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.

March 31, 2009

China as an important trading economy is not the center of technological innovation that many expected, at least not yet. According to new research, China is lagging in research and development and inventions compared with the innovative prowess of other East Asian tigers like Japan, Taiwan, and South Korea. This finding should dispel misunderstandings about the impact of U.S. foreign direct investment in China, according to Carnegie Mellon's Lee Branstetter and HBS professor C. Fritz Foley. Their chapter in the forthcoming book China's Growing Role in World Trade clarifies several myths about the emergence of China.

"The picture traced out by rapid changes in the structure of Chinese exports of an emerging technological superpower belies a more modest reality," the scholars write. "China's exports of high-technology goods are still quite dependent on imported components, technology, and expertise. Despite impressive progress and spectacular growth in human capital, China's transition to status as a significant net exporter of innovative goods and services almost certainly lies many years in the future."

Also this week, the article "Milestones in Marketing" traces how concepts of market segmentation and market research entered standard practice. And a case follows the off-court marketing savvy of Cleveland Cavaliers' star LeBron James.

 

Working Papers

Corporate Social Entrepreneurship

Abstract

Corporate Social Entrepreneurship (CSE) is a process aimed at enabling business to develop more advanced and powerful forms of Corporate Social Responsibility (CSR).

Download the paper: http://www.hbs.edu/research/pdf/09-101.pdf

Does Public Ownership of Equity Improve Earnings Quality?

Abstract

We compare the quality of accounting numbers produced by two types of public firms-those with publicly traded equity and those with privately held equity that are nonetheless considered public by virtue of having publicly traded debt. We develop and test two hypotheses. The "demand" hypothesis holds that earnings of public equity firms are of higher quality than earnings of private equity firms due to stronger demand by shareholders and creditors for quality reporting. In contrast, the "opportunistic behavior" hypothesis posits that public equity firms, because their managers have a greater incentive to manage earnings, have lower earnings quality than their private equity peers. The results indicate that, consistent with the "opportunistic behavior" hypothesis, private equity firms have higher quality accruals and a lower propensity to manage income than public equity firms. We further find that public equity firms report more conservatively, in line with their greater litigation risk and agency costs.

Download the paper: http://www.hbs.edu/research/pdf/09-105.pdf

Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors

Abstract

This study explores how firms' ownership structures affect their earnings quality and long-term performance. Focusing on a unique sample of private firms for which there is financial data available in the years before and after their initial public offering (IPO), I differentiate between those that have private equity sponsorship (PE-backed firms) and those that do not (non-PE-backed firms). The findings indicate that PE-backed firms generally have higher earnings quality than those that do not have PE sponsorship, engage less in earnings management, and report more conservatively both before and after the IPO. Further, PE-backed firms that are majority-owned by PE sponsors exhibit superior long-term stock price performance after they go public. These results stem from the professional ownership, tighter monitoring, and reputational considerations exhibited by PE sponsors.

Download the paper: http://www.hbs.edu/research/pdf/09-104.pdf

Elections and Discretionary Accruals: Evidence from 2004

Abstract

We examine the accrual choices of outsourcing firms with links to U.S. congressional candidates during the 2004 elections, when corporate outsourcing was a major campaign issue. We find that politically connected firms with more extensive outsourcing activities have more income-decreasing discretionary accruals. Further, relative to adjacent periods, the evidence is concentrated in the two calendar quarters immediately preceding the 2004 election, consistent with heightened incentives for firms to manage earnings during the election season. The incentives can be attributed to donor firms' concerns about the potentially negative consequences of scrutiny over outsourcing for themselves and for their affiliated candidates.

Download the paper: http://www.hbs.edu/research/pdf/09-103.pdf

 

Cases & Course Materials

Advanced Micro Devices: Competing in the Shadow of a Giant (A)

Harvard Business School Case 609-002

As the only significant competitor to Intel Corporation in PC microprocessors, Advanced Micro Devices faced daunting investment choices. Not only did it have to fund microprocessor design teams, it also had to fund silicon process R&D, and it faced huge capital expenditures associated with constructing its manufacturing facilities. The company was at a crossroads: it had to decide whether to partner with IBM or align with other firms as it tried to keep up with Intel.

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Business and Human Rights

Harvard Business School Note 309-097

This note addresses some of the most frequently asked questions about the relation between human rights and business. Topics include the definition of human rights, the business leader's role regarding human rights, and legal liability of companies and executives for violating human rights.

