Saturday, March 26, 2016

What kind of company is DoorDash? A question of identity

Wall Street Journal reported that the venture DoorDash, which is backed by the prestigious venture capital firm Sequoia Capital, recently raised an additional $127 million in capital. We are used to seeing high numbers for Silicon Valley firms (DoorDash is from Stanford), so this is not so surprising in itself. But, the story has some interesting details.
What interested Wall Street Journal is that this was a so-called “down” round in financing. A down round means that the company is valuated below the earlier round, so the earlier financiers are taking a loss (again, Sequoia). Finally, $40 million of the new capital came from – you have guessed it by now – Sequoia. This looks a bit like a problem.
So what exactly is DoorDash? It describes itself as a “software-enabled logistics company”, but more concretely, you would normally use it to order food deliveries from various restaurants that don’t operate their own delivery service. Given the value, it obviously delivers a lot of food, so far 22 urban areas.
Beyond the fact that so many million dollars seems a lot for delivering food, what exactly is the problem? The practical problems are that it is not profitable (yet, as they always say) and that it has problems retaining employees. But perhaps a more serious problem is in understanding what kind of company it is. Delivering food to someone is clearly logistics, but there is a catch: the deliveries are actually done by contractors, not DoorDash itself. So the logistics company is really a contracting company.
A contracting company can actually be a good thing -- Uber is very valuable and is also a contracting company, not a taxi company. In fact, one may wonder why DoorDash don’t just describe themselves as an online delivery network, like Uber calls itself an online transportation network. As a first cut, that seems like a good metaphor, although it immediately brings to mind an important difference between the two. Cars move around, and Uber gets a big advantage from knowing exactly where they are. Most restaurants stay put.
This gets to the core of the DoorDash dilemma. Companies form identities, which in turn influence how customers think of them and what other companies they compare them with. It also influences how other companies get founded and choose to compete with them. DoorDash can’t have an Uber identity because Uber’s greatest strength is their weakness. But the inside looks pretty Uber-like, so having another identity of logistics is also a thin story. Finding a good identity will be important for them because it will affect their value now and later.
Identities and their consequences is something that researchers have worked on for a long time. For a good sample of research on how identities are formed and what they do, I would suggest looking at research by Navis and Glynn on the emergence of new market categories, published in Administrative Science Quarterly. Many of the practical problems of forming identities and living with the consequences are nicely developed there.

Monday, August 31, 2015

Who does the iPhone compete with? Apple’s latest alliances suggest new competitors

We have just received the news that Apple and Cisco have become partners, with the goal of better integrating iPhones with corporate networks in general, and specifically with Cisco products for visual conferences over videolink or web services. This is short time after Apple became partners with IBM to create apps (software) for the workplace. While the IBM partnership is mostly oriented toward the large corporations that IBM serves, Apple also has many partnerships in which it either helps develop apps or helps app-developing firms connect their offerings to give greater functionality for small businesses.

Clearly, Apple is interested in becoming more of a company that serves businesses, in addition to its current strength in serving consumers. The opportunity for Cisco, IBM, and other partner firms is that so many employees own iPhones, often as a result of their own choice rather than a company purchasing policy. Integrating the iPhones deeper into what the company does can be an opportunity for simple tasks like meetings over a distance, and for more complex processes like scheduling, staffing, and sales. From the viewpoint of firms that provide these services now, the iPhone looks like a Trojan horse – something that got into the business because it looked nice and harmless, but is now ready to become a potent competitor.

So who does the iPhone compete with? The interesting feature of these competitive moves is that an iPhone (in fact, any smartphone) can be programmed and networked in so many ways that it is very unclear where the limits are. Both established Apple partners and new firms can apply their creativity to the task of seeing what business activities can be improved by integrating iPhones. Already we know that any video-conference service other than Cisco should be worried because the link between Apple and Cisco link takes advantage of the complementary business presence and software/hardware of Cisco and personal presence and software/hardware of Apple. But that is just a starting point. The next steps can happen very quickly, because starting new app-based businesses these days can be done within a few weeks.

Network Advantage in competition among firms comes from placing the firm in a position where it can benefit from its network of partner firms. It is not surprising that Apple is working hard to get network advantage, because their business is based on products that connect to networks and let their owners get personal network advantages.

