Will an Unprofitable Airline have Safe Planes?

Do you feel safe when you board an airplane for a flight? Typically we do, as we should because air travel is much safer than driving. Well, safer per mile (kilometer), but airplanes are much faster than cars, so per minute the difference is less impressive. And occasionally we get disturbing news like the two crashes of 737 MAX 8 aircraft, one of Boeing’s latest models, with a technical problem being the reason for the crash. We need the speed and convenience of air travel, for a reasonably priced ticket, but we also want aircraft builders and airlines to keep air travel as safe as possible. Are they doing that?

In the research paper“Safe or Profitable? The Pursuit of Conflicting Goals” that will be published in Organization Science, Vibha Gaba and I looked at that question. We knew that aircraft models build up different safety records through their years of operation because some models never (or hardly ever) crash, while others have more crashes. Airlines have this information, but do they act on it? It is expensive to sell an aircraft when it turns out that its model is doing less well in the air than other models, and tempting to hold on to it because the differences are small. Even models that have twice the usual crash rate are safe to fly, nearly all the time.

We found that airlines treat safety as a goal, and act on this goal. They buy and sell more aircraft when their fleet safety is lower than the average airline, and these transactions improve the fleet safety. The simple rule is “out with the bad, in with the good,” and if your fleet is good to begin with, hold on to your airplanes.  This is good news, but there are two complications in this picture.

The first complication is profit. Airlines also would like to be profitable, and these aircraft transactions cost money. Will the less profitable airlines hold on to their less safe models in order to save money? Actually the opposite is true – unprofitable airlines are particularly concerned with fleet safety, while profitable ones pay less attention to it. This sounds like a paradox but is easy to explain. An aircraft crash and loss of lives is very costly for an airline. A profitable airline can handle this cost without going out of business, but it could be fatal for an airline that is already. Aircraft safety is about survival for airlines too, at least some of them.

The second complication is the buyer. It is easy to buy safe aircraft, because both the aircraft maker and some airlines will be happy to sell. But how to sell aircraft models that everyone knows are less safe? Here we need to confess that our data are from airlines in the more developed parts of the world, not from the whole world. It is well known that less safe aircraft models and older airplanes are found in many developing nations. Some are also rebuilt and used as freighter aircraft.

So what can we learn from this? The most important lesson is that safety is maintained because firms view it as a goal and act to maintain it, at least up to the same level as other firms. They treat safety as a goal because society keeps on eye on safety and reports on unsafe events like accidents – so the media and our own choices in response keep the airlines, and other companies, focused on safety. The second lesson is that profits are important, but not in the way you might think. Profit gives safety for the firm, but that safety does not translate into safety for its customer. On the contrary, it is the unsafe firm that is compelled to provide safety to its customers. Those are important lessons in management, and they will also make me think more carefully about the choices I make as a consumer.

Gaba,Vibha and Henrich R. Greve. 2018. Safe or Profitable? The Pursuit of Conflicting Goals. Organization Science,forthcoming.

For those interested in the technicalities of the 737 MAX 8 crash, here are some details (which may change as the investigation continues). The 737 is a small airplane with wings mounted low, so as larger engines became popular for their greater fuel efficiency, engine placement has been a problem. There simply isn’t much room between the engine and the ground, so the engine is mounted more forward than is conventional. With the MAX model, an additional problem is that an increase in thrust from the engine can push the nose too high because the engine is low relative to the rest of the plane. A too high nose can cause a stall, which means that the wings no longer lift and the aircraft goes into freefall. To prevent this, the MAX model has an automatic stall prevention software, which makes adjustments to push the nose down when it rises too high. This system works even when the pilot tries to lift the nose. The system relies on an accurate reading of how high the nose is (angle of attack), and if the sensor measuring the angle of attack is incorrect, the system can incorrectly push the nose down. If that happens, the pilot needs to turn the stall prevention system off and fly without it. The system is designed to override the pilot, so it is not possible to pilot against it. Currently the Lion Air flight crew are suspected of failing to turn the system off, and Boeing is suspected of failing to teach crews how to turn the system off. The Ethiopia Flight crew did turn the system off and tried to fly manually as they were supposed to, but the manual controls are extremely difficult to use during takeoff because the airflow pushes against the horizontal tail. 

