Value Competition

SCM and CSR: Take 3--Calculation and Culture

Some thoughts: 1) along with or instead of the holistic "calculation-culture" classification system used in my AoM paper last year, develop single word cues to make classifications; 2) examples of how social responsibility initiatives in SCM involve both a calculation and a cultural element--both W-M and Africa supply chain in pharm could fit in here. 

SCM and CSR: Take 2--Africa Supply Chain in Pharma

The efficiency and incentives challenges--relationship between the two.  Efforts by companies, NGOs, governmentsts, academics to increase efficiency and improve incentives.  "Calculation" and "culture" issues associated with efficiency and incentives.  Efforts to align incentives of people working in the supply chain with efficient outcomes.  Issues associated with non-profit distribution.

SCM and CSR: Take 1--Wal-Mart

Elements of a possible paper:

1.  The logic of SCM supports monitoring suppliers' social performance as well as other kinds of performance.   (Tie-in here to work on SCM, CSR, networked organizations--e.g., Rob Phillips 2009 SBE presentation)

2.  Different and sometimes competing definitions of social performance: For example, for suppliers of an American MNC in a lower-income country to pay above-market wages could be considered either  a socially responsible sharing of economic benefits with the least fortunate or a socially irresponsible capitulation to local and/or international pressure that will reduce the chances of broader economic development in the lower-income country.  (Tie-in here to Douglass North et al on "natural state" vs. "open access state") 

3.  Central and often controversial role of Wal-Mart in SCM in the past and the present--brief review.  Current W-M effort to provide metrics on supplier CSR, with a focus on sustainability/green performance--review--key part of paper.   Relationship between W-M drive for lowest costs and the measurement of green performance.  The market-wage issue revisited through an environmental lens: A low-paid employee in a low-income country uses resources (energy, etc.) at a lower level than a higher-paid employee in the low-income country and at a much lower level than an employee in the US.  Should this be factored into an evaluation of a supplier's green performance?  How W-M is handling or avoiding this issue and other issues associated with the measurement of sustainability/green performance.

Does Value Heterogeneity Help When One Product Feature Has More Social Value?

Suppose, in keeping with intuition, that the gas guzzlers preferred by the Burners in the previous example generate higher negative externalities than the economical vehicles preferred by the Greens.  In that case, could it still be better to have some consumers with Burner preferences, as opposed to a homogeneous market in which all consumers have Green preferences? 

One intuition is that heterogeneity could be better if it induced the producer to develop an effective Green car rather than an ineffective one; Burner preferences would serve as a useful check on problems associated with a homogeneous Green market.  What follows is an effort to flesh out that intution with a principal-agent plus asymmmetric information story:

Suppose the employees of the car company can either devote a high effort level to make a "True Green" car that genuinely reduces negative externalities and performs well on other counts, or slack and make a "Faux Green" car by, say, reducing use of gas by substituting another fuel source with even higher negative externalities.  Further suppose that whether a car is "True Green" or "Faux Green" is private information of employees that cannot be communicated to the employees' principal P or to consumers.  Finally, suppose all consumers are homogeneously Green, meaning that that they internalize the relative negative externalities of auto fuel sources in their welfare function. Given these assumptions, consumers will assume that a purported Green car is Faux Green rather than True Green and will not purchase it, resulting in a market failure and a return to employees of X. 

Now, alter the assumption of consumer value homogeneity to an assumption of value heterogeneity, in which a portion of consumers are Greens who internalize negative externalities that are known to them and a portion are Burners who do not.   Further, assume, as is intuitively plausible, that the asymmetric information problem of True Green and Faux Green cars is not present for Burner cars.

The presence of Burner as well as Green consumers allows P to set up a Burner division as well as a Green division within the firm and assign employees to the different divisions.  (Assume that employees in different divisions cannot collude).  A Burner car will be produced without a market failure.  (One can if one wishes assume that Green consumers will prefer to buy the Burner car over a Faux Green car, or adopt less restrictive assumptions.)  The employees in the Green division now face a different situation from the one in the homogeneously Green market.  Instead of a payoff of X for Faux Green work, they now face a payoff Z as low as 0, in the event P can terminate them and rely solely on the Burner car.  Given that difference, the payoff Y to the Green employees of exerting the effort to develop a True Green car may well now be higher than the payoff Z of developing a Faux Green car.  The introduction of heterogeneity in the form of Burner preferences has alleviated the market failure occurring in the homogeneous market.

