Wednesday, March 28, 2012

Why is Foxconn's Alliance with Sharp a Problem for Sony and Apple?

Foxconn and Sharp just announced an alliance that involves a purchase of Sharp shares by Foxconn, sales of LCD screens from Sharp to Foxconn, and Foxconn access to Sharp LCD technology. It is a clear case of firms seeking to overcome their weaknesses: Foxconn LCD technology is not up to Sharp standards, and Sharp is a high-cost player with difficulty selling its screens. There are many ways such an alliance could fail, including the obvious one that it does not really reduce Sharp's production costs in the short run, and it is unclear how well the combined entity can keep up with the technology and build more efficient production capacity in the long run. But any project can fail, and this alliance has a good rationale when analyzed in isolation.

What if we see it in connection with other alliances that these firms have? This is a step that many forget, but it is important because the alliances of firms become a broader network where the relation of two firms can decide how they relate to other firms. So Sharp already has an alliance with Sony in exactly the same business – LCDs. Seeing Sharp tie up with Foxconn obviously suggests to Sony that Sharp is less interested in the Sharp-Sony alliance than before, and Sony can predict a number of problems following that decision. Sony has already announced that it will not invest further in that alliance, and it may exercise its right to make Sharp buy out its equity stake. This is a reaction that Sharp executives should anticipate: it is hard to maintain alliances with two firms that are rivals in the same market. But it is likely that they did anticipate this reaction and joined the new alliance regardless, expecting Sony to pull out. In research with Hitoshi Mitsuhashi and Joel Baum I found that firms in alliances also kept an eye out for other opportunities, and switched to alliance partners that fit their needs better. Alliances are practical solutions to problems, not necessarily lengthy commitments.

The problem for Apple is of a different kind. Both Sharp and Foxconn supply LCD displays to them. I have previously written about Apple's move toward spreading its purchases across multiple suppliers (Power and Temptation). This could be a risk management strategy, but it could also be a way to make them compete. If it is a way to make them compete, it is already starting to backfire, because a Foxconn-Sharp alliance is going to be a more difficult negotiating partner than Foxconn and Sharp acting independently.

The Foxconn-Sharp alliance has effects across many layers. It lets them transact more easily than before, and provides needed resources for both firms. It may re-arrange other alliances in the LCD industry, notably the Sony-Sharp relation. And finally it has implications for their customers, who may now be seeing a bigger and more assertive supplier. Alliances are complicated because they have so many effects, but in this one it looks like Sharp and Foxconn are maneuvering well.

Greve, Henrich R., Hitoshi Mitsuhashi, and Joel A. C. Baum. Forthcoming. "Greener pastures: Outside options and strategic alliance withdrawal." Organization Science forthcoming.
Juro Osawa and Daisuke Wakabayashi. Foxconn Buys Into Sharp. Wall Street Journal, March 27 2012.

Friday, March 23, 2012

Tesla and Toyota: The Unlikely Partners

Tesla Motors, the specialized maker of all-electrical vehicles, now has three vehicles in its lineup. They completed their initial public offering of stocks in 2010, and say that the subsidized loan they got from the US Department of Energy loan was helpful but not necessary for their commercial success. They seem to be having a very good year, and to have hit on the right concept by selling all-electrical vehicles in the luxury niche rather than the mass-market niche that many other auto makers have favored.

They also have a partnership with Toyota that involves sharing of technologies and some joint technology development. Such a partnership was not remarkable for Tesla in the startup phase, because it needed larger automobile firms to provide it with resources and give it recognition and status. Tesla partnered with Daimler even earlier, and their CEO and founder Elon Musk has acknowledged how a partnership with such a high-status firm “saved them” in their early phase.

Toyota is a different matter. It is renowned for its close management and coordination of suppliers, but it has not been eager to enter into partnerships with other types of firms, and especially not other auto makers. After all, they are competitors, and Toyota would rather beat its competitors than join them. Nor does it usually deal with small upstart firms such as Tesla, preferring (as many large firms do) partnerships with large and established firms. Even when it comes to the vision of low-emission cars, Toyota is distinctly more conservative than Tesla and even its other large-firm peers. In its own development it favors hybrids over all-electrical cars, and its Priuses are obviously mass-market (though chic in Hollywood).

So what happened? The last few years have been rocky for Toyota, which has been hit by various problems that shook the confidence in its vaunted quality program and pointed to problems with its growth plans. Its profitability has lagged. As a result, Toyota started looking changes in its strategy more broadly, including its strategy for partnerships. This matches research that I have done with Andrew Shipilov and Stan Li on how firms react to low performance. Because partnerships are so central to how firms reach out for new kinds of knowledge and technology, and potentially discover and exploit new business opportunities, changing the partnerships strategy is a strong move to try to recover in the face of adversity.

