Research Briefs

Fewer degrees of separation make companies more innovative, creative

When companies are indirectly linked in a network of strategic alliance relationships with only a few degrees of separation, they are more innovative.

This according to a study published in the July issue of Management Science co-authored by Corey Phelps, an assistant professor of management and organization at the UW Foster School of Business.

Phelps and Melissa Schilling, an associate professor at NYU, analyzed the innovative performance of 1,106 companies in 11 different industries over a six-year period. They examined the pattern or structure of strategic alliance relationships among companies in each industry. They found that how firms are connected to one another influences the number of patented inventions they obtained. Those that secured more patents were classified by Phelps and Schilling as being more creative.

"Most social networks—whether we're talking about friendships among individuals or alliances between companies—are typically clustered," Phelps says. "Generally speaking, we only know a very small number of people and these individuals mostly know each other. As we know from high school, the world is cliquish. This is the essence of clustering.

According to the researchers, companies reap greater benefits when they are part of an alliance network that exhibits a high degree of clustering and only a few degrees of separation, both of which are characteristic of a small-world network. This winning structure enables information to travel quickly and accurately and increases the level of cooperation among alliance partners.

"When a small-world network structure emerges within an industry, all companies in the network benefit in terms of increased innovation," Phelps says.

CEOs reap financial benefits from mergers regardless of stock performance

Following an acquisition of another company, CEOs’ compensation levels usually increase, even when the purchase turns out to be unprofitable, according to research by Jarrad Harford, an associate professor of finance and business economics at the Foster School.

For the study which appears in the April issue of The Journal of Finance, Harford and co-author Kai Li of the University of British Columbia, examined 370 mergers of publicly traded US companies between 1993 and 2000, comparing the wealth of the CEOs of the purchasing companies a year before and after the acquisitions.

They found that while a bad merger can decrease the value of a company's stock and options, CEOs typically acquire new stock options once the deal goes through, thus making up for any financial losses suffered as a result of the buy.

"There are major personal financial gains to be made by CEOs after any merger or acquisition so even if it ends up being a financial loss, shareholders suffer but CEOs nearly always come out ahead financially," says Harford.

Bad behavior seems rampant in business, and scholars are divided as to why people act ethically or unethically. Many have argued that ethical behavior is the result of simple judgments between right and wrong. Others suggest that the driving force behind ethical behavior is the individual’s moral identity, or whether the individual thinks of him/herself as an ethical person. 

New research from the Foster School of Business suggests that both of these forces are at play.  In two separate studies, Scott Reynolds, an assistant professor, and Tara Ceranic, a doctoral student studying business, surveyed roughly 500 college students and managers about their ethical behaviors.

In the first study, researchers asked students if they would have cheated in college in order to score better on a test. Those who explicitly considered themselves to be moral people and considered cheating to be morally wrong were the least likely to cheat. In contrast, students who considered themselves to be moral but saw cheating as an ethically justifiable behavior were the worst cheaters.

"Moral identity seems to be more motivational in nature than 'moral' in nature," Reynolds says.  "Managers and organizations should not just assume that a moral identity will necessarily translate into moral behaviors."

In a second study designed to more fully illustrate the motivational power of a moral identity, Reynolds and Ceranic presented company managers with a scenario that was morally ambiguous.  In the scenario, a hard-working hourly employee completed her work and was prepared to go home early, but she needed the hours. Each manager was presented with different options for dealing with the situation. These varied from being very accommodating (giving the employee the rest of the day off with pay) to very strict (keeping her at work and finding additional work for her to complete), with more moderate options in between. As expected, those who viewed themselves as moral people were most likely to take the most extreme alternatives, and chose either to be extremely accommodating to the employee or exceedingly strict about the rules in the workplace. This study proved that their moral identity motivated them to the most extreme behaviors.

As the first study demonstrated, sometimes these extreme behaviors may not be in the best interests of the organization. There are measures, though, that companies can take to help improve moral behavior.

• First, Reynolds says, companies can focus on improving individual moral judgments. Moral development has been shown to improve with formal ethics training programs.
• Organizations also can more effectively communicate social consensus from higher sources, such as state and federal law, and more firmly establish their own social consensus in areas such as gift-giving policies.
• Finally, companies can reward and encourage behaviors associated with the traits of a moral identity (fair, hardworking, compassionate), thereby encouraging development of moral identities within employees.

The study appears in the November issue of the Journal of Applied Psychology.

Relationship marketing builds illusionary loyalty as salespeople capture customers' hearts

The battle to win and keep customers in an increasingly competitive and crowded marketplace has become tougher as more companies and products are available to the free world. In response to these competitive pressures, companies are increasing efforts to build customer loyalty – commonly referred to as relationship marketing – but have these efforts been a waste of marketing dollars, or money well spent?

A team of researchers led by Robert Palmatier, an assistant professor of marketing at the Foster School of Business, has found that the payoff from relationship marketing depends on who owns the customer relationship, the salesperson or the company he or she is employed by.

Most firms are unaware that relationship marketing efforts may be generating illusionary loyalty, say the researchers in a recent issue of the International Journal of Research in Marketing. They say relational loyalty focused toward a salesperson rather than a company as a whole has a larger impact on customer behaviors and financial performance such as increasing sales, but can be worse for the business by making the company more vulnerable to salesperson defections. Palmatier says managers have to balance the higher returns generated by customer-salesperson relationships with the risk of losing salespeople.       

Palmatier says a key issue facing firms is how to control where relationship-marketing-induced customer loyalty resides. 

As part of their study, the researchers merged survey data from customers and their respective salespeople across 362 different customer-salesperson pairs from industries such as electronics, industrial safety and telecommunications. Buyer relationships averaged 6.2 years with salespeople and 9.7 years with representative firms. All were business-to-business relationships. The researchers examined how the financial performance of these companies was affected by their use of a social, structural or financially-based relationship marketing program.

Social-relationship-marketing programs convey special status and entail social engagements such as meals, entertainment or gifts. Social programs lead to strong salesperson-customer relationships, with no effect on the customer-selling firm relationship. Value-added benefits that are difficult for customers to supply themselves like electronic order-processing and customized packaging are characteristics of structural relationship marketing. Structural programs lead to customer-selling firm relationships unless the customer perceives that these benefits are being allocated based on the salesperson’s discretion.

Most surprisingly, he says, financial relationship marketing, or the provision of direct economic benefits in exchange for past or future customer loyalty including special discounts, free products and other incentives was found to provide little relational benefits for salespeople or firms. Even worse, when customers perceived that financially-based incentives were allocated by salespeople, these programs actually had a negative impact on customer-selling firm relationships. Palmatier believes this is because salespeople often communicate to customers that they are giving these benefits as an extra favor to the customer even though it is against their firm’s policies. This has the effect of undermining the customer’s relationship with their firm.

Overall, Palmatier recommends if sales force turnover is low then firms should employ social-relationship-marketing programs because they have the largest impact on performance via customer-salesperson interpersonal relationships. In situations with high salesperson turnover, firms should invest in structural-relationship-marketing programs and control the message that is delivered in conjunction with the program. Based on this research, Palmatier says financial programs are not effective at building customer relationships, but should be used as a pricing program instead.

Co-authors are Lisa Scheer and Srinath Gopalakrishna of the University of Missouri, Mark Houston of Texas Christian University and Kenneth Evans of the University of Oklahoma.