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.

January 17

The shrinking role of general manager

The authors of the new paper Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management find that the structure of top management in US companies has changed radically over the last 25 years. One notable shift: the decline of the general manager. Once the hottest title a young executive could win, general managers have been squeezed out of organizational prominence by functional managers. Why? Read the paper, written by Maria Guadalupe, Hongyi Li, and Julie Wulf.

Studying bonuses for managers

Bonuses and other incentives granted CEOs—and the effect such rewards can have on inflating reported earnings—have been well studied. Less explored, however, are the impacts of bonuses paid further down the corporate hierarchy, to division managers and CFOs, for example. According to researchers Felix Oberholzer-Gee and Julie Wulf, "Our findings have important policy implications and suggest that compensation committees should review pay policies of other managerial positions in addition to CEOs." Read their study, Earnings Management from the Bottom Up: An Analysis of Managerial Incentives Below the CEO.

What next for Yahoo?

In February 2008, Microsoft made a bid to acquire search giant Yahoo, valuing the company at $44 billion. Today Yahoo is worth half that amount, and has suffered through a revolving door of CEOs. So this appears a particularly good time to look at Yahoo and its challenges in a market dominated by Google. In the case "Strategy and Governance at Yahoo! Inc.", Krishna G. Palepu, Suraj Srinivasan, David Lane, and Ian McKown Cornell look at how Yahoo responded to challenges in 2011, as it explored ways to monetize its shareholding and business links with Alibaba Group in China and Yahoo! Japan. "The case allows students to discuss the merits of why Yahoo! turned down Microsoft's offer in 2008, evaluate Yahoo!'s value, and assess the options available to the board in late 2011," according to the authors.

 

Publications

Uncommon Service: How to Win by Putting Customers at the Core of Your Business

An abstract is not available at this time.

Publisher's Link: http://uncommonservice.com/

Venture Capital, Private Equity, and the Financing of Entrepreneurship

An abstract is not available at this time.

Publisher's Link: http://www.wiley.com/WileyCDA/WileyTitle/productCd-EHEP002070.html

Communities and Organizations

An abstract is not available at this time.

Publisher's Link: http://www.emeraldinsight.com/books.htm?issn=0733-558x&volume=33

Business Analysis and Valuation Using Financial Statements

An abstract is not available at this time.

Book: http://www.cengage.com/search/productOverview.do?Ntt=9781111972301&N=16+4294922453&Ntk=P_Isbn13

Behavioral Corporate Finance: A Current Survey

Abstract

We survey the theory and evidence of behavioral corporate finance, which generally takes one of two approaches. The market timing and catering approach views managerial financing and investment decisions as rational managerial responses to securities mispricing. The managerial biases approach studies the direct effects of managers' biases and nonstandard preferences on their decisions. We review relevant psychology, economic theory and predictions, empirical challenges, empirical evidence, new directions such as behavioral signaling, and open questions.

Read the paper: http://www.people.hbs.edu/mbaker/cv/papers/bcfsurvey2v20.pdf

Comovement and Predictability Relationships Between Bonds and the Cross-Section of Stocks

Abstract

Government bonds comove more strongly with bond-like stocks: stocks of large, mature, low-volatility, profitable, dividend-paying firms that are neither high growth nor distressed. Variables derived from the yield curve that are already known to predict returns on bonds also predict returns on bond-like stocks; investor sentiment, a predictor of the cross section of stock returns, also predicts excess bond returns. These relationships remain in place even when bonds and stocks become "decoupled" at the index level. They are driven by a combination of effects including correlations between real cash flows on bonds and bond-like stocks, correlations between their risk-based return premia, and periodic flights to quality.