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DreamWorks SKG Inc.: To Distribute or Not to Distribute?

Harvard Business School Case 709-488

No abstract is available at this time.

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Investing in Early Learning as Economic Development at the Minneapolis Federal Reserve Bank

Harvard Business School Case 309-090

In his role as Senior Vice President and Director of Research at the Federal Reserve Bank of Minneapolis (Minneapolis Fed), Art Rolnick and his colleague, Rob Grunewald, had written "Early Childhood Development: Economic Development with a High Public Return." The thesis was fairly straightforward: early childhood development (ECD) had the highest returns; so states and local governments should invest in it. But the idea of investing in ECD for economic development was new and had never been tested on a large scale, particularly in the way that Rolnick and Grunewald recommended in a later paper—using market forces to drive demand for high-quality ECD programs. The Minnesota Early Learning Foundation (MELF), formed in 2005, invested in two projects designed to test the economists' recommendations. The St. Paul Early Childhood Scholarship Program (SPECSP) provided up to $13,000 a year per child for parents in two St. Paul neighborhoods to select a high-quality ECD program of their choice. MELF had also invested in Five Hundred Under 5 (FHU5), a Minneapolis program formed to improve the capacity and quality of providers. Comparing SPECSP to FHU5 would offer insights on the potential impact of supply-side versus demand-side ECD initiatives. Rolnick reflected on the two MELF experiments. Which would be more effective? Would parents in St. Paul really drive up the quality of providers through the choices they made or was it better to work with providers directly to improve quality?

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Lan Airlines in 2008: Connecting the World to Latin America

Harvard Business School Case 709-410

Lan Airlines operates three distinct models: low-cost for domestic short-haul flights, full-service for international routes; and an international cargo business, the latter of which makes up 33% of Lan's overall revenues (markedly different from many U.S. legacy carriers that derive 3% to 4% of revenues from cargo). Since a change of ownership in 1994, Lan has grown steadily and quickly at a compound annual growth rate (CAGR) of 19% from $318 million in revenues to $3.5 billion at the end of 2007. Lan is at an interesting point in history as the low-cost model was recently implemented. While early results have been strong, observers wonder if the airline can successfully manage three disparate business models.

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Lapdesk Goes Global—Africa First

Harvard Business School Case 809-066

Shane Immelman, founding CEO of the Lapdesk Company of South Africa, is facing a number of challenges in taking Lapdesk from South Africa into the rest of the African continent. How should the African strategy be different from that of South Africa? What is the appropriate structure?

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'Lather, Rinse, Repeat': FeedBurner's Serial Founding Team

Harvard Business School Case 809-089

"Is this the right time or is it still too early?" Dick Costolo wondered as he reflected on the latest acquisition offer. He had been building FeedBurner with his three co-founders for almost four years and was staring at the details of an acquisition offer from Google. He and his co-founders had founded three prior ventures together, each of which had had increasingly attractive outcomes, but none of which had reached their full potential. The number on the table from Google was a big one. Should the deal be completed, it would be the biggest win the founding team had ever had. However, was this the right time to exit? If Costolo didn't think so, would he be able to convince his co-founders who all had different personal risk profiles? This was going to be the biggest decision in the life of FeedBurner and its co-founders.

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LeBron James

Harvard Business School Case 509-050

In 2005, to the astonishment of many sports industry insiders, superstar basketball player LeBron James fired his agent and established his own firm, LRMR, to handle all aspects of his business ventures and marketing activities and named his childhood friend Maverick Carter as the CEO. LRMR is tasked with turning James into a global icon as well as helping him reach his personal goal of becoming basketball's first billionaire. In late 2008, James has entered various lucrative endorsement deals and is considering three exclusive videogame endorsement opportunities from Electronic Arts, 2K Games, and Xbox Live to add to his portfolio. Allows for a rich discussion about how superstar athletes and other celebrities can create and capture value from their brands as well as what role talent agencies and other intermediaries play in that process. Provides in-depth information on three endorsement opportunities that each represents a common way in which talent can (choose to) get compensated: through a fixed-fee payment, a bonus payment structure, or a revenue-sharing agreement.

