

Lévi-Strauss, C. (1962). The savage mind. Chicago, IL: University of Chicago Press.

Lewin, A. Y., & Volberda, H. W. (1999). Prolegomena on coevolu- tion: A framework for research on strategy and new organiza- tional forms. Organization Science, 10, 519-534.

Lumpkin, G. T., & Dess, G. G. (2001). Linking two dimension of entrepreneurial orientation to firm performance: The moderating role of environment, firm age, and industry life cycle. Journal of Business Venturing, 16, 429-451.

March, J. G. (1991). Exploration and exploitation in organiza- tional learning. Organization Science, 2, 71-87.

March, J. G. (2010). The ambiguities of experience. Ithaca, NY: Cornell University Press.

March, J. G., & Simon, H. (1958). Organizations (2nd ed.). Cam- bridge, MA: Blackwell.

Markides, C. C. (2008). Game-changing strategies. San Fran- cisco, CA: Jossey-Bass.

Miller, K. D. (2007). Risk and rationality in entrepreneurial pro- cesses. Strategic Entrepreneurship Journal, 1, 57-74.

Moore, J. F. (1993). Predators and prey: A new ecology of compe- tition. Harvard Business Review, 71(3), 75-86.

O’Connor, G. C., & Rice, M. P. (2001). Opportunity recognition and breakthrough innovation in large established firms. Cali- fornia Management Review, 43(2), 95-116.

O’Reilly, C. A., & Tushman, M. L. (2008). Ambidexterity as a dynamic capability: Resolving the innovator’s dilemma. Research in Organizational Behavior, 28, 185-206.

Osterwalder, A., & Pigneur, Y. (2009). Business model generation. Hoboken, NJ: Wiley.

Phan, P. H., Wright, M., Ucbasaran, D., & Tan, W. L. (2009). Cor- porate entrepreneurship: Current research and future direc- tions. Journal of Business Venturing, 24, 197-205.

Podolny, J., Khurana, R., & Besharov, M. (2010). Revisiting the meaning of leadership. In N. Nohria & R. Khurana (Eds.), Handbook of leadership theory and practice (pp. 65-106). Boston, MA: Harvard Business School Press.

Powell, W. W., & Sandholtz, K. (2012). Amphibious entrepreneurs and the emergence of organizational forms. Strategic Entre- preneurship Journal, 6, 94-115.

Prahalad, C. K., & Krishnan, M. S. (2008). The new age of innova- tion. New York, NY: McGraw-Hill.

Shah, S. K., & Tripsas, M. (2007). The accidental entrepreneur: The emergent and collective process of user entrepreneurship. Strategic Entrepreneurship Journal, 1, 123-140.

Stevenson, H. H., & Jarillo, J. C. (1990). A paradigm of entre- preneurship: Entrepreneurial management. Strategic Manage- ment Journal, 11, 17-27.

Tang, J., Kacmar, K. M., & Busenitz, L. (2012). Entrepreneurial alertness in the pursuit of new opportunities. Journal of Busi- ness Venturing, 27, 77-94.

Taylor, W. C., & LaBarre, P. (2006, January 29). How Pixar adds a new school of thought to Disney. The New York Times. Retrieved from http://www.nytimes.com/2006/01/29/busi- ness/yourmoney/29pixar.html

Teece, D. J. (2007). Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise perfor- mance. Strategic Management Journal, 28, 1319-1350.

Teece, D. J. (2009). Dynamic capabilities and strategic manage- ment. Oxford, England: Oxford University Press.

Tripsas, M. (1997). Surviving radical technological change through dynamic capability: Evidence from the typesetter industry. Industrial and Corporate Change, 6, 341-377.

Tripsas, M., & Gavetti, G. (2000). Capabilities, cognition, and inertia: Evidence from digital imaging. Strategic Management Journal, 21, 1147-1161.

Volberda, H. W., & Lewin, A. Y. (2003). Guest editors’ introduc- tion: Co-evolutionary dynamics within and between firms: From evolution to co-evolution. Journal of Management Stud- ies, 40, 2111-2136.

Zahra, S. A. (2008). The virtuous cycle of discovery and creation of entrepreneurial opportunities. Strategic Entrepreneurship Journal, 2, 243-257.

