Corporate Entrepreneurship & Strategy Process: A

Ata Ozdemirci Performance Based Research on Istanbul Market

(Ata Ozdemirci)
Arista Sony (0)
Dian Rahmasari (
Satria R. Subekti ()
Hendrik ()
M. Rifai Siregar ()
Source of Competitive Advantage
Strategic Management Objectives is
competitive advantage that can be sourced
from:
• Resources Base View (RBV) : Penrose
(1957), Wernerfeld & Rumelt (1984), Asset
Stock Accumulation Dierick & Karel Cool
1989, and Jay Barney (1991)-Concept VRIN.
• Market Base View (MBV): Create strategic
Posistion product within market, Industry
Organization Bain & Mason, Competitive
Forces (1978), Strategic Generic (1980),
Value Chain (1985), National Competitive
level (1990).
• Strategic Entrepreneurship: Opportunity
Seeking Advantage & Exploiting Seeking
Advantage Behaviour. Rooted by Creative
response in Economics (Schumperter, 1947),
Entrepreneurship & Innovation, Corporate
Entrepreneurship, Strategic Entrpreneurship
(Ireland, Hitt & Sirmon 2003) and SE Input Strategic management Process & Lifecycle
Process Output (Hitt 2011). Sources Harris Turino et al 2017
Corporate Entrepreneurship and Strategy Process:
A Performance Based Research on Istanbul Market
Abstract
• Corporate entrepreneurship is the most importance factors for sustaining
development process is investigated in the context of strategy process.
• Corporate entrepreneurship is related with the habits of the company about
decision making processes.
• The decentralization of this process builds an organic structure which the workers
can take initiative.
• This will spread the entrepreneurship process from business owners or leaders to
the whole company.
• The effect of corporate entrepreneurship and different strategy processes on
abstract and concrete performance is also examined in this study.
• The type of the research is hypothetic research. Data collection method is survey.
Sample selection method is coincidental.
Entrepreneurship: Definition
Entrepreneurship is not only the characteristics of different, brave, talented, genius individuals but also an
institutional concept.
• Schumpeter 1961 & Elia 2016 : Innovative Individual sustainable change & creative destructive to
specific market.
• Entrepreneurship is the act of innovation in integrating existing resource with new wealth creation
capacity (Drucker, 1985).
• SE involves both entrepreneurship’s opportunity-seeking behaviors and strategic management’s
advantage-seeking behaviors and is useful for all organizations, including family-oriented firms (Sirmon
& Hitt, 2003; Webb, Ketchen, & Ireland, 2010).
• Innovation can be defined as introducing new methods and techniques of doing things, or a new
combination of old methods and techniques, in converting into outputs to create both economic and
social values - Fontana, 2009 (innovate we can).
We can talk about the corporate entrepreneurship issue as an external or internal factor of organization
in three situations;
i. when an organization enters a new business;
ii. when an individual or a team in organization design a new product; and
iii. when an entrepreneurial paradigm change permeates an entire organization’s outlook and
operations.
Entrepreneurship: Definition
Entrepreneurship also involves seeking and discovering new opportunities like new products and
processes, designing new organizational structures and winning new markets. This means periodic
revisions to structure and strategy; innovation, business creation and strategic renewal [2].
Terms such as intrapreneuring [3], corporate entrepreneurship [4], corporate venturing [5] and internal
corporate entrepreneurship [6] have been used to describe the phenomenon of intrapreneurship,
But the consensus on the concept of entrepreneurship involves creating value and developing
opportunity through innovation via the human and capital resources [7].
Jennings and Lumpkin [8] focuses on the new products and new markets in his corporate entrepreneurship
definition. Miller, Schollhammer, Shane and Venkataraman and Zahra [9] have also emphasized new
product innovation as an important activity in corporate entrepreneurship [10].
Just as Antoncic and Hisrich [11]; in this study, corporate entrepreneurship refers to a process that goes on
inside an existing firm like new business venturing, innovative activities and development of new
products, services, technologies, administrative techniques, strategies, and competitive postures
The corporate entrepreneurship researches usually focus on two things: The factors of the firm’s external
environment [12] and organizational-level internal factors [13]. This study focuses on the strategy process
as a predictor which is also an internal factor
Entrepreneurship: Definition
 Entrepreneurship can be classified into four dimensions:
• new business venturing, the new business-venturing dimension refers to the creation of new businesses
within the existing organization regardless of the level of autonomy. new business creation within an
existing organization by redefining the company’s products (or services) and/or by developing new markets.
• innovativeness, innovativeness dimension refers to product and service innovation with emphasis on
development and innovation in technology. Entrepreneurship includes new product development, product
improvements, and new production methods and procedures. Covin and Slevin [15] considered one part of
the entrepreneurial posture that reflected itself in the extensiveness and frequency of product innovation
and the related tendency of technological leadership
• self-renewal, The self-renewal dimension reflects the transformation of organizations through the
renewal of key ideas on which they are built. It has strategic and organizational change connotations and
includes the redefinition of the business concept, reorganization, and the introduction of system-wide
changes for innovation.
• Proactiveness, proactiveness—is related to aggressive posturing relative to competitors. A proactive firm is
inclined to take risks by conducting experiments. It takes initiative [18] and is bold and aggressive in
pursuing opportunities [19]. The concept of proactiveness “refers to the extent to which organizations
attempt to lead rather than follow competitors in such key business areas as the introduction of new
products or services, operating technologies, and administrative techniques” [20]. Proactiveness includes
initiative and risk taking and the competitive aggressiveness and boldness that are reflected in orientations
and activities of top management [21].
Hypothesis Development (1)
Corporate entrepreneurship is a strategic orientation involving the regeneration of products,
processes, services, strategies or even whole organizations [28]. As such, corporate
entrepreneurship supports sustained competitive advantage through the continuous
generation and exploitation of new sources of knowledge. Therefore, corporate
entrepreneurship can have significant impact upon organizational financial and market
performance [29].
Hypothesis 1: There is a significant effect of corporate entrepreneurship on
abstract and concrete performance.
Hypothesis Development (2)

