To be frank, the CEO of Chr. Hansen, Lars Frederiksen, could not understand the general public’s harsh and emotional critique of private equity funds (PEF). Accusations were plentiful: World champions in asset stripping loading their investment objects with exorbitant amounts of debt only to suck out capital for investors! Aggressive cost-cutters ignoring employees and suppliers! Moreover, PEFs were infamous for their aggressive tax planning. Indeed, they were routinely charged with all sorts of iniquities. However, the main reason for the unfavorable light in which PEFs were portrayed in the media was related to the fact that they were a relatively new phenomenon in the Danish business community. Perhaps the fear of the unknown meant that public and media attention tended to be one-sided.

According to Frederiksen, the reality of PEFs was more complex. Each PEF was distinct and pursued different strategies, making it unfair to make naïve generalizations. He felt that the story of Chr. Hansen offered an interesting glimpse into the workings of PEFs. The 2005 delisting of Chr. Hansen’s ingredients activities from the Copenhagen Stock Exchange following the DKK 8.2 billion takeover by the French PEF, PAI Partners, marked the beginning of a self-examination process that was remarkably “healthy” and helped to reshape the company.

As he prepared to present the 2006/7 financial results, Henrik Theilbjørn, CEO of the international brand retailer IC Companys, recalled the course of events that had resulted in his appointment to that position in December 2004, following two years as CFO. IC Companys had been established through the merger of two Danish companies, InWear Group and Carli Gry International, in April 2001. Mediocre economic performance in the years following the merger had resulted in a poor working climate and inadequate management capacity. Frustration was widespread. The problems were further exacerbated by tensions among the main shareholders of the company. In his six years with the company, Theilbjørn had watched the situation unfold.

From a revenue perspective, the merger was an “organizational blunder” that had caused substantial annual losses despite the benefits of economies of scale and the elimination of more than 400 redundant employees. The most demotivating factor was, perhaps, the management paralysis that led key people to resign. It was at this moment that a key shareholder and founder of InWear Group, Niels Martinsen, called for an extraordinary general meeting with the sole purpose of installing a new management team. For Theilbjørn, this marked the starting point of a challenging journey to first turn the company around and then unleash the company’s growth potential: “We have accomplished the turnaround and are experiencing growth in the majority of our brands and markets. There is a tremendous potential in IC Companys and I look forward to being part of unleashing that potential in the future” (interview with Henrik Theilbjørn, February 1, 2008).

The search for corporate success

Why are some firms successful – perhaps continually – while others are not? This is the fundamental question in the field of strategic management. In this regard, we argue that more attention needs to be dedicated to the role of organizational design and management processes in an attempt to understand corporate success. In this chapter, we provide an overview of our main arguments and explain a number of the key concepts and ideas used throughout this book.

The search for corporate success serves as the basis for organizational strategy. In the jargon of the strategic management field, the search for success is equivalent to the search for competitive advantage – the potential to earn above-average returns. The key question, then, is the following: What are the sources of those competitive advantages?

As he presented the company’s guidance for the coming quarters, Coloplast’s President and CEO, Sten Scheibye, felt an incipient pessimism among the equity analysts as they posed critical questions. Flanked by CCO Lars Rasmussen and CFO Lene Skole, he had already gone through the company’s full-year financial statement for 2006/7. Now the corps of equity analysts was puzzled about the company’s long-term targets, which had been the subject of varying statements in recent years. While recognizing the need for clarity, the critique that Coloplast had become less transparent did not affect Scheibye. According to him, the company’s underlying performance for 2006/7 was satisfactory, with revenue growth of 20 percent and substantial profitability gains resulting from the ongoing relocation of production to Hungary and China (see Table 5.1). Commenting on the full-year financial statement, the CEO noted: “Our financial statement was not well-received . . . I understand why they are questioning our forecasts. Yet, I do not grasp their pessimism. It is not a downgrading” (Jyllands-Posten, November 22, 2007).

In reality, Sten Scheibye was more concerned with the concrete means of realizing the outlined targets. In that respect, 2007 had been a very eventful and dramatic year. Coloplast was in the middle of a transformation. Originally a Danish company mainly operating in Europe, it was now becoming a truly global company with value chain functions scattered all over the world and a growing position as a global market leader. While the relocation of production was well underway, other areas, such as R&D, sales, and marketing, were on the threshold of becoming more standardized and global. During the previous spring, following comprehensive analytical work, Coloplast launched the biggest organizational restructuring in a quarter of a century, which affected most of the company’s employees, product divisions, and business areas (see Figures 5.1 and 5.2). These multiple, pervasive changes needed time to settle. “This is the largest change introduced to the company in the last 23 years. We need to break radically with the way we organize our work and processes if our growth ambitions are to be realized” (CCO Lars Rasmussen, Berlingske Tidende, February 22, 2007).

Introduction

Given our concern with the ways in which organization and management contribute to corporate success, we find ourselves squarely in the universe of strategic management. Fundamentally, strategic management is about coordinating activities related to the delivery of value to customers in a way that is not only supportive of success but also different from the competition – perhaps even unique. In fact, the former (success) is largely derived from the latter (differentiation). While strategists and strategic management academics may agree on this basic view, there are numerous paths to differentiation and success may be assessed in a variety of ways. In this chapter, therefore, we briefly survey some of the key ideas on superior firm performance, heterogeneity, and strategic management that have emerged in recent decades.