Zahra, S. A., & George, G. (2002). Absorptive capacity: A review, reconceptualization, and extension. Academy of Management Review, 27, 185-203.

Zahra, S. A., Sapienza, H. J., & Davidsson, P. (2006). Entre- preneurship and dynamic capabilities: A review, model and research agenda. Journal of Management Studies, 43, 917-955.

Zajac, E. J., & Bazerman, M. H. (1991). Blind spots in industry and competitor analysis: Implications of interfirm (mis)perceptions for strategic decisions. Academy of Manage- ment Review, 16, 37-56.

Zollo, M., & Winter, S. G. (2002). Deliberate learning and the evolu- tion of dynamic capabilities. Organization Science, 13, 339-351.

Author Biographies Shaker A. Zahra is the Department Chair, Robert E. Buuck Chair of Entrepreneurship and Professor of Strategy & Organization in the Carlson School of Management at the

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

Zahra et al. 407

University of Minnesota, where he is also the Academic Director of the Gary S. Holmes Entrepreneurship Center. He has served as the Chair of Entrepreneurship Division of the Academy of Management.

Sondos G. Abdelgawad is a PhD candidate at ESADE Business School, Spain. She has been a visiting PhD student at the Strategic Management department at the Carlson School of Management at the University of Minnesota.

Silviya Svejenova is Associate Professor at the Department of Organization, Copenhagen Business School, Denmark, and

Professor of Strategy & Entrepreneurship at ESADE Business School, Spain. She is Vice Chair of EGOS, the European Group for Organizational Studies.

Harry J. Sapienza is the Curtis L. Carlson Chair in Entrepreneurial Studies at the Carlson School of Management, University of Minnesota. He is currently the Doctoral Program Coordinator for the Strategic Management and Entrepreneurship Department of the Carlson School and is the Program Chair for Entrepreneurship Division of the Academy of Management.

at WALDEN UNIVERSITY on March 6, 2015jlo.sagepub.comDownloaded from

EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

RESEARCH STARTERS ACADEMIC TOPIC OVERVIEWS

Corporate Strategy Management > Corporate Strategy

Abstract

This paper explores the topic of corporate strategy and how it fits within the strategic management process. Specifically, we'll examine the various types of corporate strategy, providing a framework to recognize when a given strategy is most appropri- ate. Also, we'll provide real-life examples of corporate strategy in action, along with an overview of corporate portfolio tools used in corporate strategy formulation.

Overview

Strategy is defined as "the art of devising or employing plans or stratagems toward a goal" (Merriam-Webster online, 2007).

Within a broad business context, strategy is an integrated set of plans for achieving long-term organizational goals. Multi- unit corporations have three levels of organizational strategy: corporate strategy, business strategy, and functional strategy. "Corporate strategy concerns two different questions: what busi- nesses should the company be in and how the corporate office should manage the array of business units" (Porter, 1987). In a broad sense, corporate strategy establishes the overall direc- tion of the firm. Also, corporate strategy is a smaller part of a larger and distinct process known as the strategic management process, consisting of several interrelated stages, of which cor- porate strategy development falls within the strategy formulation stage. (There are four fundamental stages of strategic manage- ment: environmental scanning, strategy formulation, strategy implementation, evaluation and control.) Strategy formulation exists on a three-level hierarchy (see Figure 1 below). Typically, the strategy formulation process is an interactive top-down pro- cess beginning with corporate-level strategy developed by top management, followed by the business and functional levels of strategy. Yet, depending on the organization, managers at the functional and business levels provide varying degrees of input throughout the entire strategy formulation process.

Fig.1

Business Strategy — Once corporate strategies are developed, the focus is upon formulating business-level strategies. Business strategy is sometimes referred to as competitive strategy(Porter, 1980), i.e., strategy that gives the firm a competitive advantage. Business strategy development occurs within a multi-unit firm's divisions and subsidiaries, sometimes referred to as strategic business units or SBUs. A firm's internal strengths are sources of competitive advantage and are collectively defined as a firm's core competency. Porter (1985) outlines a set of generic business

Company-wide Strategy

Competitive Strategy

Abstract

Overview

Applications

Growth Strategy

Concentration Strategies

Diversification Strategies

Defensive Strategy

Factors Influencing Corporate Strategy Choice

Corporate Portfolio Approaches

Conclusion

Terms & Concepts

Bibliography

Suggested Reading

Table of Contents

Page 2EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

Corporate Strategy

strategies, such as a cost leadership strategy, emphasizing low- cost production or distribution of products. Also, differentiation strategy may be used, which distinguishes company products and services on the basis of superior service, quality, unique features, etc. Either strategy may opt to target abroad market or focus on a narrow market segment.

