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41/2 April 2008

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Charles Baden-Fuller Editorial

After a bumper sized opening issue in Volume 41-1, here is a more modest sized but value-adding set of papers on different dimensions of risk. Risk management, the subject of a special issue titled Risk, Strategy, and Finance: Unifying Two World Views organised by Michael Lubatkin and Bill Schulze, has long occupied an important place in the agenda of top managers. The mismanagement of risk has caused corporations to fail and markets to grind to a halt; but the antecedents of these calamities can often be traced back to junior and middle managers being unable to understand risk, and therefore explain it to more senior executives. In this regular, but focused issue, we have three excellent articles that explore different dimensions of the risk landscape.
In the fashion of a true advocate of the value of strategic thinking, Torben Andersen asks if a holistic approach to risk management can do more than just stabilize earnings. He cogently argues that risk management improves the systems of the firm and makes companies more flexible and responsive to opportunities in the market place. He uses indirect evidence to support his case.
Abraham Carmeli and John Schaubroeck’s essay explores the same theme, but at a more micro level. Building on the themes of the special issue on Organizational Failure organised by Adrian Wilkinson and Kamel Mellahi and the piece by Dong-Jae Kim Falls from Grace and Lessons from Failure: Daewoo and Medison, these two authors examine the kinds of practices that organisations can adopt to foster better risk management.
Christine Meyer offers a practical and much needed re-examination of some of the risks that occur in the merger process. She explores why so many mergers experience value leakage during the integration process. For example, she explains how managers defend territories and play games to divert resources during this complex process. She also explains why so many merger integration specialists fail to deliver the best results because they do not understand the complex inter-relationships that exist in defensive routines; and she makes useful suggestions about what to do about this.

Future issues
I am pleased to announce that in the next issue (Volume 41-3) Richard Whittington and Ludovic Cailluet will present a special issue on ‘Crafts of Strategy’. There will be 7 pieces that examine many different dimensions of strategic planning: contributions range from reviewing and updating us on the practices of GE Inc., to exploring why venture capital firms do not formally plan for themselves although they insist that the companies they invest in do plan, and on how planning can add value in small family firms. It will also remind us that planning is not just about plans, but also about how to improve strategic thinking and (paradoxically) flexibility in companies.

I am also pleased to signal that our August issue will have a rich and diverse set of pieces devoted to the topic of innovation.

 

Torben Juul Andersen The Performance Relationship of Effective Risk Management: Exploring the Firm-Specific Investment Rationale ta.smg@cbs.dk

Risk management is considered an increasingly important area both for study and for practising managers. While risk management techniques often focus solely on the elimination of downside exposures, this paper conceives total risk management as the ability to respond to external factors so as to stabilise corporate earnings, which in turn reduces the likelihood of financial distress and attracts favourably-priced capital for further endeavours. Effective risk management also provides incentives for stakeholders such as suppliers, customers and staff to invest in assets and competencies that are specific to the firm, which holds the key to gaining sustainable competitive advantage. Therefore risk management is not just a response to a negative: as a firm becomes better at curbing the adverse effects of external events and responding to changing environmental conditions it will be better equipped to deal with the economic consequences of market fluctuations in general. It will also have the capability to exploit opportunities. The author conducts an empirical study of 1,386 large US-based firms operating across a number of industries to examine the performance relationship of total risk management. He finds a positive relationship between total risk management and corporate performance and observes higher performance relationships among firms investing in innovation and firms operating in knowledge-intensive industries where firm-specific investments are particularly important. The implications for managers are that firms should incorporate a wider spectrum of exposures in corporate risk assessments to include important strategic risk factors and consider business development efforts as a way to increase responsiveness and exploit upside potential.

 

Abraham Carmeli and John Schaubroeck Organisational Crisis-Preparedness: The Importance of Learning from Failures carmelia@mail.biu.ac.il

There’s no magic spell that can protect companies from disaster - it can hit any organisation, no matter what its size, status or level of success. Often, a crisis may precipitate a critical turning point in the organisation’s existence. In many cases it is weakened by unexpected costs and lost business; however, organisations with effective crisis-prevention programmes in place may emerge from their experience stronger and less vulnerable to future problems. The authors argue that although companies have much to glean from success stories in crisis-management, the capacity to learn from failure along the way is equally critical. Well-prepared organisations don’t simply firefight when crisis strikes, but actually analyse why setbacks of any size happen and encourage employees to ‘unlearn’ patterns of behaviour that have turned out to be unhelpful for the company. Taking a cross-industry sample of over 200 companies, the authors assess each organisation’s capacity both to cope with immediate crises and to handle such problems in the distant future. They find that those companies that take a tolerant view of mistakes, while emphasising the need for employees to unlearn what have turned out to be ‘bad habits’, are more likely to spot the danger signals of impending crisis - and to take action. Managers play a crucial role in fostering the idea of learning from mistakes, promoting a culture of collective vigilance within the company, and emphasising the ways that being prepared for crisis can actually contribute to its competitiveness.

 

Christine Benedichte Meyer Value Leakages in Mergers and Acquisitions. Why They Occur and How They Can Be Addressed christine.meyer@nhh.no

It is often wrongly assumed that all the projected synergies of a merger or acquisition will be successfully allocated to the shareholders. Practice however, is too often disappointing, and the expected increase in value simply does not materialise. What might explain this loss of value during the M&A process? Focussing on the post-merger integration phase, this paper analyses the reasons for this value leakage and suggests possible remedies. Shareholder value is attacked from two sides. Potential gains are reduced by the rent-seeking actions of internal stakeholders e managers and employees e seeking to improve or defend their position. Costs are increased as a result of a reduction or reallocation of effort during the post-merger integration process, when uncertainty and dismay undermines staff belief and, with the integration process (and politicking) absorbing much management effort, the firm’s focus is internal rather than on the customer and the market environment. The author outlines a number of practical remedies organisations can take to resolve each of these leakages, but notes how a remedy that may resolve value leakages in one area may at the same time have adverse affects on the problem in other areas. The challenge for managers is identified as finding the best way to manage these trade-offs.

 

 

This issue is available in full on-line at www.sciencedirect.com

 
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