Equity‐Based Incentives and Supply Chain Buy‐Back Contracts*

We analyze the effect of equity‐based incentives in a supply chain with a downstream firm and an upstream supplier. By using the operational decision as a signal to influence external investors’ beliefs, the downstream firm's manager intends to maximize a convex combination of the interim share price and the terminal cash flows. We show that equity‐based incentives create a side effect. Specifically, with a universal buy‐back contract, the deadweight loss of signaling induced by equity‐based incentives could spread throughout the supply chain and cause chain‐wide damages. To mitigate such undesirable consequences, we propose a new mechanism to eliminate the inefficiency. We derive the optimal mechanism that maximizes the downstream firm's profits subject to the constraint that the supply chain efficiency is not undermined. In contrast to the full‐information benchmark, this mechanism gives positive surplus to the supplier. [Submitted: January 5, 2011. Revisions received: June 20, 2011; December 11, 2011. Accepted: December 22, 2011.]     

How Plant Managers' Experiences and Attitudes Toward Sustainability Relate to Operational Performance

Managers are increasingly faced with pressure to think not just about profits, but also about their organization's environmental and social performance. This research provides a first examination of operational managers' experiences with and attitudes about employee well‐being and environmental issues, how these factors impact employee well‐being and environmental performance, and how the three performance measures interrelate. We use violations of Occupational Safety and Health Administration regulations and Toxic Release Inventory reports of emissions as proxies for employee well‐being and environmental performance. Our findings suggest that operational managers do not (yet) think in sustainability terms. However, employee well‐being and environmental performance do interact in a significant way with operational performance. Hence, operational managers would benefit from a more complete understanding of the relationships among the elements of the triple bottom line.     

Relative Performance Evaluation and Risk Taking in Delegated Investment Decisions*

Providing proper incentives to firm managers is increasingly important in the current competitive environment. Analytical research has suggested that evaluating a manager's performance relative to that of a peer group, in conjunction with standard-based pay, can induce efficient risk-sharing between firm owners and managers while maintaining the latter's incentives to exert effort. To date, direct empirical tests of this proposition have not been reported. This study uses a laboratory experiment to test the effect of relative performance evaluation on the risk-aversion of delegated investment decisions. Project-specific risk is operationalized using operating leverage, in part because the variability of a project's operating profits generally increases with this variable, and in part because many of the new manufacturing approaches held to be important to competitive advantage require significant capital investments and attendant increases in operating leverage. Across two levels of environmental uncertainty, subjects under a relative (as opposed to absolute) performance standard selected investments with significantly higher project-specific risk. Also, as environmental uncertainty increased, subjects under an absolute standard significantly reduced the riskiness of their investments. In contrast, subjects shielded from environmental uncertainty by a relative standard chose investments of about equal riskiness under both low and high uncertainty conditions. If supported by future research, these findings would suggest that relative performance evaluation may reduce managers' reluctance to adopt risky capital investments, especially in firms operating in high-risk economic or technological environments.     

Industry Implications of Value Creation and Appropriation Investment Decisions*

Managers face a critical task in making firm investment decisions that are targeted toward creating and appropriating value. As managers weigh their resource investment decisions, we argue that these investments have a direct impact on the growth and volatility of the firm's industry. With data covering 377 industries across 16 years, we investigate relationships for aggregate firm investments on the growth and volatility of industry profit and sales. Results reveal important, complex relationships between investment in value creation and appropriation and different elements of the industry environment. Implications for management theory and practice are discussed.     

Pricing and Capacity Rationing with Customer Disappointment Aversion

Customers are averse to disappointment that arises when economic outcomes fall short of expectations. In this study, we study a two‐period model in which the firm may create rationing in either period. In the anticipation of possible disappointment due to stock‐outs, strategic customers decide when to purchase and the firm determines the prices and rationing levels in each period. We explore the impact of disappointment aversion on customers' strategic purchasing behavior and the firm's pricing and rationing decisions. Without disappointment aversion, it is optimal for the firm to adopt a uniform pricing policy without rationing. However, when strategic customers are averse to disappointment, a firm may be able to increase profits with an appropriate level of rationing. We analyze both the mark‐up and mark‐down policies. We show that, in a mark‐down scenario, the firm always benefits from disappointment aversion behavior by using an appropriate level of rationing in a low‐price period. However, in a mark‐up scenario, whether it is beneficial for the firm to induce disappointment aversion behavior depends on how customers frame payoffs in different periods when forming utilities. Particularly, when customers compartmentalize payoffs in different periods to form utilities, the firm should not induce disappointment aversion behavior.     