Had Tesla approached Toyota just a few years earlier when Toyota hit its peak performance, they would probably not have been seen as the firm that might help Toyota in the future. It took a run of poor performance, and a realization that a new strategy for getting partners could be needed, to make Toyota management look at them differently.

Yuliya Chernova. (ECO:nomics) Tesla CEO: Government Subsidies Are Usually Bad. Wall Street Journal, March 22, 2012.
Shipilov, Andrew V., Stan Xiao Li, and Henrich R. Greve. 2011. "The Prince and the Pauper: Search and Brokerage in the Initiation of Status-Heterophilous Ties." Organization Science 22(6):1418-34.

Saturday, March 17, 2012

Apple’s New iPad: Power and Temptation

One of the most important changes in the new iPad is not visible: they are not all the same. So-called "tear-down" reports from reporters taking them apart and analyzing the components have shown that Apple is getting some key components from multiple suppliers. Early reports indicate three different suppliers for displays and flash memory chips, for example. This is different from earlier versions of the iPad, which relied more on single sources for its components.

Why the change? Clearly one consideration is risk, as the recent natural disasters in Japan and Thailand have shown that supplies from a single source can suddenly be disrupted. No source of high-tech equipment is completely safe from disruption: US has its share of hurricanes and earthquake risks, Taiwan is in an earthquake zone, and South Korea has a troublesome neighbor in the north.

Power might be another reason. Apple has traditionally been a picky buyer with strict quality controls, but the end result of becoming (often) a sole supplier has actually put the supplier in a good negotiating position. Does Apple’s management now believe that it can negotiate better prices by playing suppliers against each other? That is possible, but it should be careful about stretching such advantages too far. In close supply relations like the ones Apple has had so long, suppliers also need to justify their privileged position by showing flexibility, for example by quickly adjusting production when Apple incorrectly estimates demand, as has happened a few times.

For a firm that relies on a close relation with flexible suppliers, like Apple, over-use of the power strategy is very risky because it can fall down the priority list of the supplier and no longer get special consideration. A multi-supplier strategy calls for a lot of discipline so that the bargaining power is not overused in the short run, leading to less favorable treatment in the short run. Is such discipline realistic? Recent research by Malhotra and Gino in Administrative Science Quarterly shows that it is not: those who gain power by finding alternative exchange partners will end up using this power against the exchange partner. In fact, they will try to use the power even if the alternative partner is no longer available, simply because they expect more after having had an option.

Does that mean trouble for Apple's suppliers, in the short run, and for Apple, in the longer run? That is possible. But it is also important to keep in mind that individuals and organizations are different. Organizations use devices like contracts to set clear terms of exchange, and well-managed organizations review the strategic effects of actions concerning relations with partners. Whether these mechanisms will prevent Apple from taking advantage of its suppliers remains to be seen. As Malhotra and Gino write, “The pursuit of power corrupts.”

Don Clark. Under the Hood of Apple's Tablet. Wall Street Journal Asia, March 16 2012.
Malhotra, D. and Gino, F. 2011. The Pursuit of Power Corrupts: How Investing in Outside Options Motivates Opportunism in Relationships. Administrative Science Quarterly, 56(4).

Thursday, March 15, 2012

Causes in Organizations: Learning From Samples of One (or Fewer)

Today I got the news that Judea Pearl had received the Turing Award from the Association of Computing Machinery. It made me look at my bookshelf where his book is sitting, a hefty volume where the math symbols crawl into the text of Chapter 1 and keep on coming. As early as chapter 3 there are important lessons, because it deals with how we know that a statement about cause and effect is true. The lessons are important because everyone who wants to accomplish something needs to have ideas about cause and effect, or a way of finding out links from cause to effect. In organizations we have a special need because we try to reliably and repeatedly accomplish things.

Thankfully we don't need to learn everything on our own. From an early age we are taught what actions are rewarding and what actions are not, without any need for experimentation. As a result, children know that eating vegetables has benefits beyond the immediate reward of getting dessert, and that unscrewing a light bulb and inserting their fingers will unpleasant. We maintain the habit of learning about cause and effect in adulthood because we are quite willing to ask when in doubt and to accept answers of those more experienced (or simply older). It is a highly effective habit when the consequences are subtle (health from vitamins) or are best avoided (electrical shocks).

