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 6

Fashion entrepreneurs need not copy wild styles from Paris or Milan to make their mark. "Context, Agency, and Identity: The Indian Fashion Industry and Traditional Indian Crafts" by professor Mukti Khaire describes how early entrepreneurs and designers and entrepreneurs adapted to social, cultural, and economic conditions.

"I show that the Indian fashion industry's specific identity—traditional styles with heavy embellishments, rather than innovative, modern cuts and designs—was not a function only of something inherently and ineffably Indian (as opposed to a modern Western sensibility) or purely cultural," Khaire writes. "Rather, it was the result of the actions of early entrepreneurs in the Indian fashion industry who were making decisions that made them more acceptable to customers given the particular social, cultural, and economic contexts within which they were embedded."

Auditors' reputation for integrity is paramount to their success or failure, according to the working paper "Audit Quality and Auditor Reputation: Evidence from Japan" [abstract]. Douglas Skinner and HBS professor Suraj Srinivasan explain how one of Japan's Big Four audit firms was shunned by clients after news broke that it was connected to accounting fraud at a large company.

Among cases this week, "Pandora Radio: Fire Unprofitable Customers?" follows founder Tim Westergren as he considers a cost/benefit analysis of Pandora's most loyal (and most expensive) users.



Managed Globalization: Doctrine, Practice, and Promise


Two alternate visions for shaping and explaining the governance of economic globalization have been in competition for the past 20 years: an ad hoc, laissez-faire vision promoted by the United States versus a managed vision relying on multilateral rules and international organizations promoted by the European Union. Although the American vision prevailed in the past decade, the current worldwide crisis gives a new life and legitimacy to the European vision. This essay explores how this European vision, often referred to as 'managed globalization,' has been conceived and implemented and how the rules that Europe fashioned in trade and finance actually shaped the world economy. In doing so, we highlight the paradox that managed globalization has been a force for liberalization.

Strategies to Fight Ad-sponsored Rivals


We analyze the optimal strategy of a high-quality incumbent that faces a low-quality ad-sponsored competitor. In addition to competing through adjustments of tactical variables such as price or the number of ads a product carries, we allow the incumbent to consider changes in its business model. We consider four alternative business models, a subscription-based model, an ad-sponsored model, a mixed model in which the incumbent offers a product that is both subscription-based and ad-sponsored, and a dual model in which the incumbent offers two products, one based on the ad-sponsored model and the other based on the mixed-business model. We show that the optimal response to an ad-sponsored rival often entails business model reconfigurations. We also find that when there is an ad-sponsored entrant, the incumbent is more likely to prefer to compete through the subscription-based or the ad-sponsored model, rather than the mixed or the dual model, because of cannibalization and endogenous vertical differentiation concerns. We discuss how our study helps improve our understanding of notions of strategy, business model, and tactics in the field of strategy.

Context, Agency, and Identity: The Indian Fashion Industry and Traditional Indian Crafts


Identity is an important resource for firms, since it is a critical precursor of an important strategic resource—legitimacy. However, identities of new firms in new industries are typically inchoate, since they cannot be classified within pre-existing cognitive categories and therefore do not benefit from a pre-existing understanding or identity of an industry. Given the importance of identity, it is critical that we understand how the identity of a new industry is generated. I attempt to address this gap in our knowledge in this study of the high-end fashion industry in India from its emergence in the mid-1980s to 2005. Although prior studies have attributed the specific identity, structure, and characteristic features of fashion industries in France, Italy, and the UK to the culture of Paris, Milan, and London, respectively, I find that the identity of a new industry is in fact the result of an interaction between contexts and entrepreneurial agency. With the help of oral histories, magazine primary sources, and other databases I show that the Indian fashion industry's specific identity—traditional styles with heavy embellishments, rather than innovative, modern cuts and designs—was not a function only of something inherently and ineffably Indian (as opposed to a modern, Western sensibility), or purely cultural. Rather, it was the result of the actions of early entrepreneurs in the Indian fashion industry, who were making decisions that made them more acceptable to customers given the particular social, cultural, and economic contexts within which they were embedded.

