- 18 Mar 2010
- Working Paper Summaries
Matching Firms, Managers, and Incentives
Do different kinds of firm ownership drive the adoption of different managerial practices? HBS professor Raffaella Sadun and coauthors focus on the difference between the two most common ownership modes, family firms and firms that are widely held, namely that have no dominant owner. They find that the greater weight attached by family firms to benefits from control induces a conflict of interest between family-firm owners and high-ability, risk-tolerant managers. Key concepts include: Family firms systematically offer low-powered incentive contracts to external managers compared with widely held firms. The differences are economically large. Where incentives are more powerful, managers exert more effort, are paid more, and are more satisfied. Firms that offer high-powered incentives are associated with better performance. This result holds even after controlling for the type of ownership. Economies where family firms prevail because of institutional or cultural constraints are also economies where the demand for highly skilled, risk-tolerant managers languishes. Closed for comment; 0 Comments.
- 17 Mar 2010
- Working Paper Summaries
Conceptual Foundations of the Balanced Scorecard
This article documents the precursors of the Balanced Scorecard (BSC) strategic performance management tool and describes the evolution of the BSC since its introduction in 1992 in the Harvard Business Review. During the last 15 years, the BSC has been adopted by thousands of private, public, and nonprofit enterprises around the world. HBS professor Robert S. Kaplan, who created the concept and tool with David Norton, explains the roots and motivation for their original article as well as subsequent innovations that connect it to a larger management literature. Key concepts include: The BSC was not original for advocating that nonfinancial measures be used to motivate, measure, and evaluate company performance. Early pioneers included General Electric, Nobel Economics Laureate, Professor Herb Simon, at the Carnegie Institute of Technology (later Carnegie-Mellon University), and management theorist Peter Drucker in his now-classic book, The Practice of Management in the 1950s. The BSC differs from stakeholder theory by embedding stakeholder interests within a strategy framework. It also extends the economics-based agency theory by offering the instrumentation to guide a multi-period shareholder value creation process. The BSC continues to grow and evolve. Future developments will, for example, formally embed enterprise risk management into the strategy execution framework. Closed for comment; 0 Comments.
- 11 Mar 2010
- Working Paper Summaries
The Many Faces of Nonprofit Accountability
Nonprofit leaders face multiple, and sometimes competing, accountability demands: from numerous actors (upward, downward, internal), for varying purposes (financial, governance, performance, mission), and requiring differing levels of organizational response (compliance and strategic). Yet is it feasible, or even desirable, for nonprofit organizations to be accountable to everyone for everything? The challenge for leadership and management is to prioritize among competing accountability demands. This involves deciding both to whom and for what they owe accountability. HBS professor Alnoor Ebrahim provides an overview of the current debates on nonprofit accountability, while also examining the tradeoffs inherent in a range of accountability mechanisms. Key concepts include: Accountability is not simply about compliance with laws or industry standards, but is more deeply connected to organizational purpose and public trust. Nonprofits will continue to face multiple and competing accountability demands, so they must be deliberate in prioritizing among these demands. A critical challenge is to find a balance between upward accountability to their patrons and remaining true to their missions. Few nonprofits have paid serious attention to how they might be more accountable to the communities they seek to serve. Juggling the many expectations of accountability—for finances, governance, performance, and mission—requires integration and alignment throughout the organization. Numerous mechanisms of accountability are available to nonprofits, such as greater transparency and disclosure, performance assessment, industry self-regulation, and adaptive learning. But leaders must adapt any such mechanisms to suit their organization. The greatest payoffs rest with strategy-driven forms of accountability that can help nonprofits to achieve their missions. Closed for comment; 0 Comments.
