Why Aren’t Automakers Embracing Digital Business Models?

Below is my most recent post on Harvard Business Review:
BMW is one of the best car makers on the planet. It is also thinking seriously about what digital transformation means for the car business.
Its cars now have Connected Drive, a platform that allows drivers to purchase apps for traffic, messaging, and for starting the the engine from a distance. The new BMW is also packed with electronics that allow the user to experience different driving modes, from sporty to gas-saving, substantially changing the feeling of driving the car.
And yet BMW is still not making full use of digital business strategy – nor are any other car makers.
Consider: BMW charges €360 to unlock the ability to access the apps on the Connected Drive. Some apps (e.g. Remote Services) cost €80 and others (e.g. Real Time Traffic Information) can be rented for €45 over 6 months. If one spends a hefty amount of money on a new car, paying €80 or €45 for an app doesn’t seem too expensive, but needing to pay €360 to just activate the ability to download the apps seems totally wrong.
Contrast this with the approach taken by Apple. Making money on complementary products is one of the features of Apple’s business model. How does the model work? You sell the hardware and then you sell low priced apps (some of them are even free) to increase the value of the hardware. The apps represent a complement to a car and the Connected Drive is a store to sell complements, but why does the user need to pay to enter the store?
Imagine buying an iPad (especially in the early days of this product) and then having to pay €100 (or even €50) to access the App Store. This would have been a serious barrier. Following Apple’s logic would encourage BMW to make Connected Drive free, something that would make sense given the low marginal cost to BMW of doing so. The bigger lesson here is that you should always allow the customer a free entry into your digital store and then charge small amounts for the products sold there.
Here’s another way digital business principles might play out differently for BMW and other carmakers: renting engine capacity.
If you look under the hood of BMW’s Series-3 vehicles, for example, you can get horse power of either 110, 150, or 190, depending on whether you’ve purchased a 316, a 318, or a 320. However, you might be surprised to learn that BMW uses the same 4-cylinder engine in all 3 models, except the electronic components don’t allow the engine that is sold in the less expensive model to get to the higher levels of horse power.
Why couldn’t the company make a car that allows a driver to either upgrade or rent the engine power? Say you buy a 318 model with 150 horsepower for casual driving, but then you rent the 190 HP to go on a road trip? Alternatively, could you buy a car with 150 HP but after a 3-year period pay to unlock additional horsepower permanently? If the hardware is an issue, this unlocking could happen in a dealership.
We see these free-premium-rent models all the time in other digital businesses. When you download a fitness app, for example, you can try a free version first, and then can pay to unlock premium functionality later on. Or you can rent some functionality, such as a €9.99 a month subscription to an app that gives you a personalized training program.
When I talk to auto industry executives, the reason why they don’t want to systematically offer engine upgrades is that they want the customers to sell their old car and buy a new, more powerful car. Fair enough. But they may be missing out on both new customers and new revenue opportunities. Clearly, when commuting to work or driving in the French countryside, one doesn’t need 190 horsepower engine (not only because of the high fuel consumption, but because of the high probability of getting a speeding ticket). But on a vacation to Germany, where there are no speed limits on the autobahns, 190 horsepower could come in handy. As the car already has the different driving modes that are controlled electronically, it seems that the HP control is also possible.
There are also possibilities for automakers like BMW to combine user data, software upgrades, and digital business models to “nudge” customers to try new features they’ve not used before. Consider that your Connected Drive apps might know that you’re planning an upcoming trip to Cote d’Azur, where the speed limit is 130 kilometres per hour. The car itself could ask you if you’d like to implement a temporary, over-the-air engine upgrade.  Perhaps automakers could even offer a “vacation bundle” – additional traffic, weather, and events information along with an engine upgrade that lasts the length of your trip.
Tesla does now offer a self-proclaimed “ludicrous” mode upgrade to Model S that allows reducing the acceleration time of your car by 10%, and you don’t need to sell your old Tesla to get this upgrade. However, Tesla still asks you to buy the upgrade (about $10,000), not to rent it, although the rental of additional power should be at least technologically feasible.
Clearly, the makers of physical products (like cars or home appliances) understand that digital convergence is the next frontier. However, they often don’t look carefully or creatively at the business models this might inspire. The physical asset itself is just the beginning

