Wednesday, June 19, 2019

Government by Blackmail: How States Can Influence States

We know that there is a big difference between theory and practice in how states relate to states. The theory is that each state is autonomous and rules what goes on inside it, and for anything that connects states they either follow treaties and conventions or interact as equals. The practice is that larger nations have the most say. The Mekong River goes through China, Laos, Myanmar, Thailand, Cambodia, and Vietnam, but the Mekong River Patrol jointly operated by some of these nations was a Chinese initiative involving significant Chinese police south of China’s border. US drug control south of its border is similar. 

What accounts for the difference between theory and practice? Research by Florian Überbacher and Andreas Georg Scherer looked at this question by examining a specific example: how the famous Swiss banking secrecy was eliminated. Although there can be many ways that large states influence smaller ones, this example is a good illustration of one simple approach: it was done through blackmail by the US. The interesting part is how the blackmail was done.

The problem with states blackmailing states is that statecraft is supposed to be different from running a mob, and any state action resembling what mobsters do can create resistance in the short run and hurt the blackmailing state in the longer run. As of May 2019, we are observing the US placing tariffs on Chinese exports with the explicit purpose of forcing a more favorable trade agreement, an obvious blackmail tactic, and China responding by doing … nothing. The US actions against Swiss banks were more effective, not just because Switzerland is smaller but also because they did not target Switzerland. Instead, they targeted the Swiss banks and used the potential damage to the banks as a way of blackmailing Switzerland, which cares about its banks because they are a large part of the economy.

The script was simple. A whistleblower revealed (to no one’s surprise) that Swiss banks held money that should have been taxed in the US, and US authorities proceeded to demand that the Swiss government turn over information about suspicious accounts. In addition—and this is the important point—US authorities turned increasingly aggressive in pressuring Swiss banks, to the point of making it clear that they were ready to inflict significant economic damage. It was the state version of telling potential snitches that the boss knows where their families live and children go to school and can act on this information. It worked: banks panicked, and the Swiss government agreed to release much more information than before.

All this sounds unusual as a state behavior, and maybe it is something done only when authorities are getting tired of tax evasion and want to act on banks making it easy and on states protecting the banks. But wait, does this resemble something we are also seeing now? The Chinese firm Huawei’s chief financial officer is currently under arrest in Canada at the request of the US, which is seeking extradition. By President Trump’s executive order, Huawei has been banned from using US technology in its products, ranging from mobile telephone infrastructure equipment (such as 5G gear) to components of phones its sells outside the US. The ban is formally for security reasons, but in an interview, the president has explicitly linked its fate to the outcome of the trade negotiations. So statecraft still has a component of blackmail, and we can look forward to seeing how states like Russia and China will learn from this and change how they do statecraft in their vicinity.

Überbacher, F. and A. G. Scherer 2019. "Indirect Compellence and Institutional Change: U.S. Extraterritorial Law Enforcement and the Erosion of Swiss Banking Secrecy." Administrative Science Quarterly, forthcoming.

Friday, June 14, 2019

“Be like DNA”: How Occupations Deal with their Technological Shortcomings

In my work as an editor, I sometimes give talks to authors telling them how social scientists feel inferior to those working in the physical sciences, because the physical scientists are so much more scientific. There is some truth to that inferiority, because most physical sciences definitely have better (at least more expensive) measuring devices than we do. There is also a myth attached to the inferiority, because most social scientists think that they can become better scientists by using various complicated econometric methods to analyze their data. As I pointed out in an earlier blog post, that is exactly wrong. Graphs can be more persuasive than models, and the physical sciences prefer simple methods.

This issue of science and technology envy happens elsewhere too. In a paper published in Administrative Science Quarterly, Beth A. Bechky investigated how forensic scientists reacted when the National Academy of Sciences accused all of them – except those working in DNA profiling – of being insufficiently scientific. This is a great test case because it is consequential – forensic science is important in criminal trials – and because it is a good example of what happens when one occupation gets access to a shiny new and advanced technology, and occupations working nearby watch and react. This is a frequent event in organizations, perhaps especially in healthcare with its influx of new techniques, but also in many organizations that make increased use of data processing and communication technology to improve their work.

