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S P R I N G 2 0 0 6 : Volume 7, Number 2
Learning from
Heterogenous
Experience
Bingham studied six technology-based entrepreneurial firms with headquarters in
Finland, the U.S. and Singapore as they went through the process of internationalization. The firms represented a variety of technology industries: hardware
devices, medical solutions, enterprise software, and security services. The study
was funded in part by the National Science Foundation.
Bingham examined the heuristics used by each firm. Heuristics are informal
rules of thumb that guide and shape learning—in this case, rules that entrepreneurial organizations used as they expanded globally. Bingham identified several
categories of heuristics used by all of the organizations. While the actual heuristics
were unique to each organization and its situation, all firms in Bingham’s sample
developed similar types of rules.
Research by
Christopher Bingham
Each firm developed a few simple, specific rules for choosing opportunities
(boundary rules) and a few rules for executing them (how-to rules). Boundary and
how-to rules helped organizations as they pursued a global strategy, even though
the rules themselves were often flawed. “A heuristic initiates action; it lets you get
the ball rolling,” says Bingham.
WHEN
Boundary and how-to rules provide important guidelines for young entrepre-
I T C O M E S T O D E V E L O P I N G S T R AT E G I C O R G A N I Z AT I O N A L
P R O C E S S E S , E X P E R I E N C E M AY N O T B E T H E B E S T T E A C H E R .
TH O U G H
neurial firms choosing between available opportunities. “Without filters it is very
easy to engage in opportunistic behavior and jump on the first thing that comes
your way, whether or not that fits with the longer-term mission of your organiza-
M U C H R E S E A R C H I N T H E F I E L D F O C U S E S O N T H E WAY F I R M S L E A R N
tion,” says Bingham. “Entrepreneurs have very limited resources; if you’ve placed
THROUGH EXPERIENCE , RECENT RESEARCH BY
your bet in a wrong area it can be very detrimental to your organization’s future.”
BINGHAM ,
CHRISTOPHER
A S S I S TA N T P R O F E S S O R O F M A N A G E M E N T A N D O R G A N I -
Z AT I O N , S U G G E S T S T H AT T H I S V I E W M AY N O T A D E Q U AT E LY
D E S C R I B E W H AT A N D H O W F I R M S L E A R N F R O M H E T E R O G E N E O U S
E X P E R I E N C E S S U C H A S A C Q U I S I T I O N S , P R O D U C T D E V E L O P M E N T,
PA R T N E R I N G , A N D I N T E R N AT I O N A L I Z AT I O N .
Boundary and how-to rules give executives the confidence to act even in new and
unfamiliar situations.
Organizations also developed rules about timing which Bingham calls “temporal heuristics.” These included rules about synchronization (deciding when to
enter a country according to some external timing); destination (which country or
countries the firms was targeting); sequence (the order of countries that the firm
needed to enter in order to accumulate experience correctly); and pacing (internal
timing). Organizational processes also continued to develop through elaboration,
as managers added and embellished already-existing rules for choosing which
opportunities to pursue.
Rules about timing turned out to be important for successful globalization. “If
you were going to make a soufflé, you would want certain ingredients added
before others. Yet there seems to be an assumption in the academic literature that
continued on page 4
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Increased Customer
Satisfaction Increases
Stock Price
when the market dropped, customer satisfaction seemed to provide a certain
amount of insulation.
If there is such a strong correlation between customer satisfaction and market
equity, and if people intuitively believe this to be so, why don’t more investors
make investment choices based on customer satisfaction information? It is possible that investors believe an improvement in customer satisfaction scores may
actually be detrimental to their interests, as a company could be giving away too
much for the price it is charging its customers.
Equity analysts, then, should look at customer satisfaction scores while conducting their research and ask marketing-related questions during investor meetings and conferences. They should also closely study customer satisfaction trends
Research by
Sunil Mithas
for a company and incorporate that information into their research and recommendation-making process.
Apart from the obvious implications for portfolio managers, these findings have
M OST
significant implications for marketing managers and information officers. In a pre-
B U S I N E S S M A N A G E R S U N D E R S TA N D I N T U I T I V E LY T H AT
viously published paper Mithas and his co-authors showed that customer relation-
S AT I S F I E D C U S T O M E R S A R E T H E K E Y T O A B U S I N E S S ’ L O N G T E R M
SUCCESS.
