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Initiating Supplier New Product Development Projects: A Behavioral Investigation
Abstract
While suppliers are often an excellent source of product innovation for buyers, their propensity to undertake or continue a product development project can be elusive. This study examines how characteristics of the innovation project, including the type of project revenue, type of cost uncertainty, and the contract frame, influence the decision to accept, and subsequently continue, an innovation project. Through a series of controlled behavioral experiments we find that acceptance rates increase when projects are characterized by a low real options value or an entirely new (versus replacement) revenue stream. While these factors have less influence on the supplier's decision to continue the project, once accepted, continuation rates do increase if acceptance and continuation decisions are made by the same person. We also find that using a reward (versus penalty) frame for sustaining supplier engagements significantly increases acceptance rates. This article is protected by copyright. All rights reserved.
... The term "supplier development" has existed for decades (Leenders, 1966). SD is defined as buying organization (buyer) effort, in conjunction with its suppliers, to increase the performance and/or capabilities of the suppliers to meet the buyer's needs (Charpin et al., 2021;Govindan et al., 2010;Jin et al., 2019;Wuttke et al., 2018;Zhou et al., 2022). Environmental regulations and community awareness of environmental issues have caused organizations to consider them for competitiveness reasons. ...
Organization’s sustainability performance is influenced by its suppliers’ sustainability performance. This relationship makes sustainable supplier development a strategic competitive option for a buyer or focal organization. When considering sustainable supplier development practices (SSDPs) adoption, organizations have to balance and consider their limited financial resources and operational constraints. It becomes necessary to both select the best SSDPs set and investment allocation among the selected SSDP set such that the organization can maximize overall sustainability performance level. In this paper, an integrated formal modeling methodology using DEMATEL, the NK model, and multi-objective linear programming model is used support this objective. The proposed methodology is evaluated in a practical sustainable supply chain field study of an equipment manufacturing company in China. Through case study, we found that the interdependency among SSDPs must be considered in SSDPs selection and investment allocation problem. Theoretical, managerial and methodology implications, conclusions, and directions for future research are also presented.
... Diese Sicht ist mir sehr wichtig, und sie wird auch in diesem Beitrag deutlich werden. Es geht um eine Management Aufgabe, die nicht nur technische, algorithmische Aspekte beinhaltet, sondern vor allem das Zusammenbringen, das Miteinander von unterschiedlichen Stakeholdern, die unterschiedliche Anreize und Zielsetzungen haben (Wuttke et al., 2018). Es geht darum, wie Unternehmen zusammenarbeiten können, um den Gesamtwert gemeinsam zu erhöhen und anschließend unter den Akteuren gut zu teilen. ...
The creation of mandatory social standards in global supply chains has been the subject of legal policy debate for almost three decades. While the European Commission continues to struggle over a regulatory proposal, Germany has passed the Act on Corporate Due Dilligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz - LkSG). This directional decision has great practical significance not only for those employed in foreign supply chains, but also for companies in an economy such as Germany's, which is dominated by imports and foreign trade. The 8th Wiesbaden Compliance Day focused on the fundamentals and components of this sensational development and made an initial impact assessment. With contributions by Elisabeth Gambert | Markus Kaltenborn | Janina Lukas | Michael Nietsch | David Schneider | Birgit Spießhofer | Thomas Voland | Christian Wagemann | David Wuttke
... Prior experimental studies in operations management have focused on the buyer perspective (e.g., Chae et al., 2019;Joshi & Arnold, 1998;Polyviou et al., 2018;Thomas et al., 2011), especially when they are related to sustainable practices, or even socially responsible practices (Goebel et al., 2018;Thomas et al., 2021). The supplier's perspective, however, has been less studied (Thomas et al., 2013;Wuttke et al., 2018), and very few studies included the perspectives of both the buyer and the supplier (e.g., Ro et al., 2016;Rottenburger & Kaufmann, 2020), such as our study. ...
Objective: the purpose of this paper is to explore the effect of information
transparency on the selection of a socially responsible partner, taking into
account the role played by signal send by the location of the partner and
stakeholder pressure. Theoretical approach: this study is based on the
premise that information transparency is a central element in the buyersupply
relationship and can play a key role in the selection of a socially
responsible partner. The location of a partner can also affect the feeling of
transparency if the country where the partner is located is not recognized
for its reputation. The stakeholder pressure for socially responsible practices
can also affect the decision to choose a business partner. Methods: we
employed a 2 x 2 full-factorial between-subjects, scenario-based roleplaying
experiment. In Study 1, we simulated a situation in which the
buyer is asked about their likelihood of selecting a socially responsible
supplier, while in Study 2 we simulated a situation in which the socially
responsible supplier is asked about the likelihood of selling products to
a buyer. Results: the results indicate that information transparency
affects the decision to select socially responsible partners. Stakeholder
pressure partially moderates this relationship, while location does not
moderate this relationship in either study. Conclusion: we conclude
that information transparency throughout the supply chain is a relevant
factor in negotiations within a socially responsible context. Information
transparency is a key aspect for both the buyer and the supplier when
selecting a socially responsible partner.
... Behavioral OM has been a relatively strong research domain within the field of OM, with a growing acknowledgment that almost every context in OM contains people with emotions, values, dissonances, and preferences rather than hyper-rational actors with mechanistic actions (Fahimnia et al., 2019). Behavioral OM literature reveals few insights into the factors that lead managers to engage in innovation, such as worker expertise and psychological safety (Lee et al., 2011), cost uncertainty and the contract frame (Wuttke et al., 2018), and tolerance for failure and monetary incentive schemes (Hutchison-Krupat & Chao, 2014) (see Table I for further details). However, these insights from OM research remain insufficient, and management literature offers somewhat stronger guidance on the specific drivers of managerial innovation behavior that the current study focuses on. ...
Purpose
The purpose of this paper is to analyze the influence of corporate support programs on managers' environmental and social innovation behaviors. To offer a more comprehensive understanding of these relationships, the moderating role of technological reflectiveness and business moral values is also accounted for.
Design/methodology/approach
A scenario-based experimental study to test the impact of corporate support programs on environmental and social innovation behaviors is also adopted. After running a pretest to verify the effectiveness of alternative scenarios through 100 respondents with managerial experience residing in the UK and EU countries, we collected data from a sample of 220 senior managers of firms from the Australian food and beverage industry for the main study. One-way analysis of variance (ANOVA) with Dunnett's test to investigate direct relationships and the PROCESS Model to test the moderating role of technological reflectiveness and business moral values were used.
Findings
The findings reveal time provision, budget provision and advice provision as salient forms of corporate support programs that positively impact managers' environmental and social innovation behaviors. It is found that technological reflectiveness positively moderates the link between time provision and managers' social innovation behavior and negatively moderates the link between advice provision and managers' social innovation behavior. Furthermore, it is found that business moral values positively moderate the relationships between time and budget provisions and managers' environmental innovation behavior and between budget and advice provisions and managers' social innovation behavior.
Originality/value
The authors contribute to innovation and operations management research by adopting a behavioral operations management perspective and empirically analyzing the influences of managers' technological reflectiveness and business moral values on the relationship between organizational corporate support programs and managers' environmental and social innovation behavior in the context of the food and beverage industry.
... A comprehensive sensitivity analysis is also conducted to reveal further insights. Wuttke, Donohue, and Siemsen (2018) conduct a behavioural operations management study to show how the product development project relates to incentives. They find that a positive reinforcement rewarding scheme is more effective than a negative reinforcement scheme in supporting product development projects. ...
Corporate social responsibility (CSR) is critical. As a part of CSR, fashion companies have to decide whether to be ethical or not during the product development process. Motivated by real-world practices, we conduct a gametheoretic modeling analysis and derive the firms' optimal decisions (including ethical operations (ETO) adoption, pricing, and product greenness level) in fashion product development. We identify a key moderating factor which governs how an increase of basic market demand significantly affects the optimal product greenness level and how an increase of basic production cost influences the optimal retail price. Furthermore, we find that there is a threshold that plays a critical role in determining whether the optimal retail price and product greenness level are higher or lower with the adoption of ETO. We prove that when the fixed payment from the retailer to the manufacturer under the ETO case is set to be sufficiently small, the retailer prefers to adopt ETO and requests the manufacturer to follow. We propose three practical measures (includ-ing the use of technologies) to help encourage the supply chain members to invest in ETO willingly. We finally consider the probable occurrence of moral hazard problems and explore the managerial implications. ARTICLE HISTORY
... The literature demonstrates that an amalgamation of SC members' risk-aversion with noncontractual conditions (e.g., cost uncertainty, product margin) may influence channel efficiency (Chow et al., 2014;Zhao et al., 2017;Wuttke et al., 2018). Besides, the level of risk-aversion impacts contract performance by increasing the order quantity in a push more than in a pull contract (Davis et al., 2014;Yang et al., 2018). ...
