First Look

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.

June 19, 2007

People do not always behave rationally, a fact recognized in business disciplines from finance to marketing. Operations research, however, has yet to catch up, as Carnegie Mellon's Francesca Gino and HBS professor Gary Pisano discovered. Like behavioral economics, behavioral operations attempts to understand the rational and irrational tendencies in human beings. In a new working paper available for download, the authors explain what behavioral economics means in both a theoretical and a practical sense. "We know many things now about biases such as sunk costs, framing, and the planning fallacy, to mention just a few, but how those affect the behavior and performance of operating systems is still unexplored. This will require the development of novel conceptual insights," they write.

Also new this week: an abundance of other working papers for download, including a study of film rentals and procrastination; and cases on the National Football League, MD Beauty, and the Harvard Stem Cell Institute.

 

Working Papers

Auditing in the Self-reporting Economy

Abstract

This paper examines the licensing of intellectual property in exchange for royalties that depend on the self-report of the licensee. The self-reporting aspect of the problem gives rise to demand for auditing by the licensor. We characterize the optimal royalty contract, accounting system choice by the licensee, and audit strategy choice by the licensor. We show when the owner prefers to license the property in exchange for a royalty and when it prefers to use the property directly. We also show that the internal control provisions of section 404 of Sarbanes-Oxley make royalty arrangements based on self-reporting more attractive.

Download the paper: http://www.hbs.edu/research/pdf/07-100.pdf

Toward a Theory of Behavioral Operations

Abstract

Human beings are critical to the functioning of the vast majority of operating systems, influencing both the way these systems work and how they perform. Yet most formal analytical models of operations assume that the people who participate in operating systems are fully rational or at least can be induced to behave rationally. Many other disciplines, including economics, finance, and marketing, have successfully incorporated departures from this rationality assumption into their models and theories. In this paper, we argue that operations management scholars should do the same. We highlight initial studies that have adopted a "behavioral operations perspective" and explore the theoretical and practical implications of incorporating behavioral and cognitive factors into models of operations. Specifically, we address three questions: 1) What is a behavioral perspective on operations? 2) What might be the intellectual added value of such a perspective? 3) What are the basic elements of behavioral operations research?

Download the paper: http://www.hbs.edu/research/pdf/07-096.pdf

Film Rentals and Procrastination: A Study of Intertemporal Reversals in Preferences and Intrapersonal Conflict

Abstract

We report on a field study demonstrating systematic differences between how people anticipate preferences and their subsequent preferences. We examine the film rental and return patterns of a sample of online DVD rental customers over a period of four months. We predict and find that people are more likely to rent DVDs in one order and return them in the reverse order when should DVDs (e.g., documentaries) are rented before want DVDs (e.g., action films). Relatedly, we also predict and find that should DVDs are held longer than want DVDs.

Download the paper: http://www.hbs.edu/research/pdf/07-099.pdf

Growth and the Quality of Foreign Direct Investment: Is All FDI Equal?

Abstract

In this paper we distinguish different "qualities" of FDI to re-examine the relationship between FDI and growth. We use 'quality' to mean the effect of a unit of FDI on economic growth. However, this is difficult to establish because it is a function of many different country and project characteristics which are often hard to measure. Hence, we differentiate "quality FDI" in several different ways. First, we look at the possibility that the effects of FDI differ by sector. Second, we differentiate FDI based on objective qualitative industry characteristics including the average skill intensity and reliance on external capital. Third, we use a new dataset on industry-level targeting to analyze quality FDI based on the subjective preferences expressed by the receiving countries themselves. Finally, we use a two-stage least squares methodology to control for measurement error and endogeneity. Exploiting a new comprehensive industry level data set of 29 countries between 1985 and 2000, we find that the growth effects of FDI increase when we account for the quality of FDI.

Download the paper: http://www.hbs.edu/research/pdf/07-072.pdf

How Well Do Social Ratings Actually Measure Corporate Social Responsibility?

