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.

Feb. 2

Is your company rigid or resilient? Breaking down silos is hard to do, but often necessary in the face of unpredictable market conditions. A new book by HBS professor Ranjay Gulati offers up a bevy of role models as well as practical suggestions.

As Gulati writes in Reorganize for Resilience: Putting Customers at the Center of Your Organization, "No firm that I know of has completely attained my definition of truly seamless, but companies such as Jones Lang LaSalle, GE Healthcare, Best Buy, Cisco, and Lafarge (the cement division) are well on their way to a high level of internal seamlessness. And all use the four internal levers of silo busting—coordination, cooperation, clout, and capabilities—in concert to drive strong customer centricity and to pull perspective from inside the firm looking out to outside it, looking in."

This week also sees a working paper that studies when and why, in the design of development projects, technical architecture corresponds with or "mirrors" the firm's organizational structure. HBS doctoral candidate Lyra Colfer and professor Carliss Y. Baldwin describe results and present examples from practice in "The Mirroring Hypothesis: Theory, Evidence and Exceptions" [PDF].

 

Working Papers

The Mirroring Hypothesis: Theory, Evidence and Exceptions

Abstract

The mirroring hypothesis asserts that the organizational patterns of a development project (e.g., communication links, geographic collocation, team and firm co-membership) will correspond to the technical patterns of dependency in the system under development. Thus the hypothesis predicts that developers with few or no organizational linkages will design independent system components, while developers with rich organizational linkages will co-design highly interdependent system components. (The hypothesis claims a correspondence between organizational structure and technical architecture, but allows causality to flow in either direction.) Scholars in a range of disciplines have argued that mirroring is either a necessary or highly desirable feature in the design of development projects, but empirical research shows that some projects deviate from strict mirroring, seemingly without harmful effects. In this paper, we formally define the mirroring hypothesis, describe its theoretical underpinnings, and systematically review the empirical evidence for and against it. Our review includes 129 studies spanning three levels of organization: within a single firm, across firms, and open community-based development. Across these levels, the hypothesis was supported in 69% of the relevant cases, but not supported in 31%. It was most strongly supported within firms, less strongly across firms, and often violated in community-based development settings. The exceptions in turn were of two types: In four cases, closely collaborating teams within single firms created modular systems comprised of independent components. More surprisingly, in 28 cases, independent and dispersed contributors made highly interdependent contributions to the design of a single technical system (or sub-system). Based on a detailed analysis of the latter 28, we introduce the concept of actionable transparency as a means of achieving coordination without mirroring. Contributors achieve actionable transparency by embedding their design in a centralized system with a shared design language and near-real-time updating, where everyone with an interest in improving the design has the right and the means to act on it. We present examples from practice and then describe the more complex organizational patterns that emerge in lieu of genuine mirroring when actionable transparency allows people to "break the mirror."

Download the paper: http://www.hbs.edu/research/pdf/10-058.pdf

Criminal Recidivism after Prison and Electronic Monitoring

Abstract

We study the re-arrest rates for two groups: individuals formerly in prison and individuals formerly under electronic monitoring (EM). We find that the recidivism rate of former prisoners is 22% while that for those "treated" with electronic monitoring is 13% (40% lower). We convince ourselves that the estimates are causal using peculiarities of the Argentine setting. For example, we have almost as much information as the judges have when deciding on the allocation of EM—the program is rationed to only some offenders—and some institutional features (such as bad prison conditions) convert ideological differences across judges (to which detainees are randomly matched) into very large differences in the allocation of electronic monitoring.

Download the paper from SSRN ($5): http://papers.nber.org/papers/w15602

 

Publications

Seven Lessons for Leading in Crisis

Abstract

Seven Lessons for Leading in Crisis outlines the seven critical lessons leaders need to learn when facing crises. The book contains numerous examples of successful and failed leaders, with stories to illustrate their experiences and the author's advice to readers who may face similar crises.

