Tuck graduates know how relevant their MBA is to their careers—rare is the day that they do not see some way in which it applies directly to their working lives. For those outside of academia, however, faculty research can sometimes seem like a show pony—beautiful to look at, but of little practical use in the field. But as the work of these five Tuck faculty members demonstrates, statistical significance and regression analysis can have as much impact on the world of business as quarterly reports and profit margins—and sometimes more.
Few things are as reliably constant as the marketing of toothpaste and laundry detergent—and that’s just how the packaged-goods industry likes it. “The packaged-goods industry is a very stable and mature industry,” says Kusum Ailawadi, Charles Jordan 1911, TU’12 Professor of Marketing. “Not much happens to shake things up in a big way.” Problem is, when nothing changes, it can be hard to figure what works and what doesn’t. That’s why Ailawadi and her Tuck colleague, Scott Neslin, Albert Wesley Frey Professor of Marketing, along with Professor Don Lehmann of Columbia University, were excited to learn in the early 1990s that Procter & Gamble intended to shift its marketing policy from frequent price promotions to an everyday low-value price and heavier advertising spending to support its brands. It was a move that flew in the face of current trends. “In the decade before that, promotions had steadily grown their share of firms’ total marketing budgets at the expense of media advertising,” says Ailawadi. “And the business press was full of how bad this was for brand manufacturers.” P&G’s reasoning was that frequent promotions were eroding consumer loyalty to its brands. In place of “high-low” promotions, it proposed a “value-pricing” strategy that would keep its prices consistent at reasonable levels, and it aimed to foster brand loyalty by increasing advertising beyond its already high levels. Ailawadi and Neslin were not convinced. The evidence to date had shown that advertising has a positive but small effect on brand loyalty, whereas the jury was still out on the extent to which promotions hurt loyalty. Here was an unprecedented opportunity to get to the bottom of it: Not only did Ailawadi and her colleagues have in P&G a market leader whose changes in advertising and promotion would not go unnoticed by competitors, retailers, or consumers, but the changes would be dramatic enough for them to reliably quantify the impact of the tools in P&G’s marketing mix.
By the time Ailawadi, Lehmann, and Neslin’s paper came out in 2001, P&G saw the writing on the wall and abandoned its strategy, without ever publicly labeling it a failure. Of course, it’s impossible to say what effect the research had in that decision. “We know folks from P&G were exposed to the paper,” says Ailawadi. “Certainly their subsequent actions were consistent with what our paper advises, but it would be overreaching to claim that they did so because of our paper.” P&G claimed the strategy was meant to reduce costs and had nothing to do with market share, which Ailawadi finds suspect. Even so, she gives them a lot of credit for trying something different. They changed the conversation from “promotions are a cost of doing business” to “let’s evaluate the ROI of promotions and learn how to use them more efficiently,” Ailawadi adds. “They are an innovative company, and I admire them for this. Not all companies would have the courage to experiment with something like this and, more importantly, not all companies would learn from their experiment and correct course fast.” More broadly, after the paper was published, it spurred a body of research that showed the power of promotions and countered the bad rap that promotions typically get in the business press. The researchers gave presentations at the invitation of companies like Colgate-Palmolive and in executive programs to detail their findings. And for Ailawadi at least, it highlighted the importance of conducting research on events in the real world; she has recently researched the effect that Walmart has on competing stores when it moves into a community. And she is currently studying how families change their food-purchase behavior when there is a major change in the health or economic status of the household. “This paper really highlighted for me how valuable it is to study natural experiments as they unfold in the field,” she says. “It’s a great opportunity to study how competitors, consumers, and other stakeholders respond.”
