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Recent Studies

On customer feedback online, vanishing COOs, rebuilding trust, and other topics of interest.

Photograph by Opto

Digital Word of Mouth
Chrysanthos Dellarocas (dell@mit.edu), “The Digitization of Word-of-Mouth: Promise and Challenges of Online Feedback Mechanisms,” MIT Sloan School of Management Working Paper Number 4296-03. Click here.

Word-of-mouth comments on products and services have long been recognized as powerful commercial weapons. But even the most wounding of barbs has tended to have limited, isolated impact. The Internet has changed this. Online, customer commentary — whether it’s a disgruntled mumble or an enthusiastic approval — is amplified and can sometimes be communicated globally. This is what Chrysanthos Dellarocas, an associate professor of management at MIT Sloan School of Management, describes as the “digitization of word-of-mouth.” Professor Dellarocas suggests that digitized word-of-mouth, managed through sophisticated software, has implications for businesses (online and offline) in such areas as brand building and customer acquisition; product development and quality control; and supply chain quality assurance.

Digitized word-of-mouth can be controlled and interpreted using online feedback mechanisms, also called reputation systems. These are often used on Web sites where products are rated, such as Epinions.com, Moviefone.com, and Citysearch.com. In his research, Professor Dellarocas examines eBay’s feedback mechanism. What is most notable about eBay’s approach, and its success with 49.7 million registered users, is that it relies on the old-fashioned notion of trust. Feedback is used to keep people more honest, and hence make the community more secure. Interestingly, 99.1 percent of the comments buyers make about one another are positive.

Digitized word-of-mouth is more impersonal than traditional word-of-mouth spread among friends and acquaintances, and it can be manipulated in various ways that distort the truth by those intent on doing so. Online communities also require a certain volume of participation before they can begin having any real impact on the reputation of a product or service. The subtleties of how feedback mechanisms are constructed are also little understood. For example, should feedback be voluntary? Is a one-to-five scale of preferences (used by Amazon.com) more useful than a rating of positive, neutral, or negative (used by eBay)? How can organizations assess whether a feedback mechanism is performing optimally? Although we all know that digitized word-of-mouth mechanisms can be constructed, further research is required to understand their potential and limitations.


The Art of the Apology
Peter Kim (kimpeter@usc.edu), Donald Ferrin (dlferrin@Buffalo.edu), Cecily Cooper (cooperc@mail.cox.smu.edu), and Kurt Dirks (dirks@olin.wustl.edu), “Removing the Shadow of Suspicion: The Effects of Apology Versus Denial for Repairing Competence- Versus Integrity-Based Trust Violations.” Click here. 

An important distinction can be made between violations of trust that involve matters of competence and those that involve integrity. This distinction, four American business-school researchers argue, may hold the key to understanding how trust can best be rebuilt.

Building on previous studies, Peter Kim, assistant professor at the Marshall School, University of Southern California; Donald Ferrin, assistant professor at the State University of New York at Buffalo; Cecily Cooper, assistant professor at the Cox School of Business, Southern Methodist University; and Kurt Dirks, associate professor of organizational behavior at the Olin School of Business, Washington University, St. Louis, say there are inherent differences in the way people assess competence and integrity.

For example, a single successful performance carries a lot of weight as an indicator of competence, but a single unsuccessful performance will often be discounted. In contrast, a single honest act is not enough to prove a person’s integrity, but a single dishonest act is regarded as a reliable indicator of low integrity. So, as the authors put it, “hitting a home run once makes us home run hitters in the eyes of others even if we strike out afterward. In contrast, embezzling from a company once makes us an embezzler even if we do not engage in additional thefts.”

In a series of experiments, the researchers explored the effects of two different strategies for rebuilding trust after an alleged violation: an apology and a denial. In one experiment, 200 students were asked to assume the role of a manager at an accounting firm in charge of hiring and managing a senior-level tax accountant. They were shown a videotaped job interview with actors playing the roles of a female job applicant and a recruiter. During the interview, the recruiter raised the concern that in her previous job the applicant had filed a client’s tax return incorrectly.

The students were split into four groups and each group was shown a different version of the interview. Most of the footage was the same for each group, but how the violation was portrayed and what the applicant’s response was varied. The offense was presented as a matter of either competence or integrity — i.e., the job candidate didn’t understand the tax rules, or deliberately filed a false claim — and the candidate responded with either a denial or an apology. In all cases, the allegations were based on hearsay, so the recruiter did not provide proof of guilt or innocence. The students then rated the applicant’s trustworthiness.

The results show that trust is repaired more successfully when mistrusted parties apologize for violations caused by incompetence but deny culpability for violations resulting from lapses in integrity. The researchers conducted another experiment in which the accused party’s guilt or innocence became clear. The second experiment showed that it is better for the accused to apologize for violations when evidence of guilt will emerge at a later date, but not to waver in denial when subsequent evidence of innocence will redeem them.

