HBS Working Knowledge Harvard Business School Working Knowledge offers business practitioners a first look at cutting-edge research and thinking from more than 200 HBS faculty. en-us http://hbswk.hbs.edu/ http://hbswk.hbs.edu/images/site/smalllogo.gif HBS Working Knowledge http://hbswk.hbs.edu/ 117 35 For Business Leaders Harvard Business School HBS Working Knowledge is a forum for innovation in business practice, offering readers a first look at cutting-edge thinking and the opportunity to both influence and use these concepts before they enter mainstream management practice. HBS Working Knowledge hbswk@hbs.edu no <![CDATA[Board Games: Timing of Independent Directors' Dissent in China]]> http://hbswk.hbs.edu/rss/7252.html Thu, 23 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7252.html

by Juan Ma and Tarun Khanna

Executive Summary — Independent directors are an integral part of corporate governance. Despite the copious scholarly debates surrounding board independence, however, little progress has been made in studying the inner workings of public boards. Fortunately, the regulatory environment in China offers a rare window to observe the inner workings of independent directors. This paper is one of the first statistical investigations of the circumstances under which so-called "independent" directors voice their independent views. The authors explore the following questions: 1) Why do independent directors dissent? 2) Under which circumstances is an independent director more likely to issue an open dissent? and 3) Does dissent matter sufficiently to affect independent directors' careers and firm performance? Unlike most of the previous models that view boards as a monolithic entity that "shares a common agenda on all matters," this study allows the authors to see boards as consisting of individuals with different utility functions and to examine board behaviors at the individual director level. Key concepts include:

  • Independent directors dissent more when social connections that might hold back a dissent is less constraining on one hand, and when firms have poor performance that might impose threats to independent directors' personal reputations on the other hand.
  • Boards can be reconceptualized: not as monolithic checks on managerial actions, but as social institutions with emergent norms, and sanctions and rewards to (non-)compliance on occasion.
  • The labor market not only rewards independent directors for their superior decision making expertise, but also punishes those who openly challenged listed companies' management teams.
  • For Chinese independent directors, this work suggests an inescapable dilemma whereby the Confucian doctrine of Golden Mean is the only survival guide. That is, independent directors must ensure that their relationships with listed companies are conducted on an open and mutually advantageous basis.
  • On one hand, independent directors need to build a good public reputation for being an active monitor, and on the other hand, they need to establish a good "private" reputation for being friendly with the controlling shareholders and top management.

Author Abstract

This paper examines the circumstances under which so-called "independent" directors voice their independent views on public boards in a sample of Chinese firms. Controlling for firm and board characteristics, we find that independent directors' dissent is associated with breakdown of social ties between the independent director and the board chairperson, who locates at the center of the board bureaucracy in China. In particular, independent directors tend to "time" their dissent into a restricted set of socially appropriate circumstances. Dissent is more likely to occur when the chairperson who appointed the independent director has left the board. Dissent also tends to occur at the end of board "games," defined as a 60-day window prior to departure of the board chairperson or departure of the independent director herself. The endgame effect is particularly strong, seeing 27% of the dissent issued at board "endgames," which represents only 4% of independent directors' average tenure. While directors with foreign experience are more likely to dissent, we do not find that academics, accounting, and law professionals are significantly more active in dissenting. We also show that dissent is consequential, to the director and the firm. For directors, dissent significantly increases the likelihood for a director to exit the director labor market. For firms, around announcement of dissent, firms suffer an economically and statistically significant cumulative abnormal return of -0.97%. Although literature has suggested that dissent might be reflective of diverse viewpoints, and perhaps beneficial in and of itself through reduction of firm variability, we do not find this offsetting beneficial effect to be strong.

Paper Information

]]> 7252 6491http://sands.hbs.edu/photos/facstaff/Ent6491.jpg Working Papers <![CDATA[Hidden Structure: Using Network Methods to Map System Architecture]]> http://hbswk.hbs.edu/rss/7262.html Wed, 22 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7262.html

by Carliss Y. Baldwin, Alan MacCormack, and John Rusnak

Executive Summary — All complex systems can be described in terms of their architecture, that is, as a nested hierarchy of subsystems. Despite a wealth of research highlighting the importance of understanding system architecture, however, there is little empirical evidence on the actual architectural patterns observed across large numbers of real world systems. In this paper, the authors developed robust and reliable methods to detect the core components in a complex system, to establish whether these systems possess a core-periphery structure, and to measure important elements of these structures. Overall, the findings represent a first step in establishing some stylized facts about the structure of real-world systems. Key concepts include:

  • The majority of systems analyzed in this non-random sample—67 percent to 76 percent—possess a core-periphery structure. Another 20 percent are considered borderline core-periphery. However, a significant number of systems lack such a structure. This implies a considerable amount of managerial discretion exists when choosing the "best" architecture for a system.
  • There are major differences in the number of core components across a range of systems of similar size and function, indicating that differences in design are not driven solely by system requirements.
  • Instead, these differences appear to be driven, in part, by the characteristics of the organization in which development occurs. Open, distributed organizations tend to develop modular designs with smaller "Cores"; whereas closed, collocated organizations tend to develop tightly-coupled designs with larger Cores.
  • The authors find that core components are often distributed throughout a system, rather than being concentrated in one place. Hence it is important not to assume that all key relationships in a system are located in a few subsystems. These issues are pertinent in software, given that legacy code is rarely re-written, but instead forms a platform upon which new systems are built.
  • The authors find no discernible pattern of direct dependencies between components that can reliably predict the number and location of core components. The results highlight the critical importance of indirect dependencies, which generate multiple paths along which changes and problems can propagate. These findings highlight the difficulties facing a system architect.

Author Abstract

In this paper, we describe an operational methodology for characterizing the architecture of technical systems and demonstrate its application to a large sample of software releases. Our methodology is based upon network graphs and allows us to identify and define three fundamental architectural patterns, which we call core-periphery, multi-core, and hierarchical. We apply our methodology to a sample of 1,286 software releases from 17 applications and find that 70% to 80% of these systems possess a core-periphery architecture under our classification scheme. This type of architecture is characterized by having a single dominant cyclic group (the Core) that is large relative to other cyclic groups and above a threshold with respect to system size. We find that the size of the Core varies widely, even for systems that perform the same function. These differences appear to be associated with different models of development-open, distributed organizations tend to develop systems with smaller Cores, while closed collocated organizations tend to develop systems with larger Cores. Our findings represent a first step in establishing some "stylized facts" about the fine-grained structure of large, real-world technical systems.