Functional strategy flows out of an organization's functional departmental areas, developed in furtherance of the aforemen- tioned corporate and business-level strategies. Functional area strategies include:

• Operations Strategy — Designing production processes that meet customer product/service requirements.

• Financial Strategy — Preparing budgets and securing needed financial resources.

• Marketing Strategy — Identifying customers, customer requirements, pricing strategies, promotional methods, and distribution channels.

• Human Resource Strategy — Recruiting, selecting, train- ing, compensating, and organizing employees.

• Research & Design Strategy — Creating new products or updating existing products and services.

Applications

Corporate strategy responds to a number of questions related to how a firm intends to compete on a broad scale. How will the cor- poration grow? What businesses will the firm compete with? Is growth strategy an appropriate option to choose from? If so, does the firm possess the financial capability to grow? Is the firm's target market attractive enough to allow for growth in their cur- rent industry? Must the firm look outside of its current industry for growth opportunities, and if so, which industries? These are but a few of the questions corporate strategy addresses. Depend- ing on the answers to these questions, corporate-level strategy is addressed through growth strategy or a defensive strategy align- ment.

Note that growth strategies may be pursued by internal or external means. For example, when choosing internal growth mechanisms, a firm develops and markets new products, improves upon existing products, or sells existing products to new markets. Alternatively, when a firm implements external growth strategies, the firm acquires growth assets outside of the organization.

Growth Strategy Growth strategy is that strategy employed to grow a firm's profits and lies within two broad categories: diversification and concen- tration (Wheelen and Hunger, 2006). Diversification strategy adds products/ services somewhat related or unrelated to the firm's core business. Concentration strategies are those growth

strategies whereby a firm maintains a competitive focus within their particular industry. The two types of concentration strate- gies are vertical integration and horizontal integration.

Concentration Strategies With vertical integration strategy, a firm takes over the supply function and/or distribution function that was previously han- dled by outsiders. There are several types of vertical integration strategies: forward vertical integration, backward vertical inte- gration, and full integration.

Forward vertical integration strategy involves a manufacturer assuming the distribution function for their product. A failed attempt at forward vertical integration is personal computer maker Gateway's attempt to distribute PCs through company- owned retail stores. This strategy was a failure due to the high overhead costs associated with their bricks-and-mortar retail stores. Gateway switched to marketing PCs exclusively through their website and over the phone.

More successful examples of companies taking over the distri- bution function are found in the factory outlet shopping mall phenomenon. In effect, various manufacturers sell their products directly to consumers through company-owned stores — com- panies such as Nike, Tommy Hilfiger, Sketchers, Pepperidge Farms, Samsonite, etc. However, unlike Gateway, these compa- nies do not rely on forward vertical integration entirely, as they also rely upon third-party retailers for the bulk of their sales. More on the degrees of vertical integration shall be discussed later in the topic.

Backward vertical integration is when a firm assumes the supply function for their respective value chain. With increas- ing global competition and the rising costs of commodities, (e.g. copper, rubber, aluminum, iron, and oil etc.), a trend shows an increased amount of backward vertical integration activity. In order to ensure reliable supply and to control costs, manufac- turers have been acquiring suppliers of critical inputs to their production processes. Examples include: Japan tire manufac- turer Bridgestone's purchase of an Indonesian rubber plantation, and Toyota acquiring a controlling interest in its main supplier of batteries for its hybrid vehicles (Gross, 2006).

On the other hand, Bob Evans Farms Inc. has always relied on a backward vertical integration strategy. Best known for offering pork sausage products to the retail grocery market, Bob Evans controls the supply function of their business by raising and slaughtering hogs on company-owned farms, then preparing and packaging their park sausage products for sale.

