Going Local to Go Global

Wharton's Marshall Meyer has written a new paper titled, "Going Out by Going In."   Meyer describes how Chinese firms such as Haier (an appliance manufacturer) "draw revenues from overseas by penetrating previously inaccessible domestic markets and then renting their distribution and service channels to foreign competitors.”   After all, foreign firms often find it very difficult to establish a route to market (distribution and sales channels) in the vast rural areas of emerging markets such as China or India.  If a domestic firm such as Haier has already established a route to market capability in those rural areas, they can generate significant revenue by providing services to foreign manufacturers who do not have the resources or the knowledge to replicate that rural presence quickly.  Meyer takes it one step further though.  He suggests that firms such as Haier develop experience and knowledge from building new routes to market in these rural areas in their home country, and that expertise may facilitate international expansion as well.  In other words, the knowledge and processes developed at home may be transferable as these firms from emerging markets try to establish a route to market in other countries, even those in the industrialized world.  Check out this video below, in which Meyer explains his research on this topic. 

The Winner's Curse in Mergers and Acquisitions

Many mergers and acquisitions actually destroy shareholder value.  We understand that it's challenging to make a deal work.   Integration can be difficult.  Cultures clash.   Most importantly, though, we have to understand that acquirers often overpay.  They are subject to the winner's curse, as described by economist Richard Thaler.  Basically, if you think about an acquisition as the result of an auction, then you can understand why acquirers tend to overpay.  In an auction of a target firm, you will see a range of bids.  The average bid tends to mirror the actual underlying value of the target company.  However, the winning bid is naturally well above the average.  Thus, the winner is "cursed" - they tend to pay more than the true value of the assets.   

As you think about this bidding process, you begin to realize why acquiring firms often do not achieve the synergies that they project at the time of the deal.  Yes, synergies are hard to achieve.  However, it may also be the case that acquirers rationalize paying a higher price than they might have liked.  They up their estimate of the synergies during the bidding process, to justify the higher price that they have chosen to bid.  Meanwhile, acquirers often do not think about the "anti-synergies" as one firm described them to me.  Anti-synergies represent the losses associated with meshing two firms together, as well as the costs to be incurred so as to achieve some of the real synergies that may exist. 

Beware of How Venture Capital Firms Team Up

Drew Graham, Managing Partner of Ballast Point Ventures, pointed me in the direction of a great new study by Paul Gompers, Yuhai Xuan and Vladimir Mukharlyamov.  The scholars examined over 3,500 venture capitalists and their investments in over 12,000 start-ups over a thirty-year period.  They discovered, not surprisingly, that venture capitalists tend to invest in deals alongside other venture capitalists who were quite similar to them (in terms of ethnic background, education, employment experience).   What was the effect on performance?  Here's a summary from HBS Working Knowledge:

They found that the probability of success decreased by 17 percent if two co-investors had previously worked at the same company—even if they hadn't worked there at the same time. In cases where investors had attended the same undergraduate school, the success rate dropped by 19 percent. And, overall, investors who were members of the same ethnic minority were 20 percent less successful than investors with different ethnic backgrounds.

Two major factors might be driving this drop in performance.   The venture capitalists might be picking bad deals (perhaps one is convincing the other to invest in a deal that has concerns).   Alternatively, the venture capitalists might be making poor decisions after the deal, in terms of how they influence the firm's strategy and management.  The scholars argue that "groupthink" leads to inefficient decisions after the deals, when venture capitalists are co-investing with folks with whom they share many similar characteristics.  We shouldn't be surprised by this finding, but it certainly offers a warning sign not only for investors, but also for start-ups as they seek funding. 

Newcastle: Creative "If We Won" Ad

How about this for a funny, creative ad?  Newcastle Brown Ale imagines what it would be like if the American colonists had never declared and won their independence.  The ad features comedian Stephan Merchant.  It seems to hit that sweet spot that many companies strive to find, but fail in doing so. That is to say, they have created an irreverent and funny advertisement that is not offensive or distasteful. 

Disruptive Innovation: Lepore vs. Christensen

Last week, Harvard historian Jill Lepore wrote a scathing critique of Harvard Business School Professor Clayton Christensen's theory of disruptive innovation.  Just a few days ago, Christensen responded to the critique in an interview conducted with Business Week writer Drake Bennett.  Many people have asked me about my views on this debate in the past few days, given that I spent a great deal of my career at Harvard as a student and faculty member.  Therefore, here are a few thoughts.  

