Articles

The role of procurement within global companies has changed dramatically over the past 25 years from that of simply buying goods and services to overseeing an integrated set of management functions. This brings new challenges and opportunities to procurement. Offshoring and the increased emphasis on specialization and fragmentation of production enhance the strategic character of procurement decisions. Increasingly, procurement decisions have become intertwined with strategic management in general. In this article, the authors discuss the changes in procurement from the perspective of transaction cost economics. They separate transaction costs into “soft” and “hard” costs and differentiate between the internal and external factors that affect these costs. In making procurement decisions, the authors argue, managers need to consider the full range of cost elements. In addition to traditional transaction costs such as transport costs and tariffs, managers need to recognize such elements as cultural and legal differences, government regulation, social preferences, environmental issues, political stability and risks involved in unethical business behavior. The authors argue that knowing the risks and opportunities of the different exposures is a critical management competence. Although management decisions originate in many different parts of the company, procurement managers need to keep a close eye on the various cost exposures and flag concerns as they arise. Procurement, therefore, will need to become more closely connected with strategic decisions throughout the company. This broader view represents a major extension of the concept of total cost of ownership in procurement decisions. Global sourcing creates many new opportunities for value creation, which well-run companies must learn to take advantage of.

Receiving information more frequently isn’t always helpful.

Companies with better environmental risk management have a lower cost of capital.

Airline companies may be the businesses everyone fantasizes the most about trying to fix. And just now, the fixing would require more work than usual. A new round of mergers, a new climb in costs and a new wave of customer dissatisfaction all pose fresh challenges. Add to that an industry work force whose wages have plummeted by $15 billion since 2001 and whose morale is at a low ebb plus an air traffic infrastructure that experts as well as customers realize is overstressed, and the overall industry repair problem can seem impossible. Thomas A. Kochan, along with Greg J. Bamber, Jody Hoffer Gittell and Andrew von Nordenflycht, takes up the task in the forthcoming book Up in the Air: How the Airlines Can Improve Performance by Engaging Their Employees (Cornell University Press, January 2009). In this interview with MIT SMR editor Michael S. Hopkins, Kochan, who is a professor of management at MIT and a leading analyst of workplace relations, identifies the need for totally altering employee/employer relationships as the critical opportunity and threat faced by the airline industry. Kochan explores the airline industry models that have worked (and are working) along with those that haven’t. And he suggests that the airline industry isn’t alone in encountering fundamental choices about how collaborative their workplaces will become. One of the keys, Kochan explains, is employee engagement and empowerment of service employees on the front lines.

There are 12 million reasons why Marten Mickos isn’t afraid that his rivals in the database software industry will ever overtake him. “Let them try,” he says brazenly of his competitors. “Our secret is in the way we operate our culture, and I’m convinced others cannot imitate that.” MySQL AB, the business Mickos has built since 2001, has committed itself to “open-source” innovation since its founding, giving 12 million coders & #8212; who typically receive no compensation & #8212; permission to debug, add features or otherwise modify the product before redistributing it. Mickos, now a senior vice president at Sun Microsystems Inc. after it acquired MySQL AB for $1 billion, talks with Josh Hyatt, freely sharing his ideas about why this Internet-age version of a barn raising produces superior innovation and the strengths and limitations of in-house innovation. He also discusses how open-source innovation isn’t for every company and how many organizations fail to engage the community and thus are forced to fold their open-source innovation projects. Mickos discusses engaging software developers who are so devoted to a process they seldom get paid for, and how these contributors are even willing to spend their own money to be a part of the process. Finally, he talks about whether dangers exist in open-source innovation, including potential damage to the code from malicious entities, competitors stealing code or ideas, and whether people will perceive this style of innovation as just a passing fad.

New technology tools are offering insights into the power of ancient forms of human communication that Pentland calls honest signals. In this excerpt from his new book Honest Signals: How They Shape Our World (MIT Press, October 2008), Pentland describes how he and other researchers have been using a device called a sociometer to gain a new perspective on human behavior. (The sociometer is a wearable badgelike device equipped with sensors; it measures factors such as body movement and the amount of time people spend talking face-to-face.) Studies using data from sociometers show that certain types of subtle social signals affect outcomes significantly in a variety of settings, from business plan presentations to salary negotiations. Pentland focuses on four types of honest signals: influence, mimicry, activity and consistency. Influence, in this context, refers to the degree to which one person’s speech patterns in a conversation influence the other party’s. Mimicry is the extent to which one person copies another’s gestures and movements & #8212; such as head nodding or smiles & #8212; during an interaction. The activity variable reflects humans’ tendency to show increased activity levels when interested, and consistency in speech or movement may be a sign of focus, as well as of less openness to others’ influence. Such social signals are surprisingly powerful. For example, Pentland describes a study conducted by researchers Jeremy Bailenson and Nick Yee at Stanford University, in which students were shown a three-minute video encouraging them to carry their student identification card. Some students were shown a standard animated video, whereas others saw a video in which the animated figure mimicked their gestures four seconds later. Simply adding the mimicry feature caused the sales pitch for the ID card to be 20% more effective. Understanding the power of these nonverbal forms of communication can enable us to better design organizations, Pentland concludes. However, it is an open question whether we will use the new insights this type of research provides for good or for ill. Article 50118. The MIT SMR article was excerpted and adapted from Honest Signals: How They Shape Our World by Alex (Sandy) Pentland, published October 2008 by The MIT Press. Copyright in the name of The Massachusetts Institute of Technology. All rights reserved.

Creative insights require time "Ò and a pace at odds with today’s accelerated economy.

Past research is clear on the benefits of high-performing, or “star,” workers. Star computer programmers, for example, are more productive than average ones by a ratio of eight to one. But reaping the benefits of such talent is not so simple. Say you hire a number of stars. How can you guarantee that they will be able to replicate their success in a new environment & #8212; in short, how portable are they? In the past, portability has been viewed as an attribute of a person, team or organization, but it can also be looked at as an attribute of a position. Specifically, certain jobs do require different levels of company-specific human capital, thus making some workers less portable than others. Consequently, organizations should not think of talent management as a simple “build versus buy” dichotomy. Rather, there are some positions for which they can buy, and others for which they must build. Within investment banks, for example, the retail brokers (who handle individual clients) work primarily on their own. In contrast, institutional salespeople (who sell to major institutional investors such as Putnam, Vanguard and Fidelity) are more likely to perform their jobs in teams. Thus, retail brokers are more portable and can easily be hired from the outside. Institutional salespeople, however, should be developed from within, and efforts should be made to retain them. Understanding such differences is crucial for companies attempting to attain sustainable competitive advantages that derive from human capital. The authors’ research, which has probed the application of human capital theory to talent portability, should help companies recognize that an entire class of factors & #8212; specific roles within an organization & #8212; greatly determines the portability of performance. With that knowledge, executives can gain a deeper understanding of the pros and cons of hiring certain star employees.

Innovators are more likely to achieve commercial success if they have strong networks.

Recent research suggests that consumers' state of mind affects their openness to new products affiliated with existing brands.