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.

January 15, 2008

It happens all the time in the computer, telecommunications, and pharmaceutical industries: some firms design and produce various components while other firms specialize in different stages of the complex production process. What is the effect of these networks of relationships on companies' pricing, incentive structure, and ability to innovate?

Such forms of industrial organization "may not be conducive to all kinds of innovation. In particular, innovations that add new layers of functionality to the system, and thus increase total demand, will not be adequately rewarded relative to the value they create." So explain HBS professor Carliss Y. Baldwin and colleague C. Jason Woodard in a working paper available for download, "Competition in Modular Clusters." Their paper also addresses how firms might think about these issues strategically and evaluate open, public standards versus closed, proprietary standards.

Other papers this week look at topics as varied as venture capital investment networks, the human tendency to ignore unethical behavior in particular circumstances, and whether lobbies are an important barrier to technology adoption and development. (Yes, they are).


Working Papers

Competition in Modular Clusters


The last twenty years have witnessed the rise of disaggregated "clusters," "networks," or "ecosystems" of firms. In these clusters the activities of R&D, product design, production, distribution, and system integration may be split up among hundreds or even thousands of firms. Different firms will design and produce the different components of a complex artifact (like the processor, peripherals, and software of a computer system), and different firms will specialize in different stages of a complex production process. This paper considers the pricing behavior and profitability of these so-called modular clusters. In particular, we investigate a possibility hinted at in prior work: that for composite goods, a vertical pricing externality operating across complements can offset horizontal competition between substitutes. In this paper, we isolate the offsetting price effects and show how they operate in large (as well as small) clusters. We argue that it is possible in principle for a modular cluster of firms to mimic the pricing behavior and profitability of a vertically integrated monopoly. We then use our model to compare open and closed standards regimes, to understand how commoditization affects a cluster, to determine the relative profits of platform firms and firms that depend on the platform, and to assess the impact of horizontal and vertical mergers. Our model highlights a collective action problem: what is good for an individual firm is often not good for the cluster. We speculate that this conflict may be a source of strategic tension in platform firms.

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Incompatible Assumptions: Barriers to Producing Multidisciplinary Knowledge in Communities of Scholarship


Co-locating knowledge workers from different disciplines may be a necessary but insufficient step to generating multidisciplinary knowledge. We explore the role of assumptions underlying knowledge creation within the field of organizational studies, and investigate how incompatible assumptions across subgroups may inhibit the generation of multidisciplinary knowledge. While organizational studies research commonly assumes dynamic open systems with recursive influence between environments and interactions, studies of micro-processes in organizations often assume implicitly that interactions among organizational members are closed systems. We suggest that this incompatibility between assumptions may inhibit knowledge sharing in organizational studies research. We empirically assess this assertion by analyzing studies of negotiation published in top peer-reviewed management, psychology, sociology, and industrial relations journals from 1990 to 2005. Our findings illuminate a continuum of open-systems to closed-systems assumptions underlying this micro-process research. Analysis of the rate of citation of the articles in our data set by non-negotiation organizational studies research reveals that open systems assumptions increase the likelihood that a negotiation article will be cited in organizational studies, after controlling for other known effects on citation rate, such as outlet, discipline, length, number of citations and methodology. Our findings suggest that multidisciplinary fields can enhance their knowledge sharing by attending to the compatibility of assumptions held by sub-groups within the field.

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See No Evil: When We Overlook Other People's Unethical Behavior


It is common for people to be more critical of others' ethical choices than of their own. This chapter explores those remarkable circumstances in which people see no evil in others' unethical behavior. Specifically, we explore 1) the motivated tendency to overlook the unethical behavior of others when we recognize the unethical behavior would harm us, 2) the tendency to ignore unethical behavior unless it is clear, immediate, and direct, 3) the tendency to ignore unethical behavior when ethicality erodes slowly over time, and 4) the tendency to assess unethical behaviors only after the unethical behavior has resulted in a bad outcome, but not during the decision process.

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I'll Have the Ice Cream Soon and the Vegetables Later: Decreasing Impatience over Time in Online Grocery Orders


How do decisions made for tomorrow or two days in advance differ from decisions made for several days in the future? Most economic models predict that decisions do not systematically differ on such short timescales. We use a novel panel data from an online grocer to conduct analyses suggesting that people are decreasingly impatient the further in the future their choices will take effect. In general, as the delay between order completion and delivery increases, we find that the same customers spend less, order a higher percentage of "should" items (e.g., vegetables), and order a lower percentage of "want" items (e.g., ice cream). However, orders placed for delivery tomorrow versus two days in the future do not show this want/should pattern, and we briefly discuss survey results suggesting a potential explanation for the nonlinearity in customers' apparent decreasing impatience.

