Jugaad Cars: Carlos Ghosn and Disruptive Innovation

Would you like to have a Renault or a Nissan (well, Datsun brand) for less than USD 5,000? Soon you can, if you live in India. These cars are part of a bold initiative by Renault-Nissan CEO Carlos Ghosn to harness frugal engineering, a set of practices intended to launch new models with radically lower development and production costs than has been done before. Jugaad is the term used by Indian engineers for cost-conscious engineering, and Mr. Ghosn wants to deploy it in other Renault-Nissan markets as well. It is a disruptive innovation in how new model development is done, and it can give a major boost to Renault-Nissan in price-conscious markets in developing nations. It can also make customers elsewhere wonder why they are stuck with so much higher prices for their cars.

Jugaad practices have good cost consequences, but are not without risks. One is the issue of selling cars much more cheaply in some nations than others; an issue that gets worse because one practice is actually to take older-model designs from developing markets as the initial platform. In other words, after Nissan customers in Japan, Europe, and USA pay for the design, it is re-used for free in India.  The other is the question of whether this approach gives the same safety standards that we expect of cars everywhere. Frugal engineering can be too cheap.

Why does Mr. Ghosn take these risks? One answer could be that the payoffs are potentially high in the rapidly growing emerging markets. Another is that there is little to lose in India, where Renault-Nissan started out with a 1.4 percent market share last year (now doubled). But a third opportunity is very intriguing: He may like the attention that comes from doing bold actions.

Gerstner, König, Enders, and Hambrick have published an article in Administrative Science Quarterly that looks at the connection between CEO narcissism and adoption of disruptive innovations. They find that narcissist CEOs are more likely to adopt disruptive innovations, and they are particularly likely to do so when the area of innovation is attracting attention. The reason is that attention is exactly what narcissist CEOs want, and they get it by bold actions in areas of activities that are closely watched.

Is this a good thing? Well, researchers often ask why so few firms adopt disruptive innovations, giving the impression that firms should be doing more of it. And maybe that is the right answer. But disruptive innovations are risky actions that firms would take very judiciously and probably not mix with other risks. And herein lies the problem: narcissist CEOs don’t calibrate overall risks, because as far as attention goes, more is always better. So we are stuck with the dilemma of normal CEOs calibrating risk but taking too little overall, and narcissists not calibrating risks and probably taking too much.

Do I mean to suggest that Mr. Ghosn is a narcissist? No, not at all; it was just an example of a bold action. He has by sheer necessity needed to take many bold choices in his life as a CEO. And he has written an autobiography to describe them.

Choudhury, Santanu. 2013. Renault, Nissan Bet on Small Cars in India. Wall Street Journal, June 11, 2013.

Gerstner, W.-C., König, A., Enders, A., & Hambrick, D. C. (2013). CEO Narcissism,Audience Engagement, and Organizational Adoption of Technological Discontinuities. Administrative Science Quarterly, 58(2), 257-291.

Networks of Giving: How Corporations Choose to Give Back

If this year is like last year, people in various places can soon watch Citigroup bankers clean beaches, prepare summer camps for children from poor households, and distribute food to the hungry. They participate in what Citigroup calls Global Community Day, a “Day of Service” done by many large corporations. I can imagine various reactions to bankers picking garbage and operate soup kitchens, but as a management scholar I think “Nice, but could they also do something that uses their expertise?” In all fairness, they do, in the form of teaching financial literacy to people in need.

Other companies, such as IBM, place a much greater emphasis on matching their capabilities to the activities. IBM appears to have a day of service, but it is actually a collection of various ongoing skill-based programs involving entrepreneurship and use of technology to serve communities. That’s what IBM knows how to do; start and grow businesses and use technology.

It turns out that these are two competing approaches to corporate community service; both with proponents in the community of social corporate responsibility (see my previous post for more on CSR). I usually study diffusion of strategies and technologies among firms, but occasionally I wonder how such community service spreads. A forthcoming article by Ryan Raffaelli and Mary Ann Glynn in Academy of Management Journal has looked at the question, and found an interesting answer.

It was probably obvious to you that the day of service is easier to do than the skill-based programs. It is not necessary to take into account what people know; they will be doing simple stuff. It is not necessary to motivate them for lengthy commitments. And, for workers who find the tasks unrewarding, going out to do something useful and social with co-workers can be a good motivation in itself. Think about it: can you identify people in your workplace who would be fun company for a beach cleaning trip? I can.