Nascent Market Firms as Children: Business Model Innovation through Parallel Play

Imagine that you are on the founding team of a firm in a nascent industry. Great, isn’t it? No big and established competitors who have all the assets and customers . . . full freedom to design a business model from scratch and shape the industry in your favor. But wait, it is also an awful situation. There are potential customers around, but no one knows yet what they want. There are no examples to learn from. A ton of other firms will also try to shape the nascent industry, and their founding teams are just as smart as yours is. What are you supposed to do to win this race to reach a workable business model?

This is the question that Rory McDonald and Kathleen M.Eisenhardt answer in a new article in Administrative Science Quarterly. They look at the nascent (in 2007) industry of social investing, which was envisioned as a way to help individuals and firms invest independently or follow other investors, and to do so by sharing information about choices made and returns earned. In a way, social investing can be seen as an online game in which it is possible to participate and also see what other individuals (well, their avatars) are experiencing. Except that in this online game, the objective is to invest successfully.

So what did they find? The evidence showed that there was an interesting parallel to the development of young children, who face problems similar to those firms face in a nascent industry. After all, children are also learning to handle a new and uncertain environment. They have not been in the world for long, and they don’t have many examples to learn from given that most people around them are a lot bigger and preoccupied with different things. Children solve this problem through parallel play – being next to each other but playing alone, though occasionally looking at what the other kids are doing in order to pick up ideas.

The most successful firms also engaged in parallel play. They were focused on their own business model development, mostly ignoring what other newcomers were doing, except that they would occasionally pick up good ideas from other firms and copy those ideas if they fit the strategy they had developed independently. Naturally these ideas were not about how to design the business plan but rather about how to execute parts of it, such as copying a good user interface or background process. The benefit of parallel play for firms is the same as for children – the self-focus lets them develop their own approach, and the occasional borrowing of ideas gives efficiency, which in turn gives more time to develop their own approach.

There was one more similarity between successful firms and children – their ambition. The successful social investing firms were looking at other, more established forms of asset management as their competitors rather than at their peer social investment firms. Children benefit from doing something similar – copying ideas from kids who are already doing something well. After all (even though parents sometimes find it hard to believe based on what they see their children do), most kids really do want to grow up, learn, and be successful – just like firms in a nascent industry.

McDonald, R. M., and K. M. Eisenhardt
"Parallel Play: Startups, Nascent Markets, and Effective Business-model Design." Administrative Science Quarterly, forthcoming.

Help Mom! Dad is Still Trying to Run the Business!

Does the title ring a bell? One of the oldest problems in business is when and how to accomplish succession and transfer control of the family business to the next generation. The only natural succession point is at the death of the previous generation, and the problems of that timing are obvious to those who study history and see the parallel between early-history kingdoms and family businesses. So we can agree that the next generation should take over while the older generation is still alive, but this leaves the question of how quickly the decision-making power should be transferred. After all, it is true that the older generation is both more experienced and less in touch with current affairs. What to do?

In a recent paper in Administrative Science Quarterly, Jian Bai Li and Henning Piezunka looked at this transition from father to son (their data had few women in charge) as one of handling succession in a multiplex network tie. A network tie is any social connection between two people, and a multiplex tie is one that spans different social arenas. I have a multiplex tie with my boxing trainer who seeks my advice on his entrepreneurial venture. A father–son pair involved in the same business has a multiplex tie because, well, they are father and son.

For a father to hire his son in the family business is unproblematic because the father has higher rank in both the family and the business. For a son to succeed his father in leading a family business is problematic for the same reason – the lower-rank family position of the son now is coupled with a higher-rank business position as top manager, unless the father leaves the business entirely. I think we understand that leaving the business completely is difficult, especially for a founder, and being managed by a son is not any easier. Of course the father, being a father, can make sure that the son bears most of the cost of the complications this entails, because he can draw on his authority in the family sphere whenever necessary.

As the title suggested, this leaves a role for the mother. The research showed that she could very effectively handle the transition by barring work discussions from the family context and advising the father and son separately on how to handle each other. But this required that she not work at the firm, because any role she had in the firm would complicate relations and make her a participant rather than an advisor. In network terms, the mother could help the succession only if she was involved in only one of the multiplex ties between father and son. When she was involved in the firm as well as the family, succession failed. Indeed, I am personally familiar with a succession process that failed exactly because the mother was also involved in the business, so to me this rings true.