Purpose
The recent surge in behavioral studies on the coordination mechanisms in supply chains (SCs) and advanced methods highlights the role of SC coordination (SCC) and behavioral issues associated with improving the performance of the operations. This study aims to critically review the behavioral aspect of channel coordination mechanisms.
Design/methodology/approach
Following a systematic literature review methodology, the authors adopt a combination of bibliometric (to reflect the current state of the field), content (using Leximancer data mining software to develop thematic maps) and theory-oriented qualitative analyzes that provide a holistic conceptual framework to unify the literature’s critical concepts.
Findings
The analysis confirms the plethora of risk-oriented publications, demonstrating that the second largest category of studies is concerned with social preferences theory. Most studies were based on experiments, followed by analytical modeling, revealing the impact of heuristics and individual preferences in SC decisions and suggesting promising managerial and theoretical avenues for future research.
Originality/value
The study sheds light on behavioral decision theories applied to SC coordination by categorizing the literature based on the adopted theories. The methodological contributions include using automated content analysis and validating the outcome by interviewing leading scholars conducting active research on “behavioral operations management and SC contracts.” The authors also propose several directions for future research based on the research gaps.
... In the first stream, while many studies discuss the product introduction strategy from the aspect of upstream suppliers or manufacturers (Jerry & Gregory, 2002;Dacko et al., 2015;Wuttke et al., 2018), there are some literature about the brand introduction strategy from the standpoint of retailers that are more related with our paper. Given there have been already national brands, Raju et al. (1995) analyze whether a retailer should introduce a store brand, and further Sayman and Raju (2004) investigate how many store brands should be introduced. ...
This paper builds a game‐theoretic model to examine online retailers' decisions of whether to introduce a new brand and whether to sell it in reselling or agency selling mode if introduced, given one existing brand supplier ex ante. We find it is not always more profitable for the online retailer to introduce the new brand. Interestingly, when determining to introduce the new brand, the online retailer may prefer the agency selling mode even though the commission fee becomes negligible and may not choose the agency selling even if the retailer can earn all sale profit as commission.
... Some of the issues addressed in their vignettes in fact directly correlate to questions studied in an OM context, for example the implications of race on resumé treatment is remarkably similar to the context of consumer attitudes of crowdsourced delivery drivers based on ethnicity (Ta et al., 2018). Moreover, some of the underlying theories explaining behavior in these studies, for example framing effects, are the same as those used in OM research (e.g., Abbey et al., 2019;Wuttke et al., 2018). Taken together, these results suggest that experimental research can be carried out in the OM context in a way that minimizes demand effects. ...
In late 2018, the Journal of Operations Management published an invited methods article by Lonati et al. (2018) to provide guidance to authors on how to design behavioral experiments to achieve the rigor required for consideration in the journal. That article was written as a response to a number of behavioral research submissions to JOM, each dealing with interesting topics but viewed by the editors to possess poor design choices at inception. While the Lonati et al. (2018) piece provides experimental guidance fitting to certain research agendas, questions have arisen concerning whether and how exactly to implement some of the points that it makes, and how to best address trade‐offs in the design of behavioral experiments. Questions have also arisen concerning how to apply these concepts in operations management research. This technical note seeks to address these questions, by diving into the details of research risks and trade‐offs regarding demand effects, incentives, deception, sample selection, and context‐rich vignettes. The authors would like to recognize the input of a large number of senior scholars in the JOM community who have provided support and feedback as we have sought to help authors tease out what can reasonably be done in designing strong behavioral experiments that fit various research agendas.
... The authors derived the optimal policy and interpreted the results by making use of the real options concept. Wuttke et al. (2018) studied the acceptance of new product development projects launched by suppliers. The authors uncovered that the project acceptance rate will increase if the projects has a low real options value. ...
The classical newsvendor problem seeks to minimize the expected inventory cost or maximize the expected profit. But optimizing an expected value alone does not fully capture the stochastic nature of the newsvendor problem. Inspired by the higher-moment analyses explored in finance literature, we conduct a mean-variance-skewness-kurtosis (MVSK) analysis for the newsvendor problem. We first derive the analytical expressions for the profit's mean, variance, skewness, and kurtosis in the standard newsvendor setting, and reveal their structural properties. We then establish various MVSK optimization problems and find the solutions. We show that kurtosis aversion always induces the newsvendor to order less, while skewness seeking can induce the newsvendor to order either more or less depending on the specific structure of the profit's skewness, which is affected by the symmetric and asymmetric properties of the demand distribution. Finally, based on the Pareto-optimality concept, we address the challenge of supply chain coordination (SCC) in the presence of MVSK agents in two specific cases: (i) each agent maximizes its MVSK-objective-function and (ii) each agent maximizes its expected profit function, subject to given constraints on the profit's variance, skewness, and kurtosis. In each case, we explore whether and how the supply chain can be coordinated. We find that considering the MVSK preferences of supply chain agents will affect the achievability of SCC and flexibility of the coordinating contract. We also uncover that if we assume an individual MVSK agent to be an MV one, the achievability of SCC by contracts will be very much negatively affected.
... More recent studies have investigated the role of regret and risk taking and product innovations and product technology management (Jiang, Narasimhan, & Turut, 2017;Loch, 2017). Wuttke, Donohue, and Siemsen (2018) investigate the main characteristics of innovation projects contributing to a supplier's acceptance of innovation and new product development through a controlled lab experiment. Yan, Ribbink, and Pun (2018) pursue a similar line of research, that is, supplier's involvement in a buyer's new product development. ...
Behavioral operations research has proliferated greatly over the decade since its first formal review in 2006. The growth of the field warrants an objective mapping of contributions to the literature and the identification of trends. We conduct a systematic review of the literature of behavioral operations and supply chain management (BOSCM) across eight key operations and supply chain management journals, with publication dates through the end of June 2018. Collected articles are categorized into 12 operations contexts as well as emerging topic considerations. Key research trends, theoretical foundations, and methodological choices are discussed in each context. The results show that supply chain management, inventory management, and procurement/auctions have been the most popular operations contexts for BOSCM researchers. The results of our co‐citation analysis shows that the fundamental research areas that have informed and shaped the field include supply chain risk management, marketing, cognitive psychology, and social psychology. Based on these findings and a survey of the most prolific authors in the field, we discuss possible avenues for future research.
... In alignment with industry, the number of publications in this area has significantly increased in the past few years (Dalvi and Kant, 2015;Sillanpää et al., 2015). Several studies have investigated the impact of direct and indirect supplier development activities on the performance of buyers and supply chains (Noshad and Awasthi, 2018;Wuttke et al., 2018;Routroy and Pradhan, 2013). It has been demonstrated that under some conditions, suppliers are more responsive to direct supplier development activities. ...
The effectiveness of supplier development programs has resulted in a wide range of applications in various industries. By emphasizing on cooperative efforts of suppliers and buyers, these programs can significantly improve the suppliers' performance. This leads the suppliers to develop different strategies that increase the involvement of their buyers. In this study, we identify three strategies that a supplier can implement to facilitate the supplier development effort of its buyer: (1) wholesale price manipulation, (2) paying a share of investment, and (3) controlling the investment. We analyze the implementation of these strategies under uncertainties of supply and demand to expand the applicability of the models and results. In this study, we show that the optimal decisions of the players under all three strategies are unique. Our findings also indicate that the effectiveness of these strategies decreases as the profit margin of the buyer increases. In addition, we explore the effect of profit margins and demand uncertainty on the players' optimal decisions. Through numerical analysis, we indicate that for low buyer's and supplier's profit margins, the supplier prefers wholesale price manipulation strategy. On the other hand, when the profit margin of the supplier is relatively high, paying a share of investment strategy is more attractive. Moreover, our results demonstrate that uncertainties of supply and demand may have contradictory effects on players' optimal decisions.
... They suggest that managers may need to use a contingent contract accordingly to improve profits. Through a series of controlled behavioral experiments, Wuttke et al. [24] find that using a reward frame for sustaining supplier engagements significantly increases possibility for innovation project. Rahmani et al. [25] have studied the collaborative work dynamics in projects with co-production and point that effective contracts should be flexible in scope. ...