And it turns out that the difficulty level affects how these programs spread. The easy day of service programs only require that the firm is connected to the CSR community where such practices are promoted. Many large firms have such contacts; they can afford them and cannot afford to seem uncaring about their communities. The difficult skill-based programs spread to firms that have CSR contacts and are in industries where such programs are wide-spread.

This finding makes the story relevant to my favorite topic of how strategic actions spread. In order for a company to do something new, it needs to learn two things: (1) is it good? (2) how is it done? Often, as in this case, one or a few network ties are not enough to learn both of these. It takes either a rich network or multiple networks for it to happen. So, strategic change will continue to be hard, and bankers will continue to serve soup once a year.

Raffaelli, R. and M. A. Glynn. Forthcoming. Turnkey orTailored? Relational Pluralism, Institutional Complexity, and the Organizational Adoption of More or Less Customized Practices. Academy of Management Journal,forthcoming.

Oil Sand Waste and Politics: Why Executive Values Matter

Cities sometimes have a hard time escaping their reputations. Take Detroit. Windsor, on the Canadian side of the river, has the riverside lined with Assumption Park, Ernest Atkinson Park, and Straith Park. Detroit has Riverside Park, a rail yard, and now a big mountain of petroleum coke, a byproduct of (Canadian) oil sands refining. One might say that a city isn’t a very good place for oil refining byproducts, and that the Canadians should not bring their waste to a major US city. But actually, the waste is owned by the US company Koch Carbon, and the residents of Windsor, as well as Detroit, would really like it to be somewhere else.

Why put it there? It is earmarked for export to places where lax environmental rules allow burning of petroleum coke that releases greenhouse gases and sulfur levels at levels that would be unacceptable in the US or Canada. Detroit happens to be a convenient intermediate storage point. Now, one could say that it takes exceptional levels of environmental disregard in order to create an eyesore in one place so that you can move a potential pollutant across the world and contribute to global warming. But the owners of Koch Carbon don't believe in global warming and have funded research trying to disprove it. They are the famous Koch brothers (one of them is also the CEO of Koch Carbon, as far as I can tell), who are best known for creating and funding free-market think tanks, and for having a very strong record of economic support to republican candidates for election.

Normally a paragraph above would be a standard rhetorical trick. It is juxtaposition of facts that gives the impression that conservatives are polluters, without any rigorous foundations. Even with the example of Koch Carbon, there may be lots of polluting liberal CEOs and lots of responsible conservative CEOs. But actually, recent research published in Administrative Science Quarterly by Chin, Hambrick, and Trevino suggests that the values of CEOs do have effects, at least on corporate social responsibility (CSR). They found that conservative CEOs showed less CSR advances in total than liberal ones, and moreover that conservative CEOs seemed to be more strategic about their use of CSR. They did more when their firm was doing well, and scaled it down when their firm did not, whereas liberal ones were not so selective.

So conservatives really are less responsible, at least as defined by the standards held up by the CSR movement. We don't actually know whether this means that companies run by conservatives pollute more. But, Koch Carbon is certainly not doing anything to avoid giving that impression.

Chin, M.K., D.C. Hambrick, L.K. Treviño. 2013. Political Ideologies of CEOs: The Influence of Executives’ Values on Corporate Social Responsibility. Administrative Science Quarterly, 58(2) 197-232.

Missiles and Violins: Why Knowledge Management Strengthens the Case for Disarmament

When North Korea threatens to attack South Korea or fires missiles into the sea, the press reports are typically accompanied by pictures of military parades like the one below. I am wondering if I am the only one struck by the contrast between the missile pointing skyward and the decrepit truck underneath. Once again it is clear that North Korea only spends money on what its leadership cares about, so the best they have of trucks (and trucks can be used to carry food and other useful tasks) is far inferior to their missiles.

Through economic isolation and diplomatic pressure, many nations are trying to make North Korea back off from its program of developing nuclear warheads, re-starting nuclear reactors and fuel processing facilities, and improving missiles. But one might ask, what is the point? The knowledge on how to make nuclear warheads and missiles and operate nuclear reactors is already there. Stopping the program just means a pause; it can be re-started any time the leadership pleases. In fact, there is talk they are planning to re-start a nuclear reactor that was idled in an earlier treaty. So, it would appear that North Korea can give no credible promise that a stop will be permanent, which suggests that other nations cannot reward it for stopping either.

