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.

April 22, 2008

This week offers a heads-up of To Lead the World: American Strategy after the Bush Doctrine, an edited volume of thought pieces due out this summer from Oxford University Press. To Lead the World examines how the United States can better use its power in the future. HBS professor Niall Ferguson, a historian and prolific author, contributes a chapter on the so-called legitimacy deficit that, Ferguson argues, has undermined the effectiveness of U.S. strategy in the wake of the September 11, 2001 terrorist attacks.

Case materials this week include a look at how China Netcom, a state-owned enterprise listed on both the Hong Kong stock market and the New York Stock Exchange, seeks to meet international corporate governance standards. Another case centers around Novartis CEO Daniel Vasella as he evaluates plans for R&D spending in light of a number of challenges from generic drugs, patent infringements, and pricing pressure.

 

Working Papers

The 'Thin Film of Gold': Monetary Rules and Policy Credibility In Developing Countries

Abstract

This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold-standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery—where policy credibility is a particularly acute problem—the market looked behind "the thin film of gold." Our results point to a dichotomy: whereas country-risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors.

Download the paper from SSRN ($5) http://papers.nber.org/papers/w13918

Using Financial Innovation to Support Savers: From Coercion to Excitement

Abstract

We review a wide variety of programs that support savings by families, in particular by low- and moderate-income families. These programs range from ones that literally compel families to save, to those that make it hard not to save, make it easier to save, provide financial incentives to induce savings, leverage social networks to support savers, and finally, to programs that excite people to saving. These programs involve a number of different stakeholders, including governmental entities, social intermediaries, non-profit organizations, and for-profit firms including financial institutions. They embody a number of different assumptions about incentives, drawing from economics, psychology, and sociology. We describe examples of each program and provide some information on their economics and effectiveness. Our goal is not to identify the "best" program, but rather to lay out the range of innovations to meet the needs of heterogeneous potential savers.

Download the paper: http://www.hbs.edu/research/pdf/08-075.pdf

 

Cases & Course Materials

2006 Hurricane Risk

Harvard Business School Case 207-075

In May 2006, a resident of Key West, Florida had to decide whether to renew his policy to insure against hurricane damage. The policy would cost $13,000 for one year, $5,000 more than what he paid in 2005. At the same time, a wealthy California resident was contemplating an opportunity to buy a "cat note" that offered a high yield, but with a chance of losing the full investment if severe hurricanes struck the coastline of the United States.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=207075

Capital Field: A Room with a View

Harvard Business School Case 207-091

Jerzy Peters, Managing Director of Patron Capital Partners, must decide the best investment option on the development of the Odra Polish theater chain and the associated real estate. Capital Field was a company formed by U.S.-educated Polish natives involved in real estate and cinema who worked to privatize Odra. There is potential in reinvigorating the former state-owned and operated Odra theater chain and also redeveloping portions of the associated real estate to retail, office, or residential.

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China Netcom: Corporate Governance in China (A)

Harvard Business School Case 308-027

With its dual listings on the Hong Kong stock market and New York Stock Exchange, state-owned enterprise China Netcom was mandated to meet the listing requirements of these exchanges. From this initial step, China Netcom's Chairman, Zhang Chunjiang, began a program that sought to further develop the company's corporate governance practices to meet international corporate governance standards. The company hoped that its commitment in developing a globally-accepted governance structure would help the capital markets and potential investors understand that the company was a true, modern corporation, even with the state as a majority owner.

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China Netcom: Corporate Governance in China (B)

Harvard Business School Supplement 308-091

Supplements the (A) case.

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The Deutsche Bank (A)

Harvard Business School Case 708-044

Founded in 1870 to help finance surging German exports and imports, the Deutsche Bank soon moved into domestic banking. In fact, its founders aimed to create both a commercial bank and an investment bank under one roof—that is, a "universal bank." By the end of the nineteenth century, the Deutsche Bank was not only the largest bank in Germany, but also a strategic actor in the broader European market and, indeed, in the world economy. Over the first half of the twentieth century, however, the bank faced a series of national crises: defeat in WWI (1914-1918), revolution in 1919, hyperinflation in 1923, economic depression in the early 1930s, the rise of Hitler in 1933, another world war in 1939, and then total defeat in 1945. At the end of WWII, the Soviets closed the Berlin headquarters of the Deutsche Bank as part of their denazification effort. Meanwhile, the United States, Britain, and France, occupying the western portion of Germany, attempted to implement a policy of economic decentralization and broke what remained of the bank into small pieces. By 1950, facing a proposal from leading German bankers to allow the big banks to begin reconstituting themselves, the Allied powers and the new German legislature had to decide whether to accept this proposal or reject it.

