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.

May 17

Companies that sell highly technical, complicated products have relied on their sales people to develop long-term relationships with customers. But social media is changing all that. A new case looks at how data storage provider EMC, which has a long history of "customer centricity," must adapt when its customers use social media tools instead of sales interactions to help evaluate products. Read EMC2: Delivering Customer Centricity, written by Thomas Steenburgh and Jill Avery.

In a recent research paper, The First Deal: The Division of Founder Equity in New Ventures," Thomas F. Hellerman and Noam Wasserman look at the dynamics of a common question for entrepreneurship teams: How should founder shares be divided? Many teams opt for an equal split—but that choice could be extremely costly for founders whose contributions exceed those of the others.

The global wind energy turbine industry has been around for more than a hundred years, providing Geoffrey Jones and Loubna Bouamane ample opportunity for historical analysis. In the paper Historical Trajectories and Corporate Competences in Wind Energy, the researchers examine "the long-term prominence of firms headquartered in Denmark, the more fluctuating role of US-based firms, and the more recent growth of German, Spanish, Indian, and Chinese firms."

 

Working Papers

The First Deal: The Division of Founder Equity in New Ventures

Abstract

This paper examines the division of founder shares in entrepreneurial ventures, focusing on the decision of whether or not to divide the shares equally among all founders. To motivate the empirical analysis we develop a simple theory of costly bargaining, where founders trade off the simplicity of accepting an equal split, with the costs of negotiating a differentiated allocation of founder equity. We test the predictions of the theory on a proprietary dataset comprised of 1,476 founders in 511 entrepreneurial ventures. The empirical analysis consists of three main steps. First we consider determinants of equal splitting. We identify three founder characteristics—idea generation, prior entrepreneurial experience, and founder capital contributions—regarding which greater team heterogeneity reduces the likelihood of equal splitting. Second, we show that these same founder characteristics also significantly affect the share premium in teams that split the equity unequally. Third, we show that equal splitting is associated with lower pre-money valuations in first financing rounds. Further econometric tests suggest that, as predicted by the theory, this effect is driven by unobservable heterogeneity, and it is more pronounced in teams that make quick decisions about founder share allocations. In addition we perform some counterfactual calculations that estimate the amount of money "left on the table" by stronger founders who agree to an equal split. We estimate that the value at stake is approximately 10% of the firm equity, 25% of the average founder stake, or $450K in net present value.

Download the paper: http://papers.nber.org/papers/w16922

Historical Trajectories and Corporate Competences in Wind Energy

Abstract

This working paper surveys the business history of the global wind energy turbine industry between the late nineteenth century and the present day. It examines the long-term prominence of firms headquartered in Denmark, the more fluctuating role of U.S.-based firms, and the more recent growth of German, Spanish, Indian, and Chinese firms. While natural resource endowment in wind has not been very significant in explaining the country of origin of leading firms, the existence of rural areas not supplied by grid electricity was an important motivation for early movers in both the U.S. and Denmark. Public policy was the problem rather than the opportunity for wind entrepreneurs before 1980, but beginning with feed-in tariffs and other policy measures taken in California, policy mattered a great deal. However, Danish firms, building on inherited technological capabilities and benefitting from a small-scale and decentralized industrial structure, benefitted more from Californian public policies. The more recent growth of German, Spanish, and Chinese firms reflected both home country subsidies for wind energy and strong local content policies, while successful firms pursued successful strategies to acquire technologies and develop their own capabilities.

Download the paper: http://www.hbs.edu/research/pdf/11-112.pdf

The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees

Abstract

Most research linking compensation to strategy relies on agency theory economics and focuses on executive pay. We instead focus on the strategic compensation of non-executive employees, arguing that while agency theory provides a useful framework for analyzing compensation, it fails to consider several psychological factors that increase costs from performance-based pay. We examine how psychological costs from social comparison and overconfidence reduce the efficacy of individual performance-based compensation, building a theoretical framework predicting more prominent use of team-based, seniority-based, and flatter compensation. We argue that compensation is strategic not only in motivating and attracting the worker being compensated, but also in its impact on peer workers and the firm's complementary activities. The paper discusses empirical implications and possible theoretical extensions of the proposed integrated theory.

Download the paper: http://www.hbs.edu/research/pdf/11-056.pdf

An Exploration of Optimal Stabilization Policy

Abstract

This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short-run and flexible in the long-run. Policy is evaluated by how well it raises the welfare of the representative household. While the model has Keynesian features, its policy prescriptions differ significantly from textbook Keynesian analysis. Moreover, the model suggests that the commonly used "bang for the buck" calculations are potentially misleading guides for the welfare effects of alternative fiscal policies.

Download the paper: http://www.hbs.edu/research/pdf/11-113.pdf

Specialization and Variety in Repetitive Tasks: Evidence from a Japanese Bank

Abstract

Sustaining operational productivity in the completion of repetitive tasks is critical to many organizations' success. Yet research points to two different work-design related strategies for accomplishing this goal: specialization to capture the benefits of repetition or variety to keep workers motivated and allow them to learn. In this paper, we investigate how these two strategies may bring different benefits within the same day and across days. Additionally, we examine the impact of these strategies on both worker productivity and workers' likelihood of staying at a firm. For our empirical analyses, we use two and a half years of transaction data from a Japanese bank's home loan application processing line. We find that over the course of a single day, specialization, as compared to variety, is related to improved worker productivity. However, when we examine workers' experience across days we find that variety, or working on different tasks, helps improve worker productivity. We also find that workers with higher variety are more likely to stay at the firm. Our results identify new ways to improve operational performance through the effective allocation of work.

