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Article

Restructuring and Divestitures  

Donald D. Bergh

Growth strategies have long been a priority for executive leadership. However, growth can also create problems. Leaders may need to use restructuring and divestiture actions to regain control, improve transparency, and re-establish efficiency. Given that leaders benefit from having insights into the antecedents, processes, outcomes, and decisions associated with unwinding growth most effectively, it is essential to consider the body of knowledge that exists in strategic management on restructuring and divestiture. This review seeks to describe what is currently known and not known about restructuring and divestiture and will give future researchers some suggested directions for further developing knowledge about these expensive and risky actions. The assessment is organized round five key questions that have shaped the field’s literature base: Why do firms divest? How do firms divest? Do divestitures create value? What happens to the divested units? And what are some promising directions for future knowledge development? Afterwards, three challenges for knowledge development are presented: What is value creation and for whom does it matter? What to do about incomplete information? And, is there a need for integrating different levels of strategy? Overall, it is important to identify, develop, and analyze the conceptual models of restructuring and divestiture with the purpose of guiding future research to provide knowledge that decision-makers will find useful as they engage in restructuring and divestitures.

Article

The Rise and Fall of “Shareholder Supremacy”: A Business History Perspective  

Steven Toms

With shareholder supremacy, the board is accountable to all shareholders, including minorities, enforced by restrictions on managerial opportunism. The market for corporate control and scrutiny of diversified institutional investors provide the mechanisms for disciplining managers to act in shareholders’ interests. Along with legal protections for minorities, these mechanisms ensure the supremacy of shareholders as a stakeholder group. Shareholder value maximization, as a theory and a set of financial techniques, provides quantitative outputs that drive managerial behavior. From a historical perspective, shareholder supremacy is a late twentieth-century phenomenon according to these definitional characteristics. History also reveals that shareholders have exercised dominance in other ways and that their power as a stakeholder group has waxed and waned over time as the governance role of investors has changed. Shareholder supremacy can be asserted in a number of ways. Shareholder activism and transparent structures of accountability are sufficient conditions in some circumstances. The suitability of this model is dependent on market structure and favored where there are local monopolies or businesses that have a narrow scope of activities. Alternatively, shareholders as active institutional investors can play a dominant role utilizing the market for corporate control. Collaboration with board insiders committed to expansion by takeover and merger is crucial to the success of this model. Finally, and most recently, the complementary presence of the market for corporate control, diversified institutional investors, and minority protection underpins present-day shareholder supremacy. In this model, the use of a common valuation technique is crucial. History reveals differing routes to shareholder supremacy, which have followed from developments in the institutional structure of regulation and changes in shareholding patterns.

Article

Risk in Strategic Management  

George M. Puia and Mark D. Potts

Although risk is an essential element of the business landscape and one of the more widely researched topics in business, there is noticeably less scholarship on strategic risk. Business risk literature tends to only delineate characteristics of risk that are operational rather than strategic in nature. The current operational risk paradigm focuses primarily on only two dimensions of risk: the probability of its occurrence and the severity of its outcomes. In contrast, literature in the natural and social sciences exhibits greater dimensionality in the risk lexicon, including temporal risk dimensions absent from academic business discussions. Additionally, descriptions of operational risk included minimal linkage to strategic outcomes that could constrain or enable resources, markets, or competition. When working with a multidimensional model of risk, one can adjust the process of environmental scanning and risk assessment in ways that were potentially more measurable. Given the temporal dimensions of risk, risk management cannot always function proactively. In risk environments with short risk horizons, rapid risk acceleration, or limited risk reaction time, firms must utilize dynamic capabilities. The literature proposes multiple approaches to managing risk that are often focused on single challenges or solutions. By combining a strategic management focus with a multidimensional model of strategic risk, one can match risk management protocols to specific strategic challenges. Lastly, one of more powerful dimensions of risky events is their ability to differentially affect competitors, changing the basis of competition. Risk need not solely be viewed as defending against potential losses; many risky occurrences may represent new strategic opportunities.

Article

The Role of the Media in Corporate Governance  

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.

