Management Insights

Tournaments Without Prizes: Evidence from Personnel Records (p. 1721)

Jordi Blanes i Vidal, Mareike Nossol

How does feedback affect performance? The authors study a firm in which workers are paid piece rates where management begins to reveal to workers their relative position in the distribution of pay and productivity. Are workers' incipient concerns about their relative standing activated by information about how they are performing relative to others? The authors find that workers are motivated by such information. The insight for management: Merely providing this information leads to a large and long-lasting increase in productivity that is costless to the firm.

Selling to Strategic Consumers When Product Value Is Uncertain: The Value of Matching Supply and Demand (p. 1737)

Robert Swinney

When a new product is introduced, consumers have the option of purchasing the product early, before its value has been learned, or delaying the purchase decision until a time at which valuation uncertainty has been resolved. At the same time, a firm may either commit to a single production run at a low unit cost prior to learning demand or commit to a quick response strategy that allows additional production after learning additional demand information. The author examines the value of quick response production practices when selling to a forward-looking consumer population with uncertain, heterogeneous valuations for a product. The author finds that the value of quick response is generally lower with strategic (forward-looking) customers than with nonstrategic (myopic) customers. The author finds that it is possible for a quick response strategy to decrease the profit of the firm—when prices are constant or when consumer returns are not allowed. The insight for management: The value of quick response methods depends on customer purchasing strategies.

Dynamic Portfolio Optimization with Transaction Costs: Heuristics and Dual Bounds (p. 1752)

David B. Brown, James E. Smith

How can one best dynamically optimize a portfolio over time considering risk aversion, portfolio constraints, return predictability, and transaction costs? As it turns out, the problem is very difficult to solve with more than one or two assets. The authors present several easy-to-compute heuristic trading strategies with a risk-free asset and 3 or 10 risky assets. The authors find that the performance of the heuristic strategy is very nearly optimal. The insight for management: Tough asset management problems are simplified through heuristics that lead to improved asset allocation without the complexity of optimization.

Integrating Long-Term and Short-Term Contracting in Beef Supply Chains (p. 1771)

Onur Boyabatlı, Paul R. Kleindorfer, Stephen R. Koontz

What are the optimal procurement, processing, and production decisions of a meat-processing company (a “packer”) in a beef supply chain? The packer processes fed cattle to produce two beef products, program (premium) boxed beef and commodity boxed beef, in fixed proportions, but with downward substitution of the premium product for the commodity product. The packer can source input (fed cattle) from a contract market, where long-term contracts are signed in advance of the required delivery time, and from a spot market on the spot day. The authors show that the packer benefits from a low correlation between the spot price and product market uncertainties, independent of the form of the contract. They show that higher variability (higher spot price variability, product market variability, and correlation) increases the profits of the packer but decreases the reliance on the contract market relative to the spot market. The insight for management: There is a value of long-term contracting as a complement to spot sourcing in the beef supply chain, and there is an interaction of contract terms with processing options.

Exogenous Learning, Seller-Induced Learning, and Marketing of Durable Goods (p. 1788)

Bing Jing

What is the interaction between exogenous learning (EL) such as magazine reviews and seller-induced learning (SIL) such as free trials and training programs? How do these approaches affect the firm's product release and pricing strategies? When learning of product characteristics takes some time, a firm introducing a new product such as appliances or technology faces the trade-off between releasing early to an uninformed market and deferring release to a better-informed market. The author notes three key findings. First, a strong learning intensity does not always imply deferred release. Second, SIL facilitates different product release strategies, depending on the unit cost level. Potential SIL investment facilitates early release for low or medium unit costs but may facilitate deferred release for high unit costs. Third, when customers have heterogeneous prior valuation, the high-end customers may buy early at a lower price and the low-end customers may buy later at a higher price. The insight for management: Product introduction timing depends on product complexity, cost, and form of product learning.

New Product Diffusion Decisions Under Supply Constraints (p. 1802)

Wenjing Shen, Izak Duenyas, Roman Kapuscinski

Would a supplier deny a customer a product that they have in stock? Previous research has delivered conflicting results. It has been shown that, intuitively, it is never optimal to refuse to satisfy any customers when the firm has inventory of the product. But it has also been shown that production constraints may in fact lead a firm to reject customers' orders even when the firm has the inventory to satisfy them to slow down new product diffusion. These authors find it may be optimal to deny customers a product in inventory, but only if dynamic pricing is not an option. The insight for management: The unintuitive but optimal behavior of denying customers products that are in inventory disappears when the firm can dynamically set prices.

