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.

November 20

When executives learn how much colleagues make

In 1992 the US Securities and Exchange Commission mandated that firms provide increased disclosure of how their top executives are compensated. A new paper by Claudine Gartenberg and Julie Wulf uses that change to better understand how such disclosures affect peer comparison and actual compensation throughout the managerial ranks. One finding: "Peer comparison decreases pay disparity within firms and that principals face a tradeoff between the incentive effects of performance-based pay and costs of peer comparison." Read their working paper, Pay Harmony: Peer Comparison and Executive Compensation.

Pulling the right strategy levers at Walmart

Looking at Walmart, researchers Humberto Brea-Solis, Ramon Casadesus-Masanell, and Emili Grifell-Tatje try out a new analytical framework that emphasizes quantitative methods over more traditional qualitative methods. Evaluating the strategic choices of CEOs Sam Walton, David Glass, and Lee Scott, they find that overall "the effectiveness of a particular business model depends not only on its design (its levers and how they relate to one another) but, most importantly, on its implementation (how the business model levers are pulled)." Read Business Model Evaluation: Quantifying Walmart's Sources of Advantage.

Should a food retailer fight obesity?

In a recent case, the CEO of grocery retailer H-E-B Grocery has a choice. Should the company play an active role in Texas' efforts to reduce obesity or serve its customers what they want while also trying to change their habits? "Some would say that H-E-B had no role in changing the lifestyle and food choices of its employees or customers," note the case's authors, Jose B.Alvarez, Jason Riis, and Walter J. Salmon. How would you decide? The case is titled "H-E-B: Creating a Movement to Reduce Obesity in Texas."

 

Publications

The Unbundling of Advertising Agency Services: An Economic Analysis

Abstract

We address a puzzle surrounding the shift from bundling to unbundling of U.S. advertising agency services and the slow pace of change over several decades. We model an agency's decision as a tradeoff between the fixed cost to the advertiser of establishing a relationship with an agency and pecuniary economies of scale from media services provision. Using micro-data from the U.S. Census of Services for 1982-2007, we find agencies are more likely to unbundle with increasing size, diversification, and higher media prices and less likely with increasing age, larger media volume, and an interaction between media prices and volume.

Lords of the Harvest: Third-party Influence and Regulatory Approval of Genetically Modified Organisms

Abstract

Little is known about the factors that influence regulatory-agency decision making. We posit that regulatory agencies are influenced by the firms they regulate, but not exclusively via dyadic exchanges as is traditionally argued in the regulatory capture and business-government literatures. Instead, regulatory decisions are indirectly shaped via third-party actors who shield agencies from legitimacy threats. Focusing empirically on the U.S. Department of Agriculture's approval of genetically modified organisms (GMOs), we find that product assessments by powerful stakeholders and peer agencies influence product approval and that their effects vary under different threats. We also discuss the implications of these findings for business-government relations, nonmarket strategy, and organization theory.

Read the paper: http://www.people.hbs.edu/shiatt/GMO_paper_AMJ.pdf

ISO Standards Stamp Approval

Abstract

An abstract is unavailable at this time.

Read the paper: http://www.europeanceo.com/business-and-management/2012/07/iso-standards-stamp-approval/

Children Develop a Veil of Fairness

Abstract

Previous research suggests that children develop an increasing concern with fairness over the course of development. Research with adults suggests that the concern with fairness has at least two distinct components: a desire to be fair and a desire to signal to others that they are fair. We explore whether children's developing concern with behaving fairly towards others may in part reflect a developing concern with appearing fair to others. In Experiments 1-2, most 6- to 8-year-old children behaved fairly towards others when an experimenter was aware of their choices; fewer children opted to behave fairly, however, when they could be unfair to others yet appear fair to the experimenter. In Experiment 3, we explored the development of this concern with appearing fair by using a wider age range (6- to 11-year-olds) and a different method. In this experiment, children chose how to assign a good or bad prize to themselves and another participant by either unilaterally deciding who would get each prize or by using a fair procedure-flipping a coin in private. Older children were much more likely to flip the coin than younger children, yet were just as likely as younger children to assign themselves the good prize by reporting winning the coin flip more than chance would dictate. Overall, the results of these experiments suggest that as children grow older they become increasingly concerned with appearing fair to others, which may explain some of their increased tendency to behave fairly.