- 10 Mar 2010
- Working Paper Summaries
A Reexamination of Tunneling and Business Groups: New Data and New Methods
"Tunneling" refers to efforts by firms' controlling owner-managers to take money for themselves at the expense of minority shareholders. Looking at emerging economies in general and at India in particular, HBS professor Jordan I. Siegel and doctoral student Prithwiraj Choudhury argue for a simultaneous analysis of corporate governance and strategic activity differences in order to reveal the quality of firm-level corporate governance. The development of rigorous methodology in corporate governance is not merely an academic issue but has enormous real-world consequences. It is critical that scholars gain deeper empirical and theoretical insights into the question of whether these business groups serve primarily as theft devices for the controlling owners, or whether they serve primarily as a positive force that enables the creation of scale and scope efficiencies. Key concepts include: It is too simple to say that business groups are the primary culprits of bad governance in emerging economies. Scholars need to analyze strategic activity differences across firms. In contrast to prior views, Indian business groups are not, on average, engaging in tunneling, but are on average exhibiting good corporate governance, especially in light of the markedly different business strategies they typically undertake. Business groups, through knowledge-based capabilities, have grown larger and more diversified with market liberalization, and they continue to tower over stand-alones in their marketing and technological capabilities. Closed for comment; 0 Comments.
- 05 Mar 2010
- Working Paper Summaries
Will I Stay or Will I Go? Cooperative and Competitive Effects of Workgroup Sex and Race Composition on Turnover
Inequalities in the senior ranks by sex and race remain rampant in up-or-out knowledge organizations such as consulting firms, law firms, and universities. HBS professor Kathleen L. McGinn and Wharton School professor Katherine L. Milkman focus on patterns of voluntary and involuntary turnover over six years in one such organization to untangle the multiple ways in which social identity influences career mobility. Predicting that higher proportions of demographically similar supervisors will reduce the likelihood of subordinate turnover, while higher proportions of demographically similar peers will increase the likelihood of turnover, the researchers find evidence of the hypothesized effects. They suggest that integrating research about social cohesion and social comparison enhances understanding of racial and gender inequality within organizations and facilitates organizations' ability to reduce that inequality. Key concepts include: Senior sponsorship is vital for junior professionals in up-or-out organizations. To address the problem of persistent underrepresentation of women and minorities at the highest levels, knowledge organizations need to attend to the ways in which policies and practices invoke competition, rather than social cohesion, among demographically similar peers. Clustering same race or same sex junior employees to provide an increased sense of community may have the opposite effects of those desired unless accompanied by similar or greater increases in the diversity of senior professionals. Studies of organizational sex composition and career mobility need to consider effects at multiple levels. Closed for comment; 0 Comments.
- 04 Mar 2010
- Working Paper Summaries
The Determinants of Individual Performance and Collective Value in Private-Collective Software Innovation
Why do people expend personal time and effort toward creating a public good? Over the past decade, collaborative, community-based approaches to developing knowledge-intensive products like encyclopediae, music, and software have gained prominence in both practice and scholarly analysis. "Open source software development," for example, is distinguished by self-selection of distributed participants into tasks, free revealing of knowledge, collective creation of shared software artifacts, and participants' ability to generate new innovations by reinterpreting and repurposing knowledge and artifacts created by others. The MathWorks' Ned Gulley and HBS professor Karim R. Lakhani study the determinants of individual performance and collective value in software innovation by analyzing 11 programming competitions that mimic the working of the open source software community. Key concepts include: Knowledge creation and reuse are important dual goals of social systems organized to collectively solve technical problems. Collective value relies on the ability of others to understand and comprehend the design structure of knowledge to enable reuse. Thus deviations from commonly understood rules of practice, while beneficial to the individual innovator, impede adoption by others. Although free riding is a concern in most collective systems, innovators need to realize that the value of the reuse of their work by others depends as much on the new knowledge they create as on the old knowledge they borrow. Closed for comment; 0 Comments.
- 24 Feb 2010
- Working Paper Summaries
Accelerating Innovation In Energy: Insights from Multiple Sectors
How should the energy sector best respond to the threat of climate change? In this introductory chapter to a forthcoming book, Harvard Business School's Rebecca M. Henderson and Richard G. Newell of Duke University frame the discussion by highlighting the volume's contributions concerning four particularly innovative sectors of the U.S. economy: agriculture, chemicals, life sciences, and information technology. These four sectors have been extraordinarily important in driving recent economic growth. Henderson and Newell describe why accelerating innovation in energy could play an important role in shaping an effective response to climate change. Key concepts include: An effective innovation system has three key elements: accelerating demand for new technology; institutions that support abundant generation and dissemination of fundamental scientific and technical knowledge; and a vibrant, competitive private sector. Public policy has played a role in building and/or sustaining all three elements. If the goal of federal policy is to encourage effective technological solutions to mitigate climate change, then a short-term commitment is unlikely to meet expectations, even if the commitment is extraordinarily intense, such as was seen with the Department of Defense's Manhattan Project. If federal agencies increase investment in energy innovation at the same time that vigorous efforts are made to enhance the demand for carbon-free technology, it is likely that technological innovation could play a decisive role in mitigating some of the key economic and social risks arising from climate change. Closed for comment; 0 Comments.
