Monday, January 7, 2019

Competitive Slander: Using the Media to Wage Market Battles

We often see signs of organizational competition in the market turning into battles fought on multiple fronts. Apple and Samsung have good-looking telephones that compete vigorously in the market, and their lengthy Patent War is famous. Ride-sharing firms Lyft and Uber compete in the market but have also accused each other of covertly placing fake orders and then canceling them. They also fought in the media when Uber used taxi workers’ protest against the U.S. immigration ban as a business opportunity: Lyft struck back with a strong stance against the morality of Uber’s efforts and made a donation to the ACLU, which accelerated the trend of #DeleteUber across social media.

Just how far will organizations go in such battles? A forthcoming article by Benjamin M. Cole and David Chandler in Administrative Science Quarterly looks at the famous War of the Currents between Edison and Westinghouse and finds ample evidence of how such battles can escalate. The War of the Currents started when Westinghouse realized that the Edison direct current (DC) electrical system could not be used for long-range transmission of power. He obtained the necessary patents for alternative current (AC), which transmits much more efficiently, and his company was soon a major competitor of the Edison companies. The market competition expanded into a full-blown rivalry when Edison started using competitive slander to turn media and consumers against AC and Westinghouse.

Edison’s recipe was simple: Make the newspapers publish stories about experiments showing that AC easily killed dogs and other animals, so that people would associate AC with danger—unlike the safer DC. A simple strategy, but also a grotesque one. To make it work, he needed to conceal his association with the experiments, having an electrical engineer act as the front man, and also make them seem legitimate by conducting them in famous institutions’ facilities. As a final step, his company made direct contacts with politicians who could influence the marketplace.

The campaign worked because it was well orchestrated and because Westinghouse initially thought there was no need to strike back. This left Westinghouse exposed, and when his company did respond, it chose an ineffective approach—directly countering the Edison attacks through attempts to discredit the message and expose Edison’s methods as sensationalist and immoral. This was ineffective because Edison had chosen a vulnerable point to attack: although killing dogs is immoral, it correctly illustrated that AC is more dangerous than DC at comparable voltages.

I suppose we could have all ended up with expensive DC as a result of this rivalry. But in the end, Westinghouse won by returning to the foundation of the AC advantage: it is a superior system for distributing electrical power over long distances. He won the bid to illuminate the city of Chicago as part of the World’s Columbian Exposition. He sank considerable resources into the contract, making it a financial loss but a spectacular success as a PR event for AC and for Westinghouse technology. Soon after, AC dominated and even Edison started marketing AC systems.

The War of the Currents has many lessons for current organizations, and I want to highlight one disturbing and one promising lesson. The disturbing lesson is the effectiveness of attacking: when the attacker picks the target well and is willing to go far, the rival is very likely to get hurt. The promising lesson is the effectiveness of sticking to basics: when the rival emphasizes its own strength rather than countering the attack directly, its chances of recovering are best.

Tuesday, December 11, 2018

Beer Reincarnated: How a Modern Industry Can Become Reinvigorated by the Past

There is evidence that beer has been around for about 2,500 years, but over time the technology for producing it has changed quite a bit. A modern beer brewery is scalable almost without limit, and there are existing and in-construction plants that can produce more than 20 million hectoliters of pilsner (pale lager) in a year. That production exceeds the weight of 3 million people. Modern plants are very cost efficient, and the beer quality is completely consistent. Yet there is currently a strong movement away from beer produced in these large, modern, and efficient plants toward smaller craft breweries producing a variety of different beers. Why is that?

For consumers, the answer is pretty clear: people generally like variety. Many people like and can pay for premium products, so the main issue is whether they would look to beer for variety instead of products like wine or spirits. But an article by Jochem Kroezen and Pursey Heugens in Administrative Science Quarterly looked at this question from a different viewpoint: that of the beer makers who have decided to form new breweries to compete with the established, efficient, and powerful brewers using modern manufacturing techniques. This is a more interesting perspective because for producers taking this path, it is not enough to believe that consumers might like their products—they also need to believe that enough consumers will pay enough money to make such businesses viable.

