Darden Ideas to Action Winter 2016

FACULTY RESEARCH FROM THE UNIVERSITY OF VIRGINIA DARDEN SCHOOL OF BUSINESS

BROAD STROKES

Bias in the Workplace with Melissa C. Thomas-Hunt

WINTER 2016

INSIDE Benchmarking Competitive Performance

Becoming Ambicultural: Managing Business and Beyond

Bank Diversification and the Housing Bubble

Will Smart Machines Disrupt MBA Education?

Helping Salespeople Soar: Moving the Needle

ADVANCE KNOWLEDGE, IMPROVE THE WORLD

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t the University of Virginia Darden School of Business, we are in earnest about the School’s mission: Improve the world by developing and inspiring responsible leaders and by advancing

knowledge. Darden Ideas to Action serves that mission by highlighting practical research from Darden faculty; the School’s community of scholars focus on meaningful, applicable insights useful to leaders facing real-world business challenges.

In this issue, Ming-Jer Chen examines how global leaders can embrace the mindsets of multiple cultures for better business, and Tom Steenburgh offers insight on how they can incentivize a team of diverse personalities to drive sales. Jared D. Harris dissects how companies benchmark performance and what actually affects decision-making, while Melissa C. Thomas-Hunt discusses what organizations can do to mitigate the unintuitive way people respond to the prevalence of stereotyping.

Elena Loutskina warns of a surprising factor that contributes to bubble formation, and Edward D. Hess advises the workforce on how to prepare for the disruption the Smart Machine Age will bring to business and education.

We hope responsible leaders will be inspired by this knowledge. For more actionable ideas — research, analysis and commentary — from the Darden School of Business, please visit this publication’s companion website, ideas.darden.virginia.edu.

www.ideas.darden.virginia.edu

TABLE OF CONTENTS 4 BENCHMARKING COMPETITIVE PERFORMANCE with Jared D. Harris

8 BECOMING AMBICULTURAL: MANAGING BUSINESS AND BEYOND with Ming-Jer Chen

10 STEREOTYPES with Melissa C. Thomas-Hunt

14 BANK DIVERSIFICATION LIKELY LED TO HOUSING BUBBLE with Elena Loutskina

18 WILL SMART MACHINES DISRUPT MBA EDUCATION? with Edward D. Hess

22 HELPING SALESPEOPLE SOAR: MOVING THE NEEDLE with Tom Steenburgh

4 DARDEN IDEAS TO ACTION

STRATEGY

with Jared D. Harris

BENCHMARKING COMPETITIVE PERFORMANCE

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Today’s world is awash in data, which has the potential to dramatically impact the way we make decisions.

Consider, for example, the world of competitive sports; whereas a generation ago the simple winloss record may have been the primary focus, the rise of detailed metrics and statistics has revolutionized the way we evaluate the competitive performance of athletes and teams. Performance data has changed the game, so to speak. When it comes to evaluating competitive athletic performance, we have a better understanding of what to pay attention to.

What about business? How do managers and organizations benchmark competitive performance in the business world? What competitive metrics influence the decision-making of corporate leaders?

Darden Professor Jared D. Harris’ research took a close look at the underpinnings of that question to determine what kinds of performance feedback managers pay attention to and how they pay attention to it.

“Based on some classic work in behavioral theory, we already have a broad sense of how organizations respond to signals about competitive performance. But the findings of this study add some nuance and give us a subtler understanding of how organizations respond to performance feedback,” he says.

The findings, in a paper written with Philip Bromiley of the Paul Merage School of Business at the University of California, Irvine, were published in a recent issue of Strategic Management Journal.

The study takes as its jumping-off point the idea that managers have traditionally benchmarked their company’s performance with respect to two different reference points: self-referential performance — checking how this year compared to last year — and a comparison to competitor performance.

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The three dominant models often employed to describe how managers evaluate performance have many similarities, but it’s the details that differ. One model argues that managers first pay attention to industry benchmarks, and only switch attention to their own firm’s past performance once they are performing above the industry average.