Paper Information

]]> 7262 6417http://sands.hbs.edu/photos/facstaff/Ent6417.jpg Working Papers <![CDATA[First Look: May 21]]> http://hbswk.hbs.edu/rss/7266.html Tue, 21 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7266.html Getting the most out of store liquidation

Store liquidation is a brutal but necessary part of retail—a means for investors to recover capital and managers to correct failed strategy. The new working paper Improving Store Liquidation, by Nathan Craig and Ananth Raman, offers a method that can improve net recovery on cost by up to 7 percent. The paper also identifies shortcomings with current store liquidation practice.

Do matching grants produce more philantropy?

Almost any National Public Radio listener is familiar with the concept of the matching grant. If you, dear listener, donate $50, a company will match that donation with an equal amount. Do matching grants really encourage more charitable giving? A short paper by Michael Sanders, Sarah Smith, and Michael I. Norton suggests more efficient methods are available. Read their paper, Non-Standard Matches and Charitable Giving. The results are important in a number of fields, they point out. "While increasing donation rates is of natural interest to charities and their fundraisers, it is also of academic interest to both economists and psychologists seeking to understand altruistic behaviors, and to governments, many of which seek to encourage the charitable production of public goods."

Understanding that big pile of data

What good is Big Data is you don't know how to use it? The upcoming book Keeping Up with the Quants: Your Guide to Understanding and Using Analytics provides some of the techniques needed to better understand and use information. According to authors Thomas H. Davenport and Jinho Kim, "This book offers a variety of practical tools and examples to improve a manager's understanding of business analytics, and to enhance their thinking and decision processes." It is scheduled to be published in June by Harvard Business Review Press.

More details below.

— Sean Silverthorne

Publications

  • 2006
  • Harvard Business Review Press

Keeping Up with the Quants: Your Guide to Understanding and Using Analytics

By: Davenport, Thomas H., and Jinho Kim

Abstract—Managers today need to be able to analyze and make sense of data. They need to be conversant with analytical technology and methods and to make decisions on quantitative analysis. This book offers a variety of practical tools and examples to improve a manager's understanding of business analytics, and to enhance their thinking and decision processes.

Publisher's link: http://hbr.org/product/keeping-up-with-the-quants-your-guide-to-understan/an/11177-HBK-ENG

  • 2006
  • Strategic Management Journal

Location Strategies for Agglomeration Economies

By: Alcácer, Juan, and Wilbur Chung

Abstract—Geographically concentrated industry activity creates pools of skilled labor and specialized suppliers and increases opportunities for knowledge spillovers. The strategic value of these agglomeration economies may vary by firm, depending upon the relative value of each economy, and upon firm and agglomeration economy traits. To better determine when a firm will be attracted to agglomeration economies, we develop a three-layer framework. The first layer assesses the relative importance of skilled labor, suppliers, and knowledge spillovers. The second layer considers whether firms can benefit from geographic concentration without co-locating. The final layer examines why some firms are more inclined to co-locate than others based upon firm and agglomeration economy traits. We test our framework on the U.S. location choices of new manufacturing entrants between 1985 and 1994 and find that firms are far more attracted to skilled labor and specialized suppliers than they are to potential knowledge spillovers, even in R&D intensive industries. We also find that leading firms will be more attracted to pools of labor, suppliers, and potential knowledge spillovers when their own contributions are less fungible and cannot be easily leveraged for strategic advantage by proximate competitors.

Working Papers

Prosocial Bonuses Increase Employee Satisfaction and Team Performance

By: Anik, Lalin, Lara B. Aknin, Michael I. Norton, Elizabeth W. Dunn, and Jordi Quoidbach

Abstract—In two field studies, we explore the impact of providing employees and teammates with prosocial bonuses, a novel type of bonus spent on others rather than on oneself. In Experiment 1, we show that prosocial bonuses in the form of donations to charity lead to happier and more satisfied employees at an Australian bank. In Experiment 2, we show that prosocial bonuses in the form of expenditures on teammates lead to better performance in both pharmaceutical sales teams in Belgium and sports teams in Canada. These results suggest that a minor adjustment to employee bonuses-shifting the focus from the self to others-can produce measurable benefits for employees and organizations.

Download working paper: http://www.hbs.edu/faculty/product/44800

Abstract—Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks' leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks' low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a 10 percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.

Download working paper: http://www.nber.org/papers/w19018

Hidden Structure: Using Network Methods to Map System Architecture

By:Baldwin, Carliss Y., Alan MacCormack, and John Rusnak

Abstract—In this paper, we describe an operational methodology for characterizing the architecture of technical systems and demonstrate its application to a large sample of software releases. Our methodology is based upon network graphs and allows us to identify and define three fundamental architectural patterns, which we call core-periphery, multi-core, and hierarchical. We apply our methodology to a sample of 1,286 software releases from 17 applications and find that 70% to 80% of these systems possess a core-periphery architecture under our classification scheme. This type of architecture is characterized by having a single dominant cyclic group (the Core) that is large relative to other cyclic groups and above a threshold with respect to system size. We find that the size of the Core varies widely, even for systems that perform the same function. These differences appear to be associated with different models of development-open, distributed organizations tend to develop systems with smaller Cores, while closed collocated organizations tend to develop systems with larger Cores. Our findings represent a first step in establishing some "stylized facts" about the fine-grained structure of large, real-world technical systems.

Download working paper: http://www.hbs.edu/faculty/product/44789

If Technology Has Arrived Everywhere, Why Has Income Diverged?

By: Comin, Diego A., and Martí Mestieri Ferrer

Abstract—We study the lags with which new technologies are adopted across countries and their long-run penetration rates once they are adopted. Using data from the last two centuries, we document two new facts: there has been convergence in adoption lags between rich and poor countries, while there has been divergence in penetration rates. Using a model of adoption and growth, we show that these changes in the pattern of technology diffusion account for 80% of the Great Income Divergence between rich and poor countries since 1820.

Download working paper: http://www.nber.org/papers/w19010

Improving Store Liquidation

By: Craig, Nathan, and Ananth Raman

Abstract—Store liquidation is the time-constrained divestment of retail outlets through an in-store sale of inventory. The retail industry depends extensively on store liquidation, not only as a means for investors to recover capital from failed ventures, but also to allow managers of going concerns to divest stores in efforts to enhance performance and to change strategy. Recent examples of entire chains being liquidated include Borders Group in 2012, Circuit City in 2009, and Linens `n Things in 2008; the value of inventory sold during these liquidations alone is $3B. The store liquidation problem is related to but also differs substantially from the markdown optimization problem that has been studied extensively in the literature. This paper introduces the store liquidation problem to the literature and presents a technique for optimizing key decision variables, such as markdown, inventory, and store closing decisions during liquidations. We show that our approach could improve net recovery on cost (i.e., the profit obtained during liquidations stated as a percentage of the cost value of liquidated assets) by 2 to 7 percentage points in the cases we examined. The paper also identifies ways in which current practice in store liquidation differs from the optimal decisions identified in the paper and traces the consequences of these differences.