With the increasing awareness of environmental protection and the complexity and rapid change of technological innovation, more and more enterprises seek to develop and research (R&D) institutions to cooperate with green innovation. In order to promote the cooperation efficiency of green innovation, this paper develops a multi-stage game model to analyze the optimal strategies of the enterprise, the university and the policy-maker with consumer learning and government subsidy. Then the paper compares the difference of optimal subsidy between the single-stage green innovation cooperation and the multi-stage green innovation cooperation. The research shows that consumers’ initial learning factors and green innovation cooperation cycle have a significant impact on the optimal input level of the enterprise and the university and also have a significant impact on the optimal subsidy of the government. The specific government subsidy and subsidy ratio depend on the comprehensive role of consumer learning factors and the green innovation cooperation cycle. In the end, we propose that the government should subsidize the university at times when the initial consumer learning factor is low; the government subsidy should be properly lagged when the initial consumer learning factor is high.
Problem definition: A company’s project portfolio is an important success factor. Employing strategic buckets to segment the overall budget into budgets for different project types is a commonly used approach for managing project selection. Strategic buckets typically refer to sets of projects of a certain type, such as safe and risky projects. A strategic bucket specification defines the number of buckets and thresholds between them. This paper addresses the question of how different strategic buckets specifications affect decision makers’ project selection behavior. Methodology/results: We develop a behavioral model of the effect of strategic buckets on project selection and use laboratory experiments to analyze how bucket specifications affect project selection decisions. For various strategic bucket specifications where a rational decision maker would allocate the budget to projects of the project type matching their risk preference only, we find that actual decision makers have the tendency to allocate the budget evenly among buckets and among project types within buckets. This observation can be explained by the naïve diversification bias, and we observe this effect in experimental settings with different selection processes, project definitions, and subject pools. Managerial implications: Our findings allow companies to better understand the effect of buckets guidelines on actual project selection behavior and to manage their project portfolio selection by choosing the right bucket specification.
Funding: This work was supported by the Deutsche Forschungsgemeinschaft [Grant EXC 2126/1–390838866].
Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2020.0373 .
Project leaders are responsible for planning, controlling, and revising projects. As a project unfolds, the leader evaluates the project’s progress by comparing ongoing costs and scope to a baseline plan and considers potential revisions. We offer a general model of managerial mental accounting, which includes loss aversion, reference point updating, and narrow framing, and examine how it impacts downstream decisions. Our model predicts insufficient adjustments of project scope and cost at revision, resulting in reduced financial profit. We show that the choice of measure to quantify the project progress—planned, actual, or earned—affects the updating of reference points, and hence the downstream decisions. Thus, progress measures could be wisely employed to mitigate insufficient adjustments. It turns out that measuring progress via planned scope is often advantageous, whereas utilizing earned value for cost is never advisable.
This paper was accepted by David Simchi-Levi, behavioral economics and decision analysis.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2021.02929 .
Interfirm innovation projects often require tight collaboration among firms with complementary skills and resources. The success of such projects depends on all firms generating high-quality outputs, which can be difficult to attain for aspects of quality that are not easily observable or contractible. We consider a setting with a focal firm and its collaborating firm (henceforth, the collaborator) engaging in a joint project, in which they make their quality decisions over time, respectively, and study the firm’s decision to communicate its quality output progress to its collaborator voluntarily. We first develop normative predictions using game-theoretic models by analyzing a reporting (respectively, revealing) case, in which the firm can report a not necessarily truthful quality (the truthful quality) to the collaborator. We find that the firm should be indifferent between reporting and not reporting for all project values and should be indifferent between revealing and not revealing (prefer revealing) for high (low) project values. To test this prediction, we run an experiment following a 2 × 3 design, varying the project value (high and low) and the form of communication (no communication, reporting, and revealing). We find that the quality provision is significantly lower than the normative prediction in all treatments. When the project value is high, the decision to report is beneficial to the firm (regardless of the reported quality) because the decision signals the firm’s intention to contribute high quality. The decision to reveal is also beneficial for a firm; however, a different mechanism is at play in this case. The decision itself does not directly affect the quality provisions, but the revealed quality does as the collaborator waits to observe the truthful revealed quality and incorporates this information in choosing a quality later. By contrast, when the project value is low, neither reporting nor revealing are beneficial for a firm. In particular, the decision to report no longer acts as a positive signal as it is used by firms trying to deceive the collaborator and get an advantage.
This paper was accepted by Vishal Gaur, operations management.
Funding: The authors gratefully acknowledge financial support from Zicklin School of Business, Baruch College, the City University of New York and the University of Texas at Dallas. Support for this project was provided by a PSC-CUNY Award, jointly funded by the Professional Staff Congress and the City University of New York.
Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.03180 .
Purpose: When developing a new product, a buying firm solicits revenue sharing bids from two competing suppliers. Bidding behaviors of suppliers do not always align with predictions from rational agent models due to task uncertainty and bounded rationality, which could result in non-optimal supplier offers and ultimately hurt buying firm interests.
Methodology: We built an analytical model that considers the impact of supplier technological risk, buyer-supplier coordination cost, and supplier loss aversion on the optimal bid of the supplier. Next, using limited information processing capacity as a theoretic lens, we explore antecedents to the size of a focal supplier’s bidding error, the absolute difference between the actual bid and the optimal bid. We used quantitative lab experimental data to test the hypotheses.
Findings: (1) Bounded rational bidders often fail to differentiate between relevant and irrelevant competitive information when placing bids, (2) loss aversion of a bidder significantly affects not only levels of bids, particularly for bidders with competitive disadvantages, but also sizes of the bidding error, and (3) competitive information that has clearer performance implications are more influential in reducing sizes of bidding errors.
Originality: Our results provide a comprehensive view of the bidding behaviors of a bounded rational supplier in an innovation outsourcing context with competition. With our results, managers now have a better understanding of behavioral influencers behind non-optimal supplier bids in an innovation outsourcing context.
In the pharmaceutical industry, personalized medicine is increasingly replacing the traditional blockbuster drug concept. Personalized medicine consists of a targeted drug that is only prescribed if a companion diagnostic test detects the corresponding biomarker. This concept promises improved treatments of various diseases. However, personalized medicine also presents pharmaceutical firms with new challenges resulting from interdependencies in the drug and diagnostic test development processes. Although pharmaceutical firms generally benefit from competition among diagnostic firms, the threat of substitutes from competitors could cause diagnostic firms to step back from new product development in the first place, leading to lost revenues for the pharmaceutical firm. We consider a pharmaceutical firm that may inform two competing differentiated diagnostic firms about a drug under development, such that these firms can develop a corresponding diagnostic test. We show which diagnostic firm the pharmaceutical firm should inform first and how granting early exclusivity to a single diagnostic firm can maximize pharmaceutical profits from personalized medicine.
Recent cases demonstrate that negative effects of sustainability-related scandals experienced by upstream suppliers can spill over to downstream firms. Thus, initiatives to help suppliers improve their sustainability performance are becoming increasingly essential for firms’ risk management in relation to supply chains. Thus far, the literature has yet to provide significant evidence on how firms can generate value from sustainable supplier development initiatives. In this study, we conduct dynamic panel data analysis of a dataset of 768 firm–year observations collected from four secondary sources, and find that sustainable supplier development initiatives can contribute to firms’ customer satisfaction, which further contributes to improved sales performance. Moreover, the relationship between sustainable supplier development initiatives and customer satisfaction is negatively moderated by firm reputation, yet positively moderated by the firm’s advertising intensity. These results provide robust evidence that customer satisfaction is a valid mechanism that links sustainable supplier development initiatives with improved sales performance.
With the advent of science and technology, smart devices have become ubiquitous; since the display unit is a vital component in many smart devices, the Thin-Film Transistor Liquid-Crystal Displays (TFT-LCD) industry has been one of the most rapidly growing industries. Taiwanese manufacturers play a critical role in this industry. This study investigates key factors for supplier selection in Taiwan’s TFT-LCD industry. TFT-LCD is a technology-intensive industry. However, few studies in the past considered the technological abilities dimension in supplier selection. Therefore, this study discusses the factors related to the technological abilities dimension in supplier selection. Most research considered supplier selection based on the traditional criteria such as cost and quality. This study discusses the importance of the resilience criteria such as agility and flexibility. A method combining DEMATEL (Decision Making Trial and Evaluation Laboratory) and ANP (Analytic Network Process) is applied to analyze key factors for supplier selection in Taiwan’s TFT-LCD industry. The analytical results indicate that the technological abilities dimension and resilience criteria are at the forefront of the ranking in prominence. The influential weights of criteria and the causal diagram among all criteria derived from this study can offer guidance for suppliers on improving various factors to become desirable partners in the TFT-LCD industry supply chain.
