Knowledge that Transforms

Research summary: External stakeholders frequently attempt to influence organizations' adoption of new practices through the creation of public ratings. Based on the insights of performance feedback theory, we develop the theory of organizational reactions to external ratings to explain how firms' behaviors depend on their rating scores and their profitability. A central issue in our theory is the conflict between established internal goals and goals introduced by public ratings, with public ratings receiving lower priority than established profitability goals. Our theory suggests that, contrary to the expectations of the external stakeholders, firms targeted for criticism by ratings become less likely to adopt corresponding practices when their profitability is below aspirations. These arguments are supported in data on the diffusion of corporate governance practices in C anada. Managerial summary: Firms and their products are rated and ranked by external agencies ranging from C onsumer R eports to magazine rankings of admired, environmental, or well‐governed companies. We investigate whether such ratings affect firm behaviors, and especially whether they can incentivize poorly rated firms to improve their ranking when these firms' profitability is also low. Using the leading corporate governance ranking in C anada, we find that rankings could have adverse effects: when firms have both poor governance ranking and poor profitability they are less likely to adopt governance practices, contrary to the ranking creators' intentions. The findings show that there is a hierarchy of firms' goals, where the goal of profitability comes ahead of other goals imposed by external agencies through ratings and rankings .

R esearch summary : Agency theory suggests that external governance mechanisms (e.g., activist owners, the market for corporate control, securities analysts) can deter managers from acting opportunistically. Using cognitive evaluation theory, we argue that powerful expectations imposed by external governance can impinge on top managers' feelings of autonomy and crowd out their intrinsic motivation, potentially leading to financial fraud. Our findings indicate that external pressure from activist owners, the market for corporate control, and securities analysts increases managers' likelihood of financial fraud. Our study considers external governance from a top manager's perspective and questions one of agency theory's foundational tenets: that external pressure imposed on managers reduces the potential for moral hazard . M anagerial summary : Many of us are familiar with stories about top managers “cooking the books” in one way or another. As a result, companies and regulatory bodies often implement strict controls to try to prevent financial fraud. However, cognitive evaluation theory describes how those external controls could actually have the opposite of their intended effect because they rob managers of their intrinsic motivation for behaving appropriately. We find this to be the case. When top managers face more stringent external control mechanisms, in the form of activist shareholders, the threat of a takeover, or zealous securities analysts, they are actually more likely to engage in financial misbehavior .

Research summary : This special issue of Strategic Management Journal was motivated by concern that the growing scope and diversity of the strategic management field creates the risk of incoherence and fragmentation and the belief that research reviews could contribute to synthesis and integration. In this introductory essay, we address the expanding domain of strategic management, consider where its boundaries lie, identify the forces engendering fragmentation, and discuss how this special issue—and research reviews in general—can assist convergence within the field of strategy. We conclude by addressing the potential for integration more broadly in relation to the theories we deploy, the phenomena we investigate, and cohesiveness of our scholarly community . Managerial summary : The expanding domain of strategic management reflects the widening range of strategic issues that practising managers face. However, the fragmentation that has accompanied this broadening scope impedes the usefulness of strategic management research in guiding strategic decision making. We argue that reviews of strategic management research, such as those included within this special issue, can support the accumulation of an integrated, empirically-validated knowledge base which is essential to informing management practice .

[Research summary: Within an ecosystem, standard setting coordinates development of complementary technologies across firms. But each firm can itself own multiple of these complementary technologies.We study how a firm’s own complementary technologies influence its disclosure inclination during standard setting. We identify a tradeoff: disclosure increases value-creation of the firm’s non-disclosed complementary technologies, but also heightens expropriation risk. Using data on the U.S. communications equipment industry 1991–2008, we show that the firm’s complementary technologies increase its disclosure inclination when its technological areas are less crowded, but decrease such inclination when there are SSO members with strong expropriation abilities. Findings stress that disclosure involves but a piece of the firm’s portfolio; a systemic perspective of the entire portfolio provides a more comprehensive picture of value-creation during standard setting. Managerial summary:Why should a firm disclose its key technology to participate in standard setting within an ecosystem? We urge managers to think beyond “disclosing to ensure compatibility with other firms’ complementary technologies within the ecosystem” as a motivation, to also consider how disclosure affects the firm’s own complementary technologies within its portfolio. Disclosure in one technological area makes the firm’s nondisclosed complementary technologies in other areas more valuable to itself, especially with fewer rivals competing in these other areas. But disclosure also renders the firm susceptible to losing these complementary technologies to rivals, especially when rivals have strong expropriation abilities. Analyzing disclosure decisions by communication equipment firms, we show that this tradeoff is indeed a relevant consideration in managers’ strategic calculations when participating in standard setting.]

R esearch summary: We investigate how organizational adaptation to interdependence shifts is influenced by “integrators.” These are formally mandated managerial roles meant to promote coordination across specialized but interdependent organizational subunits, yet they do so without relying on formal authority. While much has been learned about how integrators promote steady‐state coordination within a known pattern of interdependence, less is known about their impact on organizational adaptation when the pattern of interdependence itself is unknown. We discuss mechanisms by which integrators may nonetheless aid organizational adaptation and learning processes in such situations, and test our hypotheses in the context of a regulatory change that affected the in vitro fertilization ( IVF ) clinics sector in the United Kingdom using a differences‐in‐differences design . M anagerial summary: Organizational structure can influence how an organization adapts to change. We investigate how a regulatory change in the provision of fertility treatments in the United Kingdom forced clinics to change their workflows, and whether the presence of integrator roles enabled clinics to adapt to these changes. It is well known that integrator roles in general are valuable in coordinating across specialized organizational units, but this research points to the surprising implication that their value may persist even when the workflow being coordinated changes suddenly, in ways that nobody necessarily comprehends. Our research highlights the fact that even in an intensively science‐based work context, the “technology of organizing” can have a significant role in shaping organizational performance .