To see why it still makes sense to call for a stop, we need to talk about violins for a moment. In a paper in Organization Science, Gino Cattani, Roger Dunbar, and Zur Shapira discuss why nobody makes violins like the peak period Cremona violins anymore, although they are now seen as the best instruments that exist. These are the violins made by Stradivari and Guernari that are owned by the richest and played by the best (usually on loan; the richest and the best are different people). Current violin makers can get close to their sound, but they cannot reproduce it. Why can't these violins be made anymore? Cattani and coauthors point out that they became famous for their sound much later than their actual creation, as a result of music performance moving from small spaces in courts to larger concert halls or outdoor performances.  That condition, which is how top-of-the-range violins are used now, is where they are superior.

But something happened on the way to fame: the masters building the violins died and their workshops stopped producing them. Molds and some other technical knowledge persisted, but tacit knowledge disappeared. This tacit knowledge has proven impossible to recover completely, even by violin makers who have significant experience maintaining Cremona violins. It has something to do with wood selection, preparation, and varnish, and how to use those in combination.

Now let us go back to disarmament. It is clear that much technical knowledge and documentation can be preserved from a nuclear program and a missile program, and some machinery can be kept in working order. But even today, making highly complex items call for tacit knowledge. If tacit knowledge is not used, it will decline, and the ability to re-start the program will gradually wither away. So there is merit in stopping, even if there is no credible promise of re-starting. Indeed, it would not be surprising if North Korea encountered difficulties in re-starting its idle nuclear reactor.

Cattani, G., R.L.M. Dunbar, Z. Shapira. 2013. Value Creation and Knowledge Loss: The Case of Cremonese Stringed Instruments. Organization Science, articles in advance. 

 Missiles and old trucks in North Korea:

Postscript: I am aware of the research showing that a sampleof modern violinists chose a modern violin over a Stradivarius. It might suggest that there is some brand value embedded in the experiences that violinists and listeners get from a Stradivarius. But it could also be because playing a violin in an Indianapolis hotel meeting room wearing welding goggles is not an ideal way to assess a violin that plays best in concert halls.

 

How Much Do Consumers Care about the Death of Textile Workers?

Associated Press reported that there are now 761 known deaths in the collapse of a building housing multiple clothing factories in Bangladesh. Does that mean that firms will stop ordering clothing from suppliers with questionable safety standards? They have the means to do so because it is known that multi-story, multi-user buildings such as the one that collapsed are operated with low safety (the building that collapsed had too heavy machinery installed) and often have illegal modifications (the building that collapsed had three stories added illicitly). Single-story buildings are better; buildings owned by the factory operator are better.

The moral case for imposing safety standards is clear. The risk to the reputations of firms that do not is also clear, and understood by the firms. When boxes of Disney logo clothing were found in the building that collapsed, both Disney and Wal-Mart (the licensee) explained that they had withdrawn authorization to produce in such factories, and the boxes had been moved to this building for storage without their approval.

But ultimately what matters is how customers react, because there will always be firms that are willing to place orders in unsafe places unless customers are vigilant. Indeed, in the New York Times, Jerry Davis has argued that customers should make it unprofitable to be unsafe.  Will they do so?

Fred Pampel and Lori Hunter published a paper in the American Journal of Sociology that provides an interesting parallel, because it examined support for environmental spending. Concern for the environment is similar to concern for manufacturing safety because a consumer can be “selfish” and only consider local benefits (a cheap t-shirt), or the consumer can be an altruist who also considers benefits to others (not having a polluted river; not dying in a building collapse). They showed that environmental concerns have increased over time, and more importantly, they gave some insights into how. Using data on how attitudes changed over time within birth cohorts, they were able to show that individuals with higher socio-economic status (SES) were early supporters of the environment, but this concerns spread to others with lower SES, increasing the overall level of environmental concern. SES is related to income, though not quite the same, so one could say that an environmental concern spread via a diffusion process from rich to mid-income to poor.

This is important because it gives some predictions. If concern for worker safety is a concern of  high-SES individuals today (and it may well be – which newspapers and magazines discuss it?), then that is actually the start of broader acceptance. Firms may soon face customers who are broadly critical of unsafe manufacturing. And if you happen to belong to the high-SES segment, you should know that your attitudes and actions are influential.

Pampel, F. C., & Hunter, L. M. (2012). Cohort Change,Diffusion, and Support for Environmental Spending in the United States. American Journal of Sociology, 118(2), 420-448.