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.

Tuesday, April 28, 2015

Hands off my Partner! France shows how a Third Party Can Complicate an Alliance

There is excitement in the business press around the dealings that the state of France has with car maker Renault, and the impact this could be having on the alliance of Renault and Nissan. The story starts with complicated maneuvers by the Economy Minister (this is France, after all), which are interesting enough to mention, but I will soon get to the alliance issue.

The start of the excitement is that the French government made a change in the stock voting rights late last year that benefits long-term investors, because they get double voting rights, so double the power, if they have held the shares for two years or more. But there is more to the law; it can also be used to favor French or other European shareholders over others, and specifically it lets the French state get double voting rights on its shares. That is a big power grab in a nation that has large state shareholding of many companies. The French government has assured managers and other owners that their intentions are purely beneficial and they do not intend to discriminate against others. The very existence of the law, and past French Economy Minister behavior against firms, place that assurance very much in doubt.

But enough legal issues, over to alliances. The Renault – Nissan alliance is famous as one of few very successful cross-border alliances of large firms. It started more or less as a rescue of Nissan, which was in bigger trouble than Renault when it was initiated, though neither firm was healthy. As a result, both firms own a portion of each other, but Renault has voting shares over Nissan but not the other way around. And what started as a rescue led to very significant success and growth. Now Nissan has double the car sales of Renault.

The Renault CEO Carlos Ghosn has made big personal investments in making the alliance work, and has drawn much credit from its success. He reacted quickly against the new law through seeking to make a special Renault exemption from it (this is legal), as well as speaking publicly against the law. No doubt he is doing this because Nissan enjoys their relation with Renault but do not trust the French state.  Indeed, he has been supported by his board of directors, as well as from the Nissan board of directors. He has until recently looked like he would be able to get a majority of Renault stockholders to vote for the exception, as he is required to do.

And now I need to bring the French state maneuvers back into the story. The Economy Minister Emmanuel Macron has arranged to buy a substantial share of Renault stock and to have options to sell them after the shareholder meeting. Translation: he is using taxpayer money to buy the votes necessary to stop Ghosn at the shareholder meeting. This is nearly certain to work, making France an even more important shareholder in Renault as intended.

What about the alliance, then? Well, it is going to be interesting. As long as France does not intervene much, it is likely that it will go on as before because Renault and Nissan are still useful for each other. But if there are problems things could change dramatically because Nissan actually needs Renault much less now than it used before. The main problem would be that Renault owns so much of Nissan that getting away from Renault would be hard. It is easy to see ways that this change in power will cause problems, and much harder to see any benefits to the alliance -- or to France.


Stacy Meichtry,  Jason Chow and Sam Schechner. 2015. France Outflanks, Outrages Renault’s Ghosn. Wall Street Journal, April 27 2015.
Greve, Henrich R., Timothy J. Rowley, and Andrew Shipilov. 2013. Network Advantage: How to Unlock Value from your Alliances and Partnerships. Jossey-Bass. 

Sunday, April 12, 2015

Loyal Cheaters: When Organizations Promote Wrongdoing

Every now and then we hear news about employees who are engaged in wrongdoing of various kind, usually harmful to customers and employees. The most spectacular have been financial fraud, as when traders lose money while performing trades that break the internal rules of their banks. UBS trader Adoboli was convicted for unauthorized trading that led to a 2 billion dollar loss; Barings Bank trader Leeson was convicted for unauthorized trades that lost 1.4 billion dollar. Barings Bank went bankrupt; UBS bank stock owners (and surely, customers as well) suffered financially from the losses.

We often think of such wrongdoing as being the result of bad employees acting against their company, but is that really the right story? It is certainly a poor fit with these trader cases, because both of them started trading out of control after losing money, not while making a profit. You could see them as trying to avoid getting fired, but surely that does not fully explain risking lengthy prison terms.  In fact, an odd but plausible true explanation is that their wrongdoing was an attempt to save the firm from losses.

Research supporting this explanation has been done by Donald Palmer and Christopher Yenkey, and will soon be published in Social Forces. They looked at another context with some famous wrongdoing: the cycling race Tour de France. There, the beginning of blood monitoring in the 2010 race makes it easy to investigate which cyclists likely engaged in blood doping or drugging, even if they did not get blood values suspicious enough to fail tests. Of course is well known that Lance Armstrong engaged in doping for many years and was stripped of 7 wins; not everyone knows that Alberto Contador was declared winner in 2010, but lost the victory after a drug investigation. The key point in Tour de France is that players may cheat to benefit themselves and their team, and it is actually possible to test what makes them most likely to cheat.

So what determined cheating? The role in the team is most important, because specialists such as team leaders and sprinters had the most suspicious blood values, while their supporting cyclists had the second-most suspicious values. Members of teams that let each cyclist compete individually were least likely to cheat. People don't cheat for themselves as often as they cheat for their organization.