Another model — the one most closely associated with traditional theory — suggests that managers constantly “average out” industry and self-referent benchmarks into one aggregate performance target. A third model suggests that self-referent and socially-referent benchmarks are always relevant to managers, but have independent influence.

Harris wanted to see which of these models most accurately described what managers actually do. “All three models typically predict the various outcomes in a statistically meaningful way,” Harris says. “But we wanted to know which model most accurately represented the way managers pay attention to performance feedback. So we ran a horserace between these three well-known models of organizational benchmarking. How do organizations really evaluate their own performance? That was the question.”

To find the answer, Harris used public data on thousands of firms to run the comparison. This resulted in a comprehensive comparison of different benchmarking models, different performance measures and different corporate outcomes, using a common set of data: the first study of its kind.

Surprisingly, the study found that the “averaging” model was least effective at explaining corporate action, though it’s the model most strongly associated with traditional organizational theory.

And the winner of the horserace? The model in which social and self-referent benchmarks have independent influence. Which, according to

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Harris, makes sense: “Individually speaking, this is, of course, how we tend to live our lives; we have different performance targets for different aspects of our lives, and we are constantly juggling. This study shows that organizations do it, too.”

A second surprise was in store. Though it wasn’t the primary objective of the study, the research also shed some light on a long debated question of which performance metric provides the “best” measure of a firm’s performance. In the academic field of business strategy, more and more focus has been placed on sophisticated, unbiased performance measures. Would these complicated metrics prove more influential? Surprisingly, the study found otherwise.

Harris found that “raw, unscaled income was the most influential performance measure in the way these managers evaluate their performance.

It isn’t the most accurate measure of a firm’s true performance, of course, but the study shows that managers don’t pay as much attention to that more sophisticated stuff. They look at the net income and say, let’s up our game. From a research standpoint, it’s surprising the managers favored net in-

come, because it’s the worst, noisiest performance measure.” But it’s the metric that was most influential from a behavioral standpoint. The choice, in part, may be encouraged by external pressure from stock analysts and the press.

“The study was about better understanding how managers and organizations respond to and interpret performance feedback, and what we found is that managers think about different benchmarks independent of each other. In addition, the analysis demonstrated that managers tend to focus on simpler, blunter measures of performance when benchmarking,” Harris says. “That’s just what people in organizations do.”

“Managers are capable of striving for multiple criteria,” Harris continues. “The findings open the door to thinking more carefully about how organizations actually set targets and evaluate their performance, specifically with respect to multiple decision criteria. Better theoretical models of organizational decision-making can lead to better organizational decision-making.” In other words, how we keep score can influence which play we might call next.

Jared D. Harris, Samuel L. Slover Associate Professor of Business Administration, is co-author with Philip Bromiley of “A Comparison of Alternative Measures of Organizational Aspirations” in Strategic Management Journal (Volume 35, Issue 3, 2014).

HOW DO ORGANIZATIONS REALLY EVALUATE THEIR OWN PERFORMANCE? THAT WAS THE QUESTION.

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GLOBAL LEADERSHIP

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Becoming Ambicultural: Managing Business and Beyond with Ming-Jer Chen

The world today is intricately interconnected — and also more divided than ever. We need organizations willing to adopt and spread new ideas, perspectives and practices, and executives who grasp global complexity by thinking in integrative ways.

In my presidential address to the Academy of Management in 2013, I suggested that an “ambicultural mindset” can be applied to business management — or to any of life’s endeavors. The essence of the ambicultural idea is this: Every incidence or observation that challenges assumptions or runs counter to intuition or long-held beliefs holds the seeds for new understanding and dramatic learning.

One company that has sustained organizational ambiculturalism for more than a century is an American industrial firm that combines competitive and collaborative practices and balances interests among diverse stakeholders. Likewise, we can identify business leaders from both East and West who manifest ambicultural qualities.

Such organizations and executives bridge divisions and assimilate what appear to be opposites.

How do they apply the ambicultural approach in the management process?