Read the paper: http://www.people.hbs.edu/mbaker/cv/papers/Comovement_RAPS.pdf

The Effect of Reference Point Prices on Mergers and Acquisitions

Abstract

Prior stock price peaks of targets affect several aspects of merger and acquisition activity. Offer prices are biased toward recent peak prices although they are economically unremarkable. An offer's probability of acceptance jumps discontinuously when it exceeds a peak price. Conversely, bidder shareholders react more negatively as the offer price is influenced upward toward a peak. Merger waves occur when high returns on the market and likely targets make it easier for bidders to offer a peak price. Parties thus appear to use recent peaks as reference points or anchors to simplify the complex tasks of valuation and negotiation.

Read the paper: http://people.hbs.edu/mbaker/cv/papers/refpt.pdf

The Four Habits of High-Value Health Care Organizations

An abstract is not available at this time.

Read the paper: http://www.nejm.org.ezp-prod1.hul.harvard.edu/doi/full/10.1056/NEJMp1111087

When One Business Model Isn't Enough

Abstract

Trying to operate two business models at once often causes strategic failure. Yet LAN Airlines, a Chilean carrier, runs three models successfully. Casadesus-Masanell, of Harvard Business School, and Tarziján, of the Pontificia Universidad Católica de Chile, explore how LAN has integrated a full-service international passenger model with a premium air-cargo business model while separately operating a no-frills passenger model for domestic flights. LAN's multi-model success comes from recognizing the complementarity of its two high-end services and the distinct, or substitute, nature of its no-frills offering. LAN came to that insight by analyzing the major assets that the models share and the compatibility of the models' operational resources and capabilities. It recognized that the more the models have in common, the more likely they are to generate greater value together than apart; the less they share, the more likely they are to be best executed separately. Nevertheless, managing multiple models is a tall order. LAN has had to face greater complexity, broaden its organizational skills, increase the flexibility of its workforce, and make other investments. But by mastering three models, the company has built formidable advantages that are difficult for competitors to overcome. Its example has shown how, properly applied, the implementation of multiple business models is not a risk but rather a new tool for strategists.

Read the article: http://hbr.org/2012/01/when-one-business-model-isnt-enough/ar/1

Do Powerful Politicians Cause Corporate Downsizing?

Abstract

This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. This retrenchment follows both Senate and House committee chair changes, occurs in large and small firms and within large and small states, and is most pronounced among geographically concentrated firms. The effects are economically meaningful and the mechanism-entirely distinct from the more traditional interest rate and tax channels-suggests new considerations in assessing the impact of government spending on private sector economic activity.

Read the paper: http://www.people.hbs.edu/cmalloy/pdffiles/envaloy.pdf

EXEMPLARY CONTRIBUTION: Transforming Mental Models on Emerging Markets

Abstract

Economic growth in the Western world increasingly depends on meaningful engagement with emerging markets such as Brazil, China, India, South Africa, and Turkey. Business schools are responding with increased attention to these markets in their research and curricula. However, in order to understand and leverage these opportunities for teaching and learning, it is apparent that students and executives may require a major transformation of their mental models, not just incremental adjustments or extensions. Institutional economics can help prospective and established managers recognize the role of formal and informal institutions and enable them to work around the "institutional voids" in emerging markets (Khanna & Palepu, 2010). We draw on this framework to identify critical shifts in mental models required for managing effectively in emerging markets and suggest core elements of the management learning process required to accomplish such a change.

Read the article: http://journals.aomonline.org/InPress/main.asp?action=preview&art_id=1065&p_id=2&p_short=AMLE

Honest Rationales for Dishonest Behavior

An abstract is not available at this time.

Read the paper: http://www.francescagino.com/uploads/4/7/4/7/4747506/ayal_gino_chapter.pdf

What Business Schools Can Learn from the Medical Profession

An abstract is not available at this time.

Read the article: http://hbr.org/2012/01/what-business-schools-can-learn-from-the-medical-profession/ar/1

Organizations in the Shadow of Communities

An abstract is not available at this time.

