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.

Sept. 7

Capitalism: Breakdown straight ahead?

Even at Harvard Business School, seen by many as the primary supplier of talent to the free enterprise engine, it is recognized that capitalism might be headed for a breakdown. So write professors Joseph L. Bower, Herman B. "Dutch" Leonard, and Lynn S. Paine in the September Harvard Business Review article, "Global Capitalism at Risk: What Are You Doing About It?" They observe: "Increasing income inequality, migration, weaknesses in the global financial system, environmental degradation, and inadequate government and international institutions are just a few of the forces that threaten to disrupt global market capitalism in the decades ahead."

MOU or IOU?

The memorandum of understanding is typically thought of as a statement between parties that sets out common agreements and goals—a kind of formal gentleman's agreement that lacks the power of law. Or does it? The new note "Just an MOU or a Real Deal?" suggests that preliminary agreements can sometimes become binding agreements if not properly written and managed. Lena G. Goldberg and Mary Beth Findlay wrote this note for use in the HBS Elective Curriculum course on Legal Aspects of Management.

Wither Walmart?

In 2011, Walmart is the world's largest company with $420 million in sales. But not all is well in Bentonville, Arkansas. A new case by David B. Yoffie and Renee Kim discusses possible strategies for the retailer to break out of an eight-quarter decline in sales and to counter increasing competition. "What should Walmart do as its traditional markets and core competencies no longer ensured the kind of growth that it had enjoyed for decades in the past?"

 

Publications

I Moved Your Cheese: For Those Who Refuse to Live as Mice in Someone Else's Maze

Abstract

If you were a mouse trapped in a maze and someone kept moving the cheese, what would you do? Over a decade ago, the best-selling business fable, Who Moved My Cheese? offered its answer to the question: accept that change is inevitable and beyond your control, don't waste your time wondering why things are the way they are, keep your head down, and start looking for the cheese. I Moved Your Cheese takes a different point of view. This stand-alone book tells the inspiring story of a new generation of mice who begin to reexamine what others have taken for granted and to ask the important questions. Rather than simply accepting their fate and dutifully chasing after cheese, Max, Zed, and Big break the rules, challenge the limitations and constraints others have accepted, and set out to create new realities. This book is motivated by a simple observation: Leadership, innovation, entrepreneurship, creativity, problem solving, business growth-and even personal development-almost always depend on the ability to challenge accepted notions, reshape the environment, and play by a different set of rules...our own. To succeed in these endeavors, we need to understand the ways in which we unwittingly limit ourselves. As Zed explains to Max, "The problem is not that the mouse is in the maze, but that the maze is in the mouse."

Book: http://www.IMovedYourCheese.com

Commentary: A View from the East: Trade, Investment, and Economic Reform

Abstract

The Cuban economy has been transformed over the course of the last decade, and these changes are now likely to accelerate. In this edited volume, prominent Cuban economists and sociologists present a clear analysis of Cuba's economic and social circumstances and suggest steps for Cuba to reactivate economic growth and improve the welfare of its citizens. These authors focus first on trade, capital inflows, exchange rates, monetary and fiscal policy, and the agricultural sector. In a second section, a multidisciplinary team of sociologists and an economist map how reforms in economic and social policies have produced declines in the social standing of some specific groups and economic mobility for others.

Publisher: http://www.hup.harvard.edu/catalog.php?recid=31357

The New Face of Chinese Industrial Policy: Making Sense of Anti-Dumping Cases in the Petrochemical and Steel Industries

Abstract

Why have China's petrochemical and steel industries behaved so differently in seeking trade protection through anti-dumping measures, especially given that both industries face the full force of the global economy? We argue that the patterning of anti-dumping actions is best explained in terms of industrial structures, inclusive of degrees of horizontal concentration and vertical integration. These structures determine a firm's motivation to seek protection, as well as its capacity to overcome collective action problems within its industry. In the petrochemical industry, the shift toward greater horizontal consolidation and vertical integration reduces the collective action problems associated with anti-dumping petitions among upstream companies. It also weakens downstream companies lobbying in favor of the general protection of highly integrated conglomerates. In the steel industry, by contrast, national industrial policy fails to weaken local state interests sufficiently. Fragmented upstream and downstream channels instead persist, with strong odds against upstream suppliers waging a successful defense of material interests. Such distinctive industrial structures, we show, were a direct result of whether the central government could restructure these designated priority industries in its preferred direction. We find that exogenous price shocks proved particularly helpful in this regard.