Download working paper: http://www.hbs.edu/faculty/product/44781

Abstract—This paper, based on a five-year longitudinal study at two UK-based banks, documents and analyzes the practices used by risk managers as they aim to gather and establish influence in their organizations. Specifically, we examine how influence-seeking risk managers (1) establish and maintain interpersonal connections with decision makers and how they (2) adopt, deploy, and reconfigure tools-practices that we define collectively as toolmaking. Using prior literature and our empirical observations, we distinguish between influence activities to which toolmaking was not central, and those to which toolmaking was important. As for the influence activities which imply toolmaking, we can outline the contours of three modes of operation, which describe experts operating as Compliance Experts, Engaged Toolmakers, or Technical Champions, depending on the communicability of the tools and on the extent to which the experts are involved in practices related to those tools. Our study contributes to the accounting and management literature on influence-gathering, underlining that toolmaking plays a vital role in explaining how functional experts may compete in the intraorganizational marketplace for influential ideas and the attention of decision makers. Specifically, as risk management becomes more tool-driven and toolmaking may become more prevalent, our study provides a more nuanced understanding of the nature and consequences of risk managers' influence activities. An explicit focus on toolmaking extends accounting research that has hitherto focused attention on the structural arrangements and interpersonal connections when explaining the emergence of the influential financial expert.

Download working paper: http://www.hbs.edu/faculty/product/39382

Abstract—How do certain risk measurements in organizations come to be seen as more reliable and acceptable than others? Taking a multiple-control perspective, I investigate the aftermath of a control debacle at a financial services company (MultiBank), focusing on its insurance division (EurInsurance), which suffered large losses in the European insurance crisis of 2002-2003. At MultiBank, the insurance crisis opened up a field of contestability in which new control agents got the opportunity to become implicated in divisional control. The struggle for custody over divisional control was a micropolitical process of interprofessional competition, played out between accountants and risk controllers who promoted conflicting measures of the key strategic uncertainty, EurInsurance's capital adequacy. The control agents engaged in credentializing strategies (Power, 1992); they mobilized and drew on different cultural resources to construct the reliability of their techniques and to discredit and "minoritize" the others. This credibility contest was won by the accountants who (unlike their opponents) were able to demonstrate the "institutional appropriateness" of their controls. Importantly, the fate of the competing control systems was contingent, not on how well their technologies addressed the problem of EurInsurance's capital adequacy, but rather on the controllers' capacity to generate top managerial acceptance and a widespread consensus among both internal and external stakeholders. The outcome of this type of professional competition is not determined by claims about representing the underlying economic reality, but by claims about representing those who care about it most. While competing controller groups have been observed to appeal to top management's logic of functionalism, this paper argues that, in certain circumstances, controller groups may successfully draw on the logic of appropriateness as they supply new control systems.

Download working paper: http://www.hbs.edu/faculty/product/42640

Abstract—Enterprise Risk Management (ERM) has become a crucial component of contemporary corporate governance reforms. Now that principles, guidelines, and standards abound, it is time to take stock. Has the idea of ERM reached maturity with proven, unambiguous concepts and tools? Or is it still emerging and unproven? Or is it simply taken for granted, its value "proven" by the apparent demand? This paper portrays ERM as an evolving discipline and presents empirical findings on its current state of maturity, as evidenced by academic surveys and our own field research. Reviewing academic surveys, we observe that contingency theories of ERM have become a current trend but have produced few significant results. By surveying the development and content of these theories we argue that they have been based on an inadequate and insufficiently specified concept of ERM. Based on a ten-year field project, over 250 interviews with senior risk officers, and three detailed case studies in high reliability organizations, we put forward a more nuanced specification of ERM, outlining its emerging design parameters that suggest observable variation in the "ERM mix" adopted by organizations. We also propose a so far misunderstood or neglected contingent variable: the type of risk that the ERM practices address. We outline a "minimum necessary contingency framework" (Otley, 1980) that is sufficiently nuanced, yet observable to empirical researchers so that they may, in due course, hypothesize about "fit" between contingent variables, such as risk types and the ERM mix, as well as outcomes (organizational effectiveness).

Download working paper: http://www.hbs.edu/faculty/product/44034

Non-Standard Matches and Charitable Giving

By: Sanders, Michael, Sarah Smith, and Michael I. Norton

Abstract—Many organizations, including corporations and governments, wish to encourage charitable giving, and offer incentives for their employees, customers, and citizens to do so. The most common of these incentives is a match rate, where the organization agrees to pay, for example, $1 for every $1 donated. However, these incentives may not be efficient. In this short article we suggest alternative ways of matching that existing theory and data suggest might be more effective at encouraging donations. These include non-linear matching, social (and team) matching, and lottery matching-each of which novel schemes could be tested empirically against a standard match incentive.

Download working paper: http://www.hbs.edu/faculty/product/44797

The Rich Get Richer: Enabling Conditions for Knowledge Use in Organizational Work Teams

By: Valentine, Melissa, Bradley R. Staats, and Amy C. Edmondson

Abstract—Individuals benefit from accessing others' expertise, known as knowledge sourcing. Previous research has theorized supply-side explanations (e.g., availability of knowledge) and demand-side explanations (e.g., a challenging task) for why people source knowledge, but thus far the influence of information processing-how people interpret and synthesize information-on knowledge sourcing has received little attention. In this paper, we introduce an information processing perspective on knowledge sourcing by theorizing how knowledge sourcing is enabled by conditions known to influence individual and group information processing. We develop a multi-level model to examine knowledge sourcing from an electronic knowledge repository (KR) and find that when individuals have strong information processing capabilities-stemming from experiential knowledge-bases like work experience or experience with the organizational context-they engage in more frequent KR sourcing. Also, when individuals are embedded in teams with strong social information processing capabilities, such as teams with experience working together, they engage in more KR sourcing. The multi-level perspective is critical: we also find that team experience moderates the relationship between individual experience and KR sourcing. Our paper advances theory on knowledge management and offers insight for supporting team performance.

Download working paper: http://ssrn.com/abstract=2101693

Cases & Course Materials

  • Harvard Business School Case 309-004

Loews Corporation: Corporate Strategy as a Portfolio

In 2007, Loews Inc., under the leadership of James Tisch, was considering whether to buy natural gas properties from Dominion Resources. The question is whether the acquisition fits the corporate strategy. In exploring the questions, students will have the chance to consider what is in fact a corporate strategy, how Loews' corporate strategy adds value, and how the way Loews is managed contributes to the results-a tripling of market value in five years.

