First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty. Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice. For complete details on faculty research, see our Working Papers section.
May 8, 2007
Can you survive your new CEO? Yes—but be aware that when a new CEO enters, many executives are shown the exit. Research by Harvard Business School's Kevin P. Coyne and Stanford's Edward J. Coyne Sr. in this month's Harvard Business Review describes how common such shake-outs actually are. "Chances are high that executives will find themselves out the door. … Despite this grim picture, our interviews with CEOs revealed steps you can take to survive and even thrive, depending on how you behave in the first few days, weeks, and months of the new leader's tenure." Their practical advice includes "Early impressions count—more than you know or believe they should."
Also new this week: a PDF for download on privacy valuation; strategy expert Pankaj Ghemawat on why the world is not yet flat; and a case on German wholesaler Metro Cash & Carry and its challenges entering India.
Strategy-proofness versus Efficiency in Matching with Indifferences: Redesigning the NYC High School Match
|Authors:||Atila Abdulkadiroglu, Parag A. Pathak, and Alvin E. Roth|
The design of the New York City (NYC) High School match involved tradeoffs between incentives and efficiency, because some schools are strategic players that rank students in order of preference, while others order students based on large priority classes. Therefore it is desirable for a mechanism to produce stable matchings (to avoid giving the strategic players incentives to circumvent the match), but is also necessary to use tie-breaking for schools whose capacity is sufficient to accommodate some but not all students of a given priority class. We analyze a model that encompasses one-sided and two-sided matching models. We first observe that breaking indifferences the same way at every school is sufficient to produce the set of student optimal stable matchings. Our main theoretical result is that a student-proposing deferred acceptance mechanism that breaks indifferences the same way at every school is not dominated by any other mechanism that is strategy-proof for students. Finally, using data from the recent redesign of the NYC High School match, which places approximately 90,000 students per year, we document that the extent of potential efficiency loss is substantial. Over 6,800 student applicants in the main round of assignment could have improved their assignment in a (non strategy-proof) student optimal mechanism, if the same student preferences would have been revealed.
Download the paper: http://www.hbs.edu/research/pdf/07-076.pdf
Repugnance as a Constraint on Markets
|Author:||Alvin E. Roth|
This essay examines how repugnance sometimes constrains what transactions and markets we see. When my colleagues and I have helped design markets and allocation procedures, we have often found that distaste for certain kinds of transactions is a real constraint, every bit as real as the constraints imposed by technology or by the requirements of incentives and efficiency. I'll first consider a range of examples, from slavery and indentured servitude (which once were not as repugnant as they now are) to lending money for interest (which used to be widely repugnant and is now not), and from bans on eating horse meat in California to bans on dwarf tossing in France. An example of special interest will be the widespread laws against the buying and selling of organs for transplantation. The historical record suggests that while repugnance can change over time, it can persist for a very long time, although changes in institutions that reflect repugnance can occur relatively quickly when the underlying repugnance changes.
Download the paper: http://www.hbs.edu/research/pdf/07-077.pdf
An Empirical Approach to Understanding Privacy Valuation
|Authors:||Luc Wathieu and Allan Friedman|
The purpose of this paper is to detect the presence of sophisticated economic motives behind individual concerns for privacy. Recent theories of privacy demands in commercial contexts have assumed an economically aware and sophisticated consumer, capable of evaluating the indirect consequences of information transmission. We present evidence, from a large-scale experiment evoking a realistic context, that privacy concerns are indeed sensitive to the indirect consequences of information transmission.
Download the paper: http://www.hbs.edu/research/pdf/07-075.pdf
How Is Foreign Aid Spent? Evidence from a Compelling Natural Experiment
|Authors:||Eric Werker, Faisal Z. Ahmed, and Charles Cohen|
We use yearly variations in the price of oil to construct a powerful new instrument to test the impact of an important but often-overlooked foreign aid channel: money given by wealthy OPEC nations to their poorer Muslim allies. The instrument identifies plausibly exogenous variation in foreign aid. We investigate how aid is spent by tracking its short-run effect on aggregate demand, prices, the national accounts, savings, and the balance of payments. We find that aid is mostly consumed, primarily in the form of higher imports of non-capital goods. Some aid is invested and aid has a small but insignificant effect on growth. Aid has no effect on the financial account, but does raise holdings of foreign reserves.
