Management Insights
Authors: Gorman Michael F. 
Published: August 2010

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Corey M. Angst, Ritu Agarwal, V. Sambamurthy, Ken Kelley On February 17, 2009, U.S. President Barack Obama signed into law HR 1, the American Recovery and Reinvestment Act, which allocates $19.2 billion in funding to support the adoption and use of health information technology to reduce clerical errors and costs in health care. This leads to the important question: What mechanisms influence the swift and successful diffusion of technological innovations at hospitals? The authors use a “social contagion” model to study the diffusion of electronic medical records in the population of U.S. hospitals; hospitals have mutual influence on each other for information technology adoption. The authors look at 20 years of data from almost 4,000 U.S. hospitals and suggest that diffusion can be accelerated if specific attention is given to increasing adoption among well-known, larger, older hospitals in densely populated geographic regions. The insight for management: Targeting specific influential institutions for a new technology may vastly increase its rate of adoption.

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Hans K. Hvide, Jarle Møen On one hand, an entrepreneur needs sufficient capital to launch a new venture; on the other, scarcity of resources might create the need for their efficient allocation. The authors evaluate this age-old question in entrepreneurship: Which is better—to be “lean and hungry” or “fat and content”? The authors test this question by using a novel data set covering a large panel of start-ups from Norway. Not surprisingly, they find a positive relation between founder prior wealth and start-up size; if you have more, you spend more. They find that having sufficient resources improves profitability on assets over the first three wealth quartiles in their data. However, for the “fat and content” in the top wealth quartile, return on assets is adversely affected. The insight for management: Higher wealth may induce a less alert or a less dedicated management; an abundance of resources might do more harm than good for start-ups.

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Qiaowei Shen, J. Miguel Villas-Boas Is the presence of Toyota's Prius hindering the entrance of other hybrid automobiles in the marketplace? In developing industries like satellite radio and hybrid automobiles, firms have to decide whether and when to enter the market depending on the state of demand, existing firms in the industry, and the firm's capabilities. The authors investigate a model of increasing demand in which firms decide when to enter the market, anticipating the strategic behavior of other potential entrants and the effects of entry on future potential entrants. They show that, because early entry by a firm can deter future competitors' entry, firms may strategically enter the market at a rate faster than demand is expanding. With low barriers to entry, firms may be less likely to strategically enter ahead of demand because future competitor entry may limit future profit opportunity. The insight for management: In markets with barriers to entry, the first-mover advantage might include not only an established position in the market, but also greater market share in the long run because of fewer subsequent entrants.

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Christian Gollier, Alexander Muermann Don't worry—no matter what you decide, you'll regret it. —Author Unknown Formerly, decision makers were treated as stonemen when modeling how decisions are made; outcomes were evaluated on their merit only, not for the feelings of the decision makers up to the time the decision is made and after the outcome is realized. The authors propose a new decision criterion under risk in which individuals experience both anxiety before the decision and regret after. The decision maker may be an optimist, but this optimism increases both anxiety and regret at the time the outcome is recognized. The authors show that these feelings yield a preference for early resolution of uncertainty, and they predict that the decision maker takes on less risk compared with an expected utility maximizer. For example, such a decision maker is more likely to purchase an overpriced insurance contract with a low deductible; there is less anxiety at the time of decision as one awaits an outcome and less regret should the contract be enforced. The insight for management: People can exhibit behaviors consistent with reducing both anxiety and regret, structuring products that satisfy both of these desires and may perform admirably in the market.

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Achal Bassamboo, Ramandeep S. Randhawa, Jan A. Van Mieghem When a firm produces several different products, should the products share resources, or should the firm establish dedicated resources for some of them? Resource pooling improves utilization but may require that more employee training or less-efficient multipurpose capital resources be used in both processes. Dedicated resources reduce scheduling complexity and allow for more specialization. The authors suggest a way to find the optimal blend of specialized and shared resources. They find that increasing flexibility eventually exhibits decreasing returns, and they characterize the optimal flexibility configuration in a variety of situations. They evaluate “chaining” and “pairing” of similar resources to various tasks to strike a desirable flexibility/specialization blend; each resource might be assigned to at most two similar tasks, but more varied assignments can be detrimental. The insight for management: Resource flexibility to a limited degree can improve throughput and resource utilization but, if overused, can result in lost productivity.

