Thursday, November 18, 2010

Management Research: Flukes or Replicable Trends?

A recent academic study is in the news for finding precognition effects – the influence of future events on our present responses. Such a study is certainly innovative and shows dramatically new results – yet is it believable? It is interesting to see that in a field such as psychology, the entire discussion on the study has immediately shifted to replication: are the statistical results a fluke or do they represent a trend? 

I wonder why a similar conversation in the management world is so rare. The experience of many researchers suggests (and statisticians accept) that it is common knowledge that statistical relationships reported in journals can change based on even one change in a control variable. This should mean that for research in the quantitative tradition claiming some sort of generalizability, replication of statistical results is necessary before any judgments can be made. Yet, the top journals reject replication outright. How sensible is this for developing knowledge in a field? A few have raised such questions (amongst those I have seen: Don Hambrick in his later articles and conference talks). Yet, the institutionalized system conveniently ignores this obvious truth. One can't have any "evidence based management" without giving topmost priority to replications.

It is in part due to this, that the vast "top journal articles" in management, and particularly strategic management, without replication, are sitting up there without any clarity on whether these are one-off fluke results or replicable trends. Knowing whether they are either of these would help and add to knowledge. Flukes are useful. As are trends. But there is little use for results when this distinction about them is unclear.

Some would counter that meta-analyses do this job. Though helpful, these are not the same thing. Problems with these are well known due to the fact that after all, the original studies that are meta-analyzed were not meant to be meta-analyzed and were not intended as replications. You can't suddenly solve the problem of lack of replication using a large number of studies that were fundamentally not meant to be replications anyway.

It is futile to talk of improving or writing more in “management implication” sections (implying use for Practice), when the basic nature of the research is unclear on the above counts. Glossing over the problem by writing more in implication sections will do little to convince practicing managers.

What are the approaches in other fields? Certainly not all methodological approaches from other fields make sense in our field, but at least the basic idea of replication - in whatever form is appropriate for a field - seems to be a necessity for quantitative tradition research to progress in terms of actual impact.

In a different field (say biomedical engineering), imagine developing a polymer and reporting one test of its characteristics in one top journal article. Imagine now that all those scientists who try to replicate this in various contexts and counter or support the earlier results are not published, simply because they are: replications. Is there anyone out there who will have any faith in the characteristics of this polymer, let alone set up a firm to manufacture it. Yet, that is what we expect management practice to do. And when many of them seek out the "witch doctors" of management who promise wild results without enough evidence, we shake our heads at their credulity. Yet, our own research approaches do little to offer an alternative. With all our rigor and obsession with "top journals", we offer little else than what the "witch doctors" offer.

In writing a case on the innovative biotechnology industry, known for rigorous clinical trials, I was forced to do some lateral thinking. Why shouldn't management research be treated in the same way as a drug/medical innovation, and go through similar (perhaps voluntary but documented) "clinical" trials? Management ideas work on a larger plane, and wrong ideas could cause much damage in socio-economic terms.

Imagine asking these four basic questions of any management innovation that you read about in the journals or elsewhere, which aspires to have an impact on management practice. These are based on the stages of clinical trials in the drug industry:

# Is the innovation safe? (what are potential “side-effects” – what could this management innovation impact negatively in the organization)

# Does it work at all? (can it show any effectiveness in practice)

# Does it work better than standard treatment? (should we really throw out old practices or are they sufficient)

# Is the treatment safe over time? (will it cause longer-term harm – think about issues such as sustainability, environment, society, etc.)

None of these are given even token attention in the propagation of management ideas. Shouldn't there be such standards and clinical trials for management innovations?

Monday, November 8, 2010

Revisiting Basics: Cost Leadership

By Dr. Glenn Rowe

You have a great idea! It is a process innovation that could dramatically reduce the cost of a desired product/service on a per unit basis. But, you find there will probably be a price war when you enter the market. What strategy should you pursue?

You decide to pursue cost leadership because you can do it less expensively than your competitors. You have some differentiation but your focus will be on keeping the per-unit cost below that of your competitors. That low cost will allow you to be competitive on price.

There are several sources of cost leadership. Some are scale related such as volume per specialized machine or plant and equipment. It could be technological hardware such as robotics or policy choices as to what you will produce and sell. All of these are easy for competitors to overcome. A second group of sources of cost leadership may be learning curve economies – these are harder, but still possible, to imitate. A third group consists of access to low cost production factors such as labour, capital, land, and/or raw material while the fourth group consists of management processes, relationships between managers and employees, and/or culture. These last two groups are hardest for competitors to imitate.

How do you assess if you have the resources to support cost leadership?

To assess this you should conduct a thorough analysis of your firm’s value chain. Here are five key questions to start.

1) Can you efficiently control and inventory raw materials?

2) Do you have the operational elements to reduce production costs and to increase the efficiency of layout and work-flow design required to add value to the raw materials going into your product/service.

3) Will your outbound logistics ensure timely/efficient delivery of your service/product?

4) Do you have marketing and sales consistent with cost leadership?

5) Is your customer service appropriate for cost leadership and is it cost effective?

All of these areas need to be supported by an effective procurement system, a supportive HRM system, efficient and appropriate technology and a senior management team that can effectively integrate all activities across the value chain and effectively manage your firm’s cash flow.

The next step is examining the structure, control systems and reward systems needed to support cost leadership. Structurally, consider setting up a reporting structure with only a few layers, create simple reporting relationships, have a small headquarters staff and focus on a narrow range of business functions outsourcing other functions as efficiently as possible. Your control systems should include a cost leadership philosophy, tight cost controls, quantitative cost controls, and close supervision of the costs of labour, raw material, inventory, etc. Compensation needs to be structured to reward for cost reduction and there need to be incentives for all employees to be involved in cost reduction. Compensation may be the hardest thing to do when pursuing cost leadership. As with a differentiation strategy your leadership and preferences should always be top of mind.

For you, is it being a strategic leader, a managerial leader or a visionary leader that will support cost leadership? Ask yourself what type of culture you want to develop. A company like Westjet has created a culture focused on participation and pitching in that supports their cost leadership strategy. Are you the leader to do this? Another key question is: what are the preferences of your stakeholders and investors? How do you best sell your cost leadership strategy to them?

Answering these questions will ensure the effective pursuit of a cost leadership strategy.
*Dr. Glenn Rowe is the Director of the Executive MBA Program at the Richard Ivey School of Business, Canada. He is an Associate Professor of Strategic Management and holds the Paul MacPherson Chair in Strategic Leadership.