When John Horn started helping companies run war games—simulations to determine the best strategies to take regarding competitors—he was struck by how clients characterized their competitors.
Often, they’d say they couldn’t role-play specific competitors in a workshop because those competitors were “irrational.”
“They truly believed this. They couldn’t wrap their minds around why competitors behaved the way they did,” said Horn, professor of practice in economics at Olin Business School. “It always struck me as odd.”
In his career, he has worked “with really large companies whose competitors were really large companies. And you don’t get to be a really large company by acting irrational.”
“This book was the culmination of about almost 20 years of work on competitive insight,” said Horn, who was a senior expert in the strategy practice of McKinsey & Company, based out of the Washington, DC, office, before joining Olin in 2013. He spent most of his nine years at McKinsey working with clients on competitive strategy, war gaming workshops and corporate and business unit strategy across many industries and geographies.
By using some relatively simple techniques, companies can gain insight into what their competitors are likely to do and be better prepared when it’s time to act, according to the 272-page book to be released April 11, 2023.
“The point of competitive insight is not to explain why a specific action occurred in the past but to get a better understanding of what might happen in the future,” Horn said. “Strategic thinking is inherently a forward-looking effort.”
Readers will learn where to look for competitive insights; learn to anticipate how competitors will react to their company’s moves; and even apply lessons from archaeologists, paleontologists, neonatal intensive care unit nurses and a homicide detective when they can’t ask direct questions.
The retired homicide detective, for instance, shared that all cases are different, so go where the evidence and witness statements lead. The detective saw the job as always asking questions and playing devil’s advocate to test the conclusions of the case officers. What else is missing? What else can you do?
Horn interviewed more than two dozen professionals from the above fields and synthesized their insights into guidance for business strategists. One strong takeaway: “You have to have a diverse team, or you’ll miss something.”
“We’re not going to retroactively solve for the historical ‘why’ but focus on the forward-looking ‘how can we make sense without talking with them?’” Horn says in the book.
“In the real world, you have to rely on second- or thirdhand reporting and piece it together without the inside story.”
Small private firms that provide health insurance for their employees have better worker productivity and retention—as well as overall profitability—when compared with small firms that don’t offer health insurance, according to research by Ulya Tsolmon, assistant professor of strategy for Olin Business School.
The results suggest that investments in employee health and well-being provide a competitive edge to firms, especially when labor market competition for workers is high.
“The results tell me that firms are gaining financial advantage even with their expenses toward health insurance benefits,” Tsolmon said. “The productivity results suggest that workers are ‘giving back’ to the firms by being more productive, which translates into higher profits.”
“Healthy and happy employees are innovative and productive employees.”
Ulya Tsolmon, assistant professor of strategy
The research also explored the link between high unemployment insurance benefits at the state level and more small firms providing health insurance in that state. High unemployment benefits ease employee mobility between companies, and firms respond by increasing “internal market frictions,” like offering health insurance, to keep their employees, the researchers found. That correlation didn’t apply to bonuses, pensions or training—making health insurance a unique lever among employee benefits.
The paper is the first to explain health insurance provision in small firms from the perspective of human capital management and to use empirical evidence to test its impact on firm performance, the authors say.
Data from 15,000 small firms
“Health insurance is a significant investment for small firms, so the interesting question to me was not why firms don’t offer health insurance, but rather looking at firms that do offer health insurance, asking why they do that and whether it’s a smart strategy and under what conditions,” Tsolmon said.
The research used data from the financial records of 15,000 small firms (with no more than 500 employees) in the US. The data set included accounting details on all expenses and revenues, as well as employee records, for five years. The authors looked at twelve different variables, including training costs for an employee.
Tsolmon supplemented the financial records with 761 Glassdoor reviews and 11 open-ended interviews with randomly selected small business owners, representing different industries and firm sizes. Just like with the numbers’ data, employee satisfaction was reported to be higher in firms that offered health insurance, and business owners spoke about more easily attracting and retaining employees after they began offering health insurance.
Implications for large firms
“By investing in worker well-being,” Tsolmon said, “firms can tap into their latent productivity and innovation that’s difficult to incentivize with monetary rewards alone. Healthy and happy employees are innovative and productive employees.”
The research also has implications for large firms, most of which provide health insurance but whose benefits differ in generosity.
