Tuesday, February 28, 2012

Transfer, Promote, or Hire? It Depends on whether you Need Performance Soon

A while ago I saw that Wall Street Journal reported an increase in formal programs for lateral transfers in US corporations, including majors such as Intel. The description of these programs looked sufficiently similar to the job rotation of Japanese firms that I started wondering whether employment practices somehow swam across the Pacific when no one was looking: US firms are starting job rotation just as Japanese firms are starting outside hiring. Of course, job rotation is just a formal way to do lateral moves of employees (and the programs in the article were actually short term visits), so maybe nothing has changed much. It is still interesting to speculate who would have gained from such a swap of employment practices.

A recent article in Administrative Science Quarterly gives clear answers. In it, Matthew Bidwell compares the cost and performance of outside hires, inside promotions, and lateral transfers, finding that the outside hiring is the most expensive and least productive option. Well, in the short term it is less productive, because outside hires caught up with the performance of inside movers after approximately three years. The performance findings make perfect sense because outsiders know less about the firm than insiders do, and need some time to function well. Hiring from the outside is an investment where you pay first and get returns later.

But things stopped making sense when he looked at salaries and promotions. The outside hires were paid substantially more from the first year on (18 percent more) and were also promoted faster. If the salary reflects how the firm judged their value relative to their current employees, they were significantly over-valued. The apparent over-evaluation continued after they had worked in the firm, because they also got promoted faster than their internal peers. Oh, and it appears that the external hires agreed with the assessment that they were a better value for money, because they were also more likely to leave the firm, presumably in search of the next firm to offer them a better deal than what its current employees get.

That, of course, is the final piece of information that should make managers think very seriously about the balance between inside mobility and outside hires. It would be possible for internal hires to be over-valued at the start and still work out as an investment if their actual performance were discovered over time, and if they stayed long enough that the investment paid off. A firm that cannot do this is simply using the outside hire option poorly. So if you are going to hire many from the outside like a US firm does, at least retain them for a long time like a Japanese firm does.

References
“Co-Workers Change Places” Lauren Weber and Leslie Kwoh. Wall Street Journal, February 21 2012.
Bidwell, M. 2011. Paying More to Get Less. Administrative Science Quarterly 56(3) 369-407.

Saturday, February 25, 2012

Dark Shirts and Symbolic Management

One of the most recent news stories on Apple features a picture of CEO Tim Cook addressing an audience dressed in a dark shirt. It made me look twice because I initially thought he was wearing the same kind of turtleneck sweater made famous by Steve Jobs (and designed by Issey Miyake). Now, I don’t know Mr. Cook’s personal tastes in clothing, but I became curious enough to do a picture search on his name. He indeed appears in a dark shirt (not black) in most of them, but in some he has a pale blue shirt. Interestingly, the pictures marked as most recent in my search were all dark, but some of the older ones, including the one on his official apple.com profile, were pale blue.

Do short colors matter at all, or for that matter, turtlenecks? It depends on your theory of leadership. If you think that leaders only act on real decisions, then wearing is shirt is probably important but the color is extraneous. In such a view of leadership, what leaders do is collect information, make plans and decisions, make incentives for subordinates to execute the plans and evaluate and select those subordinates. Those are actions that characterize the "hands-on" leader, and we value such leaders for their understanding of the firm and attention to detail (as long as things go well, of course).

But at the same time the model of hands-on leadership seems a bit impossible, or at least incomplete, in large and complex firms. How can the leader really get necessary and correct information? How does the leader know which decisions to handle personally and which to delegate? How does the leader know that incentives don’t go awry? How does the leader combine attention to a broad set of issues with in-depth evaluation of subordinates in order to choose the best? We may have leaders who can do some or all of these tasks, but we can see how it may help a leader to choose a few simple actions with effects throughout the organization.

Such actions are what symbolic management is about. Some people find meaning in their work and the organization they work for; many more might do so if they were provided with a meaningful description of it. That is where leaders well-versed in symbolic management can provide shared meanings for members of the organization to interpret the world and their role in it, and shared goals based on these meanings. Many meanings are possible, depending on the organization, and they can be communicated through the language and actions of leaders – or even their clothes. Such actions are comparatively easy as long as the leader remembers that shared meanings fall apart whenever inconsistencies appear.

Apple is described as having a strong corporate culture because their employees do share a broad range of meanings and interpretations of the world, as well as goals – most notable in the supremacy of their own vision in making R&D decisions, with outcomes that are never boring (think of the Newton, and the iPhone). Steve Jobs was the source of these shared meanings and the goals that went along with them, and his passing away must have led to considerable uncertainty about the future of the culture. As his successor, Tim Cook has the unenviable task of trying to convince his employees that the culture will remain even after its charismatic leader, a task made especially difficult because Apple did not do well after Steve Jobs’s first departure.