More to read:
Clark, Don and Daisuke Wakabayashi. 2015. Apple, Cisco Unveil Business Partnership. Wall Street Journal, Aug. 31 2015.

Thursday, July 23, 2015

Will Greeks invest? How Domestic Strife Influences Investment Decisions

Much has been written about the aftermath of the Greek crisis, but a key point raised in a recent Wall Street Journal article is the significant distrust of politicians and divides among people following the contentious politics around the referendum on the bail-out package that was offered Greece from the EU (but actually withdrawn before the vote date). Greeks on the left and far right don't trust EU, and many would like to leave the Euro. Greeks along the political spectrum believe their politicians cannot be trusted to govern competently.

Distrust and divisions matter because the Greek recovery will largely be determined by how much Greeks believe in their country. Currently, others do not. Even worse, many of the wealthiest Greeks have moved their money abroad and may well decide to keep them there until they see how the economy is doing. But an economic recovery requires someone to invest in business. Will the citizens of a nation with distrust and divisions invest?

A useful comparison for Greece might be Kenya, for two reasons. First, Greece is now a developing economy, and Kenya has been one for a while. Second, while the distrust and divisions in Greece are recent, Kenya has long been divided ethnically and politically, and distrust of the state runs deep. In recent research published in Administrative Science Quarterly, Chris Yenkey examined the spread of stock market investment in Kenya. Stock market investments are now wide-spread after the exchange in Nairobi opened, and it is spread nationwide but with some areas seeing more investment than others.

What drives investment under these conditions? Success. The strongest driver of investment by a Kenyan is how much profit others have had from their investments. That is not surprising, but there are many other results that are very interesting, and informative for Greece. First, divisions have strong effects. The investment results of others matter much more if they belong to the same ethnic group. People pay more attention to similar others, even if they are looking at objectively the same thing – stock market gains. Second, distrust matters. People living in towns with political leadership from a rival ethnic group paid less attention to the profits of those from different ethnic groups.

Equally important, the divisions can be bridged. In Kenya, people who lived in neighborhoods or worshiped in religions with a mix of ethnicity paid more attention to those who were different from themselves. People who saw much national (rather than ethnic-political) advertising were less likely to see only the gains of same-ethnicity others. Division and distrust are in the minds of people, and differences can be thought of as harmful division or helpful diversity.

The result is some old fashioned advice for Greece. Do whatever is necessary to bring the people together. Do whatever is needed to help them think of the nation rather than its politicians. The new part is that these actions are not just for reducing conflict and increasing confidence in life. They also help investment, and can be important for improving the economy.

Fidler, Stephen. 2015. Greeks, Economists Part Ways on Benefits of Eurozone. Wall Street Journal, 23/7/2015.

Sunday, July 5, 2015

Online Suggestion Boxes: Does Anyone Listen?

I think I am not the only one who has noticed how web sites are becoming pretty needy these days, using both pop-up ratings and suggestion boxes to try to get comments on the products and any other idea that the user may have. I first saw this (and was annoyed) when Amazon wanted ratings of my purchases and help fixing its suggested books, but many others use these functions. I just looked up one of the firms providing such tools and found that it has Barclaycard, Verizon, Telefonica, and Skype as its customers. And those are just the ones that are so famous that it posts their names on its web site.

I don't reply to such requests. I have other things to do, and think that firms should fix their problems without my help. I think many others also don't reply, either for the same reason or because they think that no one will take their suggestion seriously. But there are also people who do type ideas into these suggestion boxes, ranging from simple tips to longer proposals. So do the firms listen and adopt the ideas? Well, here is a potential problem. The more people give ideas, the harder it is to pay attention to them because there are simply so many ideas that the firm can't handle all. They have idea crowding.

Henning Piezunka and Linus Dahlander just published research in Academy of Management Journal on what happens when firms have  suggestion tools, and get idea crowding. Their work was built on a simple idea with some neat additions. The simple idea is that idea crowding means ideas are less likely to be used. Quality doesn't  help; idea crowding simply makes it harder to do anything. The first addition is that ideas also are less likely to be picked when they are distant from what the organization does or looks at. Again, quality doesn't help, anything distant is less likely to be picked even if it is great. But it is the second addition that really gets interesting. Idea crowding makes the effect of distance stronger. So when an idea is distant and there is idea crowding, the idea has to be truly exceptional to be used.

