Saturday, June 29, 2013

Messy Divorce: Apple and Samsung Relation is Difficult to Unwind

The Wall Street Journal just published a nice description of how Apple is trying to become less dependent on Samsung for its component, but having difficulty getting the components it needs elsewhere. Samsung is the best supplier for many components, and for some component it even extends its reach through ownership and alliances with alternative suppliers. In some areas Apple can leave Samsung (certain chips); in others it tries to turn around and finds that it meets Samsung again (large high-quality screens).

The reason for separating is clear enough: Apple and Samsung are competing intensely in the smartphone market, and the competition is so intense that it now takes place through prices (but as little as possible because both want to earn a profit), innovative features (with Samsung currently leading on the hardware side), and legal challenges (with Apple ahead in blocking products for patent violations). The smartphone market is seen as strategically important for both companies, and Apple may in fact be more dependent on it than Samsung.

Apple really does not want to lose this fight, and there are concerns that Samsung holds too much knowledge about Apple product development and market estimates through its role as a key supplier of technologies for its iPhones. The worry does not extend all the way to Samsung suddenly failing to deliver: Apple is a too valuable customer for Samsung to consider such dirty tricks. But even if Samsung delivers everything Apple asks for at competitive prices, Apple still has a problem if the cash and knowledge from that business helps Samsung strengthen its mobile phone business.

The situation is a familiar one from research on alliances. Alliances last longer if the partners need each other for an extended period of time. Their goals have to match each other, and both wanting to be the world’s dominant supplier of mobile phones is not a good example of goals that match. Apple is determined not to produce components itself; it is not that type of company. So it needs suppliers, and Apple products are so tightly integrated that in practice any supplier of critical components becomes an implicit alliance partner. When the alliance with one goes sour, Apple needs to look elsewhere.

But here it faces a problem that is becoming increasingly common in its industry. Rapid technological changes and extreme demands for factory size are making firms drop out of the market, so there are fewer suppliers available in many critical markets. Hitoshi Mitsuhashi, Joel Baum, and I published a paper showing that firms left alliances when better partners were available outside their current alliance. Apple versus Samsung is really just the reverse: Apple would like to leave, but the options outside Samsung are limited. So, we can expect the awkward on and off relationship to continue.

Lessin, Jessica E., Lorraine Luk, and Juro Osawa. Apple Finds It Difficult to Divorce Samsung. Wall Street Journal, June 28, 2013.

Thursday, June 20, 2013

Stars or Performers? A Lesson from Basketball

The basketball team Miami Heat doesn't have a dilemma. They have the star player LeBron James with multiple Most Valuable Player awards and a big press presence, which is important for earning television and other revenues in a sport where keeping a team competitive is much, much more expensive than what one can earn by selling tickets. He was also ranked as the most efficient player in the NBA league by the end of the 2012-1023 regular season. Although finals opponent San Antonio Spurs were able to extend the series to seven games, it is not a big shock that Miami won the championship.

What if you own or manage an NBA team, and you can't get LeBron James to play for your team? He is expensive, and besides, there is only one of him, currently playing for Miami. Well, from then on it gets complicated. There are less efficient player, and players with lower status, to choose from. Put enough of them on a team with an inspired coach, and you can still be competitive because basketball is played with 5 players on the court and a bench of substitutes. But the real dilemma is that the relation between stardom and efficiency is actually murkier than the LeBron James example suggests. Some players will give you one but not (much of) the other. Which do you choose?

The problem is related to how leaders make staffing decisions. Some people are strong contributors, and make a team perform better. Or even an entire organization. Others only have star status, but that is also useful because stardom can bring in more resources, for example by making others more likely to collaborate with the team. In a recent article in the Academy of Management Journal, Gokhan Ertug and Fabrizio Castellucci look at how NBA teams made these decisions. Their results are very interesting. Teams hire in ways that suggest they are well aware of the tradeoffs: they go for stardom when their revenues are down, and they go for efficiency when they don’t play well enough. Moreover, they put money behind these hiring patterns. A player earns more when he goes to a team that has less of what he provides. So if a gifted but underappreciated player wants to win a championship, he should go to a strong team – but he will have to take a pay cut. If he wants to cash in on his skills, he should go to a weak team.

So they are doing the right thing, and this is a problem that managers generally solve correctly, right? Wrong. Basketball players are among the most closely analyzed human beings on earth. Regular fans have a good understanding of efficiency. They also have a feeling for stardom, and they know that they love some players who aren’t that efficient (sports fans understand the heart versus brain tradeoff). Coaches know performance even better, and any biases they might have are kept in check by the use of statistics.

Whenever performance is not so well understood, it is all too easy to assume that the star is also the high performer. Leaders making that assumption will be prone to picking based on past success, and will be overlooking individuals who might make their teams even better. And they will certainly miss the option of picking stardom or performance depending on the needs.