- 19 Feb 2010
- Working Paper Summaries
The Evolution of Science-Based Business: Innovating How We Innovate
Science has long been connected to innovation and thus to the business enterprise. However, the nature of the connection between science and business in recent decades has begun to change in important ways. On the one hand, we have witnessed the decline of corporate industrial laboratories. At the same time, we have seen the emergence of a new class of entrepreneurial firms that are deeply immersed in science in sectors like biotech, nanotech, and more recently energy. HBS professor Gary P. Pisano examines the changing nature of the science-business intersection and describes the emergence of a science-based business as a novel organizational form. He also describes the institutional and organizational challenges created by this convergence. Key concepts include: Science-based businesses face unique challenges as they straddle two worlds with very different time horizons, risks, expectations, and norms. The professions of management and of science are still largely separate: Scientists receive no formal training in management, and MBAs receive no training in science. This is a striking gap. Today the "invisible hand" of markets increasingly governs science-based businesses. Assessing this form of governance against the requirements of science-based businesses suggests the need for organizational innovation. Closed for comment; 0 Comments.
- 18 Feb 2010
- Working Paper Summaries
The Mirroring Hypothesis: Theory, Evidence and Exceptions
In its simplest form, the mirroring hypothesis suggests that the organizational patterns of a development project, such as communication links, geographic collocation, and team and firm membership, correspond to the technical patterns of dependency in the system under development. According to the hypothesis, independent, dispersed contributors develop largely modular designs, while richly interacting, collocated contributors develop highly integral designs. Yet many development projects do not conform to the mirroring hypothesis. HBS doctoral graduate Lyra Colfer and professor Carliss Y. Baldwin synthesize observations from a large number of cases that violate the hypothesis to explain when and how development organizations can "break the mirror." Key concepts include: While mirroring is common in practice, it is not universal. In the presence of compatible motivations and frameworks supporting expectations of good faith, there are new ways of building common ground, based on digitized designs; electronic archives; automated test suites; and instantaneous transmission of text, data, and pictures. These alternative means can be used as complements or substitutes for mirrored forms of organization. Managers of development organizations within and across firms and in open collaborative groups, who choose or are required by circumstances to "break the mirror," should be aware of these alternative means of achieving coordination. Closed for comment; 0 Comments.
- 11 Feb 2010
- Working Paper Summaries
The Architecture of Complex Systems: Do Core-periphery Structures Dominate?
All complex systems can be divided into a nested hierarchy of subsystems. However, not all these subsystems are of equal importance: Some subsystems are core to system performance, whereas others are only peripheral. In this study, HBS professor Carliss Y. Baldwin and coauthors developed methods to detect the core components in a complex software system, establish whether these systems possess a core-periphery structure, and measure important elements of these structures. The general patterns highlight the difficulties a system architect faces in designing and managing such systems. Results represent a first step in establishing stylized facts about the structure of real-world systems. Key concepts include: Core-periphery structures dominate the sample, with 75-80 percent of systems in the sample possessing such a structure. It is significant that a substantial number of systems lack such a structure. This implies that a considerable amount of managerial discretion exists when choosing the "best" architecture for a system. Variations in system structure can be explained, in part, by the different models of development used to develop systems. Legacy code is rarely rewritten, but instead forms a platform upon which new systems are built. With such an approach, today's developers bear the consequences of design decisions made long ago. Closed for comment; 0 Comments.