So far theory, but what about the evidence? Very simple: the research found that all the effects of crowding actually happen. And that has an interesting consequence for that really great idea you are about to type into the suggestion box. It will be used if it really is that great, but you do have to hope that the firm does not have idea crowding and that the idea is not distant. Type your idea and hope that others don’t do the same.

By the way, you can give me ideas by sending them to my email. Will I do what you say? Well, it depends on how good they are and how much idea crowding I have.

Sunday, June 7, 2015

Modern India: How Development is not the same as Westernization

Readers who think that India is the opposite of China – democratically developed and economically backward – should be seeing recent news as eye openers. The center of mobile phone making is moving from Korea to China, right? Well, except that Indian mobile phone maker Micromax (and some domestic rivals) are showing the world one more way to compete in the mobile phone market, with new product release times coming significantly less than a month apart. Compare that with the iPhone release schedule, and you see how advanced Micromax is. Naturally they are quickly gaining market share.

Development is also going quickly elsewhere. The Indian auto industry (yes, there are multiple makers) is introducing new models that are competitive with imports, its high tech industry is now so advanced that talk about closer US alliance leading to license manufacturing of arms in India is sounding realistic, and on the political front there is even a sudden (though very late…) resolution of the major border dispute with Bangladesh.

Does this mean that India is becoming fully Westernized? Well, here we have to deal with some myths that people have, most important of which is the idea that economic development is the same as creating some sort of US/European economy. It is not. Guoli Chen, Raveendra Chittoor, and Balagopal Vissa have published a paper in Academy of Management Journal that looks at just one of multiple dimension of difference: connections between firms.

The idea is simple. We often believe that non-western economies have more informal contacts between firms than western ones, and also are more reliant on business groups of firms controlled by owner families. The second of these statements is false, by the way, there is a lot of variation in business group presence across nations, and it does not follow a clean western/nonwestern line. This article looked at the connections part, which we know less about because it is often hidden. But it can be revealed by seeing who has the best information, which the authors did neatly by examining which stock analysts were best able to predict firm performance.

If development means westernization, we should see traditional forms of ties between firms disappear, right? Well, this almost happened. Stock analysts were unusually well informed about firms in which the CEO had the same caste or ancestral language, but only if the CEO started the career before the economic reforms in 1990. They were also unusually well informed about firms in which the CEO came from the same school as them, but only for CEOs starting the career after the reform. That school effect sounds like something that would not exist in western economies, which have rules on information release, but actually it does. Indeed, westernization doesn’t mean that networks don’t matter; it means that different networks matter.

So in what way is India different from a westernized economy then? It is that both types of ties exist at once. The traditional ties are not gone; they are just limited to the “older” CEOs. “Westernized” ties exist in addition. Perhaps the old ties will be gone at some point, but it is hard to guess now that it will happen, and it is incorrect to assume that it has already happened. 

Tuesday, June 2, 2015

Force or Example? How Firms start Good Practices

The latest news on the fire in the Bangladesh clothing factory that collapsed in 2013, killing more than 1,100 people, is that the owner, national and local building safety inspectors, and some factory supervisors have been charged with murder. This is a stronger charge than the expected homicide charges, and happens because their guilt in overlooking sudden cracks in the structure and ordering employees back to work is considered serious.

Meanwhile, the major U.S. clothing companies that used that factory and many others in Bangladesh have been increasing their checking of safety at their suppliers, and have formed consortia to effectively coordinate these checks. This is a big step forward from the earlier practice of rare checks (or no checks), but they are still checking less than one-third of the clothing factories in Bangladesh, leaving many unsafe factories with less-known (but usually foreign) customers.

In Bangladesh, people held responsible are being punished. In the U.S., companies buying from the factory were facing publicity problems and could also have been targeted by social movements against sweatshops if they had not acted quickly. So what drove the reforms, threats of punishment or better understanding of the factory dangers?