Abstract

Ratings of corporations' environmental activities and capabilities influence billions of dollars of "socially responsible" investments as well as some consumers, activists, and potential employees. In one of the first studies to assess these ratings, we examine how well the most widely used ratings—those of Kinder, Lydenberg, Domini Research & Analytics (KLD)—provide transparency about past and likely future environmental performance. We find KLD "concern" ratings to be fairly good summaries of past environmental performance. In addition, firms with more KLD concerns have slightly, but statistically significantly, more pollution and regulatory compliance violations in later years. KLD environmental strengths, in contrast, do not accurately predict pollution levels or compliance violations. Moreover, we find evidence that KLD's ratings are not optimally using publicly available data. We discuss the implications of our findings for advocates and opponents of corporate social responsibility as well as for studies that relate social responsibility ratings to financial performance.

Download the paper: http://www.hbs.edu/research/pdf/07-051.pdf

Alignment in Cross-Functional and Cross-Firm Supply Chain Planning

Abstract

In this paper, we seek to use quantitative models to help appreciate the behavioral processes associated with successful cross-functional and cross-firm alignment in supply/demand planning. We model the interaction between a sales and a manufacturing function within a firm, or between an upstream and downstream firm. We claim that misalignment is costly both to the involved functions/firms and to the rest of the organization or supply chain, and focus the paper on studying the circumstances under which alignment will or will not happen. Using game theory, we find that, although misaligned economic incentives can play a role in explaining misalignment of planning behaviors, there is another important issue to consider: in our setting, the key factor that determines whether two functions or firms can align their planning is how much each party knows about the other's beliefs about demand. Thus, in this paper's setting, improved communication can induce alignment even if no economic incentives are changed. While consistent with the predominant view in organizational behavior (OB), this is a fundamental departure from the extant operations management (OM) literature.

Download the paper: http://www.hbs.edu/research/pdf/07-058.pdf

Future Lock-In: Future Implementation Increases Selection of 'Should' Choices

Abstract

People often experience tension over certain choices (e.g., they should reduce their gas consumption or increase their savings, but they do not want to). Some posit that this tension arises from the competing interests of a deliberative 'should self' and an affective 'want self'. We show that people are more likely to select choices that serve the should self (should-choices) when the choices will be implemented in the distant rather than the near future. This 'future lock-in' is demonstrated in five experiments for should-choices involving donation, organizations, public policy, and self-improvement. Additionally, we show that future lock-in can arise without changing the structure of a should-choice, but just changing people's temporal focus. Finally, we provide evidence that the should self operates at a higher construal level (abstract, superordinate) than the want self, and that this difference in construal partly underlies future lock-in.

Download the paper: http://www.hbs.edu/research/pdf/07-038.pdf

A Perceptions Framework for Categorizing Inventory Policies in Single-stage Inventory Systems

Abstract

In this paper we propose a perceptions framework for categorizing a range of inventory policies, including optimal inventory policies, that can be employed in a single-stage supply chain. We take the existence of a wide range of inventory policies, including what we would term optimal and suboptimal policies, as given and strive not to model the reasons that the policies persist but seek a way to categorize them via their effects on inventory levels, orders placed and the demand faced by the inventory system. Using a perspective that we consider natural and thus appealing, the categorization involves the use of conceptual perceptions of demand which underpin the link between the three characteristics of the inventory system: inventory levels, orders placed and actual demand faced. The perceptions framework is based on forecasting with Auto-Regressive Integrated Moving Average (ARIMA) time series models. The context in which we develop this perceptions framework is of a single stage stochastic inventory system with periodic review, constant leadtimes, infinite supply, full backlogging, linear holding and penalty costs and no ordering costs. Forecasting ARIMA time series requires tracking forecast errors (interpolating) and using these forecast errors and past demand realizations to predict future demand (extrapolating). Categorizing deviations from optimal inventory policies is possible if we allow the perception about demand implied by the interpolations or extrapolations to be different from the actual demand process.

