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 7, 2009

It is no secret that many Americans cannot manage their debt loads, but new research makes clear the troubling divide between debt knowledge and ignorance. According to a national sample analyzed by Dartmouth's Annamaria Lusardi and HBS professor Peter Tufano, "only about one-third of the population seems to comprehend interest compounding or the workings of credit cards…. [I]ndividuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using high-cost borrowing."

Lusardi and Tufano describe the analysis in their working paper published by the National Bureau of Economic Research, "Debt Literacy, Financial Experiences, and Overindebtedness." People who don't understand the ABCs of debt may feel overwhelmed by a debt load that would be manageable, or be unable to even judge their indebtedness. Hopefully, these data about the widespread absence of financial skills among Americans will be a necessary wake-up call to policymakers.

In other news, the coming years are likely to see an exciting burst of collaboration between customers and firms, facilitated by new possibilities in digital networks. These potential advances in product design and concept are described by HBS professor Ranjay Gulati in his book chapter, "Creating Superior Customer Value in a Connected World."

 

Working Papers

Securing Jobs or the New Protectionism? Taxing the Overseas Activities of Multinational Firms

Abstract

Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations—the so-called "end to tax breaks for companies that ship our jobs overseas." At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters—the U.K. and Japan—that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy. This paper addresses these questions by analyzing the available evidence on two related claims: (1) that the current U.S. policy of deferring taxation of foreign profits represents a subsidy to American firms and (2) that activity abroad by multinational firms represents the displacement of activity that would have otherwise been undertaken at home. These two tempting claims are found to have limited, if any, systematic support. Instead, modern welfare norms that capture the nature of multinational firm activity recommend a move toward not taxing the foreign activities of American firms, rather than taxing them more heavily. Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.

Download the paper: http://www.hbs.edu/research/pdf/09-107.pdf

Corporate Misgovernance at the World Bank

Abstract

We test for evidence of corporate misgovernance at the World Bank. Most major decisions at the World Bank are made by its Board of Executive Directors. However, in any given year the majority of the Bank's member countries do not get a chance to serve on this powerful body. In this paper, we empirically investigate whether board membership leads to higher funding from the World Bank's two main development financing institutions, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). We find that developing countries serving on the Board of Executive Directors can expect an approximate doubling of funding from the IBRD. In absolute terms, countries serving on the board are rewarded with an average $60 million "bonus" in IBRD loans. This is more likely driven by soft forces like boardroom culture rather than by the power of the vote itself. We find no significant effect in IDA funding.

Download the working paper: http://www.hbs.edu/research/facpubs/workingpapers/papers0809.html#wp09-108

Corrigendum to 'Resource-Monotonicity for House Allocation Problems'

Abstract

Ehlers and Klaus (2003) study so-called house allocation problems and claim to characterize all rules satisfying efficiency, independence of irrelevant objects, and resource-monotonicity on two preference domains (Ehlers and Klaus, 2003, Theorem 1). They explicitly prove Theorem 1 for preference domain R0 which requires that the null object is always the worst object and mention that the corresponding proofs for the larger domain R of unrestricted preferences "are completely analogous." Quesada (2009) in a recent working paper claims to have found a counterexample that shows that Theorem 1 is not correct on the unrestricted domain R. In Lemma 1, we prove that Quesada's (2009) example is not a counterexample to Ehlers and Klaus (2003, Theorem 1). However, in Example 1 and Lemma 2, we demonstrate how to adjust Quesada's (2009) original idea to indeed establish a counterexample to Ehlers and Klaus (2003, Theorem 1) on the general domain R. Quesada (2009) also proposes a way of correcting the result on the general domain R by strengthening independence of irrelevant objects in two ways: in addition to requiring that the chosen allocation should depend only on preferences over the set of available objects (which always includes the null object), he adds two situations in which the allocation should also be invariant when preferences over the null object change. We demonstrate that it is sufficient to require only one of Quesada's (2009) additional independence requirements to reestablish the result of Theorem 1 on the general domain R. Finally, while Quesada (2009) essentially replicates the original proofs of Ehlers and Klaus (2003) using his stronger independence condition, here we offer a short proof that uses the established result of Theorem 1 for the restricted domain R0.

