iSpy Denial: Why Firms Need to Do the Right Thing

The news on the activities of National Security Agency (NSA) include a story that has been overlooked by many: there is a leaked document about a piece of spyware software called "DROPOUTJEEP", which makes an iPhone reveal significant information about its owner, including details such as files stored, messages sent and received, phone calls, and location. Apple has issued a denial that it collaborated with NSA to make this program. The denial is interesting because the document says nothing about a role of Apple in creating this software, and the NSA is perfectly capable of making spy software without help from the maker of a device. In user forums there have indeed been allegations that Apple is involved, but such allegations typically happen and don’t have much weight if there is no supporting evidence.

So why does Apple care? We could take a hint from the reactions of other technology companies to information on NSA activities to monitor their users. Google, Facebook, and Yahoo have issued angry responses to reports that NSA were listening in on their user’s communications by doing the Internet equivalent of a wiretap. Google went a step further by using encryption so that NSA would be left with a decryption task if it was able to continue wiretapping Google’s communications. That is a hard slap, because listening in on the internet is fairly easy, but decrypting digital communications takes a lot of time and computing power.

Apple, Google and other firms are not against national security. They do, however, dislike any technologies that will let the government monitor their users without legal backing. And because their managers are practical with respect to what they like and dislike, we can conclude that they are well aware that their users dislike such monitoring too. We know that customers can react by backing off from transactions with firms that do things they are against. That finding was in a paper by Stefan Jonsson, Takako Fujiwara-Greve, and myself on how a scandal involving favoritism in an insurance company led to withdrawals from mutual funds that customers saw a similar to insurance.

But now there is new research on others who have opinions on what firms do, and can react to it. Amandine Ody-Brasier and Freek Vermeulen published a paper in Administrative Science Quarterly looking at the pricing of grapes to Champagne producers. One would think that grapes had a single price, or at least one that was only determined by quality, but in fact there is substantial variation in the pricing. And here is the interesting finding: Champagne producers who were doing (or suspected of doing) things that the grape makers disliked, such as having a non-French subsidiary or making Champagne under a store brand, were secretly punished by having to pay more for their grapes.

So firms that are concerned with keeping a distance between themselves and any rumors of misconduct and scandal are doing the right thing. Not only is misconduct an embarrassment, it can also be punished on both sides, by suppliers and customers. Walking the straight and narrow path seems to be the way to get to profitability.

                                             

Jonsson, Stefan, Henrich R. Greve, andTakako Fujiwara-Greve. 2009. "Undeserved loss: The spread of legitimacyloss to innocent organizations in response to reported deviance." AdministrativeScience Quarterly 56(June):195-228.

Ody-Brasier, Amandine, and Freek Vermeulen. 2014. "The Price You Pay: Price-setting as a Response to Norm Violations in the Market for Champagne Grapes." Administrative Science Quarterly 59(1):109-44.

Wakabayashi, D. 2013. Apple Denies Working With NSA on iPhone Backdoor. Wall Street Journal, 31.12.2013.

Will a UK firm ally with a US firm or a French firm? National strife and firm alliances

Pakistan has India and Afghanistan as neighbors, and there is shared ethnicity and language across the borders. Still, it is not clear to us that a firm in Pakistan will choose an Indian or Pakistani firm as an alliance partner. UK is much closer to France than to the US, but we think of a special relation between UK and US that goes beyond the shared language. Would it surprise us to see UK firms ally more with US than French partners?

Let’s not explain our intuitions on these  nation pairs through some soft culture concept. We know that there have been threats of wars and actual wars between the less likely pairs of nations in these examples. Well, there was also a war between the UK and US also a while ago, but it is nothing compared to the UK-France relation. In fact, it is possible to link nations through their ties of animosity, as in the figure below.

The figure is part of a research paper published in Academy of Management Journal by Ilgaz Arikan and Oded Shenkar, who examined the effect of nation animosity on firm alliances. Their idea was that national animosity would affect the climate of trust such that firms would prefer some partner nations over others even if the animosity was more a traditional residue than an actual threat. After all, invasion threats between UK and France have not been issued for a while.  

So what can make alliances possible between two nations that historically have been in strife, but now are not and have firms that need each other? The question is a real dilemma because firms can suffer if their alliances choices are driven by history more than by economic value. Well, there are some conditions that help nations become more attractive, even if they have been in strife. The conditions are not entirely nice, but they do help. Basically, the potential partner nation looks more attractive if it is generally hostile to other nations, rather than singling out the nation of the firm. It also looks more attractive if there is a lot of variation in how it treats other nations. Under both of these conditions, the deepest kind of alliances involving equity are likely to happen.