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Cases & Course Materials

Performing Industry Research to Inform Investment Decisions

Harvard Business School Note 207-069

Conducting thorough research about an industry is often an important component of investment analysis. Written specifically for HBS MBA students, provides guidance on how to perform industry research to inform investment decisions. Provides detailed information about the recommended resources available for this type of research, focusing primarily on what is available from Harvard Business School's Baker Library. Focusing on how companies operate in the context of their industry, commences with an overview of why industry research is relevant, then offers detailed guidelines on how to approach and what to consider when investigating an industry as part of the analysis necessary to make a decision about investing in a company.

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ThedaCare: System Strategy

Harvard Business School Case 708-424

Over the 1980s and 1990s, America's changing health care payer environment resulted in mergers of numerous community hospitals into hospital systems. Based in Appleton, Wisconsin, ThedaCare stood out among community hospital systems in its pursuit of service rationalization, clinical quality improvement, and value-based delivery. Driven by determined leadership, ThedaCare began site-based service line rationalization and introduced innovative care delivery models. ThedaCare is a metaphor for the challenges of transforming American community hospital systems. Can be used to teach: the evolution of structure, organization, and strategy of U.S.-based community hospital systems; integrated practice units and care cycles; management of health care quality improvement processes; challenges in diffusion of care delivery innovation; and cost transparency and quality measurement.

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TH!NK: The Norwegian Electric Car Company

Harvard Business School Case 808-070

On August 1, 2007, 61-year-old Jan-Olaf Willums' plane was flying along the Greenland coastline on his way back to Norway after intense discussions with several prominent U.S. venture capital investors, among them Kleiner Perkins and Rockport Capital Partners, about investing in a plan to accelerate his company's entry into the North American market. A successful engineer, entrepreneur, and sustainable development champion, Willums was CEO of Think Global AS (TH!NK), a privately held Norwegian maker of electric vehicles (EVs). Having already raised $85 million in venture backing, TH!NK was just a few months away from the broad European launch of its line of EVs, the first commercially available, highway-safe cars in the world that produced zero greenhouse emissions.

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WL Ross & Co. and INVESCO

Harvard Business School Case 208-020

Wilbur Ross has built a successful private equity firm focused on distressed investing, WL Ross & Co. In 2006, INVESCO, an asset management company, approaches him about acquiring his firm. INVESCO has had weak performance in recent years and is looking to increase its exposure to alternative assets in addition to its traditional investment management business. The private equity industry is rapidly institutionalizing, with firms raising funds over $10 billion and some considering public offerings. A sale of WL Ross & Co. could help position the firm for the future; however, it could also hurt the firm's culture and performance.

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How Actions Create—Not Just Reveal—Preferences


The neo-classical economics view that behavior is driven by—and reflective of—hedonic utility is challenged by psychologists' demonstrations of cases in which actions do not merely reveal preferences but rather create them. In this view, preferences are frequently constructed in the moment and are susceptible to fleeting situational factors; problematically, individuals are insensitive to the impact of such factors on their behavior, misattributing utility caused by these irrelevant factors to stable underlying preferences. Consequently, subsequent behavior might reflect not hedonic utility but rather this erroneously imputed utility that lingers in memory. Here we review the roles of these streams of utility in shaping preferences, and discuss how neuroimaging offers unique possibilities for disentangling their independent contributions to behavior.

Supply and Demand Shifts in the Shorting Market


Using proprietary data on stock loan fees and quantities from a large institutional investor, we examine the link between the shorting market and stock prices. Employing a unique identification strategy, we isolate shifts in the supply and demand for shorting. We find that shorting demand is an important predictor of future stock returns: An increase in shorting demand leads to negative abnormal returns of 2.98% in the following month. Second, we show that our results are stronger in environments with less public information flow, suggesting that the shorting market is an important mechanism for private information revelation.

Lobbies and Technology Diffusion


This paper explores whether lobbies slow down technology diffusion. To answer this question, we exploit the differential effect of various institutional attributes that should affect the costs of erecting barriers when the new technology has a technologically close predecessor but not otherwise. We implement this test using a data set that covers the diffusion of 20 technologies for 23 countries over the past two centuries. We find that each of the relevant institutional variables that affect the costs of erecting barriers has a significantly larger effect on the diffusion of technologies with a competing predecessor technology than when no such technology exists. These effects are quantitatively important. Thus, we conclude that lobbies are an important barrier to technology adoption and to development.

