M&SOM Review

Executive committees are a key decision-making mechanism in the vast majority of organizations. They are typically comprised of senior managers, who hold responsibility for the approval or termination of the company’s strategic initiatives. In that light, they play a critical role in any company’s strategy execution. A key strategic dimension often examined in such committees is the innovation output of the company that determines its future competitiveness as captured by its R&D/innovation pipeline of projects. Committees often called ‘innovation councils’, ‘R&D project committees’, or ‘Early Stage Product Committee’ undertake such responsibility to select the right projects that should receive funding support to continue towards completion. By design, participants in such committees span different functions and product lines of the organization.

Committees have acquired such an important and central role in a company’s strategic decision making for a few reasons: first, they ensure senior management’s accountability for major decisions through their membership of high-level executives. Second, as they engage more than one member (decision-maker) they allow for coalescing diverse perspectives, and they ensure that all relevant information is accounted for; in a set of interviews we conducted, senior executives have repeatedly reported that membership diversity is essential as it ensures that critical assumptions are scrutinized from different angles and each executive bring her/his own expertise in the meeting.  Therefore, the argument goes, they drive better decisions. Finally, third, they also benefit from the ‘wisdom of the crowds’ in the sense that they “average out” the irrelevant (noisy) knowledge of the individual decision makers, and they facilitate convergence to the true knowledge.

Given the executive power held by these committees, researchers have long studied how the rules of engagement by their members, that is the followed decision protocols, affect their eventual capacity to approve the right projects. These insights have made their leeway into practice. For example, in a recent interview an executive from Amazon noted that one of the key rules for fostering innovation at Amazon is to require just one “yes” vote from a senior executive in those committee meetings to get a project initiated, rather than requiring a consensus vote which would filter out a lot more innovative ideas.1

Yet, in all these discussions on the effect of different decision protocols (e.g. single vote, majority and/or unanimity), the diverse membership has been blindly assumed as a necessary condition for committees to succeed. While diverse functional, or business, expertise enables a more comprehensive evaluation, it might also fuel specific biases within the committee. For example, executives from different units might abide to different strategic priorities, introduce their own biases and objectives, and therefore compromise the decision-making process. This underexplored tension has motivated the following research question: is a committee comprised of more or less cognitively diverse members better at approving the “good” projects and rejecting the “bad” ones? 

The question was addressed in a recent research article by Oraiopoulos and Kavadias published in Manufacturing & Service Operations Management. Based on earlier fieldwork conducted within the context of the pharmaceutical industry, the researchers observed that cognitive diversity was not always of the same nature. In particular, they have distinguished between two fundamentally different sources of cognitive diversity: diverse perspectives that stem from different preferences and beliefs about the value of the project (e.g., what is the market potential of the project?), and those that stem from the different interpretations that members might place on the new information (e.g., how much validity do I place on the initial testing results on patients?). 

Moreover, the researchers have explicitly recognized the apparent decision interdependencies in committee contexts, through a game-theoretic formulation of the decisions, which formally accounts for the strategic interactions among the committee members. In other words, they have considered that each member accounts for the choices of her peers when deciding to support the continuation or termination of a project, rather than naively assuming that her decision alone determines the outcome. While the latter might be a reasonable assumption in the context of crowd-sourcing platforms, it is less realistic in small executive committees. For such decision cases, Oraiopoulos and Kavadias evaluated the performance of those committees by examining the two fundamentals errors of decision-making: the probability of selecting a project that eventually fails, and the probability of terminating one that would have been successful. 

The article yields several managerial implications. First, it shows that the source of the cognitive diversity indeed matters! There is no unanimous effect of higher cognitive diversity on decision performance. Therefore, to mitigate any negative effects of diverse perspectives, managers need to first assess the sources of diversity: does diversity originate from different individual valuations and preferences, or does it express different perceptions about the progress information that is generated during the project execution? The distinction is crucial. Higher preference diversity always leads to higher likelihood of making the wrong decision. Yet, higher interpretive diversity can reduce decision errors. 

Second, the analysis also shows that the decision underperformance of committees with preference diversity can be particularly detrimental in environments characterised by more reliable information. This is precisely when preference diversity prevents members from realizing the substantial informational benefits and leads to a steeper drop in the performance of a committee’s selection process. The result uncovers an important insight for the proper use of committees as decision making mechanisms in organizations. Engaging committees to decide on projects with low uncertainty (and therefore clear information as to whether they can be successful or not) might be causing more challenges than expected. Alternative mechanisms might be more useful in such circumstances, e.g. delegate decisions to decision maker with closest relevance. Unless, preference diversity can be drastically reduced through explicit preference alignment efforts, e.g. encouraging more transparent project assessment methods that reveal the assumptions behind the different valuations. More specifically, higher transparency of the product pipeline across different functional and business units would enable building a common perspective of the “true” opportunity cost of a project rather than having each business unit endogenize its own level of the cost. Along similar lines, organizational exercises on effective cascading strategy across the different business units could also contribute towards more alignment.

