Management Insights
Authors: Gorman Michael F. 
Published: September 2012

Catherine H. Tinsley, Robin L. Dillon, Matthew A. Cronin When Hurricane Katrina devastated the Gulf Coast in 2005, the public and media alike wondered why so many people failed to evacuate and why the government and first-responder organizations were not prepared. These questions tend to arise in the aftermath of natural and man-made disasters, and the answers can often be found in people's previous experiences. In the lead-up to Katrina, Governor Haley Barbour of Mississippi warned of “hurricane fatigue”—the possibility that his constituents would not evacuate because they had successfully weathered earlier storms. The authors study the effect of prior “near-miss” experiences, which they define as events that have some nontrivial expectation of ending in disaster but, by chance, do not. The authors demonstrate that when near misses are interpreted as disasters that did not occur, people illegitimately underestimate the danger of subsequent hazardous situations and make riskier decisions such as not evacuating. On the other hand, recognizing and interpreting near misses as disasters that almost happened will counter the basic “near-miss” effect and encourage more mitigation. The insight for management: We might learn from our experiences, but we are often misled by near-miss experiences.

Elena Belavina, Karan Girotra There has been phenomenal growth of supply chain intermediaries that source products or services on behalf of other firms. These often completely take over the sourcing function: They select, verify, and approve suppliers; they allocate business between different suppliers; and they manage the relationship with each supplier, including provision of incentives for investments, performance, and compliance. The authors provide a novel explanation for the use of supply chain intermediaries. They find that, even in the absence of the well-known transactional and informational advantages of mediation, intermediaries improve supply chain performance. In particular, intermediaries facilitate responsive adaptation of the buyers' supplier base to their changing needs while simultaneously ensuring that suppliers behave as if they had long-term sourcing commitments from buying firms. In the face of changing buyer needs, an intermediary that sources on behalf of multiple buyers can responsively change the composition of future business committed to a supplier such that a sufficient level of business comes from the buyer(s) that most prefer this supplier. On the other hand, direct buyers that source only for themselves must provide all their committed business to a supplier from their own sourcing needs, even if they no longer prefer this supplier. The insight for management: Intermediaries have continued to flourish despite reductions in information asymmetries in the marketplace.

John M. de Figueiredo, Brian S. Silverman How do the density and governance of vertically related populations affect the life chances of organizations? The authors present a theory of how (1) specialized upstream industries affect downstream survival rates, (2) the prevalence of different governance forms among upstream and downstream organizations moderates this relationship, and (3) different forms of governance exert differential competitive pressures on focal organizations. The authors conduct an empirical analysis of the downstream laser printer industry and upstream laser engine industry, finding support for their hypotheses. The insight for management: Density of suppliers in upstream industries affects the survival rates of downstream firms.

Dina Mayzlin, Hema Yoganarasimhan Why would competing bloggers link to one another? The authors explain why a rational blogger may choose to link to another blog. Bloggers might differ along two dimensions, such as (1) the ability to post news-breaking content and (2) the ability to find news in other blogs. By linking, a blog signals to the reader that it will be able to direct her to news in other blogs in the future. The downside of a link is that it is a positive signal of the rival's news-breaking ability. One implication of the linking mechanism is that blogs that are high on the news-breaking ability are more likely to gain readers. The insight for management: Despite the fact that bloggers link for purely selfish reasons, the effect of this activity is that readers' learning is enhanced.

Eric von Hippel, Jeroen P. J. de Jong, Stephen Flowers How do consumers and businesses contribute to new product innovation? Based on a sample of 1,173 UK consumers age 18 and older, the authors estimate this type of household sector innovation to be quite large: 6.1% of UK consumers have engaged in consumer product innovation during the prior three years. They also find that, in aggregate, consumers' annual product development expenditures are more than 1.4 times larger than the annual consumer product R&D expenditures of all firms in the United Kingdom combined. Consumers engage in many small projects that seem complementary to the innovation efforts of incumbent producers. Consumer innovators very seldom protect their innovations via intellectual property, so they are more likely to spread. These results imply that, at the country level, productivity studies yield inflated effect sizes for producer innovation in consumer goods. The insight for management: Companies should reconfigure their product development systems to find and build on prototypes developed by consumers.