Qualities of ambicultural corporations and professionals include: • Openness to new and profoundly different paradigms, practices and ways of thinking • Understanding that organizations and individuals alike must be able to balance diverse — even conflicting — social, geopolitical, environmental and human needs to transcend divisions • Commitment to continual learning and to sharing knowledge and experience with others in the interest of sustainable success and mutual improvement • Recognition that the Western and Eastern business models, individually, cannot meet the challenges of globalization Further, ambicultural individuals possess skills that allow them to work in any institution, industry or region. They seek a balanced career and life, and aspire to reach the pinnacles of not only their profession, but humanity.

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The ambicultural idea may be best understood in the context of Eastern thought tradition: the concepts of zhong, or “middle way” (a balanced, holistic philosophy that allows for the reconciliation of paradox in work and life), duality and relativity (no entity exists except in relation to another), and yin-yang (the complementarity of opposites).

Ambiculturalism is informed by various conceptions of culture in different contexts. Following Confucian tradition, I embrace a conception of “culture” as encompassing all human affairs.

Cultures may be defined by geography (East and West), business (manufacturing and high-tech) and corporate function (finance and marketing), to name only a few.

In my teaching, the “gold standard” of an ambicultural organization is a firm that might seem to be an unlikely candidate: Lincoln Electric, a U.S.based welding equipment manufacturer founded in the 1890s in Ohio. Throughout its history, Lincoln has balanced tradition and entrepreneurship, and individual interests and social welfare, through such practices as: • A piece-rate incentive system to promote individual competition, applied within the context of lifetime employment • Advancements from within, profit-sharing with employees and higher-than-average pay • Shared interests among key stakeholders, from suppliers and customers to partners Interpretations of the Lincoln story reflect

called his experience as a member of an international peacekeeping task force in Croatia in the 1990s: There is no greater example of ambiculturalism than when deployed as part of the armed forces in support of a United Nations mission. One thing that became quickly clear was that in order to be able to do my job and gain the trust of my comrades, I was going to have to fully understand their culture, which included their assumptions of me as a representative of the U.S. military. Were it not for the credibility and relationships I had built working with the representatives of the partner nations, I would not have been able to be successful in fulfilling our mission to the United Nations. I have taken this experience with me all these years.

A former MBA student, now working as a partner in an IBM-Toshiba venture, wrote in an email: I returned from Tokyo yesterday, where I spent part of my time working internally and part of my time escorting a large U.S. client. In each setting, my job was to help both parties see and leverage the best from the other. My position as a mix of outsider and insider, while risky, also presents opportunity, and I am trying to embrace that as much as possible.

Ming-Jer Chen, Leslie E. Grayson Professor of Business Administration, is author of “Becoming Ambicultural: A Personal Quest, and Aspiration for Organizations,” published in Academy of Management Review (Volume 39, Issue 2, 2014); “Reconceptualizing the CompetitionCooperation Relationship: A Transparadox Perspective,” published in Journal of Management Inquiry (Volume 17, Issue 4, 2008); and “Transcending Paradox: The Chinese ‘Middle Way’ Perspective,” published in Asia Pacific Journal of Management (Volume 19, Issue 2, 2002).

The world is poised for learning between any parties that may appear to be in opposition — for example, the U.S. and China, the world’s preeminent global economic powers. The ambicultural perspective combines the best of Western and East-

THE WORLD IS POISED FOR LEARNING BETWEEN ANY PARTIES THAT MAY APPEAR TO BE IN OPPOSITION — FOR EXAMPLE, THE U.S. AND CHINA, THE WORLD’S PREEMINENT GLOBAL ECONOMIC POWERS. different cultural perspectives. From U.S. executives I’ve heard comments like “Lincoln Electric is the best form of capitalism” and “The company symbolizes Japanese management.” Teaching in China, I have been told by managers of state-owned enterprises (SOEs), “This is the best example of a socialist enterprise” and “Lincoln represents the ideal of an SOE today.”

MBA and executive students provide anecdotes of their application of the ambicultural idea. One re-

ern, and competitive and cooperative, paradigms.