Read the paper: http://www.people.hbs.edu/mnorton/shaw et al.pdf

Robust Enforcement Should Complement Voluntary Regulation

Abstract

Spurred by the anti-regulation movement that started in the 1970s, voluntary self-regulation programs have emerged in many regulatory agencies, seeking to increase cooperation between government and industry to achieve greater and more cost-effective compliance. "Beyond compliance" programs recognize and reward firms for practices that go above and beyond the requirements of the law. "Self-policing" programs adopted by several agencies shift the burden of monitoring regulatory compliance and reporting noncompliance from the government to the private sector. Policymakers often refer to these programs as a win-win-win scenario: compliance improves, regulators conserve enforcement resources, and firms save money. But this outcome can only be achieved if the self-regulatory activities of corporations can effectively substitute for government enforcement, a largely untested assumption that our research examines. We find that, to the contrary, the success of voluntary regulation is contingent on a robust regime of government inspection and enforcement. Within such a regime, we find that voluntary compliance efforts by regulated firms can actually lead to improved environmental performance. In summary, the polarized claims that corporate voluntary regulation represents a win-win opportunity-or constitutes a smokescreen that allows firms to operate with less regulatory oversight-are misguided. Instead, the key to efficient and effective regulatory design is finding the right mix of public and private regulatory activities.

Read the paper: http://www.gcbpp.org/files/EPV/EPV_Short_RobustEnforcement_92012.pdf

Conflict Policy and Advertising Agency-Client Relations: The Problem of Competing Clients Sharing a Common Agency

Abstract

What restrictions should be placed on advertising agencies with respect to serving accounts or clients that are competitors of one another in order to avoid conflicts of interest? In recent decades, the advertising and marketing services industry has undergone a number of structural changes that forced an ongoing re-examination and modification of traditional norms and policies emphasizing exclusivity in agency-client relationships. A typology of conflicts that has arisen in the U.S. shows the variety and complexity of contemporary conflicts. Cases of conflicts reported in the trade literature are used to illustrate policy issues as well as the spillover effects and resolution of disputes. To cope with these developments, two significant changes in conflict policies evident in current U.S. practice are identified. First, safeguards to preserve proprietary information that function as organizational, location, and personnel mobility barriers among quasi-autonomous units within a mega-agency or holding company have become an essential component of conflict policies. Subject to the protection against security breaches afforded by safeguards, rival clients may be served by separate organizational units that are under common control and/or ownership. Second, a family of hybrid conflict polices has evolved that feature elements of the split account system long practiced in Japan, augmented by safeguards that serve as partial substitutes for the umbrella prohibition on serving rivals imposed by exclusivity. By relying on safeguards and splitting account assignments in a variety of ways among different organizational units within a given mega-agency or holding company that may also serve rivals (or across different mega-agencies or holding companies), clients exert a measure of control over the access of those agencies to confidential information while also offering them incentives to avoid conflicts of interest. Findings from the existing body of conceptual and empirical research bearing on the sources and consequences of conflicts are reviewed and directions for further research are discussed.

How Concentrated Is the U.S. Advertising and Marketing Services Industry: Myth vs. Reality?

Abstract

We analyze changes in concentration levels in the U.S. Advertising and Marketing Services industry using data from the U.S. Census Bureau's quinquennial Economic Census and the Service Annual Survey. These data, heretofore largely ignored, allow us to redress some of the measurement problems surrounding estimates found in the existing literature. The data available permitted concentration levels to be tracked for the period 1977-2007 in the case of advertising agencies and for 1997, 2002, and 2007 for the other industry sectors. Firm level concentration, as measured by the Herfindahl-Hirschman Index (HHI) and concentration ratios (CRs), varies across the nine sectors comprising the industry, but all are within the range generally considered as indicative of a competitive industry. At the holding company level, the four largest organizations account for less than a quarter of the industry's total revenue, a share that changed little over the period 2002-2009, but one that is approximately half of estimates frequently cited in the trade press. The persistence of a diverse and relatively unconcentrated size structure appears quite consistent with other research on the underlying economics of this industry.