The research showed that reactions to the damning report were strongly influenced by how compatible the new DNA technology was with the values and existing technologies of each occupation. “DNA envy” was felt in all the other forensic labs but led to action in only some. The strongest resistance was in firearms analysis, which is an occupation that values individual craft-like judgment and uses a method unrelated to the statistical analysis used in DNA profiling. The firearms examiners didn’t accept the call to become more similar to DNA analysts and saw no way of doing so anyway.

The strongest acceptance was in toxicology. No wonder – toxicologists’ values centered on minimizing errors and quantifying the precision of their measurements, which closely matched the values held by DNA profiling labs (and the new technologies they used). The toxicologists’ main reaction to “DNA envy” was to point out that they had been like DNA profilers all the time but hadn’t been recognized as such.

As usual, the most interesting case is the one in between. Narcotics labs have measurement devices based on technology similar to that used in DNA profiling (GC/MS, in case you wonder) but also rely strongly on a fast, accurate crystal test that has little in common with DNA analysis. While there was some technology similarity, the values of the two types of labs were in conflict because narcotics analysts strongly valued their independence and flexibility when assessing evidence, and they were proud of their speed. To them, becoming “like DNA” would mean becoming less than they already were, at least as individual contributors, and they feared that they would have to adapt in that direction. This fear was especially strong because they knew about other narcotics labs that were moving to the measurement device just to become more scientific.

This research is important news for all who deal with technology. We are used to worrying about whether the right technology will be adopted and whether it will happen soon enough. Now there is another issue to keep in mind: what are the side effects of adopting new technology, and are they good or bad?

Bechky, B. A. 2019. "Evaluative Spillovers from Technological Change: The Effects of “DNA Envy” on Occupational Practices in Forensic Science." Administrative Science Quarterly, Forthcoming.

Wednesday, June 5, 2019

The Sinner as Savior: How Marijuana became Medical

Ideologies and businesses mix uneasily. They can sometimes work together, as when social movements help promote a form of business. For example, socially responsible investing has grown that way. They can also be in conflict, as when an industry runs counter to strong societal beliefs. Other industries can sidestep ideological resistance. For example, coal-fired power plants can ignore global warming because people cannot always choose how their electricity is made. But in other industries, firms are hurt because their potential customers are turned off by the stigma attached to the business, sometimes including its legal status.

What to do when your industry is stigmatized? Kisha Lashley and Tim Pollock examined this question in a recent article in Administrative Science Quarterly, using the cannabis (marijuana) industry as an example. Their study is a good illustration of how an industry that was both illegal and stigmatized, and still is illegal at the federal level in the U.S., can act to overcome its stigma. The change for the cannabis industry hinged on one feature of the product: marijuana is not just a relaxing intoxicant but also a painkiller. This may seem inconsequential considering how many medical painkillers are available, but it matters for two reasons. First, patients differ in how they respond (or not) to painkillers. Second, the most powerful medical painkillers are addictive, such as the opioids that currently kill so many.

This painkilling feature was used to create a new ideology built around marijuana as a product that could help patients who were suffering and did not have other good options for relief. Activists, politicians, and others worked to legalize marijuana sales so these patients would not need to buy marijuana on the black market, with all the risks and dangers that could involve. Medical marijuana sold in stores – which industry leaders called “dispensaries” – was presented as a solution to a problem of human suffering and could thus occupy a moral high ground.  This was a story that marijuana proponents could tell politicians and canvass to voters, pushing for legalization in many states.
 
But what about traditional marijuana users who love the intoxication but don’t necessarily need the pain relief? They were both good and bad for the new stores. Good, because patients specifically seeking pain relief from cannabis will always be a minority in a community, so having an additional customer base is helpful for this new industry. Bad, because buyers wanting the intoxicant are exactly the stigmatized kind of “stoner” customer the dispensaries didn’t want politicians, the medical community, the media, and the general public associating them with. What to do?