Download the working paper: http://www.hbs.edu/research/pdf/09-110.pdf

Debt Literacy, Financial Experiences, and Overindebtedness

Abstract

We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is measured by questions testing knowledge of fundamental concepts related to debt and by self-assessed financial knowledge. Financial experiences are the participants' reported experiences with traditional borrowing, alternative borrowing, and investing activities. Overindebtedness is a self-reported measure. Overall, we find that debt literacy is low: only about one-third of the population seems to comprehend interest compounding or the workings of credit cards. Even after controlling for demographics, we find a strong relationship between debt literacy and both financial experiences and debt loads. Specifically, individuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using high-cost borrowing. In applying our results to credit cards, we estimate that as much as one-third of the charges and fees paid by less knowledgeable individuals can be attributed to ignorance. The less knowledgeable also report that their debt loads are excessive or that they are unable to judge their debt position.

Download the working paper from SSRN ($5): http://papers.nber.org/papers/w14808

Evidence from Goodwill Non-Impairments on the Effects of Using Unverifiable Estimates in Financial Reporting

Abstract

SFAS 142 requires managers to estimate reporting unit values to determine goodwill write-offs. Those estimates often use unverifiable discounted future cash flows providing managers with more discretion than historically afforded in financial reporting.  Ex post, managers can claim their unit value estimates were not realized due to factors outside their control, claims that are difficult to objectively falsify. In promulgating SFAS 142, standard setters assume managers, on average, use unverifiable discretion to convey private information on future cash flows; in contrast, agency theory predicts managers, on average, use unverifiable discretion opportunistically. We test these alternative hypotheses using a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with agency theory, does not confirm the private information hypothesis.

Download the working paper from SSRN ($5): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1134943

 

Cases & Course Materials

Addleshaw Goddard LLP

Harvard Business School Case 409-056

Addleshaw-Goddard (AG), the 15th largest law firm in the U.K., is seeking ways to serve larger clients on more important legal matters. Part of this strategy involves its "Client Development Centre (CDC)," an innovative idea and set of services launched by Dr. Jim Hever who holds a Ph.D. in Strategic Leadership Development. The mission of the CDC is to improve the capabilities of clients' in-house legal departments, such as by making them better partners with the business units and improving their leadership skills. The CDC has adopted an innovative pricing structure. Rather than charging direct fees for these consulting services, it proposed to the client that it contract with the firm for five times this amount in legal fees that might otherwise have gone to another law firm. It is in this way that AG hopes to increase its position in its larger clients. AG has also developed a very systematic program for identifying and serving its key clients, developed in collaboration with Cranfield School of Management. It is these clients that will be the focus of the efforts for the CDC. In addition, the firm has co-developed a training program with Cranfield to improve the skills of its own partners. The case explores whether these initiatives will lead to a long-term competitive advantage. The firm believes what really will produce competitive advantage is its "Me-To-You-Mindset" initiative that encourages partners to look at the world through their clients' eyes. At the end of the case Hever is reflecting on a proposal he submitted for providing CDC services to one of the largest U.K. companies. The general counsel wants to pay for these services in cash should he decide to accept the proposal, rather than hiring AG for more legal work. Hever is wondering if this is a good way to take advantage of recent reforms allowing law firms to provide other professional services, like consulting, or if this is "off-strategy" for the mission of the CDC.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=409056

The AFSCME vs. Mozilo ... and 'Say on Pay' for All! (A)