Investment in Facility Changeover Flexibility for Early Entry into High‐Tech Markets

A model is introduced to analyze the manufacturing‐marketing interface for a firm in a high‐tech industry that produces a series of high‐volume products with short product life cycles on a single facility. The one‐time strategic decision regarding the firm's investment in changeover flexibility establishes the link between market opportunities and manufacturing capabilities. Specifically, the optimal changeover flexibility decision is determined in the context of the firm's market entry strategy for successive product generations, the changeover cost between generations, and the production efficiency of the facility. Moreover, the dynamic pricing policy for each product generation is obtained as a function of the firm's market entry strategy and manufacturing efficiency. Our findings provide insights linking internal manufacturing capabilities with external market forces for the high‐tech and high‐volume manufacturer of products with short life cycles. We show the impact of manufacturing efficiency and a firm's ability to benefit from volume‐based learning on the dynamic pricing policy for each product generation. The results demonstrate the benefits realized by a firm that works with its manufacturing equipment suppliers to develop more efficient and flexible technology. In addition, we explore how opportunities afforded by pioneer advantage enable a firm operating a less efficient facility to realize long term competitive advantage by deploying an earlier market entry strategy.     

Risk Preferences,Probability Weighting,and Strategy Tradeoffs in Wildfire Management

Wildfires present a complex applied risk management environment, but relatively little attention has been paid to behavioral and cognitive responses to risk among public agency wildfire managers. This study investigates responses to risk, including probability weighting and risk aversion, in a wildfire management context using a survey‐based experiment administered to federal wildfire managers. Respondents were presented with a multiattribute lottery‐choice experiment where each lottery is defined by three outcome attributes: expenditures for fire suppression, damage to private property, and exposure of firefighters to the risk of aviation‐related fatalities. Respondents choose one of two strategies, each of which includes “good” (low cost/low damage) and “bad” (high cost/high damage) outcomes that occur with varying probabilities. The choice task also incorporates an information framing experiment to test whether information about fatality risk to firefighters alters managers' responses to risk. Results suggest that managers exhibit risk aversion and nonlinear probability weighting, which can result in choices that do not minimize expected expenditures, property damage, or firefighter exposure. Information framing tends to result in choices that reduce the risk of aviation fatalities, but exacerbates nonlinear probability weighting.     

Marketing as an Investment in Shareholder Value

We present resource‐based and capability‐based arguments of marketing investment intensity to offer a strategic view of marketing as an investment in shareholder value. We find that marketing investment intensity has a U‐shaped quadratic effect on shareholder value creation (Tobin's q) that calls for marketing investment to be protected and increased, not surrendered. We show how marketing investments interact with investments in R&D, human capital and operations to reveal how strategic co‐investments can alter the shareholder value of marketing. Finally, we show how competitive intensity and failings in the firm's investment productivity (its ability to convert investment expenditure into sales) point to malaise in the firm's own strategic architecture as a fault for perceived poor returns from marketing investments. Our findings suggest that marketing investment should not be scapegoated when its contributions to shareholder value are not as expected. When invested in strategically and in combination with other investments, marketing can unlock exciting improvements in shareholder value.     

Endogenous Adaptation: The Effects of Technology Position and Planning Mode on IT‐Enabled Change*

The redesign of information technology (IT)‐enabled work processes often necessitates fundamental design changes to the intended work process, the IT platform hosting the work process, or both. Research suggests that such design changes often can be traced to earlier decisions involving endogenous adaptation or internal organizational change. Two such decisions are a firm's technology position and planning mode. This study examines the relationship between technology position and planning mode in predicting the magnitude of design change in process redesign projects. The conceptual frame applied in examining these relationships involves a synthesis of Miles and Snow's adaptive cycle with elements central to concurrent engineering. Our results indicate that the magnitude of design change is related to differences in technology position and planning mode. To effectively implement organizational change, firms must leverage their IT platform by carefully timing IT investments in accordance with their adopted technology position. Directing the trajectory of a firm's IT platform and deploying it so as to complement the firm's technology position reduces design uncertainty, promoting reengineering success.     

Toward Computerizing a Causal Modeling Approach to Strategic Problem Framing*

This paper proposes an object-oriented approach to the development of interactive software for the purpose of managerial problem solving. A prototype is being developed using CSM causal mapping to represent each manager's perceptions of the relationships between key variables of a firm's strategic situation. This paper suggests the design of GDSS that would enable a group of managers to discuss, learn from each other, and possibly develop consensus about decisions or their causes. Issues involving future development are discussed.     