The dispensaries needed to draw a fine line by taking strategic action. Through clean, stylish store designs they could look enough like pharmacies to avoid the stigma, even if many customers came for the high. Through logos and packaging (such as childproof containers) that mirrored those found in the medical field, they could establish legitimacy. And through changes in terminology, including the term “recreational use” to refer to the other part of their customer base, they could retire many of the stigmatized words describing marijuana and its users.

So is marijuana not stigmatized anymore? Well, it is a growing industry in the places that have made it legal, and a recent Financial Times article asked whether it can become a $100 billion industry. That does not mean it is completely destigmatized, but it has come far enough that there are opportunities for many entrepreneurs. Legal ones.

Lashley, K., and T. G. Pollock
2019. "Waiting to Inhale: Reducing Stigma in the Medical Cannabis Industry." Administrative Science Quarterly, forthcoming.


Sunday, June 2, 2019

Liberal and Conservative Companies: How Organizational Location and Politics Intermingle

You may know Nike as a liberal company in US politics – it is known for marketing statements with a liberal bent, and it also has liberal corporate policies such as transparency about manufacturing locations and labor practices. It is based in Beaverton, Oregon, a state that generally sends  Democrat representatives to the US Congress. Dell is a conservative company, though it is more obviously conservative in its political donations than in public statements. It is based in Round Rock, Texas, a state that most often elects Republicans senators and representatives. Are these facts connected?

A recent paper by Abhinav Gupta and Forrest Briscoe in Administrative Science Quarterly looked at the connections between firms‘ politics and their locations, and it found some relations that should be surprising. Let’s start with the more obvious ones. First, firms differ in how conservative or liberal they are. This can be measured by the political donations of their employees, and liberal firms are more sensitive to their surroundings and likely to concede to social movements’ demands. Second, the relation between employees’ political leanings and firms’ behaviors is stronger when employees are closer to the headquarters. The employees in Nike-owned stores far away from headquarters will not matter as much for the headquarters’ thinking and decisions as the employees in the headquarters.

Now for the really new stuff. Both Nike and Dell have political leanings that match their locations pretty well. That seems quite normal, and it matches some other firms we know about such as Seattle-headquartered Starbucks. But there are also firms that are more liberal or conservative than the average voter in their state, such as the software company SAS, which is in Cary, North Carolina and much more liberal than its state. If we compare equally liberal firms in a conservative and a liberal state, which one will be more likely to concede to the pressures of a social movement? You might think that it would be the liberal firm in the liberal state because its management feels more secure taking such actions. In fact, it is the opposite. The liberal firm in a conservative state will take a stand, so it will be more liberal than a liberal firm in a liberal state. Similarly, a conservative firm will take a more conservative stance if it is in a liberal state.

So, location and politics intermingle in organizations in ways that go beyond what you might expect if you thought of organizations as sponges that absorb whatever is around them. Employees can shape their organizations’ messages and actions in the political sphere. They are clearly more influential than people who live or work near the organization but who aren’t employees, because employees’ views not only shift organizational politics but also prompt the organization to take a stand against community members’ opposing views. People outside the organization can try to influence its beliefs and actions, but whether they succeed is largely a function of the views held by those on the inside.

Gupta, A., and F. Briscoe
2019. "Organizational Political Ideology and Corporate Openness to Social Activism." Administrative Science Quarterly, forthcoming.

Thursday, May 30, 2019

Will an Unprofitable Airline have Safe Planes?


Do you feel safe when you board an airplane for a flight? Typically we do, as we should because air travel is much safer than driving. Well, safer per mile (kilometer), but airplanes are much faster than cars, so per minute the difference is less impressive. And occasionally we get disturbing news like the two crashes of 737 MAX 8 aircraft, one of Boeing’s latest models, with a technical problem being the reason for the crash. We need the speed and convenience of air travel, for a reasonably priced ticket, but we also want aircraft builders and airlines to keep air travel as safe as possible. Are they doing that?