Purchase this book: http://www.wiley.com/WileyCDA/PressRelease/pressReleaseId-55338.html

Reorganize for Resilience: Putting Customers at the Center of Your Organization

Abstract

In an era of raging commoditization and eroding profit margins, survival depends on resilience: staying one step ahead of your customers. Sure, most companies say they're "customer focused," but they don't deliver solutions to customers' thorniest problems. Why? Because they're stymied by the rigid "silos" they're organized around. In Reorganize for Resilience, Ranjay Gulati reveals how resilient companies prosper both in good times and bad, driving growth and increasing profitability by immersing themselves in the lives of their customers. This book shows how resilient organizations cut through internal barriers that impede action, build bridges between warring divisions, and transform former competitors into collaborators. Based on more than a decade of research in a variety of industries, and filled with examples from companies including Cisco Systems, La Farge, Starbucks, Best Buy, and Jones Lang LaSalle, Gulati explores the five levers of resilience: 1) Coordination: connect, eradicate, or restructure silos to enable swift responses. 2) Cooperation: foster a culture that aligns all employees around the shared goals of customer solutions. 3) Clout: redistribute power to "bridge builders" and customer champions. 4) Capability: develop employees' skills at tackling changing customer needs. 5) Connection: blend partners' offerings with yours to provide unique customer solutions.

Purchase this book: http://cb.hbsp.harvard.edu/cb/web/product_detail.seam?R=1721-HBK-ENG&conversationId=355532&E=3159

Merchants to Multinationals

Abstract

Merchants to Multinationals examines the evolution of multinational trading companies from the eighteenth century to the present day. During the Industrial Revolution, British merchants established overseas branches which became major trade intermediaries and subsequently engaged in foreign direct investment. Complex multinational business groups emerged controlling large investments in natural resources, processing, and services in Asia, Latin America, and Africa.

Nominal versus Indexed Debt: A Quantitative Horse Race

Abstract

The main arguments in favor of and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.

Performance Measure Aggregation, Career Incentives, and Explicit Incentives

Abstract

We examine a setting in which managers have differential career concerns and firm performance is publicly observed using disaggregated measures that are incrementally informative but costly to contract upon. In such a setting, when do firms contract on aggregated rather than disaggregated performance measures? We show that at intermediate levels of managerial career concerns contracting on an aggregate measure can be welfare enhancing. In this case, the net cost of both contracting directly on an aggregate measure and exploiting career incentives based on disaggregated measures is smaller than the cost of contracting directly on disaggregate measures. Our findings also imply that detailed performance disclosures will be accompanied by lower incentive weights based on aggregate performance when career incentives mitigate distortions caused by aggregation. Further, if performance measures become noisier due to transient shocks, we find that contractual incentive weights on aggregate performance can be either increasing or decreasing, depending on the magnitude of a manager's career incentives.

Altruistic Utility Functions for Joint Decisions

Abstract

All of us make decisions that are not entirely self-centered; we voluntarily anticipate what we think to be the preferences of others and incorporate them into our decision making. We do this, not because of legal requirements or social norms, but because we are altruistic; we care intrinsically about the welfare of others. In this paper, we illustrate for these types of decisions how confusion may arise because the distinction between our personal (egotistical) preferences and our altruistic concerns is not carefully distinguished. We first define the distinction between personal and altruistic preferences, and then show how to use both of these kinds of preferences in prescriptive decision making methodologies.

Purchase the book: http://www.springer.com/economics/economic+theory/book/978-3-540-79127-0

Loan Syndication and Credit Cycles

Abstract

Cyclicality in the supply of business credit has been the focus of a considerable amount of research. This cyclicality can stem from shocks to borrowers' collateral, which affect firms' ability to raise capital if agency and information problems are significant (Ben S. Bernanke and Mark Gertler, 1989). Or it can stem from shocks to bank capital, which affects the supply of bank loans if agency and information problems limit the ability of banks to raise additional capital (Bernanke, 1983). In this paper, we examine cyclicality in the supply of credit in the context of modern forms of banking, often referred to as the "originate-to-distribute" model. In particular, we focus on the role of syndicated lending.

Download the paper from SSRN ($5): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1538892

Exploration and Exploitation within and across Organizations

Abstract

Jim March's framework of exploration and exploitation has drawn substantial interest from scholars studying phenomena such as organizational learning, knowledge management, innovation, organizational design, and strategic alliances. This framework has become an essential lens for interpreting various behaviors and outcomes within and across organizations. Despite its straightforwardness, this framework has generated debates concerning the definition of exploration and exploitation and their measurement, antecedents, and consequences. We critically review the growing literature on exploration and exploitation discuss various perspectives, raise conceptual and empirical concerns, underscore challenges for further development of this literature, and provide directions for future research.