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Shareholder Activists at Friendly Ice Cream (A1)

Harvard Business School Case 109-013

Two activist investors, one a founder and one a hedge fund manager, seek to improve board oversight at a chain restaurant company. Prestley Blake founded Friendly Ice Cream in 1935 with his brother, and the two created a chain of full-service restaurants. In 1979, they sold the business and retired. In 2000, Blake became concerned that Friendly's CEO, who owned approximately 10% of Friendly and also owned a larger percentage of another restaurant company, was shifting expenses between the businesses in a way detrimental to Friendly shareholders but personally advantageous to the CEO. Further, Blake believed that Friendly's board of directors was not meeting their fiduciary obligations to shareholders by properly overseeing the activities of the CEO and that the directors had conflicts of interest because they were involved with the CEO's non-Friendly business activities. In 2003, Blake filed a lawsuit against the CEO and the company. In 2006, Sardar Biglari, a hedge fund manager who had invested in Friendly, entered into negotiations with Friendly for him to join the board of directors to help improve the management of the business. When these negotiations failed, Biglari launched a proxy fight against Friendly in 2007. While these two activist investors shared similar objectives, they worked independently and chose different strategies.

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The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire?

Harvard Business School Case 709-462

No abstract is available at this time.

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The Walt Disney Company and Pixar Inc.: To Acquire or Not to Acquire? An Update

Harvard Business School Case 709-489

No abstract is available at this time.

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WL Ross and Plascar

Harvard Business School Case 209-091

How can distressed investors take advantage of the procedures governing an international bankruptcy? Wilbur L. Ross, chairman and CEO of the private equity firm WL Ross & Co., LLC, has the opportunity to bid for debt and equity claims on Plascar Industria e Comercio Ltda., the Brazilian subsidiary of the bankrupt global auto components company Collins & Aikman Corp. In evaluating this opportunity, students must analyze Ross's strategy to reshape a global industry with significant overcapacity, consider the opportunities created by the legal procedures that govern cross-border insolvencies, study a debt overhang problem, and consider how restructuring alternatives can address this problem.

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Publications

Innovator's Prescription: A Disruptive Solution for Health Care

Abstract

A groundbreaking prescription for health care reform—from a legendary leader in innovation. Our health care system is in critical condition. Each year, fewer Americans can afford it, fewer businesses can provide it, and fewer government programs can promise it for future generations. We need a cure, and we need it now. Harvard Business School's Clayton M. Christensen—whose bestselling The Innovator's Dilemma revolutionized the business world—presents The Innovator's Prescription, a comprehensive analysis of the strategies that will improve health care and make it affordable. Christensen applies the principles of disruptive innovation to the broken health care system with two pioneers in the field—Dr. Jerome Grossman and Dr. Jason Hwang. Together, they examine a range of symptoms and offer proven solutions.

Managing Crises: Responses to Large-Scale Emergencies

Abstract

This casebook provides an organized treatment of the major challenges associated with managing large-scale disaster events, including discussion of systematic methods of organizing disaster response, preparing in advance for disaster situations, and distinguishing between routine emergency events and true crisis emergency events.

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

Abstract

Farmers may grow crops for local consumption despite more profitable export options. DrumNet, a Kenyan NGO that helps small farmers adopt and market export crops, conducted a randomized trial to evaluate its impact. DrumNet services increased production of export crops and lowered marketing costs, leading to a 32% income gain for new adopters. The services collapsed one year later when the exporter stopped buying from DrumNet because farmers could not meet new EU production requirements. Farmers sold to other middlemen and defaulted on their loans from DrumNet. Such experiences may explain why farmers are less likely to adopt export crops.

Strategic Alliances: Bridges Between 'Islands of Conscious Power'

Abstract

Strategic alliances range from unstructured collaborations, through consortia and joint ventures that superimpose new governance structures on existing firms, to transactions that restructure firm boundaries and asset ownership. In this paper, we draw on detailed discussions with practitioners to describe and analyze a rich collection of feasible governance structures. Our model focuses on two issues emphasized by practitioners: spillover effects (as opposed to hold-ups motivated by specific investments) and contracting problems ex post (as opposed to only ex ante). By considering the allocation of assets, decision rights, and payoffs, we generate a large number of potential governance structures, including strategic divestitures, total divestitures, licensing agreements, and royalty agreements. For the broad range of parameter values and payoff functions we consider, we show that each of these possible strategic alliances could be optimal. We expect that, given institutional knowledge about a particular setting, our broad theoretical framework can be specialized to deliver testable predictions for that setting (as has occurred in some analogous work on vertical integration, for example).

