Wednesday, January 13, 2021

The Diffusion of Cleverness: Ups and Downs of Reverse Mergers

Management scholars have spent much time studying the diffusion of innovations, starting with work on new technologies and continuing to research on social practices such as institutional innovations and even strategic positions in markets. By now we know a lot about why some organizations are early adopters, and how other organizations are influenced by the number and status of early adopters, and by how close to them they are geographically or in social networks.

How about the diffusion of cleverness? By cleverness I mean small inventions that manipulate the rules in ways that are beneficial for the user, and may or may not be harmless to others. Clever innovations are very common in financial markets, where rules are everywhere, and clever interpretations of rules can be used as shortcuts. Because such clever interpretations often go against the original intent of the rule, they are usually controversial. A great example of cleverness is reverse mergers, which were studied by Ivana Naumovska, Ed Zajac,and Peggy Lee in a recent article in Academy of Management Journal.

A reverse merger (RM) is done as follows. A law firm registers a publicly listed company with stock, but the company does no business – it is just a shell. A private company that actually does business then goes public through a merger with the shell company, paying a small fee for the shell company and keeping the same ownership, unless the private owners also want to use the reverse merger to invite new ownership. This is a simple and inexpensive way to go public compared with an initial public offering. Clever, right? And as you might expect, US capital markets saw the diffusion of cleverness in the form of RMs during the mid-2000s, as Naumovska and coauthors found. They also found that this looked a lot like a regular diffusion process, where firms were more likely to use an RM the more prior RMs had happened.

So, is there anything special about the diffusion of cleverness? Yes, because clever innovations are shortcuts, and with shortcuts come controversy. Those who lose their advantage from the rules will be opposed, the press may become interested, and the regulators who made the rules will not be happy. And this happens more the more adoptions of cleverness have happened, so the cleverness is promoted by past adoptions but also undermined by past adoptions. Indeed, the SEC made rules to increase the reporting requirements of RM, though they did not otherwise make RMs harder. More importantly, the press turned against RMs and even stock market investors became skeptical and delivered lower returns to RM firms.

So, what does this teach us about the diffusion of cleverness? In some ways, it is similar to the diffusion of technological or business innovations, because innovations always come with uncertainty, and often the drawbacks of innovations are not discovered until many have adopted. When that happens, the process that follows is very similar to the RM diffusion and its later collapse. But there is an important difference that we need to keep in mind. Technological innovations are uncertain, so we know that some of them are mistakes but we do not know which ones.

Cleverness is different. Cleverness involves controversy nearly every time, so we can be confident that the diffusion of cleverness will see a collapse at some point. That is a good reason to be careful when evaluating a clever innovation, especially in financial markets where they are so frequent.

Naumovska, Ivana, Edward J. Zajac, and Peggy M. Lee. 2020. "Strength and Weakness in Numbers? Unpacking the Role of Prevalence in the Diffusion of Reverse Mergers." Academy of Management Journal forthcoming.


Friday, December 18, 2020

You Want to Control Us? But We Are Your Employees!

Organizations control people and processes – that is how organizations organize. It is unpleasant to some employees and surprising to others, but it is true. A serious concern employees have is that often the forms of control are designed by people who do not understand their work because they are too high up in the organization, as managers often are. If new instructions that control employees do not fit their work, what happens?

This very important question is addressed in research by Jillian Chown published in Administrative Science Quarterly. She looked at an interesting and typical case of control. A new process that improves work has been discovered elsewhere in the organization, executives love the process and its results, and now they are instructing new departments to follow the process. Except that those departments work differently from the ones that initially benefited from it. Everyone knows that people are stuck in their habits and often resist change that is good for them, but they also resist change that is bad for them and the organization. It is important to tell these apart. Chown focused on a work practice used successfully in the inpatient wards of a hospital and then transferred to outpatient clinics. 

Guess what? Outpatient clinics have patients who come and go every day, which makes them very different from inpatient wards. The new process did not work in any of the six clinics, and in response, the staff of the clinics started modifying it to make improvements. This is where things got interesting. Usually, we think of modification as a form of customization. If a meeting in the morning does not help a team schedule processes and assign work and equipment well enough, they may change who attends, what information is brought up, and what kind of decisions are made in the meeting. A team can customize, learn from the customization, customize again, and repeat this until they have a process that works well. Top-level executives and managers further below can see that a customized process is a great way to implement something similar to what they intended, but better. In Chown’s research, customization was an easy and good outcome for half of the clinics. But the other half did not customize. What about them?