First, let me acknowledge that I know Clay Christensen very well, and I have never met Jill Lepore. I took a doctoral seminar with Clay when I was a graduate student, and I co-taught a doctoral seminar with Clay when I was on the faculty at HBS. I have known him for twenty years. In the Business Week article, Bennett writes that colleagues and students generally think of Clay as a "generous and thoughtful and upbeat" person. I would agree. He has integrity and cares about others a great deal. Thus, I'm biased. I must admit to being taken aback by the scathing nature of the critique in this New Yorker piece. It's one thing to identify the flaws in another person's work, but the tone of the criticism caught me off-guard... particularly given that both individuals are colleagues at the same academic institution (though Harvard is a big place, and the two have apparently not met).

Does the New Yorker piece raise a good point though?   Let me start by acknowledging that the term "disruptive innovation" has become a widely overused cliche.   People seemingly apply to the term to every failure of large incumbent firms.  They also fail to examine the multiple causes of such failures.  They fixate solely on the dynamics explained in Christensen's model.    We should be careful not to blame Christensen for all the mistakes of his readers though.  On the other hand, all of us in academia fall into the trap, at times, of taking our favorite hammer (our preferred frameworks and models) and beginning to see every situation in the world as a nail (a problem or situation that can be explained by our theory). Christensen has applied his framework quite broadly, and perhaps at times, he has made mistakes by extending it to situations in which it does not quite fit (the iPhone perhaps).  

I see three other challenges with the model of disruptive innovation.  First, I think it works beautifully as a descriptive model helping us explain past situations.  It can be more problematic when applied as a predictive framework.   Many academic frameworks have this weakness.  Markets and organizations are fundamentally complex, and we would be hard-pressed to find frameworks that have high predictive accuracy in a wide range of contexts.   However, many people crave simplicity.  We demand that academics provide findings that can be generalized across many settings.  We don't like when academics say that the answer "depends" on the situation.  Second, incumbent firms can certainly make crucial mistakes if they fail to react in a timely and appropriate fashion to a disruptive innovation.  On the other hand, many firms these days have made huge bets as they have tried to counter what they viewed as disruptive threats.  Many big errors have been made in this regard.  In short, there are two types of errors: we probably should pay as much attention to the bad bets made in over-reacting to apparent disruption as we do to the incumbent firms who fail to react swiftly to disruption and get toppled from their perch atop an industry.   Finally, we have to be careful about the prescription that incumbent firms should separate units that are aiming to cope with a disruptive threat.  It may indeed be the right short term strategy, so that the core business unit does not "eat its young" so to speak.  However, in the long run, a company has to think about how the whole is worth more than the sum of the parts.  Competitive advantage comes from the alignment or fit with an integrated system of activities.  If the new unit is "too separate," then the firm may find itself with two parts that are not mutually enhancing.   In fact, there may be fundamental contradictions that make it quite difficult for the two units to co-exist in the same organization. 

Creativity, Innovation, and the Ability to Make Connections

Belle Beth Cooper has written a terrific column for Fast Company on the topic of creativity.  She writes, "Knowledge alone is not useful unless we can make connections between what we know...
Lots of great writers, artists and scientists have talked about the importance of collecting ideas and bits of knowledge from the world around us, and making connections between those dots to fuel creative thinking and new ideas."  She quotes a wide variety of innovators and scientists, ranging from Steve Jobs to Maria Popova, on this topic.   For instance, she cites Cambridge University professor W. I. B. Beveridge, who once wrote, "Originality often consists in linking up ideas whose connection was not previously suspected." 

 Cooper offers some tips on how to become more adept at making connections:

1.  Read... a lot!   Read widely - look beyond your specific area of expertise and investigate novel domains of knowledge.   Seek out novel experiences more generally, so as to gather knowledge from disparate disciplines.

2.  Take notes... a lot!   Keep a notebook with you at all times, and jot down observations and insights throughout the day.  Don't count on your memory amidst a hectic schedule in your personal and professional life. 

3.  Review your notes... a lot!  In fact, she recommends reviewing your notes every day.    Look for patterns, and seek out connections between seemingly disparate ideas.  Identify areas that you would like to further investigate. 

Five Mistakes in Consumer Research

Here are five mistakes that companies make when they send people out into the field to research consumer behavior.

1.  Researchers ask leading questions, fishing for the answers that they wish to hear.

2.   Companies research their "typical" customer, but fail to look at non-typical users or folks who have rejected doing business with the company altogether.

3.  Researchers look for and collect data that will confirm what they already believe, and they dismiss or explain away disconfirming data.

4.  Researchers intervene to "educate" consumers on how to "properly" use their companies' products, rather than seeing "improper" use of a product as an unbelievably important piece of data. 