CHANGES
customers, and that increased knowledge allows the company to provide better
I N A C O M PA N Y ’ S C U S T O M E R S AT I S FA C T I O N
s e rvices. This in turn improves customer satisfaction. The current paper has shown
S H O U L D B E A L E A D I N G I N D I C AT O R O F C H A N G E S I N T H E I R E X P E C T E D
EARNINGS, WHICH ARE THEN REFLECTED IN STOCK PRICES .
SO
ship management (CRM) applications increase a company’s knowledge about its
that increased customer satisfaction is a leading indicator of higher stock prices. So,
IF
T H E S T O C K M A R K E T WA S E F F I C I E N T, N E W S A B O U T A N I M P R O V E M E N T
“These findings are valuable because they demonstrate that
I N A C O M PA N Y’ S C U S T O M E R S AT I S FA C T I O N S C O R E S S H O U L D
intangible capital such as customer satisfaction matters
I N C R E A S E T H E C O M PA N Y ’ S S T O C K P R I C E .
because it impacts stocks prices.”
investments in CRM applications have the potential to positively impact a compa-
That is not the case, according to recent findings by a team of researchers led by
ny’s stock price. This is important information for marketing managers and infor-
Claes Fornell, Donald C. Cook Professor of Business Administration at the
mation officers, who are always under pressure to justify investments in CRM
University of Michigan, that included Sunil Mithas, assistant professor of decision
applications from a return on investment or bottom line perspective.
and information technologies at the Smith School. In their paper, “Customer
“These findings are valuable because they demonstrate that intangible capital
Satisfaction and Stock Prices: High Returns, Low Risk,” the authors show that
such as customer satisfaction matters because it impacts stocks prices,” says Mithas.
markets do not react to news related to customer satisfaction, making it is possible
This research also suggests that IT investments are valuable from a bottom line per-
for investors to generate high returns with low risk by incorporating customer
spective. Mithas has already started preparations for follow-up research. He is espe-
satisfaction scores in their stock trading strategy.
cially interested in testing the cross-selling effectiveness of CRM applications.
The paper describes a hypothetical paper portfolio and an actual stock portfo-
This research offers a practical trading strategy for small retail investors. “When
lio. The trading strategy employed to manage these portfolios was based on cus-
looking at a stock, you should not look at only the publicly-available financial
tomer satisfaction of companies as measured by the American Customer
information. You should also pay close attention to intangible capital such as
Satisfaction Index (ACSI). Trading decisions such as long and short positions were
customer satisfaction, employee satisfaction, and innovation,” says Mithas.
made based on ACSI levels and changes. Long positions were taken in companies
The paper, “Customer Satisfaction and Stock Prices: High Returns, Low Risk,”
with high and increasing ACSI scores. Short positions were taken in companies
by Claes Fornell, Donald C. Cook Professor of Business Administration, Stephen M.
with low and deteriorating ACSI scores. No other type of data or additional infor-
Ross School of Business, University of Michigan; Sunil Mithas, Forrest V. Morgeson
mation was considered in developing these trading strategies.
III, research scientist, University of Michigan; and M. S. Krishnan, professor of
Both the paper portfolio and actual stock portfolio outperformed the Dow
business information technology, University of Michigan, was published in the
Jones Industrial Average and the S&P 500 over a period of 4 to 6 years. Customer
January 2006 Journal of Marketing. For more information, contact
satisfaction pays off in up-markets and down-markets. When the stock market
smithas@rhsmith.umd.edu.
grew, the stock prices of many firms with very satisfied customers grew even more;
KUDOS
Edwin A. Locke, professor emeritus of management and organization, has won the
James McKeen Cattell Fellow Award from the American Psychological Society. He
received the award at APS 18th Annual Convention, May 25-28, 2006. Locke is the
most published organizational psychologist in the history of the field. His pioneering research focused on work motivation and job satisfaction, and he is well-known
for his publications on goal-setting theory. His 1976 chapter on job satisfaction
continues to be one of the most highly-cited pieces of work in the field.
G u p t a, Susan Ta y l o r, professor of management and organization, and Paul Te s l u k,
associate professor of management and
organization, are serving as guest editors for
a special issue of Organization Science focusing on the topic of “Innovation at and across
Multiple Levels of Analysis.”
Violina Rindova, associate professor of management and organization, and J.