In these clinics, the staff saw the new process as completely unfit to the problems they faced and did not see a path toward fixing it through customization. The result was conflicts with the program managers trying to start the process adoption, and these conflicts had interesting outcomes. The clinics were able to halt the process adoption in the original intended form and even the customization of it. But also, the clinics knew that change was needed to improve their workflow, and executives demanded it happen urgently. In response, they started innovating processes. These had some minor resemblance to the original process but were different in form and content, so they were transmutations of it.

Transmutations were not easy to develop because the learning process was harder than with customization and also had less support from the program managers, but all the clinics in question managed to find new processes that improved their work. This is a great testament to how well teams can find new forms of control of their own work. It also brings up a small puzzle: If these improvements were always possible and were so different from what the executives tried to introduce, why had they not happened already? People do resist change, but when they are pushed, they can identify change that works. The specifics of a new form of control may matter less than the effort to enact it.

Chown, Jillian. 2020. "The Unfolding of Control Mechanisms inside Organizations: Pathways of Customization and Transmutation." Administrative Science Quarterly, forthcoming.

Thursday, December 3, 2020

Changing Lenses: Using a Different Theory to Look at Internationalization

Here is a slightly nerdy question for those interested in social science: How attached are theories to fields of investigation? For example, in business schools we have marketing and organization theory. So marketing is about markets, and organization theory is about organizations, right? Not to mention all the subfields within marketing and organization theory, which are dedicated to understanding specific topics. Consumer Behavior in Marketing is about (drumroll…) how consumers behave. But is it so simple?

It is not. Many fields of investigation have been dominated by specific theories, making thinking about them so uniform that much can be learnt from other theories making inroads. To take two examples that I know well: Finance studies financial markets, but organization theory has shown that the status of investment banks affects decisions in those markets, which is against finance scholars’ belief that pricing is pure demand and supply. Organization theory studies organizations, but the entry of economists have increased awareness of how contingent rewards (incentives) can have a big role in organizing.

This means we should look around for opportunities to give established fields of investigation new ideas. That is exactly the purpose of an article by Irina Surdu, Gabriel Benito, and me in Journal of International Business Studies looking at the theory of International Business and arguing that the behavioral theory of the firm, which is an organizational theory, can inform international business studies. Why do we think this will happen? First, addressing a field of investigation with a new theory always brings out something interesting, so it would be surprising if it did not.

Second, who does international business? Firms do. Firms are organizations, and the most man-hours spent studying organizations are logged by organizational theorists, not scholars in international business. Yes, internationalization is a specific action taking by a minority of all firms, but knowing how firms act in general is very useful for understanding any specific action they do.

Behavioral theory is particularly important because it is about how firms learn, and how their managers cope with bounded rationality. This is very important for internationalization because firms that engage in international business repeatedly step into areas of uncertainty that are too great for the boundedly rational manager to make flawless decisions. Instead, they probe, get feedback, adjust, and learn. That is what the behavioral theory of the firm is about.

We do not yet know what will come from an investigation of internationalization through the lens of behavioral theory. That’s part of the beauty, because there are so many ways that this theory can be used, and so many things that can be discovered and can improve our knowledge of international business. In the end, this will feed into how we teach students to manage the complex international world that they are facing. We have now issued an invitation to researchers to change lenses, and we think it will be productive.

Surdu I, Greve HR, Benito GRG. 2020. Back to basics: Behavioral theory and internationalization. Journal of International Business Studies forthcoming.

Tuesday, December 1, 2020

Sprinters or Legionnaires? Why Entrepreneurs Benefit from Collaboration

What happens when you put talented and ambitious people together? That is an important question in many contexts, and a currently popular version is accelerators for entrepreneurs. Accelerators select the most promising venture plans from many applicants, giving them a pool of talent and ambition. They have training programs, coaches, and access to industry and funding contacts, and their goal is to help the participating entrepreneurs produce valuable ventures. Importantly, accelerators also house the venture teams together and have them interact in the training program and during their regular work.

But how should we think about their interaction? In sports, talented and ambitious people are brought together because they improve through competition. Sprinters run faster, and gymnasts develop better routines. But people are also brought together because they improve through collaboration. Soccer teams fine-tune their attacks and defenses, and Caesar’s veterans were so coordinated that they could beat other Roman armies in the civil war. Competition and collaboration can both be effective, maybe even simultaneously, but which one is best for entrepreneurs?

Thanks to research by Rekha Krishnan, Karen S. Cook, Rajiv Krishnan Kozhikode, and Oliver Schilke published in Administrative Science Quarterly, we can now answer that question. They had access to an accelerator in Silicon Valley and followed three cohorts of selected ventures, with enough differences in training and other events that it was possible to discern the formula for success. The answer may be a surprise: entrepreneurs are legionnaires, not sprinters. Collaboration with other ventures in the cohort first improved their social connections and then improved their resource access.