5.  Companies weigh surveys much more heavily than field observations, since they can quantify the data from survey responses (while field observations are written off as anecdotal evidence). 

Unsatisfied Workers

The Conference Board has issued a new report on the state of the American workforce.  The results should alarm us.  After all that has been written and attempted with regard to employee satisfaction, we don't seem to be making any progress.  Here is a summary of the results, from today's Wall Street Journal:  

Fewer than half  of American workers were satisfied with their jobs in 2013, according to a new survey from the Conference Board.  In almost every individual measure—from wages and retirement plans to vacation policies and commutes—workers are less content with their jobs than they were in 1987, when the research group started tracking the topic. Back then, 61.1% of workers said they were satisfied with their work.  The decline suggests a steady erosion of trust and loyalty between employers and employees, said Rebecca Ray, leader of the organization’s human capital research unit.

I would love to hear some theories from my readers. What do you think has caused this decline in satisfaction?  

Jill Lepore Takes on Clay Christensen

Harvard historian Jill Lepore has written a tough critique of her colleague Clay Christensen's theory of disruptive innovation in the New Yorker.   It's a long read, but definitely worth taking a close look.   I'll have comments about Lepore's argument on this blog in upcoming days. 

A New Way to Start Meetings (and Share Information)

Keith Murnighan, a professor at Kellogg, has a thought-provoking blog post about how to run more effective meetings.  Murnighan begins by pointing out an age-old problem that occurs in groups -  discussion tends to focus on the information that all members have in common, while unique information (privately held by individuals) does not get shared, discussed, and/or integrated effectively.  Gary Stasser first discovered this problem in the 1980s in a series of experiments.   Stasser found that groups spend far too little time discussing and analyzing privately held information.  Many reasons exist for this phenomenon; Murnighan offers one  plausible explanation: 

Even when people are conscientious and thoughtful, their natural tendencies are not to bring in new, useful information but, instead, to bring in information that everyone already knows.Why would anyone do this? Well, let’s imagine that you are the leader, and I am a member of your team. I want to impress you as you are my boss. Let’s also imagine that I am not shy about stating my point of view. As a result, when you ask for information, I will try to be the first person to share my thoughts.Now, what kinds of information will I share? If I present information that everyone knows, and do it fairly articulately, how will everyone else react? Their natural instinct will be to nod their heads, because I am confirming what they know – and it feels good to have your information confirmed.In contrast, how will these same people respond if I present new, unique information that no one else has? Their natural instinct in this situation is to ask a question about it. What does this signal? The implicit subtext of a question is “How the hell do you know that?”

How does Murnighan propose to solve the problem?  Drawing on the ideas of his colleague, Victoria Husted Medvec, he recommends that a leader request that key data and ideas be sent to him or her in advance of the meeting. Then, the leader should post flip charts around the conference room with the concepts and thoughts that have been collected. As team members enter the room, they will naturally peruse the flip charts, and they are likely to pay particular attention to novel ideas and information, i.e. the surprising, the new, the unexpected.  Murnighan suggests that each flip chart should include the name of the person who offered that particular data point or idea. 

At first glance, I love the idea.  Over the past few years, I have advocated distributing key information and analysis to team members in advance of meetings.  In that way, you can have a more thoughtful discussion, because people have had a chance to digest the information a bit.  However, I do see two major concerns with Murnighan's recommendation.  First, you have to be careful that people do not become too invested in a very public position that they have established at the outset of a deliberation.  You don't want the discussion to become all about advocacy and for entrenched camps to emerge.  You want to make sure that people take a look at all the information, and that people are genuinely engaging in collective inquiry... i.e., trying to work together to solve the problem.  Secondly, putting the names on the flip charts may cause people to judge the person more so than the idea.  I wonder if it might be useful to leave the names off of the flip charts at the outset. Give people an opportunity to review the data and the concepts without attribution at first.  Then during the discussion, people can disclose ownership.   It might lead to a more unbiased assessment of the information.  

Counteracting the Confirmation Bias

The confirmation bias afflicts us all.  We look for and rely on information and evidence that confirms what we already believe, and we avoid or discount data that may contradict our pre-existing positions and beliefs.   This bias leads to many flawed decisions, because we are not looking in a balanced way at the evidence.  How can managers counteract this pernicious decision-making trap?  Here are a few suggestions:

1. Before you begin to analyze a problem, write down your pre-existing beliefs.  Then, make two lists - one of the evidence supporting your initial position, and other of the data that disconfirms your initial views.   Make sure that you find at least three significant pieces of disconfirming evidence.   
2. Role play someone with a different pre-existing position.  Build a short presentation intending to persuade others of the validity of that position.  In so doing, you are forcing yourself to collect data that disconfirms your initial view.
3. Assign someone on your team to collect and present disconfirming evidence. 
4. As people to work in pairs as they conduct research on an issue, with the pairs created so as to connect people with different initial viewpoints.
5. Write down a few of the key assumptions that underlie your beliefs and positions.  Then design a simple test or experiment to try to validate each assumption. 