The Flattening Firm—Not As Advertised

Abstract

For decades, management consultants and the popular business press have urged large firms to flatten their hierarchies. Flattening (or delayering, as it is also known) typically refers to the elimination of layers in a firm's organizational hierarchy and the broadening of managers' spans of control. The alleged benefits of flattening flow primarily from pushing decisions downward to enhance customer and market responsiveness and to improve accountability and morale. Has flattening delivered on its promise to push decisions downward? In this article, I present evidence suggesting that while firms have delayered, flattened firms can exhibit more control and decision making at the top. Managers take note. Flattening can lead to exactly the opposite effects from what it promises to do.

Book: http://www.people.hbs.edu/jwulf/CMR_May.pdf

 

Working Papers

Business Model Evaluation: Quantifying Walmart's Sources of Advantage

Abstract

In recent years, the concept of the business model has received substantial attention in the strategy literature, where a number of qualitative approaches to describe, represent, and evaluate business models have been proposed. We contend that while helpful to understand a firm's overall logic of value creation and capture, qualitative methods must be complemented with quantitative analyses. The development of quantitative methods for the study of business models, however, has trailed that of their qualitative peers. In this paper, we develop an analytical framework based on the theory of index numbers and production theory to provide quantitative insight on the link between a firm's business model choices and their ultimate profit consequences. We apply the method to Walmart. Using evidence from annual reports, research papers, case studies, and books for the period of 1972-2008, we build a qualitative representation of Walmart's business model. We then map that representation to an analytical model that quantifies Walmart's sources of competitive advantage over a 36-year period. Although Walmart's business model remained the same during the years of our study, we find that the different CEOs pulled a number of business model levers differently, which partly explains the variation in Walmart's performance throughout the years. Under Sam Walton, the company's performance improved due mainly to the adoption of new technologies as well as low prices obtained from vendors. David Glass's tenure was characterized by business model choices aimed at increasing volume such as building new stores, increasing product variety, everyday low prices (EDLP), and high-powered incentives for store managers. Input and output prices played a smaller role under David Glass than under Sam Walton. Finally, Lee Scott loosened EDLP and modified Walmart's human resource practices by offering better benefits and wages to associates in response to growing social pressure. Overall, our analysis suggests that the effectiveness of a particular business model depends not only on its design (its levers and how they relate to one another) but, most importantly, on its implementation (how the business model levers are pulled).

Download the paper: http://www.hbs.edu/faculty/product/43582

When Does a Platform Create Value by Limiting Choice?

Abstract

We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (to better satisfy their individual preference for variety, users have an incentive to consume more applications than the number that maximizes joint utility); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria, which result in different utility levels for the users); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems and create value by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the allocation that maximizes users' utility); eliminate equilibria that give lower utility to the users; and reduce the severity of the coordination problem faced by users.

Download the paper: http://ssrn.com/abstract=1677624

Preparatory Power Posing Affects Performance and Outcomes in Social Evaluations

Abstract

This experiment tested whether changing one's nonverbal behavior prior to an important social evaluation could improve performance on the evaluated task. Participants adopted expansive, open (high-power) poses or contractive, closed (low-power) poses, and then prepared and delivered a speech to two evaluators as part of a mock job interview-a prototypical social evaluation. All speeches were videotaped and coded for overall performance and hireability as well as for two potential mediators: speech content (e.g., content, structure) and speaker presence (e.g., captivating, enthusiastic). As predicted, those who prepared with high-power poses performed better and were more likely to be chosen for hire; this relationship was mediated by speaker presence, but not speech content. Power-pose condition had no effect on body posture during the social evaluation, thus revealing a relationship between preparatory nonverbal behavior and subsequent performance, and highlighting preparatory power posing as a simple performance-boosting tool with the potential to benefit almost anyone.