Full integration occurs when a firm takes over the entire value chain of supplying the inputs of production (i.e., raw materials or component parts), manufacturing the product, and distribution of the product to the ultimate consumer. Examples of complete vertical integration are oil and gas companies such as ExxonMo- bil, BP, and Royal Dutch Shell PLC, etc. These fully integrated

Page 3EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

Corporate Strategy

companies engage in oil exploration, extract crude oil with their own drilling operations, refine oil into gasoline at company- owned refineries, and then distribute gasoline products through company-owned gas stations.

Note that vertical integration exists in varying degrees along the value chain. The ranges of vertical integration are: non-inte- gration, quasi-integration, taper integration, and full integration (Harrigan, 1984).

• Full Integration (discussed above) is when a manufacturer retains in-house responsibility for its supplies and is the sole distributor of its products.

• Taper Integration occurs when a firm is forward or back- ward vertically integrated, yet relies on outside firms for supplying only a portion of production inputs or a portion of distribution needs.

• Quasi-Integration is an arrangement whereby a company does not make any supplies or distribute any of its prod- ucts, but owns a partial interest in a supplier or distributor to guarantee access to supplies and distribution channels. For example, in a forward quasi-integration arrangement, PepsiCo could purchase a partial equity interest in Kroger supermarket chain in order to ensure access to Kroger's distribution network. Or in a backward quasi-integration arrangement, GM could conceivably acquire a minor- ity equity interest in a supplier of automotive electrical components.

• Non-integration involves the use of contractual arrange- ments, i.e., long-term agreements between the firm and its suppliers and/or distributors to provide services over a specified time period. With this type of arrangement, no ownership transfer or exchange of assets occurs. The automotive industry commonly makes use of such non- integration arrangements.

• Horizontal Integration is when a firm acquires a competi- tor in the same industry. Also, horizontal integration tends to be the most preferred growth strategy for many indus- tries. Mergers and acquisitions are the typical method by which horizontal integration is achieved (David, 1996). For example, the personal computer industry has under- gone a number of horizontally integrated transactions with Gateway Computer's acquisition of low-cost rival e- Machines, and HP's merger with rival pc-maker Compaq. Likewise, in the telecommunications sector, SBC Com- munications merged with AT&T. Automotive industry examples of horizontal integration are Ford Motor's ac- quisition of Volvo, Jaguar, Aston Martin, and Land Rover, as a way of quickly moving into a high-end automotive segment. Other examples include GM's acquisition of Swedish car-maker Saab, and Germany's Daimler-Benz acquisition of US-based Chrysler Corp.

Diversification Strategies Diversification strategies are of two varieties: concentric diversi- fication and conglomerate diversification.

Concentric diversification is an assortment of related products in the firm's portfolio. As one of the world's largest food and beverage companies, PepsiCo Inc. represents an example of con- centric diversification (http://pepsico.com/PEP%5fCompany/ BrandsCompanies/index.cfm). The company's related business units include:

• Frito-Lay snacks • Pepsi-Cola beverages • Gatorade sports drinks • Tropicana juices • Quaker Foods

On the other hand, conglomerate diversification is a collection of unrelated lines of business in the corporate portfolio. For example, when many people think of General Electric (GE), they automatically think of light bulbs or appliances; yet the GE of today is a truly diversified conglomerate, made up of six busi- ness units:

• GE Infrastructure consists of aircraft engines, energy, oil and gas, rail and water process technologies, and more.

• GE Commercial Finance provides loans, operating leases, financing programs, commercial Insurance, and reinsurance products.

• GE Health offers medical imaging and information technologies, medical diagnostics, patient monitoring systems, performance improvement, drug discovery, and biopharmaceutical manufacturing technologies.

• GE Industrial includes appliances, lighting and inducts, factory automation systems, etc.

• GE Money offers financial products such as credit cards, personal loans, mortgage, and motor solutions.

• NBC Universal is a media and entertainment business consisting of news production, movies, theme parks etc. (http://www.ge.com/en/company/businesses/ge_nbc_uni- versal.htm)

Defensive Strategy

Defensive strategies are those strategies used when experiencing financial trouble, indicated by declining sales and profits. The need for retrenchment strategy may be due to an industry-wide problem (e.g., an unattractive industry such as a typewriter com- pany) or a firm-specific problem (e.g., poor management, lack of

Page 4EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

Corporate Strategy

financial resources, etc.). With this in mind, there are four types of defensive strategies that firms employ: retrenchment, divesti- ture, joint venture, and liquidation (David, 1996).

