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 13

"Just Say No to Wall Street: Putting a Stop to the Earnings Game" by the Monitor Group's Joseph Fuller and HBS professor emeritus Michael C. Jensen explains the temptations facing analysts and managers to cook up unrealistic and potentially dangerous earnings expectations. After reviewing Wall Street's complicity in the implosions of Enron and Nortel Networks, the authors recommend and explain new "rules of engagement" such as "Managers must work to make their organizations far more transparent to investors and to the markets" and "Managers should not simply presume that analysts are wrong when disagreement occurs." Fuller and Jensen's article appears in the Journal of Applied Corporate Finance.

Heads-up for summer: Driven to Lead: Good, Bad, and Misguided Leadership by HBS professor emeritus Paul R. Lawrence outlines a framework for leadership development using the four drive theory of human behavior (to acquire, to defend, to comprehend, and to bond). Jossey-Bass publishes Driven to Lead in August.

The case "International Lobbying and The Dow Chemical Company" addresses how Dow's CEO, Andrew Liveris, should adapt to developments in regulation of the chemical industry. How should he assess and balance company strategy, business-government relations both domestically and internationally, and the demands of stakeholders such as environment nongovernmental organizations?

 

Publications

Driven to Lead: Good, Bad, and Misguided Leadership

Abstract

The author applies the four drive theory of human behavior (to acquire, to defend, to comprehend, to bond) to the leadership realm and explains the history of leadership in political, economic, and symbolic institutions as a result of one of three types of leadership: good leadership, misguided leadership, and evil leadership. This innovative book outlines a framework of human behavior that can be used to cultivate stellar leadership/leaders, which balances the four drives while avoiding negative leadership and leaders who are missing the drive to bond.

Order the Book: http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470623845.html

Market Heterogeneity and Local Capacity Decisions in Services

Abstract

We empirically document factors that influence how local operating managers use discretion to balance the tradeoff between service capacity costs and customer sensitivity to service time. Our findings, using data from one of the largest financial services providers in the U.S., indicate that customer sensitivity to service time varies widely and predictably with observable market characteristics. In turn, we find evidence that local operating managers account for market specific customer sensitivities to service times by deviating frequently and in predictable ways from the recommendations offered by a centralized capacity planning model. Finally, we document that these discretionary capacity supply decisions exhibit a strong learning effect whereby experienced operating managers place more weight than their less experienced counterparts on the market-specific tradeoff between service capacity costs and customer sensitivity to service times. Overall, our results demonstrate both the importance of local knowledge as an input in service operations and the potential for incorporating richer data on customer behavior and preferences into service cost and productivity standard metrics.

Optimal Value and Growth Tilts in Long-Horizon Portfolios

Abstract

We develop an analytical solution to the dynamic portfolio choice problem of an investor with power utility defined over wealth at a finite horizon, who faces a time-varying investment opportunity set, parameterized using a flexible vector autoregression. We apply this framework to study the horizon effects in the allocations of equity-only investors, who hold a mix of value and growth indices, and a more general investor, who also has access to Treasury bills and bonds. We find that the mean allocation of equity-only investors is heavily tilted towards value stocks at short horizons, but the magnitude of this tilt declines dramatically with the investment horizon, implying that growth is less risky than value at long horizons. Investors with access to bills and bonds exhibit similar behavior when value and growth tilts are computed relative to the total equity allocation of the portfolio. However, after accounting for the propensity of these investors to increase their total equity allocation as the horizon increases, the mean value tilt of the optimal allocation is shown to be positive and stable across time.

Download the paper: http://www.people.hbs.edu/lviceira/JV_GV_20100223.pdf

Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates

Abstract

This paper explores time variation in bond risk, as measured by the covariation of bond returns with stock returns and with consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yield on long-term bonds and short-term bonds forecasts positively future excess returns on bonds at varying horizons, and that the short-term nominal interest rate forecasts positively stock return volatility and exchange rate volatility. This paper presents evidence that movements in both the short-term nominal interest rate and the yield spread are positively related to changes in subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with reduced cash-flow (or inflationary) risk for bonds, but it is also correlated with larger discount rate risk for bonds. The short rate forecasts only the discount rate component of bond beta.

Download the paper: http://www.people.hbs.edu/lviceira/bbeta20100210-all.pdf

The Euro as a Reserve Currency for Global Investors

An abstract is unavailable at this time.

