Posts filed under ‘Strategic Management’
Public Entrepreneurship
| Peter Klein |
A surprising aspect of the recent growth in the entrepreneurship literature is the number of papers, projects, courses, centers, etc. studying entrepreneurship in non-market settings: “social entrepreneurship,” “cultural entrepreneurship,” “environmental entrepreneurship,” and so on. At my own university students can take entrepreneurship courses not only in the Colleges of Business or Engineering but in the College of Agriculture, the School of Natural Resources, the College of Journalism, and even the School of Social Work. (One of my colleagues organized a conference last year aimed at cattle ranchers seeking to market their, um, byproducts as fertilizer, with the classic title: “Manure Entrepreneurship: Turning Brown into Green.”
Translating concepts, theories, and research methods from the entrepreneurship literature to non-market settings raises challenging issue, however. How is entrepreneurship defined? What corresponds to entrepreneurial profit and loss? What is the entrepreneur’s objective function? Are there competitive processes that select for the better entrepreneurs? None of the classic writers on entrepreneurship — Cantillon, Say, Schumpeter, Knight, Mises, Kirzner — wrote explicitly on entrepreneurship in non-market settings, as far as I am aware. Mises, in fact, distinguishes sharply between “profit management” (or entrepreneurial management) and “bureaucratic management,” identifying the former with initiative, responsibility, creativity, and novelty and the latter with rule-following within strict guidelines (see Bureaucracy, 1944, and chapter 15, section 10 of Human Action, 1949). (more…)
Management Theory and the Current Crisis
| Peter Klein |
Here is a short piece by Nicolai and me written for a general audience, “Management Theory Is Not to Blame.” We discuss the role of resource heterogeneity in management theory and critique the vulgar Keynesianism that dominates mainstream commentary on the crisis. The graphic with the shovel alone is worth the click. Comments welcome here or at the Mises blog.
Austrian Economics and Strategic Management
| Nicolai Foss |
In terms of direct influence, the impact of Austrian economics (AE) on strategic management is fairly limited (e.g., Jacobson, 1992; Young et al., 1996; Foss et al., 2008). Different kinds of industrial economics, namely the SCP approach, the Chicago-UCLA school, and game theoretical industrial economics, have clearly been stronger influences. However, the points of contact and even overlap between the mainstream of strategic management and AE are many, and AE has the potential to contribute to the further development of the field. (more…)
New McKinsey Videos
| Peter Klein |
Acumen Fund founder and CEO Jacqueline Novogratz shares stories of social-sector entrepreneurship in an excerpt from her new book, The Blue Sweater. A video interview with the author takes you behind the book.
Google’s chief economist says executives in wired organizations need a sharper understanding of how technology empowers innovation.
Tarun Khanna says their common optimistic entrepreneurialism makes them a formidable force.
Top Four Implications for Competitive Advanatage
| Lasse Lien |
I recently blogged my top-three list of consequences of the financial crisis for firm boundaries. Here is my top-four list of consequences for competitive advantage. They are to be read as broad-stroke changes on the margin, and with a ceteris paribus clause.
1. Valuable: Kind of obvious, but cost-based advantages increase in value compared to differentiation-based advantages as prices fall and demand converges on no-frills offerings.
2. Rare: Cost-based advantages will be more contested, as competitors respond to demand changes by de-differentiating (cf. #1).
3. Imitable: Time-consuming imitation processes become less likely, as firms become more impatient and risk averse.
4. Substitutable: Advantages based on branding and product development will become more vulnerable to substitution from advantages based on scale and process development.
Now, who has a list of implications for intra-firm organization and management?
Archived Version of Hitt Presentation on Strategic Management
| Peter Klein |
Here’s an archived version of Mike Hitt’s presentation, “New Theoretical Developments in Strategic Management,” that Mike Sykuta described before. You can also download the slides.
I watched the presentation yesterday and strongly recommend it, particularly the first part, as a good introduction to the resource-based view of the firm and an overview of some of Mike’s recent work on the institutional environment. It was nice of the AEM folks to set this up.
