Two essays on risks and returns in operations management

Abstract

Scholars in Operations Management (OM) have traditionally examined the efficacy, performance outcomes, and financial returns of various organizational initiatives such as supplier management, enterprise resource planning, and research and development (R&D) investments. Yet OM scholars often overlook possible "hidden costs" behind these organizational innovations—firm risks associated with organizational strategic initiatives. Some organizational initiatives might improve the financial returns for firms while inducing significant management risks, and others might enhance financial returns and lower risks at the same time. For example, research in marketing showed that investments in customer satisfaction led to lucrative financial returns and lower stock market risks (Fornell et al., 2006). On the other hand, investments in new products lead to additional financial returns while introducing significant operational and firm risks. Do some organizational or operational investments improve organizational returns at the expense of risks, or do they reduce risks at the same time? If the investments of firms to improve organizational returns are associated with higher financial uncertainty, is there anything that operations managers can do to reduce the risks? This thesis examines two issues associated with the returns and risks of OM. In the first study, we examine the impact of R&D investments on the financial risks of firms and explore how firms could mitigate these risks through operational improvements (using the stochastic frontier estimation of relative efficiency as a proxy) and quality management initiatives (using Six Sigma implementation as a proxy). R&D investments have been recognized as one of the most important organizational initiatives leading to a sustainable competitive advantage (Danneels, 2002; Kyrgidou and Spyropoulou, 2013). Yet R&D activity is costly and risky, and returns on it are uncertain. Product innovations bring more challenges by inducing market uncertainties and operational disruptions, which might have an adverse impact on the firm's performance outcomes. In particular, previous research on R&D investments focused on investment returns to firms but was less concerned with the associated financial risks of firms. Based on data from 560 manufacturing firms from 2007-2014 in the United States (U.S.), we constructed the distributed lag model to capture the current-year and 1-year lag effects of R&D investments on firm risks. Using the system generalized method of moments estimator with a 1-year lag, we find that R&D investments significantly increase a firm's financial risks. However, we find that the risks are alleviated when a firm simultaneously invests in operational improvements or quality management. We argue that R&D investments improve a firm's explorative capacity while investments in operational improvements and quality management enhance a firm's exploitative ability. Instead of considering exploitative and explorative as competing, mutually exclusive capabilities, our empirical evidence shows that exploitative and explorative capabilities reinforce each other to mitigate the risks associated with R&D activities, which leads to lower financial uncertainties in regard to R&D investments. In the second study, we empirically examine the impact of the adoption of business intelligence (BI) systems on firms' operational efficiency and risks (using the volatility in profit returns as a proxy). We examine how the business value of BI systems is enhanced through stakeholder relationships (based on the ratings produced by Kinder, Lydenberg, Domini & Company, Inc., KLD) and process institutionalization (using ISO 9000 certifications as a proxy). Based on an event study analysis of financial data for a sample of over 200 cases of BI systems adoption from 2005-2014 in the U.S., we find that the adoption of BI systems leads to higher operational efficiency while mitigating firm risks (i.e., leading to lower volatility in profit returns). Additionally, we find that these benefits are significantly higher for firms with better stakeholder relationships and higher process institutionalization. We explore the operational impact on the adoption of BI systems by firms, and seek to understand the circumstances in which BI systems are more effective. We explore timely OM issues in an age when a huge volume of business data is available through the internet such as web server blogs and social media technologies (i.e., big data).