Posts filed under ‘Strategic Management’
Pirrong on Speculation
| Peter Klein |
Following up Dick’s post on speculation, Craig Pirrong had a nice piece in Friday’s WSJ providng more details on oil markets. Notes Craig:
The unprecedented run-up in oil prices is painful for consumers around the world. But the focus on speculation is misguided, and represents a convenient distraction from an understanding of the real, underlying causes of high oil prices — most notably continuing demand growth in the face of stagnant production, supply disruptions and the weakening dollar.
More restrictions and regulations of energy markets, in the vain belief that such actions will bring price relief, are counterproductive. They will make the energy markets less efficient, rather than more so.
The pointer is from Mike Giberson, who provides more information and links to Craig’s (brilliantly named) blog, Streetwise Professor. Craig testified Friday on oil-market speculation before the US House Agriculture Committee; you can read his remarks here. And for a classic paen to speculation more generally, see Victor Niederhoffer’s classic “The Speculator as Hero.”
Note to graduate students: If you haven’t read Craig’s classic papers on bulk shipping, introducing the concept of “temporal specificity,” your education is incomplete. Check ’em out:
Pirrong, Stephen C. 1992. “An Application of Core Theory to the Study of Ocean Shipping Markets.” Journal of Law and Economics 35: 89–131.
Pirrong, Stephen C. 1993. “Contracting Practices in Bulk Shipping Markets: A Transactions Cost Explanation.” Journal of Law and Economics 36: 937–76.
Technology and Firm Size and Organization
| Peter Klein |
As a New Economy skeptic (1, 2, 3, 4) I worry about sweeping claims that information technology has rendered obsolete the large, vertically integrated, publicly held corporation and its managerial hierarchy. Such claims suffer from two problems: First, they tend to be thinly documented — evidence on the economy-wide distribution of organizational forms is largely fragmentary and anecdotal. Second, they usually exaggerate what’s new about those changes that we can document. As I wrote in my review of Yochai Benkler’s The Wealth of Networks:
Benkler proposes social production as an alternative to the traditional organizational modes of “market” and “hierarchy,” to use Oliver Williamson’s terminology. Indeed, open-source production differs in important ways from spot-market interaction and production within the private firm. But here, as elsewhere, Benkler tends to overstate the novelty of social production. Firms, for example, have long employed internal markets, delegated decision rights throughout the organization, formed themselves into networks, clusters, and alliances, and otherwise taken advantage of openness and collaboration. There exists a variety of organizational forms that proliferate within the matrix of private property rights. Peer production is not new; the relevant question concerns the magnitude of the changes.
Here, the book suffers from a problem common to others in this genre. Benkler provides a wealth of anecdotes to illustrate the revolutionary nature of the new economy but little information on magnitudes. How new? How large? How much? Cooperative, social production itself is hardly novel, as any reader of “I, Pencil,” can attest. Before the web page, there was the pamphlet; before the Internet, the telegraph; before the Yahoo directory, the phone book; before the personal computer, electric service, the refrigerator, the washing machine, the telephone, and the VCR. In short, such breathlessly touted phenomena as network effects, the rapid diffusion of technological innovation, and highly valued intangible assets are not really really new. (Tom Standage’s history of the telegraph and its own revolutionary impact, The Victorian Internet [New York: Walker & Company, 1998], is well worth reading in this regard.)
A new paper by Giovanni Dosi, Alfonso Gambardella, Marco Grazzi, and Luigi Orsenigo, “Technological Revolutions and the Evolution of Industrial Structures: Assessing the Impact of New Technologies upon the Size and Boundaries of Firms,” looks at the empirical evidence more systematically and concludes that the effect of information technology on firm size and organization is real, but modest: (more…)
The Ecconomics of Organizing Economists
| Peter Klein |
Most regulatory agencies are staffed by a mix of attorneys and economists. Members of these groups do not always play well together. How, then, should such an agency be organized — functionally, putting the economists in a single unit, reporting to a chief economist, or divisionally, spreading the economists throughout divisions organized by legal issue, industry sector, geographic region, etc. and having them report to an attorney in charge of each division? An interesting application of the U-form versus M-form problem posed by Chandler (1962).