The Impact of Relative Standards on the Propensity to Disclose

Abstract

Two sets of studies illustrate the comparative nature of disclosure behavior. The first set investigates how divulgence is affected by signals about others' readiness to divulge. Study 1A shows a "herding" effect, such that survey respondents are more willing to divulge sensitive information when told that previous respondents have made sensitive disclosures. We provide evidence of the process underlying this effect and rule out alternative explanations by showing that information on others' propensity to disclose affects respondents' discomfort associated with divulgence (Study 1B) and not their interpretation of the questions (Study 1C). The second set of studies suggests that divulgence is anchored by the initial questions in a survey; people are particularly likely to divulge when questions are presented in decreasing order of intrusiveness. Study 2B suggests that the effect arises by affecting people's judgments of the intrusiveness of the inquiries; Study 2C goes further by showing that the effect is altered when privacy concerns are primed at the outset of the study. This research helps understand how consumers' propensity to disclose is affected by continual streams of requests for personal information and by the equally unavoidable barrage of personal information about others.

Read the paper: http://www.heinz.cmu.edu/~acquisti/papers/acquisti_herding-out.pdf

Global Capitalism at Risk: What Are You Doing About It?

Abstract

Market capitalism, a system that has proven to be a remarkable engine of wealth creation, is poised for a breakdown. That sounds dire, and it is. Increasing income inequality, migration, weaknesses in the global financial system, environmental degradation, and inadequate government and international institutions are just a few of the forces that threaten to disrupt global market capitalism in the decades ahead. In conversations with business leaders around the world, the authors found that virtually all of them shared a deep concern for the sustainability of the market system, but their beliefs about how to respond varied widely. Some said that changing their behavior would be unnecessary or even inappropriate. Others were unsure how to deal with issues seldom thought to be the responsibility of individual firms. The authors call for business to be both innovator and activist in protecting and strengthening market capitalism. Instead of seeing themselves as narrowly self-interested players in a system that is overseen by others, business leaders must spearhead entrepreneurial activity on a massive scale-devising strategies that provide employment for the billions now outside the system, inventing business models that make better use of scarce resources, and creating institutional arrangements for coordinating and governing neglected and dysfunctional aspects of market capitalism.

Read the article: http://hbr.org/2011/09/global-capitalism-at-risk-what-are-you-doing-about-it/ar/1

A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending

Abstract

We use loan-level data to study how the organizational structure of banks impacts small business lending. We find that decentralized banks—where branch managers have greater autonomy over lending decisions—give larger loans to small firms and those with "soft information." However, decentralized banks are also more responsive to their own competitive environment. They are more likely to expand credit when faced with competition but also cherry pick customers and restrict credit when they have market power. This "darker side" to decentralized banks in concentrated markets highlights that the level of local banking competition is key to determining which organizational structure provides better lending terms for small businesses.

Read the paper: http://www.hbs.edu/research/pdf/08-101.pdf

The Economic Value of Celebrity Endorsements

Abstract

What is the payoff to enlisting celebrity endorsers? Although effects on stock returns are relatively well documented, little is known about any impact on sales—arguably a metric of more direct importance to advertising practitioners. In this study of athlete endorsements, we find there is a positive payoff to a firm's decision to sign an endorser, and that endorsements are associated with increasing sales in an absolute sense and relative to competing brands. Furthermore, sales and stock returns jump noticeably with each major achievement by the athlete. However, whereas stock-return effects are relatively constant, sales effects exhibit decreasing returns over time. We outline implications for practitioners.