In the research paper“Safe or Profitable? The Pursuit of Conflicting Goals” that will be published in Organization Science, Vibha Gaba and I looked at that question. We knew that aircraft models build up different safety records through their years of operation because some models never (or hardly ever) crash, while others have more crashes. Airlines have this information, but do they act on it? It is expensive to sell an aircraft when it turns out that its model is doing less well in the air than other models, and tempting to hold on to it because the differences are small. Even models that have twice the usual crash rate are safe to fly, nearly all the time.

We found that airlines treat safety as a goal, and act on this goal. They buy and sell more aircraft when their fleet safety is lower than the average airline, and these transactions improve the fleet safety. The simple rule is “out with the bad, in with the good,” and if your fleet is good to begin with, hold on to your airplanes.  This is good news, but there are two complications in this picture.

The first complication is profit. Airlines also would like to be profitable, and these aircraft transactions cost money. Will the less profitable airlines hold on to their less safe models in order to save money? Actually the opposite is true – unprofitable airlines are particularly concerned with fleet safety, while profitable ones pay less attention to it. This sounds like a paradox but is easy to explain. An aircraft crash and loss of lives is very costly for an airline. A profitable airline can handle this cost without going out of business, but it could be fatal for an airline that is already. Aircraft safety is about survival for airlines too, at least some of them.

The second complication is the buyer. It is easy to buy safe aircraft, because both the aircraft maker and some airlines will be happy to sell. But how to sell aircraft models that everyone knows are less safe? Here we need to confess that our data are from airlines in the more developed parts of the world, not from the whole world. It is well known that less safe aircraft models and older airplanes are found in many developing nations. Some are also rebuilt and used as freighter aircraft.

So what can we learn from this? The most important lesson is that safety is maintained because firms view it as a goal and act to maintain it, at least up to the same level as other firms. They treat safety as a goal because society keeps on eye on safety and reports on unsafe events like accidents – so the media and our own choices in response keep the airlines, and other companies, focused on safety. The second lesson is that profits are important, but not in the way you might think. Profit gives safety for the firm, but that safety does not translate into safety for its customer. On the contrary, it is the unsafe firm that is compelled to provide safety to its customers. Those are important lessons in management, and they will also make me think more carefully about the choices I make as a consumer.


For those interested in the technicalities of the 737 MAX 8 crash, here are some details (which may change as the investigation continues). The 737 is a small airplane with wings mounted low, so as larger engines became popular for their greater fuel efficiency, engine placement has been a problem. There simply isn’t much room between the engine and the ground, so the engine is mounted more forward than is conventional. With the MAX model, an additional problem is that an increase in thrust from the engine can push the nose too high because the engine is low relative to the rest of the plane. A too high nose can cause a stall, which means that the wings no longer lift and the aircraft goes into freefall. To prevent this, the MAX model has an automatic stall prevention software, which makes adjustments to push the nose down when it rises too high. This system works even when the pilot tries to lift the nose. The system relies on an accurate reading of how high the nose is (angle of attack), and if the sensor measuring the angle of attack is incorrect, the system can incorrectly push the nose down. If that happens, the pilot needs to turn the stall prevention system off and fly without it. The system is designed to override the pilot, so it is not possible to pilot against it. Currently the Lion Air flight crew are suspected of failing to turn the system off, and Boeing is suspected of failing to teach crews how to turn the system off. The Ethiopia Flight crew did turn the system off and tried to fly manually as they were supposed to, but the manual controls are extremely difficult to use during takeoff because the airflow pushes against the horizontal tail. 

Sunday, May 26, 2019

Nascent Market Firms as Children: Business Model Innovation through Parallel Play

Imagine that you are on the founding team of a firm in a nascent industry. Great, isn’t it? No big and established competitors who have all the assets and customers . . . full freedom to design a business model from scratch and shape the industry in your favor. But wait, it is also an awful situation. There are potential customers around, but no one knows yet what they want. There are no examples to learn from. A ton of other firms will also try to shape the nascent industry, and their founding teams are just as smart as yours is. What are you supposed to do to win this race to reach a workable business model?