Download the paper: http://www.hbs.edu/research/pdf/07-036.pdf

 

Cases & Course Materials

Academia Barilla

Harvard Business School Case 507-001

Barilla, the world's largest pasta company, has introduced a new high-quality, high-priced product line that features a range of authentic Italian food products sourced from artisan producers. Management believes the line will appeal to consumers seeking healthier foods and convenience, and will help extend Barilla's brand identification beyond pasta. However, the new line is a bold departure from Barilla's core competencies of high-volume production and sales of fast moving, low-priced goods. Provides an opportunity to discuss trends in consumer eating habits, supply chains for locally-produced goods, and changes in retail formats. In addition, provides an opportunity to discuss the difference in investment philosophy between a family-owned company and a publicly-traded company.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=507001

Arizona Department of Public Health: The Challenges of Preparing for a Public Health Emergency

Harvard Business School Case 807-016

In the post-9/11 era information technology enablement for emergency preparedness and response have taken on increased significance. Public health organizations like ADHS play a critical role in any statewide preparation for large scale emergencies. With issues like bio-terrorism surveillance being added to a list of critical responsibilities for public health there is an urgent need to leverage IT infrastructure to meet new challenges. Historically lean funding cycles for public health has not allowed for fundamental information technology-based reach extensions. An infusion of $9.3 million from CDC has allowed ADHS to broaden its coverage through the creative use of information technology. As an initial step, ADHS initiated the development and deployment of MEDSIS. This project is causing public health in Arizona to re-evaluate their workflow and business processes as they collaborate with various counties in delivering public health effectively.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=807016

Basic Techniques for the Analysis of Customer Information Using Excel: A Step-by-Step Approach

Harvard Business School Note 107-073

Provides a set of easy, step-by-step guides for some analytical techniques that are useful in the analysis of cases discussed in the course "Competing and Winning Through Customer Information (CWCI)". The instructions that follow use datasets from three of the cases in this course: "Slots, Tables, and All That Jazz: Managing Customer Profitability at the MGM Grand Hotel"; "MercadoLibre.com"; and "Bancaja: Developing Customer Intelligence (A)". These datasets are available upon request from the author.

Purchase this note:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=107073

CEMEX: Rewarding Egyptian Retailers

Harvard Business School Case 106-065

CEMEX has pursued an aggressive decommoditization strategy focused on its relationship with small Egyptian retailers. In particular, the strategic role and effectiveness of the Rewards Program, a tournament that rewarded the sales performance of the retailers, was called into question by Assiut Cement's management based on the results of its first two rounds.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=106065

Dubailand: Destination Dubai

Harvard Business School Case 207-005

Under the leadership of the al-Maktoum family, Dubai, a member of the United Arab Emirates, invested heavily in its infrastructure to reduce national dependence on oil and gas reserves. As an established international destination for shipping, business initiatives, and tourism in the Middle East, Dubai embarked on a new megascale project: to construct the world's largest amusement park, called Dubailand. Examines various aspects of Dubai's background, world real estate and tourism trends, and environmental and political conditions of the region to support a discussion of this ambitious project's feasibility.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207005

The Dubai Ports World Debacle and Its Aftermath

Harvard Business School Case 707-014

Describes the political ramifications in the United States of Dubai-based DP World's acquisition of London-based Peninsular and Oriental Steam Navigation Company (P&O). Because P&O operated some port terminals in the United States, DP World obtained clearance from the Committee on Foreign Investments in the United States before P&O shareholders approved the deal in February 2006. Nonetheless, a ruckus over port security erupted both in Congress and in the press and this ruckus led DP World to promise that it would relinquish the U.S. terminals of P&O. Also contains a brief description of Dubai and its relationship to the U.S., a discussion of issues related to port security, and a brief history of U.S. security concerns with foreign direct investment. Ends with a depiction of the Bills passed unanimously by the U.S. House and Senate to further regulate foreign investment in the wake of the DP World debacle.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=707014

