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.

July 13

"How Will You Measure Your Life?" In a Harvard Business Review essay adapted from an address he gave at the invitation of the HBS MBA Class of 2010, strategy expert Clayton M. Christensen turns his attention to creating a strategy for a good life. The concepts and models Christensen developed for his groundbreaking work on disruptive innovation might also offer practical guidelines for living, he suggested. Ideas such as allocating resources deliberately, creating a positive culture, and using metrics that matter can provide insights for daily fulfillment.

"If you study the root causes of business disasters," according to Christensen, "over and over you'll find [a] predisposition toward endeavors that offer immediate gratification. If you look at personal lives through that lens, you'll see the same stunning and sobering pattern: people allocating fewer and fewer resources to the things they would have once said mattered most." He concluded by encouraging the graduating class to think deeply about the metrics by which they want their own lives to be judged.

Cases this week explore everything from IPOs to economics to supply chains. Professor emeritus Michael Y. Yoshino studies how Komatsu transmits and embeds its organizational culture in operations around the world ("Globalization at Komatsu"). Negotiation expert James K. Sebenius and coauthor Ellen Knebel look at a manufacturer's strategy for dealing with Walmart ("Bill Nichol Negotiates with Walmart: Hard Bargains over Soft Goods (A) and (B)"). And Lynda M. Applegate and coauthors highlight the actions of the new CEO at a design firm on the brink ("The HLB Turnaround").

 

Publications

How Will You Measure Your Life?

An abstract is unavailable at this time.

Read the Article: http://hbr.org/2010/07/how-will-you-measure-your-life/ar/1

The Secret to Job Growth: Think Small

An abstract is unavailable at this time.

Read the Article: http://hbr.org/2010/07/the-secret-to-job-growth-think-small/ar/1

Powerlessness Corrupts

An abstract is unavailable at this time.

Read the Article: http://hbr.org/2010/07/column-powerlessness-corrupts/ar/1

Are You Ignoring Trends That Could Shake Up Your Business?

An abstract is unavailable at this time.

Read the Article: http://hbr.org/2010/07/are-you-ignoring-trends-that-could-shake-up-your-business/ar/1

Vision Statement: Mapping the Social Internet

An abstract is unavailable at this time.

Read the Article: http://hbr.org/2010/07/vision-statement-mapping-the-social-internet/ar/1

 

Working Papers

Foreign Entry and the Mexican Banking System, 1997-2007

Abstract

What is the impact of foreign bank entry on the pricing and availability of credit in developing economies? The Mexican banking system provides a quasi-experiment to address this question because in 1997 the Mexican government radically changed the laws governing the foreign ownership of banks: the foreign market share therefore increased five-fold between 1997 and 2007. We construct and analyze a panel of Mexican bank financial data covering this period and find no evidence that foreign entry increases the availability of credit. We also find that switching from domestic to foreign ownership is associated with a decrease in non-performing loans and an increase in interest rate spreads, suggesting that foreign concerns bought domestic banks that had been making loans with low interest rates to parties that had a low probability of repayment.

Download the paper: http://www.hbs.edu/research/pdf/10-114.pdf

Platforms and Limits to Network Effects (revised)

Abstract

We model conditions under which agents in two-sided matching markets would rationally prefer a platform-limiting choice. We show that platforms that offer a limited set of matching candidates are attractive by reducing the competition among agents on the same side of the market. An agent who sees fewer candidates knows that these candidates also see fewer potential matches, and so are more likely to accept the match. As agents on both sides have access to more candidates, initially positive indirect network effects decrease in strength, reach their limit, and eventually turn negative. The limit to network effects is different for different types of agents. For agents with few outside options, the limit to network effects is reached relatively quickly, and those agents choose the platform with a restricted number of candidates. This is because those agents value the higher rate of acceptance more than access to more candidates. Agents with higher outside options choose the market with a larger number of candidates. The model helps explain why platforms offering a restricted number of candidates coexist alongside those offering a larger number of candidates, even though the existing literature on network effects suggests that the latter should always dominate the former.