Download the paper: http://www.hbs.edu/research/pdf/11-015.pdf

NaivetÚ and Cynicism in Negotiations and Other Competitive Contexts

Abstract

A wealth of literature documents how the common failure to think about the self-interests of others contributes to suboptimal outcomes. Yet sometimes, an excess of cynicism appears to lead us to over-think the actions of others and make negative attributions about their motivations without sufficient cause. In the process, we may miss opportunities that greater trust might capture. We review the research on when people expect too little and or too much self-interest in the intentions of others, as contrasted with rational behavior. We also discuss the antecedents and consequences of these na´ve and cynical errors, as well as some potential strategies to buffer against their effects and achieve better outcomes in competitive contexts.

Download the paper: http://www.hbs.edu/research/pdf/11-066.pdf

The Surprising Power of Age-Dependent Taxes

Abstract

This paper provides a new, empirically driven application of the dynamic Mirrleesian framework by studying a feasible and potentially powerful tax reform: age-dependent labor income taxation. I show analytically how age dependence improves policy on both the intratemporal and intertemporal margins. I use detailed numerical simulations, calibrated with data from the U.S. PSID, to generate robust policy implications: age dependence (1) lowers marginal taxes on average and especially on high-income young workers and (2) lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted. Finally, I calculate and characterize the welfare gains from age dependence. Despite its simplicity, age dependence generates a welfare gain equal to between 0.6% and 1.5% of aggregate annual consumption, and it captures more than 60% of the gain from reform to the dynamic optimal policy. The gains are due to substantial increases in both efficiency and equity. When age dependence is restricted to be Pareto-improving, the welfare gain is nearly as large.

Download the paper: http://www.hbs.edu/research/pdf/11-114.pdf

 

Cases & Course Materials

U.S. Healthcare Reform: Reaction to the Patient Protection and Affordable Care Act of 2010

Arthur A. Daemmrich
Harvard Business School Supplement 711-103

Supplement to "U.S. Healthcare Reform: International Perspectives" updating key events and disputes concerning the reform law, including the 2010 Congressional elections, legislative proposals, legal challenges, and responses by employers.

Purchase this supplement:
http://cb.hbsp.harvard.edu/cb/product/711103-PDF-ENG

PatientsLikeMe: An Online Community of Patients

Sunil Gupta and Jason Riis
Harvard Business School Case 511-093

PatientsLikeMe (PLM) is an online community where patients share their personal experiences with a disease, find other patients like them, and learn from each other. The company was founded by Jamie and Ben Heywood when their 29-year-old brother was diagnosed with ALS or Lou Gehrig's disease. In less than five years, PLM has grown to 15 patient communities where over 80,000 patients discuss 19 diseases. In December 2010, PLM is discussing its planned launch of a General Platform that would expand the number of diseases covered from 19 to over 3,500. Is it the right move, and what does PLM need to do to make it a success?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/511093-PDF-ENG

Financing New Ventures

William R. Kerr and Ramana Nanda
Harvard Business School Note 811-093

Aid in understanding of financing entrepreneurship.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/811093-PDF-ENG

Note on the Reinsurance Industry

Robert C. Pozen and Henoch Senbetta
Harvard Business School Note 311-102

This note begins with an overview of reinsurance contacts—their mechanics, types, and pricing. It then discusses the structure of the reinsurance industry and the impact of recent crises on this industry.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/311102-PDF-ENG

Talismark

Richard S. Ruback and Royce Yudkoff
Harvard Business School Case 211-097

Talismark, which helped its customers manage their waste, was considering re-engineering its business fundamentals to dramatically increase profitability by changing its sales and information processes. Implementing the changes would be expensive and would interrupt its new customer acquisition efforts, and it would be 18 months until the company could begin to acquire new business. The case explores the rationale and consequences of re-engineering a business.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/211097-PDF-ENG

Aman Resorts

Eugene Soltes and Aldo Sesia
Harvard Business School Case 111-012

This case describes the operating model and philosophy of this high-end set of global properties. Aman relies on employees taking considerable initiative to deliver the highest quality personalized service in the hospitality industry. The case also highlights Aman's strategy and operations, which differ in many ways from industry standards.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/111012-PDF-ENG

Aman Resorts (B)

Eugene Soltes and Aldo Sesia
Harvard Business School Supplement 111-015

The (B) case describes how employees are rewarded and compensated and is used to supplement the (A) case.

Purchase this supplement:
http://cb.hbsp.harvard.edu/cb/product/111015-PDF-ENG

EMC2: Delivering Customer Centricity

Thomas Steenburgh and Jill Avery
Harvard Business School Case 511-124

This case introduces the concept of customer centricity and traces its development at EMC, the world's leading data storage hardware and information management software company. EMC's customers had historically relied on EMC salespeople to guide them through the complex, consultative buying process. However, with the rise of social media, prospective customers are getting more of the information they require earlier in the purchase process online. As they do so, their physical interactions with EMC salespeople are decreasing, while their digital interactions are increasing. Given the changing business environment, BJ Jenkins, senior vice president of Global Marketing, faces significant challenges as he tries to maintain EMC's culture of customer centricity. These include 1) translating EMC's platinum service levels, designed to appeal to the world's largest companies, to small businesses and B2C customers, 2) understanding how the replacement of physical interaction with digital interaction in the consultative selling process affects EMC's business, and 3) managing a VAR sales model that distances EMC from its customers.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/511124-PDF-ENG

Shar Matin (A)

David A. Thomas and Elisa Farri
Harvard Business School Case 411-082

The head of the subsidiary of a U.S. company faced the decision to present an aggressive growth plan despite his CFO's lack of support.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/411082-PDF-ENG

Purchase this supplement (B):
http://cb.hbsp.harvard.edu/cb/product/411083-PDF-ENG

Purchase this supplement (C):
http://cb.hbsp.harvard.edu/cb/product/411084-PDF-ENG