This is the question that Rory McDonald and Kathleen M.Eisenhardt answer in a new article in Administrative Science Quarterly. They look at the nascent (in 2007) industry of social investing, which was envisioned as a way to help individuals and firms invest independently or follow other investors, and to do so by sharing information about choices made and returns earned. In a way, social investing can be seen as an online game in which it is possible to participate and also see what other individuals (well, their avatars) are experiencing. Except that in this online game, the objective is to invest successfully.
 
So what did they find? The evidence showed that there was an interesting parallel to the development of young children, who face problems similar to those firms face in a nascent industry. After all, children are also learning to handle a new and uncertain environment. They have not been in the world for long, and they don’t have many examples to learn from given that most people around them are a lot bigger and preoccupied with different things. Children solve this problem through parallel play – being next to each other but playing alone, though occasionally looking at what the other kids are doing in order to pick up ideas.

The most successful firms also engaged in parallel play. They were focused on their own business model development, mostly ignoring what other newcomers were doing, except that they would occasionally pick up good ideas from other firms and copy those ideas if they fit the strategy they had developed independently. Naturally these ideas were not about how to design the business plan but rather about how to execute parts of it, such as copying a good user interface or background process. The benefit of parallel play for firms is the same as for children – the self-focus lets them develop their own approach, and the occasional borrowing of ideas gives efficiency, which in turn gives more time to develop their own approach.

There was one more similarity between successful firms and children – their ambition. The successful social investing firms were looking at other, more established forms of asset management as their competitors rather than at their peer social investment firms. Children benefit from doing something similar – copying ideas from kids who are already doing something well. After all (even though parents sometimes find it hard to believe based on what they see their children do), most kids really do want to grow up, learn, and be successful – just like firms in a nascent industry.

McDonald, R. M., and K. M. Eisenhardt
"Parallel Play: Startups, Nascent Markets, and Effective Business-model Design." Administrative Science Quarterly, forthcoming.

Wednesday, May 1, 2019

Help Mom! Dad is Still Trying to Run the Business!

Does the title ring a bell? One of the oldest problems in business is when and how to accomplish succession and transfer control of the family business to the next generation. The only natural succession point is at the death of the previous generation, and the problems of that timing are obvious to those who study history and see the parallel between early-history kingdoms and family businesses. So we can agree that the next generation should take over while the older generation is still alive, but this leaves the question of how quickly the decision-making power should be transferred. After all, it is true that the older generation is both more experienced and less in touch with current affairs. What to do?

In a recent paper in Administrative Science Quarterly, Jian Bai Li and Henning Piezunka looked at this transition from father to son (their data had few women in charge) as one of handling succession in a multiplex network tie. A network tie is any social connection between two people, and a multiplex tie is one that spans different social arenas. I have a multiplex tie with my boxing trainer who seeks my advice on his entrepreneurial venture. A father–son pair involved in the same business has a multiplex tie because, well, they are father and son.

For a father to hire his son in the family business is unproblematic because the father has higher rank in both the family and the business. For a son to succeed his father in leading a family business is problematic for the same reason – the lower-rank family position of the son now is coupled with a higher-rank business position as top manager, unless the father leaves the business entirely. I think we understand that leaving the business completely is difficult, especially for a founder, and being managed by a son is not any easier. Of course the father, being a father, can make sure that the son bears most of the cost of the complications this entails, because he can draw on his authority in the family sphere whenever necessary.

As the title suggested, this leaves a role for the mother. The research showed that she could very effectively handle the transition by barring work discussions from the family context and advising the father and son separately on how to handle each other. But this required that she not work at the firm, because any role she had in the firm would complicate relations and make her a participant rather than an advisor. In network terms, the mother could help the succession only if she was involved in only one of the multiplex ties between father and son. When she was involved in the firm as well as the family, succession failed. Indeed, I am personally familiar with a succession process that failed exactly because the mother was also involved in the business, so to me this rings true.

This research was done in China, but I think those who know family business succession elsewhere will know the problem of succession well. Because this way of solving the problem is based on sound network theory principles, it is likely to help family business succession everywhere, including in contexts in which the mother is the founder, more than one sibling might be involved in succession, and the neutral advisor may or may not be a family member. Succession is never easy, but being aware of the multiplex network roles of those involved and using them to better advantage could make it less painful.