It is hard to tell for sure, but Tim Cook’s sartorial choice may be a deliberate way of showing continuity in Apple’s leadership without trying to mimic Steve Jobs completely – a good choice, because it is well known that he is quite different kind of leader. If it is, he has found a simple and effective piece of symbolic management. Kudos to him for that, and for not making sure the shirt is not completely black – many Europeans will have issues with leaders in black shirts.

Reference
Pfeffer, J. 1981. Management as symbolic action: The creation and maintenance of organizational paradigms. Research in Organizational Behavior 3 1-52.

Monday, February 20, 2012

Foxconn, Avestin, and Organizational Boundaries

The news last week included two stories that present dilemmas for the companies involved, and are good illustrations of how the boundaries of organizations are becoming difficult to draw in the modern economy. First Foxconn: In two perhaps unrelated actions, this Taiwanese firm that makes iPads in China is undergoing labor condition inspections by Fair Labor Association at the behest of Apple, and it has increased its base salaries of workers. You may recall that Foxconn had a string of worker suicides recently. Its initial response was to install safety nets outside the worker dormitories from which the workers jumped to their death, but Apple and others have pushed it to do more.

Next Avastin: This is a pharmaceutical drug that is in the news because counterfeits have been discovered in some places, including in stocks handled by Danish Wholesaler CareMed and apparently supplied by Swiss wholesaler Hadicon. A search is on for the manufacturer that made the fakes and placed them into the delivery stream. The exact chain of events is complicated because CareMed reports that Hadicon passed the product on to them and were informed of the problem as soon as it was discovered, while Hadicon claims not to have been made aware of a problem with products they had delivered to CareMed.  Neither CareMed nor Hadicon makes Avastin, and it appears that they do not inspect it either. The problem was found by CareMed customer River East, a UK wholesaler.

In both cases the problems were avoidable. Although the Avastin syringes were well made fakes with plausible looking labels, they had batch numbers that did not exist. One might expect pharmaceutical wholesalers to inspect batch numbers, but they did not. The Foxconn factories were huge operations that might have deserved some Apple inspection.

In both cases, we are seeing goods moving among firms that are so tightly connected that they could in principle work as one seamless production system involving multiple legal entities working together. That is the theory, but in practice organizations are more than legal entities that create and trade stuff in some machine-like way. Supervision, control, and coordination are central parts of what organizations do, which is why they are called organizations and not contractizations. Contracts are still valuable for dealing with the fallout when there are problems, but prevention and repair of problems requires more than contracting. When failures such as these occur inside a single organization, the lines of responsibility are clear. Actions to fix the problems suggest themselves immediately or can be found with some inspection. When they occur somewhere in a system composed of organizations that interact closely, as in the Foxconn case and Avastin case, multiple organizations end up looking confused and negligent. It is still possible to create complex multi-organization production and trade systems, but they require more of the classical organizational tasks of supervision, control, and coordination than a single organization does.

References
“Egypt Eyed as Possible Source of Fake Avastin” Jeanne Whalen, Wall Street Journal, Feb 18.
“Apple Partner Foxconn Raises Salaries.” Lorraine Luk. Wall Street Journal, Feb 18.

Thursday, February 16, 2012

Rank and Risk among Traders

News are coming out that some banks are reducing bonuses for their employees or even invoking clawback clauses (taking back bonuses already given) because of low financial results, or even results that needed to be re-stated because of losses unknown at the time. The trading desk has been the source of problems in some cases, as in the case of UBS, which lost more than 2 billion dollar in apparently unauthorized trades made by trader Kweku Adoboli. The case is similar to earlier trading scandals involving Nick Leeson at Barings Bank and Jerome Kerviel at Societe Generale, among others.

What makes these trading scandals happen? So far attention has focused on how individuals who fall behind their goals may ratchet up their risks to avoid losses, but in doing so can end up absorbing even greater losses. In some cases these losses spiral out of control, as has been the case for some traders. The solution seems obvious: always monitor risk; monitor risks even more closely when a trader is making losses.

Unfortunately this is not the end of the story. In a forthcoming paper, Elizabeth Boyle and Zur Shapira have looked at how people behave in tournaments with prizes for placing first. The results are worrying because they show two kinds of risk taking. One is that those below the leader position sometimes look up to the objective of beating the leader, and sometimes down to the objective of not going broke. (As the trading scandals suggest, they don't always remember the looking down part.) The second is that the leader is looking at those trying to catch up, and taking greater risks in order to stay ahead.

Why is such risk taking a concern? Many organizations have systems of bonus, recognition, or promotion that depend on placing first in formal or informal tournaments. This is an economical way to make incentives for employees because the many are motivated to chase a prize that only one person gets. But what if these employees can win by taking risks and getting lucky, not just by working harder and more diligently? For those types of jobs, the organization is facing a stark choice between offering weaker incentives and having stronger monitoring. Of course, the third option is to wait for something to go bust.

