Management Science current issue

Management Insights

Gorman, M. F. — Wed, 13 Jan 2010 10:41:31 PST

No abstract available.

Call for Papers--Special Issue of Management Science: Behavioral Economics and Finance: Submission deadline: July 15, 2010--Expected publication date: Fall 2011

Wed, 13 Jan 2010 10:41:31 PST

No abstract available.

Letter from the Editor--Management Science 2009 Report

Cachon, G. P. — Wed, 13 Jan 2010 10:41:31 PST

No abstract available.

Cost Structure, Customer Profitability, and Retention Implications of Self-Service Distribution Channels: Evidence from Customer Behavior in an Online Banking Channel

Campbell, D., Frei, F. — Wed, 13 Jan 2010 10:41:31 PST

This paper uses the context of online banking to investigate the consequences of using self-service distribution channels to alter customer interactions with the firm. Using a sample of retail banking customers observed over a 30-month period at a large U.S. bank, we test whether changes in service consumption, cost to serve, and customer profitability are associated with the adoption of online banking. We find that customer adoption of online banking is associated with (1) substitution, primarily from incrementally more costly self-service delivery channels (automated teller machine and voice response unit); (2) augmentation of service consumption in more costly service delivery channels (branch and call center); (3) a substantial increase in total transaction volume; (4) an increase in estimated average cost to serve resulting from the combination of points (1)–(3); and (5) a reduction in short-term customer profitability. However, we find that use of the online banking channel is associated with higher customer retention rates over one-, two-, and three-year horizons. The documented relationship between the use of online banking and customer retention remains positive even after controlling for self-selection into the online channel. We also find evidence that future market shares for our sample firm are systematically higher in markets with high contemporaneous utilization rates for the online banking channel. This finding holds even after controlling for contemporaneous market share, suggesting it is not simply the result of increased market power leading to the acquisition of online banking customers.

Optimal Pricing with Speculators and Strategic Consumers

Su, X. — Wed, 13 Jan 2010 10:41:31 PST

This paper studies a monopolist firm selling a fixed capacity. The firm sets a price before demand uncertainty is resolved. Speculators may enter the market purely with the intention of resale, which can be profitable if demand turns out to be high. Consumers may strategically choose when to purchase, and they may also choose to purchase from the firm or from the speculators. We characterize equilibrium prices and profits and analyze the long-run capacity decisions of the firm. There are three major findings. First, the presence of speculators increases the firm's expected profits even though the resale market competes with the firm. Second, by facilitating resale, the firm can mimic dynamic pricing outcomes and enjoy the associated benefits while charging a fixed price. Third, speculative behavior may generate incentives for the seller to artificially restrict supply, and thus may lead to lower capacity investments. We also explore several model extensions that highlight the robustness of our results.

Lone Inventors as Sources of Breakthroughs: Myth or Reality?

Singh, J., Fleming, L. — Wed, 13 Jan 2010 10:41:31 PST

Are lone inventors more or less likely to invent breakthroughs? Recent research has attempted to resolve this question by considering the variance of creative outcome distributions. It has implicitly assumed a symmetric thickening or thinning of both tails, i.e., that a greater probability of breakthroughs comes at the cost of a greater probability of failures. In contrast, we propose that collaboration can have opposite effects at the two extremes: it reduces the probability of very poor outcomes—because of more rigorous selection processes—while simultaneously increasing the probability of extremely successful outcomes—because of greater recombinant opportunity in creative search. Analysis of over half a million patented inventions supports these arguments: Individuals working alone, especially those without affiliation to organizations, are less likely to achieve breakthroughs and more likely to invent particularly poor outcomes. Quantile regressions demonstrate that the effect is more than an upward mean shift. We find partial mediation of the effect of collaboration on extreme outcomes by the diversity of technical experience of team members and by the size of team members' external collaboration networks. Supporting our meta-argument for the importance of examining each tail of the distribution separately, experience diversity helps trim poor outcomes significantly more than it helps create breakthroughs, relative to the effect of external networks.