Ownership Structure and the Cost of Corporate Borrowing


It is well known that the divergence between control rights and cash-flow rights is associated with firm value. In this paper, we identify an important channel through which the divergence affects value. Using a new, hand-collected dataset on corporate ownership and control of 3,694 firms in 22 Western European and East Asian countries during the period from 1996 to 2008, we find that the cost of debt financing is significantly higher for companies with a wider divergence between the largest ultimate owner's control rights and cash-flow rights. A one standard deviation increase in the divergence increases the average loan spread by approximately 18%, or 35 basis points. The effect of the excess control rights on the cost of bank debt is more pronounced when the borrowing firm is family-owned and the CEO of the firm is also a member of the controlling family, when the borrower has a higher degree of informational opacity, a lower credit rating, and a lower potential for being propped up, when the loan facility is subject to more credit risk, and during financial crises. The presence of collateral and loan covenants as well as strong legal rights and efficient debt enforcement mitigate the effect of excess control rights on loan spreads. Taken together, our results suggest that potential tunneling and other moral hazard activities by large shareholders are facilitated by the divergence between control rights and cash-flow rights. These activities increase the monitoring costs and the credit risk faced by banks and, in turn, raise the cost of debt for the borrower.

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Working Papers

A New Model of Integrity: The Missing Factor of Production (PDF file of Keynote and PowerPoint Slides)


An Actionable Pathway to Dramatic Increases in Individual and Organizational Performance. Full-day workshop taught at Olin School, Washington University, St. Louis, MO.

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A Reexamination of Tunneling and Business Groups: New Data and New Methods


The last decade of corporate governance research has been focused in large part on identifying what leads to superior or deficient corporate governance in emerging economies. We propose that firms' corporate governance and firms' strategic business activities within an industry are interlinked. By conducting a simultaneous economic analysis of business strategy and corporate governance, scholars can better discern the quality of a firm's governance. We look at one of the most rigorous extant methodologies for detecting "tunneling," or efforts by firms' controlling owner managers to take money for themselves at the expense of minority shareholders. We find that, in contrast to prior views, Indian business groups are not, on average, engaging in tunneling (expropriation), but are on average exhibiting good corporate governance, especially in light of the markedly different business strategies they typically undertake. Moreover, unlike many past conceptions of business groups from financial economics, sociology, and strategy, we find evidence for a knowledge-based "recombinative capabilities" view of business groups-that such groups have done the most to invest in R&D and other skills necessary to combine inputs in ways that lead to greater added value. Further, our finding that Indian business groups have grown larger and more diversified since liberalization and since broad-based corporate governance reforms were implemented, goes expressly against the prediction of prior schools of thought about business groups. We argue that the conventional wisdom about tunneling and business groups will need to be questioned and reformulated in light of the new data, methodology, and findings presented in this study.

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Audit Quality and Auditor Reputation: Evidence from Japan


We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's "Big Four" audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama's operations for two months as punishment for its role in the accounting fraud at Kanebo. This action was unprecedented, and followed a sequence of events that seriously damaged ChuoAoyama's reputations for audit quality. We use these events to provide evidence on the importance of auditors' reputation for audit quality in a setting where litigation plays essentially no role. We find that ChuoAoyama's audit clients switched away from the firm as questions about its audit quality became more pronounced but before it was clear that the firm would be wound up, consistent with the importance of auditors' reputations for delivering quality.

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Evidence on the Use of Unverifiable Estimates in Required Goodwill Impairment


SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. The current fair value of goodwill is unverifiable because it depends in part on management's future actions (including managers' conceptualization and implementation of firm strategy). In promulgating SFAS 142, standard setters assume managers, on average, will use the discretion in goodwill impairment rules to convey private information on future cash flows; in contrast, agency theory predicts managers, on average, will use the discretion opportunistically. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory derived predictions, does not confirm the private information hypothesis.