Klein Seminar at NHH
| Lasse Lien |
Monday will be a big day at the Norwegian School of Ecomics and Business Administation. P. G. Klein will give a seminar under the title “Putting Entreprenurship Into Organization and Strategy Research.” Not only will he give a seminar, but we shall have the pleasure of his company from Sunday until Wednesday. If Peter’s blogging frequency goes down early next week it will be because he’s having such a good time here, and if it goes up, it will be because he is so inspired by being here.
Top 3 Boundary Implications
| Lasse Lien |
Top 3 lists are popular, the financial crisis is a hot topic, and this is Organizations and Markets. Combine all three and you get my top 3 list of implications of the financial crisis/recession for firm boundaries:
1. Increased horizontal specialization (de-diversification)
2. Increased vertical specialization
3. Increased concentration (increased size)
Is this roughly right? If not, provide us with your own list.
Pixar’s HR Strategy
| Peter Klein |
Mostly, it’s about hiring ultra-nerds with good communication skills. To wit: You want people who have become exceptional at a tiny discipline, no matter how obscure or dorky, since it’s that compulsion to truly master something that predicts how they’ll handle a new task. (Wannabe Pixar employees: Don’t bury your unicycle or juggling skills on your resume.) Another idea is looking for people who have failed and overcome — as [HR chief Randy] Nelson puts it, “The core skill of innovators is error recovery not failure avoidance,” which is key if you’re asking someone to solve a never-before-solved problem. But perhaps the squishiest trait is the ability to make others around you better, through communication and camaraderie.
From Kottke via Fast Company. See also “How Pixar Fosters Collective Creativity” from last September’s HBR.
The Onion or Reality: Marketing Edition
| Peter Klein |
Check out the 27-page marketing proposal
(6MB PDF) for Pepsi’s recent logo redesign, which references Euclid, Feng Shui, Da Vinci, the Möbius strip, Le Corbusier, perimeter oscillations, the Earth’s magnetic field and gravitational pull, the speed of light, and space-time relativity. I kid you not. (Gawker via Fast Company.)
Remember, this is the proposal Pepsi liked.
An Empirical Test of Williamson’s Adaptation Theory
| Peter Klein |
We’ve noted before, following Bob Gibbons, how Williamson’s transaction-cost approach can be called an adaptation theory of the firm. Vertical integration, in this context, is seen as an efficient means of adjusting a production process to unanticipated changes in market conditions, regulation, or technology.
Most of the empirical TCE literature focuses on the equilibrium rent-seeking version of the story, however (perhaps more influenced by Klein, Crawford, and Alchian’s interpretation). Vertical integration is viewed as an efficient means of mitigating holdup in the presence of asset specificity — and, in equilibrium, holdups don’t occur, so there is nothing to mitigate. Hence the typical TCE empirical paper which compares observed organizational forms to observed transactional characteristics (e.g., the degree of asset specificity). Newer studies attempt to test the relationship between efficient alignment, in the sense above, and long-term performance or survival, but few study the process of adaptation itself. (Exceptions include Mayer and Argyres, 2004 and Argyres and Mayer, 2007.)
Arnaud Costinot, Lindsay Oldenski, and James Rauch have written what I think is the first large-N empirical paper on the adaptation theory, “Adaptation and the Boundary of Multinational Firms.”They construct an occupation-level measure of “routineness” — whether a job involves mainly routine tasks or more creative, problem-solving activities — and show that routineness and vertical integration are negatively correlated. An interesting operationalization of the theory. Abstract:
What determines the boundary of multinational firms? According to Williamson (1975), a potential rationale for vertical integration is to facilitate adaptation in a world where uncertainty is resolved over time. This paper offers the first empirical analysis of the impact of adaptation on the boundary of multinational firms. To do so, we first develop a ranking of sectors in terms of their “routineness” by merging two sets of data: (i) ratings of occupations by their intensities in “problem solving” from the U.S. Department of Labor’s Occupational Information Network; and (ii) U.S. employment shares of occupations by sectors from the Bureau of Labor Statistics Occupational Employment Statistics. Using U.S. Census trade data, we then demonstrate that, in line with adaptation theories of the firm, the share of intrafirm trade tends to be higher in less routine sectors. This result is robust to inclusion of other variables known to influence the U.S. intrafirm import share such as capital intensity, R&D intensity, relationship specificity, intermediation and productivity dispersion. Our most conservative estimate suggests that a one standard deviation decrease in average routineness raises the share of intrafirm imports by 0.26 standard deviations, or an additional 7% of import value that is intrafirm.