An ambicultural mindset applied to business, or to any enterprise, embraces the possibility for long-term relationships among multiple parties, from managers and policymakers to industries and customers, from organizations to societies and nations. Transcending differences, combining the best of different cultures — the process of “becoming ambicultural” — offers a path toward balance and sustained progress in all our pursuits.

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ORGANIZATIONAL BEHAVIOR

Darden Professor Melissa C. Thomas-Hunt examines how people naturally react to the prevalence of stereotyping — and how organizations can help reduce it.

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All human beings are biased today, in part, because it increased the chances of survival in our evolutionary past.

Paying more attention to a negative experience rather than a positive one, for example, allowed our predecessors to better survive in a dangerous world.

“Having a bias comes from exercising a heuristic, a shortcut we take that allows us to distill information to make judgements that, on average, are correct,” says Darden Professor Melissa C. Thomas-Hunt. “It’s when a heuristic becomes laden with incorrect societal assumptions that stereotyping comes in.”

Many of us have been told that stereotyping is bad and leads us to believe, for example, that men are more competent leaders than women. That kind of thinking leads to disparities in the workplace against women, such as lower pay, unfair performance evaluations and lack of promotions.

Thomas-Hunt and Michelle M. Duguid, a professor at Olin Business School at Washington University in St. Louis, wanted to determine if educating people about bias would indeed lessen it. The surprise findings offered a resounding no.

In fact, the opposite is true.

In their experiments, they told some people that stereotyping was rare and told others it was common. Afterward, they asked for the participant’s opinion of women. Those told stereotyping was common rated women as less career-oriented and more family-oriented. In another experiment, in which managers were told that many people stereotype, the results were similar. The managers were less willing to work with women.

Thomas-Hunt, the founding academic director of the Behavioral Research at Darden Lab and an expert in teams and negotiations, says “stereotyping is prevalent and occurs across all domains.”

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Their findings focused on biases against the elderly, the overweight and women, suggesting a robustness across “stereotyped characteristics that are immutable (gender and the effects of aging), inevitable (aging) or changeable (weight). The results were reported in the 13 October 2014 issue of the Journal of Applied Psychology.

“If we tell people everybody is biased, they allow themselves to stay biased. As individuals, we tend to do what other people are doing,” says Thomas-Hunt. “We’re not motivated to work against our bias. So if everyone stereotypes, I allow myself to stereotype also. At minimum, there’s no motivation to change.”

Thomas-Hunt says people “need to be made aware that many other people are working against their biases. Then we actually reduce our stereotyping behavior.”

And people don’t want to stereotype. “Most people don’t intentionally stereotype,” says Thomas-Hunt. “The bias is operating outside our awareness. But we need to be motivated to counter it and bring it to our awareness.” Otherwise, we may be making poor decisions that keep us from identifying and leveraging the best talent. “If we know there are lots of people actively working against their bias, we’re now creating a new norm,” she says.

The difficulty is that managers, executives and working people “already have a lot on their plates.”

It takes a lot of energy to counter our natural inclination to stereotype, she says.

So how can businesses tackle a seemingly intractable problem such as stereotyping? Thomas-Hunt says leaders have to structure processes correctly to weed out bias.

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“Organizations need to put into place certain standardized processes that give managers less discretion in how we evaluate people,” she says. “It takes full-time concentration to fight bias on our own. That’s unrealistic.”

Take hiring, for example. If the interview questions are designed to specifically assess skills and are uniformly asked of all job candidates, then bias will be minimized, she says. A more difficult situation to tackle would be that of assessing employees, which is often done through informal “micro assessments of individuals” based on numerous daily encounters.

In that situation, where bias can easily sneak in, Thomas-Hunt suggests that managers be required to assess in a much more structured way by writing down notes on performance every so often. “They’re called thin slices,” she says. “If you take thin slices — make assessments over time in writing — it leads to a better, more fair assessment of an employee’s performance.”

“It’s important to understand the nuances of our biases,” she says. “Having structures in place are absolutely critical. Then, as individuals, we don’t have to monitor ourselves 24 hours a day.”