Purchase this case:
http://hbr.org/search/309004-PDF-ENG

  • Harvard Business School Case 213-100

Assured Guaranty

Nate Katz at Yokun Ridge Capital Management is evaluating an investment in Assured Guaranty, a municipal bond insurance company that is trading at a discount to book value.

Purchase this case:
http://hbr.org/search/213100-PDF-ENG

  • Harvard Business School Case 113-094

BTG Pactual: Preserving a Partnership Culture

No abstract available.

Purchase this case:
http://hbr.org/search/113094-PDF-ENG

  • Harvard Business School Case 613-031

Microsoft Server & Tools

In 2011, Microsoft's Server & Tools Business (STB) was large, fast growing, and highly profitable on the strength of traditional packaged product lines led by the Windows Server operating system. Even as the current packaged business was performing exceptionally well, Microsoft's leadership understood that cloud-based solutions would become more prevalent in the future. As the newly appointed president of STB, Satya Nadella had to find a balance between managing the current packaged business and building the cloud offering.

Purchase this case:
http://hbr.org/search/613031-PDF-ENG

  • Harvard Business School Case 613-046

Microsoft Server & Tools (B)

Supplement for case 613-031. Update on progress of Microsoft's Server & Tools Business through July 2011. Satya Nadella and his team explore whether or not to support Linux on Windows Azure.

Purchase this case:
http://hbr.org/search/613046-PDF-ENG

  • Harvard Business School Case 613-047

Microsoft Server & Tools (C)

Supplement for case 613-031. Update on progress of Microsoft's Server & Tools Business through August 2012. Pleased with the Windows Azure product, Satya Nadella must decide how to attract customers to the cloud-based platform.

Purchase this case:
http://hbr.org/search/613047-PDF-ENG

  • Harvard Business School Case 813-018

Messer Griesheim (A) (Abridged)

The case explores the steps taken by private equity investors to restructure a European industrial gas concern held by Hoechts and complicated by partial family ownership. The case considers the relationship the partners forged with the family owners to bring about a favorable exit for the private equity partners and ownership for the Messer family.

Purchase this case:
http://hbr.org/search/813018-PDF-ENG

  • Harvard Business School Case 113-001

Agero: Enhancing Capabilities for Customers

This case illustrates the importance of choosing a primary customer as the basis for organization design. Cross Country Group managers adjusted resource allocation, organization design, and performance measures over time to transform Cross Country Group from an opportunistic family business into a sophisticated industry leader. Cross Country (renamed Agero in 2011) operated call centers that coordinated with thousands of small, independent towing companies-Cross Country's "service provider network"-to deliver roadside assistance services, such as vehicle towing and tire changes, to motorists covered by automakers' warranties and insurers' policies. The case describes Cross Country's evolution from 1972 to 2012 in three phases. This allows students to, at various stages, grapple with defining Cross Country's business (what business is it, and should it be, in?) and its primary customer (vehicle makers and insurers? motorists? service providers?). The answers to these questions have important implications for organization design. From 1972 to 1998, founder Sidney Wolk built the business through personal relationships with clients. A passionate entrepreneur, his approach to growth-secure customers first, figure out how to make money later-was remarkably successful, if sometimes chaotic. Facing an increasingly commoditized marketplace, in 1998 Wolk hired professional managers who implemented formal performance management systems and invested in sophisticated data analytics. From 1998 to 2007 (phase two), these investments allowed Cross Country to quantify service providers' impact on motorist satisfaction, monitor service providers' performance, and introduce programs to strengthen top-performing service providers' loyalty to Cross Country. Concurrently, the company undertook a two-step organization redesign to focus more resources on service providers (the new primary customer?), improve market-focused innovation, and increase client satisfaction. In phase three, from 2008 to 2012, Cross Country entered the high-tech telematics/connected-vehicle business, invested in additional innovations to strengthen its service provider network, and rebranded itself as "Agero." Wolk and his team believed Cross Country had "more driver information than any other company." The case ends with key decisions for the future.

Purchase this case:
http://hbr.org/search/113001-PDF-ENG

  • Harvard Business School Case 613-054

Groom Energy Solutions: Selling Efficiency

Groom Energy Solutions helps organizations reduce their energy use and costs through the implementation of energy efficiency measures, which create long-term financial and environmental benefits. With early success serving customers in the cold storage and industrial manufacturing sectors, the seven-year-old company must now decide whether to continue expanding within these segments or transition into commercial retail and office buildings, which offer growth potential and unique challenges. Groom Energy must also decide which geographic regions provide the best opportunity. This case study provides background on the history of the energy efficiency industry, the energy efficiency paradox, and the benefits and challenges of a business focused on implementing efficiency measures. The case is particularly relevant to courses focused on energy management, environmental sustainability, and entrepreneurship within the energy and sustainability areas.

Purchase this case:
http://hbr.org/search/613054-PDF-ENG


]]> 7266 First Look Getting the most out of store liquidation

Do matching grants produce more philantropy?

Understanding that big pile of data

]]> <![CDATA[If Technology Has Arrived Everywhere, Why Has Income Diverged?]]> http://hbswk.hbs.edu/rss/7263.html Tue, 21 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7263.html

by Diego A. Comin and Martí Mestieri Ferrer

Executive Summary — To respond to the question posed in the title of their paper, the authors explore one potential driver—the dynamics of technology adoption. Using a stylized model of adoption that accounts for individual technologies, the authors identify two margins of adoption: adoption lags and penetration rates. Analyzing a panel of adoption lags and penetration rates for 25 technologies and 132 countries, they show that adoption lags have converged across countries over the last 200 years, while penetration rates have diverged. Feeding these patterns into the aggregate representation of their model economy, they next evaluate the effects of cross-country evolution of adoption patterns on the cross-country evolution of income growth. The paper's main finding is that the evolution of adoption patterns accounts for the vast majority of cross-country evolution of income growth for many country groupings. Therefore, adoption dynamics are at the core of cross-country differences in per-capita income over the last 200 years, a phenomenon known as the Great Divergence. Key concepts include:

  • This paper explores whether the dynamics of technology can help us account for the cross-country evolution of productivity and income growth over the last 200 years.
  • Findings show that there has been convergence in adoption lags between rich and poor countries, while there has been divergence in penetration rates.

Author Abstract

We study the lags with which new technologies are adopted across countries and their long-run penetration rates once they are adopted. Using data from the last two centuries, we document two new facts: there has been convergence in adoption lags between rich and poor countries, while there has been divergence in penetration rates. Using a model of adoption and growth, we show that these changes in the pattern of technology diffusion account for 80% of the Great Income Divergence between rich and poor countries since 1820.

