Stanford Business magazine

Faculty Research

Many American Symphonies Spend More Than They Raise

Most major symphony orchestras in the United States regularly spend more money than they take in, and some dip so far into endowments that they risk their long-term survival, according to a new report authored by Robert J. Flanagan, the Konosuke Matsushita Professor of International Labor Economics and Policy Analysis, Emeritus.

“The industry should realize that there is an inherent long-term economic challenge,” Flanagan says. “Nowadays, even if symphonies filled their halls for every concert, the vast majority would still not be able to cover their performance expenses.”

Although recessions exacerbate their woes, Flanagan said many symphonies have financial troubles even in good times. Attendance has been declining for most types of concerts, and orchestras may not be adequately scrutinizing the returns to their expenditures on marketing and fundraising. Larger symphonies, for example, appear to spend nearly twice as much on fundraising as they realize through donations, he said.

Some orchestra managers told Flanagan they disagreed with that conclusion, but other symphony officials he interviewed were hardly shocked.

“Some of them say it doesn’t surprise them because many symphonies have a bias toward revenue growth strategies and a bias against cost-cutting strategies,” Flanagan said, adding that nonprofit board members often shy away from conflict. “It’s not clear that they’re willing to be as tough minded about costs as directors in the private sector.”

Flanagan’s study, “The Economic Environment of American Symphony Orchestras,” was commissioned by the Andrew W. Mellon Foundation. It includes data from every orchestra that ranked among the 50 largest U.S. symphonies for at least two years during the 1987–88 through 2003–04 concert seasons, a total of 63 orchestras. During that time 46 orchestras ran deficits on average—excluding their money from endowments—versus only 17 with surpluses.

Although Flanagan believes a best-practices effort would help many symphonies improve their financial status, the financial circumstances vary greatly from city to city and orchestra to orchestra.

“You can’t go through this analysis and conclude that there’s a single solution—a single smoking gun,” he said. “I think the report documents the futility of single solutions.”

Cool with Wrong Crowd Can Send Sales Crashing

Why do some products go from cool to out of favor in a blink? Professor Chip Heath and Jonah Berger, PhD ’07, say this happens to products that consumers associate with their own identities. If consumers believe a product has become popular with groups they don’t want to associate with, they will turn their back on a former favorite. In one study, for example, undergraduates rated a new digital music player more negatively when they learned business executives liked the product.

But such identity connections do not apply to all products. In another study consumers were asked for their favorite cars, clothing brands, music, dish soap, and bicycle lights. A couple of weeks later, they heard that the items they had preferred were now also getting a strong nod from a high percentage of other students. When retested for their preferences, they changed their choices, but only in product categories that were relevant to their own identities—cars, clothing, and music—not in categories that weren’t—dish soap and bicycle lights. Cool had suddenly become uncool, and when too many others liked an item it was no longer a good marker of identity.

The research, published in Journal of Consumer Research, suggests that companies dealing in identity-relevant goods must constantly stay ahead of the cool–passé pendulum swing. “If you want your brand to retain cachet, you might want to think about protecting or segmenting meaning,” said Berger, now assistant professor of marketing at Wharton.

Consumers Spend Dividends But Save Capital Gains

Imagine this scenario: Two households with stock portfolios of identical worth each see their investments appreciate by 10 percent one year. The only difference is that one household’s wealth grows entirely through capital gains; the other receives its additional wealth in the form of dividends. Which household is likely to spend more, and which one accumulates more wealth?

According to new research, the household receiving the dividends is likely to run out and spend the cash. The one with the capital gains is more likely to reinvest or save them. Besides adding to our understanding of consumer behavior, the information could even be used to draft economic policy, said the researchers, Stefan Nagel, assistant professor of finance, and colleagues Malcolm Baker of Harvard University, and Jeffrey Wurgler of New York University.

A 1980 paper by Richard Thaler posited that people instinctively group their assets into different categories that they then spend in certain prescribed ways. They do not see capital gains and dividends as interchangeable, but rather as two different kinds of funds earmarked for two different purposes.

“Over the years, companies have learned—sometimes painfully—that investors often prefer dividends,” Nagel says. “It’s not particularly rational. When companies decide to do stock repurchases rather than dividends, they are still returning money to investors, but investors don’t like that very much.” Consumer behavior is consistent with a widely held perception that dividends, unlike capital gains, represent a “permanent kind of income,” he says. “They don’t necessarily expect capital gains every year, but they do come to expect dividends.”

The study, “The Effect of Dividends on Consumption,” published in Brookings Papers on Economic Activity, has implications for the economy as well as for consumers and businesses. For consumers, a rule of thumb to spend dividends and not touch capital appreciation “might even be suboptimal for their overall wealth.” On the other hand, life is complicated enough. “There’s only so much time you can spend thinking about these things,” Nagel says. “Economic rules of thumb can work very well for that reason.”

At the corporate level, companies are well advised to understand investors’ attitudes or risk drawing the wrath of shareholders. And for the overall economy, although the study didn’t specifically investigate that angle, Nagel says: “There is the possibility that understanding this consumer behavior could be used to stimulate the economy.” After all, if taxes on dividends are cut and companies respond by paying out more dividends on which investors pay fewer taxes, there could be a significant increase in consumption. “If you’re looking to stimulate the economy, there’s the possibility that this could have that effect.”

On the other hand, because consumption is the flip side of saving, this means that in years when dividends are high, consumers save less. “If an investor’s portfolio increases through capital gains, the money tends to stay in the brokerage account; if dividends are paid, it tends to be withdrawn, and not put back,” he says. “Thus if the government were trying to promote savings, it could arguably encourage corporations not to give out dividends.”

Teamwork Gives Edge in Complex Manufacturing

Those who work in the most complex manufacturing environments have the most to gain from the use of problem-solving teams, according to a study recently published in the Journal of Labor Economics. As the United States concentrates its manufacturing base, workers are more likely to be working on very high-quality products that require complex manufacturing steps.

Using data from steel minimills, the study shows that teams had the greatest impact if they tackled complex tasks in these environments, enjoyed meaningful incentives, and knew that management listened to them.

Steel mills traditionally have focused on the quality and quantity of goods produced rather than how workers interact, and managers often resist the idea of taking rank-and-file workers off the factory floor or paying them overtime for meetings so they can become collaborators. Yet during the five-year study, the number of mills using problem-solving teams more than tripled—and the practice became virtually universal on lines executing the most complex tasks.

“It’s not teams, per se,” said Kathryn Shaw, the Ernest C. Arbuckle Professor of Economics, one of the authors. “It’s having an environment that supports teamwork. You need a group of experts coming together to solve a complex problem. You’re bringing people together because no one person can solve the problem as well as the group.”

Although this study focuses on a narrow aspect of one industry—“rolling mills” that reheat, roll, and cut steel to produce bar products such as rebar or I-bar—Shaw said strategic teams with appropriate incentives can have a widespread impact.

“I’ve visited so many companies in so many industries, and this really is the answer.” 

There is one caveat: The teams’ gains are significant only when they are addressing complex processes such as improving product quality or solving assembly line problems, not relatively simple tasks such as organizing shifts, Shaw said.

Companies rarely make capital investments without having detailed expectations about the potential return, she said, but most haven’t developed the same expertise about human resources policies. “That’s much harder to do with HR. But the returns to HR can be just as big.”

 

• Back to Top