Harvard Business School Case 109-009

Union seeks to protect its pension funds through shareholder activism focused on corporate governance and executive compensation. The case uses Countrywide Financial as an example. Richard Ferlauto, director of pensions and benefits policy at the AFSCME, the largest public sector workers union in the U.S., was responsible for protecting the pensions of its members. Because pensions were invested for decades, Ferlauto wanted the companies in which the union invested to be managed for the long-term interests of shareholders. He believed this required good corporate governance and effective oversight by the board of directors. The case explores the history of AFSCME's shareholder activism on this front and particularly its use of shareholder proposals voted on by shareholders at annual meetings. The case then looks at the issue of executive compensation and the idea that excessive compensation is a sign of poor governance. It also discusses the union's 'Say on Pay' proposals that sought to allow shareholders an advisory vote on executive compensation. Finally, the case provides details on the rise of Countrywide Financial, its collapse, the role it played in the mortgage financial crisis, and the excessive compensation of its CEO.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=109009

Purchase the supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=109057

Amylin Pharmaceuticals: Diabetes and Beyond

Harvard Business School Case 809-011

Ginger Graham, CEO of Amylin Pharmaceuticals, joined the company with the expectation of taking the company's signature drug, Symlin, to market. However, unforeseen regulatory challenges have put the approval process in jeopardy. At the same time, the company has a second drug, Byetta, in its pipeline. Graham must decide how to manage the company's limited resources while also finalizing another deal that has huge future potential. Graham knows that Amylin's immediate success depends on its ability to commercialize its products, but its long-term success depends on replenishing its pipeline. Can the company do it all successfully?

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=809011

Du Pont: The Birth of the Modern Multidivisional Corporation

Harvard Business School Case 809-012

Du Pont's realization in 1921 that its "U-form" corporate structure was ill-suited to its new diversification strategy led to a pioneering new kind of organization—the "M" or multidivisional form—that has been called the most important innovation of capitalism in the 20th century. This case examines how and why this pivotal transformation took place and what its implications may be for corporations that are trying to align their structure with their strategy as they undergo rapid growth and change.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=809012

Groupe Eurotunnel S.A. (A)

Harvard Business School Case 209-062

In the summer of 2006, the chairman and CEO of Eurotunnel Group is faced with the decision whether to file for bankruptcy protection, after having failed to gain creditor approval of an ambitious out-of-court restructuring plan. The company, which has been attempting to restructure its debt and operations for the last ten years, faces a number of daunting challenges. Eurotunnel is jointly listed in the U.K. and France, and its shareholders, who are largely based in France, face the prospect of significant dilution under any restructuring plan. The current chairman and CEO has been with the company for only a year and a half, following a decade of senior management turbulence in which the company has seen nine different CEOs and chairmen. Eurotunnel's capital structure is staggeringly complex, and a large fraction of its debt has come to be held by U.S.-based hedge funds that specialize in investing in distressed companies. Finally, Eurotunnel's business is extremely challenging to value and is faced with significant competition. If the current chairman/CEO decides to file for bankruptcy, he faces the additional choice of whether to file for bankruptcy in the U.K. or in France, which take quite different approaches to restructuring troubled companies.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=209062

Purchase the supplement:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=209113

The Home Depot: Leadership in Crisis Management

Harvard Business School Case 309-055

Examines the challenges The Home Depot faced in the aftermath of natural disasters such as Hurricanes Katrina, Rita, and Andrew. By providing 40,000 to 50,000 items sold by knowledgeable associates, The Home Depot became a destination place for customers in need of anything from shovels to a new kitchen sink or supplies to use in recovering from a hurricane or flood. Disasters are thus both a source of disruption to the company's operations and a source of additional demand for its products and services. How, then, should The Home Depot organize itself in advance of disaster events?

