Innovator Article

Inspiring Networks of Innovation

Faculty Research Fall 2007/Winter 2008

Demand for Soft Skills to Grow

Recognized for her expertise in organizational behavior and research on identity and work, Associate Professor Beth Bechky helped organize a two-day forum on future jobs skills at the Keck Center in Washington D.C. from May 31 to June 1. The forum, “Workshop on Research Evidence Related to Future Skill Demands,” was sponsored by the National Academies’ Center for Education with support from the National Institutes of Health’s Office of Science Education and the Russell Sage Foundation. The workshop brought together economists, sociologists, public policy specialists and educators from across the country to discuss the job skills employers will need in decades ahead, and whether students are getting the education they need to be employable. The experts shared their ideas, research methods and best practices used to predict the type of skills they believe will be most marketable in 2020. Research was presented on future demand for skills in two large and rapidly-growing employment sectors: professional “knowledge workers” and low-wage service workers. Other topics included globalization of work, methods to measure the impacts of computerization on work, and education and training strategies to meet the future demand for specific job skills. In conclusion, Bechky and other scholars agreed that “soft skills”— effective self-management and interpersonal and written communication skills—will be in high demand by the year 2020. Several participants noted that employers are already frustrated by the lack of soft skills among job candidates, particularly in science and software engineering positions. Bechky also moderated a panel of scholars who discussed the skills necessary for knowledge work

Bechky, who joined the Graduate School of Management faculty from the Wharton School at the University of Pennsylvania in 2001, was promoted to associate professor last fall.

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Timing the Sale When Buyers are Uncertain

In October Professor Hemant Bhargava presented a talk titled “Economics of Information Structure: Timing the Sale when Buyers have Uncertain Product Valuations,” at the Center for Information Technology Research in the Interest of Society (CITRIS) at UC Berkeley. CITRIS is a collaborative, public-private partnership of more than 300 faculty and thousands of students at four UC campuses (Berkeley, Davis, Merced and Santa Cruz) with industrial researchers from more than 60 corporations to create information technology solutions for pressing social, environmental and healthcare problems. Bhargava’s talk focused on how products are sold when customers are uncertain. Examples of these types of transactions include advanced-purchased electronic tickets, smart cards, mobile phone packages, web hosting plans and other technologies. In these examples firms are selling their service/product in advance of consumption and the consumer is uncertain how much of the product/service they will use. Over time customers become more certain and better informed about the products and their needs, so that a firm can influence the information structure through its decision on timing of the sale. According to Bhargava, it is commonly thought that a firm that offers late selling suffers an information disadvantage and experiences a loss in revenue compared to a company that sells in advance of consumption. His research demonstrates that despite this information disadvantage, late selling can benefit the firm when customers’ demands vary and have substantial uncertainty. Bhargava extended this analysis to cover products for which customers have multi-unit demand, such as for IT and telecommunications services. This extension uncovers the same pattern: late selling—or ex-post pricing—can outperform advance selling by better exploiting customer differences for price discrimination when customers are sufficiently uncertain. Using two-part tariffs (a service that has an entry fee and then a set price per unit consumed) and three-part tariffs (a service that has an entry fee and then provides a bulk amount to consume for a set price), both of which are commonly used price discrimination tools for IT and telecom products, Bhargava argued that the choice of tariff structure influences the relative superiority of advance vs. late selling. He also establishes the price discriminating benefits of three-part tariffs: a lean menu of three-part tariffs—one with as few as a single item—can generally outperform longer menus of two-part tariffs, and often do so while requiring far less detailed information about consumer preferences. Bhargava’s research has applications in IT and telecom services; hardware and software products (those with options to “upgrade”); supply chain (e.g., retailer contracts); marketing (e.g., sales force incentives, return policies); and managerial accounting (e.g., compensation practices

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Building Better Frameworks to Study Market Behavior