Hypothesis 2: There are significant and different effects of

strategy formation processes on abstract and concrete
performance.
 In the command style, a strong individual leader or a few top managers exercise total control over the firm. Strategy making is a conscious, controlled process
that is centralized at the very top of the organization. In such a mode, strategies are deliberate, fully formed and ready to be implemented.
 The symbolic mode involves the creation by top management of a compelling vision and clear corporate mission. The corporate vision defines the basic
philosophy and values of the firm. Unlike the command or symbolic modes, the rational mode seeks to be comprehensive in scope. There is a high level of
information processing. Formal analysis, such as environmental scanning, portfolio analysis and industry and competitive analysis is often used to aid in
competitive strategy.
 The transactive mode is based on interaction and learning rather than the execution of a predetermined plan. Strategy is crafted based upon an ongoing dialog
with key stakeholders- employees, suppliers, customers, governments and regulations.
 The generative mode of strategy-making is dependent upon the autonomous behavior of organization members. Strategy is made via intrapreneurship-new
product ideas emerge upward and employee initiative shapes the firm’s strategic direction [31].
 It’s expected that while command style effects abstract and concrete performance negatively and low, the symbolic, rational and transactive mode will effect
abstract and concrete performance positively and stronger than command and generative style as Hart refers.
Hypothesis Development (3)
Management of corporate entrepreneurship is distinct from traditional management because of the conditions
of greater uncertainty. The first challenge is managing the knowledge. The second challenge for the
management of corporate entrepreneurship as a result of dynamism, complexity and uncertainty, is that
corporate entrepreneurship requires coordination through mutual adjustment rather than command and
control, and is driven by commitment rather than consensus [32].
It’s strongly expected that corporate entrepreneurship is related with the habits of the company about
decision making processes. The decentralization of this process can build an organic structure which the
workers can take the initiative and this change will spread the entrepreneurship process from business owners
or leaders to the whole company. While command style will effect corporate entrepreneurship negatively, the
other styles are expected to effect corporate entrepreneurship positively.

Hypothesis 3: There is a strong relationship between strategy process and

corporate entrepreneurship.
Factor Analysis & Reliability

 Expletory factor analysis is made for establishing the sub dimensions of measures. All factors have
passed the KMO Measure of Sampling Adequacy and Bartlett test of Sphericity which means that
our data set is appropriate for factor analyses (Table 2). Principal components and varimax
method are used in analysis. For all measures, items which have factor weight below 0,50; unique
items in a factor; items with close factor weights are leaved out of evaluation. After this
processes, factors which have initial eigenvalues over 1,00 and Cronbach Alpha over 0,65 are:
 4 factors in Corporate Entrepreneurship Measure (Cumulative Extraction Sums= %75,905) which
can be called as Innovativeness (Cronbach Alpha=0, ,935)., Proactiveness (Cronbach
Alpha=0,831)., Self Renewal (Cronbach Alpha=0,817)., New Business Venturing (Cronbach
Alpha=0,852).
 4 factors in Strategic Leaders Types Measure (Cumulative Extraction Sums= %82,056) which can
be called as Rational – Transactive (Cronbach Alpha=0, 936), Commander (Cronbach Alpha=0,
830), Symbolic (Cronbach Alpha=0, 829) and Generative (Cronbach Alpha=0, 763).
 2 factors in Organizational Performance Measure (Cumulative Extraction Sums= %74,301 which
can be called as Concrete Performance (Cronbach Alpha=0,919) and Abstract Performance
(Cronbach Alpha=0,753). Concrete performance consists of sales, financial performance,
profitability, market share and reaching goals items which can be called as concrete performance
criteria; and the second factor of performance consists of handling difficulties, HR quality and
meeting expectations items which can be called as abstract performance criteria (Table 2).
The Result Multi Regression Model-2
Conclusions
 The positive effect of rational-transactive style and the negative effect of command style on
concrete performance disappear without new business venturing. Also the positive effect of
symbolic style on abstract performance disappear without new business venturing too.
 Just as Hart [35] predicted weak performance at the two extreme sides of his scale which are
Command and Generative style, we see a negative effect of Command Style on Concrete
Performance, neutral effect of Command Style on Abstract Performance and neutral effect of
generative style on both Concrete and Abstract Performance. It means that a strong individual
leader or highly autonomous behavior of organization members doesn’t work in this market.
 The only powerful positive effect on concrete performance comes from the Rational-Transactive
Style which has a high level of information processing, formal analysis, such as environmental
scanning, portfolio analysis and industry and competitive analysis, and which is not closed to
ongoing dialog with key stakeholders (employees, suppliers, customers, governments and
regulations).
 The significant positive effect of Symbolic Style on Abstract Performance means that when
strategy is driven by mission and vision of the organization with strong corporate culture, long
term positive advantages such as handling difficulties, HR quality and meeting expectations are
gained.
 Background US the single-tiered board structure the most vigorously
Governance failures scrutinized of governance models and has been found
Response to the recent deficient
global financial crisis
adequacy and effectiveness of current Germany two-tiered board structure consisting
models of corporate governance of both an executive board and a separate supervisory
To find directly or indirectly board of outsiders, does not suffer from the same
cause that contributed to structural problems as the US
the recent economic disaster Some approaches to corporate governance
have fared better in the crucible of the recent
Canadian models of corporate governance place a strong
financial collapse than others
emphasis on the competencies of the directors, and not
their independence from the firm
The independence of directors, can be an indicator of board quality (Larcker and Tayan 2011)  we need to by focusing on the right characteristics that
contribute to board effectiveness
 existing models of corporate governance need to be modified to include formal extensions to the board of director’s traditionally conceived role, which has
often been limited to financial oversight and not strategic control. Board members must fully understand the strategic activities of the firm and be able to
accurately assess the risk involved in the strategic direction of the firm if they are to have a meaningful voice