Download the paper: http://www.hbs.edu/faculty/product/43005

The Dynamic Effects of Bundling as a Product Strategy

Abstract

Several key questions in bundling have not been empirically examined: Do consumers value bundles over and beyond their component products, indicating synergy? Is mixed bundling more effective than pure bundling or pure components? Does correlation in consumer valuations make bundling more or less effective? Does bundling serve as a complement or substitute to network effects? To address these questions, we develop a consumer-choice model from micro-foundations to capture the essentials of our setting, the handheld video game market. We provide a framework to understand the dynamic, long-term impacts of bundling on demand. We find evidence that bundles have a significant negative synergy effect and that consumer valuations for component products are positively correlated. Despite these effects, bundling can be effective through a third previously unexamined effect: dynamic consumer segmentation. Our results, therefore, contradict prior static models: bundling can be profitable even when consumer valuations for components are highly correlated. In the absence of bundling, both hardware and software sales decrease, and consumers who had previously purchased bundles might delay purchases, resulting in lower revenues. We also find that mixed bundling dominates pure bundling and pure components in terms of both hardware and software revenues.

Download the paper: http://www.people.hbs.edu/vkumar/dynamicbundling_fall2012.pdf

Pay Harmony: Peer Comparison and Executive Compensation

Abstract

Using rich panel data on division manager pay, we investigate whether peer effects in the form of horizontal wage comparisons affect firm policies on executive pay. We find pay co-movement (or pay-referent sensitivity, PRS) to be more pronounced in geographically concentrated firms where we expect divisional proximity to facilitate information sharing about pay and magnify peer comparisons. To separate the peer effect of PRS from other factors that may drive co-movement of firm pay, we exploit exogenous increases in access to pay information using the SEC 1992 Proxy Disclosure Rule that differentially affected firms. Based on differences-in-differences models, we find increased PRS and decreased pay-performance sensitivity (PPS) after 1992 within geographically dispersed firms relative to firms with proximate divisions. The effects are strongest in dispersed firms with relatively less pay disclosure prior to 1992, a subsample for which the ruling had a relatively larger impact. Finally, based on analysis of manager pairs within a firm, we find that mean distance in pay between different-state managers increased by less relative to same-state managers after the rule change. Taken together, our findings suggest that peer comparison decreases pay disparity within firms and that principals face a tradeoff between the incentive effects of performance-based pay and costs of peer comparison.

Download the paper: http://www.hbs.edu/faculty/product/43633

Highway to Success: The Impact of the Golden Quadrilateral Project for the Location and Performance of Indian Manufacturing

Abstract

We investigate the impact of the Golden Quadrilateral (GQ) highway project on the Indian organized manufacturing sector using enterprise data. The GQ project upgraded the quality and width of 5,846 km of roads in India. We use a difference-in-difference estimation strategy to compare non-nodal districts based upon their distance from the highway system. We find several positive effects for non-nodal districts located 0-10 km from GQ that are not present in districts 10-50 km away, most notably higher entry rates and increases in plant productivity. These results are not present for districts located on another major highway system, the North-South East-West corridor (NS-EW). Improvements for portions of the NS-EW system were planned to occur at the same time as GQ but were subsequently delayed. Additional tests show that the GQ project's effect operates in part through a stronger sorting of land-intensive industries from nodal districts to non-nodal districts located on the GQ network. The GQ upgrades further helped spread economic activity to moderate-density districts and intermediate cities.

Download the paper: http://ssrn.com/abstract=2172892

 

Cases & Course Materials

H-E-B: Creating a Movement to Reduce Obesity in Texas

Jose B. Alvarez, Jason Riis, and Walter J. Salmon
Harvard Business School Case 512-034

In January 2012, H-E-B Grocery Co., a private retail chain with stores located in Texas and Mexico, was introducing its Healthy at H-E-B program to its customers. The program, which started with the company's employees a few years earlier, was an effort to educate and inform customers on how to lead a healthier lifestyle. What CEO Craig Boyan had in mind was creating a state-wide healthy living movement in Texas, where obesity was high relative to other states in the U.S. But how far to go with its employees and customers was a question that President and COO Craig Boyan and his team struggled with. On one hand Boyan believed that H-E-B, long recognized for its community involvement, had a role to play in Texans' health and well-being. On the other hand, he recognized that H-E-B was first and foremost a retailer that had to compete against the likes of Walmart. He needed to make sure that H-E-B was serving its customers what they wanted while also trying to influence their buying behavior toward healthier foods. Some would say that H-E-B had no role in changing the lifestyle and food choices of its employees or customers. But Boyan and his team thought differently.