In this study, we investigate the impact of national culture on the effectiveness of bonus and penalty incentive contracts in supply chain exchanges. We conducted laboratory experiments in Canada, China, and South Korea, involving transactional exchanges in which suppliers were presented with either bonus or penalty contracts. Then we compared suppliers’ contract acceptance, level of effort, and shirking across national cultures. Our findings reveal critical cultural influences on contract effectiveness. We show that although acceptance of bonus contracts is comparable across cultures, suppliers from Canada, a national culture considered low in power distance and high in humane orientation, exhibit lower acceptance rates of penalty contracts. In addition, we find evidence that suppliers associated with collectivist cultures exert more effort and shirk less in bonus contracts but these relationships also are more complex. When we compare contract effectiveness across bonus and penalty contracts within a given cultural setting, we find in all three countries greater acceptance of bonus contracts than penalty contracts. Also, after contracts are accepted, bonus contracts are more successful in China because suppliers exert greater effort and shirk less under bonus contracts than penalty contracts. However, in Canada and South Korea, the results of accepted contracts for both penalty and bonus contracts are nearly indistinguishable.
We study joint investment by a buyer and a supplier in improving the supplier's capacity using a Stackelberg game model. We analyze both buyer‐led and supplier‐led situations. We show that in both cases the players have an opportunistic behavior toward investment. In the buyer‐led game, when the buyer finds the supplier motivated enough to invest, he avoids any direct contribution on capacity improvement. In this situation, the buyer follows an order inflation strategy to increase the investment of the supplier. However, when the supplier does not show the desire to make enough investment, the buyer will engage in direct investment in the supplier's capacity. We showed that although the order inflation strategy increases the buyer's optimal order quantity, it does not coordinate the supply chain. Also, in the case that the buyer is forced to share the investment costs with the supplier, he relies less on order inflation strategy. In supplier‐led game, we demonstrated that the buyer has no motivation to use order inflation strategy. In the case that the supplier is the only investor, the buyer‐led game results in a higher profit for the buyer, supplier, and the supply chain. Finally, we looked at two extensions where the supplier is penalized for unsatisfied demand and the buyer uses an order‐postponement strategy.
Managers continuously make decisions on investing in projects that aim to enhance organizational performance. Poor project investment decision making results in lost benefits (rejecting a good project) and inefficiency (approving a suboptimal project). Whereas decisions regarding what project proposals to approve heavily rely on their stated goals, such goals are frequently unrealistic. This article aims at enhancing project investment decision making by extending decision comprehensiveness theory to the project goal-setting context. In an initial survey study, we found empirical support that a comprehensive goal-setting process enhances decision quality under uncertainty. In a second longitudinal study, we found that comprehensive goal setting further enhances project investment decision making above and beyond other established goal-setting dimensions (e.g., SMART goals), and eventually improves project performance. Last, we found that extensive consultation with key project stakeholders is the most effective comprehensive goal-setting practice. Based on research and practice, we describe what should comprise an effective goal-setting consultation process. This article extends goal-setting theory by suggesting that in addition to established characteristics, the goal-setting process under uncertainty should also be comprehensive.
Despite rapidly growing research interest and significant relevance to industry practitioners, the supply chain innovation research field appears to be highly fragmented. It lacks any common understanding of the elements comprising innovation management practices among members of the supply chain. In our article, we aim to structure and analyse literature on the topic, overlapping subject areas of supply chain management and innovation to understand the field's behaviour during the last decade. We conduct a systematic bibliometric analysis of 149 related articles published in the most prominent journals, from 1997 to 2018. In this study, we apply network analysis techniques to explore the accumulated knowledge on (i) factors and strategies that influence success of collaboration among supply chain partners, (ii) supply chain product innovation performance, (iii) supply chain process innovation performance. Within the scope of this research, we provide scholars with a review of state-of-art research on supply chain innovation and identify the most influential articles on the topic, as well as outlining the prospective paths for further investigation. In particular, we discuss an emerging field dealing with sustainable supply chain innovation and green product innovation.
The authors analytically and experimentally evaluate how firms make decisions in a two-stage dyadic channel, in which firms decide on investments in the first stage and then on prices in the second stage. They find that firms’ behavior differs significantly from the predictions of the standard economic model and is consistent with the existence of fairness concerns. Using a quantal response equilibrium model, in which both manufacturer and retailer make noisy best responses, the authors show that fairness significantly affects channel pricing decisions. In addition, they investigate what affects the perceptions of fairness. More specifically, they analyze whether the notion of fairness is influenced by social norms of strict equality, by endogenous investments and contributions that are affected by players’ decisions, or by the exogenous game structure. To do so, the authors compare four principles of distributive fairness: strict egalitarianism; liberal egalitarianism; libertarianism; and a sequence-aligned ideal, which is studied for the first time in the literature. Surprisingly, the exogenous game structure reflected by the new ideal, whereby the sequence of moving determines the equitable payoff for players, significantly outperforms other fairness ideals, suggesting that equity in distribution channels can arise even in contests in which channel members have fairly different payoffs.
Li-ion battery technology has become very important in recent years as these batteries show great
promise as power sources that can lead us to the electric vehicle (EV) revolution. The development of
new materials for Li-ion batteries is the focus of research in prominent groups in the field of materials
science throughout the world. Li-ion batteries can be considered to be the most impressive success story
of modern electrochemistry in the last two decades. They power most of today’s portable devices, and
seem to overcome the psychological barriers against the use of such high energy density devices on
a larger scale for more demanding applications, such as EV. Since this field is advancing rapidly and
attracting an increasing number of researchers, it is important to provide current and timely updates of
this constantly changing technology. In this review, we describe the key aspects of Li-ion batteries: the
basic science behind their operation, the most relevant components, anodes, cathodes, electrolyte
solutions, as well as important future directions for R&D of advanced Li-ion batteries for demanding
use, such as EV and load-leveling applications.
Various contracts can be designed to coordinate a simple supplier–retailer channel, yet the contracts proposed in prior research and tested in a laboratory setting do not perform as standard theory predicts. The supplier, endowed with all bargaining power, can neither fully coordinate the channel nor extract all of the channel profit. We report on a sequence of laboratory experiments designed to separate possible causes of channel inefficiency. The three causes we consider are inequality aversion, bounded rationality, and incomplete information. It turns out that all three affect human behavior. Inequality aversion has by far the most explanatory power regarding retailers’ behavior. Incomplete information about the retailer's degree of inequality aversion has the most explanatory power in regards to the suppliers’ behavior. Bounded rationality affects both players, but is of secondary importance.
Examined the low-ball technique, a tactic often used by automobile sales dealers to produce compliance from customers, in a set of 3 experiments. In all 3 studies, a requester who induced Ss to make an initial decision to perform a target behavior and who
then made performance of the behavior more costly obtained greater final compliance than a requester who informed Ss of the full costs of the target behavior from the outset. The low-ball phenomenon—that an active preliminary decision to take an action tends to persevere even after the costs of performing the action have been increased—was found to be reliable (Exp I), different from the foot-in-the-door effect (Exp II), and effective only when the preliminary decision was made with a high degree of choice (Exp III). In competition with 3 other conceptual explanations, a formulation based on the concept of commitment was seen to best account for the results. An ecologically derived strategy for the identification and investigation of research questions is discussed. (20 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Participants in four studies were faced with everyday-life decision scenarios involving risk, such as purchasing an airline ticket whose price may change. They were asked to state their maximum willingness to pay (WTP) for resolving the uncertainty with either perfect information or an option. The two are strategically equivalent, therefore, should be valued in the same way. Across all experiments, individuals tend to value the option more than the information. In addition, the distributions of responses reveal frequent and gross violations of normative bounds. Contrary to normative predictions, no relationship is found between individuals' valuation of the gamble and their reported WTP for information or option. Furthermore, although participants pay attention to the probabilities of outcomes in valuing the gambles, they ignore the probabilities in valuing uncertainty resolution. Several reasoning heuristics that participants use to come up with a value of information are identified, and it appears that the Information and Option contexts tend to trigger different heuristics. Shift in reference point and regret are consistent with the Information–Option valuation discrepancy. Copyright © 2007 John Wiley & Sons, Ltd.
One of the main assumptions in research on designing supply contracts is that decision makers act in a way that maximizes their expected profit. A number of laboratory experiments demonstrate that this assumption does not hold. Specifically, faced with uncertain demand, decision makers place orders that systematically deviate from the expected profit maximizing levels. We have added to this body of knowledge by demonstrating that ordering decisions also systematically depend on individual contract parameters and by developing a behavioral model that captures this systematic behavior. We proceed to test our behavioral model using laboratory experiments and use the data to derive empirical model parameters. We then test our approach in out-of-sample validation experiments that confirm that, indeed, contracts designed using the behavioral model perform better than contracts designed using the standard model.