Retrenchment strategy (also known as turnaround strategy) involves the imposition of cost reductions, with an emphasis on improving the operational efficiency of the firm. An example of a successful turnaround effort is Nissan Motors Ltd.

In 1999, after seven straight years of record unprofitability, Nissan named as its new CEO, Carlos Ghosn, an executive vice presi- dent from Renault. As part of his retrenchment strategy, Ghosn closed manufacturing plants in Japan, reduced employee head- count by 21,000, cut in half the number of suppliers to around 600, and reduced parts costs by 20 percent. Under Ghosn's lead- ership, Nissan went from a $5.5 billion loss in fiscal 2000 to a $2.7 billion profit in 2001—far exceeding expectations (http:// www.gsb.stanford.edu/news/headlines/vftt%5fghosn.shtml).

Divestiture involves the spin-off of a firm's business units that are unprofitable or do not represent a good strategic fit with the firm's core business. IBM's former desktop personal computer business is a prime example. In 2004, IBM sold its personal computer business to Chinese computer maker Lenovo Group for $1.75 billion. IBM's rationale for the deal was a continua- tion of IBM's strategy shift from selling low-margin hardware products to selling higher-margin consulting services, software, and high-end computers. Likewise, IBM viewed the deal as an inroad to the vast, fast growing Chinese market for servers and technical services (Spooner and Kanellos, 2004).

Joint ventures are temporary partnerships between two firms, typically utilized when both firms wish to capitalize on a mutu- ally beneficial opportunity. Technically speaking, the IBM/ Lenovo deal is a divesture transaction, yet it also contains ele- ments of a joint venture between the two companies, with IBM maintaining an 18% equity investment in Lenovo. For example, Lenovo has been the preferred supplier of PCs to IBM and was allowed to use the IBM brand for five years. Also, IBM has pro- vided marketing support to Lenovo via the IBM corporate sales force. From a benefits perspective, the deal rid IBM of its per- sonal computer business, while gaining an entry point into China for other IBM products and services. On the other hand, Lenovo gained access to IBM's extensive corporate customer base, the IBM name, and IBM's marketing expertise (Spooner and Kanel- los, 2004).

Liquidation — Liquidation involves selling off a company's assets for their tangible net worth and signals the end of the firm's existence. This strategy is employed when a firm is losing signif- icant amounts of money with no prospect of recovery; all other retrenchment strategies have been tried, yet were either inappro- priate, or ended in failure. Generally, liquidation occurs as part of a court-ordered bankruptcy sale under Chapter 7 bankruptcy. However, a firm may undertake a voluntary path to liquidation outside of bankruptcy, yet this route is less common. Examples

of firms forced to liquidate are passenger airline carriers Trans World Airlines (TWA) and Pan American Airways. Note that Chapter 7 liquidation is not to be confused with a Chapter 11 bankruptcy in which a firm is allowed to reorganize its financial affairs in the hopes of remaining an ongoing firm. (For more information on the types of corporate bankruptcies, visit the U.S. Security and Exchange Commission website at: http://www.sec. gov/investor/pubs/bankrupt.htm.)

Factors Influencing Corporate Strategy Choice There are a number of factors influencing the choice of corporate strategy (David, 1996):

Forward Integration

• Used when a firm's present distributors are too expensive, or incapable of meeting distribution needs;

• The availability of quality distributors is limited in number; • Competing in an industry experiencing high market

growth; or

• Used if the organization has the capital and capability to manage the distribution function.

Backward Integration

• Present suppliers are too expensive, unreliable or inca- pable of meeting the firm's needs;

• Number of suppliers is limited, with many existing com- petitors;

• Industry is experiencing rapid growth; • Resources are needed quickly; or • Used if the organization has the capital and capability to

manage the business of supplying its own parts.

Horizontal Integration

• The industry is a growth industry; • Increased economies of scale provide competitive advan-

tage;

• Used if the organization has the capital and capability to manage an expanded business; or

• Competitors are failing due to a lack of managerial exper- tise — expertise your firm possesses.