Paper Information

]]> 7263 438581http://sands.hbs.edu/photos/facstaff/Ent438581.jpg Working Papers <![CDATA[The Long-Term Fix to US Competitiveness]]> http://hbswk.hbs.edu/rss/7268.html Mon, 20 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7268.html

At an event at Harvard Business School that was three parts analysis and one part rally, participants tried to chart a new path forward for the sluggish US economy—a move that may require a new definition of "competitiveness."

Highlighting the panel discussions Wednesday on "US Competitiveness: Paths Forward," an HBS initiative, was an appearance by Boston Mayor Thomas Menino, who was brought in by wheelchair but rose to his feet to speak about how the city could be a model for the nation.

"I believe that for America to be more competitive, it must be more collaborative," Menino said. "This approach delivered results for our city. It will also deliver results to our country."

The mayor cited development of the South Boston waterfront and the creation of summer jobs for youth. "Just look at what happened after the Marathon attack," he said. "City, state, and federal official worked together to collect evidence, keep our city safe, and bring the bombers to justice. Everyone put their egos aside.

"Sometimes I wonder if Washington is capable of doing the same," Menino added. "We have to put away this Democrat-Republican nonsense. They get elected to help people, but it's criminal those people in Washington don't work together, don't speak together."

Likewise, Michael E. Porter, Bishop William Lawrence University Professor, and Jan W. Rivkin, Bruce V. Rauner Professor of Business Administration, each led spirited discussions on how HBS alumni could play an active role in the national debate, countering the "circus" in D.C.

"We are trying to understand what we can do to actually move the needle on both the quality of the debate and the facts underlying the debate and the political choices and compromises that we can make," said Porter.

While many people say the country needs to be more competitive, "we don't have a robust and common understanding of competitiveness," he said. "What this means is that people who should be allies are at cross-purposes with each other."

The US Competitiveness Project put forth this definition: "The United States is a competitive nation to the extent that firms operating in the U.S. can compete successfully in the global economy while supporting high and rising living standards for the average American."

Republicans may focus on the global economy angle, Democrats on the living standards, but "competitiveness occurs when we do both together," Porter said.

Rivkin put the issue in historical context: "We worried at the beginning of the Industrial Age that the advent of mass production would mean there would be no jobs for the vast majority of the population, but we reinvested and gained productivity and expanded the economy."

Innovation has driven the country's strength in world markets and quality of life, said Rosabeth Moss Kanter, the Ernest L. Arbuckle Professor of Business Administration, a panel moderator. "But that strength has to be nurtured."

She added, "We count on start-ups for job growth in America. Start-ups turn out to be more successful when they are also linked to a rich ecosystem of partnerships and collaborations."

Three panelists outlined some of those collaborations. Mary L. Fifield, president of Bunker Hill Community College, described that school's partnership with a consortium of local businesses to create the Learn and Earn program, in which students work a day or two a week at a major corporations, receive mentorship, and are matched with a "work buddy." The model should be scaled up to include the state's other 14 community colleges, she said.

Gregory Bialecki, secretary for the Massachusetts Executive Office of Housing and Economic Development, acknowledged that government is used to making rules, not partnerships, and that state officials must now learn to "be more collaborators and not order givers."

Gerald Chertavian, founder and CEO of Year Up, focused on how education must respond to workforce needs. Today 6.7 million 16-to 24-year-olds with a high school education are out of school and out of work, he said. Yet, "Thirty percent of jobs in this country are middle-skilled jobs, which means you need a high school degree but not necessarily a four-year degree."

Any discussion of the US economy must include an analysis of the debt, and Robert Kaplan, the Marvin Bower Professor of Leadership Development Emeritus, cheerfully admitted he would provide "the gloomy panel" with David Walker, founder and CEO of Comeback America Initiative. The picture they painted was gloomy, indeed.

"The bottom line is that the government has grown too big, promised too much, waited too long to restructure, and it needs to restructure sooner rather than later," Walker said. He said the government lacks three things taught in every management 101 class: a plan, a budget, and metrics for performance. "We're zero for three - that's called a strike out."

About the author

Stephanie Schorow writes for the Harvard Gazette, where this article first appeared.

]]> 7268 6532http://sands.hbs.edu/photos/facstaff/Ent6532.jpg6539http://sands.hbs.edu/photos/facstaff/Ent6539.jpg6486http://sands.hbs.edu/photos/facstaff/Ent6486.jpg6487http://sands.hbs.edu/photos/facstaff/Ent6487.jpg Views on News <![CDATA[Making America an Industrial Powerhouse Again]]> http://hbswk.hbs.edu/rss/7255.html Mon, 20 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7255.html

As part of his administration's strategy to rejuvenate American manufacturing, President Obama has called for the creation of a National Network of Manufacturing Innovation (NNMI) to advance and diffuse novel manufacturing technologies. To launch it, he has allocated $1 billion in the 2013 budget.

Critics have denounced this proposal as yet another government intrusion into the market and a futile attempt to "pick winners." What these critics ignore is that the US government has a long history of investing in research that supports innovation in American industry.

After World War II, hundreds of billions of federal dollars flowed through agencies like the National Science Foundation, the Department of Defense, the Department of Energy, and NASA to pay for the basic and applied research that spawned the semiconductor, computer, software, aerospace, and telecommunications industries. Research funded by the Defense Advanced Research Projects Agency (DARPA) sowed the seeds for the internet and advanced computer graphics. And massive investments by the National Institutes of Health in biomedical research, including the Human Genome Project, helped make the United States the hotspot for biomedical innovation. The lessons from our history are clear: Where we invest in science, we gain enormous economic pay-offs.

In principle, therefore, there is no reason why the same logic should not apply to manufacturing. Just as the National Institutes of Health have pushed forward the frontiers of medical science, so should the NNMI be capable of doing the same for manufacturing. There are many areas of science that underpin advanced manufacturing, including biotechnology, nanotechnology, advanced materials, computer science, optics, and various engineering disciplines. We need to get over the outdated notion that manufacturing is "mature" and unconnected to science. Anyone who believes that should take a tour of a factory that produces semiconductors or biotechnology drugs. In an ever more competitive global economy, US manufacturing can thrive only if it is at the leading edge of knowledge.

History provides some guidelines for making sure the NNMI lives up to its potential:

  • Have a broad agenda: Government-funded research is most productive when it lays broad foundations rather than targets specific technologies for use in particular industries. Consider the difference between the government's successful effort to map the human genome and its failed attempt to subsidize "green energy" companies like Solyndra. The former paved the way for an enormous range of subsequent commercial R&D efforts by pharmaceutical, biotechnology, diagnostics, and agricultural companies. The latter was a very specific commercial bet. Placing these commercial bets requires a depth of understanding of markets and customers that only the private sector possesses.

