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.

Monday, January 12, 2015

Apple Watch: The Computing Industry is making a Device that Will Follow Every Move You Make

There is now work underway to make smart watches both at Apple and other manufacturers using Android. In fact, many of them are already on the market. Chances are you don’t own one. They have not sold particularly well even though they are the size of a regular watch and can do additional tasks. People have not found them useful enough, but now a new generation of more advanced ones is coming along, and the makers are optimistic that this one will be a hit. Some securities analysts agree, and have estimated Apple Watch sales to be as much as 30 million units in the first year. 
Why are the new ones different? Put simply, it is the software you can buy (the apps) that make the difference. They will be giving much more timely and relevant messages to you than those that earlier smart watches had, and will significantly increase the ways such watches can be used. Earlier smart phones were mostly for people concerned with fitness and health who need a convenient way of recording data about themselves (they will click the phone as soon as they wake up…). The new ones can also be used for shopping, social network sites, orientation and sight finding in an unfamiliar place, and even making payments. 

A key feature of this application development, and the reason Apple is seen as the leader even before the launch, is that alliances of firms working closely together is needed for this launch to go well. A normal launch of a smartphone will involve sharing knowledge of the programming language and hardware so that the apps can run correctly, and is a familiar task that does not require alliances. The Apple Phone and similar devices have a range of new functions related to tactile feel (it can give information through vibration functions) that need to be understood in order to fully use them, and this requires close collaboration. 

It also has functions related to location monitoring that go far beyond the GPS functions of existing smartphones. You may have thought your phone was accurate in locating you within a 2-5 meters – in fact, you may have thought it could locate you within one meter, but that apparent accuracy is just a guess based on the map information it has. This is nothing compared to what a smart watch can do when helped by locator systems that are or will be installed in buildings – the accuracy will be within a meter. And, it can follow your motion so that a locator system will know exactly how you walked around in a store. If you pay with the phone also, it can connect the pay information with the walking information to find out what you looked at but did not buy. 

Impressive? Yes. Somewhat worrying? Well, I would certainly start thinking about when I let the phone give away my location information. Or maybe not buy one at all. I am impressed on behalf of what firm alliances can do, but I admit my feelings are mixed. This information collection is set up to be useful for the user of the smartphone and the owner of the locator system (usually a store, but not necessarily). Remarkably, it can do surveillance on people more accurately than anything a government has been able to build.

Mims, Christopher. 2015. Slick, Useful Apps Put the Wow in Apple Watch. Wall Street Journal, January 11 2015. 

Wednesday, December 10, 2014

Luxury Car or Luxury Truck? How Theory of Culture Informs Business

A classical theory paper on culture and status contains the idea that people with high social or economic status have broader cultural tastes than those with low status (See DiMaggio 1987). In other words, the respected and rich do not actually hide in the opera house and modern art gallery; they also listen to popular music and look at art that the rest of society finds understandable. The cultural lines are actually drawn in the opposite direction: it is the poor who stay away from many forms of culture, staying instead with a limited range of mass offerings.

That’s interesting for understanding culture and society, but what about business? Well, here is some news. Suppose we define a luxury vehicle as one that costs $50,000 in the USA and is mainly intended for moving people around (so we exclude commercial vehicles). What is the best-selling luxury vehicle in the US? According to a report in Wall Street Journal, the Ford F150 pickup truck. To be specific, the F150 comes in a wide range of prices, but is projected to sell about 190,000 vehicles in the luxury range this year. That’s more than twice the Mercedes Benz E-Class, which is projected to sell 67,000. And by the way, the E-Class holds third place in the ranking, behind the Ram pickup which will sell about 76,000.

Trucks sell better than cars even in the luxury range. In fact, they sell much better than sports utility vehicles, which you might have thought of as the elite version of large luxury vehicles. Seventh through ninth place in the ranking are SUVs, behind yet more trucks and the BMW 5 series. So what is going on? Many wealthy individuals are not escaping into vehicles that no poor people can afford; they are driving upgraded, equipped versions of the same vehicles. And in fact, these vehicles are actually passenger versions of trucks that one can see gardeners and construction workers drive for commercial use.

This will be interesting to some readers simply because it is unexpected. It should be even more interesting because it is not well known even in the auto industry, where much strategic and marketing effort goes into trying to win the US market back from the foreign brands. But US brands, and Ford especially, are already dominating the luxury vehicle segment. They just don’t know it because the winning vehicle is classified as a truck, not a car, and because elite buyers are classified as narrow in their taste rather than broad. The first classification is a misreading of the market. The second is completely opposite of how status and tastes are linked in reality.

White, Joseph. 2014. The Best-Selling Premium Car in America? It’s a Truck. Wall Street Journal, Dec 10 2014. 

Saturday, October 4, 2014

Path Breaking, Alliance Breaking: How New Technology Complicates Auto Manufacturing

The Paris Auto show is usually a time to celebrate new models, show off prototypes, and generally be in a good mood about what each car maker has done, and even what the industry has done. It is hard to be really upset during such a "celebrate and show off" occasion. Yet this year the CEOs of Daimler and Renault-Nissan attacked Toyota’s plans to launch a new line of environmentally friendly cars based on fuel cell (hydrogen) technology, with Ghosn of Renault-Nissan asking "How are you going to market these cars?"

Funny question, that one. One would think that marketing a car would be Toyota’s problem, and that Renault-Nissan would not be worried about the marketing being difficult, or even impossible. Toyota’s loss would be Renault-Nissan’s gain, right? Toyota responded that Toyota had introduced new technologies before, an unsubtle reminder that Toyota came up with the Prius while European car makers thought that diesel was the path toward environmentally friendly driving.

To see the reason for the conflict, one has to realize that auto makers that are not alliance partners, like Toyota, Daimler, and Renault-Nissan, sometimes act together in order to advance technologies that they all depend on. Through legal requirements they are being pushed to produce zero-emission vehicles, especially in the important California market, which they are currently addressing through making electrical cars. But electrical cars are hard to market, in large part because there are too few recharging (not refueling) stations around. In order for electric cars to succeed, the car makers are strongly dependent on the state of California and others to make good recharging networks for them. 

For a while, Toyota has been playing along with the others. Although their skepticism of electric cars is well known, they finally made a rechargeable version of the Prius (but not until the third generation model…), so one can now drive a Prius without ever starting its gasoline if buying the plug-in version. Yes, it is a special version; a regular Prius cannot be recharged, only refueled. But Toyota isn’t satisfied, and it isn’t particularly concerned about hurt feelings among other car makers. It thinks fuel cells are the way forward, even though that technology is difficult to master and also requires a network of refueling (with gas) stations. 

So the critiques of Toyota are based on its lack of cooperation with other car makers in pushing for recharging networks to be made. In the short run, this makes marketing of electrical vehicles harder. In the long run, if Toyota should succeed with the fuel cell technology (far from a sure thing), it would undercut the entire electrical vehicle market. This is a kind of situation that often occurs when industry participants are locked in competitive battles and lobbying efforts together, and it is a situation that we still do not understand well enough through research. Nor are the firms good at handling it. The Daimler CEO was clearest in expressing what they thought Toyota should do about no-emission vehicles: "we have to set the stage for this industry change together." Good idea, except that Toyota remembers that car makers compete and that Toyota has won with new technology once before.

Boston, W. 2014, “Daimler, Renault Chiefs Knock Hydrogen Cars.” Wall Street Journal, Oct 3 2014.

Toyota fuel cell car prototype. The hydrogen tank (mounted under) is very similar to the LP gas tank used in Japanese taxis, so it is likely that such commercial use is the first market target.

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.