Dean Nicole Woolsey Biggart presented her research on market regimes at the Conference on Capitalism and Entrepreneurship hosted by Cornell University’s Center for the Study of Economy and Society. The two-day conference last September featured world renowned researchers and experts in economics and sociology from universities in Denmark, Sweden, France and the U.S. Biggart presented a paper titled “Markets as Regimes: Explaining Change and Stability, Competition and Consensus in Economic Orders,” which she co-authored with Associate Professor Thomas D. Beamish of the UC Davis Department of Sociology. Biggart opened her presentation by describing how sociologists view market behavior primarily by using one of three explanatory frameworks: ecological, network, and cultural-institutional theories. She explained that the tendency among researchers is to rely on one theoretical framework over the others. Biggart and Beamish contend that this is an unnecessary approach. According to Biggart, the solution to a problem of theoretical multiplicity is to develop the notion of market regimes, a concept that builds on the strengths of each theoretical approach as well as filling in unresolved gaps left by one or the other. As a case study, Biggart and Beamish examined the commercial construction industry, one of the United States’ largest and oldest market-based-industries. By examining the historical transformation of this industry over two centuries, they found evidence of ecological, network and institutional forces. Biggart argues that the logic described by each theoretical framework helps explain three distinct market transformations that have occurred in this market-based industry over time. The key to her presentation was that no single theoretical framework can explain these changes alone and that integration is the key to a complete explanation of change and stability, competition and consensus in any market context.

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Engineering Success through Smart Design

Work space design can make or break a company’s productivity, either inspiring innovation and collaboration or stifling employees’ ability to work smarter. Thirty years ago conventional wisdom held that to create an environment that promoted efficiency and comfort, work spaces needed to be neat and tidy with no personal items cluttering desktops. In their article “The Physical Environment in Organizations” published in the Academy of Management Annals (2008), Professor Kimberly Elsbach and her co-author Professor Michael G. Pratt of the University of Illinois at Urbana-Champaign, surveyed the past three decades of research on office design and its impact on the social and psychological behavior of employees. They conclude that a single office space design doesn’t necessarily accomplish all the goals a manager may have and that there are trade-offs with any given configuration. Elsbach and Pratt contend that managers should know the functional attributes of any given design, which include instrumental, symbolic and aesthetic. The authors identified three potential tensions that arise. The first is interfunctional, or tension that occurs between functions as in the case of an office partition that has the symbolic function denoting status to a manager, but is at odds with the instrumental function of privacy (conversations in these cubicles are not private). The second tension is interform, or two separate outcomes, one desired and one undesired, that are the product of one functional attribute. For instance, giving people the ability to control their lighting will increase their sense of control over their work environment which is an instrumental function, but such control will lower their productivity on creative tasks. The third is intraform tension, or an outcome that has a desired effect but an unintended consequence. For example, the use of physical markers to denote “territories” of organizational groups or expertise can encourage affiliation within that group, but at the same time can be problematic when members are assigned to work group they do not identify with. Elsbach and Pratt argue that managers need to be acutely aware of the tensions in the work environment and should focus on what functional attributes—instrumental, symbolic and aesthetics—can be improved given their company’s work culture.

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Clinton’s Tears Shed Light on Crying at Work