- 10 Feb 2010
- Working Paper Summaries
Investing in Improvement: Strategy and Resource Allocation in Public School Districts
The operating environments of public school districts are largely void of the market forces that reward a company's success with more capital and exert pressure on it to eventually abandon unproductive activities. Stacey Childress describes the strategic resource decisions in 3 of the 20 public school districts that she and colleagues have studied through the Public Education Leadership Project at Harvard. The stories in San Francisco, New York City, and Maryland's Montgomery County occurred largely before the districts faced dramatic decreases in revenues, though they show the superintendents facing budget concerns near the end of the narratives. Even so, the situations share common principles that superintendents and their leadership teams can use to make differentiated resource decisions—reducing spending in some areas and increasing it in others with a clear rationale for why these decisions will produce results for students. Key concepts include: Given the rarity of strategic approaches to resource allocation described in the examples, it is clear that district leaders need more guidance and tools to help them make better decisions and manage the consequences, particularly when they are under enormous fiscal pressure. Back your strategy with a resource plan—otherwise it is not a strategy. Don't get trapped by the dogma of decentralization. If leaders alienate influential stakeholders when budgets are flush, it will be even more difficult to preserve key strategic investments during financial crises. Closed for comment; 0 Comments.
- 03 Feb 2010
- Working Paper Summaries
Accountability and Control as Catalysts for Strategic Exploration and Exploitation: Field Study Results
The need for organizations to both exploit current resources and explore new opportunities is a central and long-standing theme in the literature of organizations. The challenge, of course, is that these two imperatives require very different structures and skills. Exploitation demands a focus on efficiency and effectiveness in executing preset plans and procedures. Exploration requires the ability to step outside these routines by emphasizing experimentation, creativity, and novelty. In this study, HBS professor Robert L. Simons focuses on the relationship between two organization design variables—span of control and span of accountability. Using data from 102 field studies, he illustrates how these variables can be manipulated by managers to tilt the balance toward either exploration or exploitation in response to different tasks, different organizational contexts, and changing competitive environments. Key concepts include: Managers can fine-tune their organization along the dimensions of exploitation and exploration more easily than we may have suspected. For these situations, accountability and control can be adjusted to create an opening for entrepreneurship. It is the tension between the resources allocated by organizational architecture and accountability for those resources that provides a powerful catalyst for strategic exploitation and exploration. Most of the research on exploration and exploitation has focused on design architecture (centralization/decentralization, internal venture groups, alliances) and related organizational coordinating mechanisms. We must remember, however, that these structures are merely tools to affect the behavior of individuals. It is individuals, in the end, who must devote their energy and attention to either exploiting current resources or exploring new opportunities. Closed for comment; 0 Comments.
- 28 Jan 2010
- Working Paper Summaries
Does Product Market Competition Lead Firms To Decentralize?
There is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy. Economists have developed a range of theories to account for delegation, but there is less empirical evidence, especially across countries. This has limited the ability to understand the phenomenon of decentralization. Nicholas Bloom, HBS professor Raffaella Sadun, and John Van Reenen assembled a new data set on about 4,000 firms across 12 countries in Europe, North America, and Asia, and then measured the delegation of authority from central headquarters to local plant managers. Key concepts include: Competition is associated with a greater degree of delegation. One of the reasons for the move toward decentralization over time in developed countries may be increasing competition, possibly arising from more globalized product markets. A reason for greater centralization in less developed countries may be lower competitive intensity. Closed for comment; 0 Comments.
- 27 Jan 2010
- Working Paper Summaries
Labor Regulations and European Private Equity
Recent theoretical models predict that countries with stricter labor policies will specialize in less innovative activities due to the higher worker turnover frequently associated with rapidly changing sectors. HBS visiting scholar Ant Bozkaya and HBS professor William R. Kerr examine how differences in labor regulations across European countries influence the development of private equity markets, comprised of venture capital and buy-out investors. In so doing, the researchers provide the first empirical evidence for this theoretical prediction at the industry level in the entrepreneurial finance literature. They also make a methodological contribution by demonstrating how jointly modeling the different policies for providing worker insurance delivers more consistent results than their individual relationships would indicate by themselves. Key concepts include: Policy choices regarding the optimal levels and mechanisms of labor market insurance are complex and should consider many economic and non-economic factors. Worker insurance policies favoring labor market expenditures (e.g., unemployment insurance benefits) over employment protection regulations encourage greater private equity entry and larger investment levels. This is true for both domestic investors and U.S.-inbound venture capital investments. This effect is conditional on the level of worker insurance provided, which is of lesser importance for private equity patterns than the policy mechanisms employed. Closed for comment; 0 Comments.