Tweaking the Heterogeneous Values in Markets Story

Suppose a car company is deciding whether to invest $10 billion in developing a new car.  Assume that the result will be a good product, in that the net social benefit of the new car is $3 billion.  Further assume the private benefit of the product is $8 billion.  Given these conditions, the socially beneficial investment will not be made.

Now assume that the market is divided into two types of consumers, both of whom deviate from RC.  Type 1 ("Greens") overvalue fuel economy compared to RC; type 2 ("Burners") undervalue fuel economy compared to RC.  Neither type is purely irrational, though, in that both are willing to pay more for a good car that is either fuel-economical (for Greens) or fuel-uneconomical but with other virtues (for Burners), as opposed to a car that is not good.  Specifically, assume Greens will overpay $5000 for a good fuel-economical car and $1000 for a mediocre one; Burners will overpay $5000 for a good uneconomical car and $1000 for a mediocre one; both sides will pay corresponding amounts *less* than RC levels for cars of the other, non-preferred type.  Finally, assume there are 1 million Greens and 1 million Burners. 

With the value-divided non-RC market, the investment will be made by the company, as long as the car can be fit into either the Green category or the Burner category.  Either a good Green car or a good Burner car will generate an extra $5 billion in private benefit for the company compared to the RC case, or an extra $4 billion compared to producing a not-good car of the desired type in the non-RC case. 

Now compare a non-RC market with homogeneous values.  Suppose consumers are all Greens, with a non-RC preference for high fuel economy.  If one believes that ex ante good new cars are likely or very likely to be Green cars rather than Burner cars, the story can readily be told in a way that makes Green value homogeneity better than bifurcation into two contrasting camps.  To make the case for value heterogeneity in terms of the story, my intuition is that you need to do one or both of the following: a) introduce a "work cheaper" component of the story in which car company managers/employees will work at lower cost in the value heterogeneity environment (there's an analogy to politics, in which an optimistic story can be be told about pols accepting lower than RC compensation because of nonmonetary benefits they receive from working on behalf of their ideology); or b) tell a dynamic story about how value heterogeneity promotes better products compared to homogeneity by penalizing bad products of either type in a way that an all-Green or all-Burner market fails to do.  The dynamic story strikes me as the first avenue to pursue, partly because I think it may be latent in the assumptions already made about Greens and Burners, or in a plausible tweaking of those assumptions.

Modeling the Optimality of Opposing Non-RC Preferences in Markets

Suppose a business has to make a product decision between Change (C) and Stasis (S).  It can spend X to develop the optimal C or S product for the firm; assume that the profit-maximizing decision is also the socially optimal decision.  The development cost X is greater than the private benefit PB to the business assuming rational consumers, but less than the net benefit to society SB of the optimal C or S product.  Accordingly, the business will not incur the development cost and society will lose SB. 

Now assume that the consumer market is divided into non-rational consumers.  Half of the market consists of pro-C early adopters who have a non-RC preference for new products, especially ones that work well, and half of the market consists of pro-S late adopters who have a non-RC preference for the tried and true, especially what works well.

The intuition: The non-RC bifurcation of the consumer market between early adopters and late adopters can induce the business to spend X to develop the optimal C or S product in cases in which an RC market or a market of all early adopters or late adopters will not induce it to do so.   A numerical example: Suppose the cost X is $100 million, with a private benefit PB of $75 million and a social benefit SB of $200 million.  As noted before, the cost will not be incurred by the business given rational consumers (and no government or other subsidy).  Now assume that the market consists of one million pro-C early adopters who will overvalue an optimal C product at $100 each and a suboptimal one at $50 each, and one million pro-S late adopters who will overvalue an optimal S product at $100 each and a suboptimal one at $50 each.  Given this bifurcated non-RC consumer market, it now pays the business to spend the $100 million, since developing an optimal C or S product will give the business an additional $50 million from non-RC preferences in addition to the $75 million from RC preferences. 

