Business Research in Action - Spring 2012

Business Research in Action Mays Business School, Texas A&M University

Spring 2012

Scholarship and knowledge creation — fundamental to education  Industry expertise of audit firms helps companies  The “balancing act” of multilateral R&D alliances  A distribution solution of blockbuster proportions  Automation in medical records could save lives 

mays.tamu.edu

Scholarship and knowledge creation — fundamental to education

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ichael Hitt makes doing the

right things look easy, and when he is mentoring others, he makes them feel as

if the right decisions were theirs all along — even if he quietly helped nudge them in that direction.

In other words, he is a gifted teacher.

He is also a prolific researcher at Texas A&M University’s Mays Business School with a knack for putting his research into action.

He has coauthored or co-edited 26 books and authored or coauthored many journal articles, and the attention to his research on strategic management attracts top scholars in other fields.

Academic excellence A forthcoming article in the Academy of Management Perspectives recognizes Hitt’s scholarly influence on audiences outside his field — indeed, outside of academia — based on the number of citations and Google entries. And a recent article listed Hitt as one of the 10 most-cited authors in management over a 25-year period. The Times Higher Education in 2010 listed him among the top scholars in economics, finance and management and he is first among management scholars (tied) with the largest number of highly cited articles.

Hitt’s professional accolades are many: He is a University Distinguished Professor in management at Texas A&M University’s Mays Business School and holds the Joe B. Foster Chair in Business Leadership. He received his Ph.D. from the University of Colorado and an honorary doctorate from the Universidad Carlos III de Madrid.

He has served on the editorial review boards of multiple journals and is a former editor of the Academy of Management Journal and a former coeditor of the Strategic Entrepreneurship Journal.

Teaching, research entwined Hitt says the relationship between research and teaching is complicated and that the two can’t be easily separated.

“The detractors don’t realize how research changes what we teach in the classroom. For example, in my field, the textbooks in the 1980s did not have

much text, they were composed of almost all case studies. Now the content of those books is almost all based on research that is translated for practice.”

Without research, instruction becomes static, Hitt explains. “Outstanding teachers always want to learn more about what is emerging. For me, what is exciting is what will benefit the undergraduates and the graduates. It’s not just my specific research, it’s reading what other people are learning. I don’t have to invent or discover everything, but I do think it’s my responsibility to be aware of all that I can.”

Hitt says the laboratory for his research is the workplace. “I study organizations — what the executives and employees do — and I study entrepreneurs.” He collected data from 640 entrepreneurs across four countries, a task that took two years.

“That information has implications far beyond what I am even going to be able to do with it.”

Jerry Strawser, Hitt’s dean at Mays Business School, calls him “truly a one-ofa-kind scholar. … The numerous awards and accolades he has received reflect the fact that his research findings direct the work of other scholars and the course of future study in the academic profession.

In addition, he studies relevant issues that affect the business world and impact economic development. In short, his research affects both the academic and business worlds and is used both in the classroom and in the boardroom.”

Kai Xu, who has completed her second year in the doctoral program under Hitt’s guidance, calls him “a very established but incredibly nice professor.”

She says: “He always helps his students in a very insightful but also respectful way.

Sometimes, you cannot even feel the help until someday you suddenly realize how helpful he is and how valuable his advice is in your research projects.”

Joanna Campbell, who recently defended her dissertation successfully and remains at Texas A&M, says Hitt is very passionate about research, and that his work has had an enormous impact on the field of strategic management. She calls him one of the most prolific management researchers as well as a great role model for young scholars.

“He has made major contributions to multiple research areas, including mergers and acquisitions, corporate governance, and human capital. Yet, he is one of the most humble people I know. He also knows how to translate his research and make it accessible for people outside of academia, including executives.”

Campbell says Hitt’s patience is valuable when working with doctoral students. She adds, “while he always offers his input, he lets us make our own decisions, even if he disagrees with them. In the end, he is always right, but I think he would rather let us learn from our mistakes than force someone into doing something they are not comfortable with.”

