Wednesday, December 17, 2014

Final Exam Results

The exams are now graded.  It may take still an hour or more for me to post the grades.  I want to do that with some care and make sure there aren't clerical errors.  What follows are some comments about the exam itself.

Question 1 was the essay question on the first midterm.  So you had seen it before.  Question 3 was on the final from last year and we reviewed it on the last day of class.  Question 2 was new for you.  It was there, in part, to see what you would do with it.  The means on questions 1 and 3 were right about at 81 (out of 100).  The mean on question 2, was just below 70.  I will talk about question 2 below.

One of the things I found interesting is that the vast majority of students accepted the premise of the question without requiring further definition.  Let's consider possible ways to further define the issues.   I'll begin with this rather famous quote from Thomas Edison.

I haven't failed.  I've just found 10,000 ways that won't work.  

So one issue is that invention takes time and one might be "in process" for quite a while.  How does the time component get managed?  Do we look for success after a fixed time window or let the process play out?  Nobody talked about that.

Another issue is whether the invention is fundamentally new for the entire industry or if instead it is something that has been tried elsewhere but is new for this particular organization.  In the literature on diffusion of innovation, there typically is a difference made between an innovator, on the one hand, and an early adopter, on the other.  Each engage in risks but of a different sort.

Then there might be an issue of whether the innovations themselves could be larger or smaller and hence if the reward or punishment varied, either absolutely or relatively, as a consequence.  People didn't take on that issue much at all.

I'll do one more of these and stop, but know that this list could be expanded without too much difficulty.  There is the question of how innovation translates into productivity and profitability for the firm.  There is a notion called leverage, which in this context means small changes that have big positive impact.  There is a recent book by Atul Gawande called The Checklist Manifesto, where he argues that implementing checklists for procedures that have some complexity to them (his particular interest is in avoiding medical problems during surgery) is a good way to achieve leverage.  In other words, people already know what good practice is, but because they exercise discretion they may deviate from good practice.  The checklists are a way to get people to stick with what works.  In contrast, an article I suggested you read argued for discretion and that overly prescribing procedures would reduce medical success.  So there isn't universal agreement about standardizing procedures being a good thing.

On the incentives themselves, very few people addressed the following question:  What, if anything, happens to the baseline compensation?  Does it stay fixed or does it get adjusted as well?  For our class, that would have been a natural question to ask.  It speaks to the question of whether the employees earn rents or not (in the case of rewarding innovation) or if the punishment is credible (when the punishment is in place for the case where innovation doesn't occur).  A few students recognized that the employee can quit, which limits the size of the possible punishment.

Then one might have asked whether two employees who are in the same job, with similar seniority and with both trying hard to innovate, might nonetheless experience that one succeeds and the other does not - what would the consequences be?  A few people said the reward scheme would make the employees competitive with one another, but I didn't understand that.  That they'd regard it as unfair, however, seems natural to me.  We talked in class about fairness specifically in the context of Akerlof's Gift Exchange model.  Nobody tied these incentives schemes to that, but it stands to reason that if either the reward or punishment scheme were implemented that it would result in less gift giving activity in the organization.

Finally, on other mechanisms, a few students offered up interesting ideas here, but only a few.  One of those is professional development activities (more education) for employees, where promoting innovation is part and parcel of the professional development.  Another is to look for symbolic/cultural ways at work to promote innovation.  Just to show what I mean here, I mentioned in class that I attended something that at the time was called the Frye Leadership Institute. (Frye is somebody's surname, and the institute was named after him.)  A few years ago they rebranded the institute and now it is called the Leading Change Institute.  In other words, innovation is now in the name of the thing.  Symbolic and cultural means are something we discussed but didn't hammer on in class, because they are not economics.  But they can matter.  B&D make that point repeatedly.  It is one of their four frames.

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