Economic Evaluation of Scale Dependent Technology Investments

We study the effect of financial risk on the economic evaluation of a project with capacity decisions. Capacity decisions have an important effect on the project̂s value through the up‐front investment, the associated operating cost, and constraints on output. However, increased scale also affects the financial risk of the project through its effect on the operating leverage of the investment. Although it has long been recognized in the finance literature that operating leverage affects project risk, this result has not been incorporated in the operations management literature when evaluating projects. We study the decision problem of a firm that must choose project scale. Future cash flow uncertainty is introduced by uncertain future market prices. The firm's capacity decision affects the firm's potential sales, its expected price for output, and its costs. We study the firm's profit maximizing scale decision using the CAPM model for risk adjustment. Our results include that project risk, as measured by the required rate of return, is related to the inverse of the expected profit per unit sold. We also show that project risk is related to the scale choice. In contrast, in traditional discounted cash flow analysis (DCF), a fixed prescribed rate is used to evaluate the project and choose its scale. When a fixed rate is used with DCF, a manager will ignore the effect of scale on risk and choose suboptimal capacity that reduces project value. S/he will also misestimate project value. Use of DCF for choosing scale is studied for two special cases. It is shown that if the manager is directed to use a prescribed discount rate that induces the optimal scale decision, then the manager will greatly undervalue the project. In contrast, if the discount rate is set to the risk of the optimally‐scaled project, the manager will undersize the project by a small amount, and slightly undervalue the project with the economic impact of the error being small. These results underline the importance of understanding the source of financial risk in projects where risk is endogenous to the project design.     

Two Variations of the Minimum Steiner Problem

Given a set S of starting vertices and a set T of terminating vertices in a graph G = (V,E) with non-negative weights on edges, the minimum Steiner network problem is to find a subgraph of G with the minimum total edge weight. In such a subgraph, we require that for each vertex s S and t T, there is a path from s to a terminating vertex as well as a path from a starting vertex to t. This problem can easily be proven NP-hard. For solving the minimum Steiner network problem, we first present an algorithm that runs in time and space that both are polynomial in n with constant degrees, but exponential in |S|+|T|, where n is the number of vertices in G. Then we present an algorithm that uses space that is quadratic in n and runs in time that is polynomial in n with a degree O(max {max {|S|,|T|}–2,min {|S|,|T|}–1}). In spite of this degree, we prove that the number of Steiner vertices in our solution can be as large as |S|+|T|–2. Our algorithm can enumerate all possible optimal solutions. The input graph G can either be undirected or directed acyclic. We also give a linear time algorithm for the special case when min {|S|,|T|} = 1 and max {|S|,|T|} = 2.The minimum union paths problem is similar to the minimum Steiner network problem except that we are given a set H of hitting vertices in G in addition to the sets of starting and terminating vertices. We want to find a subgraph of G with the minimum total edge weight such that the conditions required by the minimum Steiner network problem are satisfied as well as the condition that every hitting vertex is on a path from a starting vertex to a terminating vertex. Furthermore, G must be directed acyclic. For solving the minimum union paths problem, we also present algorithms that have a time and space tradeoff similar to algorithms for the minimum Steiner network problem. We also give a linear time algorithm for the special case when |S| = 1, |T| = 1 and |H| = 2.An extended abstract of part of this paper appears in Hsu et al. (1996).Supported in part by the National Science Foundation under Grants CCR-9309743 and INT-9207212, and by the Office of Naval Research under Grant No. N00014-93-1-0272.Supported in part by the National Science Council, Taiwan, ROC, under Grant No. NSC-83-0408-E-001-021.     

The age of exploration and exploitation: Younger-looking leaders endorsed for change and older-looking leaders endorsed for stability

The current contribution extends theorizing on leadership and the exploration–exploitation dilemma using an evolutionary perspective. A theoretical connection is made between the exploration–exploitation dilemma and age-biased leadership preferences for exploratory change versus stable exploitation. For the majority of human evolution our species was semi- or entirely nomadic and the trade-off between exploration versus exploitation had substantial physical- and experience-based requirements which align with leadership opportunities as moderated by age. Thus, given the consistency and importance of correctly assigning leadership for the exploration–exploitation dilemma, human evolution has likely selected for age-biased leadership endorsement. Across three experiments we find that younger-looking leaders are endorsed for times of exploratory change and older-looking leaders for stable exploitation. Further, our results indicated that older leaders are endorsed for leading conservative exploitation of nonrenewable resources and younger leaders for exploration of renewable alternatives (i.e., green leadership). The results introduce an age-biased leadership endorsement hypothesis.     

Risk analysis of PCB exposure via the soil-food crop pathway, and alternatives for remediation at Serpukhov, Russian Federation.