This research was done in China, but I think those who know family business succession elsewhere will know the problem of succession well. Because this way of solving the problem is based on sound network theory principles, it is likely to help family business succession everywhere, including in contexts in which the mother is the founder, more than one sibling might be involved in succession, and the neutral advisor may or may not be a family member. Succession is never easy, but being aware of the multiplex network roles of those involved and using them to better advantage could make it less painful.

Li J.B., Piezunka H. 2019. The Uniplex Third: Enabling Single-domain Role Transitions in Multiplex Relationships. Administrative Science Quarterly, forthcoming.

How Revolutionaries and Discoverers Act in an Emerging Industry

In the age of discovery, Europeans set sail to explore and conquer a world that was then filled with uncertainty and potential. The leaders of expeditions each acted very differently, generally as a result of their own inclinations, and these days we often classify them as revolutionaries and discoverers. The revolutionaries wanted to change the world and capture parts of it to be exploited by themselves and for the Crown. They were relentless and focused, much like Hernán Cortés who overthrew the Aztec empire. He beached and later burned his ships to commit everyone to his venture, and he disobeyed his own governor’s order to halt the expedition. Cortés was a driven man who overthrew an empire and helped create another.

The discoverers wanted to understand the world, like Captain Cook whose many expeditions included one that circled the globe near Antarktis to discover (but eventually disprove) the giant continent Terra Australis. Along the way he mapped the actual continent Australia and many other places he found, returning to great fame and adulation for his flexible and decisive planning and excellent maps. He was unwilling to stay home, however, and embarked on one more expedition that ended in his death. Captain Cook was a driven man who helped an empire understand the world better.

In an article in Administrative Science Quarterly, Tiona Zuzul and Mary Tripsas analyzed four new firms in the emerging industry of airtaxis and found that two of the firms were led by revolutionaries and two by discoverers. The revolutionaries wanted to use the formation of a new air taxi service to change the world. The discovers wanted to explore what new demand the new service could capture. Although these were pioneering firms in the same industry, they acted very differently because of their founders. The difference speaks to an old debate in organization theory: which firms are able to change their strategies, and which firms are too inert to do so even when facing threats to their existence?

Usually new firms are thought to be flexible, and especially firms in emerging industries, because they face environments with so much uncertainty that strategies may need to be torn up and replaced regularly as new information becomes available. But that’s not how revolutionaries think and act. The two firms founded by revolutionaries in this study kept their strategies with minor adjustments and even made strategic changes that deepened their commitment to the existing strategy. They maintained the differences from jet charters that in their minds defined the new industry. They stayed committed to their innovative optimization software, selection of airports, and selection of aircraft. They communicated their strategy so clearly and consistently that potential customers also saw them as committed. And both companies failed quickly.

Discoverers think and act differently. The two companies they founded kept changing their strategies, in many cases bleeding into some overlap with charter jet business practices and equipment. They did not commit to the initial strategy at any time. Their communications were never clear enough to fully define to potential customers what exactly they were doing and not doing. Their actions broke rules for strategy (be clear and consistent) and marketing (communicate who you are) but kept them flexible enough to take advantage of new opportunities and pull back from threats. So far only one of them has failed, and it did so after operating longer than either firm led by a revolutionary.

So, will firms led by the modern equivalent of Captain Cook always win? Let’s not conclude that. Clearly, they are more flexible than those led by Cortés, but flexibility also has costs. Inertia is excellent if the first idea is by chance correct. I would usually place my bets on the discoverer, but I also know that Cortés lived long and Captain Cook was killed.

Zuzul, T. and M. Tripsas. 2019. Start-up inertia versus flexibility: The role of founder identity in a nascent industry. Administrative Science Quarterly, forthcoming.

Multicultural Individuals and Organizational Innovation: More is Better

I have a son who is proudly multicultural, with a geographical range that covers three continents and a skill range that goes from playing violin to programming for parallel processing, with some things in between. He mainly thinks of that range as useful for him personally, but now there is research suggesting that organizations should also be interested. The reason relates to an old dilemma about the costs and benefits of diversity.