 Corporate boards of directors need to place a much greater emphasis on the ethical oversight of managerial decisions, an orientation that would require a
greater exercising of strategic control than most boards have displayed a willingness to engage in the recent past.
This type of oversight would require board members to have an intimate understanding of the industry and the specific variables that go into managerial
decision making.
 Boards of directors need to be more keenly aware of the potential social harms behind the value-creating activities of the firm—harms that for a variety of
reasons managers tend to overlook.
 Boards must be vigilant before a crisis by understanding the firm’s value proposition and assessing the social risks and the orientation of management in the
name of good corporate governance and to ensure the economic health of our society
 What Should Corporate Boards Be Looking For?
Studies have shown that active corporate governance by the board of directors is most useful to the management of a firm, and more likely to be sought
out, when an organization is in crisis (Chaterjee and Harrison 2001). They are less likely to do so during periods of relative calm.

Cause of the crisis :

1. Managerial decisions  wrong decision, fraud
2. Managers tend to resist interference in their value-creating activities until the firm reaches the point of crisis.
3. Manager  primarily driven by the potential benefits that arise from a firm’s successful business activities  rewarded in proportion to the value they
create  such rewards have rather short-term orientations (Rappaport 1986; Haubrich 1994)  discourage managers from thinking deeply about the
longterm impacts of the firm’s activities, as well as the potential social harm that might arise Ethical concerns are thus viewed as imposing unnecessarily
burdensome restrictions and stifling the innovative activities that will lead to better firm performance.
4. Moral failures precede financial crises (Weitzner and Darroch 2009); given that we as a society do not wish to stifle future innovations in the financial
sector, better corporate governance becomes a critical task

Suggestion for boards of director:

1. Boards of directors need to devise more effective corporate governance structures in order to ensure strategic control over the ethical direction of the firm.
2. The board of directors should limit themselves to exercising financial control, while the other side believes that strategic control should be considered as an
integral part of a board’s mandate as well (Hendry and Kiel 2004).
3. Active corporate governance required in the wake of the recent global financial crisis is one that places a greater emphasis on the importance of ethics and
minimizing the potential social harm a firm may cause through its value-creating activities. Corporate governance of this order would clearly fall under the
mandate of strategic control

Board of director in Managers eyes:

1. One of the primary reasons why managers are most likely to seek counsel from the firm’s board of directors during a period of crisis, and why efforts
abound to limit the exercising of strategic control by the board during periods of fiscal calm, is because active strategic corporate governance is often
viewed by management as a constraint on strategic innovation and value creation.
2. Managers tend to view the board of directors as monitors and auditors (Charan 2005), not sources of ethical advice or good sounding boards for exploring
potential ethical dilemmas
3. as a proxy for ethical intent, and so the board is trotted out when required as a source of legitimacy
 When Governance Fails, Risky Behavior Follows

This behavior of managers seeking excessively risky opportunities in pursuit of personal gain when left to their own devices is not surprising nor is it
novel. Agency theory has long recognized the differences in interests and risk profiles between the principals of a corporation (i.e., shareholders) and
their agents (i.e., managers) and the implications for managerial behavior (Jensen and Meckling 1976). Classic agency theory suggests that we should
confidently always expect managers to explicitly choose risky behavior. As such, good corporate governance would simply be the board of directors,
acting in the interests of the shareholders, reigning in the overt and aggressive risky tendencies of management.

