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 29, 2007

How does a commercial firm compete with a free open-source product? A study by Harvard Business School's Deishin Lee and Stanford professor Haim Mendelson examines several angles: the motivations of developers, benefits to consumers, and effects on first-mover advantage. As they found, "if the open-source product is available first, all participants are better off when the commercial and open-source products are compatible." The resulting article, "Divide and Conquer: Competing with Free Technology under Network Effects," is described in a forthcoming issue of Production and Operations Management Journal.

Also newly released: Check out working papers for download on the counterintuitive effects of racial stigma and financial securities that default only under extreme economic conditions; and cases on South African business risks, the start-up of an Asian restaurant chain, and direct-to-consumer wine shipping.

 

Working Papers

Economic Catastrophe Bonds

Abstract

The central insight of asset pricing is that a security's value depends on both its distribution of payoffs across economic states and state prices. In fixed income markets, many investors focus exclusively on estimates of expected payoffs, such as credit ratings, without considering the state of the economy in which default is likely to occur. Such investors are likely to be attracted to securities whose payoffs resemble those of economic catastrophe bonds—bonds that default only under severe economic conditions. We show that many structured finance instruments can be characterized as economic catastrophe bonds, but offer far less compensation than alternatives with comparable payoff profiles. We argue that this difference arises from the willingness of rating agencies to certify structured products with a low default likelihood as safe and from a large supply of investors who view them as such.

Download the paper: http://www.hbs.edu/research/pdf/07-102.pdf

The Persuasive Appeal of Stigma

Abstract

Stigmatized minorities may have an advantage in persuading majority group members during some face-to-face interactions due to the greater self-presentational demands such interactions elicit. In contrast to models which predict greater persuasive impact of members of ingroups, White participants were more convinced by persuasive appeals delivered by a Black interaction partner than by a White interaction partner. When interacting with a Black partner, Whites engaged in greater self-presentation, which in turn made them more susceptible to their partner's persuasive appeal (Studies 1 and 2). This persuasive benefit of stigma was eliminated when participants were exposed to the same partners making the same arguments on video, decreasing self-presentational demands (Study 2). We conclude by discussing when stigma is likely to facilitate versus impair persuasion.

Download the paper: http://www.hbs.edu/research/pdf/07-103.pdf

 

Cases & Course Materials

Bancaja: Developing Customer Intelligence (A)

Harvard Business School Case 107-055

In 1996, CEO Fernando Garcia Checa wanted to make customer analytics a part of Bancaja's new strategy. Bancaja, a savings bank based in Valencia, Spain, was expanding and wanted to exploit customer information to increase commercial effectiveness. At the same time, it was pushing for innovation in the nascent Spanish credit card market. To avoid the considerable investments of time and money that a large-scale customer relationship management (CRM) project would require, the bank decided to explore its benefits with a smaller pilot project. It appointed a CRM project team to design and implement a project focused on credit cards. Describes the challenges of the Spanish credit card market at the time, the methods for profiling credit card customers, and the variables involved in designing an optimal credit card. Concludes with a consideration of the decisions the CRM team had to make in designing the project, including whether to use conjoint analysis or implement a mini campaign.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=107055

Bancaja: Developing Customer Intelligence (B)

Harvard Business School Case 107-066

Excellence in exploiting customer information and leveraging its affiliation to the GM group are among the strategic options that GMAC Insurance CEO Gary Kusumi is considering. GMAC Insurance, the wholly-owned auto insurance subsidiary of General Motors, formed through the merger of two smaller insurance firms, is at a strategic cross-roads. Progressive changed the competitive landscape with its superior pricing abilities, and now Kusumi must decide whether to compete on the ability to use customer information for pricing or whether even larger rewards could be found in leveraging the connection to the GM family. However, although jointly selling auto insurance and cars is common in many countries, the ability to do so at the GM Group is called into question by several significant organizational stumbling blocks.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=107066

Dr. Iqbal Survé at Sekunjalo Investment Group (A)