So we have an interesting result that should give pause to anyone who sees wrongdoing in organizations as a result of individuals looking out for themselves. It could be exactly wrong: they are trying to help their employer. This means that the right response against wrongdoing is not more organizational control of what people do, but less pressure to win. 

Palmer, D., C.B. Yenkey. 2015. Drugs, Sweat, and Gears: An Organizational Analysis of Performance-Enhancing Drug Use in the 2010 Tour de France. Social Forces.

Alberto Contador (center) celebrating his Tour de France victory. 
To the left is Andy Schleck, who has now been declared the winner.

Friday, March 13, 2015

Keeping Employees from Leaving: How an Art is becoming Scientific

There is now a report in Wall Street Journal on how firms are increasingly using statistical analysis to find out which employees are more likely to leave, and using this information to improve personnel management and target employees for interventions to make staying more worthwhile. Firms do this because replacing employees who leave can be very expensive, making the analysis and the responses cheap in comparison. It says a lot that Wal-Mart, a firm known to be careful about its expenses, is investing in such analysis. It is probably less surprising that Credit Suisse does so, given the importance of keeping staff in banking, or that some human-resource analytics firms do, given that they can use these results to keep their own staff and sell the methods to client firms.

What have they discovered by analyzing their employees? Well, they are more likely to leave if they have problematic managers or little contact with co-workers, less likely to leave when they are given opportunities to change jobs internally (especially promotions), plus a variety of other smaller discoveries.

Is this surprising? Actually we have known it for a long time. Job mobility is an established field of sociology and management research, and as far as I can see the statistical analysis done by the firms re-discovers what is already known. So, I would probably not go to a firm statistician expecting to learn much new about job mobility, though I would still find it interesting to see what they are doing.

Does that mean it is worthless? It does not. There are two really significant pieces of progress in the news that firms are doing this analysis. The first is that the whole point of studying job mobility is to understand what happens to the lives of people and the fates of organizations, and it is wasteful to have this understanding without also using it to improve the lives of people and the fates of organizations. Job mobility is often valuable, but there are also many cases of job mobility that is wasteful for the employee and the firm. It is better to reduce them. The second piece of progress is that firms are now gaining knowledge that lets them address the situation of each employee, and they can often intervene in positive ways such as improving job content or opening for promotions when they see a risk of that employee leaving.

There is of course some potential that this gets intrusive or used in troublesome ways, so it is worth watching. Firms are after all able to track health coverage decisions and health care use with enough detail that they can start linking them to job mobility, something that would be new to academic researchers and potentially troublesome. They could also track emails, which academic researchers have already done but always anonymously.  There are good reasons to limits such data collection and analysis.

Even with these potential problems, it is nice to see business catching up to the value of research. Of course, it has only done so to a limited extent. The number of statistical analysts involved in this work is far fewer than the number of human resource managers (and other managers) who thinks that such management is an art that calls for their unique experience and cannot be understood by others. Maybe some of these managers are right, but on average I would place my bets on the statistician.


Wednesday, February 11, 2015

Netflix “House of Cards Leak”: One Way that Organizations Explore



Those who pay close attention to media (or who simply have a twitter account) know this story already. On the afternoon of February 11, episodes of “House of Cards” were made available on Netflix, before the scheduled release date. Fans delighted, started watching, and sent tweets inviting others. The joy lasted a few minutes, and then the episodes were made unavailable again.

Viewers were disappointed. Social media was in a frenzy. Soon they reached the conclusion that this had been a very clever marketing stunt, designed to make people talk about the new season just before it would be released. And wow, did it ever work well, people did talk, and those who caught a view spread the news of what they had seen to eager fellow fans. And in a way, it is correct that this was a very successful form of marketing, at least if we take seriously the idea that social media expresses interest in products (and we should take that seriously).

But there is one interesting correction. It was great marketing, but it was not a clever marketing stunt. In fact, it was an error that the episodes had been made available, and they were made unavailable because Netflix discovered the error and corrected it. But how do we understand errors like this, errors that turn out to be great in some way, like marketing in this case?

A good way is to think of organizations as exploiting what they currently know and exploring to gain new knowledge, an insight that stems from an article by James G. March (see below). It makes sense to do both, because either one alone, or as a too small proportion, will leave the organization vulnerable. But here there is a problem. When seeking high performance and good coordination among employees and units, organizations end up exploiting a lot, and exploring very little. That’s a short-term benefit for efficiency, but also a long-term problem because the organization can become obsolete. So finding out how to explore enough, or even more than nothing, is a problem in designing organizations. R&D departments are one solution, but actually they often end up exploiting a lot of current knowledge too.

Fortunately there are some solutions that happen simply because of the way organizations work. The “House of Cards” release is a good example of one. An error is a form of exploration. Netflix did not intend to release the series early, but after doing so they have learned something new and valuable about marketing. Will they do it again, on purpose, on a later series? I would be very surprised if they did not. Exploration gives new knowledge, which organizations exploit later. And it really does not matter whether the exploration was deliberate or an error; any useful knowledge can be exploited.