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.

February 20, 2008

Many Americans have little or no financial savings. One possible incentive for these non-savers: "prize-linked savings" products. Known as PLS, such savings vehicles "offer savers a return in the form of the chance to earn large prizes, rather than in more traditional forms of interest or dividend income or capital appreciation," write HBS professor Peter Tufano and colleagues in a working paper available for download, "Consumer Demand for Prize-Linked Savings: A Preliminary Analysis." PLS products are common around the world but have yet to penetrate the United States and its array of state laws and federal regulations, and potential pushback from the gambling and lottery industries. Tufano et al. take a first look at the landscape for PLS and find it promising.

Also this week, a wealth of other working papers on timely business topics: "Allocating Marketing Resources," "The Strength of Peripheral Ties: Maintaining Status When Firms Lose Resources," and more. Cases describe bringing the Balanced Scorecard into an international car-wash company, and competing on real estate development in Japan.

 

Working Papers

Finding Missing Markets (and a disturbing epilogue): Evidence from an Export Crop Adoption and Marketing Intervention in Kenya

Abstract

In much of the developing world, many farmers grow crops for local or personal consumption despite export options which appear to be more profitable. Thus many conjecture that one or several markets are missing. We report here on a randomized controlled trial conducted by DrumNet in Kenya that attempts to help farmers adopt and market export crops. DrumNet provides smallholder farmers with information about how to switch to export crops, makes in-kind loans for the purchase of the agricultural inputs, and provides marketing services by facilitating the transaction with exporters. The experimental evaluation design randomly assigns pre-existing farmer self-help groups to one of three groups: (1) a treatment group that receives all DrumNet services, (2) a treatment group that receives all DrumNet services except credit, or (3) a control group. After one year, DrumNet services led to an increase in production of export-oriented crops and lower marketing costs; this translated into household income gains for new adopters. However, one year after the study ended, the exporter refused to continue buying the cash crops from the farmers because the conditions of the farms did not satisfy European export requirements. DrumNet collapsed in this region as farmers were forced to sell to middlemen and defaulted on their loans. The risk of such events may explain, at least partly, why many seemingly more profitable export crops are not adopted.

Download the paper: http://www.hbs.edu/research/pdf/08-065.pdf

Catering through Nominal Share Prices

Abstract

Abstract We propose and test a catering theory of nominal stock prices. The theory predicts that when investors place higher valuations on low-price firms, managers will maintain share prices at lower levels, and vice-versa. Using measures of time-varying catering incentives based on valuation ratios, split announcement effects, and future returns, we find empirical support for the predictions in both time-series and firm-level data. Given the strong cross-sectional relationship between capitalization and nominal share price, an interpretation of the results is that managers may be trying to categorize their firms as small firms when investors favor small firms.

Purchase the paper from SSRN ($5): http://papers.nber.org/papers/w13762

Allocating Marketing Resources

Abstract

Marketing is essential for the organic growth of a company. Not surprisingly, firms spend billions of dollars on marketing. Given these large investments, marketing managers have the responsibility to optimally allocate these resources and demonstrate that these investments generate appropriate returns for the firm. In this chapter we highlight a two-stage process for marketing resource allocation. In stage one, a model of demand is estimated. This model empirically assesses the impact of marketing actions on consumer demand of a company's product. In stage two, estimates from the demand model are used as input in an optimization model that attempts to maximize profits. This stage takes into account costs as well as firm's objectives and constraints (e.g., minimum market share requirement). Over the last several decades, marketing researchers and practitioners have adopted various methods and approaches that explicitly or implicitly follow these two stages. We have categorized these approaches into a 3x3 matrix, which suggests three different approaches for stage-one demand estimation (decision calculus, experiments and econometric methods), and three different methods for stage-two economic impact analysis (descriptive, what-if and formal optimization approach). We discuss pros and cons of these approaches and illustrate them through applications and case studies.

