Tag: strategy



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.

Reshef

“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. 

Jackson Nickerson
Jackson Nickerson

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.” 




Dolapu Ojutiku, MBA ’21, writes today about his summer consulting experience at Liberty Mutual. He was invited to return to Liberty Mutual full-time after graduation. His contribution is part of a series by students sharing their summer internship experiences with the Olin blog.

My internship has been one of the highlights of my MBA experience so far. I spent my summer working at Liberty Mutual as a consultant in the corporate development program. I worked on a project that had real impact on the company. I did an assessment of one of our largest vendors to streamline processes and evaluate opportunities for improvements. One of my contributions that is being implemented is a scorecard that provides better insights into the performance of our vendors. It was an eventful summer and I’m pleased to be joining the company full time after graduation. 

My internship was originally intended to be in person but ended up being virtual due to work-from-home policies as a result of the coronavirus. I initially wasn’t sure what to expect, but the company did a great job of creating ways to engage with us and build community virtually. Some examples of this include a virtual town hall with the CEO to address racial injustice in the US, an executive speaker lunch series for the interns, and a virtual baking event with Joanne Chang (Boston’s Flour Bakery), a former management consultant turned chef.

Olin did a great job preparing me. I started working with my career coach at the time, Jeff Stockton, before I had even arrived on campus to start my program. I was able to participate in the Consortium Orientation Program in Houston last summer and had to get ready for recruiting much earlier than usual. The WCC team—as well as my academic advisor, Ashley Macrander—were also a good support system throughout my first year.

I found that a lot of the frameworks we learned during Seth Carnahan’s strategy class turned out to be valuable for my internship. Two other classes that really helped me succeed were “Negotiation,” by Hillary Anger Elfenbein, and “Power & Politics” by Peter Boumgarden. Lessons from those classes came in handy when negotiating with cross-functional teams and influencing people to buy-in to my project.

My advice for students about the interview process is to try to network as much as possible, since you never know who might end up being your advocate in discussions that you’re not part of. I also found value in starting case prep very early on; I attended the Management Consulted workshop as well as some of the OSCA case sessions and found them to be very helpful in supplementing my case prep. In my personal experience, preparing well for the consulting case interview made other interviews easier.

In hindsight, I realize that a lot of the pillars we value at Olin helped prepare me for my internship. I had to be entrepreneurial and take ownership for the direction and outcome of my project. I also needed to make sure that decisions I made were supported by data, but not without considering the effect it had on our customers and the values they’ve come to expect from the company.


Each age has deemed the new-born year the fittest time for festal cheer.

—Sir Walter Scott

Happy New Year from Olin Business School! This is the perfect time for us to extend our best wishes to you for a happy and healthy 2018.

Please watch this brief video for a sneak peek into some of the many exciting things Olin has planned for the coming year.

Cheers,

 

 

@DeanTaylorWashU


Technology is changing the landscape of supply chain at a breakneck pace, and organizations that are able to stay ahead of the curve often enjoy a significant advantage over their industry competitors. Digitization, cloud computing, big data, Internet of Things, and artificial intelligence are all major factors in shaping operational strategy. These manufacturing innovations have given rise to a trend dubbed Industry 4.0.

John Stroup, President and CEO of Belden Inc., paid a visit to The Boeing Center to share his wealth of knowledge, and to give a brief history of Industry 4.0, aka the Smart Factory. He explained that Industry 4.0, a term coined in Germany, is the fourth major iteration in manufacturing processes. “‘Smart Manufacturing,’ ‘Intelligent Factory,’ and ‘Factory of the Future’ all describe an intelligent, flexible, and dynamic production facility, where machinery and equipment will have the ability to improve processes through self-optimization and autonomous decision-making,” said Stroup. The major improvements from 3.0 to 4.0 are the ability to automate complex tasks (even remotely) and the access to data across the whole supply chain that allows for greater flexibility and connectivity.

Stroup went on to discuss the key characteristics of the Smart Factory and how innovations in digital technology have improved existing business models and enabled new ones. Such innovative technology allows for improved productivity, flexibility, and decision making, all of which benefit manufacturers and consumers alike.

For more supply chain digital content and cutting-edge research, check us out on the socials [@theboeingcenter] and our website [olin.wustl.edu/bcsci]

• • •

A Boeing Center digital production

BCSCI

Supply Chain // Operational Excellence // Risk Management

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