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EFI, Inc. (A)

Harvard Business School Case 508-044

EFI has a unique sales compensation challenge. They cannot allocate sales credit for their core product to individual salespeople. So, they've historically paid the sales force as a team. This has worked out fine, since they've been a near-monopoly seller of a single product category. However, this has changed. Not only are they facing new competition in their core product but they also have diversified into other products that allow them to identify sales by salesperson. Should they pay people individually on these newer products while maintaining the team-pay approach on the core? If so, it would raise a potential problem with shirking on the core product. However, not doing so would perhaps limit the sales of the new products. The case allows for a deep discussion of the bases for variable compensation in sales, including observability of effort and outcome, risk aversion, team vs. individual pay and the marginal impact of effort. The context is also an interesting and important one for sales management: OEM sales.

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EFI, Inc. (B)

Harvard Business School Supplement 508-045

Supplements the (A) case.

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EFI, Inc. (C)

Harvard Business School Supplement 508-046

Supplements the (A) case.

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Enterprise Culture in Chinese History: Zhang Jian and the Dasheng Cotton Mills

Harvard Business School Case 308-068

This case focuses on the legal and managerial evolution of limited-liability firms in China, using the example of the Dasheng cotton mills in Nantong near Shanghai. Dasheng, one of the earliest and most successful industrial enterprises in pre-war China, was founded by the famous entrepreneur Zhang Jian (1853-1926). Having survived various economic and political crises, the Dasheng cotton mills became a state-owned enterprise in 1953. In the wake of the economic reforms, the successor to the original Dasheng Enterprise was restructured as the Jiangsu Dasheng Co. Ltd. in 1996. Issues of corporate governance, legal environment, government relations and the role of family business structures are discussed in the context of how they shaped the business environment in pre-war China and continue to influence Chinese enterprise culture in 2008.

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Gerson Lehrman Group

Harvard Business School Exercise 408-076

Gerson Lehrman Group (GLG) brought together decision makers in search of hard-to-find answers with specialized experts in nearly every imaginable field. Over time, GLG developed software to help minimize potential conflicts of interest among and between experts and their employers on the one hand, and the decision makers and their employers on the other. GLG CEO Alexander Saint-Amand needed to assess both whether the compliance mechanisms in place were adequate for all parties, and if so, how or whether the company could exploit them as a source of competitive advantage.

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Innovation at Timberland: Thinking Outside the Shoe Box

Harvard Business School Case 306-064

Innovation was linked to Timberland's heritage. In 2005, CEO Jeff Swartz and COO Ken Pucker hoped the Invention Factory, an advanced concept lab, would develop new breakthrough products and reinvigorate the company's culture of innovation. Since the 1960s, Timberland had relied on innovation, developing the world's first waterproof boot and, in the 1980s, category-defining boat shoes and day hiking boots. Creating variations of these core products, along with expansion into apparel, had sustained Timberland's business for more than 30 years. Timberland's growth in the past six years was due to increased international sales and new customer segments. As Timberland's leaders looked to the future, they hoped Doug Clark, a biomechanist, and his Invention Factory team would bring a scientific approach toward building the next generation of Timberland products and ideas. The team had to convince those in the mainstream business to accept their new ideas and integrate them back into the product line.

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The International Finance Corporation's Grassroots Business Initiative

Harvard Business School Case 508-063

Grassroots Business Initiative was set up to financially assist small enterprises engaged in creating social value. Three years later, Harold Rosen, its creator, wished to explore an alternative funding model to provide it with scale and sustainability.

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LeapFrog Enterprises

Harvard Business School Case 808-109

No abstract is available at this time.

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Moët Hennessy España

Harvard Business School Case 408-108

Since being appointed CEO of Moët Hennessy España (MHE), the Spanish subsidiary of the wine & spirits business of Louis Vuitton Moet Hennessy (LVMH), the world's leading luxury products group, Ramiro Otano had overseen a spectacularly successful run at the company by any financial measure. Despite the company's growth, some of the employees who had been at the company for years were complaining that the company had lost its "human touch" in the process of professionalizing and modernizing to capitalize on the fantastic market opportunities that had opened up in Spain. Some felt that the work was now too structured and interpersonal relationships too dry. Otano acknowledged that the financial success had happened on the expense of the informal and relational atmosphere that used to characterize the company. But did it matter, Otano wondered? How should he go forward?