An analysis of organizational structure at US and European competition agencies by Luke Froeb, Paul Pautler, and Lars-Hendrik Roller (via Dan Sokol) finds that
the main advantage of a functional organization is higher quality economic analysis while the disadvantage is that the analysis may not be focused on legal questions of concern, and is less easily communicated to the ultimate decision makers. Likewise, the advantages of a divisional organization are decentralized, and faster, decision making; however, the quality of the economic analysis is likely to be lower and can result in less information reaching the ultimate decision makers.
Froeb, Pautler, and Roller suggest that hybrid forms, such as (a) functional organizations with strong horizontal links between economists and attorneys or (b) divisional organizations with strong vertical links between economists and attorneys, and managers trained in both law and economics, are best.
My own experience at the CEA confirms the importance of both the vertical and horizontal links. We economists were organized into a focused unit for major projects like the Economic Report of the President but were also assigned to ad hoc, inter-Agency teams working on specific policy issues (I dealt with spectrum auctions, the pricing of air traffic control, and foreign ownership of domestic telecom assets, among other things). I was typically the lone economist (though hardly the nerdiest member) on each team.
Russ Coff Guest Blogging at orgtheory.net
| Peter Klein |
Russ Coff, whose work is popular in these parts, is guest blogging over at orgtheory.net. Look for some good stuff in the coming weeks.
Update: Here’s his first post.
Business History Bleg: British Trading Houses
| Peter Klein |
I’m advising a PhD student in sociology (yes, it’s true) who’s studying the rise of British commercial influence in the Far East. He’s particularly interested in Jardine Matheson & Company, a Hong Kong trading company founded in 1832 that grew quickly into a pre-modern industrial conglomerate. Can anyone recommend references on the organization and strategy of 19th-century trading firms, their political, social, and cultural activities and influence, and their role in trade and economic growth more broadly?
Reliving the 1980s
Peter Klein |
I recently watched the new Rambo film, an entertaining spectacle of blood and gore (for those who enjoy that sort of thing). The last few years have brought back several 1980s-era action heroes after long absences, not only Rambo but also Rocky Balboa, John McClane, the Terminator, and of course Indiana Jones.
We posted a while back on the golden decade of the 1970s, a fantastically productive period for research in organizational economics. How about bringing back the 1980s? Not the mullet, but the great works in organizational economics, strategy, entrepreneurship, and related subjects that appeared in that decade. Here are some of my favorites, listed chronologically. What are yours? (more…)
Lien-Klein Paper on Relatedness
| Peter Klein |
Lasse and I have a new paper on the measurement of relatedness, the degree to which a diversified firm’s markets or industries are “close” to each other. Relatedness is a key concepts of corporate strategy, but it is difficult to define and measure consistently. We discuss a new, “survivor-based” approach and compare it to conventional measures. The survivor-based approach lets the competitive process and the knowledge of local decision makers replace the judgment of the researcher (or the SIC system) in determining what is related to what, giving it a Hayekian flavor. Specifically, we measure the relatedness between a pair of industries by comparing how often they are actually combined to what one would expect if diversification patterns were random. Industries are related when this difference is large and positive, and they are unrelated if it is negative. This concept was originally suggested by Teece, Rumelt, Dosi and Winter (1994) who used it to illustrate persistent patterns of “coherence” among US firms.
The paper, “Measuring Inter-Industry Relatedness: SIC Distances versus the Survivor Principle,” is available on SSRN. Here’s the abstract:
The conventional approach to measuring inter-industry relatedness uses the SIC system to capture the “distance” between industries. While relatedness measures based on SIC codes (or equivalent classifications) are readily available and easy to compute, they do not screen effectively for the conditions under which related diversification creates value. This paper constructs an alternative, survivor-based measure of inter-industry relatedness and compares it to similar measures based on distances between SIC codes. We find that survivor-based measures consistently outperform SIC-based measures in predicting firms’ decisions to enter new markets, even when herding tendencies and motives related to mutual forbearance are taken into account.
Do What Consultants Say, Not What Other Firms Do
| Peter Klein |
McKinsey suggests this strategy: when other firms ignore strategy consultants, earn rents by listening to strategy consultants.
- Companies don’t react to competitive threats in the way management theory says they should, according to a McKinsey Global Survey.
- Instead of undertaking extensive, sophisticated analyses when faced with a competitive threat, most companies assess just a few responses, and they often choose the most obvious one.
- These practices give companies an opportunity to seize a competitive advantage by understanding how their competitors are likely to react to their moves.
