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.

July 8, 2008

Online channels are changing markets in select ways, according to new research by HBS professor Anita Elberse detailed in the July-August issue of Harvard Business Review. Elberse's study of strategies that emphasize niche offerings or blockbusters in the music and home-video industries, "Should You Invest in the Long Tail?", offers advice to producers as well as retailers. "Hits are and probably will remain dominant," she concludes.

This week also sees an exploration of factors to explain the increased prevalence of nongovernmental organizations ("What Do Nongovernmental Organizations Do?" by HBS professor Eric D. Werker and Faisal Z. Ahmand). And while communities are considered essential in open source innovation, what exactly is a community? Karim R. Lakhani and colleague Joel West seek definitions and aim to extend the research agenda ("Getting Clear About Communities in Open Innovation").

 

Working Papers

No Harm, No Foul: The Outcome Bias in Ethical Judgments (revised)

Abstract

We present three studies demonstrating that outcome information biases ethical judgments of others' ethically questionable behaviors. In particular, we show that the same behaviors produce more ethical condemnation when they happen to produce bad rather than good outcomes, even if the outcomes are largely determined by chance. Our studies show that individuals judge behaviors as less ethical, more blameworthy and to be punished more harshly when such behaviors led to undesirable consequences, even if they saw those behaviors as acceptable before they knew its consequences. Furthermore, our results demonstrate that a rational, analytic mindset can override the effects of one's intuitions in ethical judgments. Implications for both research and practice are discussed.

Download the revised paper: http://www.hbs.edu/research/pdf/08-080.pdf

 

Publications

Should You Invest in the Long Tail?

Abstract

The blockbuster strategy is a time-honored approach, particularly in media and entertainment. When space is limited on store shelves and in traditional distribution channels, producers tend to focus on a few likely best sellers, hoping that one or two big hits will carry the rest of their lists. But online retailing and the digitization of information goods have changed the commercial landscape: Virtual shelf space is infinite, consumers can search through innumerable options, and the marginal cost of reproducing and distributing products is low. What does that mean for the blockbuster strategy? In his 2006 book, The Long Tail: Why the Future of Business Is Selling Less of More, Chris Anderson, editor of Wired magazine, argues that the sudden availability of niche offerings more closely tailored to their tastes will lure consumers away from homogenized hits. The "tail" of the sales distribution curve, he says, will become longer, fatter, and more profitable. Elberse set out to investigate whether Anderson's long-tail theory is actually playing out in today's markets. She focused on the music and home-video industries—two markets that Anderson and others frequently hold up as examples of the long tail in action-reviewing sales data from Nielsen SoundScan, Nielsen VideoScan, the online music service Rhapsody, and the Australian DVD-by-mail service Quickflix. What she found may surprise you: Blockbusters are capturing even more of the market than they used to, and consumers in the tail don't really like niche products much. Elberse outlines the implications of her research for producers and retailers, and offers strategic advice to both groups.

Can Research Committees Add Value for Investors? An Analysis of Lehman Brothers' Ten Uncommon Values® Recommendations

Abstract

Since 1949 Lehman Brothers has used an investment committee to select the top ten recommendations made by its analysts each year. We examine the performance of this committee's recommendations and find that on average its selections generated abnormal returns of 2.7% at the recommendation announcement and 4.5% for the remainder of the year. This performance cannot be explained by changes in analyst recommendations and/or target prices that accompany the committee report. Nor was it due to analyst screening ability since the returns were higher than those that earned from investing in analysts' top stock picks that were not selected by the committee. Finally, we find that abnormal announcement returns and trading volume at the report publication are correlated with market-adjusted returns for the prior year's stock selections, suggesting that investors believe that a successful process in one year is likely to be repeated the following year. We believe that these findings are particularly interesting given recent efforts to require firms to use research recommendation committees to improve the quality of research.

Does Familiarity Breed Trust? Revisiting the Antecedents of Trust

Abstract

This paper investigates how the history of interaction between organizations and between organizational boundary spanners contributes to the formation of trust between firms. Our findings, using data on the supplier-buyer relationships of two major US auto manufacturers, suggest that history affects trust formation in a complex non-linear fashion, involving a period of ambivalence early in a relationship. We show that certain kinds of exchange partners can systematically reap differential returns from a common history of interaction. Organizational similarity significantly enhances the ability of exchange partners to translate the benefits of the joint history of interaction into a stock of trust.

