Management Insights
Authors: Gorman Michael F. 
Published: April 2011

Christine Harbring, Bernd Irlenbusch Does forced employee ranking inspire greatness or lead to backbiting and lack of harmony in the workforce? The authors study “sabotage”—the tendency to diminish coworkers' perceived performance in order to enhance one's own relative performance—in a controlled laboratory experiment. They find that both productive work effort and destructive sabotage are higher for higher wage spreads. However, they find that sabotage does not grow as the total wages at risk grow, holding wage spreads constant, but, conversely, higher total wage pools do not reduce sabotage. Interestingly, in their experiment, simply by explicitly calling them by their name, “sabotage,” such destructive activities are reduced. This is also the case with increased communication to reduce sabotage. The authors note that if sabotage is not possible, then wage differentials based on forced rankings are more often used by management. The insight for management: Ranking-based pay increases can inspire more effort, but some misguided efforts might be toward diminishing others' perceived output rather than increasing team output. Managers should be aware of and actively seek out such incentives, and they should communicate clearly that such destructive behaviors are not tolerable to derive the desired effects of merit-based pay increases.

Ping Hu, Jayant R. Kale, Marco Pagani, Ajay Subramanian What is the relation between a fund manager's career concerns and the risk level choices she makes in managing funds? Using a large sample of mutual fund managers, the authors find an approximately U-shaped relation between a manager's risk choices and prior performance relative to her peers. That is, significantly outperforming managers are less likely to be fired in the future, so they are likely to take on more relative risk, but, interestingly, underperforming managers are more likely to be fired in the future, so they also take on more risk. This relationship is more pronounced in younger fund managers. The relationship is less pronounced in large fund families and funds with higher expense ratios. The insight for management: Employment risk is a major underlying driver of fund risk tolerance by fund managers.

Wiebke Höhn, Felix G. König, Rolf H. Möhring, Marco E. Lübbecke Salzgitter Flachstahl GmbH, a major German steel producer, has implemented advanced optimization methodologies to their complex production planning problem in integrated steel production. A production plan comprises the sequencing of coils of different geometries and colors, but changes in size or color necessitate time-consuming and costly setup work. On the other hand, long production runs increase the average makespan (time to completion) of coils. In their production process, a sequence of coils of sheet metal needs to be coated with color in consecutive stages. In most coating stages one can choose between two parallel color tanks. This can either reduce the number of setups needed or enable setups concurrent with production. The authors developed an optimization model for this integrated sequencing and scheduling problem. This has led to an average reduction in makespan by more than 13% and has greatly exceeded expectations. The insight for management: Advanced optimization techniques can help planners reduce makespan while considering setup costs.

Timothy N. Cason, Karthik N. Kannan, Ralph Siebert In traditional and online buyer auction markets, is it better to share all bidder information after an auction, or only reveal the winning bid information? Bidders have a desire to learn the content of competitors' bids, but they also have a vested interest in preventing an opponent from learning their bid information. The authors use an experimental setting to compare complete information with imperfect information policies. Although more information extraction might spur more competition, bidders also are inclined to submit a deceptively higher bid to prevent an opponent from learning more about their costs. The authors find that risk-averse behaviors in bidders drives lower purchase prices in markets with incomplete information in markets that are highly competitive. Interestingly, bidders bid lower than theory would predict in complete information markets, perhaps because of some desire to win clouding profit maximization behavior on the part of the bidders. The insight for management: Information sharing policies in auctions affect bidding strategies and procurement prices.

Basak Kalkanci, Kay-Yut Chen, Feryal Erhun Why are simple contracts that result in theoretically predicted suboptimal outcomes often preferred in practice? The authors use an experimental supply chain setting where the buyer has better information on customer behavior than the supplier. The supplier offers either a quantity discount contract (with two or three price blocks) or a price-only contract, contracts that are commonplace in practice yet different in complexity. The experimental results show that, contrary to theoretical predictions, quantity discounts do not necessarily increase the supplier's profits. Why do theory and practice differ? The authors identify three decision biases (probabilistic choice bias, reinforcement bias, and memory bias) that do not appear in theoretical models. As a result, they exhibit a bias toward decisions that they have already chosen and inertia that slows the movement to new decisions. The insight for management: In some market structures, simpler contracts are sufficient for a supplier designing contracts when decision biases are taken into account.

Jack Stecher, Timothy Shields, John Dickhaut How does a decision maker's perception of probability and ambiguity affect their decisions? This article develops a method to provide researchers with a way to give subjects the experience of ambiguity. Probability-based decisions can be made via calculation of expected values; however, in the face of ambiguity, decision makers must make decisions with unknown probabilities—a much harder proposition. Furthermore, it is difficult for researchers to emulate such uncertainty well, given that the researchers themselves know the actual probabilities, creating an asymmetry of information and obscuring experimental results. These authors create a method that eliminates the asymmetry of information and thus generates true ambiguity in an experimental setting. The insight for management: Ambiguous environments can now be better emulated, allowing researchers to contribute more to the study of ambiguous decisions.

