Learning from others’ misfortune: Factors influencing knowledge acquisition to reduce operational risk

TLDR

Operational risks from large-scale losses are increasingly highlighted, yet firms often ignore them, leading to costly disruptions and reputational damage. The study tests how organization-level factors affect risk managers’ acquisition of knowledge about causes of other firms’ operational losses. A randomized vignette-based field experiment was used to assess how factors such as perceived operational similarity and market leadership influence knowledge acquisition. Results show that perceived operational similarity strongly increases risk managers’ likelihood of acquiring knowledge, while market leadership has a weaker effect, indicating that firms should develop systems and training to broaden knowledge screening and that industry bodies can facilitate learning.

Abstract

Abstract Risks arising from operations are increasingly being highlighted by managers, customers, and the popular press, particularly related to large‐scale (and usually low‐frequency) losses. If poorly managed, the resulting disruptions in customer service and environmental problems incur enormous recovery costs, prompt large legal liabilities, and damage customer goodwill and brand equity. Yet, despite conventional wisdom that firms should improve their own operations by observing problems that occur in others’ processes, significant operational risks appear to be ignored and similar losses recur. Using a randomized vignette‐based field experiment, we tested the influence of organization‐level factors on knowledge acquisition. Two organization‐level factors, namely perceived operational similarity, and to a lesser extent, market leadership, significantly influenced the risk manager's likelihood of acquiring knowledge about possible causes that triggered another firm's operational loss. These findings suggest that senior managers need to develop organizational systems and training to expand the screening by risk managers to enhance knowledge acquisition. Moreover, industry and trade organizations may have a role in fostering the transfer of knowledge and potential learning from operational losses of firms.