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Novartis AG: Science-Based Business

Harvard Business School Case 608-136

Novartis is a science-based drug company, which has important implications for its business strategy. It is one of the largest pharmaceutical companies in the world with over $38B in sales in 2007. Pharmaceuticals account for slightly over $24B of that total. In 2007, corporate R&D spending was $6.43B, or almost 17% of net sales. Novartis executive leaders believe in scientific progress and that large-scale investments in science will therefore result in long-term pay-offs in terms of profits and discoveries that benefit mankind. Novartis' business strategy is closely tied to its research strategy, which emphasizes extensive internal discovery and development capabilities leading to organic growth along with explicit external alliances and collaborations to supplement its core capabilities. Like its competitors, Novartis faces many challenges in terms of moving research from the bench to the bedside. Five years after undertaking the restructuring of the discovery research organization, CEO Daniel Vasella is pleased with its progress, including many more development projects in the pipeline and new molecular entities. Nevertheless, the company faces a number of challenges, including generic drugs, patent infringements in developing countries, and pricing pressure from governments and health insurers in the United States. Given these challenges, Novartis must decide how much to spend on R&D overall, how to arrive at the right mix between organic growth and external collaboration and in-licensing, and how to measure success when it takes so many years to develop and launch a successful drug.

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Olympia Machine Company, Inc.

Harvard Business School Case 708-490

The management team of an industrial equipment supplier is debating the company's method of compensating salespeople. Different executives have offered different alternatives to the current method of straight salary plus expenses. Each option has different implications for business strategy, organization, control systems, and sales management requirements. As a result, the case raises issues and analytics relevant to topics such as aligning strategy and organization, strategy implementation, and cross-functional incentive systems as well as sales management.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=708490

Opening Dot EU (A)

Harvard Business School Case 908-052

EURid considers possible market mechanisms to allocate initial domain names within the Internet's newly-created "dot EU." European Union regulations and community norms substantially constrain EURid's approach, preventing the use of the most natural economic mechanisms (such as auctions).

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=908052

Opening Dot EU (B)

Harvard Business School Supplement 908-053

Supplements the (A) case.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=908053

Sandhar Technologies Group

Harvard Business School Case 808-011

Jayant Davar, CEO and founder of Sandhar Technologies Group, a privately held auto components maker in India, is trying to decide how best to grow the company. He recently took a $22 million investment from Actis Capital, a major emerging markets private equity firm, to consummate an acquisition with a South Indian competitor. Options that Davar considers include acquisitions in developed markets, efforts to increase export sales, and greater investment R&D facilities. But these mean changing the customer-centric strategy that has been key to Sandhar's success. Perhaps he should simply continue what has worked for so long, riding India's 20% domestic growth.

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Tascot Ties

Harvard Business School Case 808-082

No abstract is available at this time.

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Trends in the United States Steel Market, 1980-1996

Harvard Business School Note 698-018

Provides a brief background on the history and structure of the steel industry in the United States. Focuses in some depth on the technological changes that have been difficult for the leading steel companies to implement. Shows that they stumbled when confronted with sustaining technologies, but may be destroyed by disruptive ones.

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Wyoff and China-LuQuan: Negotiating a Joint Venture (A)

Harvard Business School Case 908-046

Through stalled joint venture talks between Pennsylvania-based Wyoff Corp. and China-based China-LuQuan, strategic and cross-cultural negotiation challenges are explored both from American and Chinese perspectives. Wyoff, a leading US chemical company has been seeking ways to secure the company's foothold in China's emerging market since the late '90s. When approached by China-LuQuan in 2000, a major Chinese state-owned chemical producer for a joint-venture opportunity to make a popular chemical catalyst in China, Wyoff, leveraging its superior technology, demanded one-sided terms and played hardball, ruining both the deal and the relationship with China-LuQuan. Seven years later in 2007, Wyoff faced market pressure to again seek a joint venture with China-LuQuan on two other types of products. Both parties had to overcome past distrust to work things out on a series of strategic issues: investment, product slate, marketing, technology, management, organization, staffing, etc. In the negotiations, cross-cultural themes (e.g. trust, relationships, communication, time, autonomy, face, etc.) and different negotiation styles created challenges along with the business and strategic issues. The (A) case sets up the negotiations, highlights issue impasses, explores cross-cultural frictions, and poses tactical challenges. The (B) case describes the strategies, tactics, and results of these negotiations.

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Publications

The Problem of Conjecture: American Strategy after the Bush Doctrine

Abstract

Critics of the National Security Strategy document produced by the Bush administration in the wake of the 9/11 terrorist attacks have tended to criticize its allegedly novel emphasis on preemption and unilateralism. My earlier work identified the over-ambition of the NSS's third main pillar, the aspiration to spread democratic institutions and values throughout the world, and particularly the Middle East. This chapter identifies a " forth deficit"—the legitimacy deficit—which has undermined the effectiveness of U.S. strategy since 2001, in addition to the financial deficit, manpower deficit and attention deficit I had discussed in my book Colossus. However, the chapter argues that the principal defect of the NSS was conceptual. The fundamental flaw of preemptive action is that the pay-offs are asymmetric. Failure to avert a WMD attack on U.S. assets will be seen as doubly reprehensible. But success will not be rewarded, since the electorate is unlikely fully to appreciate the avoidance of a non-event. Retaliation will therefore remain a politically preferable option in a democratic polity, despite the potentially high costs involved.