Download the paper: http://www.hbs.edu/research/pdf/07-074.pdf
Cases & Course Materials
French Unemployment: The Crisis Continues
Harvard Business School Supplement 707-020
Supplements the (A) case.
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Global Climate Change and Emissions Trading
Harvard Business School Case 707-015
Global climate change is an increasingly prominent political and business problem. Design of market-based systems to reduce carbon emissions has proven difficult. More broadly, national attempts to comply with the provisions of the Kyoto Protocol present both governments and firms with significant challenges. The design of international institutions that will be useful for managing change after the Kyoto period is a challenge both for Kyoto ratifiers and for countries like the United States that have not ratified the agreement. Summarizes the science and economics of climate change, and encourages readers to contemplate the strategic and risk management problems that it presents to government officials and to business leaders in developed countries and in the developing world.
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Latvia: Economic Strategy after EU Accession
Harvard Business School Case 707-515
Describes the economic development of Latvia, a small eastern European country on the shores of the Baltic Sea, from regaining independence in 1991 to European Union (EU) accession in 2004 and is set on May 1st, 2004, the day Latvia became an EU member. Latvia had achieved strong growth since regaining independence from the Soviet Union in 1990. Describes Latvia's economic development over this period, discussing the economic policy efforts that have taken place and includes general information on the country, its history and politics, and the business environment that companies faced in 2004. A special focus is the influence that the EU accession process has on the Latvian economy and on economic policy choices in the country. Challenges students to discuss how the environment changes as EU membership is achieved, and which new priorities the country might need to define for its economic policy.
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METRO Cash & Carry
Harvard Business School Case 707-505
Analyzes the globalization of Metro Case & Carry, a German wholesaler, which has flourished in many foreign markets but struggled to gain traction in India. Considers Metro's experience in Russia and China to put the company's challenges in India in comparative perspective. Pays particular attention to the institutional obstacles for a multinational to tap into the opportunities offered by emerging markets.
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Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter
|Publication:||Boston: Harvard Business School Press, forthcoming|
Why do so many global strategies fail—despite companies' powerful brands and other border-crossing advantages? Seduced by market size, the illusion of a borderless, "flat" world, and the allure of similarities, firms launch one-size-fits-all strategies. But cross-border differences are larger than we often assume, explains Pankaj Ghemawat in Redefining Global Strategy. Most economic activity—including direct investment, tourism, and communication—happens locally, not internationally. In this "semiglobalized" world, one-size-fits-all strategies don't stand a chance. Companies must instead reckon with cross-border differences. Ghemawat shows you how—by providing tools for:
- Assessing the cultural, administrative, geographic, and economic differences between countries at the industry level and deciding which ones merit attention.
- Tracking the implications of particular border-crossing moves for your company's ability to create value.
- Creating superior performance with strategies optimized for adaptation (adjusting to differences), aggregation (overcoming differences), and arbitrage (exploiting differences), and for compound objectives.
- In-depth examples reveal how companies such as Cemex, Toyota, Procter & Gamble, Tata Consultancy Services, IBM, and GE Healthcare have adroitly managed cross-border differences—as well as how other well-known companies have failed at this challenge.