What can we learn from a hot-dog-eating contest champion?

One of my other favorite parts of the new Levitt and Dubner book, Think Like a Freak, is the chapter on Japanese hot-dog-eating champion Takeru Kobayashi.   In this video, Stephen Dubner explains what we can learn from Kobayashi's unlikely success.

Employee Turnover: The Consequences of Simultaneous Entry and Exit of Many Employees

Harvard Business School Professor Robert S. Huckman and his colleagues -  Hummy Song and Jason R. Barro - have published a new working paper about employee turnover.   They focused on what they call "cohort turnover" - i.e., the "planned simultaneous exit of a large number of experienced employees and a similarly sized entry of new workers."   In what companies and industries does this type of mass simultaneous exit occur?  Huckman and his co-authors focused on the turnover of residents in teaching hospitals.  That simultaneous entry and exit occurs in July each year at major teaching hospitals.  Experienced residents depart, and new graduates of medical school arrive. 

The scholars summarized their findings as follows:

"This annual cohort turnover results in increased resource utilization (i.e., longer length of hospital stay) for both minor and major teaching hospitals and decreased quality (i.e., higher mortality rates) for major teaching hospitals. Particularly in major teaching hospitals, we find evidence of a gradual trend of decreasing performance that begins several months before the actual cohort turnover and may result from a transition of responsibilities at major teaching hospitals in anticipation of the cohort turnover."

Do their findings apply in other industries?  The scholars suggest that this type of cohort turnover occurs in political administrations and military units.  I agree that the findings have interesting implications for those two settings.  It's particularly frightening to think about the impact in political administrations, as newly elected officials often try to enact major changes in their "first hundred days."  In other words, they are perhaps most active in establishing new policies during the precise period when resource utilization and output quality may be the lowest!  

Other industries experience this challenge, perhaps to a lesser degree.  For instance, the auditing, consulting, and investment banking businesses all hire large number of college and business school graduates each year.  At the same time, many young employees leave these firms to head off to earn an MBA.  Thus, summer turnover can be quite high in these industries.  I'm sure readers of the blog can find other industries who face this problem as well. 

Think Like A Freak

Last week, I finished reading Think Like a Freak, the third installment in the series of "Freakonomics" books by Steven Levitt and Stephen Dubner.   I enjoyed the book a great deal.  One of my favorite parts features a description of a study conducted by Robert Cialdini, one of the foremost scholars in the area of persuasion and social influence.   

Cialdini and his colleagues conducted a phone survey in California regarding the reasons why people wished to engage in energy conservation.    The researchers listed four potential reasons:

1.  It saves money (the financial motive)

2.  It protects the environment (the moral motive)

3.  It benefits society (the social motive)

4.  A lot of other people are trying to do it (the herd-mentality motive)

The survey results demonstrated that the moral motive (#2) was ranked highest by Californians.  The herd mentality motive ranked dead last.  We should not be surprised by those findings.

Then Cialdini's study examined what people actually did.   Did they act in accordance with their stated beliefs, or did they say one thing while doing another?   The researchers explored this question through an ingenious study.  They hung placards on the houses of citizens.  The placards came in five different versions - one placard for each motive listed above, and one generic placard.   Then the scholars measured and evaluated the actual energy usage in each home.  Who conserved the most energy?  The citizens who had received placards emphasizing the herd-mentality motive.  Their placard read "Join Your Neighbors."   

Why do I highlight this study?   Many people claim that social influence does not affect their actions. We think we are independent-minded.  However, our actions show that we are not so independent; we are influenced a great deal by others' words and actions.   Becoming better independent thinkers begins with recognizing the impact that social influence processes actually have on us. 

A Truly Effective Open Door Policy

How many times have you heard a manager or executive say, "I have an open door policy."   By saying that, the manager attempts to convey a willingness to hear input and feedback from subordinates, an openness to meet with employees to discuss the issues and challenges that they are facing.  While well-intentioned, I think most open door policies are highly flawed.  As I tell managers frequently, "If you are waiting for bad news, dissenting opinions, or information about important risks to come walking through that open door, good luck!  You are in for a rude awakening.  Bad news does not often walk through open doors."   