Renewal through Reorganization: The Value of Inconsistencies between Formal and Informal Organization

Abstract

We develop a theoretical perspective on how inconsistencies between formal and informal organization arising from reorganization can help create ambidextrous organizations. We argue that under some conditions, the informal organization can compensate for the formal organization by motivating a distinct but valuable form of employee behavior that the formal organization does not emphasize and vice versa, an effect we label compensatory fit. We illustrate the concept of compensatory fit by drawing upon qualitative data from a re-organization at Cisco Systems. We also derive formal boundary conditions for compensatory fit using a simple game theoretic representation. We show that compensatory fit can only work when there is a powerful informal organization already in existence and when the gains from ambidexterity are substantial. Further, depending on the strength of the informal organization, breakdown in the conditions necessary for compensatory fit may lead to performance declines and further re-organizations.

On Chinese, European and American Universities

Abstract

In North America and in Europe, the past three decades have seen an unprecedented expansion of higher education and, in the most recent time, efforts at reform and restructuring. Harvard has overhauled its undergraduate curriculum in a comprehensive fashion for the first time in 30 years. European universities have witnessed even more thoroughgoing changes in the structure of undergraduate education. But perhaps nowhere on earth have recent decades seen more revolutionary change in higher education than in the People's Republic of China. Thirty years ago, Chinese universities were just reopening after the catastrophe of the Cultural Revolution. Today they are poised for positions of international leadership in research and education.

Bargains-then-ripoffs: Innovation, Pricing and Lock-in in Enterprise Software

Abstract

In industries with quick innovation cycles and switching costs, vendor profitability is often driven by the ability to "lock in" customers. Despite a large theoretical literature, there are few empirical studies on the success of vendor pricing and product strategies to achieve lock-in. This paper uses a comprehensive database of transactions in two major product lines for a large enterprise software vendor to examine the use and success of pricing and product strategies. Regarding pricing, the paper demonstrates that the vendor engages in significant "bargain-then-ripoff" pricing; customers completely new to it receive discounts that are nearly 50% greater than existing customers who are purchasing upgrades of a product. On the product side, one common lock-in strategy—the offering of broad product "suites" which span multiple product lines—appears to be of limited effectiveness. The vendor cannot limit its initial "bargain" to customers new to a product line, even if the customer has bought a different product from the vendor previously. This suggests that lock-in is product-, not vendor-specific. Finally, not all customers get locked in; I find that customers with high IT capabilities, and/or those with strong financial performance (which are very highly correlated), are likely to receive an "initial bargain" and then switch suppliers or use legacy systems, rather than pay locked-in rates. The "best" customers in terms of future revenue potential therefore avoid getting locked in.

Governance in Global Information Economy

Abstract

In the early 21st century, IT has become more important than ever. Technology evolution, the creation of new channels to global resource pools, increased corporate operational dependence on IT, and enhanced application opportunities have combined to drive this topic much higher on many companies' agendas. Different companies are impacted in different ways. Embedded in this chapter are two analytical frameworks often used by managers to understand this different impact; namely, the strategic grid and technological learning. Some aspects of IT have remained unchanged over a 40-year period. These include the constant emergence of new technologies, the obsolescence of technical skills, and the need for strong leadership. For many firms, however, this technology now has a much deeper impact on the transformation of their operations than could have been conceived several decades ago. The chapter successively describes how Otis, World Bank, COSCO and Cathay Pacific have each been utterly transformed by IT.

Standing Out from the Crowd: The Visibility-Enhancing Effects of IPO-related Signals on Alliance Formation by Entrepreneurial Firms

Abstract

In this study, we explore how multiple signals related to entrepreneurial companies at the time of their initial public offering (IPO) influence the firms' ability to acquire non-financial resources over time. Specifically, the study looks at how signals based on investors' initial reactions to the IPO, analyst coverage and affiliations with experienced venture capitalists and prominent underwriters combine to enhance the IPO firm's visibility and reduce uncertainty, thereby influencing its ability to form post-IPO alliances. We also consider the extent to which the effects of each of the signals are sustained or diminish over time. Their analysis of 404 IPOs conducted by technology companies between 1995 and 2000 shows that these signals are positively related to alliance formation patterns and that the effects of these signals deteriorate at different rates over time.

What Do Nongovernmental Organizations Do?

