Wednesday, August 24, 2016

We are the Uber of Hype: When Entrepreneurs Crowd

Teaching entrepreneurship at a business school has its annoyances, and prime among them is students visiting to seek opinions and support for their business idea, which they describe as “We are the [insert famous company] of [insert market]”. That is a quick and catchy way of summarizing the idea, but there are problems with it. The main one is that it also summarizes that the idea is copied from something else. Copied ideas are not always bad, but very often they are. The first problem is that copying is easier than originality, so a copy faces competition. The second problem is that copies of successful firms (and yes, they are more common than copies of failed firms) involve too much excitement to understand the source of success. I have earlier written about DoorDash, which can be described as the Uber of meal delivery. Except that Uber gets its competitive advantage from knowing where all its cars are, always. It is not so hard to know where a restaurant is, so DoorDash is uber-like without a key uber advantage.

Well, going against logic and annoying business school professors are not decisive problems of copying successful firms. After all, none of them say what will happen in the market. So what happens, really? Now we know, thanks to a forthcoming paper in Administrative Science Quarterly by Elizabeth Pontikes and Bill Barnett. Their idea is simple. Look at spectacular successes in the financing of ventures, as well as agonizing failures of firms, and see if they result in crowding around successes and flight from failures. Then, see if the success crowd fails, and the entrepreneurs who stay near failures succeed.

Their answers are in support of the annoyed business school professors, and against the “uber of something” entrepreneurs. Yes, entrepreneurs crowd success and flee failures. But also, venture capitalists react exactly like business school professors, and they simply turn off the funding for entrepreneurs who crowd success. Also, firms that crowd success are more likely to fail, whereas firms that follow failures are less likely to fail. Clearly the impulse to chase success is a trap, whereas trying near a failure calls for thoughtfulness, which is often a step toward good outcomes.

So does this mean that entrepreneurs should be thinking about how to make a Blackberry variation, given its recent failure? Well, not so fast. Unthinking copying of anything is a problem, so they should not unthinkingly enter near a failure. Instead, they should think carefully about the elements of success, and those that led to failure. Blackberries had devoted followers because of the keyboard, and were also well liked for their security. They were hit by the sheer breadth of smartphone capabilities, and also by the market power by the largest high-price firms (Apple, Samsung) and the race upward in the market by the low-price firms. Is it still possible to make a device that keeps the Blackberry strength and survives the current market? Asking that question is the way to get from failure to success.

Pontikes, Elizabeth G., and William P. Barnett. 2016. "The Non-consensus Entrepreneur: Organizational Responses to Vital Events." Administrative Science Quarterly forthcoming.

Wednesday, August 17, 2016

Please Lobby Someone Else: Social Movements Can Make Firms Unpalatable

Under fundraising rules following the Citizens United v. FEC Supreme Court, funding needs for politicians are so great that a member of congress is expected to raise at least $18,000 per day, every day of the year. For new members, that can mean as much as 30 hours per week on fundraising calls, an amazing use of time for members of a legislative body that is supposed to deliberate to govern and make laws. Equally important, many of those calls have to be to firms, who can afford higher donation amounts than individuals. Firms also like this arrangement, naturally, because lobbying for favors involves donations as an important tool.

So is it possible for a firm to lose touch with politicians? Mary-Hunter McDonnell and Timothy Werner has a forthcoming article in Administrative Science Quarterly showing that this can happen. The idea is simple, but powerful. Politicians are stuck between those who fund their reelection and those who actually vote. Often voters don’t pay close attention to the funding, so politicians can take money from a broad range of firms, but social movements can single out firms for attention. This does not mean that voters will also notice whether these firms have political connections, but politicians cannot take the risk that they will notice – so they stay away from the firms that get singled out.

How do we know? It is actually quite easy to see how well connected a firm is politically. It can donate money (but politicians can return the donation), it can be invited to testify to congress, and it can simply get contracts to do work for the government. All of these connections get weaker if social movements target firms for boycott actions, they showed. And even more importantly, the research found that the weakening of connections was especially pronounced if the social movement issue had much voter attention, or if the firm was well known to begin with. This makes sense because the risk that voters will notice is especially high if either the firm or the issue is well known.

What does this mean for firms, and for society? Well, for firms the lesson seems clear – they need to avoid the attention of social movements in order to keep the attention of politicians. Not a very ethical implication, but a clear one. And for society? Well, it may seem nice that social movements can isolate firms from politicians through boycotts, but is it really? The main reason it is possible is that other firms are happy to pick up the slack through lobbying more when some firms are isolated. And those firms are not necessarily better. We live in a world of B2C (business to consumer) and B2B (business to business) commerce, where B2B is much bigger and less exposed to boycotts. If there is a boycott of Victoria’s Secret (which has happened) and defense contractor Lockheed Martin picks up the slack, do we have a better society?