The decision to engage in risky behavior is not necessarily as calculative as agency theory would suggest. Instead, the decision to engage in behavior
with potentially significant harmful consequences is often the result of management’s asymmetrical perceptions of the harm/benefit relationship. And
it is for this reason that it should be integral for a corporation’s board of directors to engage in ethical/social risk assessments of their own and curb
managerial behavior via deliberate strategic controls

In the pursuit of profit generating activities, managers tend to ignore possible events that in their assessments are unlikely, even if the magnitude of
consequences are severe (Kunreuther 1976). Most managers have functional training but are not trained to think about ethical and social risks in a
sophisticated manner.

On top of the fact that the possibility of ethical and social harm will generally be under analyzed, managerial
perception tends to be asymmetrical as the possibilities for gain are of primary significance in assessing the
attractiveness of alternatives (MacCrimmon and Wehrung 1986). So when the possibility for profit exists,
managers will even under-consider the ethical risks that have been identified.
 What agency theory describes in general:

Principals need to exercise control as managers

Unlikely that action will be pursued. If there is
bear less of the risk and receive more of the
High risk action, it would be cautious
benefits

Low risk Ideal situation where managers and stakeholders

Predictable behavior for nominal gains
will benefit with high level of certainty

Managerial Action
High benefit Low benefit

Table 1. Impact of Managerial Action

The areas of interest for agency theory are those that fall in the top left quadrant, under the assumption that the rest are worldly situations, if not from
a magnitude of economic gain perspective, certainly from the point of view of differential interests

The top right quadrant represents low benefit and is thus unappealing to managers in the classic agency paradigm.

The bottom quadrants represent behaviors involving low risk, and thus, there would be no dilemma as the interests of managers and shareholders are
likely to be aligned.

Managerial actions have both social and financial implications, and not only are these two types of risks assessed differentially, but they are also
perceived differently:
• Managers tend to be overly optimistic about the potential financial benefits of their value-creating activities.
• There exists an asymmetry in the ways through which managers on average tend to perceive the potential positive benefits of their activities,
whether they may be financial or social, as opposed to the way managers tend to perceive the negative consequences and potential harm caused by
their action.
 Two complications discussed in this paper

High potential social harm Likely to consider the benefits more prominently Likely to focus on the potential financial benefits
than the associated harms and resist oversight and ignore the social harms

Ideal situation where interests with stakeholders are Look to the board for financial controls to guide
Low potential social harm likely to align behavior

Business Activity High potential social benefit Low potential social benefit

Table 2. Impact of Manager perceptions of their action

High potential social harm Strong need for strategic control/board most likely Need for strategic control to support compliance-
to encounter resistance based approach to ethics

Low potential social harm Optimal alignment of interests/least need of board

Financial control should be adequate governance
intervention

Value proposition High potential social benefit Low potential social benefit

Table 3. Corporate governance as part of the strategic process

What is the Role of Boards of Directors: Strategic or Financial Controls?

Limited to monitoring the strategy of the firm (Stiles and Taylor 2001). Monitoring is decisively an ex post and passive role.
A broader understanding of director responsibilities sees the board’s role in strategy as including defining the value proposition behind the
firm’s business model and developing a mission and vision statement for the organization (Pearce and Zahra 1991).

Early in the strategic process, the board can define the social benefits and limit the acceptable social harm, thereby establishing a unique risk
profile for the firm, which the directors can control.

Shaping the context, conduct and content of strategy, goes beyond these traditional notions of corporate governance and director control.
Strategic control represents a continuous process of influence by non-executive directors (McNulty and Pettigrew 1999) and is a direct
challenge to the view of managerial hegemony. Given the asymmetrical perceptions identified earlier, this is what is required to oversee
managers in situations falling in the top left quadrant of our table and consequently prevent future financial crises.

Context refers to the conditions under which the strategy process happens in firms. Boards of directors can alter
the context of the strategy process by situating ethical concerns as a central part of the firm’s value proposition,
as opposed to a constraint on innovative activities.
Conduct refers to the processes used to develop strategy at both board and management levels as well as the
implementation processes employed at management level.
Content :Boards can shape strategic content by asking management to justify their intentions and by evaluating
alternatives on multiple dimensions of benefit and harm.
Corporate Governance as Part of the Strategic Process
Profit for broad group of
Innovation
stakeholder
Failure?  Social harm accusation is that financial innovations have been
Financial Profit for narrow group of designed to avoid regulation, enable large risks whose consequences were
innovation stakeholder not fully understood, exploit fraudulent credit ratings, and manipulate
financial results for accounting purposes (Partnoy 2010).

Better corporate governance can mitigate the risk of large-scale harm that might arise when the focus of innovation is solely on the pursuit of goods
external to the practice of business, like profits, at the expense of internal goods that allow the practice of business to better society (Moore 2005).

Incorporating ethical considerations early in the strategy process will have wider implications for improving the ethical practice of management beyond the
financial services sector to other industries as well. In fact, any company that pursues business innovations in a manner that loses sight of the importance
of an accompanying social good or creating new wealth for multiple stakeholders needs to moderate the potential harm.

If ethics are to be prominently restored to the financial sector in the wake of the recent crisis, models of corporate governance will need to be re-framed to
reflect a stronger need for strategic control.

