Thursday, April 20, 2017

Fair Play and Racial Bias in the NBA

In most National Basketball Association (NBA) games, we see a white coach on the sidelines and mostly black players on the court. We also see players being benched and put back in depending on how well they play, their foul trouble, and the matchup with the other team. Except for the oddity of having a league of mostly black players produce mostly white coaches, the NBA looks like it is ruled by performance only, because winning is so important and performance is so easy to assess. But it is ruled by more than performance. White coaches use white players more than they should, and black coaches use black players more than they should, compared with others who perform equally well.

This is not a special feature of the NBA. Favoring workers of the same race is well known and happens everywhere, for three different reasons. We now know more about it because a paper by Letian Zhang in Administrative Science Quarterly has looked at this unfair treatment and explored it in detail never before seen. The findings are important for any kind of business because they show the origin of same-race favoritism, how it can be reduced, and why there are limits to reducing it.

First consider the origins of this favoritism. Many people think that preferential treatment occurs because employers judge each person as being as good as the average person with similar characteristics. This explanation is often used for why women are treated less well (supposedly they are less stable employees than men) and can also account for racial preferences. But in this case, this explanation falls flat because black basketball players are on average better than white. A variation is that employers look at each person as being as good as they think the average is for someone with those characteristics, but they are wrong about the average. For example, managers may think that women are less stable, but their estimate is off because men, who (granted) get pregnant less often, quit more often than women. Both of these reasons for favoritism should adjust quickly once a manager gets to know an individual’s performance, which happens very fast in the NBA because of the excellent statistics on player performance.

But there is another reason for favoritism that is more insidious: racial preference. Simply put, people prefer to interact with others of the same race. Looking closely at the data, Zhang found that in NBA playoff games and close games, race no longer influenced someone’s playing time; only performance did. That’s exactly what we would expect from racial preference, because it is easier to treat workers unfairly when the stakes are low.

So how can this effect be reduced? Well, time reduces unfair treatment. In the NBA, the unfair playing time is reduced the longer a coach works with the same player, but it takes more than two years for a player to be treated almost fairly by a coach of another race. This length of time doesn’t match up with performance knowledge, but it matches something else: managers have a harder time treating someone unfairly when they get to know that person well enough to see him or her as an individual, not as a racial stereotype. This is the “good black player” effect in the NBA.

But if managers can start treating someone of another race fairly after a period of time, will they then start seeing others of another race as individuals, too, and treat them fairly sooner? The answer is no, at least in the NBA. Getting to know someone of a different race as an individual does not mean that fair treatment is extended to others; they still have to prove themselves one by one. And that should give pause to all organizations, because it says that even the NBA, with its highly integrated teams and its careful and timely objective performance measures (not to mention the high stakes), has a remaining racial component in the treatment of workers.

The conclusion is clear, and different from what many organizations do. Fair treatment is so hard that it is not possible to rely only on the immediate supervisor; there also have to be formal processes in place to make sure it happens.

Thursday, April 13, 2017

Think about Thinking: How Management Models Stay Relevant

Have you ever thought of how easy things are for physics researchers? The laws of physics have stayed pretty much the same through the entire history of the discipline of physics. The only significant change is that researchers have gained better theory for understanding them and better tools for testing the theory. Lucky them.

In contrast, management scholars face constant change in the world of organizations, because what goes into organizations changes – technology, people, and laws – and what organizations try to influence in their environment changes as well – especially markets, but also technology, people, laws, and so on. As a result of all these inside and outside changes, organizations change, and the laws of organization (yes, they exist) change over time, too. We have known this for a while but have not known how. A new paper in Administrative Science Quarterly by Zlatko Bodrožić and Paul Adler looks at how they change.

They focus on technological revolutions, which may be the most decisive influence because other factors (like people and laws) often follow. Just compare the work of coal miners (whom the president sees as important for the future of the U.S.) with computer programmers (the present and future of India). Coal miners work in rigid hierarchies with clearly defined processes because of the safety concerns and communication difficulties they face, and they also face highly mechanized work that requires them mainly to serve their tools. They are an extreme case of the factory, which has its own set of theories that solved many problems 100 years ago but are now barely taught, though their insights survive in mines and factories. Computer programmers are organized in groups with clearly defined tasks but full freedom to design the solution and the process for arriving at the solution, and they face a knowledge-based, communication-heavy workplace in which people create and use intergroup networks to assemble and use knowledge. They work in network organizations, which have their own set of theories that are slightly more recent than the explosive growth of such workplaces.

Every time a technological revolution happens, existing theories begin to fail because they address the wrong kind of organization. The failures are recognized by scholars, who then start building new theories for the new reality. Often spurred by visible problems in organizations, they recognize that the new problems are different. They try to find theoretical solutions to these problems and test them, finding that many are wrong but some are right. As the research accumulates, science proceeds as usual and the best models are agreed on. Then these models are spread, first within the community of scholars and then to the practice of management. Because it takes a while to go through these steps, the period after any technological revolution is one in which few people know enough, though many – both scientists and managers – think they know a lot. The laws of organization have changed, and we need to find the new ones.

