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.

December 4, 2007

This week, an article about online dating (see our interview); a case on how China's largest corporate caterer thinks through its financing strategy; and (speaking of mergers) a case exploration of a cross-border alliance in insurance and financial services completed by German firm Allianz AG and Italy's RAS.

 

Working Papers

The "Fees → Savings" Link, or Purchasing Fifty Pounds of Pasta

Abstract

Many consumers have had the experience of entering discount membership clubs to make a few purchases, only to leave with enough pasta to outlast a nuclear winter. We suggest that the presence of membership fees can lead consumers to infer a "fees -> savings" link, spurring them to increase their spending independent of the actual savings afforded by such clubs. Using both field data and studies in which we created our own "membership clubs," we show that 1) fees serve as a signal of price discounts, such that stores that charge fees are perceived as offering better deals for identical items; 2) the presence of fees can increase consumer spending and overall store profitability; and 3) the presence of fees can drive choice of retail outlets, such that stores with membership fees are more popular even when they offer the same goods at the same prices as stores without fees.

Download the paper: http://www.hbs.edu/research/pdf/08-029.pdf

Dynamics of Platform Competition: Exploring the Role of Installed Base, Platform Quality and Consumer Expectations

Abstract

This paper seeks to answer three questions. First, which drives the success of a platform, installed base, platform quality or consumer expectations? Second, when does a monopoly emerge in a platform-based market? Finally, when is a platform-based market socially efficient? We analyze a dynamic model where an entrant with superior quality competes with an incumbent platform, and examine long-run market outcomes. We find that the answers to these questions depend critically on two parameters: the strength of indirect network effects and consumers' discount factor of future applications. In addition, contrary to the popular belief that indirect network effects protect incumbents and are the source of market inefficiency, we find that under certain conditions, indirect network effects could enhance entrants' quality advantage and market outcomes hence could be more efficient with stronger indirect network effects. We empirically examine the competition between the Xbox and PlayStation 2 consoles. We find that Xbox has a small quality advantage over PlayStation 2. In addition, the strength of indirect network effects and consumers' discount factor in this market are within the range in which platform success is driven by quality advantage and the market is potentially efficient. Counterfactual experiments suggest that PlayStation 2 could have driven Xbox out of the market had the strength of indirect network effects more than doubled or had consumers' discount factor increased by fifty percent.

Download the paper: http://www.hbs.edu/research/pdf/08-031.pdf

 

Publications

Identity Incentives as an Engaging Form of Control: Revisiting Leniencies in an Aeronautic Plant

Abstract

Research has long shown that organizations shape members' identities. However, the possibility that these identities might also be desired and that members might benefit from this process has only recently been explored. In a qualitative study of a French aeronautic plant, I demonstrate how an implicitly negotiated leniency between management and workers around the use of company materials and tools, on company time, to produce artifacts for personal use, enhances workers' identities. This leniency applies to a select subset of workers and enhances their desired occupational identity. This practice produces an engaging form of control that relies on management's selective allocation of identity incentives. These findings document a previously overlooked type of control: one reliant on desired identities that engage rather than constrain. Desired identities, specifically previously enacted ones, constitute potent incentives for inducing efforts or actions.

People Are Experience Goods: Improving Online Dating with Virtual Dates

Abstract

We suggest that online dating frequently fails to meet user expectations because people, unlike many commodities available for purchase online, are 'experience goods': Daters wish to screen potential romantic partners by experiential attributes (such as sense of humor, or rapport), but online dating websites force them to screen by searchable attributes (such as income, or religion). We demonstrate that people spend too much time searching for options online for too little payoff in offline dates (Study 1), in part because users desire information about experiential attributes but online dating websites contain primarily searchable attributes (Study 2). Finally, we introduce and beta test the Virtual Date, offering potential dating partners the opportunity to acquire experiential information by exploring a virtual environment in interactions analogous to real first dates (such as going to a museum), an online intervention that led to greater liking after offline meetings (Study 3).

How to Capture Value from Innovation: Shaping Intellectual Property and Industry Architecture. 50th Anniversary Special Issue on "Leading Through Innovation"

Abstract

Capturing value from innovation requires innovators to figure out how to blunt inroads into the profit stream by imitators, customers, suppliers, and other providers of complementary products and services. In making strategic decisions around technology commercialization, managers often assume that the intellectual property environment and the architecture of the industry are beyond their control. This need not be so. This article shows how managers can shape both the appropriability regime and the architecture of the industry in ways that can benefit the innovator by blunting the actions of others who may endeavor to tap into the stream of profit generated by innovation. Even small firms can play important roles. Tools include putting information into the public domain, helping to shape standards, and promoting modularity.