It turns out that the viability of smaller craft breweries is rooted in local variations in the products and processes of the beer industry’s past. This research was done in the Netherlands, which had a remarkable variety of beers and brewers in the 19th century, before the turn toward mass production of pilsner, a light and standardized pale beer. In the mid 20th century, when variation in the industry was all but extinct—and the industrial pilsner brewers had a stranglehold even on distribution—the flicker of the craft brewing industry we have today began with a return to the past in search of ways of brewing the distinctive kinds of beers available before industrialization.

Small associations of beer lovers, members of former brewing families, and home-brewing enthusiasts in the Netherlands were inspired by the growth of craft brewing in other countries, such as the United Kingdom and Belgium, and thought that the Dutch brewing industry had a history that could be reincarnated in a modern form. They wanted to restore local traditions through drawing on existing recipes and knowledge passed along in the brewers’ families. To them, craft brewing was a way of returning to the diverse tastes and artisanal production methods of the past, which was filled with community traditions such as local brewing. The breweries that opened because of these enthusiasts’ efforts were often literal copies or reinterpretations of the past.

These “reincarnated” breweries proved that craft breweries could be viable if their beer was sufficiently distinct, and so it opened the door to others who had different ideas. Some brewers thought that although the past might have been good, the world has moved on, and better-tasting beer can be made by using craft techniques as a form of artistic expression. These brewers had their own ideas of what beer should taste like, access to broad knowledge about craft beers in different parts of the world, and the ability to buy ingredients (such as hops and yeast) from anywhere. They appreciated the diversity of beers in the past but did not feel constrained to use only the ingredients, recipes, and processes that had been used in the past. To them, craft brewing was a way to express themselves as artists of taste, just as other artists express themselves visually.

Still other brewers saw technology as a tool that craft brewers could use just as industrial brewers did. After all, the mass production done in a large-scale brewery is a product of the industrial revolution 200 years ago, but current technology can be used very flexibly and precisely to customize products. To them, the history of craft brewing was also one of constraints, because the old breweries did not have access to the means of controlling production and testing the beer that are now possible. A modern craft brewer can, with modest investment, pursue perfection in the brewing without giving up on variety, because a modern craft brewery can easily switch between brews. To them, craft brewing was a way to reach perfection at small volumes.

Reincarnation means rebirth in a different body. This is exactly what happened in the Dutch brewing industry: the past was drawn upon as an inspiration, but the result was different and arguably more diverse than the past that inspired it, as craft brewing became big business and challenged the dominant players, transforming the industry in the process.

Kroezen, J. J., & Heugens, P. P. M. A. R. 2018. What Is Dead May Never Die: Institutional Regeneration through Logic Reemergence in Dutch Beer Brewing. Administrative Science Quarterly, Forthcoming.

Tuesday, November 27, 2018

What Can the West Learn from Kenya’s Stock Market?

The nations that are Western, Educated, Industrialized, Rich, and Developed (WEIRD) have long experience with markets and democracy and are rightly proud of these. They hold the world’s oldest joint stock company (established in 1288 in Sweden), stock market (1602, in the Netherlands), and democracy (930, in Iceland). But they also started the world’s greatest economic downturn (1929, in the U.S.) and greatest war and genocide (1939, in Germany). Now that we have entered an era with significant threats to markets and democracy, it may be time for the WEIRD nations to learn something from Kenya.

Kenya is a complex nation with markets threatened by distrust and corruption and democracy threatened by ethnic divisions and conflict. This makes it ideal for studying the formation of trust in the form of stock market participation spreading beyond the well-connected elite, creating a market for investment that includes many ethnic groups and income levels. An article by Christopher B. Yenkey in Administrative Science Quarterly looks at how this was done and has many useful lessons for those who want to maintain and grow trust in markets and societies across the world.

Let me take just one example of what we can learn from Kenya. Investments require some level of trust, which is difficult in a society in which some banks are corrupt and people worry about what other ethnic groups might do to them. How is this trust created? As the figure to the right shows, it spreads from many starting points as citizens hear about others nearby making investments and gaining profits from them. The decision to invest is determined by the balance between fear and hope, and both are influenced by what happens to other people. Importantly, people pay attention both to their own ethnic group and other ethnic groups, and they can learn from the experiences of those they do not fully trust.