Quality Management and Job Quality: How the ISO 9001 Standard for Quality Management Systems Affects Employees and Employers

Abstract

Several studies have examined how the ISO 9001 Quality Management System standard predicts changes in organizational outcomes such as profits. This is the first large-scale study to explore how employee outcomes such as employment, earnings, and health and safety change when employers adopt ISO 9001. We analyzed a matched sample of nearly 1,000 companies in California. ISO 9001 adopters subsequently had far lower organizational death rates than a matched control group of non-adopters. Among surviving employers, ISO adopters had higher growth rates for sales, employment, payroll, and average annual earnings. Injury rates declined slightly for ISO 9001 adopters, although total injury costs did not. These results have implications for organizational theory, managers, and public policy.

Download the paper: http://www.hbs.edu/research/pdf/09-018.pdf

Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930

Abstract

There is a large amount of literature that aims to explain what determines country risk (defined as the difference between the yield of a sovereign's bonds and the risk-free rate). In this paper, we contribute to the discussion by arguing that an important explanatory factor is the impact that commodities have on the government's capacity to pay. We use a newly created database with state-level fiscal and risk premium data for Brazil states between 1891 and 1930 to show that in Brazilian states that exported commodities that were in high in demand (e.g., rubber and coffee) the state governments ended up having higher tax revenues per capita and, thus, lower cost of capital. We also explain that the variation in revenues per capita was both a product of the variation in natural endowments and a commodity boom that had asymmetric effects among states. These two effects generated variation in revenues per capita at the state level thanks to the extreme form of fiscal decentralization that the Brazilian government adopted in the Constitution of 1891, which gave states the sole right to tax exports. We also use indices of export prices for each state as instruments for revenues per capita. Our instrumental variable estimates confirm our results that states with commodities that had higher price increases had lower risk premia.

Download the paper: http://www.hbs.edu/research/pdf/10-027.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.

Fair Pricing

Abstract

This paper explores the consequences of supposing that consumers see a firm as fair if they cannot reject the hypothesis that the firm is somewhat benevolent towards them. When consumers can reject this hypothesis, some become angry, which is costly to the firm. The desire to appear benevolent can lead firms to adopt third-degree price discrimination based on the income of different consumer classes while foreswearing third-degree price discrimination based on differences in the elasticity of demand. It can also explain why prices seem to be more responsive to changes in factor costs than to changes in demand that have the same effect on marginal cost. Lastly, if consumers experience regret or disappointment when faced by increased prices, the model can explain why prices can be more rigid in response to disasters that increase demand dramatically than they are when there is a less substantial increase in demand.

Lone Inventors as Sources of Technological Breakthroughs: Myth or Reality?

Abstract

Are lone inventors more or less likely to invent breakthroughs? Recent research has attempted to resolve this question by considering the variance of creative outcome distributions. It has implicitly assumed a symmetric thickening or thinning of both tails, i.e., that a greater probability of breakthroughs comes at the cost of a greater probability of failures. In contrast, we propose that collaboration can have opposite effects at the two extremes: it reduces the probability of very poor outcomes—because of more rigorous selection processes—while simultaneously increasing the probability of extremely successful outcomes—because of greater recombinant opportunity in creative search. Analysis of over half a million patented inventions supports these arguments: Individuals working alone, especially those without affiliation to organizations, are less likely to achieve breakthroughs and more likely to invent particularly poor outcomes. Quantile regressions demonstrate that the effect is more than an upward mean shift. We find partial mediation of the effect of collaboration on extreme outcomes by the diversity of technical experience of team members and by the size of team members' external collaboration networks. Supporting our meta-argument for the importance of examining each tail of the distribution separately, experience diversity helps trim poor outcomes significantly more than it helps create breakthroughs, relative to the effect of external networks.

Complex Business Models: Managing Strategic Paradoxes Simultaneously

Abstract

As our world becomes more global, fast paced, and hypercompetitive, competitive advantage may increasingly depend on success in managing paradoxical strategies—strategies associated with contradictory, yet integrated tensions. We identify several types of the complex business models organizations will need to adopt if they are to host such paradoxical strategies. Managing complex business models effectively depends on leadership that can make dynamic decisions, build commitment to both overarching visions and agenda specific goals, actively learn at multiple levels, and engage conflict. Leaders can engage these functions through team-centric or leader-centric structures.