Wednesday, June 12, 2013

Jugaad Cars: Carlos Ghosn and Disruptive Innovation

Would you like to have a Renault or a Nissan (well, Datsun brand) for less than USD 5,000? Soon you can, if you live in India. These cars are part of a bold initiative by Renault-Nissan CEO Carlos Ghosn to harness frugal engineering, a set of practices intended to launch new models with radically lower development and production costs than has been done before. Jugaad is the term used by Indian engineers for cost-conscious engineering, and Mr. Ghosn wants to deploy it in other Renault-Nissan markets as well. It is a disruptive innovation in how new model development is done, and it can give a major boost to Renault-Nissan in price-conscious markets in developing nations. It can also make customers elsewhere wonder why they are stuck with so much higher prices for their cars.

Jugaad practices have good cost consequences, but are not without risks. One is the issue of selling cars much more cheaply in some nations than others; an issue that gets worse because one practice is actually to take older-model designs from developing markets as the initial platform. In other words, after Nissan customers in Japan, Europe, and USA pay for the design, it is re-used for free in India.  The other is the question of whether this approach gives the same safety standards that we expect of cars everywhere. Frugal engineering can be too cheap.

Why does Mr. Ghosn take these risks? One answer could be that the payoffs are potentially high in the rapidly growing emerging markets. Another is that there is little to lose in India, where Renault-Nissan started out with a 1.4 percent market share last year (now doubled). But a third opportunity is very intriguing: He may like the attention that comes from doing bold actions.

Gerstner, König, Enders, and Hambrick have published an article in Administrative Science Quarterly that looks at the connection between CEO narcissism and adoption of disruptive innovations. They find that narcissist CEOs are more likely to adopt disruptive innovations, and they are particularly likely to do so when the area of innovation is attracting attention. The reason is that attention is exactly what narcissist CEOs want, and they get it by bold actions in areas of activities that are closely watched.

Is this a good thing? Well, researchers often ask why so few firms adopt disruptive innovations, giving the impression that firms should be doing more of it. And maybe that is the right answer. But disruptive innovations are risky actions that firms would take very judiciously and probably not mix with other risks. And herein lies the problem: narcissist CEOs don’t calibrate overall risks, because as far as attention goes, more is always better. So we are stuck with the dilemma of normal CEOs calibrating risk but taking too little overall, and narcissists not calibrating risks and probably taking too much.

Do I mean to suggest that Mr. Ghosn is a narcissist? No, not at all; it was just an example of a bold action. He has by sheer necessity needed to take many bold choices in his life as a CEO. And he has written an autobiography to describe them.

Choudhury, Santanu. 2013. Renault, Nissan Bet on Small Cars in India. Wall Street Journal, June 11, 2013.

Sunday, June 2, 2013

Networks of Giving: How Corporations Choose to Give Back

If this year is like last year, people in various places can soon watch Citigroup bankers clean beaches, prepare summer camps for children from poor households, and distribute food to the hungry. They participate in what Citigroup calls Global Community Day, a “Day of Service” done by many large corporations. I can imagine various reactions to bankers picking garbage and operate soup kitchens, but as a management scholar I think “Nice, but could they also do something that uses their expertise?” In all fairness, they do, in the form of teaching financial literacy to people in need.

Other companies, such as IBM, place a much greater emphasis on matching their capabilities to the activities. IBM appears to have a day of service, but it is actually a collection of various ongoing skill-based programs involving entrepreneurship and use of technology to serve communities. That’s what IBM knows how to do; start and grow businesses and use technology.

It turns out that these are two competing approaches to corporate community service; both with proponents in the community of social corporate responsibility (see my previous post for more on CSR). I usually study diffusion of strategies and technologies among firms, but occasionally I wonder how such community service spreads. A forthcoming article by Ryan Raffaelli and Mary Ann Glynn in Academy of Management Journal has looked at the question, and found an interesting answer.

It was probably obvious to you that the day of service is easier to do than the skill-based programs. It is not necessary to take into account what people know; they will be doing simple stuff. It is not necessary to motivate them for lengthy commitments. And, for workers who find the tasks unrewarding, going out to do something useful and social with co-workers can be a good motivation in itself. Think about it: can you identify people in your workplace who would be fun company for a beach cleaning trip? I can.

And it turns out that the difficulty level affects how these programs spread. The easy day of service programs only require that the firm is connected to the CSR community where such practices are promoted. Many large firms have such contacts; they can afford them and cannot afford to seem uncaring about their communities. The difficult skill-based programs spread to firms that have CSR contacts and are in industries where such programs are wide-spread.

This finding makes the story relevant to my favorite topic of how strategic actions spread. In order for a company to do something new, it needs to learn two things: (1) is it good? (2) how is it done? Often, as in this case, one or a few network ties are not enough to learn both of these. It takes either a rich network or multiple networks for it to happen. So, strategic change will continue to be hard, and bankers will continue to serve soup once a year.