Research news

Michael G. Jacobides new research paper

Benefiting from innovation - value creation, value appropriation and the role of industry architectures

The last two decades have brought important changes that have made organisational boundaries more fluid and dynamic in response to globalisation and technological innovations.

In his latest paper, Michael G. Jacobides considers how firms can benefit from shaping their sectors, and what determines who captures the benefits from an innovation.

Dr Jacobides, Thorbjorn Knudsen and Mie Augier elaborate on value appropriation by pointing out the importance of industry architectures – that is, sector wide templates that determine "who does what" in a sector. The division of labour in a sector, they argue, should not be taken for granted; the same sectors are structured very differently in different countries. Firms, in a variety of sectors from financial services to telecommunications to health care are engaged in "architectural battles" – efforts to shape the sector's layout, using standards, lobbying and legislation or alliances to "shape the rules of the game" to their advantage.

As Jacobides et al observe, firms can profit – and also capture the benefit from innovation by managing their industry's architecture carefully so they become the ''bottlenecks'' of their industry. Microsoft has exercised such an advantage in the PC sector, by ensuring that there is plenty of mobility in the parts of the industry where it is not active. The music distribution sector is another example of such "architectural battles", with Apple and Microsoft each trying to promulgate an architecture that will make them be the bottlenecks.

The paper can be read in full in Research Policy, fall 2006, 20th anniversary special issue of the publication "Profiting from Innovation" by David J Teece.

Dr Jacobides other recent work has looked at how industries evolve – and e.g., how they shift from integrated sectors to dis-integrated sets of vertical specialists linked through complex relationships (and then back to strategic re-integration). He finds that such changes, precipitated by Information Technology, transform the nature of an industry, locally and globally, and examines what this means for competition and policy. He also has studied how firms can use strategic boundary design to re-invigorate themselves – choosing wisely their "vertical architecture", being partly open to intermediate markets and partly integrated. More broadly, he looks at how organizations, through their design and architecture, become more competitive and how this, in turn, affects the dynamics in a sector.

Created 5 October 2006

New research from Dr Gillian Ku suggests lower starting prices can actually result in higher final sale prices

Most people hold the belief that if they ask for more, they will get more. As a result, people expect that as sellers, setting a high starting price will bring them a higher final price, which has been confirmed by research in buyer-seller negotiations—sellers reap financial benefits when they ask for more.

But the same is not necessarily true in auctions situations, such as eBay. A new study published in the July issue of the Journal of Personality and Social Psychology by Dr Gillian Ku of the London Business School and Professors Adam Galinsky and Keith Murnighan of the Kellogg School of Management at Northwestern University, finds evidence to counter this "start high, end high" mantra. Using a variety of consumer items auctioned on eBay, such as Nikon cameras and Michael Jordan shirts, along with laboratory experiments, they found that in the social setting of auctions, lower starting prices can result in higher final prices.

This new research shows that in buyer-seller negotiations, the starting price acts as an 'anchor' that psychologically limits and constrains counteroffers. Auctions, on the other hand, are social settings with different dynamics. Unlike buyer-seller negotiations, in which the number of parties is fixed, the number of potential bidders in auctions is basically unlimited and influenced by the starting price.

In this environment, low starting prices allow more interested bidders to make initial bids in a seemingly low cost environment. With more bidders, the probability of higher prices goes up. More importantly, low starting prices also start two different psychological processes.

The people who enter into the auction early start to invest time and energy, creating "sunk cost," and the research shows that people try to recover their sunk cost by bidding more, in essence trying to justify their past bids. Second, the research shows that more bids and more bidders imply the item is valuable and is worth bidding on. Thus, bidding activity causes even more bidding activity.

Although the research found many reasons why starting low will help the seller get more in the end, there are instances when it is not always better to set lower starting prices in auctions. Whenever there is a barrier to entry or few interested buyers, low starting prices will lead to lower final prices.

"In the Bay Area of California, houses routinely sold for higher than the list price in the past 10 years because there are so many interested buyers," says Dr Ku. "However, houses in less desirable locations will have fewer prospective buyers and will be less likely to generate traffic, suggesting that low starting prices in these low-traffic auctions will produce low final prices."