Robert Baum, associate professor of management and organization, have been
selected as Dingman Center Research Fellows in Entrepreneurship for the
2006-2007 Academic Year. This research fellowship is meant to encourage and
recognize research in entrepreneurship. Rindova will be a guest editor of a special
research forum for the Academy of Management Review titled: “Dreaming,
Discovering and Creating: The Visions and Costs of Entrepreneuring.”
Soeren Hvidkjaer, assistant professor of
finance, will be a distinguished speaker at the
European Financial Management Association,
Milan, Italy.
Ritu Agarw a l, Dean’s Chair of Information Systems, Anil Gupta, , Ralph J. Tyser
Professor of Strategy and Organization, and Robert Kraut of Carnegie Mellon will
be guest editing a special issue of Information Systems Research on the “Interplay
between Digital and Social Networks.”
Gupta and Ken Smith, professor of management and organization, are serving as
guest editors for a special issue of Academy of Management Journal focusing on the
topic of “Managing Exploration and Exploitation” with Chris Shalley of Georgia Tech.
Wolfgang Jank, assistant professor of management science and statistics, and Galit
Shmueli, assistant professor of management science and statistics, have been
named guest editors for a special issue of the journal Statistical Science on
“Statistical Challenges and Opportunities in Electronic Commerce Research.”
Janet Wagner, associate professor of marketing, delivered a seminar on service
marketing to the CIT, Cornell’s Information Technology Serv i c e .
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Trade-Based Analysis
of Momentum
Small investors appeared to have a delayed reaction to winning stocks. Among
winners, there was a formation-period buying pressure which largely disappeared
on the formation date, and a buying pressure again set in slowly over the following six months. Small individual investors did not appear to immediately purchase stocks with high returns, though buying pressure mounted slowly during
the six months following the formation date.
Sorting momentum stocks into portfolios based on formation-period trading
Research by
Soeren Hvidkjaer
pressures revealed another interesting fact: that in the 20 years of transactions in
“It seems that small investors are short-term contrarian
investors and long-term momentum investors, which is not
T HE
P H E N O M E N O N O F M O M E N T U M — T H AT S T O C K S W H I C H
necessarily an optimal behavior.”
INCREASE IN PRICE ONE YEAR WILL TEND TO CONTINUE TO
I N C R E A S E I N P R I C E O V E R T H E N E X T Y E A R, A N D T H AT S T O C K S W H I C H
DECREASE IN PRICE ONE YEAR WILL CONTINUE TO DECREASE IN
PRICE OVER THE NEXT YEAR —HAS LONG INTRIGUED RESEARCHERS .
WH AT
D R I V E S T H I S A N O M A LY ?
this dataset, Hvidkjaer found that losers with strong small-trade buying pressures
underperform losers with selling pressures over the subsequent year. This means
that either small investors have a direct effect on prices despite their small size or
they tend to buy stocks which are already overvalued, notes Hvidkjaer.
“It seems that small investors are short-term contrarian investors and longterm momentum investors, which is not necessarily an optimal behavior,” says
Hvidkjaer. “It may be that individual investors are confusing average past longterm returns with future expected returns.”
Hvidkjaer’s analysis found a completely different trading behavior by large
traders: a strong large-trade selling pressure appears among losers during the forma-
If momentum is driven by a particular kind of investor behavior, then that
behavior should be detectable in the trading records, reasoned Soeren Hvidkjaer,
assistant professor of finance at the Smith School. Hvidkjaer studied the trading
behavior of small investors to see whether it was consistent with behavioral
explanations of momentum. In his paper, “A Trade-Based Analysis of
Momentum,” Hvidkjaer examines transactions data for all ordinary common
stocks in the New York Stock Exchange and American Stock Exchange between
1983 and 2002. With several billion trades and quotes, it is the largest dataset of
its kind. Hvidkjaer distinguished between the trades of large and small investors
using the volume of individual trades.
“I looked at investor behavior to see if it could be directly linked to prices,”
says Hvidkjaer. “There is limited understanding of how small individual investors
actually trade in response to new information.”
