Friday, September 12, 2014

Forgive or Forget? How people react to firm misbehavior

Last week I wrote about the surprising news that asset management unit Skandia had made a decision that annoyed its customers (Once Bitten Twice Shy? How Reputation Problems hit Mutual Fund Manager Skandia Again). The news are surprising because Skandia is familiar with customer reactions to reputation problems, as it is just over 10 years ago that it was hit by asset withdrawals as a result of a scandal in similar-name (but different management) firm Skandia Insurance. Part of what it learned is that customers leave and don't come back soon; we estimated that a typical fund would take three years to get back to the asset levels it had before the scandal. This would suggest caution, especially because the three years are after a scandal in which the mutual fund manager is actually innocent. It just happens to have the same name as its owner, an insurance firm with a scandal. Another mutual fund management company also owned by Skandia but differently named avoided this damage.

In addition to our research on how the scandal spread to many firms other than Skandia, Takako Fujiwara-Greve, Stefan Jonsson, and I also looked carefully at how customers withdrew and came back to Skandia during and after the scandal. The results will be published in International Economic Review, and are available here in longer form. We found that each mention of the scandal caused customers to withdraw money from the firm. So, either more scandal mentions meant that more people knew about it, or more scandal mentions meant that more people lost patience with Skandia. This is natural, but useful to show.

A more interesting part is the return of funds to Skandia. Here, we might assume that customers forgive – as a period goes without scandal mention, they will come back. Alternatively, we can assume that customers forget – with the meaning of forget being that new customers or customers of different firms than Skandia don’t really pay attention to a Skandia scandal, and may stumble into Skandia funds after a scandal. The idea of forgiveness appeals to us morally, and would be useful for a large firm that could have many potential forgiving customers after a scandal. The idea of forgetfulness is less appealing, and it means that large firms suffer more after a scandal than small firms would. So which is true?

First, it is clear that a model of forgiveness would have some relation between the people leaving and the people entering afterwards, typically in the form of some proportion of the people having left forgiving and returning. Forgetfulness is even easier to model because it just means that some portion of all customers available will start business with the firm, for example if they start disliking their current firm. And – our model of forgetfulness did in fact describe the return of customers very well. For Skandia, which was a large firm, forgetfulness was bad news because there would be more funds coming if customers were forgiving than if they were just forgetful. For other large firms it is potentially bad news too, because forgetfulness means that there is no loyalty or size advantage when the firm gets involved in a scandal. 

People may forgive other people, but firms they just forget.

Saturday, September 6, 2014

Once Bitten Twice Shy? How Reputation Problems Hit Mutual Fund Manager Skandia Again

Skandia is a an asset management unit owned by the insurance firm Old Mutual, and was in the press September 5 because it had decided to reverse a decision to move a sizable amount of funds (1 billion dollar) from its usual fund manager Invesco to a new company owned by former Invesco manager Neil Woodford. The reason for the reversal was protests by the owners of the funds it was planning to move, who did not think these funds could be just swapped across management companies without their agreement. Skandia’s temptation to move the funds makes some sense given that Mr. Woodford had star status and was thought to be responsible for much of the success of Invesco, the company he then let. The customers’ protests make sense because typically we normally dislike having our properties moved to different management without any say.

Is there any reason Skandia should have been a bit alert to the power of customers? Yes there is. Fund manager Skandia used to be a Swedish company, owned by a Swedish insurance firm also called Skandia. The takeover of Skandia by Old Mutual in 2005 followed soon after a period of customer protests involving significant withdrawals of funds had weakened the company. The reasons for these protests were all associated with a reputation for little attention to others. First, in 2002 a subsidiary firm was sold in a way that appeared to favor the mother company Skandia over other owners of the subsidiary. Second, top management pay received attention in the press because it was seen as unfair. Third, the press discovered that close relatives of the top management were given rental apartments at very low prices, a problem that was fully investigated during 2003. The press started referring to it as the Skandia scandal, and customers started withdrawing money from mutual funds.