An Empirical Study of System Improvement by Frontline Employees in Hospital Units

Abstract

This paper investigates the conditions under which frontline employees take initiative to improve their work systems to prevent operational failures. Drawing on the system improvement and team-learning literatures, we develop a framework of frontline system improvement and test it using survey data from 37 workgroups. We find that psychological safety—the belief that one can talk about errors without risk of punishment—and problem-solving efficacy—the belief that the organization will support employees' system improvement efforts—were positively correlated with frontline system improvement (FLSI). Surprisingly, individuals felt responsibility was negatively associated with FLSI. These findings suggest that rather than relying on hiring motivated individuals, managers need to support employees' efforts to improve their work systems by (1) creating a work environment where it is safe to talk about operational failures and (2) responding to employee communication about operational failures. Doing so may result in higher levels of frontline system-improvement efforts and ultimately improved work processes.

 

Cases & Course Materials

Allianz AG: Becoming a European Company

Harvard Business School Case 407-049

Focuses on the decision made by leadership at Allianz AG, the German insurance and financial services company, to complete a cross-border merger with the Italian insurance and financial services company, RAS. Allianz, however, could not complete the cross-border merger by remaining a German corporation under the current German statutes. Allianz, however, could conduct the cross-border merger as a European company according to the Statute of the European Community (Societas Europaea, or SE), which was recently passed by the European Union and adopted into German law. Examines the rationale for the decision made by the Allianz supervisory board and the board of management in addition to the process of becoming an SE, including the change in the composition of the supervisory board as a result of the merger and the conversion to an SE.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=407049

Analyzing Relative Costs

Harvard Business School Note 708-462

Introduces students to the technique of relative cost analysis, a core technique of strategists. Among the intricate quantitative analyses that strategists undertake, relative cost analysis may be the most common. The goal of a relative cost analysis is simply to estimate how a company's costs compare to a rival's. Companies examine relative costs for a host of reasons: to anticipate how a rival is likely to react to a price change; to predict how a price war may evolve; to test whether a cost advantage it believes it has is real and sustainable; to decide how low a company must bid in order to win a competitive contract from a rival; to identify opportunities for internal cost reduction; to estimate, in the context of an acquisition, how much the costs of an acquired company might be reduced and what a reasonable price might be for the company; and so forth.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=708462

The Coca-Cola Company (A): The Rise and Fall of M. Douglas Ivester (Abridged)

Harvard Business School Case 808-074

This is a shortened version of "The Coca-Cola Company (A): The Rise and Fall of M. Douglas Ivester," HBS case #9-800-355. It eliminates some background detail and the financial data and exhibits. As with the original case, it chronicles the appointment of Douglas Ivester as CEO of Coca-Cola and the missteps that led to his dismissal.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=808074

DW Healthcare Partners

Harvard Business School Case 208-005

No abstract available.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208005

Evaluating M&A Deals—Accretion vs. Dilution of Earnings-per-share

Harvard Business School Note 208-059

When discussing the pros and cons of an acquisition, practitioners often talk about the impact of the deal on the buyer's earnings-per-share (eps). An acquisition is said to be "accretive" if the buyer's eps goes up post-deal; it is "dilutive" if the buyer's eps goes down. Describes why managers are concerned with accretion and dilution; how to tell if a deal is accretive; why high P-E buyers can pay a premium and still have an accretive deal; how accretive deals can be bad (and dilutive deals good); and how much accretion or dilution to expect based on the terms of a deal.

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Evaluating M&A Deals—How Poison Pills Work

Harvard Business School Note 208-061

The poison pill defense against hostile takeovers was invented in 1982 by Martin Lipton, of Wachtell, Lipton, Rosen, and Katz. Pills are considered the most effective of all the normal defenses against a hostile bidder. Describes the two basic types of poison pills (flip-ins and flip-overs), and explains how the form of a tender offer changes the impact of a pill on the bidder. Also describes how bidders can set up tender offers to avoid poison pills.

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Evaluating M&A Deals—Introduction to the Deal NPV

Harvard Business School Module Note 208-060

Introduces a framework for evaluating mergers and acquisitions. Assumes that the criterion of a good deal is that it creates value for shareholders, i.e., has a positive deal NPV. Looks at the deal NPV from both the buyer's and seller's point of view. Explains how a positive deal NPV leads to positive predicted cumulation of abnormal returns. It then presents a framework for calculating deal NPVs based on the consideration paid, the work to be done, the value of the target, and the value created through restructuring or synergy. Concludes by introducing the concept of 'fragility risk,' which is basically the risk that the buyer's plans will go awry.

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Fu Ji Food and Catering

Harvard Business School Case 208-004

Fu Ji, the largest corporate caterer in China, is thinking about how its financing strategy accommodates the overall corporate strategy. Fu Ji has enjoyed phenomenal growth as the corporate catering market in China develops. But that growth in the business also entails a transition from a single restaurant to a restaurant chain, then to a catering business. Is Fu Ji well equipped for the new business model? What does it need to do on the financing side to accommodate the transition of its business model? The company is listed on the Hong Kong Stock Exchange and is thinking about issuing additional convertible bonds to finance its growth. What is the funding need? What are the alternative sources of funding that it has? How would the choice of financial instrument affect and be affected by the business strategy, and how is the instrument choice influenced by the general development of the financial markets in China?