“Given our finding that policies intended to increase employee wellness can affect turnover, productivity, and firm performance, large firms should consider increasing the employee uptake rate of health benefits by bearing a greater share of the insurance costs themselves,” the authors write.
Peter Boumgarden, Koch Center’s director and Olin’s Koch Professor of Practice of Family Enterprise, wrote this for the Olin Blog.
When it comes to our mission of supporting family business leaders as they pursue new ways to thrive in the emerging economy, we can learn a great deal by looking at WashU Olin’s model of being data-driven and values-based. But living this theory in practice means flexing a muscle that is often under-developed in many organizations, family businesses notwithstanding.
So what does it mean to have an eye toward relevant data while simultaneously being shaped by a guiding set of values? At the Koch Center, one way that we do this is in our unique approach to combining data and design in our engagement with the broader business community.
Inaugural data+design dession: Balancing continuity and change
On October 29, the Koch Center hosted the first of our new “data+design” series. Each of these sessions is organized around a particular strategic challenge for organizations. Our first event focused on how family and private enterprise balance a commitment to continuity with the past alongside the need to change to match any number of emerging realities.
Approximately 50 leaders from around the region participated in a session designed to leverage some of the university’s best offerings, particularly a rigorous approach to data built upon a strong research foundation. Unique to this model, we asked each participating leader to fill out an assessment that mapped their organization across several distinct dimensions before our time together. This battery of assessments included a modified version of the “World Management Survey,” a measure of business uncertainty, and an evaluation of how much they have changed over the past year and must change over the year ahead.
While it can be helpful to get objective numbers on these items, the data+design format enabled us to provide each attendee with a customized report that contrasted their self-assessment with all other attendees. Indeed, much of the value can come through this comparison. It is one thing to know you self-assessed at a “3.5” out of “5” when it comes to your company’s talent strategy, but a whole different level of insight if you know others in your organization scored this same item lower, and the average across a set of peer institutions was closer to 4.
With comparative data in hand, the group came together on October 29 and heard me present a set of research-backed framings on what kind of balance is especially high-performing. One study in particular from McKinsey & Company indicated that firms that maintain a relatively robust refresh rate in their product/service portfolio outperform those who do not change enough and those who change too frequently. This refresh rate of approximately 10-30% change over a decade they called “rivers” in contrast to the static “ponds” (less than 10% refresh) or overly dynamic “rapids” (over 30% change). Simultaneously presented with data about where their organization stands alongside a guiding framework to guide our discussion, and we were off to the races.
Extending rigorous measures with design and values
But back to Olin’s guiding framing, even rigorous data without a precise understanding of values runs into limits. After all, it is one thing to know your organization’s metrics compared to your peers, but the leader still has to make clear tradeoffs on what they are optimizing toward and why.
For example, core value commitments will inevitably shape whether one prioritizes progress on this dimension and how one goes about operationalizing this commitment. For example, how do leaders balance accountability with grace? What kind of patience is required as people move to aspirational performance standards? Critical considerations for building this into practice are not always easily captured in the data alone.
And so, the discussion pushed forward with designing potential futures with data in one hand and a set of guiding values in mind. The “design” part of “data+design” came in by our use of forcing mechanisms to have those present consider more than one potential future for these design challenges. “Want to professionalize your approach to growth and innovation? Let’s see if you can identify four different routes in this direction.”
In this approach, we used a modified version of the “Crazy 8’s” design prompt to push people to generate four different alternative futures. In doing so, we encouraged leaders to expand the number of strategic options too many of us consider—which Dan and Chip Heath have found is unfortunately often only one.
Generating progress through the power of data and design
Generating creative routes forward for family businesses will require creativity. In so much as this ownership form is commonplace across the country and globe, approaching questions of strategy and structure with fresh eyes holds the potential for a transformative effect for the families who lead the operations and the broader global economy.
As a university, one of our goals is to support this creativity by bringing elucidating frameworks and the precision of empirical work while at the same point leveraging the teaching function to push our thinking in ways we would not have considered previously. For us, this work requires leveraging the power of data while also operating up to the generative power of design fueled by close attention to both leader and firm values.
Businesses beware: A price increase for carryout or delivery food means an increase in negative reviews—and a downturn in restaurant reputation, if not demand.
And it’s notable that in these COVID-19 pandemic times, an exponential amount of business is being conducted via carryout or delivery.