Facts and Fallacies about U.S. FDI in China

Abstract

Despite the rapid expansion of U.S.-China trade ties, the increase in U.S. FDI in China, and the expanding amount of economic research exploring these developments, a number of misconceptions distort the popular understanding of U.S. multinationals in China. In this paper, we seek to correct four common misunderstandings by providing a statistical portrait of several aspects of U.S. affiliate activity in the country and placing this activity in its appropriate economic context.

Lowering the Cost of Bank Recapitalization

Abstract

Efforts to recapitalize banks in the current crisis have, to date, been focused on government assistance under the TARP, rather than private investment, and on bank holding companies, rather than banks. We describe three alternative or complementary approaches designed to lower the cost of bank recapitalizations by drawing in funds from the private sector and focusing on banks: rights offerings, debt restructurings, and FDIC-assisted bridge banks. Each approach was used in dealing with problem banks in the 1990s; each can be pursued without additional legislation; and each is worth considering now. We also propose two legal changes that would assist bank recapitalization: (1) the Fed should further modestly relax its rules under the Bank Holding Company Act to eliminate the presumption of "control" by investors at the current threshold of 5%, which would permit more capital to be invested in banks by private equity and other institutional investors and (2) Congress should consider a new statute to streamline the recapitalization of bank holding companies by moving them outside current bankruptcy laws into a new resolution regime similar to the FDIC regime currently used for banks.

An Exploration of the Japanese Slowdown during the 1990s

Abstract

Why was the 1990s a lost decade for Japan? How is it possible that the Japanese economy stagnated for a decade if none of the shocks that arguably hit the economy seemed to have persisted for much more than three years or so? In this paper I show that the endogenous development and adoption of technologies can propagate these shocks, making their effect much more persistent. When feeding the markup shocks observed in Japan during the early 1990s, the model is able to generate time series for output, TFP, employment, consumption, and investment that track closely the actual data. In particular, the productivity slowdown in the model is as protracted as in the data. Reassuringly, I also find evidence that, as predicted by the model, the speed of technology diffusion slowed down in Japan during the 1990s and R&D expenditures also stopped growing.

Women and Leadership: Defining the Challenges

No abstract is available at this time.

Collaboration Across Knowledge Boundaries within Diverse Teams: Reciprocal Expertise Affirmation as an Enabling Condition

Abstract

We review research on expertise diversity, psychological safety, team collaboration, and role identity to propose a model in which reciprocal affirmations of expertise identity among team members—a feature of the team environment that we conceptualize as a dimension of team psychological safety—moderates the relationship between expertise diversity and collaboration across disciplinary or knowledge-based boundaries. We argue that mixed expertise teams in which members must work together across knowledge boundaries to accomplish challenging goals will be more likely to collaborate effectively if each individual member perceives that his or her expert identity, defined broadly to encompass disciplinary and other primary sources of role identification within the work context, is validated and valued by other team members. Reciprocal expertise affirmation is further hypothesized to be necessary but not sufficient for collaboration across expertise divides within diverse teams. We propose that conceptualizing reciprocal expertise affirmation as a dimension of psychological safety is a promising avenue through which to integrate positive identity with existing theory on interpersonal collaboration. Psychological safety is expected to reduce identity threats that may otherwise arise in diverse expertise contexts, encouraging open discussion of uncertainty, confusion, and mistakes and supporting learning across disciplinary boundaries. This lens on positive identity and collaboration exposes new opportunities for research on the role of positive identity as a moderator of multidisciplinary work processes within defined task groups.

Earning from History: Financial Markets and the Approach of World Wars

Abstract

We are living through a paradox—or so it seems. Since September 11, 2001, according to a number of neo-conservative commentators, America has been fighting World War III (or IV, if you like to give the Cold War a number). For more than six years, these commentators have repeatedly drawn parallels between the "War on Terror" that is said to have begun in September 2001 and World War II. Immediately after 9/11, Al Qaeda and other radical Islamist groups were branded "Islamofascists." Their attack on the World Trade Center was said to be our generation's Pearl Harbor. In addition to coveting weapons of mass destruction and covertly sponsoring terrorism, Saddam Hussein was denounced as an Arab Hitler. The fall of Baghdad was supposed to be like the liberation of Paris. Anyone who opposed the policy of preemption was an appeaser. And so on. Yet throughout this period of heightened terrorist threats and overseas military interventions, financial markets have displayed a remarkable insouciance.