Reference
Boyle, Elizabeth and Zur Shapira. The Liability of Leading: Battling Aspiration and Survival Goals in the Jeopardy! Tournament of Champions. Organization Science, forthcoming. 

Saturday, February 11, 2012

Teaching old firms new tricks

Those who follow the business news often come across stories on how firms are going to start doing new things in order to improve customer service, strategic position, profitability, or some other reason. Maybe it is a merchant bank that wants to add investment banking or private banking services, a ferry operator that wants to add cruise tours, or a music distributor that wants to add an airline. How hard can it be? Notable successes notwithstanding, the firms often end up proving the same point as the "Top Gear" program hosts do when they try to answer the question; How hard can it be? It can be really hard.

There are many reasons why it is hard, but I want to focus on one part of the answer that is often overlooked. The old firm that tries something new gets caught out because it is not doing enough of the new. Let me give an example based on research done by Gina Dokko of UC Davis and Vibha Gaba at INSEAD. Corporate Venture Capital (CVC) is when established firms create units that are made to behave more or less like regular Venture Capital firms, so they identify promising new firms, invest in them and provide advice to help them grow, and then (usually) seek to spin them off for substantial profits. In addition, some firms view these CVC units as sources of strategic strength because they get the first pick to acquire new firms with strategically important technologies or markets.

CVC units are not held in high regard by regular venture capitalists, who see them as less skilled and more prone to mis-invest than they are, but are nonetheless willing to partner with them if the price is right. But Dokko and Gaba find that something else is going on too. CVC units are not stable in their strategy. If they are staffed with managers with regular venture capital experience, they may be able to maintain a focus on spinning off successful firms, as the usual strategy is. But if they are staffed with managers from inside the firms they will increasingly end up buying the firms under their wing. Put simply, they forget what it is like to be in venture capital because they have too little experience in it, and too much experience doing their regular business. This is not special for CVCs. Investment banking or private banking units of merchant banks can end up looking more like merchant banks, and I bet you will notice the difference between a cruise ship operated by a ferry company and one operated by a cruise line. The bottom line is that firms are good at doing their usual activity, and it takes special effort to become good at something new. Hiring management with the right experience and giving them freedom to do things the way they are used to is a good start. 

Dokko Gina, and Gaba, Vibha. 2011. Venturing into new territory: Career experiences of corporate venture capital managers and practice variation. Academy of Management Journal, forthcoming.

Saturday, February 4, 2012

Strategy and Organization in Sony

Sony now has designated its next chief executive – Kazuo Hirai, whose credentials include running the US game division and then turning the overall game division back from a precipice of potentially enormous losses. With Sony's long slide from leadership in multiple businesses (think TVs, portable music, and games), there is a lot of second-guessing of their strategies so far. There is also considerable excitement around the new strategic directions that they will take now, because many feel that such a venerable company deserves a chance to recover. A news conference with some strategy announcements may come as soon as Thursday.

But was Mr. Hirai really promoted for his strategic vision?  If we look at how Sony's problems match up with his track record, it looks a lot like he got the job because he understands organizations. Sony is large and decentralized, with divisions and groups that are sometimes described as independent fiefdoms. This is often an effective structure for fostering innovations, because each division can make its own experiments and pursue its own ideas with fewer layers of approval. But it also fails, and in very predictable ways.

When a new business calls for investments so large that the whole company needs to back it, fiefdoms fail because none of them have enough heft. Sony went from a leading position in televisions to a follower position as the new flat-screen technologies called for increasingly large bets in research and manufacturing. Its efforts in portable digital music players were ineffective because two different divisions developed and marketed them in parallel. Just to prove that one mistake was not enough to learn a lesson, four groups started development work on tablet computing.

When a new business calls for coordination across different products, fiefdoms fail because the best ideas get lost in the negotiation process. Sony handicapped its music player business further because they were unable to find a business model to merge content sales and players, and ended up being beaten by the iTunes/iPod combination. Now that Apple has expanded their model to be iTunes/iPos/iPhone/iPad, the lead may be too large for Sony to catch up.

Mr. Kazuo Hirai has shown an ability to confront these kinds of problems. During the turnaround of the game business, be brought the free-spending division to heel, apparently without creating conflicts. He told the TV division to set sales goals that were more in line with market demand than with their egos. He consolidated the four development projects for tablets into one. If Sony's main problem is their organizational structure, he may be the solution they have been waiting for. 

"New Sony Chief Executive Reveals Fast-Forward Plans." Wall Street Journal Asia, February 2. Daisuke Wakabayashi.