A pair of business researchers, from Washington University in St. Louis and Harvard University, studied the relationship between price and reputation by looking at online orders through Yelp’s Transaction Platform from its 2013 inception until January 2019, and then the resulting reviews. What they found: Ratings are price-adjusted rather than objective reviews of quality.
Their study showed an effect that is both statistically and economically significant: A price increase of just 1% leads to a decrease of 3%-5% in the average rating — a negative relationship between pricing decisions and reputation. “This effect becomes increasingly important when considering the average price change is about 3-9%,” they write. Their research is forthcoming in Management Science.
“Traditional intuition suggests a positive relation between prices and reputation, usually in the form of a price premium for reputable businesses,” said Oren Reshef, assistant professor of strategy at Olin. “Less attention, however, has been given to the direct impact of price increases on reputation for a focal firm. We find a negative relation when examining different price levels for the same business.”
The researchers used item-level data on all food orders placed via the Yelp Transactions Platform. There, they could detect changes in ratings in response to price changes. They keenly focused on narrow time bands around price changes—just days before and after restaurants updated their menu prices.
To provide further robustness to their findings, they analyzed instances where certain platforms are quicker than others to update the price. Thus, they focus on short time spans in which the same item is sold at different prices, one at the old price and one at the new price.
A new business creed
If nothing else, the study signals a new business creed: Be careful about raising prices, because, in addition to the direct negative effect on sales, down the line it will decrease reputation and, as a result, future business.
“Our results amplify the negative effect of price on sales: higher prices reduce demand today and demand in the long-run due to adverse effect on reputation,” Reshef said. “This is especially prominent in online markets, where consumers rarely know the prevailing prices and the time the review was given. This creates an additional incentive to maintain low prices and perhaps even set lower initial prices in order to establish good reputation.”
Their results hold more generally in the Yelp Star Rating, suggesting that ratings are a function of both quality and price — the cheapest restaurants achieve an average rating of 3.4 while the most expensive on average rate 3.6, less than a quarter standard deviation, despite the fact the latter group is four times as pricey. The researchers interpret this to mean that ratings are price adjusted — or at least adjusted for the expected quality at whatever price.
“The results inform us about the value of rating mechanism and how to interpret them,” Reshef said. “Online rating may not be capturing ‘objective’ quality, but rather the net value or surplus that the service or product generates. We believe that, in order to offer better platforms, managers should take this into account when designing reputation mechanism and recommendation systems on their platforms.”
The authors further attempt to disentangle other mechanisms that might impact consumers’ rating behavior. They discovered the effect is greater for first-time restaurant consumers — suggesting that diners initially respond to prices, which set their expectations for the quality of food they’ve never tasted or ordered before. This also shows that the results are not driven by repeat customers using lower ratings as a punishment for raised prices.
This price-reputation relationship translates to so many other consumer areas, what with the proliferation of Amazon, Airbnb, Taobao in Asia, grocery- and food-delivery services that grew during the pandemic, and more.
And, sorry, they cannot speak to price reductions—mainly because they were so seldom seen in the businesses they studied.
Being a “just” corporation means doing what’s morally right and fair for all stakeholders: employees, the community, customers, shareholders and the environment. But doing what’s “right” is rarely straightforward in our rapidly changing social environment.
Today’s corporations face intense pressure to implement socio-economic practices, fueled by an increase in social activism and the ease of promoting causes through the internet and social media. Yet, all too often, executives find themselves in a “damned if you do and damned if you don’t” situation when their response backfires.
In the paper “The Just Corporation,” Jackson Nickerson, Frahm Family Professor of Organization and Strategy at Olin, and co-author Sergio Lazzarini, an Olin graduate and the Chafi Haddad Professor of Management at Insper in Sao Paulo Brazil, argue that many corporations miss the mark because they fall into decision traps that lead them to misread the problems and stakeholder demands. The paper was originally published in Harvard Business Review Brasil in Portuguese. The decision traps include the following:
Blind spot traps arise when executives fail to see the big picture and anticipate how current just corporate demands will evolve.
Moral licensing traps occur when corporations attempt to paper over unjust actions in one domain by making socially welcome investments in another.
SCN traps (pronounced “sin”) occur when corporations have an “overly simplistic theory of change for what is in actuality a complex situation, a lack of competence for comprehensively assessing as well as delivering just outcomes and naivete in their thinking of how to help vulnerable stakeholders.” The result can be social welfare policies that fail to achieve the desired impact or, worse, produce negative ramifications, often for the most vulnerable.
