A Strategic Risk Management Framework for Multinational Enterprise

Liberalizations of international trade and improvements in communication and information technologies allow companies to organize around extensive multinational structures of cross-border sourcing networks. In a freely interacting market setting multinational enterprise is exposed to financial and economic risks that can be monitored within conventional reporting systems and managed through use of various derivative instruments. All the while, a dispersed multinational structure can be vulnerable to disruptions caused by changing economic conditions, competitive moves, and geopolitical developments as well as natural disasters and terrorist events that are difficult to forecast. Consequently, current risk management techniques span from conventional gap analyses and quantitative value-at-risk measures of market-related exposures to more qualitative assessments of competitive exposures and low-frequency high-impact disaster events based on scenario analyses. Hence, there is a need to consider risk management approaches that integrate relatively transparent financial exposures with the consequences of uncertain and hard-to-quantify event risks. This paper outlines the contours of such a strategic risk management framework incorporating conventional exposure measures and simulation techniques to assess vulnerability and responsiveness in a turbulent global setting

An Industry Perspective

Multinational enterprise in control of dispersed overseas resources and capabilities has been linked to strategic flexibility that allows the firm to take advantage of opportunities and manage exposures imposed by changing environmental conditions. This paper analyzes the implied performance and risk management effects in a comprehensive sample of public firms and finds supportive evidence for the proposition that multinationality can enhance performance across industries. However, the ability to exploit upside potential and avoid downside risk is industry specific. The positive effects of multinationality are found particularly pronounced among firms operating in knowledge intensive service industries while firms in capital-intensive primary industries display the inverse relationships. Keywords: Strategic flexibility, Real options, Risk managemen

Multinational Performance Relationships and Industry Context

Studies of multinational performance have moved from linear, to quadratic and to cubic relationships but despite this seeming increase in sophistication, the empirical evidence has remained contradictory. The hypothesized performance relationships of multinationality have typically been driven by assumed trade-offs between underlying cost/benefit functions. However, this paper argues that cost/benefit trade-offs associated with international expansion are shaped by industry specific conditions that systematically confound the performance outcomes of multinationality. Whereas prior studies often have been confined to a focus on manufacturing and smaller cross-sectional samples, this study analyses the multinational performance outcomes across a comprehensive industry-wide dataset during 1996-2000. The analyses show positive multinational performance relationships in manufacturing and knowledge-based service industries whereas capital-based service industries have negative performance relationships. These results support the proposed heterogeneity in multinational performance effects across industry contexts

Capital Structure Contingencies

Multinational enterprise provides access to a diverse resource base that may support options related business initiatives and operational flexibilities with a potential to improve performance and risk management capabilities. Hence, multinationality should be associated with strategic responsiveness as real option structures allow the corporation to exploit new initiatives and pursue alternative actions. This, in turn should improve economic performance and risk management capabilities as corporate activities are adapted and new initiatives introduced in response to changing global conditions. The analyses of a cross-sectional sample comprising 1357 multinational firms during 1996-2000 partially support the proposed performance and risk management effects but also raise issues for further study

Corporate Relationship Management as a Driver of Socially Responsible Behavior

How was CSR effectuated by Scandinavian management; does CSR make a difference/corporate relationship management drove CSR, as corporations grow and internationalize the need for CSR increases, there has been a shift towards in CSR requirements over the past decade/CSR can extend the scope of corporate risk management, corporate relationship management is good risk management, CSR can pay off in the long run

Responsive Dynamics as the Source of Organizational and Societal Advantage

Contemporary studies must address the challenges of responding to abrupt events in highly dynamic and complex environments. We argue that decision structures and information processing capabilities enhance the ability of organizations and societies to respond effectively to the changing conditions for durable advantages. Sustainable performance arguably derives from interactive decision-making processes that deal with opportunities as they emerge informed by updated environmental analytics. The combination of experiential insights from decentralized responses and forward-looking reasoning at the center identifies a dynamic adaptive system of interacting fast and slow processes. The fast information processing observes local environmental stimuli whereas the slow information processing interprets these events and reasons about future developments. When the fast and slow processes interact they form a dynamic system that allows an organization or society to adapt gradually to the turbulent conditions. We apply the model of fast-slow interactions in organizations and societies as the key driver of sustainable adaptation

