Tuesday, April 30, 2013

Can Innovations Happen Away from Silicon Valley? It Depends on the Network

The mobile phone market continues to be in turmoil. The launch of the innovative Galaxy S4 phone is now delayed for the US carriers T-Mobile and Sprint, and the reason is “supply issues,” which usually means that there are not enough of them. Unless something has gone wrong in Samsung’s factories, it means that it is selling more than anticipated in the markets where it has already been launched. Meanwhile, Finland’s Nokia and Taiwan’s HTC are battling each other in the marketplace with new phone models, and also trying to obstruct each other in court with legal claims. Apple is selling iPhones fast, but not so fast that they can avoid speculations that they may have to imitate Samsung’s lineup of phones in a range of different screen sizes. Whew.

Maybe you have noticed already, but only one of the four companies I mentioned hails from Silicon Valley: Apple. How does this square with the idea that the Silicon Valley is the center of information technology innovations, or more generally, that innovations in an industry usually come from agglomerations of technologically advanced firms? Well, there is a lot of research showing that such agglomerations will continue to produce innovations and new firms, so there is no need to predict doom for Silicon Valley. But there is reason to wonder about the exceptions: firms that can stay innovative away from such agglomerations.

A recent paper by Russell Funk in Academy of Management Journal looks at innovations in the nanotech industry, which also has agglomerations (one is in Silicon Valley, of course). He looked at how the structure of the networks of innovators within each firm combined with the location to determine the innovativeness. The idea is simple, but novel: we normally assume that networks that effectively spread knowledge are good for innovation, and in fact this is what happens when there is a lot of useful knowledge around. Firms surrounded by other advanced firms should have such networks. But networks that don’t spread knowledge effectively because the individuals are not well connected let each individual develop novel and unique ideas. They can help firms rebound from some of the disadvantage of being away from other sources of knowledge.

As he expected, he found that firms away from other high-tech firms were able to innovate more the fewer connections their innovators had, so maintaining internal diversity helped keep them innovative. We might suspect that Nokia and HTC, distant from Silicon Valley, are trying this approach because they are doing many product launches, and are not completely consistent in their choices. For example, HTC has both Android and Windows phones; Nokia is simultaneously pushing new models in the smartphone and basic phone market.

So the mobile phone market is likely to stay interesting for a while, and Russell Funk’s research may explain why that is so. But his research does not predict success, because innovativeness and success are as closely related as we think. But that is a story for another blog post.

Monday, April 22, 2013

Dare to Care? How Firms can (be made to) Help after a Disaster

It has been a week of tragedies. We have been shocked by the violence in Boston, with explosive devices made to maim and kill, and placed among marathon spectators. And much further from most news crews, nature struck coldly and fiercely: The earthquake in Sichuan this Saturday is known to have killed at least 186 people, and is estimated to have injured 11,000. Apart from the damage itself, it must have rattled nerves, because Sichuan also had an earthquake in 2008 that killed 70,000 people. Many deaths were from building collapses as a result of shoddy construction--some of those were primary schools.

How do communities react to disasters on a scale such as these earthquakes? We have seen the images of neighbors helping each other after disasters, often helped by highly trained (but few) disaster response crews flying in from abroad. But large-scale disasters usually overwhelm local resources, leaving the communities unable to recover on their own. Nor can they easily get help: the 2008 Sichuan earthquake, as well as the recent one, cut road links needed for help. Even Japan, with its modern infrastructure, was overwhelmed in the 2011 Tohoku earthquake and tsunami. A huge pool of volunteers was available in nearby Tokyo, but was unable to move to the disaster zone because of the need to keep roads clear for essential traffic.

What do people do when they watch such disasters unfold but are unable to help? Jianjun Zhang and Rose Luo studied the aftermath of the 2008 Sichuan earthquake in a paper forthcoming in Organization Science. Their focus was on how multinational corporations donated money to help earthquake victims, but the explanation for this philanthropy turned out to involve people, and the Internet.

As an authoritarian state, China has a tradition of state control and assistance, including in disasters, and low expectations that individuals or firms will help. But the market reforms have left China with a progressive increase in the strength of private corporations and some weakening of the state. When the earthquake overwhelmed the state, some multinational corporations started funding the relief efforts. But most did not, not right away.

What happened next was a mass movement of individuals. On the Internet, lists of donating companies appeared – and so did lists of prominent companies that did not donate. Internet forums were filled with commentary, critique, and praise. And just as the communist party has on a number of occasions been surprised by the speed and strength of Internet activism in China, so were the multinational firms. Responding to the volume of internet articles on donations, and stung by seeing their company appear on lists of stingy corporations, managers donated – and donated again if the first donation was seen as too small for the company. It started and ended quickly: the main donation period was over in a month. But in that brief month, firms made decisions that helped victims of the disaster (or not); those decisions established their reputation as supporters of the community in which they did business (or not).  

It is an interesting effect of the Internet that corporations can now learn about community reactions to their actions, or non-actions, very rapidly. When a disaster strikes, the speed of Internet activism is what it takes to match the speed of help to the quick response that the situation calls for.

Saturday, April 13, 2013

Why Do Personal Injury Lawyers Have Bad Suits and TV Ads?