Download the paper: http://www.hbs.edu/research/pdf/08-069.pdf

Positions of Power and Status: Reciprocity in the Venture Capital Industry

Abstract

This paper proposes a straightforward way of differentiating between central network positions that confer power and those that confer status. I argue that actors achieve high status by receiving numerous exchanges from actors who in turn receive numerous exchanges from others. In contrast, power is obtained by engaging in exchanges with numerous alternative exchange partners, whose exchange opportunities are limited. These distinctions yield powerful insights into dynamics and consequences of power and status. Specifically, I show that possession of status brings higher benefits than possession of power. However, status puts greater constraints on mobility than power does, as it is harder for a high-status actor than for a high-power actor to acquire the high-power, high-status position. Empirical test in the American VC industry confirms these dynamics.

The Strength of Peripheral Ties: Maintaining Status When Firms Lose Resources

Abstract

This paper examines conditions under which high-status firms can retain their positions, even if they lose resources. Firms are considered high-status when they obtain ties from other high-status firms. Among high-status firms, we distinguish between those that also receive ties from peripheral low-status firms and those that do not. Though the peripheral ties contribute little to firms' status, we hypothesize that they play a critical role in maintaining it in the event of resource loss. Specifically, following resource loss, high-status firms with peripheral ties will retain their status, but those without such ties will lose it. Results of an empirical examination of venture capital syndicate formation in the United States support for these predictions.

No download available at this time.

Behavioral Aspects of Price Setting, and Their Policy Implications

Abstract

This paper starts by discussing consumers' cognitive and emotional reaction to posted prices. Cognitively, some consumers do not appear to make effective use of price information to maximize their consumption-based utility. Emotionally, prices can induce regret and anger among consumers. The optimal responses of firm's prices to these reactions can explain why firms charge prices below marginal cost for many goods and why they keep their prices rigid. This explanation of price rigidity has the advantage of being consistent with the observation that the typical size of price increases is nearly invariant to inflation. Lastly, the paper turns to some government policies regarding prices that appear to have some consumer support. It argues that both laws against price gouging and laws regulating the terms of mortgages may have support because consumers recognize that many people do not optimize their consumption effectively and because they are angry at firms that take advantage of this. These attitudes can also explain consumer support for monetary policies that maintain a low level of average inflation.

Purchase the paper from SSRN ($5): http://papers.nber.org/papers/w13754

Minimally Altruistic Wages and Unemployment in a Matching Model

Abstract

This paper presents a model in which firms recruit both unemployed and employed workers by posting vacancies. Firms act monopsonistically and set wages to retain their existing workers as well as to attract new ones. The model differs from Burdett and Mortensen (1998) in that its assumptions ensure that there is an equilibrium where all firms pay the same wage. The paper analyzes the response of this wage to exogenous changes in the marginal revenue product of labor. The paper finds parameters for which the response of wages is modest relative to the response of employment, as appears to be the case in U.S. data and shows that the insistence by workers that firms act with a minimal level of altruism can be a source of dampened wage responses. The paper also considers a setting where this minimal level of altruism is subject to fluctuations and shows that, for certain parameters, the model can explain both the standard deviations of employment and wages and the correlation between these two series over time.

Purchase the paper from SSRN ($5): http://papers.nber.org/papers/w13755

Consumer Demand for Prize-Linked Savings: A Preliminary Analysis

Abstract

This paper reports on a small-scale survey of the potential American demand for prize-linked savings accounts, an account that awards prizes as part of the saving product's return. In October 2006, Centra Credit Union launched a prize-linked savings pilot. As part of that initiative, we conducted a mall intercept survey of over 500 people in Clarksville, Indiana, the community where the program was launched. This preliminary data suggests that low-to-moderate income Americans may have substantial demand for prize-linked savings, with a majority of survey participants expressing an interest in opening a prize-linked savings account. As predicted by theory and international experience, interest in prize-linked savings is greatest among people who do not have regular saving habits, who have little actual savings, who play lotteries extensively, and who are optimistic about their futures.

