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.

Nov. 17

In the wake of the global financial crisis, HBS professor Bill Sahlman analyzes the fallout and suggests a new player to monitor management excess. What he envisions is a monitor that would "take an objective, hard-nosed look at major financial firms on a holistic basis. … [The] new monitor would learn from working with many players in an industry. Auditing the best and worst firms would create powerful tools for improving practice."

In his working paper "Management and the Financial Crisis (We Have Met the Enemy and He Is Us …)" [PDF], Sahlman analyzes a host of management problems from the perspective of culture, incentives, control and measurement, accounting, and human capital. Opposed to quick fixes, Sahlman is in favor of soul-searching on the part of corporate managers, followed by clear steps to revise prevailing notions of risk and reward. "We have a unique opportunity to force a review of all the players in the financial system, from individual consumers to politicians and regulators to management teams at financial services firms," he concludes.

The changing economic relationship between the United States and China as a result of the 2007-2009 financial crisis is the subject of "The End of Chimerica" [PDF] by HBS professor Niall Ferguson and Moritz Schularick. As they argue, Chinese currency is undervalued in relation to the U.S. dollar. "A continuation of Chimerica and Beijing's undervalued dollar peg at a time of dollar weakness would introduce new and dangerous distortions to the global economy," the authors warn. "The dollar depreciation that seems a likely consequence of current U.S. fiscal and monetary policy would be accompanied by a further Chinese depreciation relative to other major currencies."

 

Working Papers

User, and Open Collaborative Innovation: Ascendent Economic Models

Abstract

In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with—and may displace—producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare and so worthy of support by policymakers.

Download the paper: http://www.hbs.edu/research/pdf/10-038.pdf

Platform Competition, Compatibility, and Social Efficiency (revised)

Abstract

Katz and Shapiro (1985) study systems compatibility in settings with one-sided platforms and direct network effects. We consider systems compatibility in settings with two-sided platforms and indirect network effects to develop an explanation why markets with two-sided platforms are often characterized by incompatibility with one dominant player who may subsidize access to one side of the market. We find that incompatibility gives rise to asymmetric equilibria with a dominant platform that earns more than under compatibility. We also find that incompatibility generates larger total welfare than compatibility when horizontal differences between platforms are small.

Download the paper: http://www.hbs.edu/research/pdf/09-058.pdf

From Strategy to Business Models and to Tactics

Abstract

The notion of business model has been used by strategy scholars to refer to "the logic of the firm, the way it operates, and how it creates value for its stakeholders." On the surface, this notion appears to be similar to that of strategy. We present a conceptual framework to separate and relate business model and strategy. Business model, we argue, is a reflection of the firm's realized strategy. We find that in simple competitive situations there is a one-to-one mapping between strategy and business model, which makes it difficult to separate the two notions. We show that the concepts of strategy and business model differ when there are important contingencies upon which a well-designed strategy must be based. Our framework also delivers a clear separation between tactics and strategy. This distinction is possible because strategy and business model are different constructs.

Download the paper: http://www.hbs.edu/research/pdf/10-036.pdf

The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making

Abstract

Although the concept of luxury has been widely discussed in social theories and marketing research, relatively little research has directly examined the psychological consequences of exposure to luxury goods. This paper demonstrates that mere exposure to luxury goods increases individuals' propensity to prioritize self-interests over others' interests, influencing the decisions they make. Experiment 1 found that participants primed with luxury goods were more likely than those primed with non-luxury goods to endorse business decisions that benefit themselves but could potentially harm others. Using a word recognition task, Experiment 2 further demonstrates that exposure to luxury is likely to activate self-interest but not necessarily the tendency to harm others. Implications of these findings were discussed.

Download the paper: http://www.hbs.edu/research/pdf/10-034.pdf

The CHAT Dataset

Abstract

This note accompanies the Cross‐country Historical Adoption of Technology (CHAT) dataset. CHAT is an unbalanced panel dataset with information on the adoption of over 100 technologies in more than 150 countries since 1800. The data is available for download at http://www.nber.org/data/chat. We discuss the main aim of CHAT, its scope and limitations, as well as several ways in which we have used the data so far and ways to potentially use the data for other research.

Download the paper: http://www.hbs.edu/research/pdf/10-035.pdf

The End of Chimerica

Abstract

For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with U.S. over-consumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China's economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.

Download the paper: http://www.hbs.edu/research/pdf/10-037.pdf

Management and the Financial Crisis (We have Met the Enemy and He Is Us…)

Abstract

The financial crisis of 2008-2009 has revealed that our broad model of corporate governance is broken, independent of the shortcomings in the regulatory system. Managers and boards of directors in scores of systemically important firms failed to protect employees, customers, or shareholders and placed the global financial system at risk. I assert that the root cause of the crisis can be found in five related systems: incentives, risk management and control, accounting, human capital, and culture. The worst firms had lethal combinations of strong incentives, weak control and risk management, flawed internal and external accounting, low skill and/or low integrity people, and corrosive cultures. Piecemeal attempts to fix elements of corporate governance will fail. The problem, to illustrate, is not just the structure of compensation. Nor will increasing required capital prevent problems at companies with strong incentives and weak controls. I believe that we may need a new kind of external agency for systemically risky firms that would take a holistic look at the five systems to identify weaknesses, make recommendations to managers and boards, and set regulatory policies, including assessing charges for insuring against losses. Without such a comprehensive assessment and improvement plan, boards cannot do their jobs, and the system will remain as subject to calamitous events as it was before the crisis.