A recent paper by Forrest Briscoe, Abhinav Gupta, and Mark Anner in Administrative Science Quarterly provides some useful answers. They looked at how universities react to threats – from social movements, not the law – that target sweatshop purchases by Russell, a firm that supplies branded sportswear. They looked at two ways that universities might decide to manage their supplier relations differently: either by learning from each other, or by simply responding to threats. Both would be good reasons to stop purchasing from Russell until it reformed its supply lines, but the key finding was how these reasons interacted. If a university stopped purchasing after being targeted by a threatening campaign, other universities reacted as if there was nothing to learn from it. It had simply reacted to a threat, so it probably didn't have a real reason. If a university stopped purchasing after collecting information, with no threat, other universities might copy its actions.

The conclusion is an interesting one for all who want to improve organizational practices. Threats work. But they work very locally, and expensively. The most important way that organizational change happens is actually when organizations learn from each other, and that happens much less when threats are involved. So the prosecutions in Bangladesh are important for the families of the victims, and the actions of the social movements in the U.S. are important for the conscience of the activists, but organizations learning from each other give the strongest results.

Monday, May 25, 2015

Hanergy gambling? When people and firms take risks

Li Hejun is the tycoon who owns more than 70 percent of Hanergy Thin Film Group, a solar energy firm that became famous after its shares dropped by 47 percent on May 20. The price drop was remarkable for the total stock value loss and the fact that it made him lose his position as the richest man in China; it is also remarkable for having happened in a fraction of a second thanks to computer trading driving share prices down.

There is now a great deal of uncertainty around Hanergy and the events of the stock value fall, so what I am writing in this paragraph could become outdated quickly. First, it is alleged that Mr. Li was behind a large stock sale that triggered the crash.* (Of course, it was also important that there weren’t enough buyers for that sale and additional sale attempts by others afterwards.) Second, Mr. Li both owned stock (80 percent at the latest filing) and had “short” stock (opposite of owning, 7.7 percent). Third, the company (not him) had pledged stock as collateral for a series of loans, with the latest loan being USD 200 million. Finally, Hanergy sales of equipment to its mother company were an important part of its business, but the sustainability of that business model was questioned by some.

Confused by this information? It is chaotic, but for an investor it is easy to add up: This is a company with so many question marks that an investment would be risk at the level of pure speculation. Interestingly, the actions leading to this risk were fully under the control of the investor who lost the most from them: Mr. Li. Of course, we are familiar with firm owners and top managers who take risks that look excessive to others, so the Hanergy events are not new except for the scale of risks and losses. They do however raise the question of what makes individuals and firms take risk.

There has been much research on individuals taking risks when facing losses guided by prospect theory, which is based on how people evaluate gains and losses differently, and take high risks to escape losses. There has been much research on organizations making changes when facing low performance guided by performance feedback theory, which is based on how organizations discover and seek to solve problems following disappointing performance, but are less eager to find opportunities. A recent paper by Kacperczyk, Beckman,and Moliterno in Administrative Science Quarterly sheds new light on risk taking and changing by asking whether the drivers of change and risk in organizations are the same.

The study findings speak to both theories. Organizational change happens the way performance feedback theory specifies, both for risky change and less risky change. But an important component of performance feedback theory is what level of performance is seen as disappointing, and there the results are different. Organizational change of the less risky kind is driven by comparing the performance against that of other organizations, so competitors in the market. Risky organizational change is driven by comparing the performance against that of other units in the same organization. Why are they different? Well, the internal comparison is not against market competitors – it is against nearby managers and career rivals. That’s personal, and when losses are personal people take risks. So, risky organizational change is a blend of performance feedback and prospect theory.

What do these findings say about Hanergy? Well, so far we do not have information of any fraud in the Hanergy case, so it looks like a big bet gone wrong. And the bet is interesting because it is made by an individual who controls the firm so closely that there is little difference between him and the firm. In such a case, any comparison of performance gets personal because the firm falling behind means that he falls behind, so high risk taking would be a natural response. It is a very good demonstration of how closely held firms can go wrong.

Kacperczyk, Aleksandra, Christine M. Beckman, and Thomas P.Moliterno. 2015. "Disentangling Risk and Change: Internal and External Social Comparison in the Mutual Fund Industry." Administrative Science Quarterly 60(2):228-62.

*I knew I would end up correcting this paragraph. The initial report was incorrect; he actually bought shares just before the crash. I have not seen news yet on who made the fateful sale that started the price drop.