A research paper by Matthew Corritore, Amir Goldberg, and Sameer B. Srivastava in Administrative Science Quarterly explains the dilemma well and gives new evidence. The dilemma is that diversity is both good and bad. It is good because diversity means there is a wide range of ways of looking at a problem and thinking of solutions, and combining these can fuel creative solutions that are better than what any individual skill set would produce. It is bad because diversity makes communication harder as a result of fewer shared assumptions and skills, and it generates less agreement on how to describe solutions. This good-and-bad combination has made it very hard for managers to best make use of the diversity available.

Corritore, Goldberg, and Srivastava found out that diversity has very different effects depending on whether it is found between people or within people. A multicultural organization or team in which each member has one cultural value each is exactly where the good-and-bad dilemma happens. It cannot be fully creative, and it will be less efficient than a monocultural organization or team. In fact, interpersonal diversity in organizations predicts lower profitability. But if the multicultural organization or team has members with more than one cultural value each, the result is different. Now the potential creativity can be fully realized, so firms with such people will make more innovations and experience greater economic growth.

The findings are neat. They confirm that the dilemma experienced by managers and measured by researchers is real. Diversity is good and bad at the same time, and it may be best when it is intrapersonal. This gives a solution to the managers trying to hire for creativity, because they can now see that hiring people who are different from one another is too simple a solution. Intrapersonal flexibility should also become a target of hiring, such as the diversity that can be gained from varied backgrounds and experiences.

Of course, the solution has a few problems attached to it. First, people who are truly multicultural are scarce, so hiring for that characteristic will be difficult. I can imagine that my son would be pleased about that problem of becoming a valued scarce resource, but firms looking for his type will not. Second, it can be difficult to even recognize who is multicultural. Researchers can do it through analyzing their writing, as in this research paper, but firms don’t have access to such tools.

Going by simple indicators is not enough, as I know from living in Singapore. Many foreigners from Australia, Europe, and America are introduced to Asia through spending time in Singapore, but they can be divided into those who live the expat life with little local contact and those who learn the culture more deeply. Multiculturalism is in the mind, and so is the willingness to obtain it.

Corritore, M., A. Goldberg, and S. B. Srivastava. 2019. Duality in diversity: How intrapersonal and interpersonal cultural heterogeneity relate to firm performance. Administrative Science Quarterly,forthcoming.

Hire the Second Best! When the Expert Looks Suspicious

It is said that one of the distinctive features of the Trump White House is the low levels of expertise of its staff, including some who are not relatives or in-laws of the president. The reason is that an overriding concern in hiring is loyalty and commitment to the president (the person) rather than the presidency, which rules out the most capable individuals who could have served holding job titles like Chief, Director, Deputy, Assistant, and Special Assistant. Of course, this focus on loyalty and commitment above all is an anomaly of the current White House… or is it?

A recent article in Administrative Science Quarterly by Roman Galperin, Oliver Hahl, Adina Sterling, and Jerry Guo has looked at how professional hiring managers select candidates and found that they typically prefer moderately high-capability applicants over extremely high-capability candidates. Why is that? When a job applicant has extremely high capability, the hiring managers question (without evidence) whether this person will be committed to the organization and motivated to work for it.

Notice what an odd kind of discrimination this is. For most kinds of employment discrimination that we know about, the people discriminated against are often different demographically than the hiring manager (so, not white, or not male), and the hiring manager can draw on cultural stereotypes to question their work capabilities. In this research, gender and racial stereotypes are not in play, and the hiring managers are fully aware that they are choosing the less-capable candidate. The problem is that they are comparing the applicants against an ideal-type hire who is good at exactly the job hired for and who will enjoy the job and stay with the organization for a long time. They are trying to predict the applicant’s future behaviors and worry that the most capable applicant sees the job as just a stepping stone to something better.

So, what can the extremely capable candidate do to get hired? One thing is to signal their commitment. The researchers were able to show that applicants with any kind of commitment signal would be more likely to be hired if they had extremely high capability than if they had moderately high capability.  For example, applicants can pay more attention to the organization’s mission than to the pay package or can tell the hiring manager that they have declined offers from other organizations. The only problem is that this is just talk, and it is not clear that actual applicants can persuade hiring managers of their organizational commitment as well as this research team could. If a hiring manager dismisses the signals of commitment as empty talk, the extremely capable candidate would again be less likely to be hired than someone less capable.