This paper was accepted by Christian Terwiesch, operations management.
We present a psychometric scale that assesses risk taking in five content domains: financial decisions (separately for investing versus gambling), health/safety, recreational, ethical, and social decisions. Respondents rate the likelihood that they would engage in domain-specific risky activities (Part I). An optional Part II assesses respondents’ perceptions of the magnitude of the risks and expected benefits of the activities judged in Part I. The scale’s construct validity and consistency is evaluated for a sample of American undergraduate students. As expected, respondents’ degree of risk taking was highly domain-specific, i.e. not consistently risk-averse or consistently risk-seeking across all content domains. Women appeared to be more risk-averse in all domains except social risk. A regression of risk taking (likelihood of engaging in the risky activity) on expected benefits and perceived risks suggests that gender and content domain differences in apparent risk taking are associated with differences in the perception of the activities’ benefits and risk, rather than with differences in attitude towards perceived risk.
In the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand. If too much is ordered, stock is left over at the end of the period, whereas if too little is ordered, sales are lost. The expected profit-maximizing order quantity is well known, but little is known about how managers actually make these decisions. We describe two experiments that investigate newsvendor decisions across different profit conditions. Results from these studies demonstrate that choices systematically deviate from those that maximize expected profit. Subjects order too few of high-profit products and too many of low-profit products. These results are not consistent with risk-aversion, risk-seeking preferences, Prospect Theory preferences, waste aversion, stockout aversion, or the consequences of underestimating opportunity costs. Two explanations are consistent with the data. One, subjects behave as if their utility function incorporates a preference to reduce ex-post inventory error, the absolute difference between the chosen quantity and realized demand. Two, subjects suffer from the anchoring and insufficient adjustment bias. Feedback and training did not mitigate inventory order errors. We suggest techniques to improve decision making.
We conducted an experiment in which participants acted as employees under either a bonus contract or an economically equivalent
penalty contract. We measured participants’ contract preference, their degree of expected disappointment about having to pay
the penalty or not receiving the bonus, their perceived fairness of their contract, and their effort level. Consistent with
Luft (1994), we find that employees generally preferred the bonus contract to the penalty contract. We extend Luftŕss work
by demonstrating that loss aversion caused employees to expend more effort under the penalty contract than under the economically
equivalent bonus contract. That is, employees were more averse to having to pay the penalty than they were to not receiving
the bonus, and consequently they chose a higher level of effort under the penalty contract to avoid paying the penalty. However,
we also find evidence of reciprocity in that employees who considered their contract to be fairer chose a higher level of
effort. Because our participants generally considered the bonus contract fairer than the penalty contract, reciprocity predicts
higher effort under the bonus contract, a result opposite to our finding. Our overall result that employee effort was greater
under the penalty contract is explained by the fact that, while higher perceived fairness did increase effort, this effect
was dominated by the more powerful opposing effect of loss aversion. We discuss the implications of these results for explaining
why in practice most actual contracts are bonus contracts rather than penalty contracts.
We propose a behavioral theory to predict actual ordering behavior in multilocation inventory systems. The theory rests on a well-known stylized fact of human behavior: people's preferences are reference dependent. We incorporate reference dependence into the newsvendor framework by assuming that there are psychological costs of leftovers and stockouts. We also hypothesize that the psychological aversion to leftovers is greater than the disutility for stockouts. We then experimentally test the proposed theory in both the centralized and decentralized inventory structures using subjects motivated by substantial financial incentives. Consistent with the proposed theory, actual orders exhibit the so-called "pull-to-center" bias and the degree of bias is greater in the high-profit margin than in the low-profit margin condition. These systematic biases are shown to eliminate the risk-pooling benefit when the demands across store locations are strongly correlated. Because the proposed model nests the standard inventory and ex post inventory error minimization theories as special cases, one can systematically evaluate the predictive power of each alternative using the generalized likelihood principle. We structurally estimate all three theories using the experimental data, and the estimation results strongly suggest that the proposed behavioral theory captures actual orders and profits better. We also conduct two experiments to validate the behavioral model by manipulating the relative salience of the psychological costs of leftovers versus that of stockouts to alleviate the pull-to-center bias.
Abstract In this paper, we incorporate the concept of fairness into the conventional dyadic channel to investigate how fairness may affect the interactions between the manufacturer and the re- tailer. We show that channel coordination in a channel where partners care about fairness does not require any nonlinear pricing scheme such as a two-part tariff and quantity discount. The manufacturer can use a simple wholesale price above its marginal cost to coordinate this channel. We also show that a two-part tariff or a quantity discount schedule can still coordinate the
The coordination of supply chains by means of contracting mechanisms has been extensively explored theoretically but not tested empirically. We investigate the performance of three commonly studied supply chain contracting mechanisms: the wholesale price contract, the buyback contract, and the revenue-sharing contract. The simplified setting we consider utilizes a two-echelon supply chain in which the retailer faces the newsvendor problem, the supplier has no capacity constraints, and delivery occurs instantaneously. We compare the three mechanisms in a laboratory setting using a novel design that fully controls for strategic interactions between the retailer and the supplier. Results indicate that although the buyback and revenue-sharing contracts improve supply chain efficiency relative to the wholesale price contract, the improvement is smaller than the theory predicts. We also find that although the buyback and revenue-sharing contracts are mathematically equivalent, they do not generally result in equivalent supply chain performance.
The growing sophistication of component technologies and the rising costs and uncertainties of developing and launching new products require firms to collaborate in the development of new products. However, the management of new product development that occurs jointly between firms presents a new set of challenges in sharing the costs and benefits of innovation. Although collaboration enables each firm to focus on what it does best, it also introduces new issues associated with the alignment of decisions and incentives that have to be managed alongside conventional performance and timing uncertainties of new product development. In this paper, we conceptualize and formulate the joint development of products involving two firms with differing development capabilities and examine the implications of arrangements that go beyond sharing of revenues to include sharing of development cost and work. We term these approaches that involve sharing of the development cost and sharing of the development work investment sharing and innovation sharing, respectively. These cost and effort sharing mechanisms have subtle interactions with the degree to which revenues are shared between firms and the type of development project under consideration. Our analysis shows that investment and innovation sharing are particularly relevant for products with no preexisting revenues, and their benefits also depend on the degree to which revenues are shared between the firms. Whereas investment sharing is more attractive for new-to-the-world product projects with significant timing uncertainty, innovation sharing plays an important role in environments where projects experience product quality uncertainty, firms are similar in their capabilities, and the costs of integration of work across firms can be controlled. Our key contribution involves the modeling of joint work and decision making between collaborating firms and unearthing the complementary role of revenue, cost, and innovative effort sharing mechanisms for new product development. We translate our analytical findings into a managerial framework and illustrate the results with examples from the life-sciences and electronics industries.
The format of pricing contracts varies substantially across business contexts, a major variable being whether a contract imposes a fixed fee payment. This paper examines how the use of the fixed fee in pricing contracts affects market outcomes of a manufacturer-retailer channel. Standard economic theories predict that channel efficiency increases with the introduction of the fixed fee and is invariant to its framing. We conduct a laboratory experiment to test these predictions. Surprisingly, the introduction of the fixed fee fails to increase channel efficiency. Moreover, the framing of the fixed fee does make a difference: an opaque frame as quantity discounts achieves higher channel efficiency than a salient frame as a two-part tariff, although these two contractual formats are theoretically equivalent.
This paper presents an experimental examination of a variety of group incentive programs. The authors investigate simple revenue sharing and more sophisticated, target-based systems such as profit sharing or productivity gainsharing, as well as tournament-based and monitoring schemes. Their results can be characterized by three facts: (1) history matters-how a group performs in one incentive scheme depends on its history together under the scheme that preceded it; (2) relative performance schemes outperform target-based schemes; and (3) monitoring can elicit high effort from workers, but the probability of monitoring must be high and, therefore, costly.
There is strong evidence that people exploit their bargaining power in competitive markets but not in bilateral bargaining
situations. There is also strong evidence that people exploit free-riding opportunities in voluntary cooperation games. Yet,
when they are given the opportunity to punish free riders, stable cooperation is maintained, although punishment is costly
for those who punish. This paper asks whether there is a simple common principle that can explain this puzzling evidence. We show that if some people care about equity the puzzles can be resolved. It turns
out that the economic environment determines whether the fair types or the selfish types dominate equilibrium behavior.