Democrat Hillary Rodham Clinton’s show of emotion before the New Hampshire presidential primary—when her eyes welled up and her voice quivered in response to a voter’s question about how she kept going on the campaign trail—is said to have helped her at the polls. It also shed light on the issue of crying on the job, which Professor Kimberly Elsbach has been studying. Elsbach has been interviewing women about crying at work and its repercussions as part of a bigger effort to understand the impacts. Elsbach was quoted in the Sacramento Bee, The New York Post and other press reports related to Clinton’s crying episode. Elsbach said the context of Clinton’s emotion moment was critical: she had been the target of attacks in a recent debate; she was responding on a very personal level to a personal question, and she doesn’t have a reputation of being overly emotional, all of which revealed a softer side of the senator that many voter’s hadn’t seen before. But that’s not the typical experience women have when they tear up on the job, according to Elsbach, who has started a year-long analysis with Associate Professor Beth Bechky to better document the career impacts of crying. Elsbach said has been surprised at how severe women felt the consequences were, some reporting that their tears had cost them promotions, plum assignments and coworkers’ respect. While many studies show that women are more likely than men to shed tears during the workday, Elsbach plans to further investigate the circumstances in which crying may or may not be damaging professionally. Elsbach is concerned that some managers, who feel crying is unprofessional, may be underutilizing good performers because their tears have been misinterpreted as emotional instability. One of her preliminary observations concerns the amount of time and energy women spend trying not to cry in front of people at work—running out of meetings, holing up in the office with the door closed, or hiding in a bathroom stall. “It’s an enormous burden women have that men don’t have,” she said. She explained that crying is perceived more positively if it is viewed as sincere rather than manipulative, and if it seems justified, such as the result of bullying. Hillary’s tears appear to have been seen as both sincere and justified, Elsbach said.

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Improved Corporate Governance Reduces Auditing Fees

Professor Paul Griffin and his coauthors David Lont and Yuan Sun of the School of Business, University Otago, Dunedin, recently presented their article “Corporate Governance and Audit Fees: Evidence of Countervailing Relations” at a joint symposium hosted by the Journal of Contemporary Accounting and Economics and Auditing: A Journal of Practice & Theory at The Hong Kong Polytechnic University on January 4-5, 2008. In this study, Griffin and his co-authors contend that increased spending on governance—including auditing—enhances the quality of financial statements and internal controls for a company. They found that the increased spending on governance has an opposite effect on auditing costs (via fees) in the long term—it reduces auditing costs to below what would be a much higher fee. In their study, Griffin, Lont and Sun derive and test an economic framework that describes the relation between corporate governance and auditing fees paid by companies. The framework shows that auditing and governance are co-determined by a fee-increasing relation because auditing services provide a means to attain better governance, and a fee-decreasing relation because auditors incorporate the benefits of better governance in pricing their services, passing savings onto the companies that must be audited. The authors have tested their framework in the wake of Sarbanes-Oxley legislation, which imposed substantial cost on many companies to strengthen governance, including increased spending on auditing and internal control. After controlling for this increased spending, the researchers conclude that better governance reduces the cost of auditing. Their framework explains that this offset occurs because even though better governance (including auditing) is costly, it also enhances the quality of financial statements and internal controls, which enables auditors to decrease audit and control risk resulting in reduced fees. The audit fee offset for the typical large company is more than $500,000.

Professor Griffin and his colleagues also presented their research at the Annual Academic Seminar on Corporate Reporting & Governance last September in Irvine, California; at INSEAD in France last October; and at the Israeli Institute of Technology in Haifa in January.

Download the paper

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Inspiring Networks of Innovation

Associate Professor Andrew Hargadon, director of the UC Davis Center for Entrepreneurship, and his team held the first Environmental Health Entrepreneurship Academy at the Tahoe Center for Environmental Science in Incline Village, Nev. The five-day intensive program from June 25-29 focused on strategies to commercialize research projects and innovations. The attendees were Superfund Trainees who are graduate students or post-doctoral researchers in such fields as biomedicine, atmospheric science, engineering, environmental toxicology and pharmacology. Attendees—who came from Columbia University, University of Washington, University of Kentucky and UC Berkeley, UC San Diego and other top research institutions—teamed up on projects, worked with mentors and had their presentations critiqued by venture capitalists. The academy received funding from the National Institute of Environmental Health Sciences’ Superfund Basic Research Program and the U.S. Environmental Protection Agency.