How did this happen? The paper has such a rich description that I cannot do justice to it here, but the main events are easy to summarize. The training included exercises that can be described as bonding rituals, such as social or sporting events. Even a simple game such as talking about hobbies or other personal information can be a bonding event. They also included exercises that can be described as tournament rituals, such as reporting of their progress toward many goals, in front of all the others. Bonding rituals and tournament rituals had very different effects. Bonding rituals led to social interactions not organized by the accelerator and generated friendships and openness. This made it easier for the entrepreneurs to ask questions and share important information. Importantly, bonding rituals made entrepreneurs comfortable with giving valuable tips to each other without getting anything back in return.

And the tournament rituals? They became show of strengths, just like a 100-meter sprint is, and they failed to create friendships and social interaction. Even worse, tournament rituals made entrepreneurs think that valuable tips should not be given away for free – they should be traded. But of course, this does not work. Unlike goods, information cannot be priced and traded well, and two people rarely have needs for each other’s information at exactly the same time.

This is where the legionnaire entrepreneurs win. Tightly bonded, they are willing to give without asking for anything in return, but they still get much in return. Not at the same time, and often not even from the same entrepreneur, but they know that in a group that collaborates, everyone is better off. Maybe entrepreneurs are not so different from everyone else after all.

Krishnan, R., K. S. Cook, R. K. Kozhikode, and O. Schilke

2020 "An Interaction Ritual Theory of Social Resource Exchange: Evidence from a Silicon Valley Accelerator." Administrative Science Quarterly: forthcoming.

Tuesday, November 24, 2020

The Art of Improvisation: How to Do True Leadership

Anyone who has risen high enough in an organization knows some important dilemmas and tradeoffs. One is that organizations gain most of their advantages through routines – doing the same thing over and over again, with occasional small variations – but there are situations in which routines are exactly wrong. Instead, improvisation will save the day. Another is that organizations are collaborative enterprises in which people work together to accomplish outcomes, but there is also competition. You want to perform better than the rest, and many others do too.

How to choose between routine and improvisation, and how to balance cooperation and competition? Thanks to research by Pier Vittorio Mannucci, Davide C. Orazi, and Kristine de Valck published in Administrative Science Quarterly, we know much more about these choices than before. Their work tells a fascinating story about how improvisation is done in live-action role playing, but here I will omit the details of their research and focus on their findings, which tell us some new things about leadership skills.

The first thing to know is that what we call improvisation is often just the act of stepping outside the routine way of doing things. Actions do not have to be new and dramatic to be effective, and imitative improvisation is especially good for newcomers, such as recently promoted managers. What is imitative improvisation? It is to pay close attention to what others, more experienced in the same role, are doing and to match their responses to situations you encounter. It is smarter than imitation because it is done selectively, but it looks a lot like imitation.

With experience, you can learn better ways to improvise, but not everyone manages to do so. The next step up is to think of your own reactions to unexpected situations, stepping outside routines again but now without using others’ actions as a guide. This is effective but requires more knowledge than newcomers have. The third is to look for opportunities to improvise to make improvements that others have not thought about. This type of generative improvisation is no longer problem solving because your goal is to take an organization that functions well and make it even better. This is innovative but requires more knowledge and confidence than most managers have.

Not everyone can step up this ladder of increasingly effective improvisation. What do we know about those who can? This is where the research gets even more interesting. Recall that organizations feature both cooperation and competition. It turns out that competitive people get ahead fast, also in improvisation, because they are very situationally aware and quickly learn how to imitate and how to react. Cooperative people are slower. Yes, this matches our intuition that many people who rise quickly in an organization are on the shrewd side, but keep in mind that they are solving problems well when needed.

But then it stops. Cooperative people are better at recognizing opportunities and moving others along with them to generate new ways of improvising. If you are cooperative and late to learn how to react well, you will be even better at generating improvisation than competitive people will.

And even better, people can change over time. In particular, you may be one of those who start out competitive because so much is at stake and you feel insecure, but after initial successes you become collaborative. That is the best kind of improvising leader, because that means you will quickly go through each stage of learning how to improvise, and you will reach the peak of improvisation that is done by so few and needed by so many organizations.

Mannucci, P. V., D. C. Orazi, and K. de Valck. 2020. "Developing Improvisation Skills: The Influence of Individual Orientations." Administrative Science Quarterly, forthcoming.

Friday, November 13, 2020

Light ’em Up! How to Win Stigmatization Battles

What if you are selling a product that is stigmatized by many, yet you think it benefits society? Life insurance used to be that type of product, because gaining money from someone’s death was deeply sinful. Most who have driven around Silicon Valley have a similarly negative view of fully autonomous vehicles (they are VERY annoying to have around), yet they already drive more safely than cars with human drivers and are not that much slower.