Abstract

Nongovernmental organizations are one group of players who are active in the efforts of international development and increasing the welfare of poor people in poor countries. Nongovernmental organizations are largely staffed by altruistic employees and volunteers working towards ideological, rather than financial, ends. Their founders are often intense, creative individuals who sometimes come up with a new product to deliver or a better way to deliver existing goods and services. They are funded by donors, many of them poor or anonymous. Yet these attributes should not be unfamiliar to economists. Development NGOs, like domestic nonprofits, can be understood in the framework of not-for-profit contracting. It is easy to conjure up a glowing vision of how the efforts of NGOs could focus on problem solving without getting bogged down in corruption or bureaucracy. But the strengths of the NGO model have some corresponding weaknesses—in agenda setting, decision making, and resource allocation. We highlight three factors in explaining the increased presence of NGOs in the last few decades: a trend towards more outsourcing of government services; new ventures by would-be not-for-profit "entrepreneurs"; and the increasing professionalization of existing NGOs.

Getting Clear About Communities in Open Innovation

Abstract

Research on open source software, user innovation and open innovation has increasingly emphasized the role of communities in creating, shaping and disseminating innovations. However, the comparability of such studies has been hampered by the lack of a precise definition of the community construct. In this paper we review prior definitions (implicit and explicit) of the community construct and other suggestions for future research.

 

Cases & Course Materials

Assessing Your Organization's Capabilities: Resources, Processes, and Priorities

Harvard Business School Module Note 607-014

Summarizes a model that helps managers determine what sorts of initiatives an organization is capable and incapable of managing successfully. The factors that affect what an organizational unit can and cannot accomplish can be grouped as resources, processes, and the priorities embedded in the business model. Demonstrates what kinds of changes are required in an organization and team structure for each different type of innovation.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=607014

Asset Allocation I

Harvard Business School Note 208-086

The goal of these simulations is to understand the mathematics of mean-variance optimization and the equilibrium pricing of risk if all investors use this rule with common information sets. Simulation A focuses on five to 10 years of monthly sector returns that are initially drawn from a known multivariate normal distribution. Mean-variance optimization is designed to produce the highest ratio of excess portfolio return to portfolio standard deviation (i.e. the highest Sharpe ratio) in this setting. Simulation B alters the setting by allowing students to determine expected returns through a simultaneous auction. We continue to have agreement over the covariance matrix, and implicitly over expected payoffs, but allow students to set market prices. The average portfolio weights across the 10 sectors is calculated and is used as the vector of market capitalization weights. With these market weights (w) and the given covariance matrix, the capital asset pricing model (CAPM) implied expected returns are calculated for each sector and compared with the student set expected returns.

Purchase this note:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208086

Purchase the supplement "Asset Allocation II," 208-087:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208087

Purchase the supplement "Asset Allocation III," 208-088:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208088

Collateralized Debt Obligations (CDOs)

Harvard Business School Note 208-113

This lesson integrated Merton's (1974) contingent claims model of debt and equity claims with the CAPM, which allows us to examine the risks and pricing of credit portfolios and the derivative claims issued against them. In particular, this model is used to make investment and risk management decisions in the market for collateralized debt obligations (CDOs).

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208113

Evaluating M&A Deals-Announcement Effects, Risk Arbitrage and Event Risk

Harvard Business School Note 208-103

The announcement of merger or acquisition conveys new information to the capital markets. This note describes how the stock prices of a Buyer and Target behave after the announcement of a deal. First, for an all-stock deal that is certain to go through, the note defines accouchement effects and describes the fundamental arbitrage relationship between Target and Buyer stock prices. It shows how post-announcement prices may be used to infer the market's estimate of synergies. It then explains how the betas of the two companies change post-announcement and the arbitrage relationship between prices in a cash-and-stock deal. Finally, it defines event risk and explains how it affects the prices of the Buyer and the Target.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208103

Event Arbitrage

Harvard Business School Note 208-090

The event arbitrage module includes two simulation sessions. The first simulation focuses on analyzing and evaluating individual merger transactions, while the second simulation emphasizes managing a portfolio of individual positions and the limitations of arbitrage investing in real-world capital markets. The underlying data and information are derived from actual merger transactions and have been disguised to prevent students from knowing the outcome ahead of time.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208090