Talking about cause and effect is not really a way of proving it. Knowing about causes and effects involve comparison of the effects in situations with the cause present and absent. More is involved too, but this one condition is enough to identify the problem. We usually try to explain anything unusual that we experience, which means that we identify the effect first, and then we look at anything that can be associated with it (preferably something unusual) and label it as a likely cause. Do we go through the experiment of removing the cause to see what happens? Scientists do, but in daily life we do not. Or, we do it as a mental exercise of thinking about how things could have been different. Those mental exercises are useful when we become the experienced people that others ask, because we can tell a complete story of cause and effect even though we only saw the effect and guessed a cause.

In organizations, this way of learning has interesting effects. Typically people notice the same unusual effect and start thinking and talking about it. They try out their proposed stories in conversations, and hold on to the stories that match those of others. If the effect they try to explain is a big event for the organization, these stories become part of the folklore of the organization. The accident that happened, the major client account that was won, the new product that became a big hit are effects that create stories. Because these stories are about causes and effects, others later use them to guide their own actions.

The problem with all this is that Chapter 3 of the big book of causality says that you can't really know that the proposed cause produced the effect unless you tried again without the cause, and saw how the effect changed. It would be difficult to run such an experiment even if the organization tried, because conditions have changed in the meantime. Usually organizations don't even try to run experiments. A big event happened, it was explained, and now the organization has a story and a nice new rule for action. Until it no longer works, of course, a new event occurs, and new explanations and rules are added.

March, J. G., Sproull, L. S., & Tamuz, M. 1991. Learning from samples of one or fewer. Organization Science, 2: 1-13.
Pearl, J. 2000. Causality: Models, Reasoning, and Inference. Cambridge: Cambridge University Press.

Thursday, March 8, 2012

Books for Hamburgers: Reciprocity by Proxy?

A recent Wall Street Journal described how children of McDonald’s franchisees are now moving into the business by starting their own franchises. I found it interesting to see how the new generation pioneered a number of new strategies that benefited from their familiarity of the business and the unique perspective they had as a post-“Super Size Me” generation familiar with critiques of the fast food industry. I was particularly struck by the mention of community donations and events like giving books to local children when opening a new outlet or organizing Christmas toy donation events. The young franchisees pointed to the low cost and good community relations from such events; their parent generation simply saw them as a cost.

Giving to good causes in order to be seen as a good citizen is a common strategy to retain good will and drum up business. It works as a reciprocity by proxy: “I did something for a cause you value, so will you do something for me?” Sometimes it is even made into an overt exchange. The Japanese retailer Aeon has for over a decade run a “Yellow receipt” program that prints receipts in a distinct color on certain days: these receipts can be deposited into boxes designating which good cause Aeon should donate to. This year it includes post-earthquake reconstruction, as they make sure to advertise on TV. That is a step further than the book donation because the book donation happens first, and the franchise hopes to get business later. The donations to reconstruction won’t happen unless you buy something and deposit a receipt. In that case it is an incentive by proxy: “If you do something for me, I will do something for a cause you value.”

Which, if any, of these strategies is effective? Recently researchers looked at this through a variety of experiments starting with a hotel towel reuse program that involved either an unconditional donation to a charity or one made conditional on reusing the towel. Both approaches are different from the usual signs suggesting the towel reuse will save the earth. Does it help to unconditionally donate to charities? Absolutely. Does it help to donate conditionally on reusing? Yes, but less so than an unconditional donation. Is there any situation when a donation will not work so well? Yes, people only respond positively to donations to causes they agree with.

These results are surprising because we know that results come more directly if we link rewards closely to actions, and pay later, not in advance. Businesses creating incentive programs and parents bribing children into cleaning their rooms certainly seem to know this. But the logic changes when the reward is not to oneself but to a good cause. Donations and actions for good causes create a feeling of community; that is why they work. If they are perceived as a control attempt instead, the community feeling dissipates and we may react against them instead. Intuition is a good help here. The Aeon campaign of trading receipts for earthquake reconstruction may have been carefully planned, but it fails the “good taste” test for what we think is genuine community spirit, as opposed to a commercialization of it.

Goldstein, N.J., V. Griskevicius, R.B. Cialdini. 2011. Reciprocity by Proxy. Administrative Science Quarterly 56(3) 441-473.
Jargon, Julie. “Super Size Me” Generation Takes Over at McDonald’s. Wall Street Journal, March 8, 2012.

Monday, March 5, 2012

Boeing 787 Dreamliner: Success through a new Manager?