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Cases & Course Materials

Shurgard Self-Storage: Expansion to Europe (Abridged)

Richard G. Hamermesh
Harvard Business School Case 810-102

Shurgard, a U.S.-based firm that rents storage facilities to consumers and small businesses, is considering financing options for rapid expansion of its European operations. Five years after entering Europe, Shurgard Europe has opened 17 facilities in Belgium, France, and Sweden. Along the way, Shurgard has encountered skepticism from both European consumers and investors about the unfamiliar self-storage concept and internal debates on how much to adapt the U.S. business model to European lifestyles. Wall Street analysts also do not value the impact that the European expansion could have on Shurgard's U.S. performance as a publicly traded Real Estate Investment Trust (REIT). As an alternative, to finance this expansion, Shurgard received a proposed deal from a consortium of banks and other investors where they would provide private equity financing spaced over the next few years plus a line of credit. In return, the investors would receive a large share of Shurgard's equity and control of its board, which could force a public offering in less than two years. The decision focuses on whether Shurgard Europe should accept the conditions and valuation of the proposed deal or seek another deal at a later point in time. Students must assess whether the self-storage business model can deliver the growth rate in Europe that the company has promised his potential investors. Involves calculating some basic estimates of the company's value from financial exhibits (enterprise value using an EBITDA multiple). Main focus is to assess this as an entrepreneurial venture. Students do not need to be familiar with REITs.

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Saginaw Parts Co. and the General Motors Corp. Credit Default Swap

William E. Fruhan
Harvard Business School Case 210-056

This two-page case demonstrates how to unbundle the cost of credit extensions from product prices by observing the price of a credit default swap. It also explores how credit default swaps work, and how trade creditors are treated under U.S. bankruptcy law. Finally it provides a quick overview of the bankruptcy of General Motors Corp.

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Note on Telemedicine

Regina E. Herzlinger and Jillian Peres Copeland
Harvard Business School Note 310-075

This note provides background in all the modalities of telemedicine. It accompanies the cases "Medtronic: Patient Management Initiative" (A) and (B), HBS Nos. 302-005 and 309-064.

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Jet Propulsion Laboratory

Robert S. Kaplan and Anette Mikes
Harvard Business School Case 110-031

The case, in a non-profit project-oriented setting, introduces fundamental risk management principles and processes that are easily applicable to private sector settings. Gentry Lee, senior systems engineer and de-facto chief risk officer, is applying a new comprehensive risk management system to a $600 million high-profile Mars landing mission. The case illustrates JPL's risk culture for high-visibility and expensive missions in the post-Challenger era with tightly constrained budgets. It introduces risk analytics, such as heat maps, and the management process and governance system centered around continuous challenge and "intellectual confrontation." Students will consider JPL's strategy and constraints, measurable technical risks, non-measurable external risks, and societal pressures in making a decision about whether to launch or delay the Mars mission launch. The case calls for an appreciation of the role of the chief risk officer, and of leadership in general, in risk management.

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IFP, Indonesia

Roy D. Shapiro
Harvard Business School Case 610-052

IFP, Ltd. is a Europe-based multinational mining and minerals company contemplating an investment to produce forest products in Indonesia. The primary case decisions are 1) how to assess political and operating risk, 2) how to integrate economic and political risk analysis in order to select among the alternative spatial and operating configurations, and 3) how to manage operations in order to minimize risk. This case is an effective vehicle for discussing the complex issues involved in operating in the difficult, uncertain political environment of a developing country.

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Pandora Radio: Fire Unprofitable Customers?

Willy C. Shih and Halle Alicia Tecco
Harvard Business School Case 610-077

Pandora Radio is at a crossroads. Founder Tim Westergren has just been told by a well known VC to get rid of his unprofitable customers in order to get his costs down, but Westergren is not sure that such actions are consistent with his company's business model. Pandora Radio is the largest Internet music stream site, and its rapidly growing user base loves the free customizable music stream under an advertising supported model. Pandora has to pay royalties for every song streamed, and has other variable costs that scale linearly with hours consumed, but it has taken no steps to restrict the amount of usage among its heaviest and most loyal users. Can Pandora make its model work when a significant percentage of its users cause it to lose money?

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