Another Hidden Cost of Incentives: The Detrimental Effect on Norm Enforcement

Fuster, A., Meier, S. — Wed, 13 Jan 2010 10:41:31 PST

Monetary incentives, such as subsidies or bonuses, are often considered as a way to foster contributions to public goods in society and firms. This paper investigates experimentally the effect of private contribution incentives in the presence of a norm enforcement mechanism. Norm enforcement through peer punishment has been shown to be effective in raising contributions by itself. We test whether and how (centrally provided) private incentives interact with (decentralized) punishment, both of which affect subjects' monetary payoffs. The results of our experiment show that private incentives for contributors can reduce the effectiveness of the norm enforcement mechanism: Free riders are punished less harshly in the treatment with incentives, and as a consequence, average contributions to the public good are no higher than without incentives. This finding ties to and extends previous research on settings in which monetary incentives may fail to have the desired effect.

Design of Decision-Making Organizations

Christensen, M., Knudsen, T. — Wed, 13 Jan 2010 10:41:31 PST

Starting from the premise that individuals within an organization are fallible, this paper advances the study of relationships between the organization's decision-making structure and its performance. We offer a general treatment that allows one to analyze the full range of organizational architectures between extreme centralized and decentralized forms (often referred to as hierarchies and polyarchies). Our approach furthermore allows designers to examine the change in the overall reliability of the organizational structure as the number of actors within the organization changes. We provide general proofs that show how decision-making structures can be constructed so they maximize reliability for a given number of agents. Our model can be used directly for a qualitative assessment of decision-making structures. It is thereby useful for assessment of the many complicated hybrid structures that we see in actual decision-making organizations, such as banks, purchasing departments, and military intelligence. An application from a bank illustrates how our framework can be used in practice.

An Empirical Examination of Goals and Performance-to-Goal Following the Introduction of an Incentive Bonus Plan with Participative Goal Setting

Anderson, S. W., Dekker, H. C., Sedatole, K. L. — Wed, 13 Jan 2010 10:41:31 PST

Prior research documents performance improvements following the implementation of pay-for-performance (PFP) bonus plans. However, bonus plans typically pay for performance relative to a goal, and the manager whose performance is to be evaluated often participates in setting the goal. In these settings, PFP affects managers' incentive to influence goal levels in addition to affecting performance effort. Prior field research is silent on the effect of PFP on goals, the focus of this paper. Using sales and sales goal data from 61 stores of a U.S. retail firm over 10 quarters, we find that the introduction of a performance-based bonus plan with participative goal setting is accompanied by lower goals that are more accurate predictors of subsequent sales performance. Statistical tests indicate that increased goal accuracy is attributable to managers "meeting but not beating" goals and to new information being impounded in goals. We further investigate how differences among managers are associated with goal levels. We find significant "manager effects" but no "supervisor effects." In additional tests we find that cross-sectional differences among managers are related to differing marginal returns to slack-building effort. Turning to the role of new information on goals, we find that prior period performance has incremental power to explain goal levels in the postplan period. Our results provide field-based evidence that PFP and participative goal setting affect the level and accuracy of goals, effects that are associated with both information exchange and with managers' incentives to influence goals.

Global Dual Sourcing: Tailored Base-Surge Allocation to Near- and Offshore Production