If everyone has non-RC preferences in favor of C or S, the business's incentives to develop the optimal product are weakened.  For example, if everyone is an early adopter and if the business believes there is a .5 chance the optimal choice is S rather than C, the numbers shift back against spending the $100 million.

SCMMS Seminar

I presented Monday at a department seminar, mostly focusing on the "Combining Calculation and Culture" paper I submitted to AOM in January.   Instead of the usual format of my posts on seminars--a non-VC presentation, followed by my VC reactions--I'll focus here on some of the questions and comments that I recall.

1) Semi-technical issues as to the model of Majority Tyranny and Minority Tyranny: How do the assumptions about the preference intensities of members of the groups work?   The presentation wasn't technical, and my response (intensity is normalized on a 0 to 1 scale, with the two groups adding up to 1) was about to lead me into the deeper waters of how the optimality result depends on analyzing the tie case, which I then pulled back from at the cost of making my initially correct if hard to understand response incoherent.  I did manage, I believe, to get out the point that the elections referred to in the model are important not in themselves but because victory for the side that has the greater aggregate preference in a hypothetical election will motivate self-interested agents to act in a way aligned with the firm, society, or another principal.

2) How does the approach deal with leadership (a friendly question, considering that the paper discusses Jack Welch and Herb Kelleher's combination of calculative and cultural management) and with a firm like Intel that has a detailed, programmatic approach to doing things the Intel way (Intel with Andy Grove and Gordon Moore also had/has a strong cultural leadership component, I speculated).

3) What does the approach say about whether to provide continued subsidies to GM?  I said that the approach may not have determinate consequences in a particular case; my own impression was that the GM situation was not salvageable, but that I thought it was possible to use the approach to argue the opposite.  Given that the presentation was venturing into the terrain of managerial relevance, I question my retreat into an "indeterminacy of theory" line in response to the question; better would have been including in my response a short and sweet calculation-culture line on the intractability of GM's turf problems under its current set-up.

4)  A comment/question focused on the issue of cooperation among different firms or entities, citing the issue of providing retroviral meds to AIDS patients in Africa and noting the benefits of having production facilities located closer to patients, along with the resistance of pharms in North America, Europe, and Asia to doing that.  My response suggested that that scenario was probably a better showcase for ilustrating the centrality of altruistic and egoistic values than the production facility-warehouse facility one I'd focused on in the talk; I claimed that along with altruistic values of concern for the situation in Africa, egoistic values needed to be involved if the situation was to work out for the better. 

5) A comment/question focused on the issue of whether the approach adequately accounted for the value of conflict in its concern for mitigating conflict.  I suggested that the model was pro-conflict in the sense that it assumed that divisions such as those between the production and warehouse facility and the majority and minority were functional, and then analyzed how certain negative consequences of that generally functional division could be alleviated through creating additional cross-cutting divisions that multiplied the number of conflicts while reducing its destructiveness.

6) There was interest in the trolley/footpath Greene results on utilitarian versus non-utilitarian parts of the brain.  In the main presentation, I discussed the empirical work more than making an argument about its connection to the calculation-culture approach; talking afterwards, I got a comment about System 1 and System 2 as related to marketing, which led me to make a point that my approach differs from Greene's or System 1 and 2 in that I assume a calc-cult division within reason, rather than a division between reason and emotion.

7)  Afterwards, there was a comment/question about AIG and its failure to develop a reserve for its CDS bets; I treated the point as a basis to note that an RC approach that explains AIG in calculative terms is a strong alternative to the mixed calculation and culture approach I'm arguing for; here again, a more assertive approach with a short and sweet AIG calc-cult line would be good if the approach is to be usable from a practitioner perspective.  (E.g., for all the Greenberg problems, he had a sense of responsibility to the entity that successors lacked--not sure at all that that one fits the facts, though, since I supect the seeds of AIG's CDS doom were sown while Greenberg still ran the show).