Finally, the research reveals that interpretive diversity can be used as a powerful lever to counterbalance the cost of making the wrong decision. Specifically, in settings where projects face low opportunity cost (e.g., relatively understuffed pipeline with resources available for new opportunities for alternative opportunities), higher interpretive diversity fosters a decision-making culture of more approvals and therefore it induces higher likelihood to pursue innovation. Equally, interpretive diversity benefits decision settings characterized by high opportunity cost, e.g. very strong pipeline of projects where new opportunities severely compete for resources. In these cases, diversity prompts stringent project selection decisions. 

In summary, Oraiopoulos and Kavadias highlight that diverse perspectives in executive committees rarely “average out”. Instead, they might induce systematic biases towards certain types of errors. There are a number of actions that managers can take to reduce the undesirable effects while enhancing the upside of a diverse committee. Hopefully these insights will spark further interest both from a practice and research angles to shed light upon this important management challenge. 

1  https://kellercenter.princeton.edu/stories/ten-rules-innovating-amazon-talk-doug-herrington-88

The cronut fad started in May of 2013. Soon after Dominique Ansel’s small bakery in SoHo began turning out its hybrid croissant-donuts, the lines to purchase them grew interminably long, sometimes reaching to one hundred sugar-starved sybarites. In August of this year, a similar situation occurred at Popeye’s in Gainesville, Fla., where a line stretched around the corner of the building by 10 a.m., full of people hungry for the restaurant’s famous chicken sandwich.

View Full Post »

With the growing concern for the environment, manufacturing facilities across the world have come under increased regulatory scrutiny. For instance, in the United States, the Environmental Protection Agency (EPA) monitors compliance for 44 programs authorized by statutes, such as the Clean Water Act, Clean Air Act, Toxic Substances Control Act, and so forth. These programs often use facility inspections to confirm compliance with environmental regulation. To illustrate, the EPA conducted over 187,000 facility inspections, from 2009 to 2014, just toward ensuring compliance with the Clean Water Act.

View Full Post »

Governments of developing countries have long been using local content requirements (LCRs) to regulate foreign firms operating within their boundaries. LCRs are provisions, usually under a law or regulation, requiring foreign firms to meet a minimum threshold of goods or services that must be purchased locally.

View Full Post »

Assembly supply chains are ubiquitous in manufacturing. Firms such as Toyota, Apple, and Boeing procure various components from different suppliers to assemble automobiles, smartphones, and airplanes. Such large original equipment manufacturers (OEMs) typically possess dominant market power and can extract most profits out of suppliers.

View Full Post »

Cities around the world are experiencing two socioeconomic transformations: First, the boom of the so-called sharing economy engage people to be more collaborative in sharing access to goods and services and less obsessed with ownership. PWC projects that the market size of the sharing economy will reach $335 billion by 2025. One of the most profoundly impacted sectors is transportation.

View Full Post »

In 2015, it was estimated that the Indian information technology (IT)-enabled services industry generated revenue of $146 billion, up from $105 million in 1989. A compound annual growth rate of over 30% for greater than 25 years is a remarkable industrial success story.

View Full Post »

Many firms provide ancillary services in addition to a main service to enhance the experience of consumers. Consumers need to purchase the main service in order to consume the ancillary service. For example, when taking a flight, consumers may need to transport bags or have a meal during the flight; when staying at a hotel, consumers may have breakfast or need internet connection. Ancillary revenue has become an important source of revenue generation in several industries.

View Full Post »

The multinomial logit (MNL) model, along with other discrete choice models, has been widely used in economics, marketing, behavioral science, transportation, and other fields by researchers and practitioners for roughly half century since the pioneer work by Robert Duncan Luce and Daniel McFadden; see Luce (1959) and McFadden (1974). Under the MNL model, each individual chooses the alternative with the highest outcome utility, which is consistent with the random utility maximization. Daniel Kahneman and Amos Tversky created and developed the prospect theory four decades ago as a psychologically more accurate description of decision making than the utility theory; see the seminar paper by Kahneman and Tversky (1979) in behavioral economics.

View Full Post »