The Dynamic Responsiveness of Organizations

Organizational studies should address contemporary challenges of dealing effectively with the increasingly complex and dynamic business conditions. In this context we argue that structural features are linked to the corporate strategy process and affect the organization’s ability to respond to ongoing environmental changes. Sustainable performance arguably derives from integrative strategy-making where business opportunities are pursued as they emerge while being directed and coordinated through forward-looking analytics. This combination of decentralized responsiveness and central reasoning identifies a dynamic system of interacting fast and slow processes. The fast system observes and reacts to environmental stimuli and the slow system interprets events and reasons about future actions. When the fast and slow processes interact they form a dynamic adaptive system that allows the organization to respond to uncertain and changing conditions. We apply this model to interactions among individuals in organizations where ongoing experiential insights among dispersed operating managers interact with the forward-looking planning considerations around top-management. This identifies an organization that is able to react to frequent and often unpredictable changes and adapt

Strategy as Central and Peripheral Processes

Corporate entrepreneurship is deemed essential to uncover opportunities that shape the future strategic path and adapt the firm to environmental change (e.g., Covin and Miles, 1999; Wolcott and Lippitz, 2007). At the same time, rational central processes are important to execute strategic actions in a coordinated manner (e.g., Baum and Wally, 2003; Brews and Hunt, 1999; Goll and Rasheed, 1997). That is, the organization’s adaptive responses and dynamic capabilities are embedded in integrative structures that accommodate dispersed business initiatives. The dual concerns for integration and entrepreneurial behavior are reflected in the conjoint need for effective routines and exploratory search in adaptive systems (e.g., Pfeifer and Bongard, 2007; Sutton and Barto, 1998). It has also been expressed as a need to balance exploitation and exploration (March, 2001) and configure ambidextrous organizational forms (e.g., O’Reilly and Tushman, 2008; Tushman and O’Reilly, 2004). In strategy research, optimization and rejuvenation perspectives have variously been described as intended and emergent strategies (Mintzberg, 1978; Mintzberg and Waters, 1985), top‐down and bottom‐up strategies (Nonaka, 1987), induced and autonomous strategy processes (Burgelman, 2005; Burgelman and Grove, 1996, 2007), central planning and decentralized initiatives (Andersen, 2000, 2004, Andersen and Nielsen, 2009). Burgelman and Grove (2007) outline such a combined strategy process and observe how central direction and dispersed exploration can change over time influenced by strategic leadership

Risk Management and Value Creation

Corporate failures, periodic recessions, regional debt crises and volatile financial markets have intensified the focus on risk management as the means to deal with turbulent conditions. The ability to respond effectively to abrupt environmental impacts is considered an important source of competitive advantage. Yet, surprisingly little research has analyzed whether the presumed advantages of effective risk management are associated with superior outcomes. Here we present a comprehensive study of risk management effectiveness and the relationship to corporate performance based on more than 33,500 observations in 3,400 firms over the turbulent 20-year period 1991-2010. Determining effective risk management as the ability to reduce earnings and cash flow volatility, we find that both have significant positive relationships to lagged performance measures after controlling for industry effects, company size and financial leverage

Seizing Opportunities and Managing Threats

Strategic responses to complex and frequent environmental changes must balance the tension between innovative opportunistic search and optimization of operating processes. The ability to survive and thrive depends on an ability to facilitate dispersed exploratory initiatives, test their commercial viability, and exploit the associated business opportunities. However, dispersion of authority requires coordination as well as empowerment calls for extended controls. Hence, there is a tension between the aim of avoiding diversion of corporate resources through tight control of plans and facilitation of decentralized autonomous initiatives searching for opportunities. This prescribes a strategy process that gives direction and forms structure while it at the same time enables innovative behaviors and entrepreneurial initiatives. To this end, the paper outlines an integrative model that combines centrally planned (induced) and decentralized (autonomous) strategy-making with interactive control processes. The strategy and management accounting literatures are synthesized to develop the theoretical underpinning for the model and its proposed outcome effects. It is argued that interaction control of central and dispersed strategy-making creates a dynamic system that drives organizational adaptation. The outmoded strategic control concept is revisited and updated for contemporary responsiveness needs under increasingly turbulent conditions. Finally, the paper lays out a method for an empirical survey-based study that can test the propositions from large-scale corporate sampling