314 Part 3: Strategic Actions: Strategy Implementation
Managerial opportunism is the seeking of self-interest with guile (i.e., cunning or
deceit).^23 Opportunism is both an attitude (i.e., an inclination) and a set of behaviors (i.e.,
specific acts of self-interest).^24 Principals do not know beforehand which agents will or
will not act opportunistically. A top-level manager’s reputation is an imperfect predictor;
moreover, opportunistic behavior cannot be observed until it has occurred. Thus, princi-
pals establish governance and control mechanisms to prevent agents from acting oppor-
tunistically, even though only a few are likely to do so. Interestingly, research suggests that
when CEOs feel constrained by governance mechanisms, they are more likely to seek
external advice that, in turn, helps them make better strategic decisions.^25
The agency relationship suggests that any time principals delegate decision-making
responsibilities to agents, the opportunity for conflicts of interest exists. Top-level manag-
ers, for example, may make strategic decisions that maximize their personal welfare and
minimize their personal risk.^26 Decisions such as these prevent maximizing shareholder
wealth. Decisions regarding product diversification demonstrate this situation.10-1b Product Diversification as an Example of an Agency Problem
As explained in Chapter 6, a corporate-level strategy to diversify the firm’s product lines
can enhance a firm’s strategic competitiveness and increase its returns, both of which
serve the interests of all stakeholders and certainly shareholders and top-level manag-
ers. However, product diversification can create two benefits for top-level managers that
shareholders do not enjoy, meaning that they may prefer product diversification more
than shareholders do.^27
One reason managers prefer more diversification compared to shareholders is the
fact that it usually increases the size of a firm and size is positively related to executive
compensation. Diversification also increases the complexity of managing a firm and its
network of businesses, possibly requiring additional managerial pay because of this com-
plexity.^28 Thus, increased product diversification provides an opportunity for top-level
managers to increase their compensation.^29
The second potential benefit is that product diversification and the resulting diversi-
fication of the firm’s portfolio of businesses can reduce top-level managers’ employment
risk. Managerial employment risk is the risk of job loss, loss of compensation, and loss of
managerial reputation.^30 These risks are reduced with increased diversification because a
firm and its upper-level managers are less vulnerable to the reduction in demand associ-
ated with a single or limited number of product lines or businesses. Events that occurred
at Lockheed Martin demonstrate these issues.
For a number of years, Lockheed Martin has been a major defense contractor with
the United States federal government as its primary customer. Although it provides a
variety of products and services (processes U.S. census forms, handles $600 billion of
U.S. Social Security benefits each year, and manages over 50 percent of global air traffic),
79 percent of its revenue came from the U.S. government with 59 percent from the U.S.
Department of Defense alone. This dependence on a single customer is risky, as shown
by the U.S. government’s recent attempts to reduce overall spending and to wind down
the wars in Iraq and Afghanistan. Therefore, there are strong incentives for Lockheed
Martin to diversify. Their earlier attempts to diversify into products that targeted other
customer markets were largely unsuccessful. For example, it acquired Comcast with the
intent of diversifying into the telecommunications industry. However, the acquisition was
unsuccessful and Lockheed Martin eventually sold the business. Essentially, Lockheed
Martin’s organization and operations have been structured to serve the government, and
specifically the military. Indeed, existing weapons systems compose a large portion of
Lockheed Martin’s current $45.6 billion in annual revenue.Managerial opportunism
is the seeking of self-interest
with guile (i.e., cunning or
deceit).