Awards and Accolades: • Former editor of the Academy of Management Journal and a former co-editor of the Strategic Entrepreneurship Journal • Fellow in the Academy of Management and in the Strategic Management Society • Former president of the Academy of Management and of the Strategic Management Society • Member of the Academy of Management Journals’ Hall of Fame • Best article published in the Academy of Management Executive (1999), Academy of Management Journal (2000) and Journal of Management (2006) • Award for Outstanding Academic Contributions to Competitiveness (1996) and the Award for Outstanding Intellectual Contributions to Competitiveness Research (1999) from the American Society for Competitiveness.

• Irwin Outstanding Educator Award and Distinguished Service Award from the Academy of Management (2001) • Best Paper Prize by the Strategic Management Society (2004) • Falcone Distinguished Entrepreneurship Scholar Award from Syracuse University (2006)

Industry expertise of audit firms helps companies

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rior research finds that there is substantial variation in firms’ ability to avoid income taxes. One possible determinant of this tax avoidance variation is the influence of industry expertise of a firm’s external auditor.

In other words, the tax-specific expertise of the external auditing company a firm hires potentially makes a big difference in companies’ level of tax avoidance, and ultimately, net income.

Mays Business School faculty members and researchers Sean McGuire (an assistant professor in accounting), Thomas Omer (Ernst & Young Professor of Accounting) and Dechun Wang (assistant professor in accounting) set out to investigate the relationship between firms’ level of tax avoidance and the proficiencies of the external auditing companies those firms were hiring.

“We started this project because we were interested in the influence of the external audit firm on their clients’ tax avoidance activities,” says McGuire. “Many corporations hire their external audit firm to provide tax services in addition to their audit services. Accordingly, our goal was to investigate whether the tax expertise of audit firms that provide tax services to their client influences their clients’ level of tax avoidance.”

McGuire defines tax avoidance as “any strategy that reduces a firm’s tax liability, used by companies to generate cash savings and increase after tax earnings by reducing their tax expense.”

“Consistent with other academic research,” he explains, “we view tax avoidance as a continuum that ranges from clearly legal strategies, like investments in municipal bonds, to those of questionable legality, like tax shelters.”

The research relied on previous audit studies that define expertise in terms of industry and audit office fees. Two types of industry expertise were identified to measure the level of expertise in firms: overall expertise and tax expertise.

Both overall and tax expertise are designed to capture an audit firm’s tax expertise within a particular industry and city office.

However, overall expertise includes audit expertise, rather than solely the firm’s level of tax proficiency.

To gather the information, McGuire says the researchers estimated companies’ tax-specific industry expertise based on an audit firm’s market share in a given industry and city. “We calculated market share using publicly available data from Audit Analytics,” McGuire shares.

The results of the research found that firms who hire industry experts exhibit higher levels of tax avoidance relative to firms that do not hire industry experts.

McGuire expounds upon the research results, saying, “I think the most interesting finding is that the clients of audit firms that

“Our goal was to investigate wether the tax expertise of audit firms that provide tax services to their client influences their clients’ level of tax avoidance.” have overall expertise, i.e. combined audit and tax expertise, exhibit high levels of tax avoidance. This finding suggests that the combined tax and financial reporting expertise of audit firms allows them to develop tax strategies that benefit their clients from both a tax and financial statement perspective.”

The research results provide a number of significant contributions to tax avoidance literature. Not only do the findings contribute to the stream of research investigating the variation in firms’ tax avoidance activities, but they also provide evidence on the association between the industry expertise of the firm’s external auditor and the firm’s tax activities.

According to McGuire, prior research documents substantial variation in firms’ level of tax avoidance. “Given that there are obvious benefits to avoiding income taxes (higher net income), it is important to understand why some firms are more successful than others in avoiding income taxes,” he says. “It is also interesting to examine whether the industry expertise developed by audit firms (in terms of tax-specific expertise and auditing expertise) influences the tax avoidance of their clients.”