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208004

Gome: Bidding for China Paradise

Harvard Business School Case 208-002

Gome, China's largest electronics retailer, has the opportunity to acquire China Paradise, the number three player in the Chinese electronic retailer industry. This happened in the general context of a great market development and potential consolidation of the household electronic appliance retailing sector. Gome, Suning, and China Paradise, the three largest players in the market, all experienced phenomenal growth, but Gome is slowly losing steam and risks being overtaken by the current number two, Suning. In addition, following China's entry into the WTO and the end of its five-year protection period, foreign competition, such as Best Buy, has entered the market and is bound to change the competitive landscape. Gome needs to decide what to do, and if it proceeds, it needs to move very fast. The decision will hinge on answering a few important questions. Why did China Paradise want to sell? If China Paradise failed, how could Gome guarantee that it would not follow suit? Is this the best time to snap up China Paradise? Should it focus on fixing its per-store performance measure or should it still rely on the growth of the total size of the operation in terms of the total number of stores? Does the acquisition of China Paradise put Gome in a position that it would again be very high in total number of stores but falling behind in the per store performance? This might be a big concern, especially if the acquired operation has a different culture than its existing operation. How can Gome remedy that? How does the acquisition, if it happens, fit the overall corporate strategy of relying on thin margin and volume? How would this strengthen or hurt Gome in its positioning when competition with both domestic and international players is expected to intensify?

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208002

Gome: Going Public

Harvard Business School Case 208-001

Gome, China's largest electronics retailer, is plotting the best course to go public. Unlike many high-growth businesses in China, Gome has only moderate financing needs. Its charismatic and ambitious chairman Wong Kwongyu has built an expansive retail network in China and successfully used trade credits by suppliers and banks to make Gome a highly cash-generative business. The decision to go public has three inseparable components: why, where, and how. Does Gome really face substantial funding shortages for its operations? If so, are there any alternatives other than going public? If not, what are the other potential motivations to go public? Given these considerations, financial and otherwise, which stock market is the best one to list Gome's shares on? And between an IPO and a backdoor listing, which option suits Gome the best in terms of timing, costs, feasibility, and risks? Assuming Gome chooses to go public via a backdoor listing, what is the process and how are transactions structured? Lastly, for Wong and his top managers, how will each listing choice affect Gome's future development in the context of the pending market deregulation and expected industry consolidation?

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208001

Leader(ship) Development

Harvard Business School Note 408-064

Designed for use in the first year of an MBA program, can be included within a core course on leadership or used more broadly to orient students to their upcoming experience while in school. Offers a series of robust conceptual models to help students frame their leader(ship) development experiences while in a business school. How we frame our experiences has a significant impact on how we ultimately "have" our experiences, as well as what we make of them. Drawing broadly from educational, human development, and leadership training literature, as well as a recent longitudinal study of MBA students, speaks directly to business school students in their own language in an attempt to help them make the most out of their experiences while in school. For faculty, can be used as a background resource for understanding how MBA students experience their time in school and for grasping a broad review of the leadership development literature as it applies to MBA programs. Commonly asked questions explored include: Are leaders born or made? When we talk about "leader(ship) development," exactly what is it that is developing? How do leaders develop? To address these fundamental questions, integrates colorful student quotes with primary source insights from the major thought leaders in the field of leadership development. Also offers a series of "developmental propositions" to increase the likelihood that students will get the most out of their developmental journeys.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=408064

The Parisian Revival

Harvard Business School Case 506-035

In mid-2005, George Jones had two jobs: head of Saks Inc.'s 41-store Parisian department store chain as well as president and CEO of the Saks Department Store Group (SDSG), an umbrella for seven chains with a total of 182 stores across the United States. In 2003 Jones had taken over direct management of the faltering Birmingham, Alabama-based Parisian, which operated moderate to upscale department stores in the southeastern United States. By mid-2005, he had succeeded in turning the business around. According to Jones, "between Q2 2003 and Q2 2005, we have registered eight successive growth quarters all the while reducing expenses. We had a dramatic impact on almost all of our stores. While some are growing at a single-digit rate, we have registered 20% to 40% sales growth in many of our stores. Turns are up nearly 20% and profitability has improved over 90%.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=506035

Say on Pay

Harvard Business School Case 407-129

Briefly describes the trend in 2006 and 2007 in the United States to give shareholders an advisory vote on executive compensation. Highlights a few examples where shareholders have successfully garnered a majority in support of an advisory vote measure on company proxy ballots, and describes discussion within Congress on the matter.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=407129

ValueAct: Shareholder in the Boardroom

Harvard Business School Case 408-007

ValueAct, a San Francisco investment firm, makes an investment in PerSe Technologies. The partners of ValueAct build relationships with the PerSe board and management. Eventually ValueAct is given a seat on the PerSe board and is able to influence a significant imprint in PerSe's performance.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=408007