Thursday, August 4, 2016

Keeping Threesomes Stable and Creative

Just to halt any false expectation you may have, this is a blog post about how sets of three (or more) firms can collaborate for innovating over time. It is a very interesting and important topic because the approach for doing innovations has changed a lot recently, and especially in fast-moving industries involving information technology: apps, smartphones, internet servers, automotive computer controls for example. We have long done research on firms being innovative (on their own), and we are beginning to know a lot about firms pairing up to make innovations. Unfortunately, the new approach is to do innovations in groups of three or more, and to keep working in different configurations of firms. That is something we know little about.

Fortunately, a forthcoming paper in Administrative Science Quarterly by Jason Davis has important insights. He looks at the central problem of how these groups of firms can stay together and maintain the high trust and low conflict needed to be innovative over time. Using data on collaborative projects from firms in the computing industry, he found a key insight that is only possible by understanding how different interfirm collaboration is from interpersonal collaboration.

People can form stable collaborative relations if one of them acts as a leader and is recognized as such, or if they form a cohesive team with all members staying close. That’s not what makes firm collaborations stable and innovative. Firms cannot have one leader over time because repeated projects typically involve different configurations of interests and capabilities. They cannot be cohesive because each project typically has greater complementarities between one pairing (dyad) of firms than between the other two. As a result, the configurations that work for people fall apart in conflict or in distrust when firms try to repeat collaborative innovations.

Instead, what is special about firm is recognition that firms are interdependent and that they need to work together in the future, even if they do not collaborate closely at a specific time point. This leads to a form of collaboration called group cycling: each pair of firms that are most interdependent works together closely, with the third at a distance, but they remain in touch and aware of the need to reconfigure with a different focal pair later on. Conflict is avoided because the most complementary firms work together. Trust is kept because all partners see current collaborations as preparations for future collaborations.

Interfirm collaborations is a special kind of network among organizations. Part of its special status comes from the realization that, unlike many other networks, what works for firms is different from what works for people. This is a good insight in management because we often think that intuition carries over from one level to the next.

Davis, Jason P. 2016. The Group Dynamics of Interorganizational Relationships: Collaborating with Multiple Partners in Innovation Ecosystems. Administrative Science Quarterly, forthcoming. 

Thursday, July 28, 2016

Radical Flank Marketing: How Engineers Adapted to Lost Power

Many firms that emerge or grow as a result of radical technological progress owe a lot – maybe everything – to their technical occupations, and in return give them both formal power and informal status and gratitude. Often the same firms find that these engineers have lost importance because the technology is now developed, and the next step forward is to find ways of entering new markets or strengthening current market positions. Engineers don’t know how to do that; the marketing department does. So can firms really shift authority away from the source of their success to the new path to success? Often the answer is no, as seen in firms applying technological innovations that ignored marketing challenges – such as Sony’s continued development of disk-based music players after flash media enabled firms to make compact players like the iPod.

But there are also successful cases, and a forthcoming article in Administrative Science Quarterly by Emily Truelove and Katherine Kellogg explains one mechanism. They followed a car-sharing company that made a strategic shift to marketing following a period of strong engineering success based on radical innovations. This was a classic case of a firm with engineers as a powerful occupation with a track record of success and professional norms that are completely different from the new leaders in marketing. They had all opportunities to resist, which they did – until they suddenly started making compromises. What happened?

The firm had engineers that were either radical or moderate in their views on the role (and power) that engineering should have and the type of engineering that was needed. They also had radical and moderate marketing professionals. The battle between engineering and marketing alerted engineers to the difference between marketing people, and the radicals were seen as such a great threat that the moderate engineers started collaborating with the moderate marketers. So, the firm was reconfigured from an engineering versus marketing battle to a moderate-moderate collaboration with radicals on both sides out of the loop, in both power and product/market development.

This is a very nice illustration of how power struggles in organizations can get resolved. It also is a point that harks back to classical organizational theory. Back in the days of Cyert and March, the Behavioral Theory of the Firm introduced the concept of a dominant coalition, and suggested that managers could be very astute in forming coalitions. Indeed they can – as Truelove and Kellogg pointed out, the dominant coalition can shift from a department to a cross-department collaboration.

Friday, July 22, 2016

Amphibious Coffee Maker: How Alessi Became Profitably Artistic

I don’t want to get too personal, but I am tempted to suggest that you own some product or products made by Alessi – products that make you feel vaguely artistic and unique even though they are mass produced and sold to millions of people. If you are familiar with the history of Alessi, you may know that these products are radically different from their original collection of serving tools for the food and hospitality industry, a classical low-margin high-volume good with professional buyers. From the design of the Alessi good you own – and the price – you have probably guessed that it is a high-margin good. And you are not a professional buyer of household goods.

How did Alessi make this change in product focus? This is the topic of an article in Administrative Science Quarterly by Elena Dalpiaz, Violina Rindova, and Davide Ravasi. They show that, interestingly, this move into a much more profitable and “cushy” market segment was controversial and complex. Professional serving tools are designed differently, made differently, and marketed differently than the artistic goods that Alessi now focuses on, so this was a change in philosophy and in skills.