The pointer is from the ever-valuable Luke Froeb. Most economists are puzzled management consulting, believing that consultants add little real economic value. I am sympathetic to a signaling explanation with a separating equilibrium in which high-quality firms can afford to signal quality by hiring expensive consultants and low-quality firms cannot. But I haven’t studied this closely. Can anyone recommend literature on the economics of consulting?
From Rumination to Rumelt via Dobzhansky
| Randy Westgren |
I was perusing the website of the Oxford Symposium on Food and Cookery to find the references to last year’s theme: food and morality. Some interesting reads there. I noticed that the Symposium awards the Sophie D(obzhansky) Coe Prize in Food History annually. Dr. Coe was an anthropologist who wrote on pre-Columbian diets and was the daughter of Theodosius Dobzhansky, one of “the Four Horsemen” of the modern synthesis of genetics and evolution (American Philosophical Society). Dobzhansky emigrated from the University of Kiev in 1927 to Columbia University, thence to Caltech, where he and his colleagues bred squillions of generations of fruit flies and provided the empirical basis for the mathematical models of evolution of the other horsemen: Haldane, Fisher, and Wright.
In 1937, Dobzhansky had two publications. One was his landmark book, Genetics and the Origin of Species, which was the siren song that drew Ernst Mayr and other biologists to the field of evolutionary biology. Mayr has often been credited with developing the concept of the isolating mechanism as the basis for speciation. Methinks that Mayr’s long shadow at Harvard fell on Richard Rumelt, who ported the concept to strategic management without much attribution in his 1984 and 1987 pieces. Mahoney and Pandian must be credited with the most complete exposition of the concept. (more…)
A Coasian Approach to Beating Google
| Peter Klein |
The always-interesting and provocative Mark Cuban (yes, him) suggests a “Coasian” strategy, based on side payments, for beating Google in the search-engine wars. If I understand correctly, the strategy works like this. Websites have the option (through robots.txt protocols) to prevent their inclusion in search engine databases. At some price, popular websites would presumably be willing to block Google’s spiders. Once word gets around that Google’s database no longer includes these sites, consumers would start to use alternative search engines. Doing this wouldn’t be cheap, but Cuban points out that that upstart search provider wouldn’t need the whole internet to play along, just the top sites, the ones at the left side of Chris Anderson’s long tail. It might cost, say, $1 billion, but the upstart would recover that $1 billion pretty quickly.
One problem Cuban doesn’t consider is that this kind of fragmentation in search-engine space would presumably reduce the value of search, cutting the revenue stream that Google is presently gobbling up. But the upstart might be better off with a larger slice of a smaller pie.
A more fundamental problem is that Google would presumably bid to get the top sites back. Do the search engines bid away all the rents, such that the returns from search accrue entirely to the top sites (as in the old Demsetz-Posner franchise-bidding model)? Or is the process more like a common-values auction with uncertainty and hence subject to the winner’s curse?
Take (Over) My Firm, Please!
| Peter Klein |
To paraphrase Groucho Marx, would you want to take over a firm that wants you to take it over? Most corporate bidders don’t. From Derek Oler and Kevin Smith:
We investigate 401 firms that publicly advertise a desire to be acquired (“take-me-over” or TMO firms) from 1990 to 2006. Over this period the TMO “wave” lags about one year behind the acquisition wave. Most TMO firms show evidence of high debt levels as well as fundamental underperformance relative to industry peers. Although most TMO firms enjoy positive announcement period returns, they significantly underperform in the year following their TMO announcement, and most do not receive a takeover offer. Greater proportionate ownership of the firm by dedicated institutional investors is associated with greater likelihood of the firm avoiding bankruptcy, but not with greater likelihood of the firm being acquired. These results suggest that the TMO announcement is a significant signal of bad news that is not fully anticipated by the market. However, the TMO announcement does increase the odds of the firm actually receiving a takeover offer.
The paper is titled “The Characteristics and Fate of ‘Take Me Over’ Firms.”
I tell you, I’ve been looking for an opportunity to reference Henny Youngman and Groucho Marx in the same post for years!
Toyota the Innovator
| Peter Klein |
Jim Surowiecki’s latest New Yorker column focuses on Toyota and makes several important points about innovation.
- Process innovation is at least as important as, though less visible than, product innovation.
- Innovation can be an incremental process in which “the goal is not to make huge, sudden leaps but, rather, to make things better on a daily basis.”
- Process innovations often bubble up from the bottom, rather than the top, of the hierarchy.