Download the paper: http://www.people.hbs.edu/lviceira/Europroject_20091112-ALL.pdf

What Makes a City Entrepreneurial?

An abstract is unavailable at this time.

 

Working Papers

The Global Agglomeration of Multinational Firms

Abstract

The proliferation of multinational activities has led to the emergence of new industrial clusters around the world. In this paper, we examine how "first nature" location fundamentals and "second nature" agglomeration economies jointly determine the global landscape of multinational firms. Using a unique worldwide plant dataset that reports detailed location, ownership, and operation information for plants in more than 100 countries, we construct a spatially continuous index to measure the significance and extent of agglomeration between multinational firms. Our analysis indicates that multinationals' agglomeration goes above and beyond first-nature driven geographic concentration due to market size, comparative advantage, and trade costs. Second-nature forces including knowledge spillovers, capital-market externalities, and vertical production linkages also play a significant role. In comparison to domestic plants, knowledge spillovers and capital market externalities exert a stronger impact on multinational firms while labor market pooling has a weaker effect. These findings remain robust when we examine entry decisions and explore the process of agglomeration.

Download the paper: http://www.hbs.edu/research/pdf/10-043.pdf

Introductory Reading for Being a Leader and the Effective Exercise of Leadership: An Ontological Model

Abstract

This paper is the sixth of six pre-course reading assignments for an experimental leadership course developed by the authors over five years (2004-2008) at the University of Rochester Simon School of Business working with students, alumni, executives, and faculty from various academic institutions. It is currently taught at the U.S. Air Force Academy, was taught in June 2009 at the Erasmus Academie in Rotterdam, and a version is currently taught at University of Rochester Simon School of Business and the Erasmus University Law School. This course will be taught at the Mays School of Business, Texas A&M University June 9 to June 16, 2010.

Download the paper: http://ssrn.com/abstract=1238158

Just Say No to Wall Street: Putting a Stop to the Earnings Game

Abstract

Putting an end to the "earnings game" requires that CEOs reclaim the initiative by avoiding earnings guidance and managing expectations in such a way that their stocks trade reasonably close to their intrinsic value. In place of earnings forecasts, management should provide information about the company's strategic goals and main value drivers. They should also discuss the risks associated with the strategies and management's plans to deal with them. Using the experiences of several companies, the authors illustrate the dangers of conforming to market pressures for unrealistic growth targets. They argue that an overvalued stock, by encouraging overpriced acquisitions and other risky, value-destroying bets, can be as damaging to the long-run health of a company as an undervalued stock.

CEOs and CFOs put themselves in a bind by providing earnings guidance and then making decisions designed to meet Wall Street's expectations for quarterly earnings. When earnings appear to be coming in short of projections, top managers often react by suggesting or demanding that middle- and lower-level managers redo their forecasts, plans, and budgets. In some cases, top executives simply acquiesce to increasingly unrealistic analyst forecasts and adopt them as the basis for setting organizational goals and developing internal budgets. But in cases where external expectations are impossible to meet, either approach sets up the firm and its managers for failure, and in the process, value is destroyed.

Download the paper: http://ssrn.com/abstract=1583563

Fluid Teams and Fluid Tasks: The Impact of Diversity in Experience and Team Familiarity

Abstract

In this paper, we consider how fluid teams and fluid tasks interact to affect team performance. We study the effect of diversity in experience on a team's ability to respond to changing tasks by separately examining interpersonal team diversity (i.e., the difference in experience across the entire team) and intrapersonal team diversity (i.e., whether individuals on the team are more or less specialized). We also examine whether team familiarity—team members' prior experience working with one another—helps teams to cope with the expected challenges created by changing tasks and greater interpersonal team diversity. Using detailed project—and individual-level data from an Indian software services firm, we find that the interaction of task change and intrapersonal diversity is related to improved project performance while the interaction of task change and interpersonal diversity is related to worse project performance. These results suggest that though diverse experience across team members decreases flexibility to change, diverse experience within team members increases flexibility. Additionally, we find that team familiarity partially alleviates the negative effect of interpersonal diversity on two of our three dimensions of project performance. Our results highlight the need for more nuanced approaches to leveraging experience in managing teams.