Purchase this case:
http://hbr.org/search/512034-PDF-ENG

The Product Manager

Jeffrey Bussgang, Thomas Eisenmann, and Robert Go
Harvard Business School Note 812-105#

Describes the role of product manager (PM) in technology companies, detailing 1) PMs' responsibilities; 2) different ways to organize the product management function; 3) how PMs interact with other functions within technology companies (e.g., engineering, product marketing); 4) how the nature of the PM role varies depending on context (e.g., early- vs. late-stage startups, business- vs. engineering-driven cultures); and 5) the attributes of effective PMs.

Purchase this note:
http://hbr.org/search/812105-PDF-ENG

Sir Alex Ferguson: Managing Manchester United

Anita Elberse and Thomas Dye
Harvard Business School Case 513-051

Sir Alex Ferguson, the most successful manager in British football history, is preparing for the 2012-2013 season-his record-setting 26th as manager of one of the world's most decorated professional football clubs and one of sport's biggest franchises. Over the years Ferguson has overcome several major challengers to United. The newest rival can be found closer to home: since Manchester City, United's "noisy neighbors," has switched owners, the club has invested unprecedented amounts of money in new players, resulting in its first league title in decades. How could Ferguson lead his team to another victory and bring the next chapter in United's illustrious history to a successful end?

Purchase this case:
http://hbr.org/search/513051-PDF-ENG

Urbanizing China

Lakshmi Iyer and G.A. Donovan
Harvard Business School Case 713-037

In 2012, China attained a historic development milestone with more Chinese citizens living in cities than in the countryside. China's rapid urbanization, and the accompanying conversion of agricultural land to non-agricultural uses, raised a number of economic, social, and political concerns. Could China maintain its food security in view of the sharply rising demand for land for urban development? How could it ensure the sustainability of local government finances? Was the growing number of land protests the harbinger of major changes in China's political institutions? How would the challenges of urbanization affect the business environment for private firms? The success and viability of China's overall growth strategy depended crucially on managing a successful urban transition.

Purchase this case:
http://hbr.org/search/713037-PDF-ENG

Hill Country Snack Foods Co.

W. Carl Kester and Craig Stephenson
Harvard Business School Case 913-517

Hill Country Snack Foods, located in Austin, Texas, manufactures, markets, and distributes snack foods and frozen treats. The CEO is passionate about maximizing shareholder value and believes in keeping tight control over costs and operating the business as efficiently as possible. The company invests in additional capacity and new products only when attractive, low-risk opportunities are identified and can be funded internally. The firm's culture of risk aversion extends to financing decisions with a clear preference for equity finance over debt finance. The CEO believes a strong balance sheet with large cash balances provides the company with maximum safety and flexibility. Sales growth has been steady but unspectacular. As the CEO approaches retirement, investors and analysts speculate that the company will change to a more aggressive capital structure. Students must analyze the firm's current capital structure, explore three alternatives using debt finance, and determine the optimal debt-to-capital ratio.

Purchase this case:
http://hbr.org/search/913517-PDF-ENG

Yum! Brands

Jordan Siegel and Christopher Poliquin
Harvard Business School Case 712-422

Yum!, the owner of KFC, Pizza Hut, and Taco Bell, asks what might be the lessons from its success in China for currently contemplated expansion into India and Africa. Also, the company contemplates whether Taco Bell can succeed abroad as part of a new expansion push. Also, the case asks what distance barriers are relevant for a fast food company specializing in part on fried chicken and Tex-Mex food.

Purchase this case:
http://hbr.org/search/712422-PDF-ENG

Building Cities: A Technical Note

Arthur I Segel and Oliver O. Hartleben
Harvard Business School Note 213-006

World population growth and increasing urbanization will require new cities in the future around the world. This technical note attempts to systematize the key design decisions that developers and policy makers alike must make to be able to proceed.

Purchase this note:
http://hbr.org/search/213006-PDF-ENG