When we do research on how organizations make hiring decisions, we often encounter disappointments. The world is far from as meritocratic as we think it should be. The process documented by this research looks a lot like hiring contaminated by envy of the best candidates, and who knows, envy could be exactly what starts speculation that an extremely capable candidate isn’t good enough for the job and the organization. In any case, it is strange to see research showing that extreme capabilities can be a liability for job applicants, and it’s a reason to worry about how organizations function.

Galperin, R.V.,  O. Hahl, A. D. Sterling, and J. Guo.2019. Too Good to Hire? Capability and Inferences about Commitment in Labor Markets. Administrative Science Quarterly, published online ahead of print.

Women’s Entrepreneurship: One More Form of Disadvantage

How easy is it to start a new venture? The graph shows how people answer this question across many European countries. To the right, there is a surprise for those who listen to Fox News, because the Scandinavian countries (all of them supposedly socialist and anti-business) are where people believe businesses are easiest to start. From left to right, there is a big non-surprise for those who study entrepreneurship, because in all nations shown here, men consider it easier to start ventures than women do. Indeed, the graph is disappointing for those who think that Scandinavian gender equality extends to entrepreneurship, because it clearly does not. More on that in a moment, because this finding makes more sense after looking at some recent research.

The graph is from a recent article in Administrative Science Quarterly by Vartuhi Tonoyan, Robert Strohmeyer, and Jennifer E. Jennings, who have investigated the source of gender differences in the ease of entrepreneurship. Their idea is simple and powerful: because entrepreneurship starts with experience in the labor force, different treatment of men and women in the workplace is the origin of their different sense of how easy it is to form a venture, and also of their success in forming and growing new ventures.

We know from research on the labor market that the following are true: 1) women are less likely to be promoted into management positions, 2) women are concentrated in certain occupations with less pay and independence than typically male occupations, and 3) women are concentrated in certain industries that are less connected to the market economy than typically male industries. These patterns hold across levels of worker education and job prestige. The plumbing contractor is more likely to be male. The municipal administrator (especially at the bottom level) is more likely to be female.

These labor market patterns form beliefs about entrepreneurship because our experiences at work help prepare us for entrepreneurship—or don’t. There is a distinction between a manager and an entrepreneur, but the distinction is smaller than that between a low-level worker and an entrepreneur. Managers (many of them, at least) and entrepreneurs obtain and allocate resources, formulate goals and pursue them, hire employees, define their roles, and evaluate their work. Having experience as a manager gives people confidence in their ability to start a venture, as well as a useful comparison point: management can be just as stressful and time-consuming as entrepreneurship but in support of someone else’s venture, not your own.

Stereotypes about what women can and should do have held them back from such management roles, as well as from certain parts of the labor market. Many women have been directed into typically female roles – caring and serving roles – and positions supervised by others, usually men. This has led to a list of occupations and jobs in which workers accumulate less experience relevant to entrepreneurship. For example, even though restaurants are famously easy ventures to found (and usually quick to fail), I have met only one restaurant owner who started as a waiter, and he was a man. And women are heavily weighted in certain industries, like public administration, which are remote from the markets in which entrepreneurs form new ventures.

So it is hard for women to escape discrimination in the workplace by pursuing entrepreneurship. They are found in exactly those roles and workplaces with the hardest paths to entrepreneurship, so they are disadvantaged in both games. No wonder women have to do more than men to succeed.

Oh, and the Scandinavian gender equality I mentioned at the start? Scandinavian nations are relatively good at avoiding underpayment in stereotypically female industries like public administration, and in stereotypically female occupations too. But that does not mean that people think differently in those nations than they do elsewhere in Europe. So in the absence of strong economic reasons to go against the flow, men and women have done more gender sorting in the Scandinavian labor market than in many other nations. As one would expect, the result is that Scandinavian women find it much harder to start a venture than men do, though still easier than a man in France or Germany.

Tonoyan, V., R. Strohmeyer, and J. E. Jennings

2019 "Gender Gapsin Perceived Start-up Ease: Implications of Sex-based Labor Market Segregationfor Entrepreneurship across 22 European Countries." Administrative Science Quarterly, forthcoming.