Research summary : This study examines whether the stock and bond prices of firms engaging in corporate social responsibility ( CSR ) can benefit from insurance‐like effects during occurrences of negative events. Our results suggest that in the face of negative events, engagement in CSR on a continuous, long‐term basis provides insurance‐like effects on both the stock and bond prices of firms. Nevertheless, the effects are found to quickly disappear following the occurrence of a second, or subsequent, negative event. Although our results clearly indicate that firms need to allocate some of their available resources to long‐term strategic CSR activities, managers must also realize that in a crisis communication, they will probably be able to use their CSR claims on one occasion only . Managerial summary : The purpose of this article is to examine whether firms engaging in corporate social responsibility ( CSR ) can benefit from insurance‐like effects during occurrences of negative events. We find that on the occurrence of a negative event, long‐term CSR engagement does have insurance‐like effects. We also find that these insurance‐like effects may quickly disappear following the occurrence of a second negative event. Managers of firms with a long history of CSR activities need to realize that in a crisis communication, they can probably use their claims of adherence to CSR only once .

Research summary : We investigate the theoretical and empirical implications of longitudinal data in strategy research. Theoretically, longitudinal data allow strategy researchers to distinguish between relationships among constructs within versus between firms. Empirically, longitudinal data contain information about two types of relationships: within‐ and between‐firm. We describe how the hybrid approach, a technique used in other disciplines, disentangles within‐ and between‐firm relationships. We reexamine a study of research and development expenditures to illustrate the advantages of the hybrid approach. Based on our theory and reexamination, we offer a series of recommendations for researchers using longitudinal data to test theoretical perspectives . Managerial summary: Strategy research examines two sources of variation over time: what is occurring within the firm (e.g., Do firms perform better over time when investing more in R&D?) and what is occurring between firms (e.g., Do firms investing more in R&D outperform firms investing less in R&D?). These two sources may be similar or different in both direction and magnitude, and when significant differences exist in either direction or magnitude, researchers must carefully consider the implication of these differences to their theoretical rationale and statistical testing. Our article highlights the benefits of theorizing and testing these two sources of variance, providing scholars the ability to broaden both the theoretical and empirical contribution of their research. This distinction is important to how research informs managerial decision making .

[Research summary: This article proposes an approach for modeling competitive interactions that incorporates the costs to firms of changing strategy. The costs associated with strategy modifications, which we term “repositioning costs,” are particularly relevant to competitive interactions involving major changes to business strategies. Repositioning costs can critically affect competitive dynamics and, consequently, the implications of strategic interaction for strategic choice. While the literature broadly recognizes the importance of such costs, game-theoretic treatments of major strategic change, with very limited exceptions, have not addressed them meaningfully. We advocate greater recognition of repositioning costs and illustrate with two simple models how repositioning costsmay facilitate differentiation and affect the value of a firm’s capability to reduce repositioning costs through investments in flexibility. Managerial summary:This article illustrates how the decision to make a strategic change is affected by both the cost to the firm of making the various strategy modifications, as well as the cost to its rivals of changing their strategies in response. These “repositioning costs” are important because they shape the responses each competitor would likely make to a move by the other competitor, and should be anticipated when considering an initial change to one’s own strategy. The paper shows how repositioning costs can be used strategically to facilitate differentiation, and to assess the value of potential investments in flexibility.]

Research summary: Previous research has examined the racial diversity‐productivity relationship in corporations with an evident high commitment to minority programs , Fortune' s “ Best Companies for Minorities.” To assess generalizability, we replicate this research using a different context of high organizational‐employee value congruence , Fortune's “ Best Companies to Work For.” We are not able to find evidence for the curvilinear relationships previously found, but do uncover a linear negative relationship between racial diversity and short‐run performance . Managerial summary: Using Fortune' s “ Best Companies for Minorities,” previous research found that racial diversity affected both firm productivity and Tobin's q. To see if we could find these results in a different group of firms, we replicate this research using a sample drawn from Fortune's “ Best Companies to Work For.” The former sample is distinguished by high commitment to minority programs, while the one used here stresses high congruence of values between the organization and all its employees. We are unable to replicate the relationships previously found, however, but do find that increasing racial diversity had a negative effect on firm productivity .

Research summary : We develop and test a contingency theory of the influence of top management team ( TMT ) performance‐contingent incentives on manager–shareholder interest alignment. Our results support our theory by showing that although TMT s engage in significantly higher levels of acquisition investment when their average incentive levels increase, investors' responses to those large investments are generally negative. More importantly, however, we further find that within‐ TMT incentive heterogeneity conditions that effect, such that investors evaluate TMT s' large acquisition investments more positively as the variance in those top managers' incentive values increases. Thus, within‐ TMT incentive heterogeneity appears to increase manager–shareholder interest alignment, in the context of large acquisition investments . Managerial summary : We find that as the average value of TMT s' incentives increase, relative to their total pay, they invest more in acquisitions and investors' respond negatively to the announcement of those deals. However, we further show that investors respond more positively to acquisitions announced by TMT s whose members' incentive values vary (some TMT members hold higher incentives and others hold lower). Results imply that when TMT members hold differing incentives levels, they approach investments from divergent perspectives, scrutinize those investments more heavily, and make better decisions, relative to TMT s with similar incentives. They also suggest that boards seeking tighter manager–shareholder interest alignment may benefit from introducing variance into TMT members' incentive structures, as doing so appears to create divergent preferences that can improve team decision making .