Harvard Business School Case 407-019

Dr. Iqbal Surve, a self-described "medical doctor, philanthropist, and social entrepreneur," was born in 1963 and grew up in poverty, like virtually all non-white South Africans during apartheid. During the 1970s and 1980s, he served in leadership positions in the ANC, struggling against apartheid. After apartheid ended, Surve served as a medical doctor to many prominent South African leaders, like Nelson Mandela, and to the national soccer team. But by the mid-1990s, Surve, like many of his comrades, grew frustrated by the huge economic disparities that existed in South Africa, even though its progressive constitution afforded all citizens equal rights. It seemed the government's Black Economic Empowerment (BEE) policies were only enriching a few. In 1997, Surve and three of his comrades founded Sekunjalo, an investment holding company that sought to offer "a gentler capitalism" that stressed putting people before profits, and talent development as a means of raising the lives of previously disadvantaged South Africans. By 1999, the company listed on the Johannesburg Stock Exchange, making 36-year-old Surve the youngest CEO of a listed diversified conglomerate. From its inception, Sekunjalo only purchased controlling stakes in companies, hoping to empower black workers. In 1999, it had purchased a 5% stake in LeisureNet, a white-owned and -run South African company that operated health clubs globally and was seeking a BEE partner. Surve hoped to eventually purchase a majority stake in the company, but in 2000 the company went under in the biggest corporate scandal in South African history. In one day, Sekunjalo's stock dropped 44%. Surve, already a very public figure in South Africa, had to decide what to do, especially what to tell his loyal employees who had invested so much in Sekunjalo's mission.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=407019

Dr. Iqbal Survé at Sekunjalo Investment Group (B)

Harvard Business School Supplement 407-054

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=407054

Dr. Iqbal Survé at Sekunjalo Investment Group (C)

Harvard Business School Supplement 407-055

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=407055

Dr. Iqbal Survé at Sekunjalo Investment Group (D)

Harvard Business School Supplement 407-071

Supplements the (A) case.

Purchase this supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=407071

Free the Grapes—Direct-to-Consumer Shipping in the Wine Industry

Harvard Business School Case 707-472

While wine tourism in the United States was booming, the majority of consumers who tasted a Cabernet Sauvignon in one of Napa Valley's tasting rooms were not permitted to ship the wine directly to their home. In 2002, direct-to-consumer shipping was either banned or overly cumbersome in 37 states. W. Reed Foster, president of the Coalition for Free Trade, was determined to remove these obstacles. Would he be able to free the grapes?

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=707472

Stryker Corp.: In-sourcing PCBs

Harvard Business School Case 207-121

This case examines a proposed investment in the capability to manufacture printed circuit boards (PCBs) in-house rather than buying them from third-party contract manufacturers. Stryker Corporation's Instruments business is considering the proposal in response to difficulties with existing suppliers. The case requires students to formulate and execute basic quantitative capital budgeting analyses, specifically, to compute net present value (NPV) internal rate of return (IRR) and payback period.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207121

Vivaldi Food Concepts—The Start-up of an Asian Venture (A)

Harvard Business School Case 806-118

Joel Silverstein needs to raise an additional $1.5 million from private investors to round out the equity financing for his new Quick Service Restaurant venture in China, Korea, and Japan. How should he pitch the opportunity? What should be the terms?

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=806118

 

Publications

Negotiation Genius

Abstract

Whether you've "seen it all" or are just starting out, Negotiation Genius will dramatically improve your negotiating skills and confidence. Drawing on decades of behavioral research plus the experience of thousands of business clients, the authors take the mystery out of preparing for and executing negotiations—whether they involve multimillion-dollar deals or improving your next salary offer.

The Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know

Abstract

Now more than ever before, executives and managers need to understand their larger economic context. In The Concise Guide to Macroeconomics, David Moss leverages his many years of teaching experience at Harvard Business School to lay out important macroeconomic concepts in engaging, clear, and concise terms. In a simple and intuitive way, he breaks down the ideas into "output," "money," and "expectations." In addition, Moss introduces powerful tools for interpreting the big-picture economic developments that shape events in the contemporary business arena. Detailed examples are also drawn from history to illuminate important concepts. This book is destined to become a staple in MBA courses—as well as the go-to resource for executives and managers at all levels seeking to brush up on their knowledge of macroeconomic dynamics.