So, the worst situation is when the firms that your firm needs most are in a nation that is peaceful to all other nations than your own. In business, it is best to stay away from sworn enemies, including sworn political enemies. It is just one more detail to consider in the craft of putting together an effective portfolio of alliances, and one that is so new that we did not even consider in our book on Network Advantage.

 

Arikan, I., & Shenkar, O. 2013. National animosity and cross-border alliances. Academy of Management Journal, 56(6): 1516-1544.
 Greve, H., T. Rowley, and A. Shipilov. Network Advantage: How to Unlock Value from Your Alliances and Partnerships. Jossey-Bass.

Tell Your Boss about the Problem, If You Have One

Sometimes management practice and research results are so far apart that it is worth giving a warning. Let me give an example. It has long been accepted in research that giving voice is useful for improving organizations. Employees who tell others about problems and suggest solutions can increase learning and effectiveness, even though doing so does not always earn them popularity. We also know more because recent research by James Detert and coauthors published in Administrative Science Quarterly has shown a more concrete and detailed version of this relation. It helps to have employees give voice to managers, both in their own unit and in other units. It actually hurts performance to have workers give voice to each other, presumably because other workers can only listen (and possibly be annoyed), but lack the authority to make major changes.

The prescription is clear. Make sure that managers make it safe for their workers to speak up, and that they actually pay attention to what is said. Channel complaints up, not sideways in the organization. But here is where management practice creates problems. One is the old problem of managers not wanting to hear how their unit can improve, because it suggests that they are not doing well enough (duh. . .). The other is a new one seen especially in small high-tech firms. As Rachel Silverman has noted in Wall Street Journal, some high-tech firms believe that management should be kept out of the firm as much as possible, and are reluctant to assign management roles to any employees.

How does that work? Well, they divide tasks and emphasize independence and sideways coordination. They are happy about that change because it means that their founders can say things like “I want people here who are doing the work, not managing the work.” But the problem is clear when you compare with the research. No manager means that there is no place up for the voice to go. Sideways coordination means that voice has to go sideways. They are actually organized in the worst possible way from the viewpoint of using employee voice to improve the organization.

Have the tech firms discovered some special magic that makes a manager-less organization work for them even though it hurts productivity elsewhere? Probably not; Rachel Silverman cites research showing that middle managers are the most important people for determining success in the gaming industry, which typically has small companies or small teams. So, it is time for the myth of effectiveness without management to face reality.

Detert, James R., Ethan R. Burris, David A. Harrison, andSean R. Martin. 2013. "Voice Flows to and around Leaders: Understanding When Units Are Helped or Hurt by Employee Voice." Administrative Science Quarterly 58(4):624-68.

Silverman, R. E. 2013. Some Tech Firms Ask: Who Needs Managers? Wall Street Journal, Aug.6 2013.

How do Firms Hire in Recessions? Ideologically.

The latest Jobs Report from the US confused many because it showed fewer hires by firms than one would expect given all the positive news from the economy lately. Lately there has been expansion in manufacturing, growth in economic activity overall, and increased exports from the US, showing clear signs that the US economy is doing better than before. One would think that firms would hire under such conditions, especially to increase production, but the jobs report contradicts that idea. What is going on here? First, to be technical, manufacturing has become a pretty small part of the economy, and General Motors producing more trucks doesn’t mean that Starbucks will hire more people. In fact, it may not even mean that GM hires more people, because manufacturing firms can choose between investments and hiring as ways of increasing production.

But the technical question is not the interesting part; what should interest us is what firms will actually decide to do. How are managers thinking about the economy, and their own response to it? There is a fair amount of research on this, and a recent paper in American Journal of Sociology by Todd Schifeling adds more knowledge. Two clear answers emerge. First, what managers are thinking about the economy and their own response is partly driven by what others do. Firms imitated each other in their choices of how many to hire during recessions, something they don’t do when the economy is doing well. The usual explanation for imitation is uncertainty, and it makes sense that a troubled economy is more uncertain than a healthy one. On the other hand, those who think that managers apply creativity to solve the problems presented by a recession are probably disappointed to see this. Recessions are anti-creativity events.

