Strategy

Despite studies indicating the contrary, many academics and practitioners assert that the business cycle can’t be predicted and therefore can’t be managed. However, managers who draw upon forecasting models, closely follow leading economic indicators and manage their business cycle proactively are likely to emerge from tough economic times intact, says the author. To this end, the “master cyclist” project has evaluated companies’ market literacy, forecasting capabilities and use of macroeconomic strategy. From the evaluation, it developed a set of managerial principles, defining how a market-literate management team would approach short-run functional decisions regarding inventory, production, marketing and pricing as well as more strategic choices regarding capital expansion, acquisitions and divestitures. According to the author, explicitly cycle-savvy companies like Johnson & ; Johnson, Southwest Airlines, DuPont and Duke Power weathered rough economic times well, while companies like Cisco Systems, which rejected the use of macroeconomic forecasting, was caught during the recent recession with crippling levels of product and supply-chain inventories. It follows then, according to the author, that strategic, tactical and functional decisions are better informed by intelligent speculations about the business cycle. As economic-forecasting indicators and techniques continue to improve, so should our understanding of both the business cycle and the principles associated with effectively managing it.

Many corporate boards adopt a one-size-fits-all approach to governance. Instead, they should consider that their primary role must shift depending on various conditions, both internal and external. Boards have four main functions -- auditing, supervising, coaching and steering -- each with a different perspective and behavior. The roles reflect two main differences in board culture. The first type of board concerns itself mainly with shareholder interests or shareholder plus other stakeholder interests. The focus is on externalities. The second type of board either monitors executives' activities or gets actively involved in the conduct of the organization. Here the focus is on handling ineffective management. The basic role types are not mutually exclusive; instead they reflect different board cultures that result from different emphases on decision making and resource allocation. During any time period, a board must determine what its dominant role should be, given the current conditions.

Popular wisdom holds that blue-chip companies can somehow grow continuously. According to the authors, however, the struggle of corporate icons like Kodak, Digital and Xerox demonstrate that natural limitations, managerial complexity, a lack of stakeholder harmony and antitrust concerns make continuous growth increasingly difficult. Rather than seeking growth at any cost, they suggest that companies seek alternative ways of moving beyond natural growth limits. The authors draw on a host of examples -- from Microsoft, J.P. Morgan, IBM and others -- suggesting that companies finding themselves confronting this scenario can either break up their company, create new corporate forms or make a graceful growth-to-value transition. In evaluating their options, say the authors, the corporate executives must consider their company's position in its life cycle -- growth, stall or post-stall. Stalls can be anticipated by assessing the natural limits of the company's dominant growth strategy and its pattern of financial performance. Executives must also realistically assess their company's capacity for both innovation and new-business creation in order to decide whether their capital and talent would be better spent on core business development than on the reckless pursuit of high growth. Choosing alternate options is not easy, suggest the authors, given the pervasive culture of continuous growth. The first step toward making constructive decisions for a company's future, however, is to acknowledge that unbounded growth may indeed be a myth.

Data from a decade-long research project puts advice to managers in context, country by country.

Much of the recent research on mergers and acquisitions (M&;A) seeks to link the market valuations of individual companies, as well as overall stock market levels, with merger activity and performance. In their review of work conducted in this field, the authors present a primer on ways to measure whether M&;A actually creates value and then offer an overview of the "winners" and "losers." But the long-held observation that stock prices affect merger activity was confirmed in 2001, they say, by work that revealed a correlation between high merger activity and high market valuations. Several other studies have shown that acquirers who pay with stock underperform their peers in the long run, whereas acquirers who pay cash outperform their peers. Another line of inquiry, according to the authors, finds that the level of the stock market when an acquisition is announced affects short-term and long-term merger performance. The short-term effects are positive for acquisitions announced in high-valuation markets and negative for those undertaken in low-valuation markets. Supporting evidence is provided in other recent work too: Acquisitions that take place during periods of below-average economic growth create more shareholder value than strong-economy acquisitions. The strong performance of low-valuation acquirers and weak-economy acquirers suggests that they are not distracted by short-run market reactions, but instead focus on business fundamentals and true potential synergies. Two articles published in 2002, suggesting that the root cause of such links between valuation and performance may be incorrect valuation by the market, are empirically supported by current work that Bouwman et al. also describe. The conclusion of these various research streams is that stock prices matter, say the authors. The key implication for managers: Be wary of acquisitions made when market or firm valuations are high, and be optimistic about acquisitions when valuations are low. This review includes a comprehensive sidebar of all referenced and relevant research.

Overreacting to corporate scandal will hobble risk taking, innovation and growth

During the late 1990s stock market boom, many large companies established corporate-venturing units, seeking to develop innovative new businesses and spur growth. However, with the downturn of the economy, many of these units ceased operations -- while others managed to survive and a few even thrived. What went wrong with failing companies, and how do those that still have corporate-venturing units manage to succeed? The authors studied nearly 100 venturing units, proposing that failures often occurred because such groups lacked clarity -- both in their objectives and in their business models. Using the example of successful venturing units, such as Intel Capital, Mustang Ventures at Siemens, Lucent New Venture Group and GE Equity, the authors outline four common types of venturing scenarios that, by using a careful, steady approach, companies can execute well: ecosystem venturing, innovation venturing, harvest venturing and private-equity venturing. They discuss the characteristics and benefits of each and how successful companies avoid the pitfalls that snare others. In the end, the authors conclude, there are many ways to do corporate venturing. But to succeed, companies must define their goals clearly and narrowly, understand the differences among the various types, and use the appropriate type for the appropriate activity. The ultimate key to accomplishing that, say the authors, lies in effectively employing the differences to their advantage.