For a variety of reasons, people remain reluctant to share concerns, risks, and mistakes with those more senior in an organizational hierarchy.   What then should managers do?   A truly effective open door policy means that managers make the open door a two-way street.  They leave their office, walk through that door, and go out to where the work is being done.  They engage their employees, ask questions, and solicit dissenting views.  Great managers ask, "What hidden risks could damage our business?   What assumptions that we have made could be deeply flawed?   What problems are bubbling beneath the surface?"  

This point about open doors is especially relevant today, in the wake of the report on the GM ignition switch crisis.  One can assign blame to the engineers who did not report the problems to their managers, or worse, tried to hide the issue.  One can assign blame to the managers who did not act appropriately when they learned about the concern.   However, pointing fingers at these people does not address a deeper issue.  What about all the executives at the top who claim to not have known about this issue for the past decade?   Not knowing, in a way, is just as much of a problem, as knowing and not doing the right thing.  Why didn't they know?   Did they go out and seek out bad news, or were they waiting for it to talk through an open door? 

Brands: Embrace Your Haters

Tom Denari wrote a thought-provoking column for Fast Company this week.  The article is titled, "Why Being Hated Isn't the Worst Thing For Your Brand."   Denari stresses that, as brands become popular, haters may emerge.   The typical reaction of a brand manager might be to become very concerned about these negative reactions from some portion of the public.   Denari argues that we shouldn't necessarily panic if we encounter some "hate" from certain consumers:

Despite the lip service that some marketers pay to “breaking through the clutter,” many more are too often concerned that they actually might stand out, and possibly even offend someone. Being conspicuous does create the potential for negative feedback, since everyone can’t like everything.  But a successful brand manager knows the brand can’t be for everyone. The more salient a brand becomes, those that aren’t a part of that brand experience can sometimes become opponents.

Denari argues that many brand managers are risk averse.  They worry about what their bosses will think.  They are concerned about the risks associated with negative public reactions to a brand, its image, and its marketing.  

This argument reminds me of Harvard Professor Youngme Moon's great book, Different: Escaping the Competitive Herd.  In that book, she describes "hostile brands."   These companies truly stand out in a crowded marketplace by deliberating taking a hostile approach toward certain consumers, so as to make themselves highly popular to the target customer that they wish to attract.   She uses the MiniCooper as an example, describing how their initial marketing did not apologize for how small the vehicle was.  It did not try to convince us that the car was quite roomy.  Instead, the company positioned vehicle as a sort of "anti-SUV."   Being making themselves "hostile" to the SUV consumer, MiniCooper became immensely popular with the customer it hoped to attract.  In sum, Moon seems to agree with Denari.   Embracing the haters, or at least becoming comfortable with some haters, can be productive if you are truly trying to build a brand that stands out.  

Becoming more comfortable with being wrong

Conflict Avoidance: Does It Happen Less Often in Diverse Teams

Columbia Business School Professor Katherine Phillips and her co-authors have conducted several interesting experiments examining how people approach group work differently depending on the people with whom they expect to work.   According to Columbia's Ideas at Work newsletter, here is the major conclusion from their recent studies: "The researchers found that, in fact, when individuals anticipate going in to a homogeneous environment, they don’t process information as deeply or effectively as when they anticipate going into a diverse environment." 

For instance, in one experiment, participants completed a survey about their political opinions.  The researchers informed each subject that they would be meeting in-person afterward with another subject to engage in a problem-solving task.  Before that meeting, the scholars asked each subject to analyze a murder mystery and to try to solve it.   Then they were told the political affiliation of the person with whom they would be collaborating.   Finally, the subjects had to write an essay expressing their conclusions about the murder mystery.  In this first experiment, the meetings did not actually take place.  The scholars were interested in the attitudes that had formed leading up to the meetings.  

According to Columbia's Ideas at Work newsletter, "The researchers found that both Democrats and Republicans wrote considerably less detailed statements when they anticipated meeting with someone of their own political party than when they anticipated meeting someone of a different party."  The scholars posit that people tend to want to avoid conflict with people with whom they have many similarities.   They are less concerned about clashing with those quite different than themselves.  As a result, individuals seem to be less prepared when anticipating a meeting with someone with whom they have many similarities, even when those common bonds have nothing to do with the task at hand. 

In a subsequent experiment, the meetings actually did take place.   The scholars found that those who prepared more detailed essays did, in fact, solve the mystery more often than those with less comprehensive initial analyses.  In short, preparation did matter on this task, and the individuals expecting to meet with people quite different than themselves invested more time and effort into preparing for the problem-solving task.