Managing Regulatory Involvement on Corporate Strategy and Structure DISSERTATION of the University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor of Business Administration submitted by Sebastian Frankenberger from Germany Approved on the application of Prof. Dr. Günter Müller-Stewens and Prof. Dr. Thomas Dyllick Dissertation no. 3157 Gutenberg AG, Schaan 2006 The University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation, without hereby expressing any opinion on the views herein expressed. St. Gallen, January 17, 2006 The President: Prof. Ernst Mohr, PhD Acknowledgments i Acknowledgments Looking back three years from now, I remember very well the first steps I undertook for this dissertation. Coming back from business life, I re-entered the world of academia and encoun- tered an environment that facilitated new perspectives on management, society and life. Per- sonally, those three years have been intellectually challenging and extremely enriching, some- thing I would never want to miss. At the heart of this extraordinary experience were the peo- ple who accompanied my way. In the name of all, some shall be mentioned. First of all, my thanks go to my doctoral advisor Prof. Dr. Günter Müller-Stewens. Besides his unquestioned expertise in the field of corporate strategy and strategy process, which he is always open to share with young colleagues, he also proved to possess outstanding people skills. Among those are his abilities to create an atmosphere of trust and to inspire others through his personal way of communicating. I may add that he is one of the most charismatic people I met in my life, and a professional and personal role model for many young people. I also wish to thank Prof. Dr. Thomas Dyllick, the co-advisor of my dissertation. His intellec- tual capacity always enabled him to provide constructive feedback and orientation, which he always presented in a very friendly manner. And whenever I myself had doubts about any particular weakness in my dissertation, I could be sure he had already identified it. Finally, my thanks go to Prof. Dr. Christoph Lechner who – without having a formal role in my dis- sertation – never hesitated to challenge my thoughts and provide helpful feedback. I further thank the Institute of Management, the University of St. Gallen and the Swiss Na- tional Science Foundation for providing the right infrastructure and resources for a successful dissertation and the opportunity to spend six months at Harvard Business School in Boston. At HBS, I owe considerable gratitude to Prof. Forest Reinhardt and his willingness to cooper- ate on the editing of an HBS case study on corporate strategy at the German energy giant E.ON. Thanks to his support, I was able to challenge my research at a very high level and to experience the exciting and inspiring atmosphere at Harvard University. I also want to thank Andrew Feldman and the folks of MIT Euroclub for their friendship and personal support. Like any dissertation, this study would not have been possible without the support of prac- tioners that provide the empirical data. For this reason, I am particularly thankful to all my interview partners at E.ON AG and elsewhere who dedicated their time and knowledge to this dissertation. In the name of all, I would like to thank Bernd Zizow, Dr. Diana Kolb, Christo- pher Delbrück, and Dr. Dierk Paskert. ii Acknowledgments As mentioned above, it is always the people that make any experience special. And there are many friendships that were born during my stay in St. Gallen and that will hopefully last for ever. To start with my research fellow and all time wingman Sebastian Knoll who walked on my side during my first steps as a researcher, who provided me with a corner to sleep in his one-room apartment, and who shared his thoughts on anything at anytime. Thanks Sebastian! Also, I would like to thank Manuel Seyferth for his great friendship, his skill to organize all kind of events, and his hospitality. Thanks to Dr. Katharina Klöckner and Dr. Wolfgang Jenewein for hosting Champions League evenings and their great humor. Being aware of the space limitations, I would like to briefly mention the following people knowing that behind any name there is a great story of intellectual exchange, personal support and leisure relief: Dr. Christian Bender, Dr. Berislav Gaso, Nicola Gesing, Susanne Hoare- Widmer, Frank Horn, Pedro Huerta, Dr. Mirko Jazbec, Florian Kappler, Fridericke Kollmann, Markus Kreutzer, Niklas Lang, Peppi Schnieper, Isabell Kuschel, Michaela Solterbeck, Har- ald Tuckermann, Dr. Hendrik Vater, Inga Voss, and my long-time friend “Bifi” Christian Strasser and all the other folks that supported this dissertation when playing “Schafkopf” cards with me. Not to forget about my former and current employer Mercer Management Consulting who showed flexibility and provided resources which made this dissertation project much easier. Thanks to my advisor Wolfgang Krenz, my team leader Thomas Kautzsch, and my doctoral colleague Jan Burgard. Finally, and most importantly, my thanks go to my family. Without them, I wouldn’t be where I am; evidently, I wouldn’t be at all without my parents. For this reason, I guess it is suited to dedicate this work to Ute and Fredy Frankenberger. Not only for their constant sup- port during this dissertation, but for the life they enabled for me, for their unconditional sup- port, their dedication to my well-being, and their love. At the same time, I want to thank my grandmother Maria Frankenberger. Fortunately, I can tell that my family grew bigger during this dissertation since I was lucky to find the white princess of my life, Dr. Karolin Marx. Without discrediting her father Eberhard Marx, I owe particular gratitude to her mother Karin who transcribed all interviews for me. And I hope she knows that I am very well aware of how big of a help this was for me. More importantly, I am happy to have them as my parents in law. Acknowledgments iii I could go on with thanking John Harvard’s Brewehouse in Cambridge for making the best chicken wings in the world, the Boston Red Sox for winning the world series, the “Kleiner Ochsenbrater” at the Viktualienmark in Munich for the best “Ochsen Zwibelrostbraten”; but actually, there is just one person left. Since this person is so special, I keep on feeling that no words are suited expressing my feel- ings about her. Beyond any experience I gained during this dissertation, there is one thing that stands high above. Thanks to the great ability of our joint doctoral advisor in selecting his students, I was able to meet the woman of my life. And instead of dedicating this piece of work to her, I decided to dedicate my life to her. If ever, I should dedicate a book to her, it should