Their article explains how this was done, and how other firms can learn from the transition, giving a full picture of how a complex change process was done. I will just tell you one element: the role of the amphibious coffee maker. What makes a coffee maker amphibious? It can live in two environments, moving smoothly from kitchen, where it functions well, to living room, where it looks good. Amphibious products, both concept and actual product, were used internally in Alessi to explain the strategic change. They were used externally to guide customers along the path from a set of truly artistic (but less useful) products that were sold in small numbers in the transitional period to the mass-produced and more useful (but still pricey) products that Alessi wanted to sell.

This is a very important insight. Amphibious products created a bridge in the customers’ mind between the artistic and the useful. With this bridge in place, the customer was willing to adjust the price range paid for a coffee maker, or an egg stand, or a wine bottle opener.

Amphibious products also created a bridge in the organization between its origin as a maker of mass-produced serving tools to its destination as a maker of artistic household goods. Alessi’s products were now amphibious; Alessi was now amphibious.  Truly an interesting success story.

Friday, July 15, 2016

Will it be a Success? Evaluating Creative Ideas in Firms

You probably know someone who owns an Apple Watch, or maybe you own one yourself. Is it a creative idea? Well, the multi-function watch was creative the first time it appeared in Science Fiction writing, but that was long time ago. Technologically a watch with the Apple Watch functionality has been possible for a while too, but firms have waited because they were unsure if it could become a success. If fewer and fewer people wear watches, because smartphones do the same job and much more, why make a watch? In fact, the potential for success of Apple Watch was in dispute as soon as it was launched, and it is still not settled. This is an issue that surfaces again and again – firms need to estimate the potential success of ideas, both creative ones and more conventional ones.

In a forthcoming paper in Administrative Science Quarterly, Justin Berg looks at that question through a new lens: who makes the best estimate? Is it managers (who make the decision), creators (who come with ideas), or people generally (who could be customers)? The question is important because it reflects an ongoing tension in firms. Creatives think that managers don’t have the right kind of thinking to appreciate their work, and managers think that creatives are poor decision makers, especially when evaluating their own work. Theoretically the key difference is between the divergent thinking that underlies creativity, and the convergent thinking that underlies analysis and decision making. 

What kind of thinking fits what kind of task is a good topic for discussion over drinks, but we won’t know the answer without studying it, as Berg did. To make sure the creative content was easy to evaluate, he used proposed circus acts, and drew creators and managers from the industry (yes, of course there is a circus industry).  The answers are easy to summarize, and important too.

The creators are right: They are much better at assessing creative success than managers are. In fact, managers could be the worst, with laypeople doing better in one measure of assessment accuracy.

The managers are right too: Creators are bad at assessing the success of their own work (you get no points for guessing that they over-estimate it). Even more interesting, a creator with a strong past success is especially bad at assessing, probably because of overconfidence. This gives a good rule of thumb for those who will become managers at some point: If a creator says, “I know product idea this will success/fail because [insert own success story here]”, you know exactly who to ignore. But the other rule of thumb is to ignore yourself. Have the creators assess each other’s ideas, or you can’t do that, use laypeople.

Friday, July 8, 2016

Fancy Stuff: How to Make People Really Like a Type of Product They Used to Despise

Let me start this post with a confession. I like whisky and think the different types taste very different from each other, I also like cognac but can’t tell them apart well, and different types of grappa I can tell apart but don’t really have an opinion on which ones are better. OK, so now you know my bias, which is important for what follows, and many of you have probably made an assessment of how (un)cultured I am.

But here is something to think about first: why did I mention grappa along with the other two alcohols? A few years ago, that would have been pretty insulting to whisky and cognac, but now it is natural at least among some people. And that is a big change with some importance outside drinking too, for example for management. In a paper forthcoming in Administrative Science Quarterly, Giuseppe Delmestri and RoystonGreenwood write about the Cinderella-to-Queen transformation of grappa, and what it means for our understanding of categories in general, and specifically organizations in markets.

Their paper is great in its description of how a dilemma for grappa producers, and their solution to it, solves a puzzle for researchers: why do different product types have different status rankings, and how much does that change over time? Grappa was cheap booze for the underclass. That was not ideal for grappa makers, who very much would have liked higher prices. But as long as rich people everywhere – in Italy too – though that grappa was no good, preferring other alcohols instead, that was not going to happen.

Some grappa producers were able to find a path to higher status. It involved failed attempts and even a bankruptcy, and exactly that combination of failure and eventual success let Delmestri and Greenwood work out the process. The paper has much more detail than I can give here, but the short story is that a rise in status involves distancing from the low-status past and present (detachment), copying of related high-status products (emulation), and connections to the broader society (sublimation). All needed to be done, and the “raw materials” for all needed to be present. The story of grappa’s rice to high status is interesting because it shows exactly how customers can change their minds when all the right levers are pulled. It took bottles designed to resemble perfume flagons, single-grape distilling and regional labeling, and linking to Milanese high fashion to make grappa fashionable and prestigious, but it could be done.

I think the story is also interesting because it suggests a condition that needs to be present for it to work. Grappa became high status after a long campaign. Can any regional or local product accomplish the same? Before you say yes, consider this: Italy is a pretty cool place, so grappa had a good starting point.