Given the diversity of culture among all of the countries of the world, one might assume that their regulatory styles are equally diverse. However, economists have found that countries fit ostensibly into just a few boxes when it comes to their regulatory styles, says Noble Foundation Professor of Finance Rafael La Porta. “You look at the bankruptcy law of Mexico, then that of Peru and Argentina, and it becomes quite clear that the honor code does not apply to legislators when it comes to writing laws; these laws are very often word-by-word copies from a common source,” he says. In fact, the vast majority of countries fit into one of two traditions: English common law and French or German civil law, depending on which country colonized or conquered them. (Even China falls into the latter category with its financial laws; exceptions include the Scandinavian countries and isolated communist countries such as Cuba and North Korea). “What this work showed was there were two basic regulatory styles, one that is associated with common-law countries that seeks to support unconditioned private contracting and another associated with civil law that supports socially-conditioned private contracting; one approach embraces market outcomes, the other distrusts market forces and seeks to direct them toward achieving social goals.”
Shortly after their paper was published in 2008, the World Bank adopted many of their measures in assessing the business environment in countries around the world in their annual “Doing Business” report. The institution catalogued 216 reforms across the world between June 2009 and May 2010 that have made it easier to open new businesses, fire workers, or file for bankruptcy. “Naturally, we don’t want to take credit for the fact that reforms took place since some of them might have taken place anyway,” says La Porta. “The point is that by turning institutions into measurable objects, one can keep track of their evolution over time and study the impact of different interventions.” By analyzing those measures, La Porta’s research has allowed countries for the first time to systematically choose reforms that will have the greatest potential in reforming their markets. “Multinational lenders can say to a country, for example, ‘we would like you to work on reducing the amount of time that it takes to adjudicate a commercial dispute.’ That seems better than saying, ‘we’d like you to improve property rights since policymakers don’t really know what levers to pull to improve property rights.’” At the same time, if a country has good reasons for its laws, it can justify them to investors. “The country can say, ‘we take 500 days to adjudicate a simple commercial case because we do it very well,’ or ‘it takes two years to open a restaurant in our country because we screen applications very well. To the extent that those statements are testable, we have made a little progress.” Over time, the approach has given countries a common language with which to speak about economic institutions—no matter what language they might speak at home.
Bookshelves are lined with biographies of companies and executives who made it big, implying that if you do what they do, you will make it too. “When you look at the business section at Barnes & Noble or Amazon, what you discover is a really tremendous collection of books by former CEOs talking about how great they are,” laughs Sydney Finkelstein, Steven Roth Professor of Management. “Then you see a group of books from consultants who make broad generalizations based on their clients. The third thing you see is books about success and ‘if you follow these five principles you will be successful.’” One day, while browsing through those titles, it struck Finkelstein that something was missing. “What happened to all of the companies that did the same things those writers did but ended up falling apart?” After all, he thought, there’s the old saw that we learn more from our failures than we do from our successes. What lessons might we learn from those who made mistakes in the business world? With that, the idea for Finkelstein’s 2003 book, Why Smart Executives Fail and What You Can Learn From Their Mistakes, was born.
Within weeks of the book’s publication, Finkelstein had garnered positive reviews in The Wall Street Journal, the Financial Times, and The Times (London), which he attributes to the originality of the work. “No one had done this kind of study before,” Finkelstein recalls. “It appealed to people on a very intuitive level and was a real eye-opener to a lot of CEOs and senior executives.” While he’s received letters from everyone from Bill Gates to Donald Rumsfeld (who joked he had nothing to learn from it), one of his favorites is from a woman on a church volunteer committee, who said that everything he had written applied perfectly to her organization. Another highlight was a recent Washington Post column in which the writer commented that in the midst of a report analyzing the failure of Fannie Mae, he felt he’d read it before—yup, it was in Finkelstein’s book. Since the initial waves of publicity, Finkelstein has consulted for Fortune 500 companies and taught Tuck Executive Education classes to hundreds of business leaders, implementing some of the corrective practices he prescribes in his book, like enshrining a “mistake of the quarter” in company culture. Ultimately, he sees the influence of his research as a natural extension of teaching at Tuck. “Like all my colleagues, I’m in the business of creation and dissemination of knowledge,” says Finkelstein, who teaches the core Analysis for General Managers course and the Top Management Teams elective in the MBA program. “Tuck often talks about ‘thought leadership,’ and that is really a label you can put both on this creation of original knowledge and its dissemination to people around the world. The most important thing for me is to see how it can have an impact on people. There’s nothing better than that.”