But another effect was equally interesting. During the 1950s and 1960s recessions that he studied, business leaders were affiliated with two organizations with opposing views on what firms should do during recessions. Committee for Economic Development (CED) saw hiring by firms as a way to fight against recessions, but National Association of Manufacturers (NAM) favored adapting to the recession through reduced hiring. These responses were connected to political ideology, with the CED view seeing firms as important economic problem-solvers while the NAM view saw firms as needing to wait for someone else to fix things. And as it turned out, one could tell what a firm would do by which of these organizations their leadership was affiliated with, with CED-affiliated firms hiring more than NAM-affiliated firms. Then as now, the response to recessions was a political issue, but the discussion was not just what the state should do, but also what firms should do.

What does this mean for firms and the economy now? Well, we know that the economy can recover from a recession by actions from the state, from firms, or from consumers. Or maybe through some sort of sheer luck. Many think that the state should do nothing, but these days firms also do nothing and consumers have learnt not to spend more when the economy is doing poorly. That leaves luck. The CED style of adapting to recessions is rare now, but to scholars who are interested in strategy rather than economics it actually looks pretty interesting. If a firm can afford to maintain and even strengthen its employment during a recession, will it or the contracting firms be stronger when the economy starts recovering again? It depends on whether you think money saved from not hiring is the key source of strength, or whether innovation and production is more important. It would be interesting to see whether the expanding CED firms or the contracting NAM firms did better when the economy recovered.

Cronin, B. and J. House. 2014. “Hiring Slowdown Blurs Growth View.” Wall Street Journal, January 10, 2014.

Schifeling, T. 2013. Defense against Recession: U.S.Business Mobilization, 1950–1970. American Journal of Sociology, 119, 1 (July),pp. 1-34.

Is Networking Good for Business? Yes, But Not Always How You Expect

There is no shortage of advice for entrepreneurs, managers, and executives on what they should be doing in order to succeed in business. Some of the advice comes from people who really should be careful about giving advice because they haven't actually succeeded in business—they are just good writers. Other advice comes from people who really should be careful about giving advice because they have succeeded in business once—and who knows what role luck had in that. No wonder, then, that many entrepreneurs, managers, and executives who read business-advice in books and columns do so as a form of entertainment, and then proceed to ignore the whole thing.

But wouldn't it be great if some of the advice actually was backed by evidence? Especially if the advice were urging changes in key behaviors from individuals and businesses with the promise of superior effectiveness? Consider networking, an activity heavily promoted by business gurus and that one takes up a lot of your time, most likely. Yes, the meeting and greeting, exchanging cards, memorizing names, faces, hobbies, and spouses, and so on. It's a part of the daily life of management. You act as if networking is really important, especially if you are an entrepreneur building a new business or a new corporate unit. But just how valuable is it? Is it really that important to "never eat lunch alone"?

Let's look at the problem from the angle of an individual first, and then from that of a business. We think we know a lot about how networks help individuals succeed. We have been taught the adage that "You never know who might be able to help you somewhere down the line." But, when you look more closely, it is not just how many people are in your network, but how they are connected to you and to one another that really matters. "It depends" is not a terribly exciting answer in itself, so let me give you just one example of how it depends. People have two styles of network building. One is network broadening, which means gaining more contacts and establishing rapport with each of them. The other is network deepening, which means maintaining and strengthening relations with your existing contacts. We often assume that network broadening is better, and plenty of guru-authors will affirm this. And in fact, this is true for entrepreneurs who are building businesses, because network broadening helps them initiate more business exchanges (suppliers and customers). Score one for conventional wisdom. But two words of caution are needed. The first is that these are personal styles, and people are often less effective if they apply a different personal style than they are comfortable with. The second is that we don't know enough about networking styles yet, and we may yet discover situations that are actually better served by network deepening.

We also recognize that networks help firms succeed. And the dynamic plays out in close similarity to individuals. Your business likely adheres to one of the following two network structures. Some firms have networks that reach many other firms, and these firms are in turn not well connected to one another, like a hub and spoke. Other companies have networks that reach fewer firms, and these firms are well connected to one another—the network is integrated. Both types of networks are effective, but under different conditions. Do you experience frequent turbulence, and do you need frequent innovation? Pick the hub and spoke: It will give you options and facilitate experimenting with different solutions under different circumstances. Do you experience stability (not all industries are turbulent!), and do you rely on good execution for success? Pick the integrated network. It will give you efficiency, reliability, and stability.