Download the paper: http://www.hbs.edu/research/pdf/10-033.pdf

 

Publications

Lessons for the Current Financial Crisis from Catastrophe Reinsurance

Book Abstract

Of the 20 most costly catastrophes since 1970, more than half have occurred since 2001. Is this an omen of what the 21st century will be? How might we behave in this new, uncertain, and more dangerous environment? Will our actions be rational or irrational? A select group of scholars, innovators, and Nobel Laureates was asked to address challenges to rational decision making both in our day-to-day life and in the face of catastrophic threats such as climate changes, natural disasters, technological hazards, and human malevolence. At the crossroads of decision sciences, behavioral and neuro-economics, psychology, management, insurance, and finance, their contributions aim to introduce readers to the latest thinking and discoveries. The Irrational Economist challenges the conventional wisdom about how to make the right decisions in the new era we have entered. It reveals a profound revolution in thinking as understood by some of the greatest minds in our day and underscores the growing role and impact of economists and other social scientists as they guide our most important personal and societal decisions.

Bank Lending During the Financial Crisis of 2008

Abstract

This paper documents that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to the peak of the credit boom (second quarter of 2007). New lending for real investment (such as working capital and capital expenditures) fell by only 14% in the last quarter of 2008 but contracted nearly as much as new lending for restructuring (LBOs, M&A, share repurchases) relative to the peak of the credit boom. After the failure of Lehman Brothers in September 2008 there was a run by short-term bank creditors, making it difficult for banks to roll over their short-term debt. We document that there was a simultaneous run by borrowers who drew down their credit lines, leading to a spike in commercial and industrial loans reported on bank balance sheets. We examine whether these two stresses on bank liquidity led them to cut lending. In particular, we show that banks cut their lending less if they had better access to deposit financing, and thus they were not as reliant on short-term debt. We also show that banks that were more vulnerable to credit line drawdowns because they co-syndicated more of their credit lines with Lehman Brothers reduced their lending to a greater extent.

Nobel Laureate Panel Discussion: What Retirement Means to Me

Book link: http://www.cfapubs.org/toc/rf/2009/4

 

Cases & Course Materials

Genzyme Center (A)

Michael W. Toffel and Aldo Sesia Jr.
Harvard Business School Case 610-008

Genzyme Corporation is in the midst of planning its new corporate headquarters, which incorporates many innovative green building features. After learning that the building as planned would likely earn a LEED Silver rating, an intermediate score in the LEED green building rating scheme, the CEO charged the building team with exploring opportunities that would enable the building to earn the highest rating, LEED Platinum. Five additional green building features are described, and students are asked to analyze and recommend which, if any, of these features to pursue based on their cost, likelihood of earning LEED credits, and their influence on the building's environmental performance.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/610008-PDF-ENG

Purchase Supplement (B):
http://cb.hbsp.harvard.edu/cb/product/610009-PDF-ENG

Purchase Supplement (C):
http://cb.hbsp.harvard.edu/cb/product/610010-PDF-ENG

Intellectual Ventures

Andrei Hagiu, David B. Yoffie, and Alison Berkley Wagonfeld
Harvard Business School Case 710-423

Intellectual Ventures (IV) creates and acquires intellectual property (IP), which it then seeks to monetize through non-exclusive licensing. In early 2009, as an increasing number of companies were trying to position themselves as leading intermediaries in the market for intellectual property, IV was looking for the best business model to become such a leading intermediary. Its model was predicated on making it easy for small inventors to monetize their inventions and IP (by selling it to IV) and then using its scale and aggregate IP portfolio to extract revenues from potential licensees (usually technology companies).

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/710423-PDF-ENG

Noble Group

C. Fritz Foley, Michael Shih-Ta Chen, Matthew Johnson, and Linnea Meyer
Harvard Business School Case 210-021

What role does trade finance play in facilitating global supply chain management? Richard S. Elman, founder and CEO of Noble Group Ltd., a global commodities trading company based in Hong Kong, must raise capital to support the firm's working capital and investment needs. In evaluating by which means Elman should raise capital, students must consider issues relating to the payment terms and financing arrangements used in world trade, as well as the risk management and operating decisions of a trade intermediary.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/210021-PDF-ENG

ZINK Imaging: Zero InkTM

William A. Sahlman, and Sarah Greene Flaherty
Harvard Business School Case 810-050

"ZINK Imaging" describes the issues confronting CEO Wendy Caswell as she uses a partnership model to commercialize ZINK's disruptive printing technology platform, ZINK Paper. The case focuses on the frameworks ZINK has used to decide which markets to target and which business partners to choose. Caswell contemplates changes to the partnership model in an effort to speed product introduction to manage the company's burn rate and reach profitability. The context for the case is the company's imminent need to raise an additional $25 million.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/810050-PDF-ENG