Gad Allon, Achal Bassamboo Expedia tells the user, “Only 2 seats left at this price!” Is this an effective way to generate an immediate sale? Is the customer more likely to buy given this information? The consumer has to decide how to act on unbinding and unverifiable claims. The challenge for the retailer is what (if anything) to say and how to say it. The authors study retailers who are strategic in how they provide such information, and customers are strategic in the way they interpret information and their resulting purchase decisions. Using a game-theoretic framework, they show that when customers are largely homogeneous, such claims in fact carry no actual information; the retailer cannot create any credibility with the customers. However, when customers' willingness to pay and willingness to “wait and see” vary, such claims can influence some consumers' behaviors; however, on net, the total effective demand is not impacted. The insight for management: Be careful using limited supply information tactics to entice a quick sale; credibility can be lost with little influence on behavior or net sales.

Bo Jiang, Xubing Zhang Car dealers and electronics stores regularly offer extended warranties or service plans beyond what the manufacturer offers. Do such offers affect the manufacturer's warranty? Generally, a base warranty is offered when the manufacturer is very cost efficient in providing a warranty relative to the retailer. But the authors find that service plan offerings of retailers can cause reduced manufacturer's warranties. If the customer can assess the probability of product failure, the manufacturer is more likely to offer a limited base warranty and the retailer is provoked into enlarging the service plan coverage. On the other hand, when consumers cannot assess product quality, a high-quality manufacturer is motivated to offer a better base warranty to signal its quality. Interestingly, if the retailer offers a service plan, the manufacturer is discouraged from doing so. The insight for management: Manufacturers' warranties and retail service plans are often substitutes.

Yunchuan Liu, Rajeev K. Tyagi Make or buy? This classic decision affects all industries and has given rise to outsourcing, offshoring, and the title chief sourcing officer. Typically, decisions center on the cost and benefits when production is outsourced to lower-cost upstream suppliers. But what about outsourcing production to upstream suppliers who do not have any advantages on production costs? The authors show how downstream firms can still benefit from upward channel decentralization provided they can adjust their product positioning. The authors suggest that upstream outsourcing provides more incentives for downstream firms to engage in more product differentiation, allowing them to benefit from the resulting softening of price competition. The authors use similar logic to show a new benefit to manufacturers selling through downstream retailers rather than directly. Interestingly, this has negative implications for consumer welfare. The insight for management: Outsourcing production upstream in the supply chain might lead to greater product differentiation and lower price competition; benefits outside of cost savings alone should be considered.

Pavan Rao Chennamaneni, Ramarao Desiraju McDonald's and Disney regularly cross-promote products, and presumably both sides gain—but do more people go to the movie because of a toy, or do more people get the Happy Meal because of the movie? McDonald's might be able to do more to promote moviegoing, but such a benefit to the alliance is discounted or ignored by McDonald's as it makes its decisions. The problem grows more complex as more partners, such as Coca-Cola, enter the alliance. More generally, how should comarketing contracts such as this one be structured to ensure that both partners invest appropriately in such promotions? One could construct a contract based on “effort” put into the promotions such as ad dollars, or “outcomes” of the promotion such as the number of Happy Meals sold. The authors find that, when there is a relatively weak positive externality, outcome-based contracts are preferred, but, when the externality is strong, effort-based contracts are better. The insight for management: Comarketing alliance contract structure directly affects participation and the success of the effort.

Robert Swinney, Gérard P. Cachon, Serguei Netessine Does the capacity investment timing of established firms and start-ups in new markets differ? When choosing how much capacity to build or reserve with a supplier, the trade-off is clear: Too much capacity results in underutilized facilities or depressed prices, whereas too little capacity results in reduced sales and suboptimal profit and growth. The authors find that established firms tend to choose an investment timing and capacity level to maximize expected profits, whereas start-ups focus on maximizing the probability of survival. Surprisingly, the authors find that when a start-up competes against an established firm in the face of high market size uncertainty and slowly declining costs, the start-up takes a leadership role and invests first in capacity; two established firms would both invest later. The insight for management: The composition of start-ups and established firms significantly impacts the dynamics of competition involving start-ups.

Gérard P. Cachon, Robert Swinney Fashion apparel firms such as Zara and Benetton have increasingly embraced “fast fashion” retailing; an operating philosophy that includes “quick response”—short production and distribution lead times to better match supply with uncertain demand, and “enhanced design” to support highly trendy fashion models. But some “strategic buyers” are glad to wait to get yesterday's hot fashions at greatly reduced prices. Does fast fashion result in fast discounting? Which of these capabilities have the most impact on the strategic delay in purchasing in order to obtain the item later at a discount? The authors find that enhanced design helps to reduce customer deferral by offering consumers a product they value more and are less willing to risk missing out on. Quick response also reduces the clearance by better matching supply to demand, thereby reducing the chance of a clearance sale. Most importantly, the authors find that, when both quick response and enhanced design are combined in a fast fashion system, the firm typically enjoys a greater incremental increase in profit than the sum of either system in isolation. Finally, these strategies work best when customers are most strategic in their buying. The insight for management: Fast fashion systems can be of significant value, particularly when consumers exhibit strategic behavior.