Fundamental Dynamics in Complex Organizational Change: A Longitudinal Inquiry into Hydro-Québec's Management

Co-operation is the essence of an organization's existence and a key condition for its long-term survival: but change efforts can put such co-operation to a harsh test. Too often this is caused not by change itself, but managers' tendency to stick to oversimplified ideas or tools and to pursue their implementation to the exclusion of other factors. Lacking a stable beacon, managers are often led adrift by the momentum of the change they initiate. This article uses a 20 year long longitudinal study of Hydro-Québec, one of the largest power utilities in North America, to show how the dynamics of change led away from the need to maintain co-operation and thus tend to emphasize trivia. We argue that, in a major change effort, co-operation will only be achieved by maintaining a balance between Position in the environment, organizational Context and the behaviour of People in the organization's community. This three-legged PCP framework is proposed as a structure for understanding and managing complex change efforts. The dynamics of the PCP framework are also examined to derive patterns and recommendations for managers keen to avoid a drift towards trivia.     

IT'S WHAT YOU SAY,NOT WHAT YOU PAY: AN EXPERIMENTAL STUDY OF MANAGER‐EMPLOYEE RELATIONSHIPS IN OVERCOMING COORDINATION FAILURE

We study manager‐employee interactions in experiments set in a corporate environment where payoffs depend on employees coordinating at high effort levels; the underlying game being played repeatedly by employees is a weak‐link game. In the absence of managerial intervention subjects invariably slip into coordination failure. To overcome a history of coordination failure, managers have two instruments at their disposal: increasing employees' financial incentives to coordinate and communication with employees. Synthesizing methods drawn from psychology and economics, we quantify the impact of specific types of communication on workers' effort levels and manager's profits. This methodology allows us to rigorously compare the efficacy of communication and direct incentives in an environment where both are available. We find that communication is a more effective tool than incentive changes for leading organizations out of performance traps. Examining the content of managers' communication, the most effective communication strategy is quite simple: specifically request a high effort, point out the mutual benefits of high effort, and imply that employees are being paid well. (JEL: C92, D23, J31, L23, M52)     

The Effectiveness of Management‐By‐Walking‐Around: A Randomized Field Study

Management‐by‐walking‐around (MBWA) is a widely adopted technique in hospitals that involves senior managers directly observing frontline work. However, few studies have rigorously examined its impact on organizational outcomes. This study examines an improvement program based on MBWA in which senior managers observe frontline employees, solicit ideas about improvement opportunities, and work with staff to resolve the issues. We randomly selected hospitals to implement the 18‐month‐long, MBWA‐based improvement program; 56 work areas participated. We find that the program, on average, had a negative impact on performance. To explain this surprising finding, we use mixed methods to examine the impact of the work area's problem‐solving approach. Results suggest that prioritizing easy‐to‐solve problems was associated with improved performance. We believe this was because it resulted in greater action‐taking. A different approach was characterized by prioritizing high‐value problems, which was not successful in our study. We also find that assigning to senior managers responsibility for ensuring that identified problems get resolved resulted in better performance. Overall, our study suggests that senior managers' physical presence in their organizations' front lines was not helpful unless it enabled active problem solving.     

Product Launches and Buying Frenzies: A Dynamic Perspective

Buying frenzies caused by a firm's intentional undersupplying of a new product are frequently evident in several industries including electronics (cell phones, video games), luxury automobiles, and fashion goods. We develop a dynamic model of buying frenzies that incorporates the firm's manufacturing and sale of a product over time and characterizes the conditions under which inducing such frenzies is an optimal strategy. We find that buying frenzies occur when customers are sufficiently uncertain about their valuations of the product and when they discount the future sufficiently but not excessively. We propose measures of “customer desperation” and of the extent of scarcity to measure the depth and breadth of buying frenzies, respectively. We also demonstrate that such frenzies can have a significantly positive effect on firm profits and partially recover the loss due to non‐commitment to future prices. This study provides managerial insights on how firms can influence market response to a new product through production, pricing, and inventory decisions to induce profitable frenzies.     

How Long Should a Customer Wait for Service?

A major concern for service managers is the determination of how long a customer should wait to be served. Services, due to the customer's direct interaction with the process, must face a trade-off between minimizing the cost of having a customer wait and the cost of providing good service. A total cost model is presented for determining how long a customer should wait when these two conflicting cost components are considered. An integral part of this model includes a measure of customer satisfaction with waiting time which is used to develop a waiting cost function. The model is then applied to a major fast food chain, using data collected at several locations. Analysis of the data reveals that the “ideal” waiting time for this firm is significantly less than the current corporate waiting time policy. Thus, as indicated by the model, a corporate policy change is recommended to provide much faster service. The adoption of such a policy would result in increased labor costs, and would simultaneously increase the firm's overall profits. Although appearing contradictory, increases in current labor costs and long-term profits are both possible when management takes the long-range perspective suggested in this paper.     