“Tax Avoidance: Does Tax-Specific Industry Expertise Make a Difference?”

by Sean McGuire, Thomas C. Omer and Dechun Wang, is forthcoming in The Accounting Review. In the accounting department at Mays, Omer is a professor, Wang is an associate professor and McGuire is an assistant professor.

The “balancing act” of multilateral R&D alliances

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hink about basic economics — WHEN YOU specialize in one skill and your neighbor specializes in another, you’re both better off when you collaborate and trade amongst each other, rather than relying on your own advantages.

Firms are increasingly recognizing this principle holds true when it comes to research and development (R&D) information sharing among firms.

Businesses form research and development alliances when developing new products. An R&D alliance is a formal relationship between two or more firms to pursue mutually beneficial goals. The firms remain independent entities, but enter into an agreement to combine their knowledge bases in order to expand and refine innovations. “It’s simple,” says Lorraine Eden, a management professor at Mays Business School. “Two brains are better than one.”

Many industries are involved in R&D alliances, including pharmaceutical, automotive, electronics and chemical companies.

When the costs and risks of developing new products are both high, these firms are more likely to enter into an R&D alliance, says Michael Hitt, a University Distinguished Professor in management and Joe B. Foster ‘56 Chair in Business Leadership.

Dan Li ‘05, now teaching at Indiana University, worked at Texas A&M with Eden, Hitt and R. Duane Ireland, Distinguished Professor in management, Conn Chair in New Ventures Leadership and AMJ Editor, on a recent study to examine which type of government structure is most effective for these alliances.

They focused their research on multilateral alliances (three or more firms) and compared them with bilateral alliances (a joint venture between two firms).

“Very few have studied multilateral alliances,” Hitt said in describing the research’s uniqueness. Eden adds: “People have been researching bilateral alliances for the past 20-30 years, but there’s not been much written on multilateral ones.”

Hitt describes information sharing between firms as “a real balancing act.” Individual firms must manage the information they share and the information they protect. “In a joint venture,” says Hitt, “if everyone invests money, there’s an incentive to share information and be fair.” They wanted to learn if this remained true when the number of partners increases.

According to Eden, much of the intended knowledge sharing within the alliances involves “tacit information” — information that must be thoroughly explained and demonstrated by one firm to another. She argues that selecting the type of governance (equity-based or contractual) structure can be critical to the success of the R&D alliance since equity ownership, where one

firm owns a piece of the other firms, can help facilitate planned knowledge sharing among them.

At the same time, however, sharing knowledge often leads to “unintended information leakages,” which causes problems among the R&D alliance partners. “There’s a real hesitancy,” Hitt says.

“When you’re in an alliance, you have to trust your partners, who are potential competitors, to be fair.”

Their study examined 2,500 alliances — 1,700 bilateral and 750 multilateral. The researchers also compared governance structures in two types of trilateral R&D alliances: chain and net. The study found that 18 percent of trilateral alliances use a chain-based approach, which involves a passing of information from one firm to another, and 82 percent of alliances use net-based approaches, or group sharing.

As the complexity of the alliance increases, the probability of cheating also increases. For example, the alliance between pharmaceutical companies becomes more complex if the companies are from different countries, mainly because intellectual property rights vary internationally.

The research found that equity governance structures, rather than contractual structures, combat the uncertainty informationsharing firms face as complexity escalates in multilateral alliances.

Equity ownership can help compensate for complexity and freerider problems, while also helping to facilitate intended knowledge transfers. The greater the emphasis on equity share, the smoother the facilitation and transfer of information, the research notes.

The authors found that, for both knowledge sharing and knowledge protection reasons, firms were more likely to use an equity governance structure in multilateral than in bilateral R&D alliances. Similarly, net trilateral alliances were more likely than chain ones to use equity governance structures.

Eden suggested that the study offers a confirmation for firms interested in governance mechanisms. “Companies will be able to look at the findings and determine what type of governance is best for their alliance.”