Specifically, we discuss a range of perspectives on how resources and capabilities contribute to competitive advantage, and argue that such ideas need to focus more on understanding the interplay between resources and capabilities on the one hand and organization and management on the other. We show that: (1) The organizational design and management processes of a firm may be a distinct resource for that firm; and that (2) improvements and changes in these factors may contribute to sustaining competitive advantages; not least because (3) they may assist in the process of building new strategic resources and capabilities.

It was with a sense of ambiguity that Ditlev Engel, CEO of the Danish wind turbine manufacturer Vestas Wind Systems, gave his speech at the annual meeting of the Confederation of Danish Industries in 2007. On the one hand, he saw the annual meeting as a unique opportunity to propagate key messages about Vestas and its global role in defining modern energy. On the other hand, he found himself in front of an audience with backgrounds in various industrial companies, companies that had characteristics different from those of Vestas. He pondered whether they fully grasped the dynamics of the wind industry and the global challenges facing Vestas. Of course, Vestas enjoyed the attention and interest it received from business practitioners, the political community, and the general public. In fact, it was one of the most traded stocks on the Copenhagen Stock Exchange and had a relatively large number of private investors as shareholders. Within the Confederation of Danish Industries, it was regarded as one of the crown jewels with respect to technology and know-how. However, while it acknowledged its affiliation with those companies within the Confederation, Vestas’s self-understanding, mindset and modus operandi were more similar to those of IT companies. These companies typically operated with growth scenarios of 30 percent per annum and swift decision-making processes. Touching upon this dilemma in his speech, Engel explained:

Despite politicians’ receptiveness and sympathetic attitudes, Vestas did not always feel that they fully understood the big picture. When the Australian government announced its refusal to raise the mandatory renewable energy target (MRET), which was initially designed to support industrial growth, wind power advocates argued that billions of dollars in potential investment would evaporate. Vestas, for example, would reconsider its plans to build a turbine blade manufacturing plant in Tasmania, a multimillion dollar investment. Another example involved its application to install a number of test turbines off the Danish shore. The offshore market was a strategic priority but the turbines needed further testing prior to large-scale market penetration. When referring the issue to a committee, politicians had discussed it animatedly. However, as of spring 2008 no defining decision had been made, which stretched Vestas’s patience.

In a theory that is today referred to as “survival of the fittest,” Charles Darwin presented his view of competition among different species. A similar theory can be applied to competition among firms. It is not necessarily those firms that are largest or have the most resources that do best, but rather those that are smartest, those that see the new opportunities, and those that develop new ways of doing business. What Darwin called “adaption to change” is similar to what we, in the context of competition among modern firms, denote as “management innovation.” Management innovation is about finding new, smarter, and more efficient ways of organizing activities in firms. Often, changes in the firm’s environment, such as the introduction of new technologies or consumer trends, create opportunities for management innovation. For example, the Internet has paved the way for many management innovations, like e-business and open source communities. In general, the most successful firms will be those that discover and seize new opportunities and then succeed in turning them into management innovations.

While technical innovation is about developing products and production processes, management innovation is defined as “the implementation of new management practices, processes and structures that represent a significant departure from current norms.” Note the elasticity of this definition: “Current norms” may be defined at the level of the firm, the industry, or even the world. In the following, we think of management innovation in an equally pragmatic manner; thus, there is no pretension that what we here call management innovation is necessarily something that is new to the world. The key point is that while technical innovations aim at creating new activities (products or production processes), management innovations aim to organize activities in new ways in order to increase the value that firms can create and appropriate. As outlined in the first two chapters, we think of management innovations as encompassing the following aspects:

• new ways of configuring and coordinating the division of labor;

• new ways of rewarding employees;

• new ways of allocating authority;

• new ways of measuring input and output performance;

• new standard operating procedures;

• new ways of involving stakeholders; and

• new methods of global governance.

Basically, a management innovation is a new and better way of organizing, controlling, coordinating, and facilitating existing activities in the firm, explicitly implemented by management to increase value creation and appropriation, and perhaps to a confer competitive advantage on the firm.

In 2008, Jørgen Vig Knudstorp, CEO of the Danish toymaker LEGO, recalled the company’s development during the preceding four years. According to Knudstorp, the journey had been a rollercoaster ride – overwhelming, uplifting, and, at times, bumpy, chaotic, and highly emotional. He joined the company’s strategic business development unit in 2001 before becoming Head of Corporate Affairs and interim Chief Financial Officer (CFO) in 2003 (Figure 3.1). In 2004, he took on the Chief Executive Officer (CEO) position. At the time, the LEGO Group was suffering from annual losses amounting to billions of Danish kroner (DKK), which threatened the company’s independence. The organization was stressed and its identity was unclear. The company had basically lost its way. The initial steps of Knudstorp’s survival plan had been to regain financial control of the company and define its future direction.

From a financial perspective, the turnaround plan was successful. Following a 40 percent decline in sales, the LEGO Group reported annual losses of DKK 1.8 billion in 2004. However, in 2006 and 2007, net profits amounted to DKK 1.29 billion and DKK 1.02 billion, respectively (Table 3.1). Following the implementation of a number of cost-reduction initiatives – such as the relocation of production, the downscaling of the number of components used in production, the divestment of assets (including LEGOLAND theme parks), and a renewed focus on core product lines, user groups and markets – the LEGO Group had stabilized and was building a profitable business platform to serve as the backbone for sustainable growth in the years to come (Figure 3.2).