Concentric Diversification

• Poor growth prospects exist in the current industry; • New related products or services would enhance the sale

of existing products;

• Related products can be offered for sale at competitive prices;

Page 5EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

Corporate Strategy

• New products offer a seasonal counterbalance against the seasonality of existing products; or

• Current products are in a decline stage of their life cycle.

Conglomerate Diversification

• Industry is declining in sales and profits; • Does the organization have the capital and capability to

manage a diversified business line?;

• Existing markets are saturated; • An attractive investment exists in an unrelated business; or • Antitrust concerns prevent pursuing companies in the

same industry.

Also, Porter (1987) identifies three tests for making diversifica- tion choices that are most likely to create shareholder value.

1. Attractiveness test — Is the industry attractive or capable of being made attractive?

2. Cost-of-entry test — Is the cost of entry reasonable enough so as not to jeopardize future profits?

3. Better-off test — Does the parent corporation offer competitive advantage to the new unit or will the new unit bring a competitive advantage? In other words, are meaningful synergies likely to result between the new unit and the corporation?

Joint Venture

• The distinctive competencies of the two firms comple- ment one another;

• A reduction in risks results from an alliance; • Appropriate for smaller firms having trouble competing

against larger firms; or

• There is a need to get a new technology to market quickly.

Retrenchment

• The firm has a weak competitive position; • The firm is plagued by inefficiency, low profits, or stock

holder pressure to improve performance;

• The organization has grown so large that an internal reor- ganization needs to take place; or

• A distinctive competency exists, yet the firm has failed to capitalize on it.

Divestiture

• The retrenchment strategy was a failure; • A product line or division needs more resources in order

to compete and survive;

• A division is performing poorly; • A division is a poor strategic fit with the firm's overall

corporate vision; or

• An infusion of cash is needed but can't be obtained else- where.

Liquidation

• Pursued when divestiture and retrenchment have failed; • When bankruptcy is the only alternative—liquidation al-

lows for the orderly sale of assets; or

• Liquidation allows the firm's stockholders to minimize their losses.

Corporate Portfolio Approaches As noted previously, "Corporate strategy concerns two different questions: what businesses should the company be in and how the corporate office should manage the array of business units" (Porter, 1987). As for managing the array of business units, there are several corporate portfolio approaches. One of the first portfolio approaches developed is the BCG (Boston Consulting Group) matrix. The BCG matrix is a two-dimensional analysis of a business unit's strength, determined by relative market growth rate and relative market share. Market growth rate is the annual growth rate in which the firm competes, with market share being the firm's market shares relative to all other direct competitors.

1. Cash cows are profitable business units with a low market share and high growth rate. They should be milked for cash, with the cash flow being deployed elsewhere.

2. Dogs possess a low market share and low growth rate and should be liquidated or divested.

3. Question marks are typically found within new product areas and have a low market share with a high growth rate. Given their high growth rates, question marks should be infused with cash to develop them into stars.

4. Successful question marks become stars; stars have a high growth rate and high market shares, hence a growth strategy of integration would be employed here (Thomp- son and Martin, 2005).

The BCG matrix's simplicity — a recognized strength — is also one of its weaknesses. The market growth rate dimension (one indication of industry attractiveness) and relative market share (one determinant of competitive advantage) overlook other important determinants of profitability. In response to this limitation, consulting firm McKinsey and Co. derived a more comprehensive model from the BCG Matrix, i.e., the GE Business Screen Matrix. The GE matrix, developed for GE by Mckinsey, considers a three-dimensional analysis of high, medium, and low industry attractiveness and competitive position. Industry attractiveness is substituted for BCG's market growth rate, and is comprised of external factors such as entry barriers, market

Page 6EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

Corporate Strategy

growth, industry profitability, market size, pricing trends, etc. Competitive position replaces BCG's market share measure, and includes internal strengths and weakness factors including market share, relative brand strength, management strength, profitability, size, etc.(Thompson and Martin, 2005).