  • Keep a balance between exploratory research and commercial need: While the NNMI should focus on broad, long-term research, it needs to resist the temptation to develop technologies that the private sector has no interest in. To avoid this, its research agenda should be influenced by industry and by academics with close ties to industry. Similarly, the NNMI itself needs to be run by people who have both strong scientific and practical expertise. The currently proposed governance model-which balances government, industry, and academic representation-is the right one. suggests that these employees were actually turned off—and their motivation dropped—when the managers introduced awards for good behavior they were already exhibiting.

  • Don't focus on regional economic interests: Unlike the National Institutes of Health, the NNMI is following a decentralized model, with different institutes to be located in different parts of the US. Decentralization has its advantages (e.g., less bureaucracy), but there is also a danger. It would be easy for each institute to devolve into a regionally focused center, particularly if regional stakeholders become overly dominant, and the implicit goal becomes to support local industries. If this occurs, the NNMI is doomed to failure, since no one region has a monopoly on the expertise needed to develop world-class technology. Regardless of its physical location, each center must engage academic and industrial partners from around the country. suggests that these employees were actually turned off—and their motivation dropped—when the managers introduced awards for good behavior they were already exhibiting.

  • It's all about leveraging talent: Global competitive advantage does not come from better machines, better software, or even better intellectual property. In today's world, these are all highly mobile factors that companies located anywhere can access quickly. Talent is a different story. It is much less mobile. To access talent, companies have to be close to it. The National Institutes of Health created a lot of scientific know-how that flowed very quickly around the world. But it also created a talent pool in the US biomedical field that is second to none. And the only way to get that talent is for companies-both domestic and foreign-to do their R&D here. That's why pharmaceutical and biotechnology companies from around the world are putting their key research laboratories in places like Boston and San Diego. Creating new technology is not enough. If the NNMI can build a first-rate talent pool of scientists, engineers, and workers with deep expertise in manufacturing disciplines, it will go a long way toward making the United States an industrial powerhouse again.

About the author

Gary P. Pisano is the Harry E. Figgie Professor of Business Administration at Harvard Business School and author (with Willy Shih) of Producing Prosperity: Why America Needs a Manufacturing Renaissance (Harvard Business Review Press, 2012).

]]> 7255 6530http://sands.hbs.edu/photos/facstaff/Ent6530.jpg Op-Ed <![CDATA[Marketplace or Reseller?]]> http://hbswk.hbs.edu/rss/7258.html Thu, 16 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7258.html

by Andrei Hagiu and Julian Wright

Executive Summary — Retailers including Best Buy and Safeway act as intermediaries between suppliers and buyers, reselling the products they purchase from suppliers to buyers. Other intermediaries, such as eBay or Mall of America, act as marketplaces in which suppliers sell directly to buyers via a platform. In the existing literature, the structure of an intermediary—reseller or marketplace—is taken as given. It is important to recognize, however, that intermediaries can often choose which mode they operate under; this paper analyzes that choice. What are the economic tradeoffs that drive an intermediary to adopt one mode or the other? The authors present a framework in which the allocation of residual control rights creates meaningful distinctions between the two modes, and emphasize a fundamental tradeoff between local information and coordination that was not raised in earlier literature. Overall, the analysis provides a new style of modeling intermediaries' strategic positioning decisions. Key concepts include:

  • A fundamental distinction between marketplaces and resellers is the allocation of control rights between independent suppliers and the intermediary over non-contractible decisions (such as prices, advertising, customer service, responsibility for order fulfillment, etc.) pertaining to the products being sold.
  • There is a fundamental tradeoff faced by an intermediary choosing whether to function as a marketplace or a reseller. The marketplace mode allows for better exploitation of suppliers' location information, whereas the reseller mode leads to better coordination of activities that have cross-product spillovers.
  • Among other findings, the authors' model shows that cost differences tilt the tradeoff in favor of the marketplace when there are many long-tail products, and in favor of the reseller when there are a few short-tail products.

Author Abstract

An intermediary can choose between functioning as a marketplace, on which suppliers sell their products directly to buyers, or as a reseller, purchasing products from suppliers and selling them to buyers. In our model, this choice comes down to whether residual control rights over non-contractible decision variables are better held by suppliers (the marketplace mode) or by the intermediary (the reseller mode). We focus on a single non-contractible decision variable―the level of demand-enhancing marketing activities. The reseller is better able to coordinate these activities across products, whereas the marketplace mode benefits from allowing independent suppliers to tailor their marketing activities to local information about buyer demand. In the benchmark setting, the marketplace mode is preferred if and only if the variance of local information exceeds the squared value of spillovers from marketing activities across products. We explore several generalizations, showing how the benchmark tradeoff is modified in different settings.

Paper Information

]]> 7258 337239http://sands.hbs.edu/photos/facstaff/Ent337239.jpg Working Papers <![CDATA[From McRibs to Maseratis: The Power of Scarcity Marketing]]> http://hbswk.hbs.edu/rss/7236.html Wed, 15 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7236.html

Editor's note: Think money can't buy happiness? Behavioral economists Elizabeth Dunn and Michael Norton beg to differ. It actually can, they say—but only if we spend it the right way.

In their book released this week, Happy Money: The Science of Smarter Spending, Dunn and Norton draw on years of quantitative and qualitative research to explain how we can turn cash into contentment. The key lies in changing our spending habits and adhering to five key principles: Buy Experiences (research shows that material purchases are less satisfying than vacations or concerts); Make it a Treat (limiting access to our favorite things will make us keep appreciating them); Buy Time (focusing on time over money yields wiser purchases); Pay Now, Consume Later (delayed consumption leads to increased enjoyment); and Invest in Others (spending money on other people makes us happier than spending it on ourselves).

Happy Money provides valuable information not only for pleasure-seeking consumers, but also for companies looking to increase the happiness of both employees and customers. The following excerpt describes how the power of limited access led to fanatical demand of such products as McDonald's "McRib" sandwich and KFC's "Double Down."

MAKE IT A TREAT

From Happy Money: the Science of Smarter Spending

By Elizabeth Dunn and Michael Norton

In June 2011, a chorus of tweets heralded the arrival of a culinary wonder:

@BJIT: #doubledown is coming back!!! God bless the colonel!

@kevinelop: OMG!! . . . The Double Down is back at KFC!!!

@iamToddyTickles: KFC's #doubledowns for Breakfast. Mmmmm. Mmmmmm. Yummmmmmy. I'm full.