Download the paper: http://www.hbs.edu/research/pdf/09-145.pdf

 

Cases & Course Materials

Note on Direct Selling in Developing Economies

Michael Chu and Joel Segre
Harvard Business School Case 310-068

Informal and formal direct selling play a particularly important role in developing countries characterized by markets with limited retail sectors. This note explores the practice of direct selling for the company, the sales person, and the consumer, as well as the potential of direct selling as a means of reaching the base of the pyramid for both commercial and social purposes.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/310068-PDF-ENG

International Lobbying and The Dow Chemical Company (A)

Arthur A. Daemmrich
Harvard Business School Case 710-027

This case explores company strategy, business-government relations, and collective action challenges associated with international and domestic lobbying regarding regulation of the chemical industry. In the fall of 2006, a five-year legislative process for a major new law regulating chemicals in the European Union appeared to be nearing its conclusion. REACH—the Registration, Evaluation, Authorization, and Restriction of Chemicals—would create a new European Chemicals Agency, require companies to submit testing data on existing and new compounds, and restrict the manufacture of hazardous substances. Andrew Liveris, CEO of the Dow Chemical Company, has to decide whether the company should engage in direct discussions with the European Parliament and Commission, with the implication that the company can influence the regulations but also would have to support the final outcome. The case summarizes Dow's history, competitive dynamics in the sector, and regulation of the chemical industry before describing the REACH legislative process and various approaches to lobbying used by chemical companies, trade groups, and environmental NGOs.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/710027-PDF-ENG

Purchase the supplement:
http://cb.hbsp.harvard.edu/cb/product/710028-PDF-ENG

Ricoh Company, Ltd.

Robert G. Eccles, Amy C. Edmondson, Marco Iansiti, and Akiko Kanno
Harvard Business School Case 610-053

Ricoh, the Japanese copier manufacturer, is committed to reducing its environmental impact to one-eighth of its 2000 levels by 2050. It has already introduced three stages of environmental awareness to its operations, and its recycled copier business broke even in 2006. The company developed environmental accounting methods and produces annual environmental and sustainability reports, but Ricoh is concerned that investors may not take these efforts into account.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/610053-PDF-ENG

Living PlanIT

Robert G. Eccles, Amy C. Edmondson, Susan Thyne, and Tiona Zuzul
Harvard Business School Case 410-081

Living PlanIT is a start-up company that has developed a new, innovative business model for sustainable urbanization. This model reflects the software and technology backgrounds of its founders, Steve Lewis and Malcolm Hutchinson, and is in vivid contrast to other models for green or smart cities that are variations on a massive real estate development project. The main economic engine driving Living PlanIT's model is a partner channel strategy adopted from the high technology industry. The case shows how the Living PlanIT business model has evolved from the original vision of Lewis and Hutchinson to radically transform the construction industry to a go-to-market partnership model using the real estate as a "showroom" for evolving sustainable urban technology—a $3 trillion global market over the next 20 years. Living PlanIT is developing its first project, a new city called PlanIT Valley, outside of Porto, Portugal. The company has clarified its vision and is moving into the implementation phase, which involves fundraising, signing up channel partners, and negotiating various issues with the Portuguese government for its pilot project. Success in PlanIT Valley will translate into a strong market position as global population and demand for new cities increases, particularly in developing countries such as China and India.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/410081-PDF-ENG

Carolina for Kibera

Kathleen L. McGinn and Cailin B. Hammer
Harvard Business School Case 910-017

A growing NGO based in Kibera, Nairobi, Kenya, is facing a complete change in leadership as the founders step back. At the same time, a $1 million grant presents new opportunities and challenges.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/910017-PDF-ENG

Transforming ASUSTeK: Breaking from the Past

Willy Shih, Ho Howard Yu, and Hung-Chang Chiu
Harvard Business School Case 610-041

What happens when an original design manufacturer (ODM) firm tries to transform itself into a branded goods seller? The case traces the evolution of ASUSTeK from a motherboard supplier, to an ODM of desktop and notebook PCs, through its split into three companies that separately pursue the branded business, ODM, and contract manufacturing. Chairman Jonney Shih has to not only confront the challenges of brand building, but he must also build new organizational capabilities in ASUSTeK, while Pegatron struggles to win business from ASUSTeK's former customers and now competitors. The case offers an opportunity to apply the lens of disruptive innovations to a discussion of outsourcing, examining the consequences for firms like HP and Dell that have outsourced most of their computer product design to ODM firms like ASUSTeK, only to watch them morph into competitors. Students can also examine how organizational resources, processes, and values can shape or limit its ability to move into new areas.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/610041-PDF-ENG