Lean in or Lean out? Unfair Treatment Stops Women’s Careers in Many Ways

We have by now learnt a lot about how women’s careers are held back by unfair evaluation and promotion procedures, and it gets worse at higher levels in the organization. The glass ceiling exists at some point before the executive suite, unless we are talking about the more symbolic executive offices that are seen as good women placeholders. Women know this too. A centerpiece in the discussion about women’s careers is the book “Lean in: Women, Work, and the Will to Lead” by Cheryl Sandberg, COO of Facebook, which offers career advice for women to get ahead. Many women took the recipe-like advice as a way to behave more like men, in order to the get ahead the way men do. Others asked whether title “the Will to Lead” and its focus on women’s behaviors was a way of blaming the victims of a system set up to make them fail.
It is fair to say that the discussion of that book is a sideshow for most women with careers. They care about the hiring and promotion decisions that they are exposed to, and they doubt that these are fair. That makes sense: why should they be any different from the others?  Chances are that they have been hit by unfair promotion criteria at some point in their career.
Now research by Raina Brands and Isabel Fernandez-Mateo in Administrative Science Quarterly has revealed a cruel twist on this story. In turns out that people adapt their behaviors to the fairness of the system they are in. If they are treated fairly, they will reach for opportunities. If they are given signals that they belong in a group, they seek to join it. And once you think about those two mechanisms, it is obvious what happens to women seeking executive positions. They are not treated fairly and felt to belong, and the rejections from positions that they (often) should have gained discourages them from reaching for new opportunities. After all, who plays a losing hand? Naturally this accumulates over time, because more experience means more rejections, so exactly the women best placed to become executives are most likely to think they cannot reach that level.
This is not just a story about women. Unfair treatment can hold back a group in the short run. In the longer run it creates discouragement and resentment, and the members of the group starts holding themselves back. They are leaning out of the unfair

system, looking for better places to work. The labor market gets split as they avoid the career paths with unfair treatment, and organizations need to fill their positions from an increasingly narrow and less talented pool of applicants. The firm that shows through its hiring that it has a problem with female, black, Muslim, and Hispanic job applicants will learn the long-term consequences of narrow hiring.

Probing the Protests: Firms can learn to Avoid Activists

Often we see popular protests against firm initiatives. Recently the Standing Rock Sioux tribe and environmentalists organized protests against the planned Dakota Access Pipeline, which was scheduled to run through sacred grounds and across a river. The project has been suspended not because of protests, but because the Army Corps of Engineers blocked the measure needed for it to be legal. Could the construction backers have understood that the pipeline routing would lead to protests? In retrospect it seems obvious that an oil pipe through sacred land would be seen as a rough equivalent to an oil pipe through a church, and would lead to some anger. But the more general question is, can firms learn to avoid provoking activists?
It turns out there is research showing that such learning happens, at least for firms that are experienced with protests. An article in Administrative Science Quarterly by Lori Yue, Huggy Rao, and Paul Ingram studied the combination of two events: protests against Wal-Mart Inc. store development proposals and subsequent Target Corporation filing of store development proposals. This sounds complicated, but it is a really simple sequence. Walmart needs to file a proposal and have it approved in order to open a store (stores are big projects). After a proposal is filed, there can be protests against it (many dislike the idea of a nearby Walmart store), and Walmart can then decide whether to stop planning for the store. Walmart is known to file many proposals, and has a pattern of probing for places that are “protest-safe” by the seeing whether there is a protest or not.
But in our sequence, the next step is to see what Target does if there is a protest after Walmart’s filing. Here it gets interesting. For Target, it could be a simple rule to just avoid places with protests. In fact, they found that Target does avoid places with protests, but it was also learning in smarter ways. First, because Target knows that labor unions are uniformly unhappy with large low-price (and low-wage) department stores, it pays less attention to union-organized protests than to protests from other local groups. Second, it distinguished between protests that specifically paint Walmart as evil, versus those that are against any large store. Target is likely to enter when protests are specifically against Walmart, but to avoid places with protests against big stores. So, Target learns as much as possible from each protest.
And Target is even more sophisticated than what I just wrote. These learning patterns are what Target uses for locations that they are not familiar with, so they need to use protests to learn instead of relying on own local knowledge. If Target already has knowledge about a location, it ignores the protest and goes ahead with its own plans based on the commercial promise and its own assessment of risk.
Clearly, a corporation needs to be pretty unpopular (and to have unpopular peers) to become this good at learning from protests. And equally clearly, protests are not just temporary solutions, they are also signals that firms pay attention to and learn from. Protests have a deterrence effect, just as proposals have a probing goal.