The research suggests the following for sellers: In a one-on-one negotiation, set high starting prices. However, in an auction with a large set of potential buyers, set low starting prices, and in an auction with few interested buyers, set a high starting price and possibly negotiate with prospective buyers.

Created 28 September 2006

Craig Smith examines consumer boycotts

Last September executives from Arla foods amba, the Danish dairy giant, probably paid little attention to a series of caricatures of the prophet Muhammad appearing in a Danish newspaper.

Six months later, they had learned a hard lesson about religion and commerce - watching their annual sales virtually vanish in the Middle East as a result of the "cartoon controversy". Craig Smith from London Business School, together with Richard Ettenson, Jill Klein and Andrew John have examined the lessons learned from these recent events in a paper published in Sloan Management Review.

They have found consumer boycotts can be touched off by broad geopolitical, religious or historical tensions with the company suffering from the boycott being far removed from the controversy – as in the case of Arla.

However not all consumer protests are negative – some companies have seen sales explode as the result of a protest, through "buycotts". For example, products where purchase has been encouraged in support of a certain cause, such as dolphin-friendly tuna.

The researchers found in high-profile, company specific boycotts, drops in sales – although sometimes substantial – are typically short-lived. In contrast, boycotts resulting from broader societal issues have the potential for greater long-term harm. In the case of Arla, their sales are slowly returning but full recovery is anticipated to take years.

Even if a firm's connections to a country or region are tenuous it can still find itself the target of protest.

Finally the researchers found that societal boycotts require different tactics. When animosities run high, traditional approaches for increasing sales (for example, price promotions) will have little effect.

Created 28 September 2006

Survey delivery mode study

Surveys are more than a bugbear. They provide marketers with useful information about their customers and audiences.

A new study in the September issue of the Journal of Consumer Research argues that the recent shift from phone surveys to online surveys may have unintended consequences for marketers.

The study by Nader Tavassoli of London Business School and Gavan Fitzsimons of Duke University finds that speaking answers uses a different part of the brain in comparison to typing answers. "In other words, speaking an attitude activates a different representation in the consumers mind than does typing an attitude, and as a function of this changes later expressed attitudes and behaviours," write the professors.

Therefore, if a question is asked over the phone the first time and by online survey the next, the validity of results may be compromised. Consistency in response mode is vital for good results, the research finds.

Created 8 August 2006

All work and no play … makes for an innovation dead-end

New research by Dr Babis Mainemelis and doctoral candidate Sarah Ronson shows how the best ideas are born in fields of play and how to ingrain more time and space for creativity within organisational settings.

Next time you spend a little more than your lunch hour playing with your colleagues, don't feel too guilty. Dr Babis Mainemelis of London Business School has identified two fundamental ways in which play has a positive impact on creativity in companies. In a new paper to be published in Research in Organizational Behavior in August 2006, Dr Mainemelis and phd student Sarah Ronson focus on two manifestations of play in organisations. The first is play as a form of engagement with work: when employees turn their core work into play, play facilitates the cognitive, affective, and motivational processes that creativity requires. The second is play as a form of diversion from work, which is much more than water cooler gossiping. Play as a diversion, argue Mainemelis and Ronson, fosters creativity in a peripheral way by creating a psychological and social-relational climate that is conducive to creativity.

Current normal work environments can be seen to stifle creativity. But should we worry about this? Work is what one gets paid for, and productivity surely is key? Apparently not. According to Dr Mainemelis creativity is increasingly important to companies, and not only those in the so-called 'creative' industries. Encouraging creativity and innovation via play is beneficial on many levels: it can generate creative ideas for new products or processes; it can calibrate an organisation's ability to flexibly respond to future challenges; and it can also contribute to the creation of a social context that stimulates creativity in the first place.

So what can organisations do? Dr Mainemelis argues that companies can nurture play in three ways: by creating a playful work environment; by providing freedom, time, and other resources that allow employees to select and turn their work into play; and by delineating a dedicated organisational time and space in which employees feel safe to play freely with new ideas that may not seem at first useful in generating new products or processes. Mainemelis and Ronson observe that some companies have started to recognize the power of play. Companies like IDEO and Pixar have created very playful work environments, while companies like Google, Gore, and 3M, encourage people to use up to 20% of their work time to play freely with new (even strange) ideas which may lead up to new products or processes.