Publisher's Link: http://www.emeraldinsight.com/books.htm?issn=0733-558x&volume=33

Toward a Three Tier Market for U.S. Home Mortgages

Abstract

This chapter analyzes the various forms of federal programs to support home mortgages-both government-insured mortgages and privately issued mortgages purchased by Fannie Mae or Freddie Mac. It argues that there will be a third tier of home mortgages created by the provisions of the Dodd-Frank Act establishing special rules for qualified residential mortgages.

 

Working Papers

Understanding the Incentives of Commissions Motivated Agents: Theory and Evidence from the Indian Life Insurance Market

Abstract

We conduct a series of field experiments to evaluate two competing views of the role of financial service intermediaries in providing product recommendations to potentially uninformed consumers. One view argues intermediaries provide valuable product education and guide consumers towards suitable products. Consumers understand how commissions affect agents' incentives and make optimal product choices. The second view argues that intermediaries recommend and sell products that maximize the agents' well-being, with little or no regard for the customer. Audit studies in the Indian life insurance market find evidence supporting the second view: in 60%-80% of visits, agents recommend unsuitable (strictly dominated) products that provide high commissions to the agents. Customers who specifically express interest in a suitable product are more likely to receive an appropriate recommendation, though most still receive bad advice. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong. We then test how regulation and market structure affect advice. A natural experiment that required agents to describe commissions for a specific product caused agents to shift recommendations to an alternative product, which had even higher commissions but no disclosure requirement. We do find some scope for market discipline to generate debiasing: when auditors express inconsistent beliefs about the product suitable from them, and mention they have received advice from another seller of insurance, they are more likely to receive suitable advice. Agents provide better advice to more sophisticated consumers. Finally, we describe a model in which dominated products survive in equilibrium, even with competition.

Download the paper: http://www.hbs.edu/research/pdf/12-055.pdf

Got Local Food?

Abstract

We study the operational tradeoffs of a retailer and farmers in a fresh produce supply chain to determine the equilibrium supply chain structure. These operational tradeoffs arise as a result of the geographic constraints posed by the availability of arable land and the spatial population distribution. We model the interdependent operating decisions of a retailer and farmers and show that technological advances in transportation, spatial characteristics of population distributions, and advances in farming technologies have led to a dominant economies-of-scale model of production, distribution, and retailing in fresh produce supply. When farm capacities are asymmetric, the small local farmer has a disadvantage and can be completely squeezed out of the supply chain if the large farm has enough capacity to fill demand. However, we quantify how backhauling and vertical differentiation can increase the retailer's margin for local food, thus increasing the small local farmer's competitiveness. We also show how the local farmer can leverage polyculture farming, a farming practice that increases the resilience and yield of crops, to mitigate risk of weather or pest damage, increasing his competitiveness.

Download the paper: http://www.hbs.edu/research/pdf/12-058.pdf

Matthew: Effect or Fable?

Abstract

In a market context, a status effect occurs when actors are accorded differential recognition for their efforts depending on their location in a status ordering, holding constant the quality of these efforts. In practice, because it is very difficult to measure quality, this ceteris paribus proviso often precludes convincing empirical assessments of the magnitude of status effects. We address this problem by examining the impact of a major status-conferring prize that shifts actors' positions in a prestige ordering. Specifically, using a precisely constructed matched sample, we estimate the effect of a scientist becoming a Howard Hughes Medical Investigator (HHMI) on citations to articles the scientist published before the prize was awarded. We do find evidence of a post-appointment citation boost, but the effect is small and limited to a short window of time. Consistent with theories of status, however, the effect of the prize is significantly larger when there is uncertainty about scientist and article quality.

Download the paper: http://www.hbs.edu/research/pdf/12-049.pdf

Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management

Abstract

This paper shows that top management structures in large U.S. firms have radically changed since the mid-1980s. While the number of managers reporting directly to the CEO doubled, the growth was driven primarily by functional managers rather than general managers. Using panel data on senior management positions, we explore the relationship between changes in executive team composition, firm diversification, and IT investments-which arguably alter returns to exploiting synergies through corporate-wide coordination by functional managers in headquarters. We find that the number of functional managers closer to the product ("product" functions i.e., marketing, R&D) increase as firms focus their businesses, while the number of functional managers farther from the product ("administrative" functions i.e., finance, law, HR) increase with IT investments. Finally, we show that general manager pay decreases as functional managers join the executive team suggesting a shift in activities from general to functional managers-a phenomenon we term "functional centralization."