But Thomas-Hunt says fixing biases may be easier if we educate people at an earlier point in their lives — as preschoolers or even infants. In one study, white infants could detect those unfamiliar faces that looked different from them. “They’re not thinking bad or good person,” she says. “But then they become infused with societal values over time. There is an adaptive component to this that is no longer necessary.”

Preliminary studies also show, for example, if a mother works outside the home, the son or daughter of that mother develops a more positive view of women in the workplace.

She is also gathering data from various military branches on whether there is an experience at a “critical juncture that mitigates bias.” In the Army in particular, which is highly integrated, even at the officer level, would this greater exposure to different races mean less bias in evaluating a candidate for promotion later in life?”

Eradicating or reducing bias would strengthen businesses and the bottom line, says Thomas-Hunt. “For organizations to succeed, they need to fully leverage the talent they have.”

THE BIAS IS OPERATING OUTSIDE OUR AWARENESS. BUT WE NEED TO BE MOTIVATED TO COUNTER IT AND BRING IT TO OUR AWARENESS.”

Melissa C. Thomas-Hunt, associate professor of business administration, is co-author with Michelle M. Duguid of “Condoning Stereotyping? How Awareness of Stereotyping Prevalence Impacts Expression of Stereotypes,” published in Journal of Applied Psychology (Volume 100, Issue 2, 2015).

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BANK DIVERSIFICATION LIKELY LED TO HOUSING BUBBLE

FINANCE

Darden Professor Elena Loutskina is an expert in how financial innovation and advancements in technology changed the way banks lend to consumers and businesses alike.

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In a set of academic papers, Elena Loutskina has been evaluating the role mortgage securitization played in the 2007 crisis and unearthed one of the possible causes for the housing bubble.

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In her landmark paper “Informed and Uninformed Investment in Housing: The Downside of Diversification,” written with Professor Philip E. Strahan of Boston College, she demonstrates that one likely contributor of the housing bubble may have been financial integration — the linking of financial markets over regional or even global economies.

“Financial integration is rarely fingered as a bad guy. The ability to invest in a wide set of financial markets makes investors and banks happy. It broadens the set of investment opportunities and allows better businesses to obtain funding. But in 2006, the mortgage capital was chasing deals across the U.S. in a hurry. We had too much of a good thing,” says Loutskina.

Using her expertise in securitization — the practice of pooling debt such as residential and commercial mortgages and selling their cash flows to investors as securities — she noted in her paper how “banking deregulation and loan securitization led to a dramatic increase in geographic diversification as banks expanded their operations across markets.”

The push for diversification came about through banks, naturally, chasing profits. “Under the old banking system, those mortgages sat on your balance sheet,” she says. “You have capital requirements. You have to have money to fund the mortgages for the next 30 years. You also care about the quality of those loans. But now you originate the mortgage and turn around and sell it to Fannie Mae or Freddie Mac and retain the origination fee.”

As the securitization markets gained steam, so did the banks’ pursuit of new, fee-based sources of profits. “In response to this business model, what is your first move as a banker? You get as many mortgages as you can. You aggressively expand to new markets and new borrowers,” she says.

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In her paper, Loutskina compares two lending methods: traditional and diversified. In the traditional lending model, banks tend to operate in one or a few local markets and hire loan officers who collect “private information” about the borrowers during the origination process.

“Private information is something you can’t measure in numbers. For example, if you have had an account at a bank for a long time, a loan officer can judge you as a devoted, responsible customer,” she says. This private information is more personal and contributes to better lending decisions.

Under the diversified lending model, the loan approval decisions are formed very differently since banks grew by the use of online lending and local brokers. Building branches was expensive and, since it required regulatory approval, time consuming. “Can banks trust the information self-reported by the borrowers online? Can they fully trust mortgage brokers who get paid only if the loan is originated and carry no financial responsibility if this loan subsequently defaults?” she says.

As the banks expanded their lending across the continent, they came to primarily rely on the value of the property, with borrower credit score and mostly self-reported borrower income coming in second place. Banks actively participating in mortgage securitization had no desire to spend money on local loan officers who could collect private information. “They automated the process to oblivion,” Loutskina notes.