- Cumulative, bottom-up, process innovation is really hard to imitate. “[T]he fundamental ethos of kaizen — slow and steady improvement — runs counter to the way that most companies think about change. Corporations hope that the right concept will turn things around overnight. This is what you might call the crash-diet approach: starve yourself for a few days and you’ll be thin for life. The Toyota approach is more like a regular, sustained diet — less immediately dramatic but, as everyone knows, much harder to sustain.”
These points are well known in the innovation literature but Surowiecki’s succinct and elegant presentation is well worth a read, even by specialists.
See also Steve Postrel’s earlier post on Toyota.
Wharton Private Equity Review
| Peter Klein |
A special report from Knowledge@Wharton:
While the credit crunch has put a damper on headline-grabbing large buyouts, private equity firms have found other ways to discover value in the current market. In this special report, produced in cooperation with the Wharton Private Equity Club, Knowledge@Wharton looks at how funds are adapting to changes in the credit environment, what opportunities exist in the developed markets of Europe and Japan, and the ways that proposed changes in taxation may affect the industry. Also included is a roundtable discussion on setting up a first-time fund in the current market, as well as an interview with David Rubenstein, co-founder and managing director of The Carlyle Group.
Get the report here. For more on private equity see the proceedings from last fall’s AEI conference.
Incidentally, I used Jensen’s “Eclipse of the Public Corporation” in my strategy class this semester amd continue to be impressed with Jensen’s insight and prescience in that piece, now nearly twenty years old. Still an excellent introduction to the organizational economics of private equity.
MDE Special Issue: Frontiers of Strategic Management Research
| Nicolai Foss |
Managerial and Decision Economics has become a favorite journal of mine. It has a strong econ orientation, to be sure, but the journal stresses econ that is relevant, readable, and right. In other words, there is lots of applied microeconomics, transaction cost economics, etc. Moreover, over the last few years MDE — presumably as a result of Margie Peteraf’s tenure as co-editor — has become very much of an econ-based strategic management journal, not like the Journal of Economics and Management Strategy, to be sure, but more economics-oriented than the Strategic Management Journal.
The most recent issue(s — issue 2 and 3 are bundled into one special issue) features a string of excellent papers under the heading “Frontiers of Strategic Management Research,” edited by Peteraf and Catherine Maritan. Several of the papers should be of interest to the O&M readership. For example, Kyle Mayer (with Janet Bercovitz) continues to work with his information technology service contracts dataset, this time looking at the influence of inertia on what contract clauses that are included in these kind of contracts. Maritan and Robert Florence engage in a nice modelling exercise, modelling strategic factor markets in a way that seems quite different from earlier attempts (e.g., by Rich Makadok). Michael Jacobides builds an interesting argument, linking foreign direct investment to the investing firm’s embeddedness in value chains in the home country and value chain conditions in the host country. And, of course, there is the usual handful of alliance articles. A great special issue. Highly recommended.
The Sixth Force
| Peter Klein |
Luke has a nice post today about competition and cooperation among providers of complementary products — the “sixth force” that Michael Porter left out of his famous framework. Luke points us to “How Companies Become Platform Leaders”by Annabelle Gawer and Michael Cusumano in the Winter 2008 Sloan Management Review. As Luke notes (continuing this week’s Apple meme):
One of the biggest mistakes a company can make is to pursue a product strategy and fail to recognize the platform value of their product. The best example of this is perhaps Macintosh computer which, due to its early technological lead, could have become the dominant platform for personal computing. Instead they priced high, failed to encourage complementary innovation, and let Microsoft become the dominant platform.
Porter does discuss complements in his newer work (e.g., here) but does not elevate them to the status of the original Fab Five.
Apple, Microsoft, and Product Design
| Peter Klein |
I’m not an Apple guy. I have no doubt the Mac is a fine product but, come on, I’m not some froofy artist type! (Teppo, take note.) And I know how to use a right mouse button. I do like the iPhone, and would definitely consider buying one if it weren’t tethered to AT&T. At present, however, the only Jobs et al. product I’ve owned is an Apple II back in high school. (With 48K and dual floppies, it sizzled!)
This week I’m teaching the Apple 2006 HBS case in my undergraduate strategy course. As the case materials emphasize, Apple’s product design and packaging capabilities are an important source of its competitive advantage. The Zen thing is certainly a refreshing change from the industry norm. In preparing the case I was reminded of a funny item that circulated a couple of years ago, What if Microsoft Designed the iPod Package? You don’t have to be one of the bad Kleins to enjoy it.