Happy Money: The Science of Smarter Spending Despite his precious Twitter handle, iamToddyTickles appears to be a fully grown man in his profile picture, yet his tweet echoes the slobbery exuberance of Scooby Doo. What could have prompted such an onslaught of emotion, ranging from unadulterated excitement to utter incoherence? KFC's Double Down features two slices of bacon, two kinds of cheese, and the Colonel's secret sauce, all sandwiched between two slabs of fried chicken. According to KFC, it's "so meaty, there's no room for a bun!"

This bunless "sandwich" was a hit in the United States, but in Canada, it was a sensation. The Double Down (translated for our French-Canadian friends as Coup Double, or "Double Punch") made KFC history, becoming the chain's best-selling new item in Canada ever. When the sandwich made its Canadian debut in the fall of 2010, KFC sold a million Double Downs in less than a month, enough "to stretch across 2,083 hockey rinks," according to the company's press release. (For readers unfamiliar with Canadian culture, all Canadian measurements are in hockey rink units, or HRUs.) Social media activity was intense, and consumers even organized Double Down "Bro Downs" where men competed to see who could guzzle the most Double Downs.

In response to the initial runaway success of its product, KFC pulled the sandwich off the menu across most of Canada. This move may seem strange in an industry where a pivotal goal—in the words of Coca-Cola's long-standing mantra—is to be "within an arm's reach of desire." According to KFC Canada's chief marketing officer, David Vivenes, KFC is about "making moments that are so good." But by removing the Double Down from the menu, KFC made the moment when it came back in 2011 not just "so good," but even better. Nor is KFC alone in adopting this approach. McDonald's has pursued a similar strategy with its McRib sandwich, a ground pork patty with barbecue sauce, onions, and pickles. Although pork supplies are steady, the McRib has been continually taken off the market and reintroduced—always for a limited time—over the past three decades. Ashlee Yingling, of McDonald's media relations department, explained that the company makes the McRib available in the fall, thereby creating nostalgia for summer barbecues.

The consumer response has been obsession. If you want to know when and where you might get your hands on a McRib, you can visit McRib fan Alan Klein's McRib Locator website, a United States map with a comprehensive list of confirmed, possible, and questionable McRib sightings. McDonald's kicked off its latest McRib launch with a "Legends of the McRib" event in New York City. The McRib was a key contributor to a 4.8 percent increase in company sales in November 2010.

Long before innovations like bunless sandwiches and boneless ribs, Disney began harnessing the power of limited availability by making its movies available for limited periods. The company locks away Dumbo, Cinderella, Peter Pan, and other hits in the "Disney vault," where they remain unavailable for years at a time. Like Cinderella herself, these movies rush out of the ball while the party's still going strong, before the magic wears off. Many other companies adopted similar strategies, and the psychologist Robert Cialdini devotes an entire chapter of his classic book Influence to the creative and downright crafty ways in which scarcity has been used to move product. Although Cialdini admits to a "grudging admiration for the practitioners who made this simple device work in a multitude of ways," he urges readers to resist the lure of scarcity marketing, coaching them on "how to say no." If we take Silverman's mantra and the science behind it seriously, however, scarcity marketing starts to look like a win-win. That is, people may savor everything from the Double Down to Dumbo more when they know these delights won't be available forever, increasing their own satisfaction even as companies ring up increased sales.

Applying this principle is straightforward when it comes to ephemeral delights such as movies and bunless sandwiches. But what about major purchases? Derek Lee is an aspiring actor and filmmaker who owns a beautiful, bright red Mini Cooper. If you owned a sporty little car, you might be tempted to drive it all the time, settling in to the comfy leather seats whenever you needed to get groceries or meet friends for dinner. But Derek lives in Vancouver, Canada, where public transit is excellent and car insurance is expensive. So, when Derek first got the Mini Cooper, he kept it in the garage and insured it only on the days when he really wanted to use it, rather than paying regular monthly car insurance and using the car every time he needed to run an errand. As his mildly traumatized former passengers can attest, Derek got the most out of those days, hugging turns and accelerating through straightaways like he was auditioning for a car commercial. Recently, he decided to insure his car full-time, but now, he says, driving is "just about contained road rage and not killing people." He looks back wistfully on the earlier years, when he "drove exuberantly."

Car-sharing companies like Zipcar provide customers with a similar opportunity for exuberance by turning driving back into a treat. Whereas traditional car rental companies choose standard cars in the dullest colors of the rainbow, the first Zipcar was a tricked-out lime-green Volkswagen Beetle. The founder and former CEO of Zipcar, Robin Chase, pointed to the key difference between driving your own car and driving a Zipcar: You use your own car for everything. Zipcars are for "outings." Higher-end companies, like the Classic Car Club, founded in London in 1995, take this approach to its logical extreme. For a hefty membership fee, the Classic Car Club gives members access to a "staggeringly stylish fleet of cars," including Ferraris and Maseratis. In Manhattan, club members pay almost $11,000 for thirteen days of driving the club's "high-end supercars." This doesn't sound like a bargain. But the cost of actually owning one of these cars is mind-boggling. And we're willing to bet that members' attention stays focused on the "supercars" during those magical thirteen days, making each of those eleven thousand dollars count.

Car-sharing is now a familiar concept, but creative companies are making it possible for their clients to share ownership and access to just about everything, from villas and handbags to dogs and French truffle trees. According to our favorite Portuguese saying, "You should never have a yacht; you should have a friend with a yacht." (To be honest, it's also the only Portuguese saying we know.) By joining SailTime, members can live the Portuguese dream by sharing a yacht with up to seven other people. In describing SailTime, a recent media story warned consumers that sharing the yacht means "there is no guarantee you will always be able to use it when you want." This apparent limitation is precisely what helps consumers make it a treat. Limiting your access to everything from the McRib to Maseratis helps to reset your cheerometer. That is, knowing you can't have access to something all the time may help you appreciate it more when you do.

About the authors

Elizabeth Dunn is an associate professor of psychology at the University of British Columbia. Michael Norton is an associate professor of business administration and the Marvin Bower Fellow at Harvard Business School.

From Happy Money: The Science of Smarter Spending, by Elizabeth Dunn and Michael Norton. Copyright © 2013 by Elizabeth Dunn and Michael Norton. Reprinted by permission of Simon & Schuster, Inc.

]]> 7236 326229http://sands.hbs.edu/photos/facstaff/Ent326229.jpg Research & Ideas <![CDATA[First Look: May 14]]> http://hbswk.hbs.edu/rss/7259.html Tue, 14 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7259.html Hillary Clinton and social change

Professor Rosabeth Moss Kanter's new case explores the change process within Hillary Clinton's US State Department as it pursues women's empowerment through partnerships around the globe. One issue raised: Are the alliances sustainable when Clinton leaves office? Purchase the case, "Hillary Clinton & Partners: Leading Global Social Change from the US State Department."

Where is the economic research on digitization?