Download the paper: http://www.hbs.edu/research/pdf/12-059.pdf

Open Innovation and Organizational Boundaries: The Impact of Task Decomposition and Knowledge Distribution on the Locus of Innovation

Abstract

This paper contrasts traditional, internal organization-centered models of innovation with more recent work on open innovation. These fundamentally different and inconsistent innovation logics are associated with contrasting organizational boundaries and organizational designs. We suggest that when critical tasks can be modularized and when problem-solving knowledge is widely distributed and available, open innovation complements traditional innovation logics. We induce these ideas from the literature and with extended examples from Apple, NASA, and LEGO. We suggest that task decomposition and problem-solving knowledge distribution are not deterministic but are strategic choices. If dynamic capabilities are associated with innovation streams, and if innovation types are rooted in contrasting innovation logics, there are important implications for the firm, and its boundaries, design, and identity.

Download the paper: http://www.hbs.edu/research/pdf/12-057.pdf

Earnings Management from the Bottom Up: An Analysis of Managerial Incentives Below the CEO

Abstract

Performance-based pay is an important instrument to align the interests of managers with the interests of shareholders. However, recent evidence suggests that high-powered incentives also provide managers with incentives to manipulate the firm's reported earnings. The previous literature has focused primarily on chief executive officers, but managers further down in the firm hierarchy-division managers and chief financial officers-are likely to have similar incentives and perhaps even greater opportunity to influence reported earnings in a manner that maximizes these managers' personal incomes. Moreover, previous research focuses on equity incentives and largely ignores other elements of incentive pay. We contribute to this literature by analyzing all forms of incentive pay for several types of managerial positions and include additional measures of earnings manipulation-end-of-year excess sales and class action litigation-in addition to the standard measure of discretionary accounting accruals. We find that the association between high-powered incentives and earnings manipulation varies by both type of incentive pay and position. Our findings have important policy implications and suggest that compensation committees should review pay policies of other managerial positions in addition to CEOs. Importantly, if the committees wanted to weaken incentive pay to get more truthful reporting, diluting the CFO's bonus and stock options would be one place to start.

Download the paper: http://www.hbs.edu/research/pdf/12-056.pdf

 

Cases & Course Materials

Attack of the Clones: Birchbox Defends Against Copycat Competitors

Peter A. Coles and Benjamin Edelman
Harvard Business School Case 912-010

Birchbox offers trial-sized beauty products delivered monthly by mail-attracting rave reviews. Seeing the success of this model, numerous "copycat" clones seek to offer the same service. Many of these copycats focus on non-U.S. countries, but others are challenging Birchbox on its home territory. Can Birchbox defend its position? How?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/912010-PDF-ENG

Moda Operandi: A New Style of Fashion Retail

Mukti Khaire
Harvard Business School Case 812-040

Moda Operandi is a startup in the fashion industry. The firm organizes online trunk shows of designers' collections, allowing its members to directly order clothes from the collections shown in Fashion Weeks all over the world. Moda Operandi conveys the preorders to the designers and the members receive their clothes six months later. The founders of Moda Operandi-Aslaug Magnusdottir and Lauren Santo Domingo-believe that the firm has the potential to address and eliminate inefficiencies in the fashion industry. While the founders plan to include editorial content on the site, the question is-can Moda Operandi succeed despite removing an essential piece of the fashion industry?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/812040-PDF-ENG

Paddle8: Painting a New Picture of the Art Market

Mukti Khaire
Harvard Business School Case 812-047

The Paddle8 case is a short case that presents the idea for a new business in the global art market and asks students to evaluate whether it will work, given the structure and unique workings of the art market. Paddle8 is a New York-based startup that partners with well-known galleries to offer art works from their collections for sale on the Paddle8 website to carefully selected, globally dispersed members. The firm aims to help galleries overcome their geographic limitations and to make art more accessible to a wide range of new collectors with the help of its technology platform. The question is: will this succeed in the context of the art market where exclusive access is a prime driver of value?