GE's Jeff Immelt: The Voyage from MBA to CEO

Harvard Business School Case 307-056

GE believes its ability to develop management talent is a core competency that represents a source of sustainable competitive advantage. Traces the development of a 25-year-old MBA named Jeff Immelt, who 18 years later is named as CEO of GE, arguably the biggest and most complex corporate leadership job in the world, and how he frames and implements his priorities for GE. Describes the processes that guided Immelt's own developments and the strategic changes Immelt adopts in his first year as CEO, when he pulls hard on the sophisticated human resource levers his predecessors left him. Immelt questions whether the changes in place will foster the development of the next generation of GE growth leaders.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=307056

Go Red For Women: Raising Heart Health Awareness

Harvard Business School Case 507-026

In 2003, the $654 million American Heart Association (AHA) approached Cone, Inc. (a brand and communications agency) to develop a corporate sponsorship strategy that would raise $75 million over three years. Within 12 months, the AHA launched the highly successful Go Red For Women campaign to help women understand their risk for heart disease. But Go Red became more than a fundraising vehicle. It energized the AHA and its 22 million volunteers, and potentially sparked a long-term movement focused on women and their prevention of heart disease. Traces the development of the relationship between Cone and the AHA and the development of the Go Red For Women campaign. Challenges students to assess the success of Go Red and its impact on the AHA and its goals. Concludes by summarizing three of the AHA's other health initiatives and questions the appropriate role for the AHA and cause marketing.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=507026

The Harvard Stem Cell Institute

Harvard Business School Case 807-096

Describes a set of issues confronting the leaders of the Harvard Stem Cell Institute, an innovative cross-university effort to accelerate scientific discovery and translation in the domain of stem cells. Covers a wide range of topics, including understanding how science research gets funded, how politics affect research, how universities approach intellectual property, how countries (and states) compete for talent, and how therapies are developed.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=807096

The Howland Long-Term Opportunity Fund

Harvard Business School Case 207-066

Melissa Howland, founder of an investment firm, must choose between two competing investments, which differ in size, maturity, and rate of return.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207066

Lean at Wipro Technologies

Harvard Business School Case 607-032

Wipro Technologies, a rapidly growing software services firm based in India, decided to use principles from the Toyota Production System (also known as lean) to fundamentally change their operating model. Looks at why Wipro chose to use lean and how they went about implementing it in a novel context such as this. Provides detail of Wipro's internal and external environment, which was necessitating the change (shift from delivering a low-cost product to providing a business solution). Also, explores whether this new approach can lead to a substantial competitive advantage.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=607032

MD Beauty, Inc.

Harvard Business School Case 806-045

Describes some of the issues confronting the entrepreneurial team responsible for creating a highly successful natural beauty and skin care company. They are considering selling all or some portion of the company's stock.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=806045

The NFL

Harvard Business School Case 706-412

From 10-cent tickets to $17 billion television contracts, examines how a game became a multibillion dollar industry. Looks at the birth and growth of the NFL, how the NFL responded to competitive challenges, how the NFL maximized revenues, revenue sharing, the salary cap, and a financial comparison of the NFL with MLB, NBA, etc. The NFL from start to finish.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=706412

An Overview of Project Finance and Infrastructure Finance—2006 Update

Harvard Business School Note 207-107

Provides an introduction to the fields of project finance and infrastructure finance, and gives a statistical overview of project-financed investments over the years from 2002 to 2006. Examples of project-financed investments include the $4 billion Chad-Cameroon pipeline, $6 billion Iridium global satellite telecommunications system, $900 million A2 Toll Road in Poland, $1.4 billion Mozal aluminum smelter in Mozambique, and $20 billion Sakhalin II gas field in Russia. Globally, firms financed $328 billion of capital expenditures using project finance in 2006, up from $217 billion in 2001. The use of project finance has grown at a compound rate of 13% over the past 10 years. Focuses primarily on private sector investment in industrial and infrastructure projects, and contains four sections. The first section defines project finance and contrasts it with other well-known financing mechanisms. The second section describes the evolution of project finance from its beginnings in the natural resources industry in the 1970s, to the U.S. power industry in the 1980s, to a much wider range of industry applications and geographic locations in the 1990s, to infrastructure finance in the 2000s. The third section provides a statistical overview of project-financed investment over the last five years (2002 to 2006), and looks at industry, project, and participant specific data. In addition, provides recent data on infrastructure investments and public-private partnerships. The final section discusses current and likely future trends.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207107