Healthcare and Harvard Business School Alumni in 2008

Harvard Business School Case 808-044

This case chronicles the role that Harvard Business School alumni play in the healthcare industry. Overall data on alumni is given, and the industry is broken into seven areas in which the careers of twenty-five alumni are highlighted.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=808044

House of Tata: Acquiring a Global Footprint

Harvard Business School Case 708-446

Chronicles the globalization of the Tata Group, one of India's largest business groups. Since 2000, many Tata Group operating companies have aggressively built international businesses, particularly through overseas acquisitions. After describing the globalization rationales and approaches of the major Tata Group companies, the case asks students to consider whether Tata Motors should pursue the acquisition of the Jaguar and Land Rover brands owned by US-based Ford Motor company.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=708446

Korea: On the Back of a Tiger (Abridged)

Harvard Business School Case 708-052

What caused the 1997 Korea crisis? Did the International Monetary Fund (IMF) help or hinder recovery? Did democracy help or hinder recovery? Seen as an economic miracle, Korea succumbed to the wave of currency crises sweeping Asia in late 1997. Did the same state-led export growth strategy that had brought about such spectacular success cause this financial meltdown? Conversely, what role had foreign investors played in setting up the crisis by pouring short-term capital into Korea's partially and unevenly liberalized financial system? When it arrived on the scene, did the IMF do more to help Korea recover from its economic distress, or did it just bail out foreign investors and prepare the way for Wall Street to up buy Korean banks and firms? Had Korea's long move toward democracy helped or hindered government efforts to reform its economic strategy and to resolve the current crisis? This case explains the background to explore these questions.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=708052

TheLadders

Harvard Business School Case 908-061

Despite strong appeal among job seekers and outside recruiters, TheLadders' corporate job listings seem to lag. Could raising prices help solve the problem? TheLadders considers this strategic paradox.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=908061

Measuring Investment Performance

Harvard Business School Note 208-110

Examines various approaches to measuring investment performance. The approaches include the use of risk exposure and the Sharpe and Information Ratios. Applies the approaches to a variety of mutual funds to demonstrate the effect of using different metrics to measure fund performance.

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Note on the Nonprofit Sector

Harvard Business School Case 308-033

This note introduces students to the current state of the nonprofit sector around the world. It also provides insight into the sector's origin and purpose as well as the identifying important current trends. The note draws on numerous sources to provide a single resource for readers to gain understanding of this complex sector. The intended audience includes students, prospective professional leaders, those considering joining a board, consultants to the sector, or anyone wishing to learn more about the field.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=308033

Transparent Value LLC

Harvard Business School Case 108-069

Leading index company Dow Jones recently signed a license and joint marketing agreement with Transparent Value LLC, the creator of a new fundamentals-based valuation methodology. The agreement allowed Dow Jones to offer a family of indexes based on the Transparent Value methodology. The methodology viewed stock prices as the clearest and most reliable signals of the market's expectations about a company's future performance and employed a Reverse Discounted Cash Flow (RDCF) valuation model to calculate the revenue required to support a given stock price for a given company. Then, the methodology applied a probability that the company would achieve the needed revenues in the next 12 months, based on its recent track record. Moreover, the methodology endeavored for specificity. For example, when possible, Transparent Value strove to determine what the company needed to do in its business activities to achieve the required revenues. Called "business performance requirements," these could include the number of new store openings, or the number of product unit sales needed, as two examples. The fictitious case protagonist, a business development manager at a leading money management firm, is looking to launch an exchange-traded fund (ETF) using a fundamentals-based index as the underlying index. She needs to decide whether to base her ETF products on the Dow Jones Transparent Value indexes. The case study provides an overview of equity indexes and ETFs and a step-by-step description of Transparent Value's methodology.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=108069

Valuing Risky Debt

Harvard Business School Case 208-111

This lesson develops the classical structural approach to pricing and hedging credit risk: Merton's (1974) contingent claims model of debt and equity claims. This model is used to make investment and risk management decisions in an over-the-counter (OTC) market for distressed bonds.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208111

The Xiamen PX Project: The Rule of Contract or Citizens in China Today

Harvard Business School Case 808-123

This case examines the effect of environmental activism on China's investment climate, focusing on the petrochemical sector. It shows how tensions between a country's national economic development goals and political constraints make for a more unpredictable investment climate, despite considerable improvements in the rule of law within China. This case is suitable for courses in international business, business and society, and doing business in China and/or the developing world.

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http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=808123