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.

Greve, H.R. 2009. Bigger and safer: The diffusion of competitive advantage. Strategic Management Journal30(1) 1-23.

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

When do Firms Need Each Other? Vestas – Mitsubishi Wind Energy

Wall Street Journal has a notice on the previously dominant offshore wind energy firm Vestas, which now is forming a joint venture with Mitsubishi Heavy Industries. The collaboration would have seemed strange earlier, as it involves a Danish entrepreneurial firm with a strong and focused position in its market with a giant established Japanese firm with a very broad product line. Not exactly a collaboration of similar firms, but in fact one that has been negotiated for a while.

The explanation is simple, but it has a couple of different parts. One is that Vestas is no longer dominant: it has some very strong competitors including Siemens. It has been losing bids and money, and is beginning to look less secure. But the deal is not just about inserting money; that could have been done by any firm including those without any industrial activity. Vestas also looks stronger now because of the engineering strength of Mitsubishi Heavy Industries, which can start and successfully complete building projects that are much larger than anything Vestas has done. So, it is the combination of different but complementary capabilities in these firms that gives hope for the joint venture.

So is everything fine then? Well, they still need to take on the new market leader Siemens in order to succeed. And, they need to be able to work together effectively. Mitsubishi seems to have decided to avoid disturbing Vestas too much; the headquarter will remain in Denmark and the CEO of the joint venture comes from Vestas.  That would be typical things to do for a large firm that is not sure about how compatible it is with a collaboration partner, and wants to manage carefully first. The joint venture of these two firms looks like something that has been designed to address the need for complementary capabilities and compatible firms. The greater success of alliances with complementarity and compatibility is something that Hitoshi Mitsuhashi and I found in research published in Academy of Management Journal, so I can see good reasons for what Vestas and Mitsubishi are doing.

Will the joint venture move work? Unless we are business clairvoyants, we need to look again later to see if the joint venture succeeds. But it shows an attention to collaboration that many other firms are missing. Indeed, Andrew Shipilov has noted that the Blackberry downfall could be related to a lack of alliances by its maker. Of course, trying does not always work either, but it is better than ignoring a problem completely.

Bomsdorf, C. and D. Chopping. 2013. Vestas, Mitsubishi Form Offshore Wind Joint Venture. Wall Street Journal, September 27, 2013.

Mitsuhashi, H., & Greve, H. R. (2009). A Matching Theory of Alliance Formation and Organizational Success: Complementarity and Compatibility. Academy of Management Journal, 52(5), 975-995.

Grounded Airplanes: Routines versus Learning

Wall Street Journal has an interesting article about the low-price airline Allegiant Air, which is now making flight cancellations because it urgently needs to check the evacuation slides of its MD-80 aircraft. Why such a problem all of a sudden, when other airlines don't have problems with the same type of aircraft? This is where the story gets interesting.

One of its aircrafts needed an emergency evacuation after a minor incident, and the pilot ordered passengers to slide down the evacuation slides. The evacuation went without problems except for one thing: slides are supposed to inflate automatically when the door opens in an emergency, but only two of the four slides did. The other two had to be inflated manually by flight attendants. (I am assuming that manual inflation means pushing a button, not blowing air into the slide.) Half the slides not opening as they are supposed to is unusual, and the Federal Aviation Agency (FAA) quickly found out that the slides had not been inspected annually, as is required for older slides. The airline promised to fix its slides immediately, leading to the grounding of 34 planes that needed slide inspection or replacement.

Why did Allegiant Air not inspect its slides? Actually it did inspect them, at the three-year interval recommended for newer slides. This was their routine, where routine is a behavior that an organization repeatedly does to address an issue. Common features of routines are that they are easy to do because the organization is experienced with them, and they are not checked because people in the organization believe they are the correct set of actions. But routines can be wrong, like when the calendar for inspecting slides is marked with every third year instead of every year. 

Wrong routines are hard to fix because something needs to tell the organization that there is a problem, and that “something” is often an accident. That almost happened to Allegiance, but fortunately their airplane evacuation was not hurried and did not fail. Instead, they were told of the problem by two other mechanisms that often interrupt harmful routines. One is to document the correct action, as Boeing has done for the MD-80 slides (McDonnell Douglas was the original maker, but Boeing now has the documentation). The other is to communicate the correct action, as the FAA did when it suspected that the incorrect inspection interval had been followed.

Thanks to these actions, Allegiance Airlines evacuation slides for MD-80 planes should soon be in good shape. Of course, there are lots of airplane parts and airlines, so learning about such an incorrect routine is worrying for those who fly frequently.

Carey, S. 2013. Allegiant Air Forced to Ground Some Planes. Wall Street Journal.

BlackBerry as Niche: Firm Disappointment and Strategy Change

BlackBerry director Bert Nordberg was elected recently, but is not shy about making statements: he has already said publicly that the BlackBerry smartphones need to retreat to certain niches in the market, leaving others for the competitors. This may seem reasonable to many listeners given how BlackBerry has suffered from competition by Samsung, Apple, and other firms, but it is probably not a popular view in BlackBerry, where employees remember their earlier great times.

The statement reminded me of my discussion with a technical assistant when I got a new job and needed to choose between a BlackBerry and a different brand of Smarthphone. I asked about the details of the differences, and was told that the main difference was that the BlackBerry installation of the mailer was more complicated on their side, though it would look the same on mine. The security would also be greater. I was not quite convinced, and went for the other phone, which had some nice features. (I think there are more efficient ways of hacking email accounts than going for the smartphone, so the extra security did not impress me.)

Of course, the problem that BlackBerry might be having is that too many people are making my choice, that some firms have stopped offering BlackBerry, or that some other phones have improved their security so much that the difference is not important anymore. In fact, a mix of these things may be going on. Indeed, a recent worry is that Samsung has been approved as secure enough by Pentagon, and may also get other approvals by the US government. It is hard to argue you are most secure if the approvals line up with a major competitor.

If that is the strategic situation, where does the “niche” comment come from? Well, it really is an issue of how organizations learn specific actions. There is a lot of research on this, which Gavetti, Greve, Levinthal, and Ocasio recently reviewed, and some main conclusions are well known:

• Strategies have histories. For example, Mr. Nordberg has previously worked for Sony Ericsson, and one of the things he did there was to narrow its niche focus. It worked, making it likely that he will try it again and even that BlackBerry will be interested in having him as a board member.
• Strategies spread. For example, niche focus is a known strategy that can be observed among many firms, its sheer popularity can make it an option even if the success in each firm is uncertain.
• Strategies have reasons. For a firm that is losing in some places, the option of marketing more intensely in fewer places is easy to explain, and is a good way to sell a niche focus strategy.

So, we can tell where this strategy came from. Will it work? That’s too early to tell: what firms do and what saves firms is not so well linked.

Gavetti, G., Greve, H. R., Levinthal, D.A., & Ocasio, W. (2012). The Behavioral Theory of the Firm: Assessment and Prospects. Academy of Management Annals, 6, 1-40.