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Xin Xu, Viswanath Venkatesh, Kar Yan Tam, Se-Joon Hong When I upgraded to third-generation (3G) wireless phone services, I considered a number of features and their interaction—not only coverage and cost, but also issues from operating system and user interface to available applications and e-mail provider interconnectivity. How do these complex interconnected advances in hardware and software capabilities affect consumer migration to new platforms and subsequent platform success? The authors develop and test a model of platform migration to explain consumers' reactions to the newest generation of an information and communication technology platform. They test the model with survey data from more than 4,000 consumers before and after the introduction of the 3G mobile data services platform in Hong Kong. The authors find that user perceptions of technology and social influences play a role but that technology complementarity and the extent of change in platform play a strong role in adoption decisions. The insight for management: Technological advances in complex products depend heavily on complementary advances in other areas for successful consumer migration; careful consideration to the timing and nature of advances must be given to encourage consumer migration.

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Jürgen Mihm The complexity of many products forces organizations to specialize in their new product development; an automobile, for example, has interior designers, exterior designers, and engine designers who work somewhat autonomously in their efforts to develop a new model. How do the incentives of these individual groups affect profitability and development time? What can management do to curtail overdesign and project delays in new product development? The author suggests that popular project management approaches may allow or even encourage engineers to introduce late design changes and exhibit weak cost compliance, reducing the product's profitability or competitiveness. The “heavyweight” project manager may be perceived as an inspector rather than a collaborator and may receive active or passive resistance rather than cooperation; engineers in various departments will work to maximize their own satisfaction rather than the product as a whole. The author proposes practical incentive schemes, including profit-sharing contracts and component-level target costing, which are shown to improve cost compliance and project timeliness. The insight for management: Appropriate incentive schemes and organizations can directly contribute to the successful new product development project.

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Yalçın Akçay, Harihara Prasad Natarajan, Susan H. Xu Firms are increasingly adopting revenue management methods to improve profits. The problem gets harder when there are multiple classes of substitutable products, such as standard and deluxe rental cars or hotel rooms. Because the products are substitutable, individual product demands are linked through consumer choice processes. Hence, the seller must formulate a joint dynamic pricing strategy while explicitly incorporating consumer behavior. The authors show that pricing policy must be based on the form of product differentiation: If one product is superior to the other across all consumers (e.g., a deluxe room), optimal pricing can be based solely on aggregate inventory rather than individual inventories of each product, and the inventory of higher-quality product determines the price difference between the two substitute products. For products without a uniformly clear customer preferences (such as early or late flight departure times), the authors show that individual, rather than aggregate, product inventory availability drives pricing for each product. The insight for management: Optimal yield management strategies of substitute products depend directly on the clarity of consumer preferences between them.

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Owen Q. Wu, Hong Chen The relationship between commodity inventory and short-term price variations is crucial to industries such as petroleum. The authors investigate the inventory–price relationship in two dimensions: across time and across production stages. They characterize the dynamics of inventory, market price, and gross margin based on theoretical analysis, simulation, and empirical evidence from the petroleum industry. They find that inventory fluctuations lag behind price variations and that the length of the lags depends on how far the inventory is from the source of the supply or demand shocks. They also find that shocks are both dampened and delayed when propagating through the production stages and that shocks have a prolonged effect on inventories and prices at both stages. The insight for management: The spot and futures markets for commodities such as oil depend heavily on the total inventory of oil throughout the supply chain.

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Frank Youhua Chen, Candace Arai Yano Weather is a great metaphor for life—sometimes it's good, sometimes it's bad, and there's nothing much you can do about it but carry an umbrella. —Pepper Giardino The U.S. National Research Council has estimated that 46% of U.S. gross domestic product is affected by weather. The authors consider a manufacturer–retailer supply chain for a seasonal product whose demand is weather sensitive. They examine how a manufacturer can structure his umbrella: a weather-linked rebate to improve his expected profit. Their proposed rebate contract offers advantages: It requires no verification of leftover inventory and/or markdown amounts, it has no adverse effect on sales effort by the retailer, it is flexible, and it offers opportunities for both manufacturer and retailer to limit their weather-related risk. The insight for management: Mutually beneficial weather-related hedging can improve supply chain performance and reduce risk.

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W. Stanley Siebert, Nikolay Zubanov Is your middle management worth what you pay them? The authors use unique data from 245 stores of a UK retailer to study links among middle (store) manager skills, sales, and manager pay. After controlling for a number of variables, they find that the best middle managers can produce 13.9% higher sales per worker than the worst. In this retail environment, “commercial awareness”—knowing the products, traffic patterns, and external perception of the store—is a key contributor to the success of the store manager. At this retailer, incentive-based contracts allow managers to share approximately 20% of the benefit (or loss) that they produce, but this does not match the benefits that they generate. Abler managers do not extract the full surplus that they produce, implying that their skills are company specific, producing a sort of competitive advantage in the marketplace. The insight for management: Your middle management can matter. Develop their skills in-house to create firm-specific human capital as a source of competitive advantage, and create incentive pay structures for middle management to keep them paid above market but below their marginal contribution to your company.