Why Focus? A Study Of Intra-Industry Focus Effects

In an intra-industry setting, firm-focus is found to be positively correlated with the ability of firms to produce high-value products, while the overall effect of focus on firm performance is negative due to missed demand externalities generated by a broad product offering. In particular, it is shown that U.S. mutual funds that belong to more focused fund providers outperform similar funds offered by more diversified providers. An explanation based on alignment among a provider\u27s activities is consistent with this result. Cash inflows into fund providers—a measure related to fund provider profitability—is, however, negatively correlated with focus in fund offerings

Misperceiving Interactions Among Complements and Substitutes: Organizational Consequences

Systems composed of activity choices that interact in nonsimple ways can allow firms to create and sustain a competitive advantage. However, in complex systems, decision makers may not always have a precise understanding of the exact strength of the interaction between activities. Likewise, incentive and accounting systems may lead decision makers to ignore or misperceive interactions. This paper studies formally the consequences of misperceiving interaction effects between activity choices. Our results suggest that misperceptions with respect to complements are more costly than with respect to substitutes. As a result, firms should optimally invest more to gather information about interactions among complementary activities—e.g., concerning network effects—than about interactions among substitute activities. Similarly, the use of division-based incentive schemes appears to be more advisable for divisions whose products are substitutes than for divisions that produce complements. It is further shown that system fragility is not necessarily positively correlated with the strength ofthe interaction between choices. While systems of complements become increasingly fragile as the strength of interaction increases, systems of substitutes can become increasingly stable

Expense Shifting: An Empirical Study of Agency Costs in the Mutual Fund Industry

Using a dataset comprising almost all equity and bond funds in existence in 1996, we find that fund providers shift advertising and distribution expenses via so-called 12b-1 fees onto fund shareholders. It is further shown that bonds funds with 12b-1 fees are more risky, while having similar returns, than bond funds without 12b-1 fees. Lastly, we find that fund providers shift part of their research expenses onto fund shareholders by generating soft dollars (rebates in form of research services provided by brokers in return for excess commissions paid by fund providers) and not reducing explicit fees.Mutual Funds, Agency Costs, 12b-1 Fees, Soft Dollars

Determinants Of The Write-Off Decision Under IFRS: Evidence From Germany

This study examines the factors that influence write-off decisions in German-listed companies. Write-offs have been widely discussed, especially for the US-American market, and a relation to earnings management has been found in existing studies. German companies differentiate from the companies that have already been analyzed as they operate under different accounting standards (IFRS) and in a different institutional setting.Additionally, managers are confronted with the task to derive the IFRS annual statements from the existing annual statements according to local GAAP which follow a differing objective. Based on a sample of 805 observations of German companies listed in the DAX, MDAX, TecDax and SDAX indices between 2004 and 2010, we analyze the impact of firm performance as well as reporting incentives on the write-off decision. We find that the write-off probability rises significantly with decreasing overall firm performance, which is in line with the legal requirements. Additionally, we find a strong relation of the write-off probability with unexpectedly high earnings, which is an indicator for income smoothing. Besides influencing the shareholders perception, income smoothing can serve to minimize overall tax payments or to influence the banks risk assessment. In contrast with prior studies focusing on the US-American market, we found no evidence for other capital market motives, like big bath accounting and management changes; neither could we confirm the hypothesis that earnings-based management compensation or leverage have a significant influence on the write-off decision. These results indicate that German managers aim to influence tax payments and potential lenders in contrast to the perception of potential shareholders

Dealing With Complexity: Integrated vs. Chunky Search Processes

Organizations are frequently faced with high levels of complexity. While the importance of search for dealing with complex systems is widely acknowledged, how organizations should structure their search processes remains largely unexplored. This paper starts to address basic questions: How much of the entire system, and thus complexity, should be taken into consideration at any given time during a search process? Should a problem solver pursue an integrated search and be concerned with the whole system right from the start, or should a problem solver incrementally expand the “search domain,” i.e., the subset of system elements and interdependencies that are included in the search efforts? If the latter, how “chunky” should these steps be? Our analysis of a simulation model yields four insights: (1) expanding the search domain in smaller steps can yield a distinct advantage in final system performance, (2) following a completely incremental expansion pattern is not necessary as long as larger chunks are added early on in the process, (3) the value of chunky search is particularly high if highly influential system elements are considered first and highly dependent elements are added later, and (4) under time pressure, chunky search can lose its performance advantage over more integrated search processes. We discuss the implications of our findings for managing organizational search and complex systems more broadly

Contextuality Within Activity Systems and Sustainability of Competitive Advantage

Research on the interactions among activities in firms and the extent to which these interactions help create and sustain competitive advantage has rapidly expanded in recent years. In this research, the two most common approaches have been the complementarity framework, as developed by Milgrom and Roberts (1990), and the NK-model (Kaufman, 1993) for simulation studies. This paper provides an introduction to these approaches, summarizes key results, and points to an aspect of interactions that has not found much attention because neither of the two approaches is well-suited to address it: contextual interactions, i.e., interactions that are influenced by other activity choices made by a firm. We provide a number of examples of contextual interactions drawn from in-depth studies of individual firms and outline suggestions for future research

How Much to Copy? Determinants of Effective Imitation Breadth

It is a common and frequently implicit assumption in the literature on knowledge transfer and organizational learning that imitating practices from high-performing firms has a positive impact on the imitating firm. Although a large body of research has identified obstacles to successful imitation, not much is known about what breadth of imitation is most effective. In this paper, we use a simulation model to explore how context and firm similarity, interdependence among practices, context and firm similarity, and time horizon interact in nontrivial ways to determine the payoffs that arise from different breadths of imitation. The results of the model allow us to qualify and refine predictions of the extant literature on imitation. In particular, the results shed light on the conditions under which increases in imitation breadth, and hence investments that facilitate the faithful copying of more practices, are valuable. In addition, the results of the model highlight that imitation can serve two different functions—mimicking high performers, and generating search by dislodging a firm from its current set of practices—each requiring different organizational routines for its successful implementation

Organizing to Strategize in the Face of Interactions: Preventing Premature Lock-In

Motivated by real examples that run contrary to conventional wisdom, we examine how firms organize themselves to strategize well. Interactions among decisions make strategizing difficult. They raise the spectre that a firm\u27s strategizing efforts will get stuck in a web of conflicting constraints prematurely, before managers explore a wide enough range of possibilities. A key role of organizing is to free strategizing efforts and encourage broad search. At the same time, organizing must ensure that strategizing efforts are stabilized once the firm discovers an effective set of choices. The need to balance search and stability, we argue, is a central challenge of organizing. We explore this challenge with an agent-based simulation of firms that organize to strategize in the face of interactions. The results shed light on our counterintuitive examples. They show why and when firms may benefit from unnecessary overlap between departments; how and when firms can increase firm-wide search by reining in the search efforts of individual managers; and how and when a change in organizational structure — e.g., a shift from decentralization to integration — may reflect an effective sequence of organizing, rather than a reversal of early mistakes. The disparate examples share an underlying logic. The unnecessary overlap, the reining-in of managers, the period of decentralization — all can be seen as organizational mechanisms that help ensure the broad, early search that a firm needs when interactions among strategic decisions raise the danger of locking-in on a strategy prematurely