Extreme Decentralization at Walmart
| Peter Klein |
A fascinating NY Post story on Walmart by a reporter who went undercover and got hired as an entry-level worker. The story reveals a surprising amount of decentralization for a firm sometimes regarded as some kind of Taylorite dinosaur. (Thanks to Rafe Champion for the pointer.) Excerpt:
Having pledged ourselves, we encountered the aspect of Wal-Mart employment that impressed me most: The Telxon, pronounced “Telzon,” a hand-held bar-code scanner with a wireless connection to the store’s computer. When pointed at any product, the Telxon would reveal astonishing amounts of information: the quantity that should be on the shelf, the availability from the nearest warehouse, the retail price, and (most amazing of all) the markup.
All of us were given access to this information, because — in theory, at least — anyone in the store could order a couple extra pallets of anything, and could discount it heavily as a Volume Producing Item (known as a VPI), competing with other departments to rack up the most profitable sales each month. Floor clerks even had portable equipment to print their own price stickers. This was how Wal-Mart detected demand and responded to it: by distributing decision-making power to grass-roots level. It was as simple yet as radical as that.
We received an inspirational talk on this subject, from an employee who reacted after the store test-marketed tents that could protect cars for people who didn’t have enough garage space. They sold out quickly, and several customers came in asking for more. Clearly this was a singular, exceptional case of word-of-mouth, so he ordered literally a truckload of tent-garages, “Which I shouldn’t have done really without asking someone,” he said with a shrug, “because I hadn’t been working at the store for long.” But the item was a huge success. His VPI was the biggest in store history — and that kind of thing doesn’t go unnoticed in Arkansas.
New Theoretical Developments in Strategic Management
| Mike Sykuta |
“New Theoretical Developments in Strategic Management: Opportunities for Research Contributions” is the topic of an interactive online seminar Thursday, 26 February, 12:00-1:30pm EST. The speaker is Michael Hitt, Distinguished Professor of Management and the Joe B. Foster Chair in Business Leadership and the C.W. and Dorothy Conn Chair in New Ventures at Texas A&M University. During the 90-minute seminar participants will explore theoretical developments in strategic management including the resource-based view, institutional theory, and a new concept of strategic entrepreneurship, and will offer updates on how more established theories such as TCE and agency theory are being applied.
The seminar is sponsored by the Agribusiness Economics & Management (AEM) Section of the Agricultural & Applied Economics Association (AAEA). The AEM Section has sponsored online seminars previously on topics that may be new or less familiar to its members, one of the more valuable contributions any professional society provides. Although many of the “new theoretical developments” described above may not seem quite so new to frequent O&M readers, they are certainly more novel in the context of agribusiness research.
You can register for the conference as an individual or as a host location for as many people as can fit into your local class or conference room. This is an especially good opportunity for graduate students and faculty to learn more about the research opportunities in this area. I expect several of our Missouri colleagues and grad students will be participating. Check out the conference website for information about technical requirements and registration.
Raising Rivals’ Costs
| Peter Klein |
Last spring, Microsoft supported bills in the New York and Connecticut legislatures to impose strict regulations on businesses that gather personal information online for marketing purposes. The bills would hurt Microsoft, too, given that it also wants to sell advertisements based on customer behavior. But the self-inflicted wound may be worth it for the damage it causes Google.