On Knowing and Doing: A Perspective on the Synergies between Research and Practice

Abstract

The current rigor/relevance debate is a central strategic issue for business schools and their faculty. I argue that ongoing relationships with firms, rooted on the joint acknowledgement of the importance of faculty research by firms and respect for practice by faculty, increase the quality and impact of faculty research. With roles and boundaries clear, such ongoing relationships with firms, particularly those rooted in executive education venues, increase the insightfulness of our research questions and the quality of our data. Such relationships also benefit doctoral training. Further, to the extent that these relationships help faculty translate our field's research into practice, we are able to live into our institutions' promise to shape managerial practice. These engaged relationships with firms help faculty and their business schools excel in both rigor as well as relevance. This paper provides a personal example of these synergistic relationships and discusses boundary issues associated with these faculty/firm collaborations. Executive education in general, and custom programs in particular, may be an underleveraged vehicle in reducing the rigor/relevance gap between business schools and the world of practice.

 

Cases & Course Materials

Akin Ongor's Journey

Rosabeth Moss Kanter
Harvard Business School Case 306-072

A retired bank CEO, one of Turkey's most admired leaders, wants to start a leadership institute to develop emerging leaders in the eastern Mediterranean region. Describes his biography and values, the models he established for excellent financial performance and corporate social and environmental responsibility at the bank, and his attempt to partner with an American university to establish the institute. His first approach did not work; what should he do now?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/306072-PDF-ENG

Communispace

Anat Keinan
Harvard Business School Case 510-018

Communispace is the market leader in creating and managing private, brand-focused online communities for major corporate clients. These communities have provided its clients with insights into how consumers view their brands, with quick feedback on potential marketing decisions, and with a sounding board for new product ideas. Now, a potential client has asked Communispace to build and manage an online community for the sole purpose of fostering word-of-mouth for a new brand it was launching. Should Communispace take on this assignment?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/510018-PDF-ENG

Hulu: An Evil Plot to Destroy the World?

Anita Elberse and Sunil Gupta
Harvard Business School Case 510-005

In July 2009, Jason Kilar, the chief executive officer of Hulu, is debating online video aggregator should move away from a purely advertising-supported model, and whether it should participate in an industry-wide initiative to develop and test "authentication" technology that can facilitate a subscription or pay-per-view model. The case traces the early years of Hulu, a joint venture between News Corp. and NBC Universal, that was initially met with strong skepticism but quickly became on the most celebrated and popular online video business. Provides in-depth information on how the company serves content owners, users, and advertisers. Describes the online video space in considerable detail, also covering economic and viewership statistics that enable a rich discussion of viable business models.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/510005-PDF-ENG

The Investment Fund for Foundations (TIFF) in 2009

Luis M. Viceira and Brendon C. Parry
Harvard Business School Case 210-008

In late June 2009, management at The Investment Fund for Foundations (TIFF) was considering expanding the footprint of the TIFF Diversified Fund (TDF), the first truly comprehensive endowment management vehicle offered under the TIFF banner. The recent large capital losses suffered by most endowments, including those of Harvard and Yale, had motivated some to question the two basic premises of the endowment investment model—that investors get rewarded for bearing illiquidity, and that a diversified blend of asset classes and strategies provides meaningful protection against capital losses under virtually all market conditions. Despite this questioning, the investment professionals at TIFF were convinced that this model remained viable as a means of generating superior long-term returns, and that TDF was a vehicle that provided TIFF's current and potential clients access to this model. But they were aware that they would need to increase their efforts to educate their clients on the benefits of this comprehensive approach to investing and also reflect on whether to modify the current structure of TDF, particularly regarding its liquidity provisions.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/210008-PDF-ENG

The University of Notre Dame Endowment

Andre F. Perold and Paul Buser
Harvard Business School Case 210-007

The Endowment Model of Investing, which was based on creating high risk-adjusted performance through diversification, a long time horizon, top-notch outside managers, and illiquid investments, had served Notre Dame and other large universities well over the past several decades. Scott Malpass, Notre Dame's Chief Investment Officer, was confident that this was a successful way to invest if implemented effectively, but he also saw the top university endowments experience 25% to 35% declines in portfolio value during the second half of 2008 that eviscerated the investment gains from the past several years. Notre Dame had weathered the crisis relatively well, but there were several key questions Malpass had to address. Should Notre Dame continue to make illiquid investments in the context of rising unfunded commitments relative to liquid funds? Was compensation adequate for the illiquidity of these types of investments? In relation to manager selection, how could the Notre Dame investment team continue to find the best managers to create alpha? To what extent would the performance of managers during the crisis be predictive of future performance in other portions of the economic cycle? How would the long-established industry terms of contract between clients and managers change going forward? Was there an opportunity for clients to negotiate better terms? These issues all needed to be addressed in the context of protecting the University's operating budget and supporting the mission of the institution.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/210007-PDF-ENG