Podcasting

Harvard Business School Compilation 806-109

Profiles the nascent podcasting industry, based on a compilation of published articles. Describes factors driving industry growth, barriers to adoption, ecosystem roles, and potential business models.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=806109

Protecting Foreign Investors

Harvard Business School Note 706-044

Describes the emergence of several kinds of efforts to assure the safety of foreign investment in emerging markets: international arbitration, expanded official political risk insurance, credit from government agencies, and intervention by investors' home governments. Points out the roles of bilateral investment treaties and regional economic agreements in making arbitration accessible to an increasing number of foreign investors. Views the various arrangements as substitutes for a global agreement on foreign direct investment that would parallel the WTO for trade given that attempts to negotiate a comprehensive arrangement have so far failed. Also, presents several criticisms of the current system.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=706044

Providian Financial Corporation

Harvard Business School Case 707-446

On October 3, 2005, Washington Mutual acquired Providian Financial Corporation, the ninth-largest credit card issuer in the U.S., for $6.5 billion. At the time, Providian had approximately 10 million customer relationships and a balance of $18.6 billion. For some observers, the transaction was merely the end of another chapter in the history of the fast consolidating credit card market. For Providian CEO Joseph Saunders, it was vindication of four years' hard work in turning around a company that many thought was close to bankruptcy.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=707446

SAP: Industry Transformation (A)

Harvard Business School Case 707-435

SAP seeks growth in the small- and medium-sized enterprise market. To do so, it has created a platform strategy with SAP Netweaver. What are the advantages and challenges for an incumbent entering a new market? What are the benefits and challenges of implementing a platform strategy?

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=707435

Stedman Place: Buy or Rent?

Harvard Business School Case 207-063

A couple has to decide whether to continue renting a townhouse or buy the one next door. Allows for a discussion of net present value, internal rate of return, and the costs and benefits of homeownership.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207063

Summit Partners—The FleetCor Investment (A)

Harvard Business School Case 807-033

Part of a 3-case series in which students get to see the unfolding of due diligence on private equity (buy out) deal. In this, the A case, the deal team has negotiated a letter of intent with FleetCor, a firm that operates a fuel payment network for vehicle fleets. Presents the basic investment thesis and analysis that the team has done to get to this stage. Asks students to not only come to a point of view on whether this looks like a good opportunity at the price and financial structure proposed, but what due diligence needs to be done prior to actually writing the check.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=807033

Summit Partners—The FleetCor Investment (B)

Harvard Business School Supplement 807-034

Supplements the (A) case.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=807034

Summit Partners—The FleetCor Investment (C)

Harvard Business School Supplement 807-035

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=807035

ThinkCycle, Supplement to Epodia

Harvard Business School Supplement 606-056

Supplements the case "Epodia: Demise of the HBS Case-Writing Monopoly?"

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=606056

Warner Music Group

Harvard Business School Case 207-068

TH Lee, a leading private equity firm, needs to decide whether to commit to the acquisition of AOL Time Warner's music group, and whether to commit the entire amount needed, $1.4 billion. The music industry has suffered greatly in recent years, largely as a result of music piracy.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207068

Wal-Mart in Europe

Harvard Business School Case 704-027

Presents challenges facing Wal-Mart during its move into Germany. Explores the dynamics of the German retail market.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=704027

 

Publications

Capital Structure with Risky Foreign Investment

Abstract

Political risks increase the volatility of multinational firm operating returns, prompting firms to adjust their capital structures. Politically risky countries feature more volatile returns, and the volatility of a parent company's aggregate foreign returns also increases with the extent of the firm's political risk exposure. Parent companies mitigate the cost of return volatility by adjusting their capital structures: a one standard deviation increase in exposure to political risks reduces domestic leverage by 4.4% of its mean level. Foreign political risks most strongly influence the capital structures of firms in industries that are particularly susceptible to political risks. These results suggest that other business risks may similarly affect capital structures.