What if the distrust is so strong that it amounts to rivalry? Some of Kenya’s ethnic groups saw each other not only as different and untrustworthy but also as rivals for economic and political power, so we know the answer to that too. The figure below shows that more-successful rivals pushed people away from the stock market, suggesting that potential investors came to see the profits of the rival ethnic group as a sign that the rival controlled the market, so that they could not profit from it. The figure also shows some easy ways of making this effect go away. Religious integration in the communities also integrated markets. Advertising that emphasized nation over ethnic group (by using the shared language) also integrated markets. Finally, spatial integration – having neighbors who were of the rival group – had the same effect. All of these mechanisms helped spread participation in the stock market for low-income Kenyans, helping their income and the economic growth of the nation.

Democracy means contests for power, and these contests can be done in many ways. Tribalism and distrust may help someone gain loyal followers, but at the cost of tearing up the trust that underlies markets and the democracy. Kenya teaches us how the torn fabric of trust can be mended, as one of the many steps needed for a society in which everyone is welcome to contribute and gain rewards.

Friday, October 19, 2018

Using Subordinates to Manage Managers: Influence Tactics that Work

It is well known that organizations work well when subordinates know how to manage managers. Experienced work groups often need to teach their new and inexperienced manager what routines are important because they work much better than the alternatives. Work groups facing new conditions often need to tell their experienced manager that the world has changed and that their work needs to change with it. Managerial effectiveness starts with the ability to listen to subordinates and learn from them.

When organizations need to change, can the subordinates managing their managers be a good tool for making it happen? Research published in the Administrative Science Quarterly by Katherine C. Kellogg answers this question. The managers she studied were actually medical doctors who do a range of managerial tasks and are at least as protective and assertive of their own ideas and ways of working as regular managers. If a hospital wants to change its overall activities, who are best situated to manage the medical doctors: medical directors or medical assistants? Kellogg’s research showed what happened when two hospitals tried to implement patient-centered reforms in their clinical practices.

As you might have guessed from the title, medical directors were not very useful for getting doctors to change their practices. A doctor can easily ignore instructions from higher levels in the organization, or even protest them. A doctor can also ignore suggestions from lower levels in the organization, but one of the hospitals found a set of tactics that made the suggestions coming from subordinates very persuasive. Those subordinates were medical assistants, who help to manage doctors’ patient inflow, time, and information. Each medical assistant works with multiple doctors, so they are central nodes in the doctor network. By having medical assistants meet without the doctors in the room, the hospital let them benefit from the experience of other medical assistants in their networks and become even more central. The hospital could also use the meetings to motivate the medical assistants, teach them how to influence doctors, and have them teach each other how to do so.

The medical assistants ended up with a wide range of influence tools and with a network that gave them exactly the information needed to use those tools well. They put together information for the doctors that helped the doctors follow reforms while still feeling that they were in charge. After all, the doctors felt they were reacting to better information, not to the assistants assembling it. The medical assistants would ask the doctors to change practices to help the assistant work better, and the doctors would grant such favor requests because they knew they were dependent on the assistants and felt that favors were a good reward. The medical assistants would strategically choose which doctors to approach first for changing practices and would let other doctors know when those first doctors had agreed to make changes. That way doctors felt they were not following assistants but other doctors.

Why do we know that these tactics for managing the manager work? As I wrote earlier, two hospitals tried to implement patient-centered reforms, but only one succeeded – the one using these tactics. Maybe not all of these tactics were needed in the hospital, or are needed elsewhere, but Kellogg’s research certainly shows how managers can be managed to make changes in an organization.

Monday, September 17, 2018

Which Entrepreneurs Will Remain Communist?

I know the title is puzzling – entrepreneurship is associated with capitalism, not communism. But there is one big exception. China, the world’s largest nation, has both a capitalist market and a state controlled by the Communist Party. It wasn’t always this way. Before the market transition under Deng Xiaoping, its economy was run according to communist principles, and Communist Party members were trained to see these principles as good and capitalist economies (meaning pretty much the rest of the world) as fundamentally evil.

Those who were party members under the market transition were suddenly told that communist rule is good and a market economy is also good. That’s a tough combination to swallow and one that may have had some consequences for their professional lives. A new paper in Administrative Science Quarterly by Christopher Marquis and Kunyuan Qiao looks at how party members acted when they became entrepreneurs in charge of young and growing firms. They studied the choice of internationalization, which is particularly meaningful for entrepreneurs with a communist background because an international firm has to interact with foreign countries that were previously seen as evil.