Inner Work Life: Understanding the Subtext of Business Performance
|Authors:||Teresa M. Amabile and Steven J. Kramer|
|Periodical:||Harvard Business Review 85, no. 5 (May 2007)|
Anyone in management knows that employees have their good days and their bad days—and that, for the most part, the reasons for their ups and downs are unknown. Most managers simply shrug their shoulders at this fact of work life. But does it matter, in terms of performance, if people have more good days than bad days? Teresa Amabile and Steven Kramer's new stream of research, based on more than 12,000 diary entries logged by knowledge workers over three years, reveals the dramatic impact of employees' inner work lives—their perceptions, emotions, and motivation levels—on several dimensions of performance. People perform better when their workday experiences include more positive emotions, stronger intrinsic motivation (passion for the work), and more favorable perceptions of their work, their team, their leaders, and their organization. What the authors also found was that managers' behavior dramatically affects the tenor of employees' inner work lives. So what makes a difference to inner work life? When the authors compared the study participants' best days to their worst days, they found that the single most important differentiator was their sense of being able to make progress in their work. The authors also observed interpersonal events working in tandem with progress events. Praise without real work progress, or at least solid efforts toward progress, had little positive impact on people's inner work lives and could even arouse cynicism. On the other hand, good work progress without any recognition—or, worse, with criticism about trivial issues—could engender anger and sadness. Far and away, the best boosts to inner work life were episodes in which people knew they had done good work and their managers appropriately recognized that work.
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Surviving Your New CEO
|Authors:||Kevin P. Coyne and Edward J. Coyne Sr.|
|Periodical:||Harvard Business Review 85, no. 5 (May 2007)|
Almost 50% of the largest American firms will have a new CEO within the next four years; your company could very well be next. Senior executives know that a CEO transition means they're in for a round of firings, organizational reshuffles, and other unwelcome career changes. When your career suddenly depends on the views of a person you may not know, how worried should you be? According to the authors—very. They investigated the 2002-2004 CEO turnover rates of the top 1,000 U.S. companies and interviewed more than a dozen CEOs, each of whom had taken over at least one very large organization. Their study reveals that when a new CEO takes charge, remaining top managers are more likely than not to be shown the door. Those who leave often land in a lower position at a new company, work in a much smaller firm, or retire altogether. The news is not all grim, however. The interviewees offer some pointers on how to create a good impression and maximize your chances of survival and success under the new regime. Some of that advice may surprise you. One CEO pointed out, for instance, that "managers do not realize how much the CEO is looking for teammates on day one. I am amazed at how few people come through the door and say, 'I want to help. I may not be perfect, but I buy into your vision.'" Other recommendations are more intuitive, such as learning the new CEO's working style, understanding his or her agenda, and helping him or her look good in the new position by achieving positive operating results—and soon. Along with the inevitable stresses, the authors point out, CEO transitions can provide opportunities. Whether you reinvigorate your career within your company or find fulfillment elsewhere, the key lies in deciding what you want to do—and then doing it right.
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Assessing and Improving the Safety of Internet Search Engines
|Publication:||In The Power of Search Engines, edited by Marcel Machill and Markus Beiler, 259-277. Koln, Germany: Herbert von Halem Verlag, 2007|
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Strategic Bidder Behavior in Sponsored Search Auctions
|Authors:||Benjamin Edelman and Michael Ostrovsky|
|Periodical:||Journal of Decision Support Systems 43, no. 1 (February 2007): 192-198|
We examine sponsored search auctions run by Overture (now part of Yahoo) and Google and present evidence of strategic bidder behavior in these auctions. Between June 15, 2002, and June 14, 2003, we estimate that Overture's revenue from sponsored search might have been higher if it had been able to prevent this strategic behavior. We present a specific alternative mechanism that could reduce the amount of strategizing by bidders, raise search engines' revenue, and also increase the overall efficiency of the market. We conclude by showing that advertisers' strategic behavior has not disappeared over time; rather, such behavior remains present on both search engines.
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Internet Advertising and the Generalized Second-Price Auction: Selling Billions of Dollars Worth of Keywords
|Authors:||Benjamin Edelman, Michael Ostrovsky, and Michael Schwarz|
|Periodical:||American Economic Review 97, no. 1 (March 2007): 242-259|
We investigate the "generalized second-price" auction (GSP), a new mechanism used by search engines to sell online advertising. Although GSP looks similar to the Vickrey-Clarke-Groves (VCG) mechanism, its properties are very different. Unlike the VCG mechanism, GSP generally does not have an equilibrium in dominant strategies, and truth-telling is not an equilibrium of GSP. To analyze the properties of GSP, we describe the generalized English auction that corresponds to the GSP and show that it has a unique equilibrium. This is an ex-post equilibrium, with the same payoffs to all players as the dominant strategy equilibrium of VCG.