Information or Opinion? Media Bias as Product Differentiation

Abstract

Two aspects of media bias are important empirically. First, bias is persistent: it does not seem to disappear even when the media is under scrutiny. Second, bias is conflicting: different people often perceive bias in the same media outlet to be of opposite signs. We build a model in which both empirical characteristics of bias are observed in equilibrium. The key assumptions are that the information contained in the facts about a news event may not always be fully verifiable, and consumers have heterogeneous prior views ("ideologies") about the news event. Based on these ingredients of the model, we build a location model with entry to characterize firms' reports in equilibrium, and the nature of bias. When a news item comprises only fully verifiable facts, firms report these as such, so that there is no bias and the market looks like any market for information. When a news item comprises information that is mostly non-verifiable, however, then consumers may care both about opinion and editorials, and a firm's report will contain both these aspects—in which case the market resembles any differentiated product market. Thus, the appearance of bias is a result of equilibrium product differentiation when some facts are nonverifiable. We use the model to address several questions, including the impact of competition on bias, the incentives to report unpopular news, and the impact of owner ideology on bias. In general, competition does not lead to a reduction in bias unless this is accompanied by an increase in verifiability or a smaller dispersion of prior beliefs.

(Noisy) Communication

Abstract

Communication is central to many settings in marketing and economics. A focal attribute of communication is miscommunication. We model this key characteristic as a noise in the messages communicated, so that the sender of a message is uncertain about its perception by the receiver, and then identify the strategic consequences of miscommunication. We study a model where competing senders (of different types) can invest in improving the precision of the informative but noisy message they send to a receiver, and find that there exists a separating equilibrium where senders' types are completely revealed. Thus, although communication is noisy it delivers perfect results in equilibrium. This result stems from the fact that a sender's willingness to invest in improving the precision of their messages can itself serve as a signal. Interestingly, the content of the messages is ignored by the receiver in such a signaling equilibrium, but plays a central role by shaping her beliefs off the equilibrium path (and thus, enables separation between the types). This result also illustrates the uniqueness of the signaling model presented here. Unlike other signaling models, the suggested model does not require that the costs and benefits of the senders will be correlated with their types to achieve separation. The model's results have implications for various marketing communication tools such as advertising and sales forces.

Motivating Supply Chain Behavior: The Right Incentives Can Make All the Difference

Abstract

The article determines the effectiveness of incentives designed to improve inventory and delivery performance, through the "Survey on Information, Incentives, and Performance Management Within Supply Chains." It provides information from mid- to senior-level supply chain executives at almost 50 organizational divisions. Some of the conclusions are considered to be consistent with expectations, while others are more surprising. A detailed report regarding this matter is further presented.

The Second World War as an Economic Disaster

Abstract

World War II was the greatest ever man-made disaster. Yet for all the damage to life and property, the war also brought to an end the deepest Depression in history. Moreover, the decades after the war witnessed more rapid economic growth than the world had ever seen, not least in the vanquished countries. This paper reassesses the economic motivations of the war's instigators; the economic arguments that prevented their being deterred from going to war; the economic reasons for their ultimate defeat; and the economic consequences of the Allied victory. False economic assumptions led the Axis powers to start the war and prevented the Western powers from effectively deterring them. Yet the economic successes of the Allied war economies ensured that the new empires created by the Axis powers did not endure for long. Two models of state-led production—the American and the Soviet—passed the test of total war. Those new models were then exported around the northern hemisphere, generating major improvements in economic performance nearly everywhere they were adopted or imposed.

Risk Management, Capital Budgeting and Capital Structure Policy for Insurers and Reinsurers

Download paper:
http://www.hbs.edu/research/facpubs/workingpapers/abstracts/0304/04-035.html

Land Titling and Rural Transition in Vietnam

Abstract

We examine the impact of the 1993 Land Law of Vietnam which gave households the power to exchange, transfer, lease, inherit and mortgage their land-use rights. We use household surveys before and after the law was passed, together with the considerable variation across provinces in the speed of implementation of the reform to identify the impact of the law. We find that the additional land rights led to statistically significant increases in the share of total area devoted to long-term crops and in labor devoted to non-farm activities. However, these changes are not large in magnitude and appear to be driven mainly by the increased security of tenure provided by the law, rather than by increased access to credit markets or greater land market participation.

Getting Unusual Suspects to Solve R&D Puzzles

Abstract

Often times solutions to difficult problems can arrive from surprising sources. We describe a method of problem solving that entails an open broadcast of problem information to a large pool of external problem solvers. We find that diversity in the knowledge base of the potential solvers is very important for problem solving success. Successful external problem solvers brought solutions from fields that were quite distant from the problem field. We discuss how firms can tap diverse knowledge sources within their own organizations by internal problem broadcasting.