In an article in Administrative Science Quarterly, Stefan Jonsson, Takako Fujiwara-Greve, and I have studied how the effect of this scandal spread, with particular attention to one important detail: the mutual fund management company Skandia did nothing wrong. All the three reputation problems were associated with the insurance firm that owned it. In spite of that, customers punished Skandia fund management. In fact, they even punished other fund management companies owned by (innocent) insurance companies, as well as fund management companies with owner companies that resembled Skandia in some way.  

The punishment for behaving in ways that customers disliked spread wide, to with no connection to the scandal. It lasted long, with the investment levels of Skandia taking three years to recover. Skandia is a good example of something we know already. Reputation effects on firms are powerful, and often overlooked. Overlooked so much, in fact, that even a firm that should have known better because it was once bitten, isn’t yet twice shy.  

Cox, Josie. 2014.Skandia U-Turns on Woodford Mandate. Wall Street Journal, 2014 Sept 5.

Sunday, August 10, 2014

The food tastes better if I can’t see her: Evaluation of female expertise

This is obvious to those who know Japanese food and obscure to others: Kaiseki is the fanciest Japanese food. No, it is not sushi or any other of the other straightforward and specialized kinds of food. Kaiseki is a course meal, with many courses, each of them having what we in western food would consider many courses. The first round of food is a bit like an appetizer, but in a kaiseki restaurant we would end up counting any number of small dishes on it. It is well worth trying out kaiseki if you have not already had it.

But I am getting too excited here and forgetting the story I was going to write. There is a kaiseki restaurant called n/naka in Los Angeles where the master chef stays out of view of customers. That is not so unusual in kaiseki restaurants, which often have chefs out of view, but there is a special reason: she is female, and some customers will be more satisfied if they can taste the food without knowing that it is made by woman. You see, kaiseki chefs are true experts, and nearly all male.

This sounds like a pretty specialized issue having to do with the norms of Japanese food (sushi chefs are also male, typically), but it is actually linked with what happens in work places as well, including important functions such as corporate research and development. We constantly evaluate the expertise of others, and in teams where expertise is required these evaluations are closely linked with work distribution and resulting effectiveness. A chef being assessed as less effective because she is female means fewer customers at the restaurant. An engineer being assessed as less effective because she is female could mean an inferior quality product – a problem for the firm, and also for you if the product happens to be the car you are driving.

So do we know when the evaluation is fair? This is a topic that there is much research on, and a typical finding is that it is harder for a woman to be evaluated fairly by others. Now, thanks to research on research teams by Aparna Joshi published in Administrative Science Quarterly, we know exactly how important the evaluator is in determining the fairness.  The results are actually quite simple. When a female assesses others, she will rate them higher the better their education is. That sounds simple and logical, and I bet you think you do the same. That could depend on your gender though: when a male assesses others, he will rate them higher when they are male and will ignore their education. That is a pretty big difference. These are research teams in a university, so of course we cannot know whether teams with less educated participants have a more educated way of assessing each other.

Actually, the story is a bit more complex because it depends on how strongly the evaluator identifies with his or her gender. Again the results are simple, but not really encouraging. A man who feels very manly will rate a woman below men regardless, and lower when she has more education. Yes, lower. A man who is more neutral will ignore her education and simply rate her lower than men regardless.  So, does this mean that firms should be careful about using women in roles that call for expertise to be correctly evaluated? Well, actually the opposite conclusion seems better. Women are actually good at evaluating women, and at evaluating men, so if teams had many women (especially in the supervisor role) they would function better. You could be better off driving a car designed by a team with mostly female engineers.

Fontoura, Maria. 2014. Meet Niki Nakayama, One of the World's Only Female Kaiseki Chefs. Wall Street Journal, Aug 8 2014.

Wednesday, July 2, 2014

Quirky Appliances: Network Advantage through Complementarity

Quirky is actually the name of a company. It collects ideas on innovative products, has "community members" on its list vote and comment on them, and arranges to have some of them manufactured and sold. The idea is roughly similar to the wisdom of crowds, with many people being smarter than a few, and has the same strength and weaknesses. The strength is that many people are in fact smarter than a few, especially in a topic that they have some knowledge about. The weakness is that a product that has never been made or sold is not a topic that most people are knowledgeable about. So, Quirky has some successes and some failures.