The automation and limited data used in the origination decision led to what Loutskina calls uninformed lending. “Think about a couple who want to buy a house in an area where everyone knows a big employer is going to go out of business and send real estate prices down. Someone who originates a mortgage from California or Massachusetts doesn’t have a clue.”

From 1992 to 2006, the market share of local

mortgage lenders (those operating in one locality like Boston) dropped from about 18 percent to 4 percent. The new, geographically diversified business model dominated the market pre-crisis.

“Now stop for a second and think what a combination of abundant cheap money with no barriers to travel and technology-based lending did to the mortgage market,” Loutskina says. “Areas with higher housing price appreciation saw more willing investors and thus more happy borrowers, which resulted in even higher housing prices.

Lenders were just following the crowd, which fed the bubble further — similar to the stock market bubble of 2000.”

In the paper, Loutskina and her co-author show that areas dominated by geographically diversified banks — like Phoenix or Las Vegas, where 90 percent of the banks were highly diversified and had no appetite or ability to digest private information — had a much higher housing price appreciation over the decade prior to the 2007 crash.

“The results imply that geographic diversification led to a decline in screening by lenders, which likely played a role in the 2007–08 crisis — which is a complicated way to say that lenders got hooked on simply relying on housing prices and refused to do proper screening of loan applicants,” she says.

The financial integration combined with abundant cheap money contributes to the bubble formation. Such bubbles grow until the underpinning lack of realistic value forces them to pop.

Everybody tries to jump off the bandwagon at the same time, leading to a broad market collapse.

“Technology in the financial sector is a great thing that pushes the efficiency of the financial sector and the frontiers of financial services forward,” she says. “But sometimes technology is so seductive that it incites people to act irrationally.

I hope that the market can correct itself. We have started to see a revival of the local lending business model in last few years.”

Elena Loutskina, associate professor of business administration, is co-author with Philip E. Strahan of “Informed and Uninformed Investment in Housing: The Downside of Diversification,” published in The Review of Financial Studies (Volume 24, Issue 5, 2011).

...LENDERS GOT HOOKED ON SIMPLY RELYING ON HOUSING PRICES AND REFUSED TO DO PROPER SCREENING OF LOAN APPLICANTS.” WINTER 2016

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INNOVATION AND GROWTH

with Edward D. Hess www.ideas.darden.virginia.edu

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It is no secret that technology has transformed the creation and operating of businesses and that coming technological advances in the areas of smart robots and artificial intelligence (“smart machines”), the “Internet of Things,” big data and 3D additive manufacturing could accelerate that transformation.

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Darden Professor Edward D. Hess believes that “we are on the cusp of a Smart Machine Age that could transform how most businesses are staffed, operated and managed.” Hess believes that most businesses of the future will be staffed by some combination of people and smart machines, with people doing those things that technology cannot do well.

Leading researchers at MIT, the University of Oxford and IBM concur that in the near future, humans will only be needed to do jobs that require higher-order critical, creative and innovative thinking, the making of moral judgments or high emotional engagement with other humans. If they are correct, then business of the future will require people who are very good critical and innovative thinkers and who have high emotional and social intelligence. That also means that in many businesses the human component could be reduced, with big displacements occurring in many service businesses (retail, logistics, hospitality, construction, commercial services and distribution) and even in some professional fields (accounting, legal, journalism, finance, management, architecture and medicine). For example, researchers at the

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University of Oxford have predicted that up to 47 percent of the U.S. workforce has a high probability of being displaced by technology in the next 10–20 years. If this magnitude of displacement happens, how many MBAs will be needed to manage the businesses of the future?

For Hess, that raises some fundamental questions: “Do existing MBA programs produce individuals who excel at critical and innovative thinking and who have highly developed emotional and social intelligence? What type of professional training — business, engineering, law, the hard sciences, architecture, liberal arts or education — best produces individuals with those needed capabilities? What type of pedagogies — the case method, small team project-based learning, scientific experimentation, personalized developmental coaching or personalized experiential learning — best develops those capabilities?”