Adoption of Information Technology Under Network Effects

Abstract

Because information technologies are often characterized by network effects, compatibility is an important issue. Although total network value is maximized when everyone operates in one compatible network, we find that the technology benefits of the users depend on vendor incentives, which are driven by the existence of "de facto" or "de jure" standards. In head-to-head competition, customers are better off "letting a thousand flowers bloom," fostering fierce competition which results in a de facto standard if users prefer compatibility over individual fit, or a split market, if fit is more important. In contrast, firms that sponsor these products are better off establishing an upfront, de jure standard to lessen the competitive effects of a network market. However, if a firm is able to enter the market first, by choosing a proprietary/incompatible technology, it can use a "divide and conquer" strategy to increase its profit compared to head-to-head competition, even when there are no switching costs. When there is a first mover, the early adopters, who are "locked-in" because of switching costs, never regret their decision to adopt, whereas the late adopters, who are not subject to switching costs, are exploited by the incumbent firm. Whereas in head-to-head competition, customers are unified in their preference for incompatibility, when there is a first mover, late adopters prefer de jure compatibility since they bear the brunt of the first-mover advantage. This again underscores the interdependence of user net benefits and vendor strategies.

Divide and Conquer: Competing with Free Technology under Network Effects

Abstract

We study how a commercial firm competes with a free open source product. The market consists of two customer segments with different preferences and is characterized by positive network effects. The commercial firm makes product and pricing decisions to maximize its profit. The open source developers make product decisions to maximize the weighted sum of the segments' consumer surplus, in addition to their intrinsic motivation. The more importance open source developers attach to consumer surplus, the more effort they put into developing software features. Even if consumers do not end up adopting the open source product, it can act as a credible threat to the commercial firm, forcing the firm to lower its prices. If the open source developers' intrinsic motivation is high enough, they will develop software regardless of eventual market dynamics. If the open source product is available first, all participants are better off when the commercial and open-source products are compatible. However, if the commercial firm can enter the market first, it can increase its profits and gain market share by being incompatible with its open source competitor, even if customers can later switch at zero cost. This first-mover advantage does not arise because users are "locked-in," but because the commercial firm deploys a "divide and conquer" strategy to attract early adopters and exploit late adopters. To capitalize on its first-mover advantage, the commercial firm must increase its development investment to improve its product features.

Oracle vs. PeopleSoft: A Case Study

Abstract

This case describes Oracle's hostile takeover bid to acquire PeopleSoft, which began with an unsolicited cash tender offer at $16.00 per share in June 2003 and ended with a negotiated deal at $26.50 per share in December 2004. Novel questions of corporate law are raised by the prolonged use of a poison pill against a structurally non-coercive, all-cash, fully-financed offer; as well as PeopleSoft's unprecedented Customer Assurance Program (CAP), which promised PeopleSoft customers between two and five times their money back if Oracle acquired PeopleSoft and then reduced support for PeopleSoft products.

Suppressed Negative Information and Future Underperformance

Abstract

We present evidence of inefficient information processing in equity markets by documenting that biases in analysts' earnings forecasts are reflected in stock prices. In particular, investors fail to account for analysts' tendency to withhold negative views and to issue overly optimistic forecasts when earnings are uncertain. The errors are especially severe when the two effects interact. We show that indicators of missing negative opinions predict earnings surprises and announcement day returns, and can be used to generate profitable trading strategies. Institutions often trade against the mispricing, and in doing so push prices closer to the fundamentals.

Bargaining in the Shadow of PeopleSoft's (Defective) Poison Pill

Abstract

This Commentary is part of a dealmaking symposium on the Oracle-PeopleSoft contest from 2003-2004. The facts of the case are described in Millstone & Subramanian (2007). This Commentary examines Oracle's alternatives and PeopleSoft's potential responses in the fall of 2004. I demonstrate that certain defects in the design of PeopleSoft's poison pill made a deliberate pill trigger a plausible course of action for Oracle at this critical juncture. This radical maneuver becomes even more attractive because Oracle had made the negotiated acquisition route extremely expensive for itself by revealing that it had $26 per share in its pocket nine months earlier. Even if Oracle had not actually triggered PeopleSoft's poison pill, threatening this maneuver would have given Oracle bargaining power that it could have used to pay a lower price in its negotiated acquisition. The Commentary closes with implications of this analysis for practitioners, boards of directors, and the Delaware courts.