be about poetry and not about management. And Karolin, once again, I love you, and I want to spend the rest of my life with you. Munich. February 14, 2006 Sebastian Frankenberger Table of contents v Table of contents Table of contents i List of figures v List of appendices ix List of abbreviations x Summary xi 1 Introduction 1 1.1 Dissertation as part of the ICS Research Project 1 1.2 Research objective and guiding questions 2 1.3 Theoretical relevance 7 1.4 Practical relevance 10 1.5 Outline of dissertation 12 2 Theoretical background 14 2.1 Strategy process research 15 2.1.1 General conceptualizations and principles 16 2.1.2 A look at prominent strategy process models 19 2.1.3 Strategy formation and the environment 26 2.1.4 External actors and their influence on strategy and structure 29 2.1.5 Overarching constructs: consistency, fit, and alignment 36 2.1.6 Performance outcomes 43 2.2 Organizational theory lenses on strategy process 45 2.2.1 Criteria for theory selection 46 2.2.2 Evolutionary theory 48 2.2.3 Stakeholder theory 52 2.2.4 Neo-institutional theory 56 2.2.5 Critical evaluation of theory lenses 61 vi Table of contents 2.3 Selection of neo-institutional theory for this dissertation 62 2.3.1 Overview of institutional theory 62 2.3.2 Introducing strategic agency into institutional theory 66 2.3.3 Strategic responses to institutional pressures 69 2.3.4 Neo-institutional theory and the strategy formation process 76 2.4 Summary and discussion 80 3 Research framework 82 3.1 Unit and level of analysis 82 3.2 Theoretical framework 85 3.3 Summary and discussion 90 4 Research setting 92 4.1 Industry and case study selection 92 4.2 Introduction to the selected case company: E.ON 94 4.3 German energy sector 98 4.3.1 Introduction 98 4.3.2 Regulatory initiatives as triggers of change 99 4.4 Actors in the field 107 4.5 Summary and discussion 113 5 Methodology 114 5.1 General research methodology 115 5.1.1 Quantitative methodologies 115 5.1.2 Qualitative methodologies 115 5.1.3 Selection of qualitative methodology with some quantitative elements 116 5.2 Research design 117 5.2.1 Study design: A two-phased approach 118 5.2.2 Validity and reliability 121 5.3 Phase I: Resource-based outside-in analysis 122 5.3.1 Data collection Phase I 123 5.3.2 Data analysis phase I 126 5.4 Phase II: Interview-based in-depth case study 129 [...]... strategy and structure and, vice versa, the influence of the corporation on its environment Chapter 2.1.5 goes on to outline the overarching constructs for our study: corporate strategy and its elements; resource allocations as executed strategy; consistency between resource allocations and the defined concept of corporate strategy; fit among the elements of corporate strategy and with the environment; and. .. organization and environment and among the elements of corporate strategy and structure (Venkatraman, 1989; Miller, 1992) The specific research question at this point is as follows: Q2: How and in what sequence are the concept of corporate strategy and the elements of corporate strategy and structure aligned following regulatory involvement? (3) Externally directed responses toward regulatory involvement. .. of regulatory actors on resource allocations • Internal alignments of corporate strategy and structure • Externally directed responses toward regulatory involvement 7 Managing regulatory involvement - towards an integrative theoretical framework • Theoretical framework and institutional mechanisms • Relative importance and coordination of market and non-market strategies 8 Discussion and implication... outline of chapter 2 and its principle contents: 2.1 Strategy process research •General conceptualization and principles •A look at prominent strategy models Strategy formation and the environment •External actors and their influence on corporate strategy and structure •Overarching constructs: consistency, fit, alignment •Performance outcomes 2.2 Organizational theory lenses on strategy process •Criteria... the extant concept of corporate strategy? (2) Internal alignments of corporate strategy and structure The second phase of the study will deepen our understanding of the actual effects of regulatory involvement on the firm beyond the very general influence on resource allocations and strategy making Instead of asking whether corporate strategy and structure are affected, we want to understand how this... creation of its institutional environment and the corresponding regulatory actors (Hillman et al., 2004) Next to internal alignments, externally directed strategies can be equally important for managing the effects of regulatory involvement on corporate strategy and structure This poses the following research question: Q3: How can corporations influence the creation of the institutional environment and. .. 6 presents the results of this study and consequently sits at the heart of this dissertation According to the three distinct research questions, results will be presented on the direct impact of regulatory actors on corporate resource allocations, on internal alignments of corporate strategy and structure, and on externally directed responses towards regulatory involvement While results remain separated... which elements of corporate 1 Introduction 5 strategy and structure change, and in what sequence Referring to the first research question, we suggest that if inconsistency between resource allocations and the concept of corporate strategy exists, strategies and structures internal to the firm need to be realigned to reduce dissonance within the organization (Burgelman and Grove, 1996) and achieve fit... regulatory actors in particular, into the strategy formation process Building on neo-institutional theory, we intend to improve our understanding and develop propositions on the following issues: How do regulatory actors influence strategy formation? What is the actual impact on corporate strategies and structures? How can corporations manage regulatory involvement? Beyond this, we aim at developing a theoretical... represented by corporate resource allocations is influenced by regulatory actors Second, we explore how strategy formation is impacted in terms of internal alignments of corporate strategies and structures And third, we elaborate on the corporation’s externally directed response strategies in order to reversely influence its environment Utilizing a neo-institutional perspective on strategy formation, and comparing . 2.1.3 Strategy formation and the environment 26 2.1.4 External actors and their influence on strategy and structure 29 2.1.5 Overarching constructs: consistency,. Third Concept of Corporate Strategy: Focus and growth (E .ON) Appendix 8: Fourth Concept or Corporate Strategy: Integration and Performance (E .ON) Appendix