Michael K. Bednar
Corporate governance scholars have long been interested in understanding the mechanisms through which firms and their leaders are held accountable for their actions. Recently, there has been increased interest in viewing the media as a type of corporate governance mechanism. Because the media makes evaluations of firms and leaders, and can broadcast information to a wide audience, it has the potential to influence the reputation of firms and firm leaders in both positive and negative ways and thereby play a role in corporate governance.
The media can play a governance role and even influence firm outcomes by simply reporting about firm actions, giving stakeholders a larger voice with which to exert influence, and through independent investigation. However, despite the potential for the media to play a significant governance role, several barriers limit its effectiveness in this capacity. For example, media outlets have their own set of interests that they must strive to fulfill, and journalists often succumb to several cognitive biases that could limit their ability to successfully hold leaders accountable.
While significant progress has been made in understanding the governance role of the media, future research is needed to better understand the specific conditions in which the media is effective in this role. Understanding how social media is changing the nature of journalism is just one example of the many exciting avenues for future research in this area.
Kathryn Rudie Harrigan
Concerns regarding strategic flexibility arose from companies’ need to survive excess capacity and flagging sales in the face of previously unforeseen competitive conditions. Strategic flexibility became an organizational mandate for coping with changing competitive conditions and managers learned to plan for inevitable restructurings. They learned to reposition assets and capabilities to suit their firms’ new strategic aspirations by overcoming barriers to change. Core rigidities flared up in the form of legacy costs, regulatory constraints, political animosity, and social resistance to adjusting firms’ strategic postures; managers learned that their firms’ past strategic choices could later become barriers to adapting corporate strategy.
Managerial insights concerning how to modify firms’ resources changed the way in which they were subsequently regarded. Enterprises saw assets lose their relative productivity and value as mastery of specific knowledge become less germane to success. Managers recognized that their firms’ capabilities were mismatched to market or value-chain relationships. They struggled to adapt by overcoming barriers to change.
Flexibility problems were inevitable. Even if competitive conditions were not impacted by exogenous change forces, sustaining advantage in a steady-state competitive arena became difficult; sustaining advantage in dynamic arenas became nearly impossible. Confronted with the difficulties of changing strategic postures, market orientations, and overall cost competitiveness, managers embraced the need to combat organizational rigidity in all aspects of their firms’ operations. Strategic flexibility affected enterprise assets, capabilities, and potential relationships with other parties within firms’ value-creating ecosystems; the need for strategic flexibility influenced investment choices made to escape organizational rigidity, capability traps and other forms of previously unrecognized resource inflexibility.
Where entry barriers once protected a firm’s strategic posture, flexibility issues arose when the need for endogenous changes occurred. The temporary protection afforded by imitation barriers slowed an organization’s responsiveness to changing its strategy imperatives—making the firm rigid when adaptiveness was needed instead. A firm’s own inertia to change sometimes created mobility barriers that had to be overcome when hypercompetitive conditions arose in their traditional market arenas and forced firms to change how they competed.
Where exogenous changes drove competitive conditions to become more volatile, attainment of strategic flexibility mandated the need to downsize the scope of a firm’s activities, shut down facilities, prune product lines, reduce headcount, and eliminate redundancies—as typically occurred during an organizational turnaround—while simultaneously increasing the scope of external activities performed by an enterprise’s value-adding network of suppliers, distributors, value-added resellers, complementors, and alliance partners, among others. Such structural value-chain changes typically exacerbated pressures on the firm’s internal organization to search more broadly for value-adding innovations to renew products and processes to keep up with the accelerated pace of industry change. Exploratory processes of self-renewal forced confrontations with mobility or exit barriers that were long tolerated by firms in order to avoid coping with the painful process of their ultimate elimination. The sometimes surprising efforts by firms to avoid inflexibility included changes in the nature of firms’ asset investments, value-chain relationships, and human-resource practices. Strategic flexibility concerns often trumped the traditional strengths accorded to resource-based strategies.
John Bryson and Lauren Hamilton Edwards
Strategic planning has become a fairly routine and common practice at all levels of government in the United States and elsewhere. It can be part of the broader practice of strategic management that links planning with implementation. Strategic planning can be applied to organizations, collaborations, functions (e.g., transportation or health), and to places ranging from local to national to transnational. Research results are somewhat mixed, but they generally show a positive relationship between strategic planning and improved organizational performance. Much has been learned about public-sector strategic planning over the past several decades but there is much that is not known.
There are a variety of approaches to strategic planning. Some are comprehensive process-oriented approaches (i.e., public-sector variants of the Harvard Policy Model, logical incrementalism, stakeholder management, and strategic management systems). Others are more narrowly focused process approaches that are in effect strategies (i.e., strategic negotiations, strategic issues management, and strategic planning as a framework for innovation). Finally, there are content-oriented approaches (i.e., portfolio analyses and competitive forces analysis).