Kickstarting the Disadvantaged: Activism in Venture Funding

Research and news tell the same story: there is discrimination both in employment and in business. Women are few and far between among executives and founders of technology firms, and claims of bias are often made, especially in Silicon Valley. On the financing side, venture capital firms appear to disadvantage women in executive roles. #AirbnbWhileBlack is hashtag collecting discussions of discrimination, and has led to Airbnb examining its processes for retaining hosts.
This looks like a problem for women seeking to start businesses, especially if those businesses are in industries with few women to begin with, like high technology. Even worse, the tendency to favor similar people to oneself – homophily – could make this even worse. Interestingly, a recent article in Administrative Science Quarterly by Jason Greenberg and Ethan Mollick has found a counter effect. The idea is that if a minority thinks that it is discriminated against, it will be especially supportive of its own members. It will not only favor its own, as all groups do, but it will do so in an activist way. If this happens, being recognized as a disadvantaged minority – like women in technology – will lead to better treatment, at least from members of the same minority.
Does it happen? It is not clear whether this is always true, but one good place to look is in crowdfunding, where ventures and their founders are presented to a “crowd” of any interested funder, and they in turn decide what ventures to back. And indeed, women Greenberg and Mollick found that women targeted women’s ventures for funding, and did so

especially for industries were women are known to be scarce. So, women especially supported other women not fashion or publishing, where women are frequent business founders, but technology, where they are scarce.

This is clearly not a reason to think that discrimination will balance out. Crowdfunding is the form of funding where this type of activist support is most effective, but most venture funding is not down through crowds – and we already know that venture capital firms, for example, have mostly male executives. Also, activist funding does not have large effects when there are few women funders to begin with. So, we can conclude that this provides some relief, but it is a less fair solution than simply evaluating ventures on their merit.

Getting the Orange out of My Head: How Respect can set Inmates Free

Organizations can have very different work environments, including differences in the respect they give to employees. Organizational cultures differ, and managers differ, in whether they see employees and valuable and how well they acknowledge this. Many organizations think that it makes a difference – notice how I used the word “employee” just now, but actually words like “colleague” and “team member” are frequent in actual work. Does this matter?
For an example of how much this can matter – in a very special context – a recent paper in Administrative Science Quarterly by Kristie Rogers, Kevin Corley, and Blake Ashforth looked at an organization that operates professional call centers as part-time work for selected inmates in prisons. Every day inmates go to work in their orange jump suits (yes, just like in the TV series). Every day they go back to the prison wing after working. But this work is not like the demeaning chain gangs that we see in some old movies; the organization (Televerde) values its inmate workers and gives them both encouragement and respect.
So what happens? The respect they get from their Televerde managers, and from customers, changes lives. They get a specialized respect based on the value of the work they do, and their performance, and this gives excitement and self-respect. They get general respect from being seen as real people with lives and accomplishments, not inmates with orange jumpsuits and numbers, and this gives ideas of a changed and improved life. Together, these two kinds of respect, and especially the general one, puts the inmate-workers on a path toward removing themselves from their identities as current and future inmates, and attaching themselves to a new identity as a professional doing legal and respected work out of prison.
It happens impressively fast. These changes were easy to see over a period of less than a year (for most it was much faster), even though the Televerde workers were still in the prison wing, with their old friends and controlling prison wardens, every day after work. As part of the identity journey, they needed to transition from their old thinking habits – the orange in their heads – to a new way of seeing themselves as part of a regular civil society that they could not yet reach because it was outside the prison walls. Remarkably, they were able to not just see their inmate identity and their worker identity as separate beings coexisting in their minds, they also could shift to a new and holistic identity that would guide their lives after they were released from prison.
Giving workers respect is seen as important also in regular organizations, with no inmate workers, but there is a certain degree of cynicism about its effect, and there are also managers who don’t think it matters. After seeing how transformative it can be under these conditions, when it is done honestly, maybe it is time to reconsider.