We study a supply chain consisting of an upstream supplier who invests in innovation, which increases the value of products to users, and downstream manufacturers who sell to users. Analyzing a bargaining model, we find that the supplier should invest more in innovation under downstream competition than under a downstream monopoly if the supplier does not have strong bargaining power. However, if the supplier already has strong bargaining power, the supplier should make more innovation investment only if the downstream competition is relatively mild. Interestingly, we find that, if the supplier has strong bargaining power, intense competition between downstream manufacturers negatively impacts the supplier’s profit. Finally, we show that a stronger bargaining power may not always benefit manufacturers.
Suppliers are often reluctant to invest in capacity if they believe that they will be unable to recover their investment costs in subsequent transactions with buyers. In theory, a number of different contracts can solve this issue and induce first-best investment levels by the supplier. In this study, we investigate the performance of these contracts in a two-tier supply chain. We develop an experimental design where retailers and suppliers bargain over contract terms—and have the ability to make multiple back-and-forth offers—while also providing feedback on the offers they receive. One key result from our study is that an option contract and a service-level agreement are best at increasing first-best investment levels and overall supply chain profits. However, these same contracts also generate the largest inequity in expected profits between the two parties. We find that both of these results are driven by the bargaining tendencies of retailers and suppliers, which we refer to as “superficial fairness.” In particular, retailers and suppliers place more emphasis on negotiating the wholesale price, while partially overlooking any secondary parameter, such that final wholesale prices end up roughly halfway between the retailer’s selling price and the supplier’s production cost. We show that this bargaining behavior contributes to higher investment levels observed in the option contract and service-level agreement, along with the inequitable payoffs.
The online appendix is available at https://doi.org/10.1287/msom.2017.0654 .
We study risk taking on behalf of others, both when choices involve losses and when they do not. A largescale incentivized experiment with subjects randomly drawn from the Danish population is conducted. We find that deciding for others reduces loss aversion. When choosing between risky prospects for which losses are ruled out by design, subjects make the same choices for themselves as for others. In contrast, when losses are possible, we find that the two types of choices differ. In particular, we find that subjects who make choices for themselves take less risk than those who decide for others when losses loom. This finding is consistent with an interpretation of loss aversion as a bias in decision making driven by emotions and that these emotions are reduced when making decisions for others.
Prior theory claims that buyback and revenue-sharing contracts achieve equivalent channel-coordinating solutions when applied in a dyadic supplier–retailer setting. This suggests that a supplier should be indifferent between the two contracts. However, the sequence and magnitude of costs and revenues (i.e., losses and gains) vary significantly between the contracts, suggesting the supplier’s preference of contract type, and associated contract parameter values, may vary with the level of loss aversion. We investigate this phenomenon through two studies. The first is a preliminary study investigating whether human suppliers are indeed indifferent between these two contracts. Using a controlled laboratory experiment, with human subjects taking on the role of the supplier having to choose between contracts, we find that contract preferences change with the ratio of overage and underage costs for the channel (i.e., the newsvendor critical ratio). In particular, a buyback contract is preferred for products with low critical ratio, whereas revenue sharing is preferred for products with high critical ratio. We show these results are consistent with the behavioral tendency of loss aversion and are more significant for subjects who exhibit higher loss aversion tendencies in an out of context task. In the second (main) study, we examine differences in the performance of buyback and revenue-sharing contracts when suppliers have the authority to set contract parameters. We find that the contract frame influences the way parameters are set and the critical ratio again plays an important role. More specifically, revenue-sharing contracts are more profitable for the supplier than buyback contracts in a high critical ratio environment when accounting for the supplier’s parameter-specification behavior. Also, there is little difference in performance between the two contracts in a low critical ratio environment. These results can help inform supply managers on what types of contracts to use in different critical ratio settings.
Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2182 .
This paper was accepted by Martin Lariviere, operations management.
Prospect theory offers powerful insights and propositions into political decision-making, especially in international politics. Evidence indicates that statesmen are indeed risk-acceptant for losses. This would help explain observed patterns in bargaining, deterrence, the origins of wars, as well as suggesting why states are less likely to behave aggressively when doing so would produce gains than when such behavior might prevent losses.
We analyze optimal contractual arrangements in a bilateral research and development (R&D) partnership between a risk-averse provider that conducts early-stage research followed by a regulatory verification stage and a risk-neutral client that performs late-stage development activities, including production, distribution, and marketing. The problem is formulated as a sequential investment game with the client as the principal, where the investments are observable but not verifiable. The model captures the inherent incentive alignment problems of double-sided moral hazard, risk aversion, and holdup. We compare the efficacy of milestone-based options contracts and buyout options contracts from the client's perspective and identify conditions under which they attain the first-best outcome for the client. We find that milestone-based options contracts always attain the first-best outcome for the client when the provider has some bargaining power in renegotiation and identify their applicability to different R&D partnerships.
This paper was accepted by Yossi Aviv, operations management.
The value of demand information underlies many supply chain strategies that aim at better matching supply and demand. This study reports on the results of a laboratory experiment designed to estimate the behavioral value of demand information. Relative to the commonly assumed benchmark of a rational risk-neutral decision maker, we find that decision makers are consistently willing to pay too much for the option to eliminate the risk of supply not matching demand. Contrary to intuition, we show that risk aversion does not explain this result. We posit that demand information provides behavioral value because it mitigates regret from ex post inventory errors.
This paper investigates the impact of royalty revision on incentives and profits in a two-stage (R&D stage and marketing stage) alliance with a marketer and an innovator. The marketer offers royalty contracts to the innovator. We find the potential for royalty revision leads to more severe distortions in the optimal initial royalty contracts offered by the marketer. We show if the innovator plays a significant role in the marketing stage, the marketer should offer a low royalty rate initially and then revise the royalty rate up later. Otherwise, she should do the opposite. We identify two major effects of royalty revision. First, royalty revision provides the marketer with a flexibility to dynamically adjust royalty rates across the two stages of the alliance to better align the innovator’s incentives. This incentive realigning effect improves the marketer’s profit. Second, royalty revision makes it harder for the marketer to obtain private information from the innovator because the innovator worries the marketer will take advantage of the information to revise the initial contract to a more favorable one to herself later. This information revealing effect hurts the marketer’s profit. We characterize in what kind of alliances marketers would benefit the most from royalty revision so that managers should clearly establish the expectation for royalty revision, and in what kind of alliances marketers would not benefit from royalty revision so that managers should commit not to revise the initial royalty contract. With royalty contracts that are contingent on the R&D outcome of the R&D stage, we find that contingent contract structure could be either substitutable (by fully capturing the incentive re-aligning effect) or complementary (by weakening the information revealing effect) to royalty revision depending on whether the innovator plays a significant role of the marketing stage. Managers may need to use contingent contract (if possible) either to replace or with royalty revision accordingly to improve profits.
We consider a supply chain with an upstream supplier who invests in innovation and a downstream manufacturer. We study the impact of supply chain contracts with upstream innovation, focusing on three different contract scenarios: (i) a wholesale price contract set by the supplier, (ii) a quality-dependent wholesale price contract set by the manufacturer, and (iii) a revenue sharing contract. We confirm that a revenue sharing contract can coordinate a supply chain including investment in innovation, whereas wholesale price contracts may result in under investment in innovation. However, the downstream manufacturer does not always prefer a revenue sharing contract; the manufacturer’s profit can be higher under a quality-dependent wholesale price than that under a revenue sharing contract, specifically when the innovation cost of the upstream supplier is low. We then extend our model to incorporate upstream competition between suppliers. When the competing suppliers set the wholesale price, by inviting upstream competition, the manufacturer can increase his profit substantially to the level in which he has the right to set the quality-dependent wholesale price in a one-to-one supply chain. Furthermore, under the upstream competition, the revenue sharing contract coordinates the supply chain, and is also an optimal contract form for the manufacturer. We also analyze the case of complementary suppliers, and show that our primary results are robust.
We utilize research on alliance governance structures and on new product development to study how partners working under an existing alliance governance structure will organize a new product development project. Initially, we consider a contractual alliance doing multiple projects and argue that the critical organization decisions for any project are whether one or both partners should be involved, whether the partners should work with little or considerable interaction, and whether decision-making authority should reside in a project manager or be consensual. Based on the answers to these questions, we identify at least four viable project organization options. We next examine the option that would be selected under conditions involving the alliance's newness, whether a cooperative history exists, and the distribution of skills for the project. Under each condition, we compare the costs and benefits of the options with respect to the underlying transaction costs, potential for learning, and the ability to contribute to developing a social relations network. By allowing variations in time-to-market pressures, the tacit knowledge that a partner can obtain from the project, and the partners' need to work closely together on future projects, we can determine the points at which costs and benefits indicate a switch from one organization option to another. Finally, we indicate how to adjust the theory for it to apply to a contractual alliance doing only one project and to an institutional alliance such as a joint venture.