Download the paper: http://www.hbs.edu/research/pdf/08-061.pdf

 

Cases & Course Materials

ProntoWash: Washing the World's Cars to a Tango Beat

Harvard Business School Case 108-037

ProntoWash management considers whether franchising and the Balanced Scorecard could be combined to help customer-facing employees provide consistent service across the world and capture relevant management information. In 2007, ProntoWash, an international car-wash company based in Argentina, was planning for rapid growth through a combination of owned and franchised operations. CEO Sergio Kompel needed to find a performance management system that would help the firm maintain a unified focus and operational consistency in new and existing points of sale around the world. One measure that Kompel and his team were considering was the Balanced Scorecard, a tool traditionally used by top management. The challenge for ProntoWash was to design a Balanced Scorecard that would be accessible throughout the organization, from the executives in the central office, to the franchises, to the workers at the front line.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=108037

Roppongi Hills: City Within a City

Harvard Business School Case 707-431

Minoru Mori is the CEO of Mori Building, which has built Roppongi Hills, an ambitious large-scale, mixed-use development in Tokyo, Japan that includes high-end retail, restaurants, hotel, office, library, and art museum. A destination site for tourists and local people, the performance of the development was strong, with the exception of the art museum, which posted losses. Also, the branding efforts by Mori were at odds with other tenants and he needed to manage "the town." Lastly, another competing development was in the works just blocks away, and Mori needed to determine how to address this new competitor.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=707431

 

Publications

Judgment in Managerial Decision Making

Abstract

Is your judgment influenced by personal biases? In situations requiring careful judgment, we're all influenced by our own biases to some extent. But, with Judgment in Managerial Decision Making, you can learn how to overcome those biases to make better managerial decisions. The text examines judgment in a variety of organizational contexts and provides practical strategies for changing your decision-making processes and improving these processes so that they become part of your permanent behavior. Throughout, you'll find numerous hands-on decision exercises and examples from the authors' extensive executive training experience that will help you enhance the quality of your managerial judgment. Past editions have been used in top universities, in business schools, and in public policy, psychology, and economics classes. In addition, the text has been widely recognized by practitioners in the world of behavioral finance.

Predictable Surprises

Abstract

Most events that catch us by surprise are both predictable and preventable, but we consistently miss (or ignore) the warning signs. This book shows why such "predictable surprises" put us all at risk, and shows how we can understand, anticipate, and prevent them before disaster strikes. There is a universal fear factor surrounding this subject: that society and the workplace are filled with disasters in the making that we could prevent if we only knew what to look for. This book plays on that fear and offers a positive, proactive resolution to it. Two leading experts in managerial decision making show that many disasters in business are preceded by clear warning signals that leaders either miss or purposely ignore. Here they outline the six danger signals that suggest a predictable surprise may be imminent.

The Evolution of Financial Services

No abstract is available at this time.

The Execution Premium: Linking Strategy to Operations for Competitive Advantage

Abstract

In a world of stiffening competition, business strategy is more crucial than ever. Yet most organizations struggle in this area—not with formulating strategy but with executing it, or putting their strategy into action. Owing to execution failures, companies realize just a fraction of the financial performance promised in their strategic plans. It doesn't have to be that way, maintain Robert Kaplan and David Norton in The Execution Premium. Building on their breakthrough works on strategy-focused organizations, the authors describe a multistage system that enables you to gain measurable benefits from your carefully formulated business strategy. This book shows you how to:

  • Develop an effective strategy—with tools such as SWOT analysis, vision formulation, and strategic change agendas
  • Plan execution of the strategy—through portfolios of strategic initiatives linked to strategy maps and Balanced Scorecards
  • Put your strategy into action—by integrating operational tools such as process dashboards, rolling forecasts, and activity-based costing
  • Test and update your strategy—using carefully designed management meetings to review operational and strategic data

Drawing on extensive research and detailed case studies from a broad array of industries, The Execution Premium presents a systematic and proven framework for achieving the financial results promised by your strategy.