The curriculum and format of the UC Davis Center for Entrepreneurship’s Business Development Intensive Program, a five-day program to increase the knowledge and skills of research scientists and engineers in technology commercialization and new business development, was successfully held at another university for the first time. Hargadon gave the opening presentation at Portland State University, where the program was held August 26-30 for 25 Portland State business students and scientists from the University of Oregon, the Oregon Nanoscience and Microtechnologies Institute, the Oregon Health Sciences University and other research institutions in the state.

Hargadon served on a panel of industry experts at the 13th annual National Instruments Week on August 7 in Austin, Texas. NIWeek is the industry’s premier event covering virtual instrumentation and graphical system, bringing together engineers, scientists and educators from around the world. Hargadon spoke and answered questions about innovations, how they come to fruition and how they become a market success. From Austin, Hargadon traveled to Chicago to deliver the keynote address at the International Energy Program Evaluation Conference on August 14. The conference is a biennial professional forum for presentations and discussions about energy programs with the goal of conserving natural resources and reducing greenhouse gas emissions. Hargadon talked about advancing energy efficiency technologies to the market, including the need to design better businesses around existing energy technologies.

Hargadon visited Britain last May to present his research on “The Networks of Innovation” at the Imperial College London on May 15, at the Advanced Institute of Management Research on May 16, and at Oxford’s SAID Business School on May 18. He returned to Imperial College London on January 14, 2008, to kick off the STIR (Simulator, Teach, Incubate, Research) lecture series for Design London, a joint project between Imperial College and the Royal College of Art that combines design and innovation knowledge. The lectures will address the core areas of Design London from conducting research and incubating new business ideas to innovation technology. In his talk, “Transforming Creativity into Commercial Success: from Edison to the iPod Touch,” Hargadon discussed the patterns and the role of design in innovation and encouraged the audience to think critically about what they are designing and the networks of information that surround the product. Hargadon recently accepted an invitation to serve on the Design London Advisory Board.

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Leadership in Open Source Communities: Democracy vs. Bureaucracy

Assistant Professor Siobhán O’Mahony teamed up with Assistant Professor Fabrizio Ferraro of the University of Navarra, Pamplona, Spain, to conduct a two-part study that relied on ethnographic and quantitative methods to understand how an open source community developed a stable governance model over a 13-year period. Their work was recently published in the October 2007 issue of the Academy of Management Journal. The scholars’ investigation focused on the Debian Linux community, which produces a free and open source version of the Linux operating system. Their research examined how this grass roots community dealt with the problem of leadership in the absence of any pre-existing hierarchical structure. O’Mahony and Ferraro’s research shows how a seemingly non-hierarchical community that exists outside of formal hierarchical bureaucratic structures developed a shared notion of authority and a system of governance. In the case of Debian Linux, governance emerged through “grass roots” development (or bottom up) and evolved over time, rather than through the design of a formal bureaucratic system (top down system). By blending directly democratic mechanisms with bureaucratic structures, the community created a viable organization that could adapt with members’ needs. Individuals who became leaders did not do more technical work than others, but were more likely to engage in informal coordinating efforts across the community and link individiuals’ efforts to larger collective goals. These findings have implications for others seeking leadership in laterally organized projects or communities: the impact that your work has on others and your ability to connect people to the goals of the project may be more important than just the amount of effort you devote to the project.