Allon, G., Van Mieghem, J. A. — Wed, 13 Jan 2010 10:41:31 PST

When designing a sourcing strategy in practice, a key task is to determine the average order rates placed to each source because that affects cost and supplier management. We consider a firm that has access to a responsive nearshore source (e.g., Mexico) and a low-cost offshore source (e.g., China). The firm must determine an inventory sourcing policy to satisfy random demand over time. Unfortunately, the optimal policy is too complex to allow a direct answer to our key question. Therefore, we analyze a tailored base-surge (TBS) sourcing policy that is simple, used in practice, and captures the classic trade-off between cost and responsiveness. The TBS policy combines push and pull controls by replenishing at a constant rate from the offshore source and producing at the nearshore plant only when inventory is below a target. The constant base allocation allows the offshore facility to focus on cost efficiency, whereas the nearshore facility's quick response capability is utilized only dynamically to guarantee high service. The research goals are to (i) determine the allocation of random demand into base and surge capacity, (ii) estimate corresponding working capital requirements, and (iii) identify and value the key drivers of dual sourcing. We present performance bounds on the optimal cost and prove that economic optimization brings the system into heavy traffic. We analyze the sourcing policy that is asymptotically optimal for high-volume systems and present a simple "square-root" formula that is insightful to answer our questions and sufficiently accurate for practice, as is demonstrated with a validation study.

The "I Designed It Myself" Effect in Mass Customization

Franke, N., Schreier, M., Kaiser, U. — Wed, 13 Jan 2010 10:41:31 PST

Many companies offer websites that enable customers to design their own individual products, which the manufacturer can then produce to order. To date, the economic value of products self-designed using mass customization (MC) toolkits has been attributed to the two factors of preference fit achieved (which should be as high as possible) and design effort (which should be as low as possible). On the basis of literature on behavioral decision making, we suggest a third factor, namely the awareness of being the creator of the product design. In the course of five different studies, we provide experimental evidence that this "I designed it myself" effect creates economic value for the customer. Regardless of the two other factors, self-designed products generate a significantly higher willingness to pay. This effect is mediated by feelings of accomplishment and moderated by the outcome of the process as well as the individual's perceived contribution to the self-design process. These findings have important implications for MC companies: It is not enough merely to design MC toolkits in such a way that preference fit is maximized and design effort is minimized. To capture the full value of MC, toolkits should also elicit "I designed it myself" feelings.

Inventory Dynamics and Supply Chain Coordination

Krishnan, H., Winter, R. A. — Wed, 13 Jan 2010 10:41:31 PST

This paper extends the theory of supply chain incentive contracts from the static newsvendor framework of the existing literature to the simplest dynamic setting. A manufacturer distributes a product through retailers who compete on both price and fill rates. We show that inventory durability is the key factor in determining the underlying nature of incentive distortions and their contractual resolutions. When the product is highly perishable, retailers are biased toward excessive price competition and inadequate inventories. Vertical price floors or inventory buybacks (subsidies for unsold inventory) can coordinate incentives in both pricing and inventory decisions. When the product is less perishable, the distortion is reversed and vertical price ceilings or inventory penalties can coordinate incentives.

Detailing vs. Direct-to-Consumer Advertising in the Prescription Pharmaceutical Industry

Bala, R., Bhardwaj, P. — Wed, 13 Jan 2010 10:41:31 PST

The pharmaceutical industry has always used sales representatives to target physicians (detailing), who are a key link in sales and market share for prescription pharmaceuticals. Since August of 1997, when the Food and Drug Administration eased the restrictions on direct-to-consumer advertising (DTCA), there has been a dramatic increase in the use of DTCA by pharmaceutical firms to target end customers (patients). DTCA seems to have two different effects on pharmaceutical markets. The first is to inform patients about the availability of drugs for some ailments, thus expanding the market (constructive). The second is to persuade patients to talk about specific brands when they meet physicians, with the objective of influencing market share (combative). We consider both effects of DTCA in the presence of a detailing program in a competitive environment. We incorporate the dynamics of physician-patient interaction in a game-theoretic model where firms decide on the form of DTCA to adopt (constructive or combative) and then compete in the marketplace by choosing detailing and DTCA levels. We answer four questions: What is the impact of adopting DTCA on competitive intensity? How do optimal detailing levels for a firm change with the adoption of DTCA? How should the DTCA strategy for a firm vary depending on whether it is stronger or weaker in its degree of influence in the physician's office? Finally, under what conditions would competing firms voluntarily decide to pursue constructive DTCA?