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=309055

Neck & Neck: Leveraging the Club Neck Information

Harvard Business School Case 109-070

Commercial Director Prado wonders how to leverage the loyalty card information to prepare the fall 2008 budget. The case discusses the value of subjective and objective information for profit-planning purposes. Spanish children's apparel retailer Neck & Neck uses loyalty card information for tactical purposes, such as promotional campaigns. Its management team is thinking about how to incorporate that information to the budgeting (profit-planning) process. From an analytical standpoint the case looks at the surprising results of a mailing campaign that reveals the consequences of inadequate updating of the customer database. Also, the budgeting data in the case may be used to teach regression model selection and R-squared.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=109070

The Posse Foundation: Implementing a Growth Strategy

Harvard Business School Case 309-056

The Posse Foundation selected high-potential, non-traditional students to attend selective colleges as part of a group of 10 from the same city. The organization had developed an ambitious growth plan, but because it focused on the most selective colleges, the pool of available university partners was somewhat limited. Some members of Posse's board wondered if the organization should broaden the criteria for potential partner colleges in order to more quickly grow the number of students it served. If Posse defined its impact as helping as many non-traditional students as possible enter and graduate from college, expanding the list of acceptable partners might make sense. But CEO Deborah Bial believed that selective colleges provided Posse scholars with more than just superior career opportunities—they were a gateway to influential leadership positions and powerful networks. If Posse defined its impact as changing the demographic makeup of the leadership of professions such as law, business, medicine, and education, then perhaps it should continue to target only the most selective colleges. The case provides an opportunity for readers to be in the CEO's shoes and weigh the consequences of each approach.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=309056

Sub-Prime Crisis and Fair Value Accounting

Harvard Business School Case 109-031

This case examines the challenges in implementing fair value accounting for mortgage instruments, the role of accounting in the sub-prime crisis, and proposals for revising accounting standards given the crisis.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=109031

Transforming AMFAM

Harvard Business School Case 508-081

On a winter day in December 2007 at the American Family Mutual Insurance Company (AMFAM) headquarters in Madison, Wisconsin, Dave Anderson and Jack Salzwedel remained in the conference room after the senior management meeting had concluded. Anderson, CEO of AMFAM since January 2007, and Salzwedel, named President in August 2006, reflected together on how far the company had come over the past two years. Both recalled meetings in which top executives simply read out activity reports to help prepare a previous CEO for a largely ceremonial board meeting. These days, they sensed energy and movement at different levels—whether in a strategic planning meeting, or in Salzwedel's recent visit to a regional office to explain in person the content of and motivation for the company's new strategic plan. Anderson and Salzwedel were pleased that the just-ended meeting exhibited the kind of engaged discussion, "pushback," and argumentation they had been encouraging.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=508081

Upgrading the Economy: Industrial Policy and Taiwan's Semiconductor Industry

Harvard Business School Case 609-089

The government-led creation and incubation of the semiconductor industry in Taiwan is a striking success for advocates of strong industrial policy. It has led to the island nation's domination of the global "foundry" business in which firms like Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) manufacture the designs of "fabless" design companies. The two have a combined global market share of close to 70% of this global business segment. This success was all the more striking because when the initiative began, the country had few of the large-scale firms that could support the R&D and scale necessary to enter such sophisticated capital-intensive industries. There were no firms with the deep technological roots or the skill base to even begin. Yet government planners recognized the challenges of upgrading the nation's technology base and formulated a strategy that entailed the creation of "pilot agencies" that would serve as vehicles to bridge between sources of leading-edge technology (predominantly sourced from overseas) and the commercialization to be carried out by local firms.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=609089

Understanding Brands

Harvard Business School Note 509-041

For many firms, the brands associated with their products and/or services are their most valuable assets, and, hence, much management attention is given to designing, communicating, nurturing, and protecting them. This note is designed to provide an understanding of brand management strategies firms use to build, sustain, and leverage their brands.

Purchase this note:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=509041

 

Publications

The Impact of Add-On Features on Consumer Product Evaluations

Abstract

The research presented in this article provides evidence that add-on features sold to enhance a product can be more than just discretionary benefits. We argue that consumers draw inferences from the mere availability of add-ons, which in turn lead to significant changes in the perceived utility of the base good itself. Specifically, we propose that the improvements supplied by add-ons can be classified as either alignable or nonalignable and that they have opposing effects on evaluation. A set of four experiments with different product categories confirms this prediction. In addition, we show that the amount of product information available to consumers and expectations about product composition play important moderating roles. From a practical standpoint, these results highlight the need for firms to be mindful of the behavioral implications of making add-ons readily available in the marketplace.