A big challenge for MBA schools (or any school for that matter) is that those needed capabilities do not come naturally to humans. “All of us are basically suboptimal thinkers because cognitively we are lazy, reflexive thinkers, and emotionally we are basically defensive thinkers,” says Hess. “As Nobel Laureate Daniel Kahneman stated: ‘Laziness is built deep into our nature.’ We are confirmation machines processing only information that confirms our existing mental models, and we tend not to process disconfirming information. We are limited by our cognitive blindness, dissonance and biases. As the late Professor Jack Mezirow stated: ‘We have a strong tendency to reject ideas that fail to meet our preconceptions.’ Emotionally, we engage in what the late Harvard Professor Chris Argyris called ‘defensive reasoning,’ because our natural reflexive emotional inclination is to deny, defend and deflect information that challenges our self-image or ego. That means that MBA schools (or other professional development programs) need to produce future leaders who have learned how to overcome those human cognitive and emotional proclivities so they can excel at critical and innovative thinking and high emotional and social intelligence.”

Hess wonders: “Will other professional schools enter into direct competition with MBA programs because they have competencies in developing those capabilities? Will engineering or arts and science colleges add minors in business? Will STEM-based programs add business concepts delivered online by star MBA professors or by online programs like Harvard Business School's initiative

‘HBX’? Could this mean that the business of the future will be led by a professional team trained in different disciplines, reducing the value of a traditional MBA? Will a two-year residential MBA program be transformed into a one-year residency with an additional year of personal developmental experiential field work, with each student having a developmental coach trained in adult learning and cognitive and emotional development? Or will more schools move to a one-year MBA?” Hess states: “Technology will continue to advance and technology will continue to transform businesses. Will that require MBA education to transform? Will MBA programs produce the best critical and innovative thinkers who have high emotional and social intelligence?” Hess, author of the best-selling book Learn or Die: Using Science to Build a Leading-Edge Learning Organization (Columbia University Press, 2014), believes business schools can learn from leading businesses like

Edward D. Hess, Professor of Business Administration and Executive-in-Residence at Darden’s Batten Institute for Entrepreneurship and Innovation, authored the book Learn or Die: Using Science to Build a LeadingEdge Learning Organization (Columbia University Press, 2014).

“ALL OF US ARE BASICALLY SUBOPTIMAL THINKERS BECAUSE COGNITIVELY WE ARE LAZY, REFLEXIVE THINKERS, AND EMOTIONALLY WE ARE BASICALLY DEFENSIVE THINKERS.” Google, Pixar Animation Studios, Amazon, W.L. Gore & Associates, IDEO, and Bridgewater Associates LP and the special elite fighting forces of the United States military. All of those organizations are engaged in employee developmental activities intended to develop “independent thinkers” or “smart creatives” or highly “adaptive learning leaders.” Worthy of note is that almost all those organizations are led by non-MBAs. It will be interesting to see how MBA educators respond to the Smart Machine Age.

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SALES MANAGEMENT

Helping Salespeople Soar:

MOVING THE NEEDLE with Tom Steenburgh

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www.ideas.darden.virginia.edu

How do you motivate your sales team? What strategies are best for helping your top, middle and bottom performers scramble to a higher plateau?

Research into these practical questions has been less than you might expect. “When I came into my doctoral program, I was surprised to see the lack of research in the sales area,” says Darden Professor Tom Steenburgh, an expert in business-to-business marketing and sales. “My interest is in the type of sales research that makes a difference with practicing managers.”

Steenburgh’s interest stems from his business background. Before entering academia, Steenburgh worked at Xerox developing sales incentives

to help make salespeople more productive. His team created incentive plans for Xerox’s 4,000 salespeople in the U.S. That experience led him to his current research analyzing the effectiveness of sales and marketing strategies.

Steenburgh says a typical sales force has a “clear majority of ‘core’ performers, a small but elite group of stars, and a group whose performance trails,” also known as laggards. “One of the telltale signs of a star is that they have a plan on how to achieve their numbers,” he says. “They set high

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goals for themselves and develop a roadmap for making them.”