Download the paper: http://www.hbs.edu/research/pdf/10-098.pdf

Systemic Risk and the Refinancing Ratchet Effect (revised)

Abstract

The confluence of three trends in the U.S. residential housing market-rising home prices, declining interest rates, and near-frictionless refinancing opportunities—led to vastly increased systemic risk in the financial system. Individually, each of these trends is benign, but when they occur simultaneously, as they did over the past decade, they impose an unintentional synchronization of homeowner leverage. This synchronization, coupled with the indivisibility of residential real estate that prevents homeowners from deleveraging when property values decline and homeowner equity deteriorates, conspire to create a "ratchet" effect in which homeowner leverage is maintained during good times without the ability to decrease leverage during bad times. If refinancing—facilitated homeowner—equity extraction is sufficiently widespread-as it was during the years leading up to the peak of the U.S. residential real-estate market-the inadvertent coordination of leverage during a market rise implies higher correlation of defaults during a market drop. To measure the systemic impact of this ratchet effect, we simulate the U.S. housing market with and without equity extractions, and estimate the losses absorbed by mortgage lenders by valuing the embedded put-option in non-recourse mortgages. Our simulations generate loss estimates of $1.5 trillion from June 2006 to December 2008 under historical market conditions, compared to simulated losses of $280 billion in the absence of equity extractions.

Download the paper: http://www.hbs.edu/research/pdf/10-023.pdf

Implications for GAAP from an Analysis of Positive Research in Accounting (revised)

Abstract

Based on extant literature, we review the positive theory of GAAP. The theory predicts that GAAP's principal focus is on control (performance measurement and stewardship) and that verifiability and conservatism are critical features of a GAAP shaped by market forces. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1413775

The Effect of Market Leadership in Business Process Innovation: The Case(s) of E-Business Adoption

Abstract

This paper empirically investigates how market leadership influences firm propensity to adopt new business process innovations. Using a unique data set spanning roughly 35,000 plants in 86 U.S. manufacturing industries, I study the adoption of frontier e-business practices during the early diffusion of the commercial internet. Theory predicts that firms with greater market share will be more likely to adopt innovations that build on their existing strengths, while they will resist more radical technological advances. While prior work primarily focuses on product innovation, I extend the logic into the business process setting to find that leaders were far more likely to adopt the incremental innovation of internet-based e-buying. However, they were commensurately less likely to adopt the more strategically sensitive and complex practice of e-selling. This pattern is remarkably robust, holding across a wide range of industries and controlling for factors such as productivity and related technological capabilities. The results are explicated by a framework I develop for understanding the drivers of this behavior and making it possible to classify business process innovations as radical or not. While greater market share promotes adoption of all types of business process innovations, this effect is outweighed by additional co-invention and coordination costs whenever a technological advance address strategically sensitive and complex business processes that must also span the firm boundary.

Download the paper: http://www.hbs.edu/research/pdf/10-104.pdf

 

Cases & Course Materials

The HLB Turnaround

Lynda M. Applegate, Bhaskar Chakravorti, and Laura Winig
Harvard Business School Case 810-023

Ford Pearson has recently taken over as CEO of HLB, a Chicago-based product design and development firm (and once one of the largest in the business), to help turn it around after a series of crises that had seriously threatened its survival. Pearson has personally invested in the firm, re-organized many aspects of its operations, and has hired a younger executive and turnaround expert, Andrew Macey, as COO to help him in the effort. Pearson and Macey have several options to consider: Should HLB raise $1 million in debt financing and focus on a turnaround or should it approach a private equity investor and raise an additional $4 million and pursue a more aggressive productivity improvement plus growth strategy? While they consider these options in September 2008, the credit markets are about to clamp shut as a global financial crisis is around the corner.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/810023-PDF-ENG

Disruptive IPOs? WR Hambrecht & Co.

Clayton M. Christensen and Tara Donovan
Harvard Business School Case 610-065

Bill Hambrecht faces a dilemma: should he accept a high profile client for his online Dutch auction IPO? Though it would be viewed as a real coup, what would accepting the business mean to WR Hambrecht? Should he seek other high profile clients like this, or should he try to work with those companies on lower profile financing activities like secondary offerings? Or perhaps he should work with companies that are too small to attract the attention of the big investment banks, who really don't like the whole Dutch auction idea. The case offers a very different setting to apply the theory of disruptive innovation, yet one in an industry that might be quite familiar to many students.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/610065-PDF-ENG

Flying J (B)

Rohit Deshpandé and Lauren Barley
Harvard Business School Supplement 510-120

This case supplements the "Flying J" case.