Article

Social Capital and Founder, Team, and Firm Networks in Entrepreneurship  

Ha Hoang

Entrepreneurial activity is facilitated by the ties that connect founders and their venture to a broader network of actors. This insight on the value of social capital has been enriched by a large body of research that builds on core concepts of network content, governance, and structure. Network content refers to the resources, information and social support that is exchanged or flows between actors. Governance encompasses the mechanisms that organize and regulate the exchange. Network structure refers to broader patterns created from the relationships between actors. With these building blocks, key findings that have emerged over 30 years of research can be organized into two domains: how networks influence entrepreneurial outcomes and how networks develop over the entrepreneurial process. Core findings regarding the performance consequences of social capital underscore its benefits while identifying limitations due to decreasing returns to growing and maintaining a large network or to contingencies tied to the stage of the venture’s growth. Our understanding of the sources of network evolution and the resulting patterns have also developed significantly. As a motor of network change, scholars have emphasized the goal-oriented behavior of the entrepreneur, but recognize social relationships also engender mutual concern, obligation, and emotional attachment. From a focus on founder and founding team ties to start-up, small firm networks, the literature now spans multiple levels and accounts for contextual variation between industries and institutional environments. Advances within each of these domains of inquiry have led to rich insights and greater conceptual complexity. Future research opportunities will arise that leverage cross-fertilization of the process and performance research streams.

Article

Strategic Decision-Making in Business  

Bill Wooldridge and Birton Cowden

Scholarly interest in how managers make strategic decisions dates from the inception of the strategic management field and continues in the present. Although such decision-making was originally conceived as a completely rational, top-management process, contemporary thinking recognizes that strategies from across multiple organizational levels change within social and political contexts. Within this broad domain, multiple research streams address a wide variety of topics and issues. Prominent among these are, (1) the extent to which strategic decisions are formed through comprehensive analysis versus piecemeal decision-making, (2) how characteristics of top managers and the composition of top management teams affect strategic decision-making, (3) the role of politics, conflict, and consensus in strategy making, (4) how cognitive biases and heuristics influence the process, (5) when and how intuitive judgments can form the basis for effective decision-making, and (6) how managers at various organizational levels participate in the process. Research across these streams is both descriptive and normative, with a focus on contextual contingencies and relationships to firm performance. Taken as a whole this literature has significantly enhanced understanding of how strategies form within organizations. Contemporary work continues to provide new insights and demonstrates the continued value of this productive area of study.

Article

Strategic Empowerment in Human Resource Management  

M. Taner Albayrak and Alper Ertürk

Empowerment is considered one of the best managerial approaches to foster employees’ effectiveness, creativity, commitment, performance, and other positive work-related attitudes and behaviors while providing an essential tool for leadership development and succession planning. Empowerment involves delegation of authority, sharing of information and resources, and allowing employees to participate in decision-making processes. Empowerment practices result in positive outcomes through psychological empowerment, which comprises meaning, impact, self-determination, and competence. However, empowerment should be exercised with care, and before doing so, leaders should understand their employees’ competences, willingness, and characteristics, as well as the organizational culture and industrial dynamics. With the increasing use of information and communication technologies, inevitable influence of globalization, and continuously changing dynamics of interconnectedness among industries, the business environment has become more volatile, uncertain, complex, and ambiguous (VUCA). In order to survive in this environment, companies try to increase diversity in their workforce to make the best use of a broad variety of skills, experiences, and opinions, thus boosting creativity and innovativeness, which makes leadership more difficult than ever. With empowerment, the concept of delegation of power is important. Therefore, comparing the concept of personal empowerment with managerial empowerment helps in understanding that these concepts are different, although interconnected. Delegation of authority ensures that the manager transfers decision-making authority to subordinates under certain conditions. In delegation, authority is retained by the manager, who has the ultimate responsibility. On the other hand, in empowerment, authority is fully transferred to the person who is already doing the job, with all the rights and responsibilities to take the initiative as necessary. Empowerment is also closely related but different from the concept of motivation. In motivation, decision-making authority and control stays with the manager. Empowerment, on the other hand, gives employees the opportunity to participate in management, solve problems, and participate in decision-making processes. In this context, the concepts of delegation of authority, motivation, participation in management, and job enrichment are the domain dimensions of personal empowerment, and thus they are interrelated, yet different. It is important to create a common vision and to have common values in order to establish the empowerment process. Subordinates and supervisors need to trust each other, and empowerment needs to be seen as a philosophy, not a technique. It is necessary to create business conditions that enable the development of knowledge and skills in personnel empowerment. These conditions affect the perceptions and attitudes of the staff, such as, support, loyalty, identification, and trust. Empowering employees promotes organizational commitment, increases engagement, and reduces turnover intentions of key personnel. Because empowerment involves encouraging participation of subordinates in the decision-making process, it also helps to enhance the effectiveness of the decisions and reduce decision-making time. In the VUCA world, limited decision making could be a critical obstacle to establish and maintain sustainability in highly competitive business environments.