Methodological Fit in Management Field Research

Abstract

Methodological fit, an implicitly valued attribute of high-quality field research in organizations, has received little attention in the management literature. Fit refers to internal consistency among elements of a research project—research question, prior work, research design, and theoretical contribution. We introduce a contingency framework that relates prior work to the design of a research project, paying particular attention to the question of when to mix qualitative and quantitative data in a single research paper. We discuss implications of the framework for educating new field researchers.

Cooperation and Equity in the River Sharing Problem

Abstract

This paper considers environments in which several agents (countries, farmers, cities) share water from a river. Each agent enjoys a concave benefit function from consuming water up to a satiation level. Noncooperative extraction is typically inefficient and any group of agents can gain if they agree on how to allocate water with monetary compensations. The paper describes which allocations of water and money are acceptable to riparian agents according to core stability and several criteria of fairness. It reviews some theoretical results. It then discusses the implementation of the proposed allocation with negotiation rules and in water markets. Lastly, it provides some policy insights.

Excess Comovement of Stock Returns: Evidence from Cross-sectional Variation in Nikkei 225 Weights

Abstract

Relative to their weights in a value-weighted index, a number of stocks in Japan's Nikkei 225 stock index are overweighted by a factor of 10 or more. I document a strong positive relation between overweighting and the comovement of a stock with other stocks in the Nikkei index, and a negative relationship between index overweighting and comovement with stocks outside of the index. The cross-sectional approach resolves endogeneity problems associated with event study demonstrations of excess comovement. A trading strategy that bets on the reversion of stock prices of overweighted stocks generates economic profits, confirming that the observed comovement patterns are excessive, and providing further evidence that comovement of stock returns can be a consequence of commonality in trading behavior.

Corporate Honesty and Business Education: A Behavioral Model

Abstract

Since the mid-1970s neoclassical economic theory has dominated business school thinking and teaching in dealing with the nature of human motivation. However valuable in understanding competitive product and financial markets, neoclassical economic theory employs an incorrect, Homo economicus, model of human behavior that treats managers as selfish maximizers of personal wealth and power. The Homo economicus model implies that a firm's board of directors can best further stockholders' interests by (a) selecting managerial personnel who are focused virtually exclusively on personal financial gain, and (b) inducing them to act as agents of the stockholders by devising incentives that minimize the difference between the financial returns to stockholders and the firm's leading managers. Moreover, while neoclassical financial theory, in the form of the efficient markets hypothesis, is a generally insightful portrayal of financial markets, this theory implies that a firm's stock price is the best overall measure of the firm's long-term value. This implies that managerial incentives should be tied to stock market performance, since this will best align the interests of managers and stockholders. However, this implication is invalid when managers can manipulate information flows that influence short-term stock price movements. Neoclassical economic theory thus fosters a corporate culture that ignores the personal rewards and social responsibilities associated with managing a modern enterprise, and encourages an ethic of greedy materialism in which managers are expected to care only about personal financial reward, and in which such human character virtues as honesty and decency are honored only when they contribute to personal material reward. However, a wide range of experiments based on behavioral game theory contradicts the Homo economicus model. In complex environments where complete contracts cannot be written or enforced, honesty, integrity, intrinsic job satisfaction, and peer recognition are powerful motivators, leading to better results for contracting parties than reliance on financial incentives alone. In particular, many individuals place high value on such character virtues as honesty and integrity for their own sake and are more than willing to sacrifice material gain to maintain these virtues. We suggest that business schools develop and teach a professional code of ethics similar to those promoted in law, education, science, and medicine, that the staffing of managerial positions be guided by considerations of moral character and ethical performance, and that a corporate culture based on character virtues, together with stockholder-managerial relationships predicated in part on reciprocity and mutual regard, could improve both the moral character of business and the profitability of corporate enterprise.