Purchase this supplement:
http://cb.hbsp.harvard.edu/cb/product/510120-PDF-ENG

The Greening of DUMBO

Robert G. Eccles, Amy C. Edmondson, and Abhijit Prabhu
Harvard Business School Case 410-079

The Brooklyn, New York, neighborhood Down Under Manhattan Bridge Overpass (DUMBO) has seen a revitalization since the late 1970s. The neighborhood's business improvement district (BID) is charged with supplementing New York City's efforts in several areas, including safety, sanitation, marketing, promotional programs, capital improvements, and beautification. Since 2007, the DUMBO BID has done "small things that are collectively big" to improve the area and are in line with New York City's "plaNYC," a blueprint to become a "sustainable city" by increasing water quality, energy efficiency, and open space while decreasing greenhouse gas emissions. This year, the DUMBO BID must decide if it should continue its small actions or pursue a neighborhood-wide Leadership in Energy and Environmental Design (LEED) rating while constrained by its budget, staff size, and the recession.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/410079-PDF-ENG

Microsoft's IP Ventures

Josh Lerner and Ann Leamon
Harvard Business School Case 810-096

Microsoft's IP Ventures program, through which Microsoft spun out promising but unused technologies into new companies, is a new approach to corporate venture capital. The program provides "IP for equity" and has proven very successful in achieving its main goals—improved morale among researchers who like knowing their technology is being used, improved relationships with the venture capital community particularly in Silicon Valley, and good PR. Many of the eight companies launched so far are doing well. Yet how can the program be scaled beyond its current size, and how can it structure its investments to reduce the dilution that Microsoft invariably faces, given that it does not invest beyond the technology that seeds the company initially?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/810096-PDF-ENG

Supply Chain Partners: Virginia Mason and Owens & Minor (A) (Abridged)

V.G. Narayanan and Lisa Brem
Harvard Business School Case 110-063

Owens & Minor (O&M) performed lean inventory services for Virginia Mason (VM) as its Alpha Vendor, but the outdated industry pricing model created perverse incentives and could not capture O&M's costs. Together, O&M and VM created an activity-based pricing model: Total Supply Chain Costs (TSCC), which incented both companies to be more efficient and to streamline their distribution activities. After beta testing the TSCC for one year, VM's Daniel Borunda and O&M's Michael Stefanic believed that TSCC was a better and more cost-effective pricing model, but could they convince their companies to continue to invest in TSCC?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/110063-PDF-ENG

The Credit Crisis of 2008: An Overview

V.G. Narayanan, Fabrizio Ferri, and Lisa Brem
Harvard Business School Case 110-048

This case examines the causes and consequences of the credit crisis of 2008 from a national and global perspective and explores the actions taken and proposed by the U.S. and European governments.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/110048-PDF-ENG

The U.S. Life Insurance Industry

Robert C. Pozen and McCall Merchant
Harvard Business School Note 310-091

This note provides a background on the U.S. life insurance regimes for the life insurance industry, including descriptions of different types of insurance, annuities, and regulation.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/310091-PDF-ENG

Friend Bank: The Time for Hope

Clayton Rose and Aldo Sesia
Harvard Business School Case 310-070

In 2010, Friend Bank was entering the fifth year of Hope Harris Johnson's ambitious 20-year growth plan to transform her family's one branch community bank into an institution with a substantial presence in southeastern Alabama. Harris Johnson was pleased, so far, with the results. Strategically they had exceeded expectations in opening a second office and execution of the plan was going well. And while the financial and economic crisis that began in 2008 had affected the financial results, it also presented Friend with competitive opportunities. Nonetheless, realizing her ultimate goals for Friend would not come easily.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/310070-PDF-ENG

Investment Technology Group

Clayton Rose and David Lane
Harvard Business School Case 310-064

Investment Technology Group (ITG) CEO Robert Gasser wondered if the financial crisis had permanently affected the firm's business model. A leader in trade analytics and execution for institutional equity investors, ITG had grown since its establishment in 1987 in step with the dramatic rise in equity trading volumes. During 2009, however, investors curbed their equities trading, depressing ITG's heavily commission-based revenues, and earnings plunged by 63%, resulting in ITG's first unprofitable quarter since 1988. Gasser was convinced that ITG's challenges were not simply a function of shrinking trading volumes; 2009's downturn revealed limits of client willingness to pay for the value ITG delivered, and the infrastructure ITG had constructed to support clients with customized software tools and technical support had grown well beyond sustainable levels. With his management team, Gasser had developed a two-part response to the challenge: a reduction in staff and a focus on clients that most valued what ITG offered. While significant cost savings goals would be realized in part through employee layoffs, he wondered about ITG's ability to deal with these changes. Adjusting its customer portfolio meant that ITG would be pulling back products from some clients while reaching out to others in new ways, and he was unsure how clients would respond.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/310064-PDF-ENG