What If Everyone Learns From Others? Finding Fool’s Gold

So the US election ended with a Trump win and wild swings in the stock markets. The Dow Jones fell from 18,200 to 17,900. Then, less than a week after, stock prices rushed back up and passed 18,800. What happened? Let’s start with the simple observation that we were observing stock sales and buys by investors, who sell and buy for profit, and who have a lot of experience selling and buying. These wild movements were not a result of ignorance, and not a result of playfulness either. Investors chasing value drove prices down and back up, and lost and gained money. And, this was not a unique event, we are familiar with dramatic price changes as the market responds to uncertainty.
What drove these events was in fact a fundamental process that has been studied long, and we can go back to a paper by Hayagreeva Rao, Gerald Davis, and myself in Administrative Science Quarterly in 2001 to learn about it. People making decisions under uncertainty try to learn ways to reduce uncertainty. When they are looking for value, one way is to learn from others. After all, if we see someone moving toward one option, or away from it, their decisiveness could indicate that they know something that we don’t know. But people can be decisive for many reasons. They may have correct knowledge. They may have incorrect knowledge. They may be impatient. But learning from others can be very tricky when those others act on incorrect knowledge or impatience. This was known before our study.
What we found went one step further. Learning from others is especially tricky when those others learn from others. In that case, it is enough for some people to make decisions without correct knowledge. Others do the same learning from them, and then others do the same learning from those who learnt from them. And so on. See how this can make stock markets plunge, with very little basis in fact? Or increase? In fact, our research was based on stock market actors – not investors, but stock analysts. They want to cover firms that are good but overlooked, because analysts are most useful for investors if they give scarce information on valuable opportunities. But we found that when analysts were chasing valuable firms, they were in fact only chasing other analysts. And the later they were in learning from others, the less valuable were the firms they found.
This is a problem that extends much further than stock markets, though it is easier to  prove there than elsewhere. Learning from others is a good strategy as long as it is not over-used. But, those who learn from others typically don’t stop using that strategy soon enough, so at some point it becomes costly. Again and again we see people, and firms, chasing fool’s gold: opportunities that looked good to the first who entered, but only because of incorrect information.

Being Led by a Narcissist: What Will Happen?

A narcissist is someone who has an inflated perception of oneself, and will give exaggerated accounts of own capabilities, past accomplishments, and ability to predict and change future events. Narcissists have, to put it colloquially, huge self-esteem. Clearly this suggests leadership as an appealing career path for narcissists. After all, leaders are looked up to, which confirms what the world should be like for narcissists, and leaders can accomplish great deeds, which narcissists are confident they can. That does not mean that CEOs of firms are narcissists in general. CEOs typically are not given the firm by dad; they are career managers who get their position based on a track record of success. Some degree of randomness is involved in who wins, but it also helps to have a realistic view of oneself and the world, and narcissists fall short on that dimension.
Still, there are enough CEO narcissists around that it is possible to do research on them, and thanks to an article by Arijit Chatterjee and Donald Hambrick in Administrative Science Quarterly, we know how they lead. The key question to pose is how CEOs learn from experience – do they become more cautious by low performance, and bolder by high performance, as one might expect and want a firm to do? After all, adjusting actions to feedback is an astute way to behave both for individuals and firms.
Intuition suggests that narcissists don’t respond much to feedback because they are already convinced of their own greatness, so they will ignore evidence to the contrary. The research showed that this intuition is only half right, and this is where things get interesting. It is true that narcissists are unresponsive to indicators of their own performance – objective indicators, the kind that one should learn from.  A narcissist CEO will completely ignore recent stock returns when calibrating the level of risky investments; a non-narcissist CEO will pay close attention and make more risky investments when they indicate success.
But that does not mean that narcissists ignore feedback. The reason is that narcissists are not as confident as they seem. In fact, they can be very insecure, and as a result they crave applause and lash out at criticism. This means that social feedback – praise – has a big effect on the behavior of narcissists. In fact, the opposite relation holds there. A non-narcissist CEO will nearly ignore media praise when adjusting risky investment, while a narcissist will make strong increases in risky strategic investment when praised a lot.  
So is it OK to be led by a narcissist? This research suggests that it might be OK, provided that social praise exactly mirrors objective indicators, or that the leader is not responsible for any decisions involving risk. Those are strict conditions, so it seems that it will nearly always be better not to be led by a narcissist.

Small Firms are Admired. But are They Good Employers?

There has been a strong movement toward smaller firms in many economies. This is partly a result of larger firms doing less well than before, and shrinking as a result of failure, and partly because large firms find it convenient to subcontract work, making their payrolls smaller than the actual work done for them. Along with this, we are seeing increased admiration for small firms, entrepreneurs founding and running them (especially), and even the “gig economy” where many people are not really employees of anyone, just individual contractors. If you took an uber ride today, you had a gig (economy) with someone.
We may wonder what all this does to employment. That’s a big question, but a practical place to start is wage levels and inequality. We already know that large firms pay more than small firms do, for the same worker. There is also some indication that they have greater wage equality, because employees inside large firms can compare their pay more easily, and can protest when inequality is high. But how does the presence of large firms affect the overall employment, including those who work for smaller firms? That’s the ambitious question answered by a paper in Administrative Science Quarterly by Adam Cobb and Flannery Stevens. They look at how US states differed in the proportion of people employed by large firms over time, and measured the effect on the income inequality — the spread of income across the population.
What they find is disturbing for those who celebrate the rise of small firms. Large firms in a state reduce income inequality, which is only possible if they reduce inequality both inside themselves and among firms around them. So, rise of small firms means rise of income inequality. Some other findings are interesting too, and suggest problems. Large firms can have higher wage inequality if their employees compare themselves less, which is easier if they have racial diversity (races are often separated by job title, just as genders are). Racial diversity in large firms increases income inequality in the state, and this effect is especially large if the large firms are dominant employers in the state. Dispersion of large-firm employment across locations, which also prevents comparison, also makes large firms a weaker force in reducing income inequality.
Many lament the lower freedom in large firms, and hierarchies can even feel oppressive for employees. But the freedom of small-firm employment has its costs too. Jobs are lost more often, pay is lower, and even as neighbors they are less valuable – being in a state with many people employed by large firms equalizes income. Something to think about.