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On the Origin of Strategy: Action and Cognition over Time
|Authors:||Giovanni Gavetti and Jan W. Rivkin|
|Periodical:||Organization Science (forthcoming)|
We develop a perspective on how managers search for a strategy. In the spirit of Cyert and March (1963), we aim for a perspective that reflects the reality of managerial behavior; that respects both the reasoning power of managers and the bounds on their rationality; and that permits organizations to change, but within realistic limits. Our perspective employs the variable time to frame the question of strategy's origins in a distinctive way. Over time, the cognitive and physical elements that make up a strategy become less plastic, while mechanisms to search rationally for a strategy become more available. This generates a fundamental tension in the origin of strategy: managers struggle to understand their environment well enough to search rationally for an effective strategy before their firms lose the plasticity necessary to exploit that understanding. A focus on time allows us to synthesize and extend the evolutionary and positioning models of strategic search. Toward this end, we couple induction and deduction. The inductive part of the paper uses detailed observation of the search for a strategy at one firm in order to identify constructs that play a crucial role in strategic search. The deductive part steps beyond our focal firm and uses these constructs to derive theoretical propositions about the typical path of strategic search and the mortality associated with different approaches to search.
Neo-Carnegie: The School's Past, Present, and Reconstructing for the Future
|Authors:||Giovanni Gavetti, Daniel Levinthal, and William Ocasio|
|Periodical:||Organization Science (forthcoming)|
A Behavioral Theory of the Firm and the broader " Carnegie School" form critical theoretical underpinnings for modern organization studies. Despite its impact, however, we suggest researchers who rely on the Carnegie School have progressively lost touch with its defining commitment to a decision-centered view of organizations. Decision-making has given way to learning, routines, and an increased focus on change and adaptation; the organizational level of analysis, although frequently invoked, has been largely supplanted by either a more micro or a more macro focus. In this paper, we argue for restoring the School's original mission and perspective. Our proposal for how this overarching goal can be achieved encompasses three central points. First, we believe the School needs to resurrect a few select ideas that, despite their fundamental importance, have been neglected over time. Second, we believe there is a need for greater paradigmatic closure amongst the School's central theoretical pillars. Loose coupling among such pillars might keep key insights on organizational decision making from emerging. Finally, there is the need to incorporate major developments that have been generated post-Carnegie School, both within organization theory and in the behavioral and social sciences more broadly. In particular, we point to the shift to more open systems perspectives on organizations, the conceptions of organizations being embedded in larger social contexts, and recent developments in the study of individual cognition.
Why the World Isn't Flat
|Periodical:||Foreign Policy, no. 159 (March/April 2007): 54-60|
The article discusses what the author sees as a misperception that globalization has made national boundaries nearly obsolete. Statistics are cited that over 90 percent of phone calls, Internet traffic, and investment is local. The author contends global interconnectedness and integration have barely occurred, and globalization's future is fragile. Cross-border mergers are running up against protectionism, and local economic stagnation may lead to a reversal of globalization that may persist for decades.
The Innovation of Time-Driven Activity-Based Costing
|Authors:||Robert S. Kaplan and Steven R. Anderson|
|Periodical:||Journal of Cost Management 21, no. 2 (March-April 2007): 5-15|
Activity-based costing has enabled managers to see that not all revenue is good revenue and not all customers are profitable customers. Unfortunately, the difficulties of implementing and maintaining a conventional ABC system have prevented this innovation from being an effective, timely, and up-to-date management tool. The time-driven ABC approach overcomes these difficulties and has a number of advantages: 1. easier and faster to build an accurate model, 2. integrates well with data, 3. drives costs to transactions and orders using specific characteristics of particular orders, 4. can be run monthly to capture the economics of the most recent operations, 5. provides visibility to process efficiencies and capacity utilization, 6. enables fast and inexpensive model maintenance, 7. forecasts resource demands, allowing companies to budget for resource capacity on the basis of predicted order quantities and complexity, and 8. can be used in any industry or company with complexity in customers, products, channels, segments, and processes and large amounts of people and capital expenditures.