General Electric (GE) is also a company that has thrived on innovation and still does. It was an Edison company, after all, and it is in many industries where only the advanced and innovative stay ahead. But, GE is at least thought to be very traditional in its approach to innovation, with research and development staff making improvements to existing products and technologies, and doing some exploration of new ones. This means, of course, that a collaboration between GE and Quirky would mean two firms with the same idea of innovating, but totally different and potentially complementary approaches. Sound like a good idea? So did GE and Quirky, and they are working together.

So how is this working? Well, there is a new air conditioner called Aero that is pretty smart. It can do some things humans can't, in fact. The main point is that it is network connected and can be controlled by the smartphone of the user, which is effective but not truly smart. The truly smart options are little details like geo-fencing. Geo-fencing means that if you let it, the Aero will keep track of where your smartphone is, and use the location and movement to tell when you are headed home, so it can start up at the right time. Many think this is a neat idea, and the Aero has sold well.

But how did the collaboration work? In fact, GE stayed GE, if the information now reported is correct. They did collect some ideas from Quirky, but the rest of the design was thoroughly in-house. This is perhaps not surprising, because GE knows a lot about air conditioners. But it is also clear that GE benefited from the complementarity that gave these ideas. And GE is getting the idea that complementarity is not just something you pick up in a single alliance; more alliances make it better. In fact, many of the early sales of Aero were done through a collaboration with taxi company Uber. Selling air conditioners through a taxi firm? Truly complementary. Now GE is getting close to the type of hub-and-spoke network that I, Tim Rowley, and Andrew Shipilov discuss in our book "Network Advantage: How to Unlock Value from your Alliances andPartnerships."
Mann, Ted. 2014. GE's First Quirky Device Isn't Very Quirky. Wall Street Journal, July 2 2014.

Thursday, June 19, 2014

Monitor your Teenager by Satellite: How Google May Demonstrate the Power of Complementarity

Google has just acquired satellite firm Skybox, and got plenty of attention for the acquisition. Two things stood out. The first was the low price – well 500 million dollars, but this is not expensive for a firm with the capabilities of Skybox. The second was the potential for new services combining the satellite imagery with other technologies and services. Skybox has six satellites in space and is launching 18 more, giving it the majority of satellites in the world that can take images of very high resolution and sell the images commercially. Sell commercially, as opposed to deliver the images to the government that owns them, like spy satellites do. This advantage is likely to continue for a while because its satellites are currently the cheapest high-resolution satellites in the business.

What exactly does high resolution mean? They can take pictures of parking lots that allow counting of vehicles parked there, a capability that has already been used to predict revenues of Walmart and iPhone release dates (although Apple is secretive, it is still necessary to park trucks outside Foxconn factories in order to ship out iPhones). All it takes to use the capability is to know a location and a good time to take the picture, because the satellites pass frequently, so you can now check for cars parked near your house when you are away for the weekend and have told your teenager not to host a party.

Of course, the main use of such satellite imagery is corporate intelligence. And, I am using the word intelligence in the same meaning as its use in naming CIA: spying. Although some of it will have no particular target and much potential usefulness, like finding out whether crops are failing in some part of the world (helps speculators, but also farmers elsewhere) or giving real-time improvements of maps (the first use of these satellites that Google is planning), other uses are less benign. Corporations can monitor each other’s facilities easily, just as Foxconn is now being monitored. Governments that do not have the resources to launch spy satellites, meaning most governments, can now order images whenever they want to check something -- like the location of refugees that they would like to remove or imprison.

As I write this, it strikes me that the examples I am giving are simple, and might not be enough to justify the price of Skybox. But, that is where the complementarity comes in. Skybox satellites have good flight paths and optics, but at the end of the day they are flying cameras with decent software. But add Google to the equation, and you get flying cameras, excellent software, and immense databases. These two companies have different capabilities, and when listing them it looks a lot like they could be combined to make something completely new. Skybox and Google are complementary, and complementarity is a good start of innovation. The innovations might involve valuable new products and services, and they might also involve worrying levels of monitoring and privacy breaches. We don’t know in advance, except that there will be surprises.

Mims, Christopher. 2014. Amid Stratospheric Valuations, Google Unearths a Deal With Skybox. Wall Street Journal, June 15 2014.