So, physics scholars really do have an easier job than management scholars. That’s pretty obvious. What is less obvious is that when we hear some entrepreneurs leading major web-based businesses complain about the uselessness of business schools, they are half right and half wrong. The right part is that researchers are catching up, so the schools clearly know less about their business than about coal mines, or even software outsourcing firms. The half wrong part is that they don’t know, either – it is possible to be right about a decision without knowing why – and scholars will soon catch up and know this technology and its organizations well.

Friday, April 7, 2017

Gourmet Food Truck Strategy: How Strategic Groups Compete

Let’s start with a fact known by some fortunate people, but far from everyone.  There are gourmet food trucks that serve food of a quality found in good restaurants, but on four wheels and in either fixed or varying locations. Nice, right? In the world of strategy, gourmet food trucks would be a strategic group, distinct from other kinds of food services (such as regular food trucks, fast food retail, or brick-and-mortar gourmet restaurants). The way we normally teach strategy, firms in a strategic group compete little with firms outside and a lot with firms within.

Many things we teach are not quite true because they come from early research. For strategic groups, a paper in Administrative Science Quarterly by Scott Sonenshein, KristenNault, and Otilia Obodaru offers some very interesting new insights. Let’s start with competition.  Gourmet food truck operators lend each other supplies, help each other make repairs, volunteer to work for each other, share locations, promote each other, and make a wide range of helpful suggestions to each other.  Oh wait, that was the list of cooperative behaviors. What they do to compete is... practically nothing. They aim for excellence in the product, but also for uniqueness. For gourmet chefs, excellence is not competition, it is their calling in life. Aiming for uniqueness and promoting it is not competition, it is avoidance of competition.

In fact, they do more to maintain the integrity of the strategic group than to compete with each other. Breaking municipal rules, copying from other chefs, and intruding on parking spots are all actions that weaken the community of gourmet food trucks by exposing them to authorities or creating internal conflict. And now I used the word that they often use: community. The strategic group of gourmet food trucks is held together by a shared identity and feeling of community, and the actions of each come from them wanting to build the community and belong to it. They literally build the community through actions that make it easier for others to join – another no-no in strategy, where you are supposed to stay as isolated as possible in order to maintain pricing power.

So are the gourmet food trucks unusual, or is there something wrong about strategic groups theory? Probably both. The unusual part of gourmet food trucks is that they are a high-end product, and uniqueness is such a strong part of the sales pitch – and identity – that ordinary competitive moves are slow to materialize. The incorrect part of strategic groups theory is overlooking how individual firm owners think about their work in ways that are shaped by other members. This shaping of their thinking takes place through creation of an idea of what a proper firm looks like, and it is easily maintained through community-building actions. Although some of the helping seems excessive and possibly costly for the helping firm, it is actually not easy to tell whether that is true or not. Especially for a young strategic group, building a community also establishes the group as a well-defined entity in the minds of customers, regulators, and suppliers. Less competition, more cooperation – possibly giving a stronger position overall, at the cost of less individual jockeying for a better position.

Interesting insights about strategy from a strategic group that we would all like to have nearby.

Sunday, April 2, 2017

Caught in the Web of Finance? When Network Connections Are Missing

Following the news can give the impression that the world of business, and finance especially, is very well connected internally and to other sources of profits. As of March 16, the still-understaffed Trump administration had hired five people from Goldman Sachs, and coincidentally, Goldman has reported that increased trading has helped its quarterly profits increase more than threefold.  Simultaneously and unrelated to this, billionaire investor Carl Icahn, who now advises the president on deregulation, has seen his shares in his oil refinery increase significantly in value (oil refineries are regulated because of their pollution and climate effects).
So is finance a web that entangles everyone? Not really. Goldman Sachs is special because the bank has and exercises market power, which in turn helps attract network ties. Icahn’s role is, well, a bit more personalized and complicated. In general, though, finance is an industry that competes like any other industry, and network ties among its firms adapt to competitive concerns. This is why a paper in Administrative Science Quarterly by Pavel I. Zhelyazkov nicely shows how networks have systematic gaps both in finance and other industries.  

To start, networks connect because introductions and friends-of-friends connections help firms find trustworthy and capable partners when they want to execute complex tasks that are too big for one firm alone. This is the logic driving networks tie formation. The same logic of why ties are formed helps explain why ties do not form, leading to gaps in the network. First, the need for firms to find trustworthy and capable partners means that connections are premised on success – friends recommend their good friends, not the cheats and failures they know. Second, the use of ties to help share tasks means that connections are not made to strong competitors, because they might just take the entire business away. In fact, for close competitors the more capable are the ones that should be avoided the most, because they could take away a big portion of the business.

So does this logic hold? The study looked at venture capitalists seeking investment ties from private equity limited partners, which is an interesting tie because venture capitalists look for promising firms to invest in, and private equity is a big pool of money. They work together, and they work on a complex task of finding good prospects and helping them succeed. Venture capitalists do form networks that interconnect them and private equity partners, as one would expect if venture capitalists who have some past connection also make introductions. But also, as expected, these ties are formed exactly when there is past success and absence of low competition – past failures or current competition create gaps in the network.

So are the venture capitalists the normal kind of network builders, or are investment banks like Goldman Sachs normal? Arguably the venture capitalists are normal, because they deal with uncertainty and competition, which are constants in business. Centers of power, whether economic or political, play by different rules than the rest of the world.