“Governance in Multilateral R&D Alliances” by Dan Li, Lorraine Eden, Michael Hitt, Duane Ireland and R.P. Garrett is in press at Organization Science. Eden, Hitt and Ireland are professors of management at Mays. Li is at Indiana University. Garrett is a Ph.D. student at Indiana University.

A distribution solution of blockbuster proportions

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ompanies THAT produce items such as biochemicals, ready concrete, milk, eggs and even DVDs always arrive at an important question: What is the quickest, most effective way to distribute these short shelf life products?

Neil Geismar, an associate professor in the department of information and operations management at Mays Business School, along with fellow researchers Milind Dawande and Chelliah Sriskandarajah from the University of Texas at Dallas, explored the solutions to these companies’ issues with distribution of perishable products.

The zero-inventory production and distribution problem (ZIPDP) is a common problem encountered in situations in which a product cannot be inventoried because of its short shelf life. Short shelf life is determined by either physical characteristics (such as perishable food items or chemicals) or by the limited duration of market interest (such as magazines, DVDs and electronic games).

ZIPDP answers some Geismar’s research was initiated of the following at the request of the vice president questions: of operations at Blockbuster, Inc.’s, • When and how much distribution center in McKinney, Texas. should be produced “He asked us for help to make his system at the plant? run more efficiently,” Geismar explains.

• Should the production The facility supports 5,600 retail stores rate be increased? via 40 regional hubs, or “pool points.”

• How many delivery “Quick delivery of DVDs to the retail outlets is important because DVDs trucks should have an extremely short product be hired? life cycle, which can be attributed • When should the to the ephemeral nature of most trucks leave the plant? entertainment products, to the release of new titles on DVD every week, and to the release date requirements imposed by the movie studios,” Geismar says.

ZIPDP’s challenge is to coordinate the production and transportation operations so that the total cost of operations is minimized while the product lifetime and the delivery capacity constraints are satisfied. Geismar puts it this way: “The product’s limited lifetime implies that no inventory can be held between production and delivery; hence, the two functions are tightly coupled.”

The researchers examined a popular method of distribution, the pool-point delivery model, which is also known as the “hub-and-spoke” delivery model. In pool-point distribution, the product or service is delivered to dispersed clusters of demand points by first delivering large quantities to pool points (hubs), which are centrally located in their respective

clusters. The large quantities of products are then dispersed into small carriers for point-to-point connections (spokes).

This system is used by a wide variety of industries: airlines (large jets fly between hubs, small ones from hubs to other cities), freight distribution, light petroleum products, candy distribution, automobile distribution, and newspaper delivery. Each of these industries requires two steps of distribution—first to the “hubs,” then to the “spokes.”

Combining pool-point distribution and zero-inventory products is no simple feat. Geismar’s research discusses a few real-world examples of this type of distribution, including the production and distribution of ready concrete for the construction of venues for the 2004 Athens Summer Olympics. This example served as a case study for the researchers to investigate when considering the production and distribution of Blockbuster DVDs. Geismar says the research primarily focused on two objectives relevant in the practice: Minimizing the sum of production and delivery time, and minimizing the total cost for producing and delivering products. The research also examined minimizing mean flow time, minimizing maximum lateness, and minimizing the number of late deliveries in the pool point distribution system.

The research details how these systems operate and provide “efficient algorithms to find optimal schedules for various objectives,” the research states.

The researchers’ paper was the first rigorous study of pool-point distribution in a zero-inventory system. Geismar notes that managers’ supply chain decisions are based on production times, delivery times, the cost to hire each truck, and the cost to increase the production rate, so the results of the study proved effective and beneficial to companies facing distribution issues similar to Blockbuster.

Geismar’s research sums it up this way: “By analyzing overall system cost, we provided managerial insights into how different costs for trucks and for production rates affect the optimum decisions on how many trucks to hire and on which production rate to use for various objectives.”

“Pool Point Distribution of Zero-Inventory Products” by Neil Geismer, Milinde Dawande and Chelliah Srikandarajah was published in 2011 in Production and Operations Management. Geismar is an associate professor in information and operations management at Mays. His colleagues are from the University of Texas at Dallas.