- 22 Jan 2010
- Working Paper Summaries
Competing Ad Auctions
Joining ad platforms can attract substantial regulatory attention: In November 2008, the Department of Justice planned to file antitrust charges to stop the proposed Google-Yahoo transaction. More recently, in September 2009, the Department of Justice sought additional information from Microsoft and Yahoo about their proposed partnership. At first glance it might seem paradoxical to claim that the Google-Yahoo transaction is undesirable, for advertisers and for the economy as a whole, while the Microsoft-Yahoo transaction offers net benefits. But that conclusion is entirely possible. HBS professor Benjamin G. Edelman and doctoral candidates Itai Ashlagi and Hoan Soo Lee explore competition among ad platforms that offer search engine advertising services. In addition, the authors evaluate possible transactions among ad platforms—building tools to predict which transactions improve welfare and which impede it. Key concepts include: Participation costs exist and matter, affecting bidders' decisions about which ad platforms to use, and changing the welfare consequences of mergers or joins among platforms. By creating a joined ad platform of larger size than Microsoft or Yahoo alone, the transaction lets advertisers spread participation costs over a larger purchase, making it worthwhile for small to midsize advertisers to sign up with the joined Microsoft-Yahoo platform even though they do not use Microsoft or Yahoo separately. Preventing a competing platform from attracting advertisers reduces the quality of that competing platform (fewer ads yielding an inferior match with users' searches), cuts that platform's revenue (impeding future investment), and generally hinders that platform's efforts at growth. Closed for comment; 0 Comments.
- 21 Jan 2010
- Working Paper Summaries
Going Through the Motions: An Empirical Test of Management Involvement in Process Improvement
How can managers better lead their organizations to improve work processes? Describing their study of hospitals over an 18-month period, HBS professor Anita L. Tucker and Harvard School of Public Health professor Sara J. Singer detail how and why managers' taking action was more effective than their communicating about actions taken. Findings suggest, first, that taking action on known problems in specific work areas on at least a quarterly basis may improve the organizational climate for improvement. Second, the study indicates that managers would be well advised to take action-preferably substantive and intense action-in response to frontline workers' communications about problems. Overall, the research provides insight for senior managers who want to improve their organization's climate for process improvement. Key concepts include: Resolving a small number of problems is better than collecting data about many problems. Giving feedback to employees about actions taken can worsen their perceptions of the climate for improvement if the actions were superficial or punitive. In other words, managers do not fool frontline workers by going through the motions of process improvement. The risk of surfacing a large number of problems is twofold: (1) identifying many problems simultaneously may overwhelm people with a new awareness of the full extent of problems within the organization, complicating and slowing decision processes and spreading already-stretched resources, and (2) it may reinforce cynicism among frontline workers that managers are uncommitted to improving the organizations' work systems. Closed for comment; 0 Comments.
- 14 Jan 2010
- Working Paper Summaries
Optimal Auction Design and Equilibrium Selection in Sponsored Search Auctions
Reserve prices may have an important impact on search advertising marketplaces. But the effect of reserve prices can be opaque, particularly because it is not always straightforward to compare "before" and "after" conditions. HBS professor Benjamin G. Edelman and Yahoo's Michael Schwarz use a pair of mathematical models to predict responses to reserve prices and understand which advertisers end up paying more. Key concepts include: A search engine's optimal reserve price is independent of the number of bidders and also independent of the rate at which click-through rate declines over positions. Most incremental revenue from setting reserve price optimally comes from the indirect effects on high bidders—not from the low bidder's direct effect, nor from indirect effects on other low bidders. This result may appear counter-intuitive because top bidders' large valuations place them, in an important sense, "furthest from" the reserve price. Closed for comment; 0 Comments.