Read the paper: http://www.people.hbs.edu/aelberse/publications/Elberse_Verleun_2011.pdf

How to Solve the Cost Crisis in Health Care

Abstract

Existing health care costing systems have serious flaws that make it impossible to measure costs accurately at the individual patient and medical condition level. This gap has severely limited meaningful cost reduction throughout the system. The paper describes a new (for health care) approach that can accurately measure the costs incurred over the care cycle for a patient's condition. Combining this cost information along with the patient outcomes achieved reveals major opportunities for health care providers and third-party payers to transform the economics of delivering health care. We illustrate multiple ways for providers to drive costs out of the system while simultaneously improving the quality of care they deliver.

Read the article: http://hbr.org/2011/09/how-to-solve-the-cost-crisis-in-health-care/ar/1

The Current Crisis and the Essence of Capitalism

An abstract is unavailable at this time.

Read the article: http://www.themontrealreview.com/2009/The-current-crisis-and-the-essence-of-capitalism.php

Reversing the Null: Regulation, Deregulation, and the Power of Ideas

An abstract is unavailable at this time.

Book: http://www.amacad.org/pdfs/challenges.pdf

Information Risk and Fair Values: An Examination of Equity Betas

Abstract

Using a sample of U.S. financial institutions, we exploit recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3 to test whether greater information risk in financial instrument fair values leads to higher cost of capital. We derive an empirical model allowing asset-specific estimates of implied betas and find evidence that firms with greater exposure to level 3 financial assets exhibit higher betas relative to those designated as level 1 or level 2. We further find that this difference in implied betas across fair value designations is more pronounced for firms with ex ante lower-quality information environments: firms with lower analyst following, lower market capitalization, higher analyst forecast errors, or higher analyst forecast dispersion. Overall, the results are consistent with a higher cost of capital for more opaque financial assets, but also suggest that differences in firms' information environments can mitigate information risk across the fair value designations.

Read the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1439851

 

Working Papers

Trade Policy and Firm Boundaries

Abstract

This paper provides evidence that market conditions matter for organization design by studying how trade policy affects vertical integration. We embed an incomplete-contract model of firm boundaries into an international trade framework. Integration decisions are driven by a tradeoff between managers' pecuniary benefits of coordinating production and their private benefits of operating in preferred ways. Integration generates more output than non-integration but imposes a cost on managers by forcing them to accommodate to common procedures. A key implication is that higher product prices result in more integration. Since trade policy affects prices, it influences organizational decisions: higher tariffs lead to more integration; moreover, ownership structures are more alike across countries with similar levels of protection. To assess the evidence, we construct firm-level indices of vertical integration for a large set of countries from a unique dataset. Our empirical analysis, which exploits both cross-section and time-series variation in import tariffs, provides strong support for the predictions of the model.

Download the paper: http://www.hbs.edu/research/pdf/10-060.pdf

Cyclicality of Credit Supply: Firm Level Evidence

Abstract

Theory predicts that there is a close link between bank credit supply and the evolution of the business cycle. Yet fluctuations in bank-loan supply have been hard to quantify in the time-series. While loan issuance falls in recessions, it is not clear if this is due to demand or supply. We address this question by studying firms' substitution between bank debt and non-bank debt (public bonds) using firm-level data. Any firm that raises new debt must have a positive demand for external funds. Conditional on issuance of new debt, we interpret firm's switching from loans to bonds as a contraction in bank credit supply. We find strong evidence of substitution from loans to bonds at times characterized by tight lending standards, high levels of non-performing loans and loan allowances, low bank share prices and tight monetary policy. The bank-to-bond substitution can only be measured for firms with access to bond markets. However, we show that this substitution behavior has strong predictive power for bank borrowing and investments by small, out-of-sample firms. We consider and reject several alternative explanations of our findings.