Does Performance Cause Organizational Form?
| Peter Klein |
There is a large literature on the performance effects of organizational form. Obviously, for the strategist, getting organizational form right is important only if it leads to superior performance. Of course, the empirical literature recognizes that organizational form, governance, strategy, and other key decision variables are at least partly endogenous. Still, the causal arrows are usually thought to run from strategy to performance.
Ben Hermalin was at Missouri this week to present his paper, “Firm Value and Corporate Governance: Does the Former Determine the Latter?”, which argues that good governance can be the result, not the cause, of good performance. He constructs a model in which the benefits of getting governance right are, on the margin, increasing in the value of the firm’s investment opportunities. Better-performing firms have better opportunities and hence more to gain from designing governance structures that align managers’ incentives with owners. The model is based on an agency framework and applies specifically to managerial governance, but the general problem would seem to apply to a variety of organizational problems and contexts. (more…)
Private Equity and Innovation
| Peter Klein |
LBOs do not reduce patent activity, and the quality of patents may actually increase following a “going-private” transaction, according to a new paper by Morten Sorensen, Per Strömberg, and Josh Lerner.
A long-standing controversy is whether LBOs relieve managers from short-term pressures of dispersed shareholders, or whether LBO funds themselves are driven by short-term profit motives and sacrifice long-term growth to boost short-term performance. We investigate 495 transactions with a focus on one form of long-term activities, namely investments in innovation as measured by patenting activity. We find no evidence that LBOs decrease these activities. Relying on standard measures of patent quality, we find that patents applied for by firms in private equity transactions are more cited (a proxy for economic importance), show no significant shifts in the fundamental nature of the research, and are more concentrated in the most important and prominent areas of companies’ innovative portfolios.
I very much like this kind of work even though I’m a patent skeptic (1, 2, 3, 4).
Big Think in Management Research
| Peter Klein |
Greg Clark’s A Farewell to Alms has received a lot of attention in the econo-blogosphere. I haven’t read the book and don’t have much to say about it but you can read as much as you like from Cowen, McCloskey, DeLong, Caplan, Kling, and others. One of the most interesting reviews, to me, is this one by Robert Margo of Boston University. Margo admires the book but dislikes this genre, what he calls “Big Think.”
“Big Think” refers to the genre of economic history that asks The Big Question. Why England and not China? Do institutions “matter” or is it something else, or many things? Why is the United States rich and Bolivia poor?
Reviewers should be upfront about their ex ante biases. Here is one of mine: I do not care for Big Think. The Big Question per se is not the problem — in economics, there is nothing more important. For me, the problem with Big Think is that it is inherently Too Big. One cannot hope to answer The Big Question by tackling it head on. One must break The Big Question into a great many very tiny precisely posed questions, and get the answers to them right. In economic history we are still _very_ far from completing this task even for a country whose economic history is as well-worn as the United States. Big Think is a Big Distraction from our true purpose in life. (more…)
Upcoming Events: A Busy June
| Peter Klein |
June is an exciting month for O&Mers looking for research conferences. First up is ACAC 2008, 12-14 June in Atlanta. ACAC, which has received high marks on this blog, is an annual workshop organized by Rich Makadok emphasizing the “big issues” in strategic management. Next is the DRUID 25th Anniversary Conference, 17-20 June in Copenhagen, with the theme of “Entrepreneurship and Innovation.” The distinguished participant list includes Rajshree Agarwal, Carliss Baldwin, Bo Carlsson, Kathy Eisenhardt, Maryann Feldman, Bronwyn Hall, Steve Klepper, Anita McGahan, Joanne Oxley, Olav Sorenson, Scott Stern, Sid Winter, and some Foss guy. Immediately afterward is ISNIE’s 12th annual meeting, 20-21 June, in Toronto. I am on the program committee, working with president-elect Scott Masten, and we got a bunch of great submissions this year. Barry Weingast and Robert Ellickson are keynoters. The preliminary program should be up on the ISNIE website soon.
Also, for graduate students in economics, history, philosophy, political science, business administration, and related disciplines there’s the Rothbard Graduate Seminar, 13-18 June in Auburn, Alabama. The RGS is an intensive workshop and research seminar on Austrian economics that uses Murray Rothbard’s Man, Economy, and State as its core text. I am one of the discussion leaders.
If I could teleport I’d attend all four!
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