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The Stock market, corporate strategy, and innovative capability in the 'new economy': the optical networking industry

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The purpose of this paper is to analyze the impact of the stock market on the innovative capabilities of high-technology companies that have been central to the "new economy". The empirical focus is on equipment suppliers in optical networking -- an industry that integrates the bandwidth potential of fiber optics with the data communications potential of the Internet. Through analysis of the changing role of the stock market in the accumulation of innovative capabilities at major optical networking companies - Alcatel, Cisco Systems, Nortel Networks, and Lucent Technologies -- this study provides a foundation for assessing the impact of the stock market on strategic decision-making and organizational learning at the companies concerned, particularly in the context of the volatility that has characterized financial and product markets over the past few years. This paper shows how three "old economy" companies -- Nortel Networks, Lucent Technologies, and Alcatel - competed with a "new economy" company, Cisco Systems to use their corporate stock as an acquisition and compensation currency for the accumulation of innovative capabilities. This paper then connects the analysis of the changing roles of the stock market in the accumulation of innovative capabilities to the "social conditions of innovative enterprise" framework that emphasizes the importance of the roles of three social conditions in the innovation process: a) strategic control that determines how strategic decision makers choose to allocate resources to uncertain investments in innovative capabilities, b) organizational integration that determines the structure of incentives that motivates employees to apply their skills and efforts to collective learning processes, and c) financial commitment that determines whether the enterprise will have the resources available to it to sustain the cumulative learning processes until they can generate financial returns. Specifically, the authors explore the impact of the use of stock a) as an acquisition currency on strategic control and b) as a compensation currency on organizational integration, as well as c) the effects of using stock as an acquisition and compensation currency on corporate cash flow and restructuring, and hence on the sources of financial commitment. Given that, with the dramatic slowdown of growth in the telecommunications industry in 2001, every optical networking company has had to engage in substantial organizational restructuring, the authors explore how the use of corporate stock as an acquisition and compensation currency in the boom may have rendered make these companies more vulnerable than they otherwise would have been to the current slump.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2002/2002-66.pdf

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