Understanding Managers' Moral Decision-Making

The paper discusses managers' moral decision-making based on analyses of managers' talk when they are facing a morally problematic situation. The qualitative data was collected by a survey questionnaire from Finnish top managers in large manufacturing companies. The research questions are: How managers construct good in their speech? How managers reason for a moral choice? Managers' reasoning is analysed by grouping the responses according to whether they agree or disagree with the presented moral dilemma, and by finding the cultural distinctions managers make in the responses. The analysis shows that ethical theories are used, if not explicitly, at least implicitly in managers' moral decision-making. Good is constructed in managers' speech by either referring to the consequences of an action, to certain moral norms or rules, or to the culturally accepted way of action. The content of the reasons for a moral choice varies depending on whether the response reflects disagreeing, agreeing or uncertain attitude towards the given moral dilemma.     

Price and Service Competition in an Outsourced Supply Chain

We consider a buyer who outsources the manufacturing of a product to multiple symmetric make‐to‐stock suppliers who compete on price and service (fill rate). The buyer allocates demand to the suppliers using a score function with an exponential form, which specifies the relative importance of price vs. service, in order to minimize his costs, while the suppliers choose their prices and fill rates to maximize their profits. For the case of dual‐sourcing, we characterize the optimal parameter of the exponential score function, considering the impact of the buyer's decisions on the suppliers, and considering how the suppliers compete against each other to earn a portion of the buyer's demand. We prove the existence of a unique equilibrium and characterize the equilibrium behavior of the system. We then consider a general number of suppliers and show that the equilibrium prices and fill rates, and the buyer's cost, are increasing in the number of suppliers. We compare these results to a model of single‐sourcing, in which the buyer is the Stackelberg leader and extracts all profits from the supplier. We find that the buyer always prefers single‐sourcing to multisourcing. Finally, we study a centralized system and use the results to develop a coordinating contract for the decentralized system.     

Customer Learning Processes,Strategy Selection,and Performance in Business‐to‐Business Service Firms*

Learning about customers takes place through relevant dialogues with those customers, also known as customer relationship management (CRM). As relationships develop, information about the customer is gathered in the firm's customer information systems (CIS): the content, processes, and assets associated with gathering and moving customer information throughout the firm. This research develops a measure of CIS management capabilities based on learning organization theory and measured by the ability to get, store, move, and use information throughout the business unit. This measure is then used to analyze customer learning processes and associated performance in the context of marketing strategic decision making. This study of 209 business services firms finds that generic marketing strategy positioning (low‐cost and differentiation) and the marketing tactics of personalization and customization are related to CIS development. Customer information systems development in turn is associated with higher levels of customer‐based performance, which in turn is associated with increased business growth. Since the strongest association with customer‐based performance is strategy selection, the long‐term benefits of the knowledge gained from the CIS may be in the ability to assist in measuring customer‐based performance, rather than in the ability to immediately contribute to performance. Finally, for these firms, customization and personalization are not directly associated with performance and thus may not be necessary to support every firm's marketing strategy.     

Revenue‐Sharing vs. Wholesale‐Price Contracts in Assembly Systems with Random Demand

Assembly and kitting operations, as well as jointly sold products, are rather basic yet intriguing A decentralized supply chains, where achieving coordination through appropriate incentives is very important, especially when demand is uncertain. We investigate two very distinct types of arrangements between an assembler/retailer and its suppliers. One scheme is a vendor‐managed inventory with revenue sharing, and the other a wholesale‐price driven contract. In the VMI case, each supplier faces strategic uncertainty as to the amounts of components, which need to be mated with its own, that other suppliers will deliver. We explore the resulting components' delivery quantities equilibrium in this decentralized supply chain and its implications for participants' and system's expected profits. We derive the revenue shares the assembler should select in order to maximize its own profits. We then explore a revenue‐plus‐surplus‐subsidy incentive scheme, where, in addition to a share of revenue, the assembler also provides a subsidy to component suppliers for their unsold components. We show that, by using this two‐parameter contract, the assembler can achieve channel coordination and increase the profits of all parties involved. We then explore a wholesale‐price‐driven scheme, both as a single lever and in combination with buybacks. The channel performance of a wholesale‐price‐only scheme is shown to degrade with the number of suppliers, which is not the case with a revenue‐share‐only contract.