The research on public-sector strategic planning has pursued a number of themes. The first concerns what strategic planning “is” theoretically and practically. The approaches mentioned above may be thought of as generic—their ostensive aspect—but they must be applied contingently and sensitively in practice—their performative aspect. Scholars vary in whether they conceptualize strategic planning in a generic or performative way. A second theme concerns attempts to understand whether and how strategic planning “works.” Not surprisingly, how strategic planning is conceptualized and operationalized affects the answers. A third theme focuses on outcomes of strategic planning. The outcomes studied typically have been performance-related, such as efficiency and effectiveness, but some studies focus on intermediate outcomes, such as participation and learning, and a small number focus on a broader range of public values, such as transparency or equity. A final theme looks at what contributes to strategic planning success. Factors related to success include effective leadership, organizational capacity and resources, and participation, among others.
A substantial research agenda remains. Public-sector strategic planning is not a single thing, but many things, and can be conceptualized in a variety of ways. Useful findings have come from each of these different conceptualizations through use of a variety of methodologies. This more open approach to research should continue. Given the increasing ubiquity of strategic planning across the globe, the additional insights this research approach can yield into exactly what works best, in which situations, and why, is likely to be helpful for advancing public purposes.
Mikko Ketokivi and Joseph T. Mahoney
Which components should a manufacturing firm make in-house, which should it co-produce, and which should it outsource? Who should sit on the firm’s board of directors? What is the right balance between debt and equity financing?
These questions may appear different on the surface, but they are all variations on the same theme: how should a complex contractual relationship be governed to avoid waste and to create transaction value? Transaction Cost Economics (TCE) is one of the most established theories to address this fundamental question.
Ronald H. Coase, in 1937, was the first to highlight the importance of understanding the costs of transacting, but TCE as a formal theory started in earnest in the late 1960s and early 1970s as an attempt to understand and to make empirical predictions about vertical integration (“the make-or-buy decision”). In its history spanning now over five decades, TCE has expanded to become one of the most influential management theories, addressing not only the scale and scope of the firm but also many aspects of its internal workings, most notably corporate governance and organization design. TCE is therefore not only a theory of the firm, but also a theory of management and of governance.
At its foundation, TCE is a theory of organizational efficiency: how should a complex transaction be structured and governed so as to minimize waste? The efficiency objective calls for identifying the comparatively better organizational arrangement, the alternative that best matches the key features of the transaction. For example, a complex, risky, and recurring transaction may be very expensive to manage through a buyer-supplier contract; internalizing the transaction through vertical integration offers an economically more efficient approach than market exchange.
TCE seeks to describe and to understand two kinds of heterogeneity. The first kind is the diversity of transactions: what are the relevant dimensions with respect to which transactions differ from one another? The second kind is the diversity of organizations: what are the relevant alternatives in which organizational responses to transaction governance differ from one another? The ultimate objective in TCE is to understand discriminating alignment: which organizational response offers the feasible least-cost solution to govern a given transaction? Understanding discriminating alignment is also the main source of prescription derived from TCE.
The key points to be made when examining the logic and applicability of TCE are:
(1) The first phenomenon TCE sought to address was vertical integration, sometimes dubbed “the canonical TCE case.” But TCE has broader applicability to the examination of complex transactions and contracts more generally.
(2) TCE could be described as a constructive stakeholder theory where the primary objective is to ensure efficient transactions and avoidance of waste. TCE shares many features with contemporary stakeholder management principles.
(3) TCE offers a useful contrast and counterpoint to other organization theories, such as competence- and power-based theories of the firm. These other theories, of course, symmetrically inform TCE.
This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Business and Management. Please check back later for the full article.
While no unified theory of vertical integration exists, transaction cost economics, agency theory, and more recently, property rights theory, have been influential in analyzing not only make-or-buy decisions, but also in understanding “hybrid forms” or interfirm alliances, such as technology licensing contracts, equity alliances, joint ventures, and the like.
Before Coase’s work became widely known, the theoretical underpinnings of vertical integration were provided by the neoclassical theory of the firm. Here, the firm was viewed as a production function that utilized the most technologically efficient way to convert input into output. In particular, neoclassical theory was concerned primarily with market power and the distortions that it created in markets for inputs or outputs as the main driver of vertical integration. Hence, the boundaries of the firm—that is, where to draw the line between transactions that occur within the firm and those that occur outside the firm—were irrelevant within this framework. It was Coase’s question: “Why is there any organization?” that first suggested that price mechanisms in the market and managerial coordination within firms were alternative governance mechanisms. That is, the choice between these alternative mechanisms was driven by a comparative analysis of the costs of implementing either mechanism.
Williamson built on Coase to provide the theoretical foundations for vertical integration by joining uncertainty and small numbers with opportunism in defining exchange hazards, and thus provide a comparative analysis of alternative governance forms. More recently, property rights theory brought attention to ownership of key assets as a way to distinguish between the governance of internal organizations compared to that of market transactions, where ownership confers to the holder of these residual control rights the authority to determine how these assets will be used. Last, agency theory provides important building blocks for understanding contractual choice and, by extension, boundaries of the firm, by placing the emphasis on the different incentives that vary with different contractual arrangements between a principal and its agents.
Transaction cost economics, property rights theory, and agency cost theory complement one another well in explaining vertical integration in terms of alternative governance forms in a world of asymmetric information, bounded rationality, and opportunism.