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/812047-PDF-ENG

Telemonitoring at Visiting Nurse Health System

F. Warren McFarlan, Mark Keil, and Mala Kaul
Harvard Business School Case 112-030

This case presents one home healthcare organization's efforts to use telemonitoring to improve the quality of care provided to at-risk patients who were discharged from hospitals and needed home care. After two years of using the Health Buddy system for telemonitoring at-risk patients, Mark Oshnock, president of Visiting Nurse Health System (VNHS) must decide whether to invest in buying more Health Buddy units. While Oshnock believed that there were real benefits associated with telemonitoring, he was having difficulty quantifying those benefits, and he was concerned about VNHS' ability to continue investing resources in telemonitoring given the realities of the health care reimbursement environment in which it operated. While several studies had demonstrated the benefits of telemonitoring, Oshnock felt that the long-term benefits accruing to the health system as a whole were not immediately quantifiable or visible to the hospitals and insurance companies. Without external support for the telemonitoring initiative from insurance companies, it would be difficult for VNHS to keep up the momentum and ramp up telemonitoring through additional purchases of Health Buddy units. From a purely financial standpoint, such an investment would be very difficult for VNHS to justify. The irony was that with the new regulatory pressures and increased focus on preventative healthcare, telemonitoring pointed to an effective tool in managing and reducing acute care hospitalizations. However, balancing these benefits against limited financial support from other key players in the health care system would be challenging.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/112030-PDF-ENG

Strategy and Governance at Yahoo! Inc.

Krishna G. Palepu, Suraj Srinivasan, David Lane, and Ian McKown Cornell
Harvard Business School Case 112-040

Yahoo! faces a number of governance and strategic challenges in late 2011 as it tries to compete with rivals such as Google and find ways to monetize its shareholding and business links with Alibaba Group in China and Yahoo! Japan. The company is now valued at almost half the offer that Microsoft had made in its acquisition offer in 2008. The depth of the challenge is underscored by the frequent CEO changes the company has had, culminating in the recent firing of the latest CEO, Carol Bartz. The case examines the successes and failures at Yahoo! and the decisions now facing its board as it encounters investor pressure to improve performance.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/112040-PDF-ENG

Boeing 737 Industrial Footprint: The Wichita Decision

Willy Shih and Margaret Pierson
Harvard Business School Case 612-036

The case examines the circumstances leading up to the Boeing Company's decision to spin-off its Wichita Division. This case is intended to be taught with two notes: "On the Use of Capital Efficiency Metrics," HBS No. 612-034, and "Modularity in Design and Manufacturing: Application to Commercial Aircraft," HBS No. 612-035.

Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/612036-PDF-ENG

Modularity in Design and Manufacturing: Application to Commercial Aircraft

Willy Shih and Margaret Pierson
Harvard Business School Note 612-035

The note discusses the modularization of design and the modularization of manufacturing in the commercial aerospace industry. It is intended to be taught with the case, "Boeing 737 Industrial Footprint: The Wichita Decision," HBS No. 612-036.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/612035-PDF-ENG

On the Use of Capital Efficiency Metrics

Willy Shih and Margaret Pierson
Harvard Business School Note 612-034

This note describes capital efficiency metrics including RONA, ROIC, and EVA. This note is intended to be used with the case "Boeing 737 Industrial Footprint: The Wichita Decision," HBS No. 612-036.

Purchase this note:
http://cb.hbsp.harvard.edu/cb/product/612034-PDF-ENG