- 13 Jan 2010
- Working Paper Summaries
Private Equity and Industry Performance
In response to the global financial crisis that began in 2007, governments worldwide are rethinking their approach to regulating financial institutions. Among the financial institutions that have fallen under the gaze of regulators have been private equity (PE) funds. There are many open questions regarding the economic impact of PE funds, many of which cannot be definitively answered until the aftermath of the buyout boom of the mid-2000s can be fully assessed. HBS professor Josh Lerner and coauthors address one of these open questions, by examining the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007. In particular, they look at the relationship between the presence of PE investments and the growth rates of productivity, employment, and capital formation. Key concepts include: It is still too early to assess the consequences of the economic conditions in 2008 and 2009, a period where the decrease of investment and absolute volume of distressed private equity-backed assets was far greater than in earlier cycles. Despite this caveat, it appears that: PE investments are associated with faster growth. There is little evidence that economic fluctuations are exacerbated by the presence of PE investments. In industries with PE investments, there are few significant differences between industries with a low and high level of PE activity. Activity in industries with PE backing appears to be no more volatile in the face of industry cycles than in other industries, and sometimes less so. The reduced volatility is particularly apparent in employment. These patterns continue to hold when the focus is on the impact of private equity in continental Europe, where concerns about these investments have been most often expressed. Closed for comment; 0 Comments.
- 07 Jan 2010
- Working Paper Summaries
International Differences in the Size and Roles of Corporate Headquarters: An Empirical Examination
Are small headquarters more nimble and efficient than large ones? Not necessarily, according to HBS adjunct professor David Collis and coauthors David Young and Michael Goold. Even within a single industry in one country, the variance can be enormous: In Germany in the late 1990s, for instance, Hoechst, the chemical and pharmaceutical manufacturer, had only 180 people in the headquarters function at the same time that Bayer had several thousand. This paper seeks to fill gaps in the research by using a unique database of over 600 companies in seven countries to determine whether systematic differences in the size and roles of corporate headquarters between countries actually exist, and if so, how they differ. In particular, the authors examine whether there is a systematic difference between market- and bank-centered economies, and between developed and developing countries. Key concepts include: Contrary to popular expectations, corporate headquarters in the United States are about twice the size of European counterparts yet appear to be more effective. It is not universally valuable to have small corporate headquarters. While companies with small headquarters can be successful, it is clear that larger headquarters can also be correlated with high performance and executive satisfaction with their role and cost- effectiveness. Japanese headquarters are substantially larger than elsewhere—a factor of nearly four times Europe. However, those headquarters are becoming smaller because of dissatisfaction with their performance. The developing country model of headquarters appears to fit none of the developed country models. There is no "market-centered" and "bank-centered" model of corporate headquarters, suggesting that at the level of key corporate decisions, other phenomenon have important independent influences. The size and role of corporate headquarters vary widely both between countries and within countries. There is more variation within each country than there is between countries. Closed for comment; 0 Comments.
Fiduciary Duties and Equity-Debtholder Conflicts
Managerial decisions influence the distribution of value between different parties. This can lead to conflicting interests among financial claimants, such as holders of equity and debt. The Credit Lyonnais v. Pathe Communications bankruptcy ruling of 1991 before the Delaware court—a case widely perceived to have created a new obligation for directors of Delaware‐incorporated firms—provides an interesting opportunity to assess whether and how equity-debt conflict affects firm behavior. HBS professor Bo Becker and Stockholm School of Economics professor Per Strömberg outline important changes in behavior after Credit Lyonnais. Key concepts include: The Credit Lyonnais duties are a prime example of how important the Delaware courts are, and how the differences between Delaware corporate law and other jurisdictions can be of significance. After the ruling, behavior changed for Delaware firms in the vicinity of bankruptcy, which enabled them to enter Chapter 11 in a healthier state, thus making bankruptcy resolution easier. Firms in distress sometimes have an incentive to undertake actions that hurt debt and benefit equity. Such behavior leads to indirect costs of financial distress, discouraging leverage and reducing overall firm value. A reduction in such behavior took place after the Credit Lyonnais ruling. Closed for comment; 0 Comments.