The findings could have important implications for the way business leaders and politicians manage their images when they get into trouble. Selecting the right response has a pragmatic as well as a moral dimension. But, as the authors warn, these findings could also “be employed just as easily by those who do not deserve to be trusted as by those who do.”


The Disappearing COO
Raghuram G. Rajan (raghuram.rajan@gsb.uchicago.edu) and Julie Wulf (wulf@wharton.upenn.edu), “The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies,” National Bureau of Economic Research Working Paper Number W9633. Click here. 

This paper by Raghuram G. Rajan, the Joseph L. Gidwitz Professor of Finance at the University of Chicago, and Julie Wulf, an assistant professor of management at the Wharton School of Business, provides yet more evidence that corporate hierarchies are shrinking. However, the authors’ research also makes a striking observation that is supported by other recent studies: The most significant casualty of flattening organizations appears to be chief operating officers (COOs). In the group of companies the researchers studied, the number of COOs had shrunk by 20 percent.

The team’s research covered 300 publicly traded American companies between 1986 and 1999. Large, well established, and profitable, the sample firms (on average) employed 47,500 workers, were 85 years old, and recorded a return on sales of 19 percent.

The first finding is that an increasing number of managers now report to CEOs. The average number of direct reports to CEOs rose from 4.4 in 1986 to 7.2 in 1999. This suggests that direct interaction between the CEO and managers, and CEOs’ influence over decision makers below them, is increasing.

The second finding is that the number of positions between the CEO and the lowest-ranking managers with profit-center responsibility fell by more than 25 percent during the same period. Simultaneously, the number of division heads tripled.

The authors point to General Electric Company’s division of GE Capital into four business units as evidence of the move toward flatter hierarchies with decentralized decision making. This restructuring effectively removed the chairman’s role at GE Capital. It also meant that more people — four business unit heads — reported to GE CEO Jeffrey Immelt.

In flatter organizations, promotion to the most senior executive levels brings significant pay increases and more emphasis on long-term incentives. However, the passing of greater responsibility down to those in the lower echelons doesn’t necessarily bring them greater rewards. Indeed, this research shows that for lower-status jobs, salary and bonuses are smaller than in traditional heavily layered organizations.

Particularly interesting is the fact that the COO role seems to be disappearing. This adds to mounting evidence from other research that the role of the COO is of questionable usefulness. This study suggests that divisional managers tend to step into the hierarchical gap when the COO role is eliminated.

Professors Rajan and Wulf also find that CEOs whose predecessors eliminated the role of COO survive longer.

Overall, the research of Professors Rajan and Wulf reinforces two commonly cited organizational trends. First, more intense competition is pushing employees to act more quickly, innovatively, and independently (and ideally, they should be rewarded commensurately). Second, the key source of power is shifting from one’s position to one’s competencies.


The Strategy Delta
Arnoldo C. Hax (ahax@mit.edu) and Dean L. Wilde II (wilde@dean.com), “The Delta Model — Toward a Unified Framework of Strategy,” MIT Sloan School of Management Working Paper Number 4261-02. Click here. 

What is the fundamental unit of strategy? Michael Porter’s hugely influential work seeks to make sense of strategy within the bounds of particular industries, whether the Swiss watch industry or the Dutch flower industry. Another approach is propounded by Gary Hamel and C.K. Prahalad. This theoretical school sees the company as the basic strategic unit. A company’s strategy is regarded as a function of its resources — human and otherwise. Over the last decade, a great deal of intellectual energy has been expended on refining these two world views, merging them, or coming up with coherent alternatives.

Entering this theoretical fray are Arnoldo C. Hax, the Alfred P. Sloan Professor of Management at MIT’s Sloan School of Management, and Dean L. Wilde II, chairman and founder of strategy consultants Dean & Company. The “Delta Model” developed by Professor Hax and Mr. Wilde puts forward three strategic options that can lead to what they call customer bonding. These are best product, total customer solutions, and system lock-in.

The best-product strategy is built on having a low-cost or differentiated product. However, this option is limited because it does not build substantial customer bonding. The business-to-business total customer solutions strategy is based on reducing customer costs and increasing customer profits. Companies compete on the basis of customer economics. Finally, system lock-in embraces others in the supply chain — customers, suppliers, and “complementors.” Complementors are firms that produce products or services that enhance a company’s own product and service portfolio. Proprietary computer standards is one example of how a complementor can execute system lock-in. More than 100,000 applications are designed to work with Microsoft’s Windows operating system, whereas only one-quarter of that number of applications exist for Apple’s Macintosh system, according to the authors.