The Boeing 787 Dreamliner program is getting a new manager, Larry Loftis, who is the current manager of the highly successful 777 program. It is hard to be surprised at a change in management of this program, which delivered its first aircraft 3 year behind schedule and has been plagued by design and manufacturing problems. The latest one was discovered one month ago. It makes sense that a project in trouble should have a new manager, and that this new manager should have a track record of success. That’s the way to fix problems, isn't it?

Without taking anything away from the successes of Mr. Loftis, we can still ask the question whether Boeing really will get what it management expects out of this change in leadership. In an uncertain and complex world, individuals and firms performance has two components: capability and luck. Capability is the strong and accurate kick of the football (soccer, if you will) star and the manufacturing prowess of a top quality car maker; luck is the deflected shot that tricks a world-class goal keeper and the oil crisis that favors smaller cars. We often think that capability is involved when we see high performance, even if it is only once. We are especially easy to convince if we see repeated high performance.

How could this be wrong? The problem is that we underestimate how easy it is to get high performance when capabilities don’t differ much between competitors. The first reason is due to James March, and has to do with who wins promotion tournaments with prizes only for the first place. Among a set of managers with some mix of capabilities and risk taking, the risky ones are more likely to have high performance and be singled out for promotion because risk gives more extreme outcomes than capability -- and extreme sometimes means good. The role of risk relative to capability in deciding promotions is greater the more managers are being considered, suggesting that it can be hard for large firms to pick capable managers over risky ones.

The second argument is from Jerker Denrell, who asked how performance would develop over time if early luck gave advantages later on. It is not hard to imagine advantages given to early winners: the better team around a winning manager (or football player!); the better resources obtained by the winning firm. He found that it would only take minor advantages to the winner for long runs of performance differences to appear among otherwise equal players. Remarkably, recent research by Henderson and coauthors shows that this model explains many of the high performers among US firms.

I think I speak for all flyers in hoping that Mr. Loftis really is as capable as Boeing believes, and can bring the 787 project to a safe and successful conclusion. Indeed, just because these two models of luck can explain the same performance as our usual model of capabilities does not mean that there are no capability differences. It does mean that we cannot be as confident as we would like to be.

David Kesmodel and Susan Carey. “Boeing Replaces 787 Chief” Wall Street Journal, February 24.
Denrell, J. 2004. Random Walks and Sustained Competitive Advantage. Management Science 50(7) 922-934.
Henderson, A.D., M.E. Raynor, M. Ahmed. 2012. How long must a firm be great to rule out chance? Benchmarking sustained superior performance without being fooled by randomness. Strategic Management Journal 33(4) 387-406.
March, J.G. 1981. Footnotes to organizational change. Administrative Science Quarterly 26 563-577.

Thursday, March 1, 2012

Networking Styles: Those Annoying Successful People

Today I clicked on another of those "accept" buttons inviting me to join the online network of someone I can barely recall. My threshold for clicking "accept" is not that high because I know that those ties are pretty low maintenance. Most of those people I will never hear from again; and those I do hear from again tend to be people I would stay in touch with regardless. Today I also had a (very funny) email exchange with someone I know well, and who often sends messages that are a mix of business and social content, or sometimes just social.

I have started noticing how people approach me and "maintain" me as a network contact as a result of a paper by Balagopal Vissa on the networking styles of entrepreneurs. It is a nice paper because it studies network use by entrepreneurs, who are often deliberate and skillful networkers, and to me the findings are a good blend of intuition and surprise. Like the people who keep on sending out social network invitation and collecting name cards, there are entrepreneurs who focus on broadening their networks through adding ties. Like the people who stay in touch with their acquaintances and mix social and business contacts, there are entrepreneurs who focus on deepening their network ties. That is intuitive; I have certainly noticed such differences in people.

Obviously time is limited, especially for entrepreneurs, so it would be really useful to know which style works best. The research showed out that the network broadening style is good, because those who use that style are less reliant on people they already know for getting in touch with new people. Even better, broadening the network led to more business for the entrepreneur, compared to deepening the network. That was an interesting surprise. Although in regular life we enjoy meeting friends of friends, what the findings say is that in business it can be problematic to meet customers through customers because it creates deeper dependencies with existing customers. Those dependencies hold back the business growth.

In regular social life we enjoy the company of those who stay in touch with us, and we don't appreciate the card collectors and link collectors so much. But social and business life is different, and entrepreneurs appear to do better when choosing exactly the type of behaviors that are a little less socially accepted. Let's hope they can go about with their network broadening in a nice way at least.

Vissa, Balagopal. Forthcoming. Entrepreneurs' Networking Style and Initiation of Economic Exchange. Organization Science, published online before print. DOI: 10.1287/orsc.1100.0567.