Good Fences Make Good Neighbors: An Institutional Explanation of the Benefits of Industry Self-regulation

Abstract

We extend theories of self-regulation of physical commons to analyze self-regulation of intangible commons in modern industry. We posit that when the action of one firm can cause spillover harm to others, firms share a type of commons. We theorize that the need to protect this commons can motivate the formation of a self-regulatory institution. Using data from the US chemical industry, we find that spillover harm from industrial accidents increased after a major industry crisis and decreased following the formation of a new institution. Additionally, our findings suggest that the institution lessened spillovers from participants to the broader industry.

Psychological Influence in Negotiation: An Introduction Long Overdue

Abstract

This paper discusses the causes and consequences of the (surprisingly) limited extent to which social influence research has penetrated the field of negotiation and then presents a framework for bridging the gap between these two literatures. The paper notes that one of the reasons for its limited impact on negotiation research is that extant research on social influence focuses almost exclusively on economic or structural levers of influence. With this in mind, the paper seeks to achieve five objectives: (1) Define the domain of psychological influence as consisting of those tactics which do not require the influencer to change the economic or structural aspects of the bargaining situation in order to persuade the target; (2) Review prior research on behavioral decision making to identify ideas that may be relevant to the domain of psychological influence; (3) Provide a series of examples of how behavioral decision research can be leveraged to create psychological influence tactics for use in negotiation; (4) Consider the other side of influence, i.e., how targets of influence might defend against the tactics herein considered; and (5) Consider some of the ethical issues surrounding the use of psychological influence in negotiation.

"Do Well by Doing Good? Don't Count On It." Social Responsibility

Abstract

Research over 35 years shows only a weak link between socially responsible corporate behavior and good financial performance. However, there's no evidence of risk in doing good, only in being exposed for misdeeds.

Getting More Out of Analogical Training in Negotiations: Learning Core Principles for Creating Value

Abstract

The present research adapts analogical training to teach negotiators broad thought processes for creating value. Recently, specific analogical training, wherein negotiators draw analogies between different cases involving the same strategy, was shown to be effective for learning and transferring specific value-creating strategies. The current results suggest that such specific learning may have limited generalizability to other value-creating processes. Diverse analogical training, wherein negotiators compare several different value-creating strategies, was shown to be more effective for learning underlying value-creating principles. This method facilitated transfer to a very distinctive task and improved performance on a variety of value-creating strategies, including some never previously encountered. The improved performance was also accompanied by a deeper understanding of the potential to create value.

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 previous future. This "future lock-in" is demonstrated in four experiments for should-choices involving donation, public policy, and self-improvement. Additionally, we show that previous future lock term-in can arise without changing the structure of a should-choice, but by just changing people's temporal focus. Finally, we provide evidence that they should self operates at a higher construal level (abstract, superordinate) than the want self, and that this difference in construal partly underlies previous future lock-in.

Selling Stem Cell Science: How Markets Drive Law along the Technological Frontier

Abstract

Since 2001, stem cell science in the United States has been explicitly constrained by federal prohibitions. Under an executive order announced by President George W. Bush on August 9 of that year, U.S. researchers can only receive federal funding for work done on the limited number of embryonic stem cell lines (an estimated 60 to 78) created prior to the executive order. Continued research on embryonic stem cells (ESCs) is not expressly prohibited. But, under the Bush administration's executive order, no federal funds can be used to develop new embryonic stem cells lines, or even to work on new lines developed after August 2001. This article's authors believe that it is possible for breakthrough science to emerge without federal funding in this country, and indeed even without the formal sanction of the law. To make this argument, we review the history of two earlier breakthrough technologies—the birth control pill and in-vitro fertilization (IVF)—both of which were developed in the United States without federal funds and in an environment of ambiguous legality. Today, however, the birth control pill and in vitro fertilization are booming businesses, each estimated to generate annual revenues of well over $3 billion. The histories of the pill and IVF, therefore, suggest a pattern that may be highly relevant for embryonic stem cell research. Thus, the article suggests that, even in areas of strong moral opposition, science is often able to develop in the shadow of the law, with the market eventually compelling both moral concerns and legal prohibitions to decline.