Automation in medical records could save lives

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edical errors account for 98,000 deaths each year in the U.S., according to a 1999 report published by the Institute of Medicine (IOM). In a more recent report, the IOM claims medical errors harm 1.5 million people and cost $3.5 billion every year.

Interestingly, the report claims that medical errors are not due to incompetent people, but to bad systems that include the processes and methods used to carry out various functions.

These staggering numbers and facts have caught the attention of many researchers, including Ram Janakiraman, assistant professor of marketing at Mays Business School, Shelley and Joe Tortorice ’70 Faculty Research Fellow and Mays Teaching Fellow.

Janakiraman says he has always been interested in several aspects of healthcare. “As a marketing researcher, the context of doctor and patient relationships greatly interests me,” he says.

This interest led him and a group of other researchers from around the nation to explore and analyze the impact of system automation on medical errors.

Janakiraman explains that medical errors are most commonly traced back to the manual transmission of information across different functional units of the hospital, manual calculations of doses and unmonitored clinical interventions. The big question surrounding the research, he says, was, “Can automation really reduce the rate of errors in various hospital wards?”

Janakiraman’s co-researchers on the article in “Information Systems Research” were Ravi Aron, an assistant professor at the Johns Hopkins Carey Business School; Shantanu Dutta, vice dean for graduate programs and professor of marketing at USC Marshall School of Business; and Praveen Pathak, American economics institutions professor at University of Florida’s Warrington College of Business Administration.

The researchers hypothesized that the “Automation of information capture and transmission between agents and across the different functional units of the hospital can reduce the rate of medical errors, because they enable the automation of the checks and procedures, thereby removing the ‘human touch.’”

The researchers recognized the sensing, control and monitoring functions as having potential for automation. One example that could be automated is logging the time an item is removed from storage. Rather than recording in a logbook, a technician could swipe a digital card to record the time.

Janakiraman says this research is important for a number of reasons: No study has empirically analyzed the relationship between automation and medical errors using actual hospital

data and no study has looked at the differential impact of automating these three functions on the incidence of two types of medical errors (procedural and interpretative errors) in hospitals.

Also, no other study has examined the effect of quality Recommended procedures: training programs and their 1. Sensing function Observe and complementary effect on record actions of agents automation of error prevention 2. Control function Recommend functions using actual data. context-specific procedural “Collecting this data was a controls humongous feat,” Janakiraman 3. Monitoring function Do says. The researchers used periodic review of agent panel data of incremental compliance with norms automation over time of the error prevention functions and actual rates of medical errors at several wards of two large, topnotch hospitals.

With this data, Janakiraman describes the two categories of medical errors the researchers found: procedural errors (deviations from norms irrespective of what the context and circumstances are) and interpretative errors (deviations from norms that are classified as errors based on the underlying circumstances and the context).

Results from the study confirmed Janakiraman’s hypothesis: automation of the three core error prevention functions (sensing, control and monitoring) helps reduce both kinds of medical errors (procedural and interpretative).

In addition, the researchers found evidence of a significant complimentarity between automation of certain functions and the training of clinical and nonclinical workers in quality management.

“The research demonstrates that there are hidden benefits to the automation of manual functions that are often not captured in a cost benefit analysis,” he says.

Janakiraman plans to continue with his research on healthcare — this time focusing on hospitals’ decision to adopt various technologies, rather than just the impact of technology.

“The Impact of Automation of Systems on Medical Errors: Evidence from Field Research” by Ramkumar Janakiraman, Ravi Aron, Shantanu Dutta and Praveen Pathak was published in 2011 in Information Systems Research. Janakirman is an assistant professor of marketing at Mays. Aron is from Johns Hopkins Carey Business School, Dutta from USC Marshall School of Business and Pathak is from the University of Florida’s Warrington College of Business Administration.

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Business Research in Action illustrates the research conducted by Mays Business School faculty and its application to current and emerging business issues.

Editor: Kelli Levey Writer: Kristin MacKenzie Designer: Linda Orsi