“Laggards miss more quotas than they make,” he says. “But they’re not all terrible salespeople.

Some are and you have to manage them out of the business. Most simply don’t have a plan. You have to help them develop one. Laggards oftentimes don’t even know why they’re failing.”

The core fall somewhere between the stars and the laggards. Steenburgh says they get the least attention though “they’re the group most likely to move the needle — if they’re given the proper incentive.”

The overall key to helping sales teams soar is understanding the differences in how salespeople behave. “You need to design an incentive plan with the needs of each group in mind in order to boost performances at all points on the curve,” says Steenburgh, the faculty chair for the Strategic Sales Management program in Executive Education.

Elaborating on this point in a recent Harvard Business Review article, Steenburgh notes that “it’s different abilities and internal drives” that make salespeople stars, core performers or laggards.

Each group requires “different levels and kinds of attention. A growing body of research suggests that (they) are motivated by different facets of comp plans. Wise sales leaders use different tools for each group.”

His research shows that those tools include: • Implementing multi-tier targets and using prizes over cash in sales performance contests to motive the core group • Using quarterly bonuses instead of yearly ones to nudge laggards • Hiring new talent, which puts pressure on laggards in what is called the “man on the bench’’ effect — a current study shows salespeople in districts with a bench player perform about 5 percent better than those without one • Implementing overachievement commission, in which higher rates kick in after quotas are met by star salespeople • Increasing the number of prizes in a contest, which increases the chances a laggard or a core salesperson will win a prize instead of a star — motivating the star to work harder • Not capping commissions “Most of the capping is driven by financial executives whose role is to control spending. It makes sense they want to do it. The downside of that, though, is that your salespeople work up to the cap and stop. Your choice. Do you want that star out in the field that last quarter or not? Does it make sense to keep your star performers on the sideline?

I would argue it doesn’t.”

Keeping good salespeople is also paramount, especially given the investment in their training.

“They know the customers and the product,” says Steenburgh. “And if they leave, they take the relationship with the customer with them.”

“So fairness matters. People get unduly angry if they’re treated unfairly. When we’re asking people to do a job, we have to make sure it’s within their capabilities and that we’ve given them the training to do the job right. One study looked at why salespeople leave, and it was because of lack of respect from managers. You would think it would be money, but it’s not.”

YOU NEED TO DESIGN AN INCENTIVE PLAN WITH THE NEEDS OF EACH GROUP IN MIND IN ORDER TO BOOST PERFORMANCES AT ALL POINTS ON THE CURVE. “The best incentive plan will be targeted, understandable and fair,” he adds. “Good salespeople are hard to find.”

Steenburgh also offers a simple suggestion that improves all types of incentive plans: Simplify.

“Many business leaders make their incentive plans too complicated. They try to solve every problem and they end up solving none,” says Steenburgh.

“You need to pick one or two things to motivate.

Keep it targeted to keep everyone working hard.”

Steenburgh co-founded the Thought Leadership on the Sales Profession Conference, which provides a unique opportunity for leading academics and senior business leaders to discuss current issues in sales.

“It goes back to my passion for getting academics and practicing managers together. We get 90 senior sales leaders and 90 leading academics together to present research and discuss ideas about sales force management,” says Steenburgh. “We try to get people to interact, with academics — giving TEDtype talks — explaining their research to business people. We then have the senior executives comment on the work. The executives can learn how to improve their businesses, and academics can think about new questions and lines of research.”

The third annual conference will be held in the future at Stanford University. Visit http://salesthoughtleadership.org/ for more information.

Thomas J. Steenburgh, Paul M. Hammaker Professor of Business Administration, is co-author with Doug J. Chung and K. Sudhir of “Motivating Diverse Salespeople Through a Common Incentive Plan,” published in The European Financial Review (October – November 2013), and “Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of BonusBased Compensation Plans,” published in Marketing Science (Volume 33, Issue 2, 2014).

WINTER 2016

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