Nichol Negotiates with Walmart: Hard Bargains over Soft Goods (A)

James K. Sebenius and Ellen Knebel
Harvard Business School Case 910-043

CEO Bill Nichol must somehow negotiate a surprise ultimatum from Walmart, his largest customer, about his largest and most profitable product line: "We're dropping it." Among its hosiery products, the Kentucky Derby Hosiery Co. produces and sells a branded line of infant socks to Walmart under an expensive license from another manufacturer, subject to unconditional, multi-year sales minimums and significant forward financial obligations. Taking out long-term bank loans, his firm has purchased modern, high-speed machinery to manufacture this line. Yet his Walmart contracts run only one year at a time. Without the Walmart volume and profit on these branded infant socks Kentucky Derby Hosiery Co. faces financial distress. In a generally bleak North American textile environment, Nichol ponders the most promising negotiating strategy and tactics to rescue this product line.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/910043-PDF-ENG

Bill Nichol Negotiates with Walmart: Hard Bargains over Soft Goods (B)

James K. Sebenius and Ellen Knebel
Harvard Business School Supplement 910-044

This case describes the multi-prong negotiating approach that Bill Nichol, Kentucky Derby Hosiery Co. CEO, took to deal with an ultimatum from his largest customer, as well as the outcome of this process. It concludes with a number of Nichol's observations about supplier-retailer negotiations.

Purchase this supplement:
http://cb.hbsp.harvard.edu/cb/product/910044-PDF-ENG

A Giant Among Women

Willy Shih, Ethan S. Bernstein, Maly Hout Bernstein, Jyun-Cheng Wang, and Yi-Ling Wei
Harvard Business School Case 610-096

Few CEOs successfully manage the evolution of their companies from OEM outsourcer to branded manufacturer to expert consumer marketer as well as Tony Lo, CEO of Giant Manufacturing Co. Ltd., now the largest bicycle manufacturer in the world. In the mid-1980s, Giant produced over a million bikes per year with the Giant brand on fewer than 15% of them; by 2008, Giant was producing 6.4 million bicycles with 70% carrying the Giant brand. And in 2010, the transition was still in-process as CEO Lo experimented with a new business model for women cyclists in Taiwan and globally—leveraging some of Giant's lessons learned and challenging others. The case explores Giant's historical evolution from OEM outsourcer to branded manufacturer, which relied heavily on Giant's forward integration into the construction of a world-class, global retail organization. Giant's ability to understand the customer and move him/her up-market has driven both sales growth and profitability (e.g., average sales prices in 2006, 2007, and 2008 were $325, $345, and $360 respectively). That sets the stage for Lo's latest challenge: a realization that his products were not meeting the needs of women customers (including particularly his wife). As a result, Lo commissioned his CFO Bonnie Tu to open the first all-women's bicycle store in Taipei (owned by corporate, not the traditional retail organization) and charged her not only with figuring out the needs of women customers, but also mandating that she turn a profit. "Because your only customers are women, if you don't know how to sell to them, you're out of business—period. So you experiment for survival," explained Lo. The case concludes by examining the company's continuing integration into retail stores, looking closely at the Liv/giant pilot and the surprising business model that it developed.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/610096-PDF-ENG

Globalization at Komatsu

Michael Y. Yoshino
Harvard Business School Case 910-415

The case captures the challenges Komatsu, the second largest manufacturer of earth-moving equipment, faced during the past five decades as it sought to globalize its operations. By 2007, it had become the second largest manufacturer of earth-moving equipment with more than 80% of its sales coming from outside of Japan. It has built a network of plants, distributors, and service centers around the world. Senior management is convinced that a major reason for its success is its culture, recently articulated as the Komatsu Way. The central issue in the case is how to transmit and embed it to its far flung operations throughout the world.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/910415-PDF-ENG