The Evolution of Corporate Ownership after IPO: The Impact of Investor Protection

Abstract

We use firm-level data from 34 countries covering the 1995-2006 period to analyze how the characteristics of public markets shape the process by which firms become widely held. Firms in all countries in the sample tend to have concentrated ownership at the time they go public. Decreases in ownership concentration are more likely for firms in countries with stronger protections for minority shareholders, lower block premia, and more liquid stock markets. In these countries, firms are more likely to issue equity when investment opportunities are high, becoming widely held in the process. We find scant evidence, however, that changes in percentage blockholding forecast future returns, inconsistent with market-timing theories. Our results suggest that liquidity-based theories of corporate ownership may have been underemphasized in previous cross-country studies.

The Influence of Firm Ownership Form on Post-Merger Customer-Mix Strategies

Abstract

This study empirically examines firms' post-merger behavior using an institutional theory framework. While mergers can serve as a strategic tool for firms to reconfigure their product and customer mix, differences in institutional constraints influence the extent of this reconfiguration. A firm's ownership form signals the extent of institutional constraints and hence it is hypothesized that post-merger customer-mix changes will differ based on firm ownership form. Empirical analysis using data from public and private for-profit, non-profit, and government hospitals in California, covering 773 hospital-year observations and 59 mergers, reveals differences in post-merger customer-mix reconfiguration strategies. For-profit hospitals increase their share of the insured patients and decrease their share of uninsured patients after the merger, while non-profit hospitals marginally increase their share of insured patients but do not decrease their share of uninsured patients. Government hospitals do not make any discernable change in their customer mix after a merger.

Conceptual Foundations of the Balanced Scorecard

Abstract

David Norton and I introduced the Balanced Scorecard in a 1992 Harvard Business Review article. The article was based on a multi-company research project that studied performance measurement in companies whose intangible assets played a central role in value creation. Our interest in measurement for driving performance improvements arose from a belief articulated more than a century earlier by a prominent British scientist, Lord Kelvi: "I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind." If you cannot measure it, you cannot improve it. Norton and I believed that measurement was as fundamental to managers as it was for scientists. If companies were to improve the management of their intangible assets, they had to integrate the measurement of intangible assets into their management systems.

After publication of the 1992 HBR article, several companies quickly adopted the Balanced Scorecard giving us deeper and broader insights into its power and potential. During the next 15 years, as it was adopted by thousands of private, public, and nonprofit enterprises around the world, we extended and broadened the concept into a management tool for describing, communicating, and implementing strategy. In this chapter, I describe the roots and motivation for the original Balanced Scorecard article as well as the subsequent innovations that connected it to a larger management literature.

Contribution to Harry M. Markowitz, Merton H. Miller, William F. Sharpe, Robert C. Merton, and Myron S. Scholes

Abstract

No abstract is available at this time.

Dirty Work, Clean Hands: The Moral Psychology of Indirect Agency

Abstract

When powerful people cause harm, they often do so indirectly through other people. Are harmful actions carried out through others evaluated less negatively than harmful actions carried out directly? Four experiments examine the moral psychology of indirect agency. Experiments 1A, 1B, and 1C reveal effects of indirect agency under conditions favoring intuitive judgment, but not reflective judgment, using a joint/separate evaluation paradigm. Experiment 2A demonstrates that effects of indirect agency cannot be fully explained by perceived lack of foreknowledge or control on the part of the primary agent. Experiment 2B indicates that reflective moral judgment is sensitive to indirect agency, but only to the extent that indirectness signals reduced foreknowledge and/or control. Experiment 3 indicates that effects of indirect agency result from a failure to automatically consider the potentially dubious motives of agents who cause harm indirectly. Experiment 4 demonstrates an effect of indirect agency on purchase intentions.

Milestones in Marketing

Abstract

Marketing flourished in U.S. business schools in the prosperous years following World War II. Students preparing for assistant-product-manager positions at the likes of Procter & Gamble, Lever, and General Foods enrolled in courses in marketing management, management of promotion, marketing research, sales management, distribution, and cost accounting. As the marketing field matured in the 1950s and 1960s, it articulated a set of foundational concepts. As early as 1900, some firms chose to differentiate their products in order to do a better job of satisfying customers' diverse needs. In subsequent years, the marketing discipline developed increasingly sophisticated tools for competitive positioning, target-market segmentation, and product-line strategy. Within firms, the boundaries of marketing proved to be fuzzy, in large part because customer issues cut across many different aspects of a firm's activities. The concepts of Smith, Borden, Kotler, Green, and Levitt continue to inform marketing education and research. Their ideas about market segmentation, the marketing mix, marketing for nonbusinesses, market research, and globalization are embedded in business practice.