Researchers suggest that playing fair can maximize profits

According to Knowledge@Wharton (“In the Game of Business, Playing Fair Can Actually Lead to Greater Profits”), the conventional, macho confrontational system of management is likely costing your business money.

Today’s macho managers preen themselves on being “tough guys” and hard-nosed negotiators (including the women amongst them). They’re always out to wring another few dollars from every deal, even if it means squeezing suppliers unmercifully and cutting costs to the bone. They don’t care about fairness: profit is all that matters and the other person’s loss is their gain.

But according to John Zhang and Jagmohan Raju, both Wharton marketing professors, and Tony Haitao Cui, a University of Minnesota marketing and logistics professor, this behavior may produce the opposite results to the ones they expect — a fall in profits compared with what they could obtain by playing fair. (Paper published in Management Science and titled, “Fairness and Channel Coordination.“)

When you hurt the other guy, he gets back at you

This research comes from the field of study called behavioral economics, which has shown by experiment that people sometimes value fairness over profit maximization. It’s not unusual for one party to a deal to walk away from any contract from which they receive less than 20%. In some cultures, people will reject anything less than a 50/50 share.

According to Zhang:

“The ultimatum game [a research tool used by behavioral economists] tells you that people aren’t hard-nosed economists. They are fair minded. And this kind of experimental outcome has strategic implications. We are saying that you don’t need a hard-nosed attitude to make a profit in the real world. In some areas, fairness will address the channel relationship in such a way that everyone can be better off.”

When each party sees that he is being treated fairly by the other, he will reciprocate instead of taking up time and energy in squabbling. “If you are fighting against each other, ultimately the whole channel will suffer,” Zhang notes.

Sadly, it doesn’t always work

The main blockage to this kind of sensible behavior is — surprise! — the way organizations reward managers for short-term results. Making suppliers and customers mad may not seem so bad, if you know you’ll have taken your money and moved on before they can retaliate.

“All else being equal, if you are working for a bigger company and you will get promoted if you make a short-term profit, you don’t worry so much about fairness,” Zhang says. “However, disregarding fairness can be detrimental to the company in the long run, as fairness is the lubricant for the sales machinery.”

Just another way in which today’s macho, short-term outlook is storing up trouble for the future.

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