The Hax and Wilde team add some compelling financial performance data to the discussion about customer-centered strategy. Their research looked at more than 100 major companies whose strategic positions clearly fitted one of the three categories — system lock-in, best product, or total customer solution. Those that competed on the basis of system lock-in were substantially more successful in terms of market value added (MVA) and market-to-book value. For example, companies with a system lock-in had a mean MVA of 57.15, compared with 14.26 for companies competing on the basis of having a best product and 22.38 for those competing on the basis of a total customer solution.

The authors argue that three “adaptive processes” — operational effectiveness, customer targeting, and innovation — are the primary means by which the three different strategic options can be pursued and executed. (For an extended examination of these issues, see Professor Hax and Mr. Wilde’s book, The Delta Project: Discovering New Sources of Profitability in a Network Economy (Palgrave, 2001).


Glamour by Association
Christina Schlecht (cschlecht02@gsb.columbia.edu), “Celebrities’ Impact on Branding,” Working Paper, January 2003. Click here. 

Companies believe celebrity sells — and spend billions each year for the attention that star athletes, singers, actors, and other famous people bring to their products. In 2000, for example, sportswear manufacturer Reebok International Inc. signed a five-year, $40 million contract with tennis phenomenon Venus Williams. Compared with bland endorser types, such as professional experts or satisfied customers, A-list stars achieve a high degree of consumer attention and recall. Still, the price is high. So how can companies make sure that the glitz, glamour, and excitement celebrities engender stimulate revenues too?

That is the issue examined by Christina Schlecht, a visiting scholar at Columbia Business School’s Center for Global Brand Leadership, a consortium of international business schools and companies that promotes research on branding issues. “To ensure positive results,” Ms. Schlecht argues, “it is critical for advertisers to have a clear understanding of the ‘black box’ of celebrity endorsement.” Drawing on existing literature, she examines four theories about positively influencing consumers’ brand attitudes. She calls them: source credibility and attractiveness; the match-up hypothesis; the meaning transfer model; and the principles of multiple brand and celebrity endorsement.

Source attractiveness refers to the endorser’s physical appearance, personality, likeability, and similarity to the target consumer. For obvious reasons, advertisers have traditionally preferred physically attractive messengers. Sometimes the most appropriate messenger may be a celebrity with a demographic profile or social status that matches that of target consumers.

The match-up hypothesis examines the fit between celebrity endorsers and brand to understand why some endorsements succeed and others fail. For example, actress Elizabeth Hurley’s endorsement of Estée Lauder was regarded as a success, but Bruce Willis’s endorsement of Seagram’s was deemed a failure. Simply being popular, Ms. Schlecht says, is not enough. An effective celebrity pitchperson should also appear qualified to talk about the product. Elizabeth Hurley was seen as a credible user of cosmetics. Ironically, Bruce Willis’s hard-living image may have reduced his credibility as a responsible spokesperson for alcohol. Interestingly, too, Michael Jordan proved effective as a spokesperson for Nike but not for WorldCom, suggesting that he was a good choice to pitch sportswear, but had less credibility with regard to communications.

The third concept — the meaning transfer model — tries to explain how celebrity glitz is transferred to the brand and rubs off on the consumer. For example: Tiger Woods is a great golfer. He wears Nike sportswear, so that is a great golf brand. I wear Nike, so I’m a great golfer, too.

Celebrities provide additional richness to the image transfer process because they have deeper and more complex associations for consumers. Madonna, for example, is more than just a pretty face. She is seen as a “tough, intense, and thoroughly modern woman.” She also carries a strong connection with the lower middle class.

Finally, Ms. Schlecht considers the effectiveness of multiple-brand and multiple-celebrity endorsements. Multiple-brand endorsement involves the same celebrity promoting several different brands. For instance, Tiger Woods has endorsed the American Express, Rolex, and Nike brands. Multiple-celebrity endorsement involves more than one celebrity promoting the same brand. L’Oréal matches different product lines to such celebrities as Andie McDowell and Vanessa Williams.

Ms. Schlecht concludes that celebrity endorsements can justify the price tag. But the decisions involved are complex, and marketing managers still need better analytical tools to help them select the right endorser. Until then, brand managers should remember that all that glitters is not necessarily gold.

Authors


Des Dearlove (des.dearlove@suntopmedia.com) is a business writer based in the U.K. He is the author of several management books and a contributing editor to strategy+business and The (London) Times. He is coeditor of the Financial Times Handbook of Management (Financial Times Prentice Hall, 2001).
Stuart Crainer (stuart.crainer@suntopmedia.com) is a U.K.-based business journalist and a contributing editor to strategy+business. He is the author of numerous management books, including The Management Century: A Critical Review of 20th Century Thought and Practice (strategy+business/Jossey-Bass, 2000).
 
 
 
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