The ‘Corporate Ladder of Justice’
Lazzarini and Nickerson a developed a decision-making model, which they call the “Corporate Ladder of Justice,” to guide just corporate strategies, while avoiding the common pitfalls other corporations face. The steps include:
Rung 1: Identify existing and emerging stakeholder demands. The world is continuously changing in myriad ways and so too are the demands of society. While these demands have always been in flux, they seem to be changing and multiplying at a quickening pace, which magnifies the potential number and kind of blind spot traps. To overcome the potential for blind spot traps, Lazzarini and Nickerson recommend that executives start by stepping into the shoes of each stakeholder to fully understand their needs and demands.
Next, executives should shift thinking from specific and narrow categories demanded by stakeholders to a higher and more abstract meta-category. Then, from this meta-category, reverse the process to identify all subcategories into which firm activities fall.
Finally, corporations should make corporate or industry association investments to measure both changing demands and desired outcomes.
“Overcoming the blind spot trap through activities that generate evenhandedness, overcome blind spots and focus attention through measurement of changing demand and desired outcomes can help executives climb the first rung of corporate justice,” they write.
Rung 2: Compete fairly. Even when strategic manipulations intended to limit competition are not illegal, they can be viewed as unjust when they undermine equal access to market opportunities.
“Corporations that engage in manipulative actions to soften competition, restrict entry, limit substitutes, and use investments in socio-environmental projects as a moral license to gain bargaining power create unfair and unjust competition,” they write in their paper.
“In contrast, those corporations that gain competitive advantage and profitability by developing difficult to imitate superior innovations and capabilities for delivering unique products and services are competing on merit, which mitigate moral licensing concerns that support unfair competition.”
Rung 3: Care for vulnerable stakeholders. To avoid the SCN trap, Lazzarini and Nickerson recommend that executives use two criteria to prioritize and respond to stakeholder demands.
“First, focus on stakeholders who are no more than one or two degrees of separation from the actions of the corporation, unless the supply chain keeps the most vulnerable ones (e.g., child and slave labor) distant from the corporation,” they write. Addressing peripheral demands and their causes limits deep understanding and can lead to moral licensing and SCN traps.
Second, follow an evidence-basedapproach to corporate socio-environmental projects. Start with a well-crafted and vetted theory of change to clearly indicate how corporate interventions can improve the lives of vulnerable stakeholders and achieve expected outcomes. Employing scientific research techniques and partnering with academic research centers that are well versed in designing these kinds of studies can help corporations assess and adjust its theory of and investments for change.”
Rung 4. Do or give efficiently. Should the corporation rely on or build its capabilities and competencies to take the action or should it provide resources to others to take just actions? It depends.
“The fourth rung recommends that executives make efficient organizational choices to care for vulnerable stakeholders. If sustainable actions are consistent with the corporation’s business strategy—as validated by its shareholders, especially when financial tradeoffs are involved—and require unique capabilities that other organizations do not already possess, then vertical integration typically is an efficient execution strategy,” Lazzarini and Nickerson write.
“Alternatively, if others, like NGOs and public sector agencies, already have made these unique investments or they can aggregate substantial economies of scale and scope beyond what the corporation can provide, then outsourcing is a superior way to support vulnerable stakeholders.”
Why climb the ladder?
By shifting the corporate mindset away from “socio-environmental projects as a way to mitigate risk or increase profits” and committing to the principles of action outlined in the Corporate Ladder of Justice, Lazzarini and Nickerson said corporations will be better equipped to cope with escalating uncertainty in their socio-environmental demands.
“The rapidly changing environment that is stimulating the call for just corporations also is creating conditions to destabilize business models that fail to adopt these standards, in ways that cannot be fully anticipated,” Lazzarini and Nickerson write. “In other words, corporations today face escalating pressures and adverse reactions from stakeholders that can’t be known beforehand.
“Failure to cope with these complex demands fuels public distrust in corporations, leading to escalating social media activism and exacerbated political and regulatory responses, all of which impose additional costs on corporations and society. By voluntarily committing to climb the corporate ladder of justice, companies demonstrate their willingness to contribute to the social contract and attenuate extreme responses to the inequalities that inescapably emerge when they grow and expand their corporate activities.”