Can the State Help Firms Innovate? “Get some!”

The role of the state in business is hotly debate in some parts of the world, but less controversial in other parts. A key reason for the debate is that some think that the state can do some things better – for example, having a long-term perspective and committing resources – while others think the state should stay out because its decisions and execution are worse than the private sector. Different parts of the world has reached different answers, with the US standing apart as particularly skeptical of the state, with most of Europe and important parts of Asia having a much more optimistic view of the state.
One of the places with some controversy is actually China, which has gone through a market transition but still has state intervention both through state ownership and state grants to firms. This makes it a great place for looking at what the state can do, and an article by Kevin Zhou,Gerald Gao, and Hongxin Zhao in Administrative Science Quarterly takes advantage of this opportunity.  Their idea is simple. State ownership gives Chinese firms advantages both in general financing and in funding research and development, which in turn should help innovation. But, the effect on innovation will only happen if the firms are actually good at using these extra resources. So, they need to pick good research (decision making) and do the research and development well (execution) in order to do better than firms without state ownership.
Their research has a rich set of results on state effects, but the key conclusions are easy to summarize. Yes, state ownership means getting more money for research and development. Yes, those funds are used less effectively than in firms with no state ownership. And here is the interesting tradeoff: the two effects don’t balance out; instead they make firms with some state ownership superior to those with a lot, and with nothing. The advice is clear: get some! And interestingly, this advice is particularly important not for established firms, which one might think are the ones best able to milk the state for funds, but for start-ups. The reason is that start-ups are better users of the added funds they can get from the state. So, a state that understands this relation should (as the Chinese state clearly does) not just give money to the large and established firms, but also to startups.
And what happens if there is too much of the state? This is a problem seen some places in Europe, where there isn’t a deliberate market transition as in China, and where the state has a fair amount of money. For example, Norway has mostly been directing its oil-funded pension money abroad, for a number of reasons including the peculiarity of owning firms and choosing what firms should receive research funds. In spite of this caution, there is still significant state funded research in Norwegian firms, and Financial Times has reported some indications that it is used less effectively where there is a lot of it. Just like in China.

Virtual Teams: When Can They Innovate?

Some claim that more than half of all professional employees are now in virtual teams, where virtual means that one or more of the following is true: 1) team members are dispersed, 2) team members communicate electronically, and 3) team structure is shifting over time. I am the member of such teams, and my teams are also multinational  (some count that as a dimension of virtualness too). All of these factors make it harder to manage teams, and especially hard for teams that innovate rather than perform standard tasks. Why? Because teams that innovate need close communications in order to share idea, develop them further, and avoid misunderstandings along the way. Distance, in any form, makes this harder.
So why let innovating teams be virtual? Part of the reason must be that managers are confident in the results. However, research in Administrative Science Quarterly by Christina Gibson and Jennifer Gibbs looked at the issue and found that there are significant drawbacks in making teams virtual. Along each dimension of virtualness, teams lost some innovation ability. But importantly, they also found that this negative effect could be reduced. If the teams were managed in a way that made communication psychologically safe, there was still reduced innovativeness in more virtual teams, but less reduction. 
Psychological safety is a simple idea because it just means that team members should be able to say things without fear that other team members will react negatively, even if they are not sure that what they are saying is correct. This is important because when doing innovations, it is normal to be in doubt, but important to bring up issues, especially those that are uncertain, because innovation comes from testing out and resolving uncertainty. So, this is very useful research, with clear implications for how one can design teams for innovation.

The research also has two other features I wanted to mention.  One is that the research is 10 years old, but still an important insight. Good research stays current a long time. The other is that part of the research was done on a fighter aircraft budgeted to 200 billion, so obviously a context calling for highly innovative teams. They don’t say what aircraft it is, but I can guess because I happen to know about an aircraft program that was budgeted to 200 billion but now costs 400 billion. Psychological safety in virtual teams makes a difference… The picture of my guess on the aircraft is in this post.