Article

Strategic Flexibility and Competitive Advantage  

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.

Article

Strategic Groups in Business  

Briance Mascarenhas and Megan Mascarenhas

A strategic group is defined as a set of firms within an industry pursuing a similar strategy. The strategic group concept emerged with much promise over 40 years ago. Research on strategic groups over time in a broad variety of settings has sought to clarify their theoretical and empirical properties. These research findings are gradually being translated into practical managerial guidance, so that the strategic group concept can be understood, operationalized, and used productively by managers. Two main approaches exist for identifying strategic groups—a ground-up approach, using disaggregated data, and a top-down, using cognition. Once identified, managerial insights can be derived from clarifying a strategic group’s profile. Firm membership in a group helps to uncover immediate and more distant types of competitors. Group profitability differences reveal the more rewarding and less attractive areas within an industry, as well as identify the lower-return groups from where firm exits are likely to occur. Group dynamics reflect competitive and cooperative behavior within and between groups. Several promising areas for future research on strategic groups to improve understanding and practice of strategy.

Article

Strategic Planning in the Public Sector  

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.

Article

Sustainability in Business: Integrated Management of Value Creation and Disvalue Mitigation  

Markus Beckmann and Stefan Schaltegger

Sustainable development is about meeting the needs of current and future generations while operating in the safe ecological space of planetary boundaries. Against this background, companies can contribute to sustainability in both positive and negative ways. In a world of scarce resources, the positive contribution of businesses is to create value for diverse stakeholders (i.e., goods in the actual sense of good services and things with value) without social shortfalls or ecological overshooting with regard to planetary boundaries. Yet, when value-creation processes cause negative social or ecological externalities, companies create disvalue for current or future stakeholders, thus undermining sustainable development. Sustainability in business therefore aims at the integrative management of value creation and disvalue mitigation. Various institutions, such as sustainability laws as well as quasi-regulatory and voluntary sustainability standards, aim at providing an enabling environment in this regard yet are often insufficient. Corporate sustainability therefore calls for proactive management. Neither value nor disvalue fall from heaven but are rather co-created or caused through the interaction with stakeholders. Transforming from unsustainability to sustainability thus requires transforming the underlying relational arrangements. Here, market and non-market stakeholder relations need to be distinguished. In markets, companies transact with customers, employees, suppliers, and financiers who typically have voluntary exchange relationships with the firm. As a result, stakeholders can use the exit option when the relationship causes them harm. Companies therefore need to know and respect their value-creation partners, their potential contributions, and above all their needs. Sustainability can influence these market relationships in two ways. First, as sustainability addresses environmental, social, and ethical issues that are otherwise often overlooked, sustainability can relate to specific goals and motivations that stakeholders pursue when they care about these matters. Second, sustainability can be linked to transaction-specific particularities. This can be the case when sustainability features lead to information asymmetries, higher transaction costs, or resource dependencies. Non-market relationships, however, can differ in that stakeholders are involuntarily affected by the firm. In many cases, such as environmental pollution, stakeholders like local communities experience disvalue but cannot simply walk away. From a sustainability perspective, giving voice to non-market stakeholders through dialogue and participation is therefore crucial to identify early-on potential issues where companies cause disvalue. Such a proactive dialogue does not necessarily present a constraint that limits value creation in the market. Giving a voice to non-market stakeholders can also help create innovations and mobilize valuable resources such as knowledge, legitimacy, and partnership. The key idea is to find solutions that create value not only for market stakeholders but also for a larger circle, including non-market stakeholders as well. Such stakeholder business cases for sustainability aim at the synergistic integration of value creation and disvalue mitigation.

