Monday, October 28, 2013

Curved Phones? Innovations from near and far away

Today the long rumored announcement came: LG is launching a mobile phone with a curved screen, shortly after Samsung made the same announcement. The phones are not imitations of each other. The Samsung phone has curved sides, which changes the grip and visibility. The LG phone is curved lengthwise so that it can be held more snugly against the head. I admit some puzzlement at the need for these designs, but OK. Seen as innovations, it is pretty impressive that the screens can be curved. This is done as an OLED, or organic light-emitting diode, which is a new, difficult, and expensive technology.

Are these introductions right after each other just evidence that firms in the same industry will act as rivals and pursue the same technologies? Maybe, but the story has more details. LG and Samsung are Korean companies, are well aware of the screen technology each of them is developing, and most likely they get some information from the same sources. Such a high technology is not developed solely inside one firm, even a giant firm like Samsung; alliances are used to develop it. Indeed, Samsung is one of the key examples of a good user of alliances in the book that I, Tim Rowley, and Andrew Shipilov wrote and will publish soon. When firms are developing new products, a network of alliances gives a firm an advantage, but so does the proximity to other innovators. This is the kind of benefit that has made Silicon Valley so powerful, as firms there learn through alliances and through being near each other.

But now there is also research on how firms can be far away from other firms and still do well. The answer is again related to information flows through networks. Russel Funk has an article coming out in Academy of Management Journal that looks at innovations by nanotech firms. He finds that firms that are near other innovators have an advantage if they have a well-integrated network internally so they can integrate information they get from the outside. This is well known, and we write about it in our book. But he also finds a different form of advantage. Firms that are away from other innovators have an advantage if they have a loose network internally, so that innovators inside the firms can be more independent from each other. So, learning from the outside and developing in the inside calls for the exact opposite internal structure.

This new research is interesting, and gives some hope to firms that are away from other innovators. Such firms often have disadvantages in innovation races, and need every trick they can get. For Samsung, it is less interesting because they already have the advantages of proximity to others and a large network – and internally they are tightly integrated.

Sangani, B. 2013. LG curved G Flex smartphone 'to rival Samsung Galaxy Round'. The Telegraph, 28.10.2013.

Monday, October 21, 2013

“We are nice too”: How Firms Deal with Problems

A famous firm has a business built on the principles of a good natural environment, community development and affordable housing, and engagement and philanthropy in society. It is the sponsor of cultural, scientific, and sports events. Its people (those who would have been called employees in many other firms) are its most valuable assets, and it treasures diversity and nourishes strong values among its people. All of this is on its web site.

I suppose you have probably already guessed that the firm is J.P. Morgan, the bank that just reached a deal to pay the US government $13 billion to settle government civil claims related to J.P. Morgan not being sufficiently truthful in its marketing of mortgages ahead of the 2008 financial crisis. The deal limits the financial repercussions of the government investigation, but the bank was unable to convince the US that it should also stop criminal investigations against its employees (sorry, people) that are apparently ongoing.

So what is going on with the difference between all these good things in the first paragraph and the problems in the second? Well, for many firms they might be unrelated, because it is easy to make neat web sites that trumpet various virtues; especially because the makers of those web sites are likely to be totally unaware of dirtier activities elsewhere in the firm. But actually, critiques and bragging could be related. The case for linking them is from research by Mary-Hunter McDonnell and Brayden King in Administrative Science Quarterly. They did not look at civil and criminal investigations, but rather announced boycotts of firms by social movements. Boycotts are less burdensome than fines and imprisonment, but are still enough of a problem that firms respond. In fact, a common response is to talk about all the good they do for society, and this is a stronger response among firms that have a past record of making such claims of helping society. So if you have heard a lot of talk from a firm about good deeds recently, one reason might be good deeds, the other reason might be the opposite.

The research shows clearly that some firms really like to talk about their good deeds, and those firms will talk more if others expose them to critiques. Will the firms also fix the problems that trigger critiques? Well, that is another question. There is also evidence that firms do this, but it takes solid press coverage for a firm to respond to a social critique. As the $13 billion payment suggests, investigations of criminal acts get a lot more attention. So, talk seems to be pretty reliable; responses to investigations quite solid; but the fixing of problems raised by social movements a little less so.

Monday, October 14, 2013

Diapers and Alliance Advantage: Amazon connects to P & G

Procter & Gamble (P & G) makes and sells all sorts of essential goods that we don’t necessarily talk about so much: diapers, paper towels, toilet paper, laundry detergent, cleaning liquids. Some of these goods are heavy and bulky, and there are probably some parents who wish they had not needed to carry all the diapers back home from the store. Well, now Amazon is there to help: they can deliver these goods, in fact as subscriptions that arrive regularly. Now this seems a bit odd because these products are cheap to buy and expensive to ship, at least compared to books and other Amazon goods, but Amazon do mean to profit from it.