A New Approach to Measuring Technology with an Application to the Shape of Diffusion Curves


This paper documents the sources and measures of the cross-country historical adoption technology (CHAT) data set that covers the diffusion of about 115 technologies in over 150 countries over the last 200 years. We use this comprehensive data set to explore the shape of the diffusion curves. Our main finding is that, once the intensive margin is measured, technologies do not diffuse in a logistic way.

Microeconomic Determinants of Location Competitiveness for MNEs


The concept of microeconomic competitiveness based on the frameworks developed by Michael Porter since 1990 are popular with policy makers interested in improving the attractiveness and economic performance of their countries and regions. This concept also has many important implications for multinational businesses, a notion that has been initially discussed at the end of the 1990s. This chapter revisits the linkages between the two areas, focusing on the more recent learnings about microeconomic competitiveness and their implications for multinational companies. It lays out different dimensions of locational competitiveness and discusses their structural differences in terms of how they affect companies and how they can be affected by government. It finds that locational competitiveness is becoming an increasingly strategic question for both locations and companies: Locations need to choose their role in the global economy in terms of activities and value provided, and excel in the specific set of microeconomic dimensions that support this particular positioning. Companies need to choose locations that provide the specific assets and capabilities that are best placed to strengthen their own strategic positioning on the market place. The chapter also points out that the locational agenda for companies has broadened: they need to focus not just on choosing the right location, but on developing their strategies to leverage the locations in which they are present and on investing in those aspects of the microeconomic environment in their locations that are most critical to their own strategic position.

Fair (and Not So Fair) Division


Drawbacks of existing procedures are illustrated and a method of efficient fair division is proposed that avoids them. Given additive participants' utilities, each item is priced at the geometric mean (or some other function) of its two highest valuations. The utilities are scaled so that the market clears with the participants' purchases proportional to their entitlements. The method is generalized to arbitrary bargaining sets and existence is proved. For two or three participants, the expected utilities are unique. For more, under additivity, the geometric mean separates the prices where uniqueness holds and where it fails; it holds for the geometric mean except in one case where refinement is needed.

Bringing the Context Back in: Settings and the Search for Syndicate Partners in Venture Capital Investment Networks


Most existing network-based theories of relationship formation, whether based on homophily or structural constraint, imply that actors form highly cohesive, homogenous clusters. Yet real networks also include many 'bridging' ties—isolated links between parties that vary on one or more social dimensions. To explain the formation of bridging ties, we propose a theory of relationship formation based on the characteristics of 'settings', or the places and times where actors meet. We argue that bridging relations form when organizations participate in two types of settings: unusually popular or fashionable ones, and those with limited partner risk. In an empirical exploration of our thesis in the formation of syndicate relations between venture capital firms, we find that the likelihood that bridging ties form between VCs increases with several attributes of the target company investment 'setting': (1) the recent popularity of investing in the target firm's industry and home region, (2) the size of the investment syndicate, (3) target company maturity, and (4) the density of relationships among the other members of the syndicate.

Entrepreneurship: Field of Dreams?


This paper has two objectives. We begin by contrasting two potential paths for future research in entrepreneurship. One is the establishment of an independent field of research with a clear jurisdiction, a common theoretical canon, and autonomy from related fields. The second is a phenomena-based approach, in which scholars congregate around common interests in empirical phenomena but approach them with distinct disciplinary lenses. After discussing these alternatives and lobbying for the phenomena-based approach, we then review some of the recent, discipline-based research in economic and organizational sociology relevant to entrepreneurship, and identify significant gaps in that literature.

Strategic Networks and Entrepreneurial Ventures


Much research suggests that social networks shape the emergence and development of nascent ventures. Scholars have argued that founders' and firms' networks influence innovation and the identification of entrepreneurial opportunities, as well as facilitate the mobilization of resources for growth and the harvesting of value from fledgling firms. It is not an exaggeration to claim that existing empirical findings point to the centrality of networks in every aspect of the entrepreneurial process. However, with exceptions so few they may be counted on one hand, this research untenably treats network structures as exogenous—in other words, as if entrepreneurs and enterprises do not pursue valuable connections. In this article, we review the literature on networks in entrepreneurial contexts, argue that it disproportionately focuses on the consequences of networks at the expense of research on their origins, and consider the implications for the literature of the fact that most entrepreneurs and young ventures are strategic in their formation of relations. We then articulate a research agenda, composed of five areas of inquiry that we consider critical to a better understanding of networks and entrepreneurship.