Strategy

Recent corporate scandals have made many U.S. boards question the wisdom of combining the chairman and CEO positions. But a knee-jerk decision to adopt the British model of separating the two top jobs without understanding the model's complexities is hardly the answer. Corporate governance across the Atlantic has its own characteristic problems. For example, although a separate chairman makes the board more independent of the CEO, the arrangement can lead to confusion regarding the company leadership. And a poor relationship between the chairman and CEO can easily lead to conflicts and power struggles. U.S. boards need independent leadership, but achieving such leadership by splitting the two positions is not necessarily a clear improvement over the U.S. model. Instead, the authors argue, for most large U.S. companies, the addition of a competent lead director or presiding director will likely strike the right balance between effective governance and leadership.

Corporate boards in the United States have recently been on the hot seat. Stimulated by high-profile scandals, investor dissatisfaction with board performance and questions about the level of executive compensation, regulators have introduced significant reforms in the rules that govern boards. But will such reforms actually contribute to the effectiveness of boards? A real danger exists that the mandated changes not only will fail to enhance how companies are governed but also could possibly lead to a number of negative unintended consequences. To investigate such issues, the authors conducted a study that compared the board practices and effectiveness of Fortune 1000 companies in 1998 versus 2003. They looked specifically at three areas: board leadership, the conditions governing board membership, and the performance evaluations of boards, individual board members and CEOs. The results have helped to determine which practices in those three areas are actually related to overall board performance.

Most startup companies today consider overseas expansion from their inception. Yet, says the author, entrepreneurs and their managers often underestimate the cost of expansion and lack a clear conceptual framework for it. On the basis of studying 50 entrepreneurial ventures in more than 20 countries, he concludes that such ventures follow a variety of different expansion paths. The most successful are those that best manage the constant tensions between resources and opportunities, each of which run the gamut from purely local to worldwide. He offers a framework that defines the choices a venture has at its inception and throughout its life, then shows how the framework can be used to assess and direct a venture and mitigate developing tensions by anticipating a variety of strategic, financial, organizational and regulatory factors. This is illustrated with case examples of a software company that took a balanced or “diagonal” path (the most common), an air-freight delivery service that progressed from pursuing local opportunities with local resources to pursuing cross-border opportunities with local resources, and a consumer-loan provider that began by pursuing a local opportunity with local resources, then added cross-border resources. Other examples include London-based fashion e-tailer Boo.com, Boston-based Internet Securities Inc. and the Georgian Glass and Mineral Water Co. in the Republic of Georgia.

In recent years, gray markets -- in which a firm's products are sold or resold through unauthorized dealers -- have become ubiquitous. They exist for tangible products (lumber and electronic components) and intangibles (broadcast signals, IPOs); for massive goods (automobiles and heavy construction equipment) and for light, easily shipped products (watches and cosmetics); for the mundane (health and beauty aids) and the life saving (prescription drugs). Gray markets aren't going away soon. Although they ebb and flow as exchange rates, price differentials and supply conditions change, surveys confirm the increasing incidence and scope of gray markets. In many situations, their sales outstrip authorized sales. An inability to compete with gray markets can wreak havoc on firms and industries. Unfortunately, because it is so hard to get data on gray-market activity and what firms are doing to deal with it, there is little published guidance to help managers. The sale of legitimate products in the wrong place or in the wrong channel poses unique problems to companies, but there are unique solutions that can successfully manage them. Describing several examples that show the scope and complexity of the gray-market problem, the authors explain how managers can apply a framework based on sensing, speed and severity in order to manage it. They also point out scenarios in which gray markets actually help and should be tolerated.

Although the pursuit of opportunity promises outsized rewards to entrepreneurs and established enterprises, it also entails great uncertainty. The critical task of entrepreneurship lies in effectively managing the uncertainty inherent in trying something new. Some entrepreneurs foolishly try to ignore uncertainty; others go to the opposite extreme of attempting to avoid it altogether. Rather than ignore uncertainty or attempt to avoid it in the na_ve belief that every contingency can be anticipated, entrepreneurs should instead manage uncertainty by taking a disciplined approach. Over the past five years, the author conducted systematic research into how entrepreneurs manage the inevitable risks while pursuing opportunities. A synthesis of the research revealed that discipline -- and its byproduct, the successful management of uncertainty -- comes through the adoption of an iterative experimentation model. In this three-step process, an entrepreneur first formulates a working hypothesis about an opportunity, then assembles the resources to test the hypothesis, and finally designs and runs real-world experiments. Depending on the results of a round of experimentation, the entrepreneur may revise the hypothesis and run another experiment, harvest the value created through a sale, or abandon the hypothesis and pull the plug. The model provides insights into some of the most daunting questions entrepreneurs face -- including how to screen an opportunity, how much money to raise, when to make key hires and how to use limited resources most efficiently.

Many studies have shown that the most treacherous time in the failure-strewn business of mergers comes when companies attempt to combine operations. Surprisingly, however, they often destroy value not as a result of inattention to detail but through excessive zeal in their integration efforts. That's because acquirers, recognizing the many potential dangers inherent in the merger process, often attempt to immunize themselves by painstakingly mapping out comprehensive, detailed plans for blending every aspect of operations. What they don't realize is that too much integration can block companies from realizing the benefits of a merger just as easily as too little can. And, in some cases, overintegrating can do far more damage. The authors posit that M&;A activity is typically based on one of three types of "investment theses"-- "active investing," growing scope and growing scale -- and that each requires different degrees of merger integration. If an acquired company is the first plank of a new platform in a venture-capitalist firm's portfolio, for example, it will probably require the bare minimum of integration. But deals that enhance scope or scale require executives to pay much more attention to integration. The authors explain how Illinois Tool Works, Sears, Roebuck and Co., BP, Philips Medical Systems and Keppel Offshore & ; Marine have all benefited from integrating selectively, comprehensively or with a mix of the two, according to whether they were seeking economies of scale or scope.

Technological diversity and organizational structure both shape an alliance’s potential payoff.

Truly innovative strategy must emanate from more than objective analysis.

Differences in emphasis and approach make global supply-chain management even more of a challenge.

Although large-scale risks such as war, terrorism and natural disaster garner media attention, it is the everyday, small-scale risks associated with opacity -- a lack of transparency in countries' legal, economic, regulatory and governance structures -- that can confound global investment and commerce. The authors offer new research that identifies the causes and measures the effects of this phenomenon across 48 countries. The research draws upon 65 objective variables from 41 sources including the World Bank, the International Monetary Fund, the International Securities Services Association, the "International Country Risk Guide" and individual country's regulators. The authors' methodology projects which aspects of a country's economy carry the greatest risk, then, by assessing and comparing the costs of those risks on a country-by-country basis, they create an overall Opacity Index. Next they correlate the Opacity Index to a variety of other indicators, including a country's income level, economic development and foreign investment, entrepreneurship, and access to capital and lending and equity markets. The authors conclude that opacity strongly correlates overall with slower growth and less foreign direct investment in nearly all markets, and they suggest how information about opacity and its contributing factors can enhance both managerial and national policy decisions alike.