I enjoyed the chance to present; in particular, it was highly useful to try to take the VC approach in the direction of managerial relevance.  Thanks to my faculty and student colleagues for being there and for giving me the reactions I've just described!

Channel Consistency

Our SCMMS department seminar today featured a presentation on how distributors' satisfaction with a manufacturer was affected by how consistent the manufacturer's rules and incentives were in the sales territory.  A nice feature of the study was that the measure of consistency was based on averaging the rules and incentives responses by the distributors in a given territory, not on asking the distributors their perceptions of manufacturer consistency; that helped deal with the common methods issues that affect a survey that derives both its independent and its dependent variables from respondents' perceptions of satisfactoriness.

The study made me wonder about whether to classify it as upholding the efficacy of calculative management that emphasizes rational planning, techniques, and incentives, of cultural management that emphasizes cooperation, relationship-building, and informal processes, or of both calculative and cultural management.  Because of the semi-objective derivation of consistency that I just praised, the study is more conducive to a "calculation works" interpretation than if both consistency and satisfaction had been measured based directly on respondent perceptions.   "Be objectively consistent (at least in a new cooperative distributor network), and the distributor will be more satisfied" sounds like a guide to calculative management; "If your distributor believes you are consistent, it will be more satisfied" sounds like a guide to combine calculative and cultural management. 

Time versus Money

Does the amount students say they would pay for a more valuable outcome (10 CDs rather than 2, a Foreman grill instead of a tire gauge, 4 pandas saved instead of 1) compared to a less valuable one differ more than the time students say they would spend for the more valuable outcome versus the less valuable one?  Yes, according to an interesting marketing/behavioral economics presentation today in a department seminar. 

Can a company take advantage of deviations from rational choice by consumers to make a better profit margin by selling a cheap "some assembly required" product compared to an expensive one?  If the survey effect can be translated to revealed preferences, the answer is yes; consumers would be willing to spend, say, 50 minutes of their time assembling the cheaper product and saving $20 but only 60 minutes assembling the expensive one and saving $100.  One real-world example in favor of the effect working with revealed preference: Ikea at the low end of furniture pricing relies on customers assembling in a way that more expensive firms don't.  A plausible alternative explanation, though, which is preferable for those who prefer to explain observed phenomena in RC terms, is that Ikea and similar producers cater to less affluent customers with a lower value for their time.

A value competition reaction: The variance in the time the respondents were willing to spend in the different scenarios was greater than the variance in money; I'd relate that to a pretty general phenomenon of preferences for goods other than money being (even more) value-laden, and of values often being subject to a bimodal distribution, or at least to high variance. 

Price and Operating Costs

Do consumers tend to underweight or overweight the future operating costs of a car compared to the price of the car?  In a nicely crafted presentation at an SCMMS department seminar today, James Sawhill of UC-Berkeley explained his analysis of the question, based on data relating to US car purchases from the 1970s to the 1990s.  The key result was that future operating costs in the form of gas prices had a much higher variance in terms of consumer weighting compared to price.  Some people appeared to care a lot about gas prices, others very little, while people were more consistent in how they cared about price.  (As to the absolute size of the coefficient: With a 5% real discount rate assumed, consumers appeared to weight a dollar in operating costs somewhat more heavily than a dollar in price, though the difference was not significant.)

A few value competition observations: 1) I believe that the methodology assumed a normal distribution of consumer preferences on both prices and operating costs; VC principles would suggest the possibility of a bimodal distribution for a value-laden issue such as gas usage; 2) A bimodal distribution of consumer preferences on gas prices, or for that matter the flattened-out normal curve Jamie Sawhill found, would seem to be parallel in its potentially optimizing qualities to bimodal consumer preferences on willingness to incur search costs.  The consumers who overvalue operating costs are socially useful to the degree they internalize negative externalities of gasoline use, and also to the degree they spur innovations in fuel efficiency.  Those who undervalue operating costs are harder on the face of it to rationalize in social welfare terms.  One possible rationale: Assuming that there are positive as well as negative externalities of gasoline use, it may be the case that we want some consumers to adopt an "underweight costs" position and others to take an "overweight costs" position.