• The first step would involve the board of directors having a close look at the value proposition of the firm.
• Assessing the relative potential for managerial action in pursuit of value-creating activities to result in social
harm/benefit to understand boards of director strategic role.
Once the value proposition is understood, the strategic responsibilities of the board will fit into one of four scenarios.
 Corporate Governance as Part of the Strategic Process- cont’d

The top right and left quadrants : areas calling for a more active and strategic approach to corporate governance and control by the board of
directors.
Top right quadrant: management is more likely to invite the board to engage in the decision-making process, particularly if the financial benefits are
not high. With a lack of high financial or social benefits, managers will be less likely to be distracted from undertaking a robust assessment of the
potential social harm behind their value-creating activities. In these scenarios, where the potential for harm has been recognized as part of the
strategy-making process, management will likely adopt a compliance-based approach to ethics/CSR. There would be recognition of the need for
regulatory compliance; while ethics would be regarded as a constraint on the value-creating activities of the firm, management would be less likely to
resist board guidance

Bottom left quadrant : new models of strategic CSR position managerial behavior (Porter and Kramer 2006). The interests of various stakeholders will
be aligned with management and shareholders as ethical concerns are incorporated directly into the firm value chain.
The strategic process has an inherently ethical component, and so under these ideal conditions, the need for active strategic intervention by the
board of directors will be limited to an occasional review of firm strategy and classic monitoring of management to ensure that they are not
straying from the agreed upon value creation model.

The bottom right quadrant : calls for a limited role for active strategic governance. In this quadrant, the value proposition
of the firm carries with it little risk for significant social harm, and little potential for significant social benefit. Managers
have an incentive to just do their jobs, and most existing control structures should adequately guide prudent behavior

Value-creating innovations that have the potential for large-scale social harm, benefit, and financial returns are where the
strongest role for governance must be exerted, recognizing that these are the factors with an underlying potential to cause
the next crisis.
Conclusion
First and foremost, the recent disasters have been failures of corporate governance.

Responsible boards of directors need to objectively assess the potential social harms behind the value-creating
activities of the firm that managers tend to overlook. It is therefore incumbent on board members to know when they
can limit their responsibilities to the classic role of financial control, and when they need to become more active and
aggressive in exercising strategic control over the value-creation process.

Managers tend to focus on the potential returns in their activities and underestimate the risk, especially the social and
ethical risks that most are not trained to rigorously explore. Therefore, when there is a high potential for significant
social harm, corporate governance needs to be incorporated into the strategy-making process.
Case study 1:

Corporate Governance Failure: The Case Parmalat

Presented by: Satria R. Subekti

INTRODUCTION
• Founded in 1961 as a family run in Northern Italy

• Grew into one of the largest dairy and food companies in Italy

• Parmalat listed 214 subsidiaries in 48 different countries

• During 1990, Parmalat’s fraud was apparently beginning and lasted until 2003

• Parmalat executives used a wide range of unethical techniques to extend the fraud
I. Inflated revenues
II. Used receivables from these fake sales as collateral to borrow more money from banks
III. Created fake assets thereby inflating reported assets
IV. On legitimate debt that they hid from investors
FINANCIAL FLOWS
• In 1987 – finances of Parmalat was in a very poor shape

• Calisto Tanzi sold Parmalat to a dormant holding company

• Raised €150 million from outside investors – enable Parmalat to go public in 1990

• It had a market value of €300 million – key moment

• From 1990 to 2003, Parmalat inflated its revenues through double billing and
various methods of “creative accounting” – enable Parmalat to borrow money

• In 2003, it owed its investors €14 billion

THE FAILING OF PARMALAT
• During late 1999, Deloitte & Touche filed an internal
‘early warning’ report about Parmalat’s Latin American
operations, where it was losing over €300 million yearly.

• In March 2003, Deloitte’s Maltese office doubts about a

now confirmed, fictitious $7 billion inter-company
transfer were swiftly silenced internally.

• Calisto Tanzi has admitted transferring some €500

million to family.
CORPORATE GOVERNANCE FAILURE
1. LACK OF INDEPENDENCE OF NON-EXECUTIVE DIRECTORS

Parmalat’s eight out of thirteen directors were executive and they included Calisto Tanzi (Chair and
CEO); Tanzi’s son Stefano; Tanzi’s brother Giovanni; nephew Paola Visconti; Parmalat’s CFO Fausto
Tonna and the senior managers Luciano Del Soldato, Alberto Ferraris and Franseco Giuffredi.

Board Committees were also composed of members of executive management. This demonstrates that
the corporation’s governance structure was a mockery of an effective and strong governance process
and largely unethical.
CORPORATE GOVERNANCE FAILURE
2. CHAIR AND CEO POSITIONS AND ROLES WERE NOT SEPARATED

Tanzi held both positions. Principally, a firm’s board and Chair of the board serves to hire, fire, evaluate
and compensate management (including the CEO) based on performance. Clearly then, these
proponents argue, it is difficult to effectively execute the roles of both Chair and CEO under one person
as has been demonstrated by the case of Parmalat.