For example, the manufacturer Gore's 'Elixir' non-breakable guitar-wires were invented by an engineer who used his "free-time" to improve the gear cables of his mountain bike. Then he asked how these cables could be used to develop less brittle guitar strings. He teamed up with an engineer who had invented Gore's 'Glide' non-breakable dental floss and with a second colleague who was an amateur musician. They played together with this idea for 3 years without being subjected to any form of direction or control. Today, Gore controls 35% of the acoustic guitar strings market, although Gore had absolutely nothing to do with the music market prior to this invention. In fact, the Elixir guitar wires were invented in one of Gore's medical product plants! Mainemelis and Ronson argue that play is the only form of behaviour that can lead to such unexpected and surprising discoveries.

For more information about Dr Mainemelis's research, or to speak with him directly, please contact the press office.

Created 5 July 2006

New research by Paddy Barwise shows that PVRs will not be the death of TV advertising after all

For the past 15 years, there have been many predictions that we are rapidly moving from a world of "linear TV", in which programmes are overwhelmingly delivered by TV channels and watched live, to an "on-demand" world in which viewers choose what to watch, when (and even where) to watch it, in terms of the ability to pause, rewind, and fast-forward.

A new study by London Business School professor Paddy Barwise focuses on personal video recorders (PVRs), and asks whether the ability of this new digital technology to fast-forward through commercials when watching time-shifted programmes really does spell doom and gloom for the advertising industry as we know it.

The evidence showed that of the 3480 opportunities to see commercials there were in the study, 2438 (70%) were viewed live and 1042 (30%) were time-shifted. So, for the specific issue of ad avoidance, it suggests that the likely impact (at least in the short to medium term) has been greatly exaggerated.
 
In the wider digital context, the evidence also suggests that the shift from live viewing to on-demand viewing over the next 10 years will be less dramatic than many are predicting. BARB data (supported by the study) suggests that over 80% of viewing in Sky+ homes is in fact still live.

Until now, the assumption has been that if viewers fast-forward through a time-shifted commercial they receive no exposure to the message. It is as if they had left the room. But Professor Barwise's new research shows that although viewers do hit the fast-forward button, the attention they pay to the adverts is actually heightened. In fact, when fast-forwarding through commercials, viewers almost invariably concentrated on the screen, sometimes commenting on particular commercials, watching them at slower speed, and occasionally even rewinding to watch them again.

Marketing magazine said of the research, "Not for the first time, marketing academic Barwise has punctuated futuristic nonsense with observation, facts and sound judgement."  The study, which has received widespread coverage in the media, with mentions in the Financial Times, Reuters, the Guardian, and numerous marketing publications, amongst others, will be published in full in July.

For more information please contact the press office at London Business School via kwatkins@london.edu or kerrytaylor@london.edu.

Created 26 June 2006

Annual barometer of social enterprise in the UK

The largest, annual survey of social entrepreneurial activity in the United Kingdom shows that young people are more likely to be social entrepreneurs than any other age grouping.

3.9% of those in the 18 – 24 year-old category would pursue a socially minded enterprise, compared to only 2.75 of over 55s. Similarly, education is a strong predictor of social entrepreneurial activity, and those in full time education are the most likely group to be SEA active (5%).

This is one of the key findings of the second annual Social Enterprise Monitor Report from London Business School. The report, sponsored by Barclays, examines enterprise activity with social or community goals as its base, and where the profit is invested in the activity or venture itself rather than returned to investors. It is published by the Global Entrepreneurship Monitor (GEM) UK.

More information can be found at the GEM website.

Created 15 June 2006

London Business School Professor Bruce Weber publishes new book on equity trading

Seat-of-the-pants trading is history. Data from Neonet, an agency broker, show that over 28 percent of trades in U.S. stock markets are the result of automated trading strategies. The Boston-based Tabb Group forecasts 34 percent annual growth in global money managers' use of trading algorithms. 

So, in an industry increasingly governed by computerization, algorithmic trading, and fully electronic markets, an appreciation of the theory and operations of equity trading is critically important. A new book from Bruce Weber, Professor of Information Management at London Business School, along with Professor Robert A. Schwartz of Baruch College in New York, and Reto Francioni, CEO of Deutsche Börse, offers a comprehensive course in equity trading for professional and serious independent traders.