Managing Ambiguity in Market-Based Projects  

O’Mahony recently completed a paper titled, “Nexus Work: Managing Ambiguity in Market-Based Creative Projects,” coauthored with Elizabeth Long Lingo, research associate at the Curb Center for Art, Enterprise and Public Policy at Vanderbilt University. This collaborative work was recently recognized at the Fourth Annual Research Conference on “Creativity, Entrepreneurship and Organizations of the Future,” a Harvard Business School Centennial Colloquium on December 7-8, 2007. It was one of 10 papers out of 100 accepted into this elite colloquial series. In their work, the authors explored how music producers in Nashville manage ambiguity when bringing a creative project to market (e.g. a song, pitch package or album). As entrepreneurs, producers must integrate contributions from many different types of experts to create a coherent creative product without the benefit of hierarchy or the infrastructure that a single organization provides. Producers are at the hub of a network that includes musicians, engineers, song writers, publishers, artists and labels. With a field study, O’Mahony and Long-Lingo examined how producers accomplished this task and found that they frequently encountered three sources of ambiguity: 1) an ambiguous quality metric (what makes a hit?); 2) ambiguous occupational jurisdictions (who should do what?); and 3) an ambiguous production process (how should the work get done?). By examining the work practices producers used to respond to these sources of ambiguity, the authors build a theoretical framework to help understand how people in the nexus role bring a creative project to fruition in a market.

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California Winemakers Optimistic about the Future

Professor Robert Smiley, director of wine industry studies, presented his analysis of the current state and future of the wine industry to executives and financiers at the 15th annual Wine Industry Financial Symposium last September in Napa, California. Smiley based his presentation on his annual survey of wine professionals, now in its 16th year, which included responses from 104 wine producers, wine grape growers, distributors, retailers and lenders. It is the largest study of its kind in the wine industry. He also conducted in-depth interviews with chief executive officers and senior executives of 26 major wine operations, including growers, wine producers and distributors. According to Smiley’s findings, both winemakers and vineyard owners predict higher profitability over the next two years in the California wine industry. During the next three years, the survey participants believe the major challenges to growth in wine sales will be increased government regulation, global competition and consolidation of wine retailers and distributors. Both winery owners and grape growers predicted that the greatest growth in consumer demand and resulting sales will be seen in pinot noir, followed by pinot grigio and chardonnay wines. A decline in sales was projected for white zinfandel. Finally, many in the industry say that environmental issues will top industry concerns in five to 10 years.

Download the study

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Non-profits’ Financial Reports Benefit from Oversight

Assistant Professor Michelle Yetman presented two papers at the annual American Accounting Association meeting in Chicago last August. The first, “Effects of Governance on the Financial Reporting Quality of Nonprofit Organizations,” was co-authored with Professor Robert Yetman. Yetman described how stakeholders use nonprofit financial information for their investing, contracting, and regulating decisions. Stakeholder decisions are directly affected by the quality of the underlying financial information provided by the nonprofit. She concluded that oversight and monitoring provided by auditors and municipal bond lenders and associated intermediaries have positive effects on nonprofit reporting quality. She contended that attempts to enhance the monitoring and oversight of nonprofits can lead to higher quality financial reports, particularly if those efforts involve auditors or market participants such as lenders.

Price Effect of Capital Gains Tax on U.S. Cross-listed Stocks

Yetman also presented “Capital Gains Taxes, Pricing Spreads and Arbitrage: Evidence from Cross-Listed Firms in the U.S.,” a study she co-authored with Assistant Professors Jennifer Blouin and Luzi Hail of the Wharton School at the University of Pennsylvania. Their research examines how shareholder-level taxes affect the pricing of stocks that are simultaneously listed and traded on multiple exchanges around the globe. Specifically, their study showed how an unexpected reduction in U.S. capital gains taxes as a result of the 1997 federal budget accord changed the pricing of foreign firms’ U.S. cross-listed shares compared to the underlying equities listed in their home country. The reduction in the capital gains tax rate increases expected after-tax cash flows of the U.S. cross-listed stock held by U.S. individual investors, and thus should have a price effect. Home country shares generally do not react, creating a pricing spread. When costs of arbitrage are low the pricing disparity quickly dissipates. Yetman explained that they did not find consistent evidence of the lock-in effect, which predicates a decrease in prices attributable to a surge in volume for U.S. cross-listed shares with greater accrued taxable capital gains. Their findings suggest that an exogenous U.S. shock targeted at U.S. tax clientele can reverberate in international asset prices and affect foreign firms’ cost of equity capital.

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