The title of this blog entry reflects a stereotype of personal injury lawyers in the USA: They have late-night TV ads for their services (“Get what you deserve!”), they wear ill-fitting suits, and their status is a few steps below that of lawyers in specialties like criminal law and the various kinds of corporate law. Personal injury law is in fact important: it helps individuals recover damages from accidents that are not covered by insurance, or when insurance firms resist paying out. It also helps individuals recover damages resulting from product defects. Personal injury law is one reason why firms will check whether the toys they manufacture are nontoxic and cannot lead to choking, before putting them in a store for you to buy for your child. 

Having said that, there is some truth to the stereotype. Personal injury law is a low-status specialization, just a few notches higher than family law, the lowest-status of all legal specializations. And they are guilty of bad TV ads and suits.

Lawyers are status-conscious, so the low status of personal injury law, and indeed any personal (rather than corporate) area of law, cuts into recruitment for that specialization. Personal injury law is especially blighted because some high-status law corporate firms that do have family law practices on the side do not have personal injury practices. Why is that?  An article by Damon Phillips, Catherine Turco and Ezra Zuckerman in American Journal of Sociology has an explanation that also tells us a lot about markets in general.
Phillips, Turco, and Zuckerman noted that there were many explanations that did not make sense. Status alone was not an explanation, because these firms entered the lowest specialization of family law, but personal injury law was higher. Nor was it a worry that personal injury law somehow would involve them into low-ethics practices (it does not, in general) or that they lacked capabilities for it. Instead, their interviews with corporate clients of top law firms and lawyers delivered a simple and strong message. Their corporate clients viewed participation in personal injury as treason. Personal injury law means that the firm has crossed over to the other side, and is now willing to sue corporations on behalf of individuals. For the general council of a corporation, that is worrying enough that they stated their willingness to dropping their law firm just for adding a personal injury practice. Corporations demand loyalty from their law firms and are willing to shop around to get it.

Clearly this means that we cannot expect that a personal injury will get the best possible legal representation. That will be found on the other side of the courtroom, defending the corporation. More broadly, firms can make demands of loyalty from other firms that shape their business and organization. These in turn shape markets. For example, in markets with battling giants, like automobile companies, suppliers have to choose sides if the giants demand loyalty. When lobbyist firms and industry associations need research to justify their views, they will go to research providers that do not work with the other side. Loyalty demands have potentially far-reaching consequences.
OK, we are at the end of this blog entry. Are you still wondering whether the “bad suits” in the title was an intended pun? Yes, it was. Thank you for noticing.

Friday, April 5, 2013

Outsourcing and Management Consulting: When do Firms do What?

I just did a search on keyword "consulting" and found that two of the top articles that appeared were on the problems that the large Indian outsourcing firms were having in getting enough visas for their employees to work in the US, and McKinsey’s attempts to get female workers who left the company to return.

It is a nice feature of searches that the results sometimes juxtapose items that I would not normally think about at the same time. McKinsey's business is management consulting, and especially strategic management consulting, which is essentially outsourcing of the task of making strategy and organizational designs and objectives. It is a way to let others rework the brains of the corporation. The information technology outsourcing that the Indian firms are famous for (they also do management consulting) consists of making large systems for corporations, often mission-critical systems such as those that process transactions and maintain databases for your bank and insurance company. It is a way to let others rework the guts of the corporation.

It seems scary that the modern corporation would rely on others for these tasks. It might also sound a bit like cheating, because one might argue that a CEO is rewarded richly and given the freedom to create a management team in order to be able to make strategies inside the corporation. The case for consulting and outsourcing is that it leaves the tasks to firms that are specialists, and very good at what they do. A management consultant and a manager have similar education, but a junior management consultant working on strategy will gain experience faster and have a greater selection of experienced senior colleagues for support than the counterpart working in a firm. The same thing goes for the IT outsourcing specialist, who is dedicated to making new systems (often similar ones) rather than maintaining them, and quickly builds expertise.

Much research has been done on how corporations choose which activities to do internally or externally. There is a lot of repetition of simple cost/benefit arguments that are hard to measure. What is the long-term cost of letting the management consultant learn from making a strategy, for example, as opposed to letting the corporation’s own managers learn from making a strategy? Hard to tell.

A recent article by Robert David, Wesley Sine, and Heather Haveman in Organization Science offers a new and refreshing perspective on the question. They took a broader view and asked how management consulting became established and took the form that it currently has. They were able to trace it back to the origins of three individuals starting the now-famous consulting firms McKinsey, Booze, and Arthur D. Little. These three founders acted as entrepreneurs on two dimensions, forming their businesses and shaping the business environment. Some of the things they did to shape the environment are well known: they built status from elite connections, and they built acceptance from academic connections. But the most striking part of their actions was the apparent altruism: they claimed more concern for the societal benefits of their work than their own business (a claim they made credible by not being particularly profitable, unlike modern consulting firms!). That is a very nice observation, because shaping the environment around a new form of business is much easier if you can convince potential clients that they, not the new business, take first priority. The combination of status, science, and zeal made management consulting an accepted activity.

Management consulting has come a long way from these entrepreneurs working before WWII to its current position as an accepted and even essential part of management. The outsourcing business is still under debate, but it is already home to some very large corporations and an increasingly accepted part of management. But if history is any guide, the debate will end. After all, management consulting and outsourcing have in common the movement of activities from the inside of the firm to the outside, with a rationale based on expertise and cost.