The world's equity trading markets are large, complicated, and constantly evolving. In his new book, The Equity Trader Course, Professor Weber manages to give a comprehensive overview of the final, critical step in turning market ideas into realized profits. Even in the richest and deepest markets in the world, liquidity is costly, and hidden trading costs can erode profits. Salient advice in the book covers how to place orders "optimally", how to react to volatility, and, ways to avoid moving the market when buying or selling.

The book includes insights into trading, liquidity, and markets, and tools to apply when using auctions, submitting limit orders, and measuring trader performance. The role of technical analysis and the advantages of algorithmic trading are covered. Each chapter of the book teaches both novice and experienced traders how to be adaptive and successful in their purchasing and selling decisions. The Equity Trader Course comes with a companion CD containing the TraderEx simulation, which walks readers through the dynamics of various market structures, and the mechanics of trading - from entering orders to monitoring the market, and profitably exiting a position.

For more information, please see the Wiley website, or to contact Professor Weber directly, please contact us at the press office at London Business School.

Created 1 June 2006

Financial services following on from manufacturing

Financial services companies, like manufacturing firms before them, are outsourcing and offshoring, going beyond geographical and organizational boundaries in search of efficient operations, according to new research.

Financial services is one of the most important industries in both the UK and the US and is one of the biggest employers, but it has historically lagged behind manufacturing industries in exploring the opportunities of outsourcing and offshoring – key components of what are known as "global sourcing models".

This new research, published in a joint study conducted by a team drawn from London Business School and the Capco Institute, explores the experiences and sourcing strategies revealed by sixty two executive respondents from the world's top financial services organizations.  The findings dispel many of the myths surrounding both outsourcing and offshoring in the financial services industry today.

Some of the key findings of the research include:

• The Global Sourcing Model is well established amongst the world's leading financial services organizations even for "vertical business processes" often assumed to be too difficult to outsource or even offshore.  Indeed, 58% of survey respondents who outsource business processes already use alternative sourcing strategies for these vertical processes.
• These companies no longer think about "whether to outsource" or "whether to offshore" in terms of single functions and a single vendor; instead they are beginning to manage sophisticated sourcing frameworks that integrate multiple-vendors, multiple-geographies and vertical, business specific processes.  Nearly 25% of the respondents reported that they already use a combination of resources onshore and offshore, in-house and outsourced.
• While cost savings continue to be the dominant motivation for the transition to global sourcing models, other factors are emerging as important drivers; over 40% of respondents cited quality improvements as a key objective while 25% cited increased flexibility as a priority, especially in outsourcing.

Dr. Phanish Puranam, Assistant Professor at London Business School and co-author of the survey, commented on the findings: "The survey highlights that financial services companies are finally adopting what can truly be described as a Global Services Sourcing Model.  They are doing what the manufacturing sector did years ago, breaking up the supply chain and breaking free of geographical and organizational boundaries."

For more information please refer to the CAPCO website.

Created 22 May 2006

Nirmalya Kumar examines Zara

Professor of Marketing Nirmalya Kumar unlocks the secrets to the High Street success of Zara.

In 1975 Zara opened its first store in north-west Spain. By the end of 2005 there were 723 Zara stores in 56 countries. It has become Spain's best known fashion brand with a winning formula based on its approach to the supply chain.

Zara has been a pioneer in taking high fashion to the High Street. With a team of 200 largely unknown designers they create styles mimicking the latest on the catwalk, churning them out to the shop floor only weeks after their haute couture debuts. When Madonna toured Spain her outfit was copied by Zara designers. By the time she performed her last concert in the country, young fans were wearing the same outfit brought from Zara shops.

Due to a frequent refreshing of stock, customers constantly return to stores to browse new items. Most customers average 17 visits per year in comparison with only 3 visits to Zara's competitors.

But Professor Kumar states Zara faces some challenges for future growth – more competitors are copying its supply chain model of success and globalisation brings challenges in each new market.

Read about Zara in the upcoming summer edition of London Business School's Business Strategy Review – available from June.

Created 18 May 2006