As you might expect, entrepreneurs who were members of the Communist Party before they founded their enterprises were less likely to internationalize than entrepreneurs who weren’t, suggesting that the association of foreign nations with evildoing had some effect on their business decisions. Although this was expected, it is far from obvious: The same Communist Party that created that association then led the market transition and encouraged firm foundings to improve the economy. For many of these entrepreneurs, the basic ideology they were trained in meant more than the party’s updated instructions.

Other findings give hints on what could make Chinese entrepreneurs behave less like traditional communists. Interestingly, two important ones involve government actions. First, entrepreneurs who got involved in social networks created by the government, such as industry associations, were more likely to internationalize their firms. In social networks, people learn from and influence each other, and these networks had exactly that effect. Entrepreneurs learned more about how to internationalize and why doing so wasn’t evil, and they acted on it.

Second, government corruption led to internationalization. Firms that were exposed to greedy governments (usually local ones) and had their resources taken away turned to internationalization as a way to get into cleaner economic and political environments. Presumably, these entrepreneurs learned that not all evil was foreign. Evil could be found domestically also, so the difference between foreigners and locals perhaps was not as great as they had been taught.

This study confirms that the Communist Party has a lifelong influence on its members but shows that those influences can be weakened – by the state. This is an interesting conclusion about what can occur when a party and state are combined, and it should raise questions about how other sources of influence on entrepreneurs combine.

Thursday, August 2, 2018

Who Makes the Fastest Progress—the Specialist or the Generalist?

The title looks like a simple question and one that would be important to know the right answer to. People choose whether to be a specialist in one subject, a generalist who can master multiple subjects, or something in between (like the specialist who knows a few things about related subjects). Firms choose whether to hire specialists and generalists and how to organize their work. The idea in each case is that there is some benefit to the choice. The specialist has deep knowledge and developed skills; the generalist has a broad overview and flexibility. But they can’t both be best – or can they?

We know surprisingly little about the answer to this question, but now there is progress thanks to new research published in Administrative Science Quarterly by Florenta Teodoridis, Michaƫl Bikard, and Keyvan Vakili. Because specialists and generalists can have different value in different contexts, they chose one that is particularly important for firms: the generation of knowledge through research. After all, research and development is a budget item and a function in most firms of some size, and it is how firms invest in their future.

To make the research conclusions especially clear, they didn’t look at firms but at university researchers in mathematics. Unlike firm R&D employees, mathematicians typically work alone, or when they work in teams every team member is named in the publication. Their productivity is very easy to measure because every important step of progress results in a publication, and the more important publications receive more citations. And in mathematics, something special happened: In the Soviet Union, a lot of research on mathematics was advanced but kept secret from the West, and it was revealed to the world when the Soviet Union collapsed. That gave mathematicians in the rest of the world insight into theoretical mathematics that was very advanced (areas in which Soviets were ahead) or areas that were nothing special (in which they were even). So it was possible to measure the progress of specialists and generalists both in fields with rapid progress and fields that had slow progress.

The comparison was important, it turned out. Because specialists have deep knowledge, they make the fastest progress when faced with fast-paced research fields. They have the foundation to leap forward when presented with significantly different knowledge than what they hold currently. For generalists, fast-paced fields are confusing because there is too much new knowledge to incorporate, and they have too little in-depth knowledge to make sense of it.

But generalists can also make fast progress: they just require slow-paced research fields. In such fields, they can use their generalist knowledge to incorporate and integrate knowledge from outside the specialized field, and by doing so they renew the field.  That’s much harder to do for specialists, who know little outside their field.

So now we know who is best: either specialists or generalists, depending on the pace of the field of knowledge they enter. That makes the choice easy for firms that know the pace of the field in which they want to do research. It makes the choice hard for individuals, who typically choose specialization early in life and then keep it for a long time. Personally I would still choose specialization, because it is more fun to be ahead when things change fast. It is also less safe, of course. Choices are never easy, but it is good to have research that shows us the consequences.

Free article downloads are available for a limited time only:

Teodoridis, F., Bikard, M., & Vakili, K. 2018. Creativity at the Knowledge Frontier: The Impact of Specialization in Fast- and Slow-paced Domains. Administrative Science Quarterly, Forthcoming.