Download the paper: http://www.hbs.edu/research/pdf/10-107.pdf

The International Politics of IFRS Harmonization

Abstract

The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of the international political dynamics of countries' IFRS harmonization decisions. The analysis is based on field studies in three jurisdictions: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize the jurisdictions' IFRS responses: proximity to existing political powers at the IASB and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1875682

 

Cases & Course Materials

The Offshore Drilling Industry in 2011

Ramon Casadesus-Masanell, Kenneth Corts, and Joseph McElroy
Harvard Business School Case 711-543

After booming in 2007 and early 2008, the offshore drilling industry slumps in 2009. Lower oil prices lead oil companies to reduce drilling budgets, and rig utilization falls from essentially 100% to 70% in some markets. Day rates—the prices paid for a rig's services—fall by as much as 68%. The case illustrates how supply and demand work together to determine prices and utilization in the short run, as well as how long-run supply is determined in an industry where capacity additions take several years. Also describes how advances in deep-water drilling technology are changing industry structure.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/711543-PDF-ENG

Aquion Energy

Thomas R. Eisenmann and David Kiron
Harvard Business School Case 811-047

Leaders at Aquion Energy, a Pittsburgh-based battery start-up, are deciding on a market entry strategy. Should they pursue the large but unproven grid utility market or a smaller, but higher margin market?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/811047-PDF-ENG

Just an MOU or a Real Deal?

Lena G. Goldberg and Mary Beth Findlay
Harvard Business School Note 312-018

Notwithstanding the professed intention of a party to a memorandum of understanding (MOU), a "preliminary" agreement can have binding effect. This note explores the circumstances under which MOUs may give rise to binding and enforceable agreements.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/312018-PDF-ENG

Tombstones

Timothy A. Luehrman and David Lane
Harvard Business School Case 211-063

This case consists primarily of excerpts from term sheets and prospectuses for six securities offerings made by U.S. companies during 2009-2010, just after the financial crisis and recession of 2008-2009. There are three issues of senior unsecured notes, one floating rate note, one equity offering, and one convertible note. The issuers are Microsoft, Coca Cola Enterprises, Norfolk Southern, IBM, Ford Motor, and Cephalon.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/211063-PDF-ENG

Global Business School Network

Christopher Marquis and Rwitwika Bhattacharya
Harvard Business School Case 412-044

The mission of the Global Business School Network (GBSN) is to strengthen business education for the developing world. The organization was transitioning out of its start-up phase and wants to shift its focus from capacity building activities driven by the organization to empowering the network to carry out GBSN's mission. The case asks, what is the best way to accomplish this objective?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/412044-PDF-ENG

Steering Monetary Policy Through Unprecedented Crises

David Moss and Cole Bolton
Harvard Business School Case 711-048

In early April 2008, economic conditions in Europe appeared to be deteriorating on almost all fronts: sales figures were falling, business and consumer confidence was slumping, forecasts for European growth were being revised downward, and inflation was rising. In fact, figures for the month of March revealed that inflation had reached an annualized rate of 3.5%, Europe's highest level since 1992. On top of these broad economic problems, the European financial sector—indeed, the financial sector worldwide—was in turmoil. By April 2008, global financial institutions had written down the value of their mortgage-related investments and other assets by at least $230 billion, and businesses around the world were complaining that it was ever more difficult to secure credit. In America, meanwhile, consumer confidence was falling, consumer spending had slowed to a near halt, and inflation had crept above 4%. In reaction to these dismal economic conditions, the Federal Reserve had steadily cut interest rates over a seven-month period, most recently lowering its key rate to 2.25% on March18. In sharp contrast to the Fed, the European Central Bank (ECB) had long held its key rate at 4%, where it stood when the ECB's Governing Council reconvened on April 10, 2008. Given both the market turmoil and the evident inflationary pressure, members of the ECB's Governing Council would have to weigh the available data extremely carefully as they decided whether to raise, lower, or maintain their benchmark interest rate. The significance of this decision could hardly be overstated, since it had the potential to send a strong signal about the nature of European monetary policy and the priorities of the ECB going forward.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/711048-PDF-ENG

Indian Railways: Building a Permanent Legacy (B)?

Aldo Musacchio, Tarun Khanna, and Rachna Tahilyani
Harvard Business School Supplement 711-083

Supplement to case 710-008.