Article

The Personality Underpinnings of Strategic Leadership: The CEO, TMT, and Board of Directors  

Bret Bradley, Sam Matthews, and Thomas Kelemen

“Strategic leadership” is the umbrella term used to describe the study of an organization’s top leaders—what they do, their interactions, and how they influence important organizational outcomes. The three major areas of focus within this field are the chief executive officer (CEO), the top management team (TMT), and the board of directors. Although each area has vibrant bodies of literature on important topics of inquiry, the integration of research findings, frameworks, and insights across the three areas remains underdeveloped. For example, the study of leader personality is a rich line of inquiry within the broader management literature, and all three areas are developing, albeit at different rates and with little integration across the three areas. The work on CEO personality is the most developed, and the work on board personality is the least developed. CEOs personality traits that have been studied include the Big Five personality traits (conscientiousness, extraversion, agreeableness, openness to experience, and emotional stability), locus of control, core self-evaluations, narcissism, overconfidence, hubris, humility and regulatory focus (a person’s general approach to goals as either promotion focused or prevention focused). TMT personality traits that have been studied include the Big Five, trait positive affect, propensity to innovate, and competitive aggressiveness. Finally, board of directors’ personality traits that have been studied include only personality diversity.

Article

The Role of Board Leadership Structure in Firm Governance  

Danuse Bement and Ryan Krause

Boards of directors are governing bodies that reside at the apex of the modern corporation. Boards monitor the behavior of firm management, provide managers access to knowledge, expertise, and external networks, and serve as advisors and sounding boards for the CEO. Board attributes such as board size and independence, director demographics, and firm ownership have all been studied as antecedents of effective board functioning and, ultimately, firm performance. Steady progress has been made toward understanding how boards influence firm outcomes, but several key questions about board leadership structure remain unresolved. Research on board leadership structure encompasses the study of board chairs, lead independent directors, and board committees. Board chair research indicates that when held by competent individuals, this key leadership position has the potential to contribute to efficient board functioning and firm performance. Researchers have found conflicting evidence regarding CEO duality, the practice of the CEO also serving as the board chair. The effect of this phenomenon—once ubiquitous among U.S. boards—ranges widely based on circumstances such as board independence, CEO power, and/or environmental conditions. Progressively, however, potential negative consequences of CEO duality proposed by agency theory appear to be counterbalanced by other governance mechanisms and regulatory changes. A popular mechanism for a compromise between the benefits of CEO duality and independent monitoring is to establish the role of a lead independent director. Although research on this role is in its early stage, results suggest that when implemented properly, the lead independent director can aid board monitoring without adding confusion to a unified chain of command. Board oversight committees, another key board leadership mechanism, improve directors’ access to information, enhance decision-making quality by allowing directors to focus on specialized topics outside of board meetings, and increase the speed of response to critical matters. Future research on the governance roles of boards, leadership configurations, and board committees is likely to explore theories beyond agency and resource dependence, as well as rely less on collecting archival data and more on finding creative ways to access rarely examined board interactions, such as board and committee meetings and executive sessions.

Article

Transaction Cost Economics as a Theory of the Firm, Management, and Governance  

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.