The Circulation of Ideas in Firms and Markets (p. 1813)

Thomas Hellmann, Enrico Perotti

Why do innovation-driven clusters such as Silicon Valley form, and how do they facilitate progress? The authors strive to understand the generation, circulation, and completion of new ideas in firms and markets. The authors show that markets and innovative firms complement each other in a symbiotic relationship for cultivating ideas. Novel ideas are initially incomplete and require further insight before yielding a valuable innovation. Finding the complementary piece requires ideas to circulate, which creates appropriation risks. Circulation of ideas in markets ensures efficient completion, but, because ideas can be appropriated, market entrepreneurs underinvest in idea generation. Firms can establish boundaries that guarantee safe circulation of internal ideas, but, because firms need to limit idea circulation, they may fail to achieve completion. Spin-offs allow firms to benefit from the market's strength at idea completion, whereas markets benefit from firms' strength at generating new ideas. The insight for management: Diverse organizational forms (such as internal ventures, spin-offs, and start-ups) naturally coexist and mutually reinforce each other.

Demand Forecasting Behavior: System Neglect and Change Detection (p. 1827)

Mirko Kremer, Brent Moritz, Enno Siemsen

Information or noise? That's the question that forecasters regularly need to answer. In a laboratory, the authors analyze how individuals make forecasts based on time-series data. They find that forecasters regularly make these mistakes: Forecasters overreact to forecast errors in relatively stable environments but underreact to errors in relatively unstable environments. The insight for management: Surprisingly, forecasting performance loss due to such systematic judgment biases is larger in stable environments than in unstable environments.

Cash-Out or Flameout! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry (p. 1844)

Ashish Arora, Anand Nandkumar

Is it enough to survive, or does a new venture need to thrive in order to be a success? Typically, venture survival is used as the measure of success in research. These authors use both entity failure and cash-out as indicators. Interestingly, high-opportunity-cost entrepreneurs prefer a shorter time to success, even if this also implies failing more quickly. Entrepreneurs with fewer outside alternatives will choose less aggressive strategies and, consequently, linger longer. Using a novel data set of information security start-ups, the authors find that entrepreneurs with high opportunity costs (other options) are not only more likely to cash out more quickly but are also more likely to fail faster. The insight for management: Not only is survival a poor indicator of performance, but its use as one obscures the relationship among entrepreneurial characteristics, entrepreneurial strategies, and outcomes.

Intellectual Capital and Financing Decisions: Evidence from the U.S. Patent Data (p. 1861)

Qiao Liu, Kit Pong Wong

What are the distinct roles played by intellectual capital in corporate financing decisions? Whereas intellectual capital limits a firm's debt capacity because of its low liquidation value, it enhances a firm's debt capacity through its positive impact on earnings. Using data on patents and research and development, the authors show that which role dominates depends on whether the rate of dissipation of intellectual capital upon default is large. Specifically, a one-standard-deviation increase in the level of a firm's intellectual capital is associated with an increase of 6.6% to 21.1% in its market leverage. The authors find this positive relation to be stronger for biotechnology firms. The insight for management: Financing decisions and intellectual capital are interwoven.

Experienced vs. Described Uncertainty: Do We Need Two Prospect Theory Specifications? (p. 1879)

Mohammed Abdellaoui, Olivier L'Haridon, Corina Paraschiv

Prospect theory has been long well accepted as the best way to analyze decision making under risk. Generally, people evaluate an outcome relative to a reference point alternative, and often small probabilities are subjectively overweighted while higher probabilities tend to be underweighted. There is considerable debate as to whether decision makers behave differently when the probabilities are known (risk) and when they are not (uncertainty). Do decision makers behave differently when they are told the probabilities (description-based decisions) than they do when they learn the probabilities through experimentation themselves (experience-based decisions)? The authors observe a less pronounced overweighting of small probabilities and a more pronounced underweighting of moderate and high probabilities for experience-based decisions. On the contrary, for losses, no significant differences were observed in the evaluation of prospects across contexts. The insight for management: The two sources of information yield very similar decision making outcomes.