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We present results from two experiments that reveal significant gender differences in ordering behavior in the newsvendor problem. In high margin settings, males tend to order more than females, and they also tend to achieve higher profits. There are no gender differences in low margin settings. We show that the observed gender differences are partially driven by (or mediated by) gender differences in risk appetite. Males tend to prefer taking greater risk than women, and this leads them to order more in the newsvendor problem (in high margin settings). We show that the risk-ordering relationship is related to financial risk attitudes but not to social risk attitudes, and also that the effect is not driven by gender differences in affect, a likely alternative explanation for the results.
During development of an innovative product there is often considerable uncertainty about component production cost, and it is of interest for both the manufacturer and the supplier to engage in a collaborative effort to reduce this uncertainty and lower the expected cost. Despite the obvious benefits this brings, the supplier may be reluctant to collaborate as he fears revealing his proprietary cost information. We investigate how information asymmetry and procurement contracting strategies interact to influence the supply chain parties' incentives to collaborate. We consider a number of procurement contracting strategies, and identify a simple strategy, expected margin commitment (EMC), that effectively promotes collaboration. The manufacturer prefers EMC if collaboration leads to a large reduction in unit cost and/or demand variability is low. Otherwise, a screening contract based on price and quantity is preferred. We also find that, paradoxically, ex post efforts to enhance supply chain efficiency may hinder ex ante collaboration that precedes production.
This paper was accepted by Yossi Aviv, operations management.
It is becoming increasingly common to involve external technology providers in developing new technologies and new products. Two important phases involved in working with technology vendors are vendor selection and vendor management. Since for both steps theory development of key decision guidelines is still immature, we use detailed case studies of 31 innovation outsourcing projects at Siemens to develop grounded theory on provider selection criteria and on project management success drivers. A selection criterion often associated with successful outsourcing is the provider’s “track record” or previous experience. Our cases suggest that there is no standard “track record” for success but that a “match” between the client firm’s outsourcing motivation and the provider’s strengths appears to be a necessary condition for a successful outsourcing collaboration. As to the second phase – managing the vendor – we identify a number of operational project success drivers. There seems to be no universal checklist, but the most important drivers seem to be contingent on the type of vendor chosen and on the maturity of the technology. We compare five provider types – universities, competitors, customers, start-up companies and component suppliers – and find that some success drivers are common to all providers, while others are relevant only for certain types of provider. Moreover, drivers in the case of a mature technology are more focused on successful transfer to manufacturing than on development itself. Our findings offer guidelines for innovation managers on how to select innovation providers and how to manage them during the project.
Drawing on transaction cost economics theory, this study addresses the following research questions: (1) Does supplier involvement in market intelligence gathering activities have a greater impact on innovation success in predesign or commercialization activities? and (2) Does supplier involvement in market intelligence gathering activities have a greater impact on success in radical or incremental product innovation? Hypotheses are tested using both subjective and objective measures of success from a study of 205 incremental and 110 radical new product development projects. Results from the estimation of a two-group path model suggest that this theoretical framework is useful in providing guidance as to when product developers should emphasize the gathering of market intelligence through suppliers. Consistent with conventional wisdom, the findings suggest that supplier involvement in market intelligence gathering activities are positively related to success in incremental innovations across predesign and commercialization activities. However, supplier involvement in market intelligence gathering activities is found to have no significant impact on market share and is negatively associated with perceived product performance in radical innovations in predesign tasks. Also, while there was no significant difference in market share for supplier involvement in market intelligence gathering activities between radical and incremental innovation in commercialization activities, supplier involvement in these activities did have a greater impact on perceived product performance in radical innovation than it did in incremental innovation. Although current practice suggests that teams allocate fewer resources to the gathering of market intelligence through their suppliers during predesign activities in incremental innovation projects compared with radical innovation projects, the findings in this study suggest that they should do the opposite. Shifting resources allocated for engaging suppliers in market information gathering activities in predesign activities from radical innovation projects to incremental innovation projects could increase the return on these investments. Alternatively, these resources currently allocated to the gathering of market intelligence through suppliers in predesign activities of radical innovation projects could also provide greater benefits if allocated to commercialization activities of radical innovation projects, where they have the greatest positive impact.
Existing studies of supplier involvement in new product development have mainly focused on project-related short-term processes and success factors. This study validates and extends an existing exploratory framework, which comprises both long-term strategic processes and short-term operational processes that are related to supplier involvement. The empirical validation is based on a multiple-case study of supplier collaborations at a manufacturer in the copier and printer industry. The analysis of eight cases of supplier involvement reveals that the results of supplier–manufacturer collaborations and the associated issues and problems can best be explained by the patterns in the extent to which the manufacturer manages supplier involvement in the short term and the long term. The results of this study reveal that the initial framework is helpful in understanding why certain collaborations are not effectively managed yet conclude that the existing analytical distinction among four different management areas does not sufficiently reflect empirical reality. This leads to the reconceptualization and further detailing of the framework. Instead of four managerial areas, this study proposes to distinguish between the strategic management arena and the operational management arena. The strategic management arena contains processes that together provide long-term, strategic direction and operational support for project teams adopting supplier involvement. These processes also contribute to building up a supplier base that can meet current and future technology and capability needs. The operational management arena contains processes that are aimed at planning, managing, and evaluating the actual collaborations in a specific development project. The results of this study suggest that success of involving suppliers in product development is reflected by the firm's ability to capture both short- and long-term benefits. If companies spend most of their time on operational management in development projects, they will fail to use the leverage effect of planning and preparing such involvement through strategic management activities. Also, they will not be sufficiently able to capture possible long-term technology and learning benefits that may spin off from individual projects. Long-term collaboration benefits can only be captured if a company can build long-term relationships with key suppliers, with which it builds learning routines and ensures that the capability sets of both parties are aligned and remain useful for future joint projects.
The purpose of this study was to test a model of the organizational innovation process that suggests that the strategy-structure causal sequence is differentiated by radical versus incremental innovation. That is, unique strategy and structure will be required for radical innovation, especially process adoption, while more traditional strategy and structure arrangements tend to support new product introduction and incremental process adoption. This differentiated theory is strongly supported by data from the food processing industry. Specifically, radical process and packaging adoption are significantly promoted by an aggressive technology policy and the concentration of technical specialists. Incremental process adoption and new product introduction tends to be promoted in large, complex, decentralized organizations that have market dominated growth strategies.
Findings also suggest that more traditional structural arrangements might be used for radical change initiation if the general tendencies that occur in these dimensions as a result of increasing size can be delayed, briefly modified, or if the organization can be partitioned structurally for radical vs. incremental innovation. In particular, centralization of decision making appears to be necessary for radical process adoption along with the movement away from complexity toward more organizational generalists. This suggests that a greater support of top managers in the innovation process is necessary to initiate and sustain radical departures from the past for that organization.
In this paper we analyze the joint implications of two effects: (a) inserting independent profit-maximizing retailers into the channel system provides “buffering” to the manufacturers from price competition when their products are highly substitutable and intrachannel contracts are observable (as shown by McGuire and Staelin 1983 under the assumption of constant marginal production costs), and, (b) lack of channel coordination results in a reduction in manufacturer's incentives to invest in efforts to reduce production costs (as shown by Jeuland and Shugan 1983 for the case of bilateral monopoly). We show that both these results are robust in the sense that the first holds even in the presence of the vertical externality of manufacturer's effort reduction in a noncoordinated channel, and the second holds regardless of the degree of substitutability between the competing channel's products.
Specifically, we analyze a four-stage game with two manufacturers and two retailers, where the intrachannel contracts are linear and observable and manufacturers make investments in process improvements to reduce their production costs. We find that the optimal channel structure decision depends on interactions between two parameters: the degree of substitutability between products and the level of investments required to achieve production cost reduction. These parameters represent what have been widely interpreted in the management literature as the two primary “generic strategies” that most organizations follow in order to gain competitive advantage: cost leadership and product differentiation (Porter 1980). Thus, our analysis brings out the strategic and interdisciplinary nature of the channel structure decision that can significantly affect firm profitability.
Our main results are as follows. First, we find that decentralized, noncoordinated channels appear as more profitable equilibrium than integration (or perfectly coordinated channels) at high product substitutability even when process innovation dimension is accounted for, in agreement with the literature. However, the range of substitutability over which decentralization is an equilibrium strategy is smaller the easier it is to reduce production costs. Intuitively, the easier the cost reduction, the larger the cost penalty that the channel incurs as a result of not coordinating investment and pricing decisions between channel members, and thus smaller the range over which decentralization is an equilibrium. This implies that there is an explicit tradeoff between efficiency and strategic incentives in distribution channel design.