Many organizations are dealing with products that have varying levels of stigmatization, so this is an important problem to solve. Thanks to research by Olga M. Khessina, Samira Reis, and J. Cameron Verhaal published in Administrative Science Quarterly, we have a better idea of what works best. They looked at firms that are still highly stigmatized by many – marijuana dispensaries – and asked the question of whether they benefited from subtle or brash self-presentations.

The question is important because the self-presentation shapes how customers respond in three ways. First, through shop naming, location, and design, the dispensary can make it easier or harder for potential customers to enter, given that some people are interested in the product but also worried about becoming stigmatized as, well, dope-heads or whatever the fashionable denigrating term happens to be. Second, a shop that is seen to celebrate its identity as a seller of marijuana can influence customers’ thinking, because its celebration can be a source of pride that counters the stigma.

The third mechanism is especially important. People influence each other very powerfully, especially when there is no clear profit motive (unlike the influence from a shop to a potential customer). Maybe when some of the shops celebrate their identity, that makes it easier for their customers to openly do the same. If that happens, the influence among people can greatly reduce the stigma.

The conventional belief is that a store selling stigmatized products, or even just controversial ones, should keep a low profile. The California dealerships selling three-ton trucks to consumers are often placed away from where the Priuses are found, and the Hermès-ish bags in Paris are not found near rue Saint-Honoré. Any benefits from being open would surprise a lot of people. But surprise is exactly what the data offered. Stores that openly celebrated their products increased acceptance of marijuana in their local communities. Customers posting online store and product reviews with more open discussion of the products increased acceptance of marijuana in their local communities.

These findings are not the same as saying that each of these stores benefited directly – the data are not fine-grained enough to allow that conclusion. But they do show that a community of stores with a shared stigmatized product are best off being open about their identity. Together they can change opinions, wear down the stigma, and gain acceptance as a legitimate form of business. And that is very useful guidance for organizations in need of advice because their products are stigmatized.

Khessina, Olga M. , Samira Reis, and J. Cameron Verhaal. 2020. Stepping out of the Shadows: Identity Exposure as a Remedy for Stigma Transfer Concerns in the Medical Marijuana Market. Administrative ScienceQuarterly, forthcoming.

Tuesday, October 20, 2020

Motivating (Soccer) Teams: What Price Success, or Failure?

Here is something we would like to know about teamwork: What is the effect of successes along the way? Or failures? The answer is important because teams often have partial goals that they either fulfill or not at the designated time, so a team may be encouraged by a success or disappointed by a failure. And those effects, in turn, may affect their work, though it is by no means certain that teams work better after a success. 

Jo Nesbø, Nils Rudi, Marat Salikhov, and me investigated this question in an article published in PLOS ONE, picking a context that has very literal teams and goals – top national leagues of professional soccer (known as football in most of the world). The idea was that a goal scored is a success for scoring team and a failure for the conceding team, so each goal changes the dynamics of the game. The question, then, is how that affects the likelihood of a victory or the full-time goal difference in the game.

To start with the obvious, soccer games have few goals, so simply scoring a goal makes a big difference. But here is also something less obvious, and potentially important. Usually the play goes on after a goal, but an important exception is when the goal is just before halftime. For example, in the last minute before halftime, which is what we investigated. In that case, the referee blows the whistle soon, and the teams go to their locker rooms. Then what?

The halftime break is when managers (coaches) make adjustments and motivate their teams, and team members rest and prepare for the second half. A goal just before the break is supposed to be demoralizing for the team that conceded the goal, and managers try to counter that effect. If they fail in doing that, a goal just before halftime influences the game much more than one at any other time. And indeed, that is what we found – halftime goals by the home team are influential; halftime goals by the away team are not. The difference is interesting because away teams are playing at a disadvantage to begin with, and conceding a goal at a bad time just makes things worse.

So, is the conclusion that successes are good, and failure are bad? It looks that way, and in fact it is quite likely that success just before the break gives the team a better start. Actually, it is not so simple that we can draw that conclusion. You see, another possibility is that successes produce overconfidence that makes a team more vulnerable to mistakes for a (short) while after. If that is true, halftime goals are great simply because the halftime removes the vulnerable period. That would affect home team more because away teams play in front of hostile fans and feel vulnerable even after scoring a goal.

What is the real explanation of this effect? We cannot be sure, because team dynamics are complicated and difficult to dissect very accurately. That, along with how important teams are for work in many kinds of organizations, means that we have to be very careful in the research before drawing final conclusions. That sounds like a reason to do more research on goal scoring in soccer, and on teams having successes and failures more generally.

Greve, H. R., J. Nesbø, N. Rudi, and M. Salikhov. 2020 "Are goals scored just before halftime worth more? An old soccer wisdom statistically tested." PLOS ONE, 15: e0240438.