Purchase this supplement:
http://cb.hbsp.harvard.edu/cb/product/711083-PDF-ENG

Reversing the AMD Fusion Launch

Elie Ofek and Ryan Johnson
Harvard Business School Case 511-036

AMD management needs to make a critical decision on the launch sequence of its next-generation technology called Fusion. The Fusion processor concept merges the central and graphics processing units (CPU and GPU) onto one chip—yielding advantages in performance (particularly graphics related), power consumption, and suitability for new computer form factors (tablets, all-in-one machines, etc.). AMD planned to launch Fusion at the beginning of 2011 with a high-end processor, code-named Llano, to impress the industry and consumers with the best the technology could offer (suited for high-end desktops and notebooks), and subsequently to launch low-powered versions, code-named Brazos (suited for small notebooks and netbooks). However, the development of Llano suffered delays while that of Brazos was ahead of schedule. AMD's executive committee raised the possibility of reversing the launch sequence and going with a "Brazos First" strategy. The case describes the microprocessor industry, its main competitors (AMD and Intel), and the evolving world of PC selling and buying. The case further provides a host of market research that AMD conducted to better understand the market. Students need to address the advisability of a reverse launch vs. waiting to launch all versions together and whether AMD can advance its competitive position relative to Intel with Fusion. Students need to outline their marketing approach (sales effort, pricing, consumer marketing, etc.) in the event that a reverse launch strategy is pursued.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/511036-PDF-ENG

Nashton Partners and Its Search Fund Process

Richard S. Ruback and Royce Yudkoff
Harvard Business School Case 212-006

Nashton Partners was a search fund founded by two HBS MBA's that raised $500,000 to finance a search for a company that they could purchase and then run for the next five to ten years. The case examines the search fund structure, the two-year search, and two potential acquisitions.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/212006-PDF-ENG

IBM China Development Lab Shanghai: Capability by Design

Willy Shih, Kamen Bliznashki, and Fan Zhao
Harvard Business School Case 611-055

When IBM shifted from a traditional territory-based multinational organization to what it called a globally integrated enterprise, it established its headquarters for "Growth Markets" in Shanghai and "Established Markets" in New York. This positioned its China Development Labs (CDL) in Shanghai as a key platform for serving growth markets including the BRIC countries and other rapidly developing regions. Though quite young, CDL Shanghai had grown to become one of IBM's largest labs. The case examines IBM's early-mover establishment of its corporate research lab and CDL, and through the examination of three product development vignettes looks at the systematic approach taken to the development of lab personnel and capabilities.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/611055-PDF-ENG

Shelley Capital and the Hedge Fund Secondary Market

Luis Viceira, Elena Corsi, and Ruth Dittrich
Harvard Business School Case 211-112

An advisory company has to decide how to sell their client's hedge fund holdings in the secondary market, and thinks about their future. Shelley Capital was a a European advisory company operating in the hedge fund secondary market, a market that boosted in 2008 with the world financial crisis. Shelley had identified four final bidders for the $84.5 million portfolio of illiquid hedge fund holdings that one of their clients had commissioned them to sell and had now to decide to whom they should sell the holdings, if they should split up the portfolio, or if they should postpone the sale. At the same time, they needed to decide about their future business. The financial crisis was behind the exceptional growth of the hedge funds' secondary market, yet another crisis could follow and boost the secondary market again. What direction should Shelley take once the hedge fund industry fully recovered? But what if a second global crisis threw the hedge fund industry into disarray once again?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/211112-PDF-ENG

Wal-Mart Update, 2011

David B. Yoffie and Renee Kim
Harvard Business School Case 711-546

In 2011, Wal-Mart was the world's largest company with $420 billion in sales and operations in 14 countries. Yet it found itself searching for the right growth strategy moving forward. U.S. same-store sales had declined for eight consecutive quarters, and Wal-Mart was increasingly becoming dependent on international sales. Meanwhile, intense competition came from various players, ranging from general discounters to dollar stores to online retailers. What should Wal-Mart do as its traditional markets and core competencies no longer ensured the kind of growth that it had enjoyed for decades in the past?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/711546-PDF-ENG