A single CEO and Chair cannot perform these tasks apart from his or her personal interests, making it
more difficult for the board to perform its critical functions, if and when the CEO is its Chair.
CORPORATE GOVERNANCE FAILURE
3. FAILURE TO IMPLEMENT ADEQUATE AND EFFECTIVE MONITORING SYSTEM

Parmalat’s management failed to implement an effective monitoring system. The entire monitoring
system was rotten to the core and Parmalat’s auditors and legal advisors literally helped Parmalat’s
management to sustain this fraud.
REFERENCE
• Ferrarini, G. and Giudici, P. (2005). Financial Scandals and the Role of Private
Enforcement: The Parmalat Case. European Corporate Governance Institute.
Retrieved April, 20 2016
• Melis, A. (2005), Corporate Governance Failures: to what extent is Parmalat a
particularly Italian Case? Corporate Governance: An International Review, 13: 478–
488. Retrieved April 23, 2016
• New detention in Parmalat probe. (2004, February 25) in BBC News. Retrieved April
21, 2016
Case study 2:

Management Practices, Relational Contracts, and the Decline of

General Motors

Presented by: Hendrik

There are ways to do it better — find it
Thomas A. Edison
 vs
General Motors was once
regarded as the best-
managed and most
successful firm in the
world. However, between
1980 and 2009 GM’s US
market share fell from 46
to 20 percent, and in 2009
the firm went bankrupt.
 Root cause of GM’s decline
1. High legacy costs
2. Poor quality and poor
design
3. Low productivity of its
production
4. Hostile between union and
and its blue collar workers

Product of Japanese competitor

especially Toyota
1. Cars with much higher
quality
2. Much better design
3. Significantly lower cost
4. Highly efficient productivity
 Lesson learnt too long
Outside General Motors, the idea that one could copy
NUMMI—or indeed any of Toyota’s advantages—by
simply copying the physical plant was seen to be mistaken
quite early.
These studies (along with many others) documented the
very different ways in which Toyota managed product
design, assembly, and its supplier network.
One of the GM managers was ordered, from a very senior level—
Despite this flood of research, it took General Motors (it) came from a vice president—to make a GM plant look like
more than two decades to imitate Toyota’s practices NUMMI. And he said, “I want you to go there with cameras and
consistently. While problems in perception and motivation take a picture of every square inch. And whatever you take a
picture of; I want it to look like that in our plant. There should be
are certainly plausible explanations of why GM took so
no excuse for why we’re different than NUMMI, why our quality
long to internalize fully the idea that Toyota was indeed is lower, why our productivity isn’t as high, because you’re going
doing something differently. to copy everything you see....
Immediately, this guy knew that was crazy. We can’t copy
Here we make the case that GM struggled for so long
employee motivation; we can’t copy good relationships between
because Toyota’s practices were rooted in the widespread the union and management. That’s not something you can copy,
deployment of effective relational contracts and you can’t even take a photograph of it.
Jeffry Liker, (“This American Life”, 2010)
 Comparing Managerial
Practices at Toyota and
General Motors
1. Automotive Assembly
In the 1960s and 1970s, jobs on the General Motors assembly
line were very narrowly defined; a worker would perform the
same set of tasks—for example, screwing in several bolts—
every 60 seconds for eight to ten hours per day.
Relationships between blue collar
workers and local management were
actively hostile.
Jobs on Toyota’s production line were even more
precisely specified: for example, standardized work
instructions specified which hand should be used to
pick up each bolt
Toyota with high-performance work systems
1) implement effective incentive systems,
2) pay a great deal of attention to skills
development, and
3) use teams and create widespread opportunities
for distributed communication and problem
solving.
 2. Supply Chain Management
• short-term—usually one-year—contracts, arm’s- length relationships, and a reliance on as many as six to eight suppliers per part.
• driven overwhelmingly by price and were governed by written contracts
• There was little communication between suppliers and either the central engineering groups who designed the parts
• In the Japanese automobile industry, in contrast, firms were much more likely to enter into long-term relationships with suppliers
and were much less likely to switch suppliers because of small differences in quoted price. Because of their belief in genchi
genbutsu (that detailed knowledge of context is valuable)
• Toyota’s use of “knowledge overlap” (Takeishi 2002) between its engineers and its suppliers’ engineers not only allowed for better
problem-solving, but also helped Toyota ensure that its suppliers remained near the production frontier. In contrast, a top
purchasing manager at General Motors explained in 1993: “GM doesn’t need to understand the technologies that our suppliers
use—we let the market tell us” (Susan Helper, unpublished interview)
• US and Japanese automobile firms also developed very different ways of handling the design changes that were frequently made
as responses to unforeseen interaction problems. Soderberg (1989), for example, estimates that on average, each part was
changed at least once in the industry during the 1980s. Thus suppliers were often not making precisely the part they were
originally contracted to make.
• In US practice, changing specifications meant legally changing the contract and suppliers were often able to extract high prices for
making these changes. In contrast, Japanese manufacturers simply asked suppliers to make the change both parties trusted each
other to “sort things out” later. As one supplier to several automakers said, “Honda cares about making the part fit the car, while
Ford cares about making the part fit the blueprint” (Mac Duffie and Helper 1997).
• Smitka (1991) describes these arrangements as “governance by trust.” This reliance did not mean that the Japanese paid less
attention to performance management than the American firms. Toyota’s relational contract with suppliers was not “a cozy
relationship,” as one manager of a supplier company pointed out (Helper and Sako 1995). The firm pushed its suppliers very hard
to reduce costs and avoid defects; it reduced the market share of suppliers who did not meet these strict goals and exited the
relationship completely if improvement was not forthcoming. In fact, Honda and Toyota collected more data about supplier
performance than GM did during this period.
 3. Product Design and Development
• Before 1984, product development within General Motors was managed by three separate organizations: a car division, such as Buick, that
was responsible for the car’s design; Fisher Body, which was responsible for the detailed engineering; GMAD (the General Motors Assembly
Division), which would modify plants and equipment to prepare for the new model and ultimately assemble the car.
• According to Keller (1989, pp. 100, 101, 106), “Each of the three (organizations) viewed itself as a separate entity with the necessity of
protecting its own autonomy.” Consultants hired to evaluate the process found that “the bureaucracy was a virtual quicksand bog of
procedures” in which “individuals were not held accountable for the decisions they made."
• Then in 1984, General Motors was reorganized into two divisions: “BOC”, which was composed of the Buick, Oldsmobile, and Cadillac car
divisions, and “CPC”, which was composed of Chevrolet, Pontiac, and GM Canada. Fisher Body and GMAD were broken up and combined
with BOC and CPC. The apparent intention was to streamline and integrate new product development, but the reorganization created
considerable confusion and did not noticeably improve performance. The informal agreements—or in our terms, the relational contracts—
that lower-level GM managers had established with each other were purposely broken up, either because they were not valued or because
they were assumed to be an active impediment to improvement. However GM’s formal organization was so cumbersome that work
proceeded even more slowly, as managers did not know if they could trust their counterparts to ignore some of the red tape (Keller 1989),
an observation consistent with Kaplan and Henderson’s (2005) suggestion that the need to remake relational contracts may be a significant
barrier to the ability to develop new ones.
• Both divisions relied on “light-weight project teams”—coordinating mechanisms in which the project manager attempted to coordinate the
work of the multiple functions whose work was critical to product design but without the benefit of any real authority over the team’s
members (Clark and Fujimoto 1991). Within this structure, key decisions about product design appear to have been driven as much by the
finance function as by the project leader, and engineers and process designers appear to have focused as much on the health of their own
local organizations as on the strength of the design process itself.
• In contrast, product design and development at Toyota was managed through tightly knit, dedicated “heavyweight” project development
teams. Team leaders were managers of long experience who had full authority over a team composed not only of representatives from
engineering and design, but also from manufacturing, sales, and marketing. They had responsibility for the entire lifecycle of the product:
from concept through detailed engineering to manufacturing and commercial launch. For example, one team defi ned its goal as designing a
car that felt like “a rugby player in a business suit,” a concept that informed every aspect of the subsequent process (Clark and Fujimoto
1991).
 Why Did General Motors Struggle to
Adopt Toyota’s Management Practices?
1. General Motors needs some time to understand exactly what Toyota was doing and to attempt to
implement the full bundle of practices necessary
2. General Motors had great difficulty building the relational contracts on which these practices relied