Article

Trust and Trustworthiness in Business  

Richard Coughlan

Trust is a relatively complex psychological state that arises in relationships characterized by dependence and risk. It has both cognitive and emotional elements that can be linked to certain actions made by parties involved in exchange relationships. The relationships of interest include some level of uncertainty, both about the motives and future actions of other parties and about the potential outcomes of engaging in cooperative behavior with those parties. Each party involved in an exchange relationship has a certain propensity to trust, a baseline shaped by various factors including previous relationships. An individual’s propensity to trust is viewed to be relatively stable over time and is most important in the earliest stages of a relationship when a leap of faith is required to enter the relationship because firsthand evidence about the other party is scant. During a relationship, a party’s propensity to trust serves as a filter through which the other party’s actions are judged. A party’s trustworthiness is shaped by views on the degree to which the potential trustee has (a) an ability to fulfill its duties, (b) a sincere concern about the welfare of the trusting party and a willingness to sacrifice its own outcomes, and (c) a commitment to abide by prevailing ethical norms. The relative importance of each component—ability, benevolence, and integrity—is likely to change over the course of a relationship. Trust may exist between two individuals in a dyad, among several individuals in a work group, between an individual and a firm, and between one organization and another. The last of these categories has been described as interorganizational trust, an important component in the relationships between firms and their stakeholders. When trust exists between firms, formal governance mechanisms, such as contracts and monitoring systems, will be less necessary, reducing transaction costs in the relationship. At the interpersonal level, trust in a relationship has been tied to many positive outcomes, including greater sharing of more accurate information and more frequent displays of organizational citizenship behavior. It has also shown a connection to higher levels of job satisfaction, creativity, cooperation, and productivity. When trust in leaders is higher, subordinates’ intention to quit is lower.

Article

The Uppsala Model in the Twenty-First Century  

Jan-Erik Vahlne

When it was developed in 1977, the Uppsala internationalization process model (Uppsala model for short) had three basic premises: process ontology, behavioral assumptions, and the presence of uncertainty. Multinational business enterprises (MBEs), among all actors, were in their infancy, and their future could not be known. Later on, the model was extended to cover the evolution of the MBEs, with factors such as internationalization, globalization, and the development of characteristics prompting changes and making them possible. Likewise, the knowledge concept was substituted for by capabilities, operational and dynamic, fitting well the other concepts of the model. The neoclassical view of the firm as an independent unit on the market is considered unrealistic. Instead, firms, MBEs, and small and medium enterprises are seen as embedded in networks with other cooperating and competing actors. The mechanisms of the 2017 version, though, are the same as in the original version. Hopefully, the latest version can be used as a tool within the scope of the “theory of the firm” research and as a platform for more studies on causal mechanisms, later to be applied in normative conclusions. It follows that static cross-sectional statistical methods are not fully satisfactory. Application of dynamic analytical methods requires investment in longitudinal data collection, which is costly, and has to be performed by institutions rather than individuals. A dream is that the Uppsala model can be used as a stepping stone in the construction of realistic macro-level studies of the economy.

Article

Vertical Integration and the Theory of the Firm  

Jongwook Kim

How do firms organize economic transactions? This question can be thought of as a question of firm boundaries or as a decision about a firm’s scope, encompassing the choice along a continuum of governance structures, including spot markets, short-term contracts, long-term contracts, franchising, licensing, joint ventures, and hierarchy (integration). Although there is no unified theory of vertical integration, transaction cost economics, agency theory, and more recently property rights theory have been influential not only in analyzing make-or-buy decisions but also in understanding “hybrid forms” or inter-firm alliances, such as technology licensing contracts, equity alliances, joint ventures, and the like. Before Coase’s work became widely known, whatever theoretical underpinnings there were of vertical integration were provided by applications of neoclassical theory. 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 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. Oliver 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 consequently established comparative analysis of alternative governance forms as the way to analyze vertical integration. More recently, property rights theory brought attention to ownership of key assets as a way to distinguish between the governance of internal organizations and those of market transactions, where ownership confers the authority to determine how these assets will be utilized. And lastly, agency theory also provides important building blocks for understanding contractual choice by placing the emphasis on the different incentives that vary with different contractual arrangements between a principal and its agent. 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. These theories have also been utilized in analyzing “hybrid” organizational forms, in particular strategic alliances and joint ventures. Together, vertical integration and alliances account for a significant part of corporate strategy decisions, and more research on the theoretical foundations as well as novel ways to apply these theories in empirical analyses will be productive avenues for a better understanding of firm behavior.