Conclusion

Corporate strategy does not exist in a vacuum — it is a smaller, yet integral part of a larger and distinct process known as the strategic management process, interrelating with the formulation of a firm's business strategy, as well as its functional strategy. Is there one best corporate strategy? The answer is an unequivo- cal no — there is no single best corporate strategy. Likewise, the process of developing corporate strategy has become a more daunting task in light of the global competitive forces firms must confront. Corporate strategy is dependent on numerous factors as outlined with respect to industry attractiveness and the relative competitive strengths of the respective company. Once again, the fact that corporations operate in a global environment greatly complicates the formulation and coordination of corporate strat- egy. Hence, the formulation of corporate strategy is a dynamic, interactive, iterative process, sometimes requiring midstream adjustments as a result of unexpected changes in the firm's com- petitive environment. Therefore, the wrong corporate strategy choices, in addition to improper implementation, can mean the difference between success and failure.

Terms & Concepts

BCG Matrix: A portfolio analysis tool to assess business unit strength, determined by relative market growth rate and relative market share.

Business Strategy: Also known as competitive strategy, it is that strategy developed by the firm's strategic business units that gives the firm its competitive advantage.

Concentration Strategies: Growth strategies whereby a firm maintains a competitive focus within their particular industry.

Concentric Diversification: The development or acquisition of business-lines related to the firm's existing corporate portfolio.

Conglomerate Diversification: The addition of unrelated lines of business to the corporate portfolio.

Corporate Strategy: The game-plan developed by top man- agement for how a corporation intends to compete within its respective industry.

Core Competency: The collection of a firm's internal strengths that are sources of competitive advantage.

Defensive Strategies: Those strategies a firm employs when experiencing financial trouble.

Diversification Strategy: Adding related or unrelated products/ services to the firm's core business.

Divestiture: Spin-offs of a firm's business assets because of unprofitability or because it does not represent a good strategic fit with the firm's core business.

Functional Strategy: Strategy flowing from organizations' functional areas, developed in furtherance of the corporate and business-level strategies.

Forward Vertical Integration Strategy: A manufacturer taking over the distribution function for their particular product.

Backward Vertical Integration: A manufacturer assuming the supply function for their respective value chain.

Full Vertical Integration: A firm taking over the entire value chain of supplying the inputs of production (i.e., raw materials or component parts), manufacturing the product, and distribution of the product.

GE Business Screen Matrix: A more comprehensive derivation of the BCG Matrix, which considers portfolio analysis on low, medium, and high dimensions, based on industry attractiveness and competitive position.

Horizontal Integration: When a firm acquires competitors in the same industry.

Joint Ventures: Temporary partnerships between two firms, used when both firms wish to capitalize on a mutually beneficial opportunity.

Liquidation: Selling off a company's assets for their tangible net worth; signals the end of the firm's existence.

Non-Integration: The use of contractual arrangements, i.e., long-term agreements between the firm and its suppliers and/or distributors to provide services over a specified time period.

Quasi-Integration: An arrangement whereby a company does not make any supplies or distribute any of its products, but owns a partial interest in a supplier or distributor to guarantee access to supplies or distribution channels.

Retrenchment Strategy: The imposition of cost reductions, with an emphasis on improving the operational efficiency of the firm.

Strategic Business Units: Divisions and subsidiaries within a multi-business firm.

Page 7EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

Corporate Strategy

Strategy: "The art of devising or employing plans or stratagems toward a goal" (Merriam-Webster, 2007).

Taper Integration: A firm relies on outside firms for: 1) sup- plying only a portion of production inputs or 2) distributing a portion of its products.

Bibliography

Bharadwaj, A., El Sawy, O. A., Pavlou, P. A., & Venkatraman, N. N. (2013). Digital business strategy: toward a next generation of insights. MIS Quarterly, 37(2), 471–482. Retrieved November 20, 2013 from EBSCO Online Database Business Source Complete. http://search.ebsco- host.com/login.aspx?direct=true&db=bth&AN=87371552 &site=ehost-live

Caescu, S., & Ploesteanu, M. (2011). Corporate strategies of integrated marketing. Romanian Journal of Marketing, 6 (3), 22–29. Retrieved November 20, 2013 from EBSCO Online Database Business Source Complete. http://search. ebscohost.com/login.aspx?direct=true&db=bth&AN=699 20156&site=ehost-live

David, F. R. (1996). Strategic management (6th ed.). Upper Saddle River, NJ: Prentice Hall.

