The broad explanation of these results lies with an intriguing question: Which of two types of conflicting relationships have the largest impact on a company’s value? The first is the conflict between the interests of minority shareholders and managers (who appropriate value through their compensation packages). The second is the conflict between minority shareholders and large controlling shareholders (such as family members who appropriate value through dividends and other mechanisms). In firms with a CEO who is also the founder, the first conflict is reduced. The markets apparently are a lot less concerned about the second conflict, which remains in these cases, because the overall effect is to create more value for minority shareholders. But in companies with a descendant (but nonfounder) CEO, it is more likely that both conflicts exist, and minority shareholders could suffer a double impact.
The findings of this paper have implications for all firms making the transition from founder to next generation — and for their shareholders. According to one estimate, this could be as many as 40 percent of all America’s family-owned businesses between 2003 and 2008.
Broad View of R&D
Sendil K. Ethiraj ([email protected]) and Phanish Puranam ([email protected]), “The Distribution of R&D Effort in Systemic Industries: Implications for Competitive Advantage,” Advances in Strategic Management, Vol. 21, 2004. Click here.
If you make an essential component of airplanes, should your R&D effort focus solely on improving and developing that component? Or is that too narrow? For competitive purposes, should R&D also consider other critical airplane parts, even those that you don’t manufacture? Sendil K. Ethiraj, assistant professor of corporate strategy and international business at the University of Michigan Business School, and Phanish Puranam, assistant professor of strategy and international management at London Business School, examine this fundamental R&D issue.
They examine the PC component industry, which they call a “systemic industry; the way the components work together determines the value that consumers obtain from the product.” The authors studied the R&D efforts of 111 companies in five PC component sectors — microprocessors, random access memories, display/graphics, rigid disk drives, and mainboards — over a 22-year period, from 1978 to 1999.
The PC component industry was of interest for two reasons. First, the functions of a PC rely on highly interdependent components. Second, most component makers in the PC industry specialize in manufacturing a single product type; more than 90 percent of the sample companies generated at least 75 percent of their revenue from a sole component.
The authors explain why such companies need to take a broader view of their R&D. In the PC industry, for example, faster hard disk drives have an impact on how much memory is required. Memory manufacturers must, therefore, think about R&D in terms of the system, not just their component. Of course, hard disk manufacturers should do the same, although they generally don’t.
One problem, the authors contend, is that intense competition among hard disk makers encourages R&D to be focused solely on improving hard disks. As a result, manufacturers miss opportunities to take advantage of advances in the broader PC system, and it can lead to mismatches between the components being produced and what the PC actually requires.
Professors Ethiraj and Puranam found, however, that the average company in the sectors studied earmarked only 16 percent of its annual R&D efforts to its own component product market. The authors conclude that broadly focused R&D campaigns enable companies to keep abreast of changes to the overall technological system. Diversified research also improves R&D productivity in the core component technology. System-level R&D may also open more doors for licensing technology. This, the authors suggest, is an avenue worthy of further research.