A risk assessment was conducted to determine the likelihood of certain health risks resulting from exposure to soils and food crops contaminated with polychlorinated biphenyl (PCBs). PCBs have contaminated soils, river sediments, and air in the past as a result of industrial activities at a capacitor plant located in the City of Serpukhov, Russian Federation. This risk assessment and suggestions for remediation are designed to aid in decision-making efforts by a joint Russian-American research team developing a community, national, and international response to industrial contamination. Bobovnikova et al. (The Science of the Total Environment 139/140, 357-364, [1993]) have reported that PCBs are elevated in soils and sediments, breast milk, and locally grown foods in the Serpukhov area. Data from these and other investigators have been used in this risk assessment to calculate a potential cancer risk resulting from exposure to PCBs. Our assessment indicates that members of the local population may be at increased risk of cancer, and possibly other adverse health effects, as a result of PCB contamination of their environment. Because previously unassessed environmental contamination is a common problem in the former Soviet Republics, as well as many other areas of the world, we believe this type of evaluation, using known methods, can serve as a model for assessment efforts in other parts of the globe and result in remediative efforts in regions constrained by faltering economies.     

Assessment of Airborne Exposure to Trihalomethanes from Tap Water in Residential Showers and Baths

This study evaluates airborne concentrations of common trihalomethane (THM) compounds in bathrooms during showering and bathing in homes supplied with chlorinated tap water. Three homes in an urban area were selected, each having three bedrooms, a full bath, and approximately 1,000 square feet of living area. THMs were concurrently measured in tap water and air in the shower/bath enclosure and the bathroom vanity area using Summa canisters. Chloroform (TCM), bromodichloromethane (BDCM), and chlorodibromomethane (CDBM) were quantified using U.S. Environmental Protection Agency (EPA) Method TO-14. Air samples were collected prior to, during, and after the water-use event for 16 shower and 7 bath events. Flow rate and temperature were measured, but not controlled. The increase in average airborne concentration (+/- standard error) during showers (expressed as microg/m3 in shower enclosure or bathroom air per microg/L in water) was 3.3+/-0.4 for TCM, 1.8+/-0.3 for BDCM, and 0.5+/-0.1 for CDBM (n = 12), and during baths was 1.2+/-0.4 for TCM, 0.59+/-0.21 for BDCM, and 0.15+/-0.05 for CDBM (n = 4). The relative contribution of each chemical to the airborne concentrations was consistent for all shower and bath events, with apparent release of TCM > BDCM > CDBM. The results are therefore consistent with their relative concentration in tap water and their vapor pressures. When the shower findings for TCM are normalized for water concentration, flow rate, shower volume, and duration, the average exposure concentrations in these urban residences are about 30% lower than those reported by other investigators using EPA analytical methods. This difference is likely attributable primarily to greater air exchange rates in residential shower/bath stalls compared to more "airtight" laboratory shower chambers. This appears to be the first field study to thoroughly evaluate THM exposures from residential showers and baths, and can be used to validate previously published models of tap water volatile chemical transfer to indoor air.     

Perceived Environmental Uncertainty, Entry Mode Choice and Satisfaction with EC-MNC Performance

Previous theoretical and empirical research provides substantial support for a contingency approach toward international entry-mode selection. Similarly, additional empirical research supports the notion that different international ownership-based entry modes tend to be associated with varying performance levels. In this study we provide an initial attempt to use Werner, Brouthers and Brouthers' (1996) multiple measures of Perceived Environmental Uncertainty (PEU) to determine the entry mode choices of firms and link these risk-adjusted mode choices to managerial satisfaction with firm performance. We hypothesize and find that firms which make PEU risk-adjusted entry mode choices are significantly more satisfied with their firm's performance than firms whose entry mode choices cannot be predicted using multiple PEU risk measures.     

Evaluating risk: global fees and episodic care

In 1999, two articles in The Physician Executive -- "Part I: Global Theory and the Nature of Risk (July-August)." and "Part II: Towards a Choice-Based Model of Managed Care (October-November)" -- outlined the flaws of orthodox managed care theory and highlighted the unique advantages of moving to a genuinely market-based model, which included the concept of direct contracting for integrated episodes of care. This follow-up focuses on comparing an episode contracting system to a traditional capitated program and outlines the features that make this approach much more attractive to physicians, payers, and most importantly patients.     

Bridging Scholarship in Management: Epistemological Reflections

If the relevance gap in management research is to be narrowed, management scholars must identify and adopt processes of inquiry that simultaneously achieve high rigour and high relevance. Research approaches that strive for relevance emphasize the particular at the expense of the general and approaches that strive for rigour emphasize the general over the particular. Inquiry that attains both rigour and relevance can be found in approaches to knowledge that involve a reasoned relationship between the particular and the general. Prominent among these are the works of Ikujiro Nonaka and John Dewey. Their epistemological foundations indicate the potential for a philosophy of science and a process of inquiry that crosses epistemological lines by synthesizing the particular and the general and by utilizing experience and theory, the implicit and the explicit, and induction and deduction. These epistemologies point to characteristics of a bridging scholarship that is problem-initiated and rests on expanded standards of validity. The present epistemological reflections are in search of new communities of knowing toward the production of relevant and rigorous management knowledge.