Thanks to Jesse Walker for finding the passage in Wired’s very interesting story on the political economy of digital competition, which is just as nasty as in “old economy” industries. And don’t even get me started on Apple’s threat to go nuclear on Palm.
Attacking Incentive Pay is the “Height of Irresponsibility”
| Peter Klein |
Imagine you’re a salesperson at a company. In order to create an incentive for you to bust your tail, the company negotiates with you a leveraged compensation plan under which you receive a relatively small base salary plus fairly generous commissions on the sales you close. Suppose you do a bang up job one year, but the company as a whole suffers a loss because of some poor decisions beyond your control (or because of developments in the macroeconomy, such as the bursting of an asset bubble facilitated by government-sponsored entities). Now imagine that the government perceives your company to be strategically important and therefore decides to subsidize it by, say, buying its preferred stock or extending it a loan. Would it be “the height of irresponsibility” for your employer to honor your legitimate compensation expectations and pay you the wages that you effectively earned under your implicit deal with the firm? And what would happen if your employer didn’t pay you what you legitimately expected? Wouldn’t you and the other successful salespeople at your company immediately bolt, leaving the company with a much less effective sales force?
I have little to add to Thom’s excellent post on Obama’s populist attack on bonuses except to note that the compensation system is just one element of a firm’s organizational architecture (along with the allocation of decision rights, systems of performance evaluation, and so on). The firm, as Holmström and Milgrom put it, is an incentive system, and the elements of this system interact in complex and nuanced ways. The idea that regulators can simply march in and dictate changes to one element or another, based on popular prejudice, without affecting the performance of the system, is typical of the hubris of the intellectual.
The Hot Hand
| Peter Klein |
Watching UNC beat Clemson in basketball last week — Clemson has lost all 54 games it has played in Chapel Hill, the longest such streak in the nation — I was reminded of the behavioral economics literature on the “hot hand” (Gilovich, Vallone and Tversky, 1985; Camerer, 1989; Brown and Sauer, 1993), a version of the gambler’s fallacy in which people put too much weight on past results in predicting future performance. There is debate about hot-hand effects in sports, where the behavior of players and teams (unlike that of dice or roulette wheels) can certainly be affected by knowledge about past contests. If you’re on a team that has lost every game to a particular opponent, how can you not get nervous down the stretch? But such effects are hard to distinguish, empirically, from random error.
I haven’t seen much on hot-hand effects at the level of the firm, though there is a healthy literature on autocorrelation of stock returns (see Boudoukh, Richardson, and Whitelaw, 1994, for one survey). The business press often describes a firm being on a “hot streak” following a string of successful products or performance results (think Apple, Pixar, Google, etc.). If above-normal performance is anomalous, then investing in such firms is a mistake. If a firm’s hot hand reflects superior resources, strategies, market positioning, etc., and these advantages persist, then its hot hand may be real.
PS: When I taught at Georgia I used to know a great Clemson joke. Originally Clemson’s name was simply “Clem,” but it was decided that “Clem University” didn’t sound very distinguished, so they added “s” for chivalry, “o” for honor, and “n” for knowledge.
Update (2 February): Brian McCann notes that, including last night’s game, the NFC has won twelve consecutive Super Bowl coin tosses.
The Heath Brothers on Incentives
| Peter Klein |
Dan and Chip Heath worry that incentive plans backfire because of focusing illusion — managers place too much weight on a single variable in the incentive contract, ignoring the likely side effects. I don’t disagree that this is possible but Chip and Dan seem to be knocking down a pretty feeble straw man. The drawbacks of single-variable, quantitative incentive schemes are well known in the organizational design literature, spawning oodles of studies of multi-tasking, the use of multiple performance measures, the benefits and costs of subjective evaluation criteria, and the like. (There’s a nice overview in BSZ chapter 16.)