Hvidkjaer found that small investors tended to purchase losing stocks during
the six-month formation period of the momentum portfolio. The buying pressure
became very strong on the formation date, but then a selling pressure gradually
set in, which peaked almost a year later. This suggests that small individual
investors both underreact and have a delayed reaction to news about low returns
on stocks; small investors purchase those stocks when they see the stock price
falling, perhaps perceiving it as a bargain. This buying pressure might prevent the
stock price from declining further. While small investors do eventually sell losers,
tion period, followed by a drop on the formation date and a gradual disappearance
over the following year. Buying pressure for winners seemed symmetric; Hvidkjaer
found little evidence for initial underreaction or delayed reaction. So small
investors appear to trade very differently than larger institutional investors, says
Hvidkjaer, and the evidence of this study points toward the trading behavior of
smaller investors as a source of the momentum effect.
Hvidkjaer feels that it may become much more difficult to analyze the behavior
of small investors in the future, because automated stock trading will make it more
difficult to distinguish between institutional and individual investors. “Institutions
used to trade in large sizes. If they wanted 50,000 shares, they would buy 50,000
shares in one trade, and we could tell from the recorded data that it was a large
trade. Now a computer can trade for you, and it uses sophisticated algorithms to
find where liquidity is best and trades in smaller sizes. An institution will purchase
50,000 shares, but the purchase will be recorded as many smaller trades. So in the
future we’ll have to come up with new measures that will distinguish institutional
trading from the trades of small, individual investors,” says Hvidkjaer.
Hvidkjaer plans to continue to use this dataset in further research examining
how stocks purchased by small traders underperform over the long run.
Hvidkjaer’s paper, “A Trade-Based Analysis of Momentum,” was published in the
Review of Financial Studies, Summer 2006. For more information, please contact
shvidkja@rhsmith.umd.edu.
they react extremely slowly to the negative formation-period information.
Pete Kyle Joins Smith School
One of the foremost financial theorists in the world, Albert “Pete” Kyle, will join the
Smith School as the Charles E. Smith Chair in Finance in July 2006. He is best
known for creating the “Kyle Model,” which provides a foundation for the modern
t h e o ry of market microstructure, a subfield of finance dealing with the process of
price formation in financial markets.
Beyond his seminal contributions to the theory of information and financial
markets, Kyle’s research has had a pervasive impact in areas such as asset pricing,
investments, corporate finance, and financial institutions. Kyle’s impact has also
been extended beyond the stock market, and is reflected in markets for derivatives,
bonds, and global trading mechanisms, with policy implications for exchange
design and market regulation.
Kyle joins the Smith School after serving as professor of finance at the Fuqua
School of Business at Duke University. He received his PhD in economics from the
University of Chicago in 1981. He also held appointments at Princeton University
and the University of California at Berkeley, where he was tenured.
Smith Research On SSRN
Many working papers and abstracts produced by Smith School faculty and graduate
students may now be accessed at Social Science Research Network (SSRN.) SSRN is
composed of a number of specialized research networks in each of the social sciences
which reaches over 35,000 academics in more than 70 countries. Each of SSRN’s
networks encourages the early distribution of research results by reviewing and
publishing submitted abstracts and by soliciting abstracts of top quality research
papers around the world. The Networks encourage readers to communicate directly
with other subscribers concerning their own and other’s research.
To learn more, visit http://www.ssrn.com/link/Robert-H-Smith-Business.html.
Smith Professor Receives Humboldt Award
Dilip Madan, PhD ’72 (Economics), PhD ’75 (Mathematics), professor of finance
at the Smith School, has been chosen to receive a 2006 Alexander von Humboldt
R e s e a rch Award in mathematics. The award recognizes Madan’s body of research
in the field of mathematical finance.
The trading of derivative securities in financial markets has exploded in the last
30 years, and these securities are hard to value accurately. Since the Black-Scholes
model was developed in the early 1970s, literally hundreds of variations of derivatives valuation models have been developed to value an ever-expanding set of
derivatives. However, few have had as significant an impact on practice as Madan’s
Variance-Gamma (VG) model (developed with Eugene Seneta of the University of
Sydney). Their model uses a more accurate methodology in accounting for the way
underlying asset prices move through time. It is one of three pricing models used
by Bloomberg (along with the Black-Scholes model and the Stochastic Volatility
model developed by Smith Professor Steve Heston).
Beyond the VG model, Madan has been incredibly prolific, publishing scores of
papers. He was drawn to finance because the problems presented by that field are
mathematically interesting. “They come to me with real issues which are mathematical problems and I try to help in solving them,” says Madan. His research
focuses on improving the quality of pricing models, enhancing the performance of
investment strategies, and advancing the understanding and operation of efficient
risk allocation in modern economies.