A Quantitative Measurement of Regret Theory

Bleichrodt, H., Cillo, A., Diecidue, E. — Wed, 13 Jan 2010 10:41:32 PST

This paper introduces a method to measure regret theory, a popular theory of decision under uncertainty. Regret theory allows for violations of transitivity, and it may seem paradoxical to quantitatively measure an intransitive theory. We adopt the trade-off method and show that it is robust to violations of transitivity. Our method makes no assumptions about the shape of the functions reflecting utility and regret. It can be performed at the individual level, taking account of preference heterogeneity. Our data support the main assumption of regret theory, that people are disproportionately averse to large regrets, even when event-splitting effects are controlled for. The findings are robust: similar results were obtained in two measurements using different stimuli. The data support the reliability of the trade-off method: its measurements could be replicated using different stimuli and were not susceptible to strategic responding.

An Example and a Proposal Concerning the Correlation of Worker Processing Times in Parallel Tasks

Schultz, K. L., Schoenherr, T., Nembhard, D. — Wed, 13 Jan 2010 10:41:32 PST

Models and understanding of line design depend on accurate assessments of the effects of design parameters on human actions. Although equity theory predicts that workers will react to the speed of people around them, experimental work has failed to find this effect in an industrial setting with parallel workstations or a change in coworkers. With the current research we contribute to the understanding of line design by using archival data from a manufacturing line. We show that workers do react to the speed of their coworkers, but that individual reactions vary widely. Because workers are different both in speed and reaction, managerial implications are not straightforward. We model an optimal and a heuristic rearrangement of workers and suggest a modified heuristic that performs well for increasing throughput. Our methodology combines empirical approaches, analytical modeling, and Monte Carlo simulation.

Coping with Uncertainties in Technological Learning

Ma, T. — Wed, 13 Jan 2010 10:41:32 PST

To date, optimization models of endogenous technological change commonly deal with uncertainty in technological learning with risk-factor methods, i.e., by adding expected risk costs resulting from overestimating technological learning rates into an objective function with a subjective risk factor. This paper argues that another way of coping with the uncertainty, risk-constrained methods that have been ignored in existing literatures, could be more practicable (at least as a supplement) for decision support. With a simplified model, this paper explores technology development paths generated by two risk-constrained methods, and compares the two risk-constrained methods with a risk-factor method. Our study shows that comparing with the risk-factor method, the two risk-constrained methods also generate an S-shaped technology diffusion pattern, which accords with historical observations, and they can result in earlier as well as later adoption of an advanced but currently expensive technology, depending on different combinations of uncertainty levels of the technology learning rate and the upper limit on the expected risk cost. Another finding of our research is that two totally different technology development paths can both be optimal solutions, which implies that with early policy interventions there is the possibility that an economy could be led to a low-carbon economy with little additional cost.

Drivers of Finished-Goods Inventory in the U.S. Automobile Industry

Cachon, G. P., Olivares, M. — Wed, 13 Jan 2010 10:41:32 PST

Automobile manufacturers in the U.S. supply chain exhibit significant differences in their days of supply of finished vehicles (average inventory divided by average daily sales rate). For example, from 1995 to 2004, Toyota consistently carried approximately 30 fewer days of supply than General Motors. This suggests that Toyota's well-documented advantage in manufacturing efficiency, product design, and upstream supply chain management extends to their finished-goods inventory in their downstream supply chain from their assembly plants to their dealerships. Our objective in this research is to measure for this industry the effect of several factors on inventory holdings. We find that two factors, the number of dealerships in a manufacturer's distribution network and a manufacturer's production flexibility, explain essentially all of the difference in finished-goods inventory between Toyota and three other manufacturers: Chrysler, Ford, and General Motors.

Call for Papers--Special Issue of Management Science: Marketing Within the Enterprise and Beyond: Submission deadline: February 26, 2010

Wed, 13 Jan 2010 10:41:32 PST

No abstract available.