That Great Klein (1996) Paper
| Peter Klein |
No, not this one. I’m talking about Ben Klein’s 1996 Economic Inquiry paper, “Why Would Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships.” It’s from a special issue honoring Armen Alchian, the entire contents of which are worth reading. Klein’s paper extends the Klein, Crawford, and Alchian (1978) model by explaining why, in equilibrium, holdups can occur, even if parties are farsighted. The basic story — that parties deliberately leave “gaps” in their contracts because the marginal costs of filling in the gaps exceed the marginal benefits — is closer in spirit to neoclassical economics than is Williamson’s Carnegie-style appeal to bounded rationality. Writes Klein:
[In an uncertain world where complete contractual specification is costly, transactors use incomplete contracts that deliberately do not take account of every contingency. As a result, transactors knowingly leave themselves open to the possibility of hold-ups.
The costs associated with contractual specification that lead transactors to use incomplete and imperfect contracts involve much more than the narrow transaction costs of writing down responses to additional contingencies. In addition to these extra “ink costs,” complete contractual specification entails wasteful search and negotiation costs associated with discovering and negotiating prespecified contractual responses to all potential contingencies. Because most future events can be accommodated at lower cost after the relevant information is revealed, much of this activity involves largely redistributive rent dissipation with little or no allocative benefit. Transactors are merely attempting to obtain an informational advantage over their transacting partners, hoping to place themselves in a position where they will be more likely to collect on (and less likely to pay for) hold-ups. Therefore, rather than attempting to determine all of the many events that might occur during the life of a contractual relationship and writing a prespecified response to each, the gains from exchange are increased by the use of incomplete contracts.
Transactors also use incomplete contracts because writing something down to be enforced by the court creates rigidity. Since contract terms are necessarily imperfect, once something is written down transactors can engage in a hold-up by rigidly enforcing these imperfect contract terms, even if the literal terms are contrary to the intent of the contracting parties (p. 447). (more…)
New Foss Thought Piece
| Nicolai Foss |
I blatantly confess that I enjoy writing what are known in academic putdown-ese as “essays” or “thought pieces,” that is, “conceptual” papers that do not construct a theoretical model, and/or engage in empirical analysis. My most recent product in this genre is inelegantly titled, “Alternative Research Strategies in the Knowledge Movement: From Macro Bias to Micro-Foundations and Multi-level Explanation.” It is an invited paper for European Management Review (the other invited contributors are David Teece, Bronwyn Hall and Will Mitchell). Mail me at njf.smg@cbs.dk if you want a copy. Here is the abstract:
The emergence over the last two decades or so of “knowledge” as an important part of the explanatory structure of management research is an intellectual breakthrough that is comparable in terms of its transforming impact to the behavioral revolution of the 1960s. A veritable “knowledge movement” has emerged that spans several fields in management. I take stock on alternative research strategies with that movement, distinguishing between “capabilities first,” “networks first,” and “individuals first” strategies. Reasons are given why more research attention need to be allocated to the latter strategy if the knowledge movement is to continue making progress, but that the aim should ultimately be to reach towards multi-level research that combines aggregate constructs with top-down processes and bottom-up processes.
Wernerfelt (1984)
| Nicolai Foss |
Birger Wernerfelt’s 1984 paper in the Strategic Management Journal, “A Resource-based Theory of the Firm,” is conventionally considered one of the founding contributions to the RBV, on par with Jay Barney’s 1986 and 1991 papers. The paper has more than 6,000 hits on Google Scholar (which probably translates into more than a thousand on Web of Science), while Barney’s 1991 paper has more than 10,000. Although the underlying conceptualization of the firm is similar, the papers address different dependent variables, namely diversification and growth (Wernerfelt) and sustained competitive advantage (Barney) (a point missed by those who indiscriminately cite both papers, usually in the context of competitive advantage).
In a recent paper in Organization Studies, “The Development of the Resource-based View: Reflections from Birger Wernerfelt,” Andy Lockett, Rory P. O’Shea, and Mike Wright draw on conversations with Wernerfelt to tell the story of the 1984 paper. (more…)
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