Madan is a professor of finance in the Smith School. He is managing editor of
Mathematical Finance and associate editor for both the Journal of Credit Risk and
Quantitative Finance.
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Research
IN THIS ISSUE
@Smith
Global Business
Stock Market
Finance
For firms looking to international-
Customer satisfaction information
The actions of small investors
ize, experience may not be the best
makes for a surprisingly successful
may help to explain the anomaly
teacher.
stock trading strategy.
of momentum in stock markets.
RESEARCH BY
RESEARCH BY
RESEARCH BY
Christopher Bingham
Sunil Mithas
Soeren Hvidkjaer
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Volume 7, Number 2
Learning From Heterogeneous Experience
continued from page 1
DEAN
Howard Frank
DIRECTOR OF RESEARCH
Research@Smith is published three times a year by the Robert
H. Smith School of Business, University of Maryland; 3570 Van
Munching Hall, College Park, MD 20742.
www.rhsmith.umd.edu
Michael Ball
EDITOR
if you accumulate more experience, that’s all you need. It takes a more discerning
Rebecca Winner
mindset to understand which experiences ought to come first, and which should
come later,” says Bingham. He cites a Singaporean organization which wanted to
enter the Japanese market. Despite the fact that Japan was closer geographically,
leaders chose to enter the U.S. first. Doing so gave the firm U.S. reference customers, which was very important to signal the legitimacy and credibility needed
CONTRIBUTING WRITERS
Sachin Agarwal
MBA Candidate ’07
We’d like to put Research@Smith directly into the hands of
faculty and administrators who are interested in learning about
the latest research conducted by Smith School faculty. To request
a copy of this publication or make an address correction, contact
Rebecca Winner via e-mail, editor@rhsmith.umd.edu, or phone,
301-405-9465.
DESIGN
Jeanette J. Nelson
Visit the Smith Research Network:
www.rhsmith.umd.edu/smithresearch/.
for entering one of Asia’s largest markets.
As the firms continued to develop their globalization strategies, their heuristics
became more abstract, with fewer details. This allowed for more freedom on the
part of workers within the new country markets to act and make decisions. This is
UPCOM ING EVENTS
a counter-intuitive insight of Bingham’s research: while early learning involves less
abstract thinking as leaders develop specific boundary and how-to rules, later
learning involves more abstract thinking, as leaders improve their understanding
of how simple rules encourage effective improvisation. More abstract heuristics
provide coherence, so managers aren’t reinventing the wheel, but at the same time
permits for flexibility and creativity.
“Firms start with very specific boundary and how-to rules, but over time these
rules become more abstract,” says Bingham. “When we look at improvisation we
Supply Chain “Webinar”
Sandy Boyson, research professor and co-director of Smith's Supply
Chain Management Center, hosted a free webinar on supply chain management for World Trade Magazine's Supply Chain Management Online
University's 2006 Webinar Series. The webinar, “Road Map to the Global
Real Time Supply Chain,” was sponsored by Hewlett-Packard. Read or
view highlights at the Smith School Web Site.
think that people are just winging it, but there is actually a deep foundational
knowledge and cognitive sophistication which allows managers to understand
how their heuristics can be improvised in different ways in different countries.”
Changing levels of abstraction keeps managers from operating on auto-pilot,
simply following set rules. Managers are forced into a more conscious engagement, making calculated choices that are most appropriate for a firm’s current situation, rather than just repeating set-in-stone solutions that worked in the past
but might not be appropriate for the current situation.
Bingham’s study suggests that learning a strategic process from experience is
about developing expertise, not honing a routine as most research suggest.
“Unveiling the Creation and Content of Strategic Processes: How and What Firms
Learn from Heterogenous Experience,” authored by Christopher B. Bingham and
Kathleen M. Eisenhardt, professor of management science and engineering,
Stanford University, received the Best Paper Award from the 2005 Atlanta
Competitive Advantage Conference. For more information about this research,
contact cbingham@rhsmith.umd.edu.
AMA Sheth Annual Conference
The Smith School is pleased to host the American Marketing
Association (AMA) Sheth Foundation Doctoral Consortium, July 12-16,
2006. The consortium introduces up-and-coming scholars in marketing
to leaders in the field and also provides an opportunity for participating
doctoral students to network with each other and with faculty. One doctoral candidate is nominated from each of the leading universities in
North America as well as some from other continents.