Like many forms of business advice, "go network" is generally sound. But, like many forms of business advice, it is too often presented generically, as if there is a "one size fits all" answer. And that is often the conclusion we discover when we let evidence influence management advice. Thinking deeply and consulting multiple sources of input can be less entertaining and more challenging than some of the books you could read, but it's a better option if you want to do something that works.

(This blog post was previously published in Strategy+Business) 


Further Reading
Henrich Greve, Timothy Rowley, and Andrew Shipilov. Network Advantage: How to Unlock Value from your Alliances and Partnerships. 2013: Jossey-Bass.
Timothy J. Rowley, Dean Behrens, and David Krackhardt, “Redundant Governance Structures: An Analysis of Structural and Relational Embeddedness in the Steel and Semiconductor Industries,” Strategic Management Journal, March 2000, vol. 21, no. 3,  369–86: On interfirm network types.
Balagopal Vissa, “Agency in Action: Entrepreneurs’ Networking Style and Initiation of Economic Exchange,” Organization Science, March/April 2012, vol. 23, no. 2, 492–510: On interpersonal network styles.

Merck & Co: Can the World’s Top R&D Lab Improve by Doing Less?

The pharmaceutical firm Merck & Co. has a famous research and development (R&D) unit with successes that includes first-ever vaccines and cholesterol control drugs, all developed fully in-house from discovery to final development and approval. But the fame is fading these days, because their last successes were drugs approved in 2006, which means that they have had a long dry run and will soon be holding a portfolio of drugs with fewer and fewer patents. That means more competition and lower profits.

Their solution is to do less research. They will sell many of the drug development projects they are doing, reduce the size of their R&D unit, and instead create a set of innovation hubs that are intended to look out for research done by others. These hubs are rumored to be planned for Boston, the San Francisco Bay area, London, and Shanghai. This probably seems like a strange idea. Can a firm improve its research record by doing less research? Is a hub that plans to look for research done by others really an innovation hub, and not an imitation hub? What exactly is going on here?

The explanation is that Merck is finally starting to do what other pharmaceutical firms are doing. The pharmaceutical industry has increasingly lost its advantage in doing research relative to biotechnology firms and universities, and now it is common for pharmaceutical firms to look out for promising research done nearby, with an eye to create an alliance with the biotech firm or get a license for its product once it looks promising. Such arrangements are useful for two purposes. The first purpose is to do the research in an economical place. Biotech firms have two advantages over pharmaceutical firms in doing research. One is that they do it very well; the other is that they either succeed or go broke, which means that the cost of failures is borne by their founders and investors, not by any pharmaceutical firm.

The second purpose is to grab research results from firms that usually cannot commercialize them. There are very few biotech firms that have the capabilities and resources needed to get a new drug approved for use, but pharmaceutical firms are experts in doing that. This means that the biotech firms can't get the full value out of their research, they need to sell it at a "discount." That discount, of course, becomes profits for the pharmaceutical firms.

Researchers have followed this change to innovation and commercialization through a network of firms for a while, with the best-known articles involving Walter Powell and collaborators. The advantages of this system were pretty established in 1996, so Merck is a few years behind the curve in changing to it. The advantages of combining proximity to firms that do research with a central position in alliances is something that was documented in research by Whittington, Owen-Smith, and Powell, and it suggests that Merck not only needs to be in the right place, it also needs to have the right connections – the right alliances.

Getting the right portfolio of alliances actually takes longer to do than building an innovation center, so there is no guarantee that Merck's new strategy will work soon enough for them. And if it took them many years to start following what researchers and other firms saw as the good way to locate research centers, it is hard to tell when they will start following advice on how to build alliances. I know where they could get it, though, having recently finished writing a book with Tim Rowley and Andrew Shipilov on how to get a Network Advantage through alliances.

Greve, Henrich R., Timothy J. Rowley, and Andrew V.Shipilov. 2014. Network Advantage: How to Unlock Value from your Alliances and Partnerships. San Francisco: Jossey-Bass.

Loftus, Peter and Rockoff, Jonathan D. 2013. Merck Plans Radical Overhaul of Drug R&D Unit. Wall Street Journal, Dec. 27 2013.

Whittington, Kjersten Bunker, Jason Owen-Smith, and Walter W. Powell. 2009. "Networks, Propinquity, and Innovation in Knowledge-intensive Industries." Administrative Science Quarterly54(1):90-122.