Gibbons and Henderson (2013) outline three broad classes of explanation for why relational contracts may be difficult
to build.
1. unobserved heterogeneity.
2. credibility.
3. clarity

 Up until the 1990s, GM was receiving oligopoly rents. In this situation, arm’s-length relations maximized was receiving oligopoly
rents. profits compared to relational contracts because they made suppliers easily replaceable, thus reducing suppliers’ ability to
bargain for a share of these rents (Helper and Levine 1992).
 GM’s stance towards both its blue collar employees and its suppliers had been deeply adversarial.
 The use of “teams” and of “joint problem solving” mean to reduce headcount (Russo 1984)
 Wall Street Journal in 1984 reported that GM wanted suppliers to locate within GM’s Buick City complex, to promote better
communication. However, GM provided no assurance of future business to suppliers who incurred the significant costs of moving,
making suppliers reluctant to relocate (Helper 1987).
Hansei / Reflection
• Hansei is a careful review after one action is taken. this is a part that plays a very big role and is absolutely
essential in learning. with few exceptions, western culture is lacking in this regard..
• Hansei is not about confirmation, not about celebrating success, but rather examining the real situation in
depth, no matter what the results of the inspection are..
• In Toyota culture, if attending a Hansei meeting after experiencing great success, the atmosphere was very tense
and serious. The team has far exceeded the target. However, that means they don't understand the process.
Their goals should be achieved. Even if it is in accordance with the target, the team still has to review the
process and actions, not just the final results.
Genchi Genbutsu
• Go and see. Understand the situation completely. Look with your own eyes. Only after that – Not before –
define the problem and design the solution.
• Toyota so strongly believes in the practice of personal fact collection and direct problem solving to the point that
Genchi Genbutsu is written on stone as one of the values that guide the company. This is a matter of operating
principle. They will not ignore this practice, even if punished.