Second, we show that decentralized manufacturers invest less in process innovation than integrated manufacturers do, regardless of the structure of the competing channel and the degree of substitutability between products. Consequently, a decentralized channel has higher costs, charges higher prices, and produces lower quantities than an integrated channel does. Moreover, these differences get larger the easier the cost reduction. The effect on manufacturer profits, however, is not that clear. Manufacturers make higher profits by decentralizing if products are highly substitutable, in agreement with McGuire and Staelin (1983) and Coughlan and Wernerfelt (1989). However, we also find that the relative profitability of decentralization at high substitutability (and of integration at low substitutability) increases the easier the cost reduction. Moreover, the range of substitutability over which decentralization is more profitable than integration is itself larger the easier the cost reduction (though decentralization is an equilibrium strategy over a smaller range). Thus, process innovation accentuates the profit difference between integrated and decentralized channels and makes the Prisoner's Dilemma situation worse in the choice of distribution channel structure.
Finally, we analyze two examples of coordinated decision making in a channel: a divisional integrated system and franchising. In the first case, we find that decentralization can emerge as a unique (and more profitable) equilibrium at high product substitutability, in contrast to McGuire and Staelin (1983). In the second case, we find that decentralization is not always a unique equilibrium and it is not always more profitable than integration, in sharp contrast to the results by Coughlan and Wernerfelt (1989). Thus, franchising does not provide a sure way of achieving channel coordination when marginal production costs are not constant.
In sum, this paper highlights the importance of simultaneously considering both the horizontal and the vertical dimensions of interorganizational relations on one hand and, on the other, paying attention to cross-functional interactions across marketing and operational decisions to better understand the underlying incentives that shape firm and market structures; conventional focus of marketing on demand side effects and of operations on cost side effects can lead to suboptimal decisions.
This paper presents the results of an experimental investigation on how increased expected information affects subjects' choices. We show that Claude Henry's (1974) result (the Irreversibility Effect) is strongly supported by our experimental data. According to the Irreversibility Effect a rational (expected utility maximizing) agent who anticipates more information before making his future choices, will take a less irreversible position today. In our experiment, present and future choices are framed respectively as portfolio and investment decisions. The degree of irreversibility (or flexibility) chosen by experimental subjects in response to additional information indicated that subjects react to anticipated information as predicted by theory.
We draw upon evolutionary economics and transaction cost economics to examine how alliance experience accumulation at the parent firm level and alliance features at the transaction level jointly and interactively shape the favorability of research alliances’ termination outcomes. Fifteen percent of the terminated alliances we examined were successful, 34% were failures, and 51% experienced an intermediate outcome in the form of contract expiration or unilateral withdrawal by a partner. We find that the effect of partner-specific experience on the favorability of termination outcomes is greater for non-equity alliances than for equity structures affording stronger formal governance mechanisms. Other forms of experience such as general alliance experience or prior alliances in the same technological area as the focal agreement have no such favorable consequences for alliance termination. The findings also indicate that alliance complexity adversely influences firms’ termination outcomes in alliances. We therefore find evidence in partial support of both evolutionary and transaction cost based arguments for the explanation of termination outcomes in research alliances.
The second French Community Innovation Survey (CIS) indicates that 14% of R&D collaborating firms had to abandon or delay their innovation projects due to difficulties in their partnerships, an outcome which we term “cooperation failures”. Controlling for sample selection on the cooperation decision, our estimates show that firms collaborating with competitors and public research organizations (PROs), especially when they are foreign, are more likely to delay or stop an innovation project because of difficulties encountered in their R&D partnerships. More surprisingly, firms collaborating with their suppliers also face a higher risk of “cooperation failures”. At least for PROs, firms can reduce the risk of “cooperation failures” through previous experiences in partnerships. Larger firms and group subsidiaries are less likely to face “cooperation failures”, and so do firms in industries with a strong appropriability regime.
It is generally in a firm’s interest for its supply chain partners to invest in innovations. To the extent that these innovations either reduce the partners’ variable costs or stimulate demand for the end product, they will tend to lead to higher levels of output for all of the firms in the chain. However, in response to the innovations of its partners, a firm may have an incentive to opportunistically increase its own prices. The possibility of such opportunistic behavior creates a hold-up problem that leads supply chain partners to underinvest in innovation. Clearly, this hold-up problem could be eliminated by a pre-commitment to price. However, by making an advance commitment to price, a firm sacrifices an important means of responding to demand uncertainty. In this paper we examine the trade-off that is faced when a firm’s channel partner has opportunities to invest in either cost reduction or quality improvement, i.e. demand enhancement. Should it commit to a price in order to encourage innovation, or should it remain flexible in order to respond to demand uncertainty. We discuss several simple wholesale pricing mechanisms with respect to this trade-off.
Controlled experiments provided evidence that (1) employees are more likely to accept incentive contracts described in bonus terms than contracts that appear identical except for being described in penalty terms, and (2) when employees' judgment of their past performance is dependent on memory, the preference for bonus over penalty contracts increases with experience. These phenomena are explained in terms of the human information processing costs of communicating and evaluating the contract terms, and further implications are drawn for the empirical study of contracting.
Amanufacturer writes supply contracts with N buyers. Then, the buyers invest in innovation, and the manufacturer builds capacity. Finally, demand is realized, and the firms renegotiate the supply contracts to achieve an efficient allocation of capacity among the buyers. The court remedy for breach of contract (specific performance versus expectation damages) affects how the firms share the gain from renegotiation, and hence how the firms make investments ex ante. The firms may also engage in renegotiation design, inserting simple clauses into the supply contract to shape the outcome of renegotiation. For example, when a buyer grants a financial "hostage" to the manufacturer or is charged a per diem penalty for delay in bargaining, the manufacturer captures the gain from renegotiation. "Tradable options," which grant buyers the right to trade capacity without intervention from the manufacturer, return the gain from renegotiation to the buyers. This paper proves that, under surprisingly general conditions, the firms can coordinate their investments with the simplest of supply contracts (fixed-quantity contracts). This may require renegotiation design, and certainly requires that the firms understand the breach remedy and set their contract parameters accordingly.
Many theoretical models adopt a normative approach and assume that decision-makers are perfect optimizers. In contrast, this paper takes a descriptive approach and proposes a decision framework of bounded rationality, in which decision-makers are prone to errors and biases. In our model, while the best decision need not always be made, better decisions are made more often. We apply this framework to the classic newsvendor model and characterize the ordering decisions made by a boundedly rational decision-maker. We identify systematic biases and offer insight into when over-ordering and under-ordering may occur. We also investigate the impact of these biases on several other inventory settings that have traditionally been studied using the newsvendor model as a building block, such as supply chain contracting, the bullwhip effect, and inventory pooling. We find that incorporating decision noise and optimization error yields results that are consistent with some anomalies highlighted by recent experimental findings.
A number of recent contributions by economists have provided a clear insight into the causes of the varied forms of environmental deterioration, and have also suggested, implicitly or explicitly, policies for more efficient management of environmental as well as other resources. In this paper, the authors explore the implications of uncertainty surrounding estimates of the environmental costs of some economic activities. It is shown in particular that the existence of uncertainty will, in certain important cases, lead to a reduction in net benefits from an activity with environmental costs. In such cases the implication for an efficient control policy will generally involve some restriction of the activity.
Much experimental evidence indicates that choice depends on the status quo or reference level: changes of reference point often lead to reversals of preference. The authors present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point. The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages. Implications of loss aversion for economic behavior are considered. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
It has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget-balancing constraint, and that this facilitates the design of contracts that can sustain the Pareto optimum as a (perfect) Nash equilibrium. This note offers an explanation for why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision. The note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party, which could render the proposed equilibrium incredible.
This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.
The time course of resensitization of the down-regulated beta-adrenoceptor system of rat myometrium was studied. The isoprenaline-induced decrease of myometrial cAMP reversed rather rapidly and after 4 and 8 days no significant change of the cAMP level was demonstrated, however, the cAMP level was higher than in the control myometrium after 12 days. The elevated phosphodiesterase activity decreased to 80% of control activity after 4 days, but returned to control activity after 8 days. The decreased number of beta-adrenoceptors increased gradually after discontinuing the treatment and reached the number of the controls after 12 days. Our results suggest that the resensitization of the beta-adrenoceptor-cAMP-system is rather complex, the normalization of the cAMP content and the phosphodiesterase activity is more rapid than the normalization of the beta-adrenoceptor number which is a rather slow process in myometrial tissue.