Part of the ambition comes from how they do it. Now there are little Amazon centers in some P & G warehouses, and these pack and ship goods directly from the warehouse instead of having it sent to the Amazon warehouse. The cost savings are obvious. And, this is not just P & G; Amazon is said to be pursuing similar arrangement with other manufacturers too.

What will these alliances do to the market? The complementarity between Amazon and P & G in this arrangement will make them stronger than other firms trying to sell similar goods online; that is the easy part. It is likely that other firms will be either inspired or threatened enough to try the same strategic move. Interestingly enough, I found in research published in Strategic Management Journal that even strong competitive moves are not necessarily imitated fast. That research was about technologies that gave major advantages, but the results are likely to be similar for new alliance types. There are enough doubts about their value and too little information about how they are done, making other firms reluctant to move.

But to the extent that other firms will try to get the same benefits, the competition is likely to make things harder for the small firm and the late firm. P & G are happy to have Amazon in their warehouse, but how many additional alliance partners do they need? Amazon is happy to have P & G goods for sale, but how many brands of diapers and toilet paper do they need? The low need for replicating this arrangement with others will reduce competition, especially because people are more likely to use the web services that they already use for other goods. This will mean that many firms on both the producer and the web sales side will be left out in a game where the big firms win. And that’s probably fine with the big firms P & G and Amazon.

Ng, Serena. 2013. Soap Opera: Amazon Moves in With P&G. Wall Street Journal, October 14, 2013.

Thursday, October 3, 2013

Heart Medicine Cheating: Are the Top Firms the Worst Firms?

Today's news contains a note on well-known pharmaceutical company Novartis punishing some of its executives in Japan as a result of a scandal related to its heart medicine Diovan. Both the content of the scandal and the firm raises worrying questions. Novartis is being checked by Japan Health Ministry after two independent studies found that data in research on Diovan had been altered to produce inaccurate results, which in turn were used in Japanese advertising for the drug. Misleading advertising for heart medicine is a serious breach of trust. Novartis is a major pharmaceutical company with more than 100,000 employees that is marketing a broad range of medicines.

But the case is not unique, and Novartis is not the only well-known pharmaceutical firm in the news these days. China is moving against corruption in the medical industry, and firms suspected of bribing doctors to favor their medicines include GlaxoSmithKline, Novartis, AstraZeneca, Sanofi, Eli Lilly, and Bayer. Although the evidence is not clear yet, the accusation is familiar – authorities in the USA monitor pharmaceutical sales practices closely because of the potential for corruption.

So is there something special about large and famous firms that make them particularly drawn towards questionable practices? One would think so based on the familiarity of the names in the previous paragraph. But actually a lot of less-known firms have problems too. For example, Ranbaxy, an Indian maker of generic medicines, has repeatedly had unacceptable production quality in its factories, and was caught manipulating data for an application for drug approval. Ranbaxy also makes Diovan, but is likely to have to wait for approval in the USA given its history of problems.

Recently published research in Administrative Science Quarterly gives an interesting view on the problem of size, fame, and misbehavior. In the research, Scott D. Graffin and his coauthors examined the 2009 expense scandal in the UK Parliament, finding that the better-known members of parliament were just as likely to cheat on their expense reporting as the less-known members. So not more likely, nor less likely. But fame did have one effect: the best-known members were much more likely to be reported in the press, so for a newspaper reader they would appear to be much more likely to cheat.

Is this the case for firms too? It seems likely that the press would investigate and report the best-known firms first, and possibly journalists would even choose the best-known firms to name in a report if they had names of many cheaters available. In fact, the corruption investigation in China also involves a number of Chinese firms, but these are less known abroad and are usually not mentioned in articles. But does that mean we can be sure that the largest, most famous companies are just as good (just as bad?) as the others? Not really; unfortunately it is hard to be sure about something that is revealed as rarely as cheating and misbehavior.

Ranbaxy's Chronic Maladies. The Economist, September 21 2013.
Graffin, Scott D., Jonathan Bundy, Joseph F. Porac, James B. Wade, and Dennis P. Quinn. 2013. "Falls from Grace and the Hazards of High Status: The 2009 British MP Expense Scandal and Its Impact on Parliamentary Elites." Administrative Science Quarterly 58(3):313-45.
Inagaki, Kana. 2013. Novartis Sanctions Executives at Japan Unit amid Research Scandal. Wall Street Journal, October 4, 2013.