Kaizen / Continuous Improvement

• Kaizen consists of three steps: First, create a standard. Second, follow
that standard. Third, find a better way. Repeat continuously.
Two aspects of GM’s experience that seems common to a wide range of firms.
1. Past success often led to extended periods of denial.
e.g. The leaders of the American steel industry were extraordinarily slow to
adopt competitive techniques (Christensen 1997), and most of the major
semiconductor producers refused to believe that their Japanese competitors
were outflanking them (Ferguson 1989)
2. Many large American manufacturers had difficulty adopting the bundle of
practices pioneered by firms like Toyota.
“high commitment” or “purpose driven” firms are particularly successful in
motivating their workforce (Pfeffer 1998)
Basically Kaizen is about people. People innovate, companies don’t. You must
change your attitude so that it works. It requires strong commitment and
takes a lot of time and effort.
Case study 3:

Corporate Entrepreneurship

Presented by: M. Rifai Siregar

 History of

• Google is a software company and search engine founded in

1998.

• The company’s slogan is “don’t be evil,” and its mission is to

organize the world’s information and make it universally
accessible and useful.

• Headquartered in Mountain View, California, Google was

founded when Larry Page and Sergey

• In 1999 they filed a patent for Google, Inc. and by the end of
1999 had secured $25M in equity funding from venture capital
firms including Kleiner Perkins Caufield and Byers, and Sequoia
Capital
• In 2000, Google began selling advertisements associated with
keywords and in 2004, had its initial public offering.
 Corporate Entrepreneurship

Structuring Corporate Entrepreneurship at Google

• We encourage our employees, in addition to their regular projects, to spend

20% of their time working on what they think will most benefit Google
• Another form of entrepreneurship at Google is research and incubation.
• Google publishes hundreds of scholarly articles per year and spent over $ 8 B
on R&D last year
• Google X Labs, the secretive incubator at Google where new ideas are
brought into fruition, is responsible for driverless cars, Google Glass, Project
Loon and proposals for new acquisitions
• Another strategy used by Google has been to develop “Google Cafes” where
employees are encouraged to interact with employees from different teams
and potentially find project partners for their non-core projecsts.
• Lastly, there is no stigma attached to failure at Google. While an unsuccessful
project is de-funded, any innovative or beneficial discovery is recorded for
future us
 Corporate Entrepreneurship

Small, Self-Managed Teams

• The majority of Google’s employees worked in teams of three engineers when
working on product development.
• Big products like Gmail could have 30 or more people with three to four people
on a team. Each team had a specific assignment (e.g., building spam filters or
improving the forwarding feature).
• Each team had a leader; however, leaders rotated on teams. Engineers often
worked on more than one project and were free to switch teams.

Reward Structure

• Google was called a playground on steroids where there were 18 cafes staffed
with seven executive chefs.
• Google was known for offering its staff incredible free perks: volleyball court,
gyms, gourmet lunches, and dinners (although leaving after eating dinner was
frowned upon), Ben & Jerry’s Ice Cream, yoga classes, employees could bring
their dogs to work, onsite masseuse, office physician, laundry service, travel back
and forth to work, etc
 Corporate Entrepreneurship

Reward Structure
• Google also had a policy of giving outsized rewards to people who came
up with outsized ideas, a team-focused approach to product
development, and a corporate credot hat challenged every employee to
put the user first (Hamel & Breen, 2007)
• At Google, annual bonuses amounted to 30% to 60% of base salary, but the
financial upside could be much, much bigger for those that came up with a
profit-pumping idea (Hamel & Breen, 2007).

• Therefore in 2004, they created the “Founders Awards.” These were

restricted stock options (sometimes worth millions) that were given
quarterly to teams that came up with the best ideas to increase the
profitability of the company
 Corporate Entrepreneurship

Hiring the right fit is crucial to maintaining the culture

• Managers have to make a strong case for how the new employees will help boost
revenues at the company.
• A brilliant tool that Google is using, called Foo.bar identifies candidates based
on their google searches for a given programming language
• “In-person interviews are designed to test cognitive ability, leadership ability, role-
related knowledge, and Googlyness

Separation Of Core Business From High Risk Ventures Is Essential

• it has realized that in order to maintain transparency to its shareholders it

needs to separate its core advertising business from other higher risk initiatives
• As such Google created Alphabet Inc., now the parent company of Google,
Google X, Google Capital, Nest Labs etc. This shows that while Google does not
shy away from entrepreneurship, it understands that there is a limit to how
experimental a corporation can be and keeping shareholders happy is always a
priority for corporations .
REFERENCE
Bhakhri, A., Ludena, L., & Silveri, C. Entrepreneurship at Google 15.368 Corporate
Entrepreneurship (2015).
Finkle, T. A. (2012). Corporate Entrepreneurship and Innovation in Silicon Valley: The Case of
Google, Inc. Entrepreneurship: Theory and Practice, 36(4), 863–884.
https://doi.org/10.1111/j.1540-6520.2010.00434.x
https://mybroadband.co.za/news/business/134740-what-the-new-alphabet-and-google-will-
look-like.html
https://www.businessinsider.com/google-20-percent-time-policy-2015-4/?IR=T