J. N. Hooker, H. P. Williams How can mathematical models blend the needs of the conflicting objectives of equity and utilitarianism in social policy making such as healthcare? Equity is the maximization of the minimum utility over individuals or classes of individuals. Utilitarianism maximizes the efficiency or total benefit generated regardless of its distribution. The authors develop a model that estimates these trade-offs. The authors apply the formulation to a healthcare planning problem to demonstrate that these problems are easily solved by standard software. The insight for management: Tough trade-offs between fairness and efficiency can be estimated via mathematical modeling.

Mehmet Gümüş, Saibal Ray, Haresh Gurnani Is a low-price supplier worth the risk? The risk of supply disruption increases as firms seek to procure from cheaper, but unproven, suppliers. Imagine a supplier that is comparatively more reliable but also more expensive than another supplier that is less reliable but cheaper and faces higher risk of disruption. Which to choose? The problem is complicated only if it might be hard to recognize the unreliable supplier, increasing the buyer's purchasing risk. The risky supplier might provide a price and quantity guarantee to the buyer. The authors show that such guarantees allow the unreliable supplier to better compete against the more reliable one by providing supply assurance to the buyer. In spite of these benefits, a guarantee offer may not always be desirable for the buyer. The insight for management: Low price and volume guarantees can reduce competition between suppliers, resulting in higher costs for the buyer.

Omar Besbes, Costis Maglaras How do earnings estimates affect pricing and sales behavior? The authors consider a seller that starts with an initial inventory of goods, has a target horizon over which to sell the goods, and is subject to a set of financial milestone constraints on the revenues and sales that need to be achieved at different time points along the sales horizon. For example, a builder of a multiunit, residential real estate development might have many intermediate milestone constraints on cash flow that play an important role in financing and construction plans. The authors propose an optimal policy can be written in “feedback form,” where the price at each point in time is selected so as to track the most stringent among all future milestones. The authors propose a discrete-review policy that aims to dynamically track the appropriate milestones, and they show that this simple and practical policy is nearly optimal in settings with large initial capacity and long sales horizons even in settings with no advance demand model information. The insight for management: Choose your goals carefully; they have real impact on pricing and production plans over time.

Andrew E. B. Lim, J. George Shanthikumar, Gah-Yi Vahn Do your investment returns keep up with the Joneses? Regardless of portfolio performance, the authors suggest that portfolio value is often measured relative to the performance of someone else. “Relative regret” evaluates a portfolio by comparing its return to a family of benchmarks, where the benchmarks are the returns of fictitious investors who invest optimally given knowledge of the model parameters. The optimal relative regret portfolio is the one that performs well in relation to all of the benchmarks. The authors' results show that regret is a natural means by which robust decision making and learning can be combined. The insight for management: Portfolio performance is gauged in a relative manner; investing behavior changes based on how alternative portfolios are performing.

Michael Padilla, Benjamin Van Roy As much as 12% of the daily volume on the New York Stock Exchange, and similar volumes on other major world exchanges, involves sales by institutional investors to brokers through blind portfolio auctions. Blind portfolio auctions typically take the form of a first-price sealed-bid auction in which the seller engages a few potential brokers and provides limited information about the portfolio being sold. Uncertainty about the portfolio contents reduces bids, effectively increasing the transaction cost paid by the seller. How might a trusted intermediary reduce transaction costs? The authors propose a mechanism through which each party provides relevant private information to an intermediary who ultimately reveals only the portfolio contents and price paid, and only to the seller and winning broker. The insight for management: There may be a substantial potential benefit to sellers of such an intermediary; a seller can reduce expected transaction costs by more than 10% through this approach.

Sezer Ülkü, Claudiu V. Dimofte, Glen M. Schmidt Products such as PCs, cameras, and cell phones can be released more quickly, with more future feature flexibility, and can achieve a longer product life through a modular design. Although product modularity is often advocated as a valuable design strategy in operations, little is known about how consumers respond to modular products. The authors describe consumer response to modularly upgradeable products in settings featuring technological change. They consider both the initial product design choice and the subsequent consumer upgrade decision to replace a module or replace the entire product. The authors find that consumers tend to discount the cost savings associated with modular upgrades excessively when the time between the initial purchase and the upgrade is short and tend to value it excessively over longer intervals. This finding suggests that modular upgradability as a product feature has higher profit potential for slowly rather than rapidly improving products. The authors also observe a preference reversal between the initial purchase and the point of upgrade: At the point of initial purchase, people foresee making a full product replacement in the future, yet, when faced with the actual upgrade decision, they are more likely to revert to modular upgrades. The insight for management: Consumers' perspectives on modular products evolve the use of the product, directly affecting the desirability of modular design.