Creating Superior Customer Value in a Connected World

Abstract

In the early twenty-first century, customers are more demanding than ever, and difficult economic times make them all the more so. As customers tighten their wallets and increase their demands, firms face greater pressure to provide superior customer value. Reducing costs, improving efficiency, and even creating more compelling goods may not be enough to satisfy customers anymore, not if what the customers ultimately want is to design the firm's offerings themselves.

What is a firm to do when customers will not be satisfied easily? The answer is, in a word, collaboration—with suppliers, partners, and customers in creating and delivering value—on a scale not seen before in the annals of business. Nearly every aspect of business—from product design to the idea of value itself—stands to be transformed by twenty-first-century collaboration, made possible by twenty-first-century information technologies. […] In this chapter we explore the new possibilities that digital networks create for firms as they seek to collaborate with customers.

What's Your Google Strategy?

No abstract is available at this time.

Purchase the article: http://hbr.harvardbusiness.org/2009/04/whats-your-google-strategy/ar/1

The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre

Abstract

We analyze geographic patterns of trade between individuals using transactions data from eBay and MercadoLibre, two large online auction sites. We find that distance continues to be an important deterrent to trade between geographically separated buyers and sellers, though to a lesser extent than has been observed in studies of non-Internet commerce between business counterparties. We also find a strong "home bias" for trading with counterparties located in the same city. Further analyses suggest that location-specific goods such as opera tickets, cultural factors, and the possibility of direct contract enforcement in case of breach may be the main reasons behind the same-city bias.

Stable Many-to-Many Matchings with Contracts

Abstract

We consider several notions of setwise stability for many-to-many matching markets with contracts and provide an analysis of the relations between the resulting sets of stable allocations for general, substitutable, and strongly substitutable preferences. Apart from obtaining "set inclusion results" on all three domains, we introduce weak setwise stability as a new stability concept and prove that for substitutable preferences, the set of pairwise stable matchings is nonempty and coincides with the set of weakly setwise stable matchings. For strongly substitutable preferences, the set of pairwise stable matchings coincides with the set of setwise stable matchings.

How to Market in a Downturn

No abstract is available at this time.

Purchase the article: http://hbr.harvardbusiness.org/2009/04/how-to-market-in-a-downturn/ar/1

Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry

Abstract

This study explores the importance of cross-border social networks for entrepreneurs in developing countries by examining ties between the Indian expatriate community and local entrepreneurs in India's software industry. We find that local entrepreneurs who have previously lived outside India rely significantly more on diaspora networks for business leads and financing. This is especially true for entrepreneurs who are based outside software hubs—where getting leads to new businesses and accessing finance is more difficult. Our results provide micro-evidence consistent with a view that cross-border social networks play an important role in helping entrepreneurs to circumvent the barriers arising from imperfect domestic institutions in developing countries.

Labor Market Institutions and Global Strategic Adaptation: Evidence from Lincoln Electric

Abstract

Although one of the central questions in the global strategy field is how multinational firms successfully navigate multiple and often conflicting institutional environments, we know relatively little about the effect of conflicting labor market institutions on multinational firms' strategic choice and operating performance. With its decision to invest in manufacturing operations in nearly every one of the world's largest welding markets, Lincoln Electric offers us a quasi-experiment. We leverage a unique data set covering 1996-2006 that combines data on each host country's labor market institutions with data on each subsidiary's strategic choices and historical operating performance. We find that Lincoln Electric performed significantly better in countries with labor laws and regulations supporting manufacturers' interests and in countries that allowed the free use of both piecework and a discretionary bonus. Furthermore, we find that in countries with labor market institutions unfriendly to manufacturers, Lincoln Electric was still able to overcome most (although not all) of the institutional distance by what we term flexible intermediate adaptation.