Gobble, M. M., Petrick, I., & Wright, H. (2012). Innovation and strategy. Research Technology Management, 55 (3), 63–67. Retrieved November 20, 2013 from EBSCO Online Database Business Source Complete. http://search. ebscohost.com/login.aspx?direct=true&db=bth&AN=7470 0144&site=ehost-live

Gross, D. (2006, August 17). Dis-integration? Retrieved April 30, 2007, from http://www.slate.com/id/2147952

Harrigan, K. (1984). Formulating vertical integration strat- egies. Academy of Management Review, 9(4), 638. Retrieved May 02, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/ login.aspx?direct=true&db=bth&AN=4277387&site=eh ost-live

Porter, M.E. (1980). Competitive strategy. New York: Free Press.

Porter, M.E. (1985). Competitive advantage: Creating and sus- taining superior performance. New York: Free Press.

Porter, M.E. (1987). From competitive advantage to corporate strategy. Harvard Business Review,65(3), 43–59. Retrieved

May 01, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx? direct=true&db=bth&AN=4126877&site=ehost-live

Spooner J.G. & Kanellos M. (2004, Dec. 8). IBM sells PC group to Lenovo. Retrieved March 30, 2007, from http:// news.com.com/IBM??????????1042%5f3-5482284.html

Stanford Graduate School of Business (2002, Nov. 11). Nissan motor CEO Carlos Ghosn is turnaround hero. Retrieved March 30 2007, from http://www.gsb.stanford.edu/news/ headlines/vftt%5fghosn.shtml

Thompson, J. L. & Martin, F. (2005). Strategic Management — Awareness and Change. (5th ed.) London: Thomson Learning.

Suggested Reading

Ansoff, H.I. (1957). Strategies for diversification. Harvard Business Review, 35(5), 113–124. Retrieved May 07, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=t rue&db=bth&AN=6769323&site=ehost-live

Campbell, A., Goold, M., & Alexander, M. (1995). Corporate strategy: The quest for parenting advantage. Harvard Business Review, 73(2), 120–132. Retrieved May 01, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=t rue&db=bth&AN=9503282004&site=ehost-live

Farid, M., & Flynn, D. (1992). The strategic choice of Chapter 11: An examination of the critical factors. Review of Business, 13(4), 32. Retrieved May 02, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bt h&AN=9607035565&site=ehost-live

Harrigan, K., & Porter, M. (1983). End-game strategies for declining industries. Harvard Business Review, 61(4), 111. Retrieved May 02, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/ login.aspx?direct=true&db=bth&AN=3868184&site=eh ost-live

Henderson, V., & Hobson, D. (2011). Optimal liquidation of derivative portfolios. Mathematical Finance, 21 (3), 365–382. Retrieved November 20, 2013 from EBSCO Online Database Business Source Complete. http://search. ebscohost.com/login.aspx?direct=true&db=bth&AN=605 73352&site=ehost-live

Page 8EBSCO Research Starters® • Copyright © 2014 EBSCO Information Services, Inc. • All Rights Reserved

Corporate Strategy

Essay by Edwin D. Davison, M.B.A., J.D.

Mr. Davison is a licensed attorney from Dayton, OH and holds advanced degrees in law and business administration. Specifically, he holds a Master of Business Administration and a Doctor of Law degree from the University of Wisconsin–Madison. Also, he has completed professional management training at the University of Michigan Ross School of Business, UCLA Anderson School of Man- agement, and the University of South Carolina Moore School of Business. He has a wide breadth of over twenty years work experience as a management consultant, business professor (most recently UCLA Online Extension), entrepreneur, and U.S. Navy JAG attorney. As well, he has presented and published research on multinational human resource practices. He has also been employed with the Edu- cational Testing Service of Princeton, NJ.

Copyright of Corporate Strategy -- Research Starters Business is the property of Great Neck Publishing and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

Copyright of Corporate Strategy -- Research Starters Business is the property of Great Neck Publishing and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

Copyright of Corporate Strategy -- Research Starters Business is the property of Great Neck Publishing and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

Copyright of Corporate Strategy -- Research Starters Business is the property of Great Neck Publishing and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.