"In an industry that is all about information, shouldn't the information economy be more measurable?" That question is central to an essay by Josh Lerner, Shane Greenstein, and Scott Stern that points out the critical need for more research on the consequences of digitization on topics ranging from the composition of organizations to the design of copyright. Read "Digitization, Innovation, and Copyright: What Is the Agenda?" in the February 2013 issue of Strategic Organization II.

Innovation at Greylock Partners

The case "Greylock Partners" explores the pioneering initiatives of venture capitalist William Elfers, who started Greylock Partners in 1965. Using a limited partnership structure, Elfers helped create "a new organizational approach to venture capital through mechanisms that deeply reflected New England's financial investment culture," according to authors G. Felda Hardymon, Tom Nicholas, and David Lane. Over three decades, Elfers never lost a general partner or saw a colleague leave to start his own venture capital firm, they note.

— Sean Silverthorne

Publications

Abstract—What's behind the phenomenal success of entertainment businesses such as Warner Bros., Marvel Enterprises, and the NFL-along with such stars as Jay-Z, Lady Gaga, and LeBron James? Which strategies give leaders in film, television, music, publishing, and sports an edge over their rivals? In this book, drawing on my case studies and other research on the worlds of media and sports, I explain a powerful truth about the fiercely competitive world of entertainment: building a business around blockbuster products-the movies, television shows, songs, and books that are hugely expensive to produce and market-is the surest path to long-term success. Along the way, I reveal why entertainment executives often spend outrageous amounts of money in search of the next blockbuster, why superstars are paid unimaginable sums, and how digital technologies are transforming the entertainment landscape. Full of inside stories about some of the world's most successful entertainment brands, Blockbusters is aimed at anyone seeking to understand how the entertainment industry really works-and how to navigate today's high-stakes business world at large.

Publisher's link: http://www.blockbusters-thebook.com/

  • 2006
  • Journal of Economic Perspectives

The Investment Strategies of Sovereign Wealth Funds

By: Bernstein, Shai, Josh Lerner, and Antoinette Schoar

Abstract—This paper examines the direct private equity investment strategies across sovereign wealth funds (SWFs) and their relationship to the funds' organizational structures. SWFs seem to engage in a form of trend chasing, since they are more likely to invest at home when domestic equity prices are higher and invest abroad when foreign prices are higher. Funds see the industry P/E ratios of their home investments drop in the year after the investment, while they have a positive change in the year after their investments abroad. SWFs where politicians are involved have a much greater likelihood of investing at home than those where external managers are involved. At the same time, SWFs with external managers tend to invest in lower P/E industries, which see an increase in the P/E ratios in the year after the investment. By way of contrast, funds with politicians involved invest in higher P/E industries, which have a negative valuation change in the year after the investment.

  • 2006
  • New England Journal of Medicine

Leading Clinicians and Clinicians Leading

By: Bohmer, Richard M.J.

Abstract—More effective models of care delivery are needed, but their successful implementation depends on effective care teams and good management of local operations (clinical microsystems). Clinicians influence both, and local clinician leaders will have several key tasks.

Publisher's link: http://www.nejm.org/doi/full/10.1056/NEJMp1301814

  • 2006
  • Marketing Science

The Dynamic Advertising Effect of Collegiate Athletics

By: Chung, Doug J.

Abstract—I measure the spillover effect of intercollegiate athletics on the quantity and quality of applicants to institutions of higher education in the United States, popularly known as the "Flutie Effect." I treat athletic success as a stock of goodwill that decays over time, similar to that of advertising. A major challenge is that privacy laws prevent us from observing information about the applicant pool. I overcome this challenge by using order statistic distribution to infer applicant quality from information on enrolled students. Using a flexible random coefficients aggregate discrete choice model that accommodates heterogeneity in preferences for school quality and athletic success, and an extensive set of school fixed effects to control for unobserved quality in athletics and academics, I estimate the impact of athletic success on applicant quality and quantity. Overall, athletic success has a significant long-term goodwill effect on future applications and quality. However, students with lower than average SAT scores tend to have a stronger preference for athletic success, while students with higher SAT scores have a greater preference for academic quality. Furthermore, the decay rate of athletics goodwill is significant only for students with lower SAT scores, suggesting that the goodwill created by intercollegiate athletics resides more extensively with low-ability students than with their high-ability counterparts. But, surprisingly, athletic success impacts applications even among academically stronger students.

  • 2006
  • Harvard Business Review

The Performance Frontier: Innovating for a Sustainable Strategy

By: Eccles, Robert G., and George Serafeim

Abstract—By now most companies have sustainability programs. They're cutting carbon emissions, reducing waste, and otherwise enhancing operational efficiency. But a mishmash of sustainability tactics does not add up to a sustainable strategy. To endure, a strategy must address the interests of all stakeholders: investors, employees, customers, governments, NGOs, and society at large. To do that, it has to increase shareholder value while at the same time improving the firm's performance on environmental, social, and governance (ESG) dimensions. This article outlines a process that can be used to execute a sustainable strategy and extend the boundaries of The Performance Frontier.

Publisher's link: https://archive.harvardbusiness.org/cla/web/pl/product.seam?c=25586&i=25588&cs=266ba43f09b94a7a5f5f39a2ab0d9479

  • 2006
  • Management Science

Governance and CEO Turnover: Do Something or Do the Right Thing?

By:Fisman, Ray, Rakesh Khurana, Matthew Rhodes-Kropf, and Soojin Yim

Abstract—We study how corporate governance affects firm value through the decision of whether to fire or retain the CEO. We present a model in which weak governance-which prevents shareholders from controlling the board-protects inferior CEOs from dismissal, while at the same time insulates the board from pressures by biased or uninformed shareholders. Whether stronger governance improves retain/replace decisions depends on which of these effects dominates. We use our theoretical framework to assess the effect of governance on the quality of firing and hiring decisions using data on the CEO dismissals of large U.S. corporations during 1994-2007. Our findings are most consistent with a beneficent effect of weak governance on CEO dismissal decisions, suggesting that insulation from shareholder pressure may allow for better long-term decision making.

Publisher's link: http://www.people.hbs.edu/mrhodeskropf/GovernanceCEOTurnoverMS.pdf

  • 2006
  • Journal of Law, Economics & Organization

Contractual Incompleteness, Contingent Control Rights, and the Design of Internet Portal Alliances

By: Lerner, Josh, and Dan Elfenbein

Abstract—We test theoretical propositions from the literature on information and control in interfirm agreements using a sample of over 100 Internet portal alliance contracts. The literature on information and control in alliances suggests that the use of verifiable performance measures to allocate state-contingent control rights depends (a) on the precision of the information about the realized state and (b) on the level of information asymmetry between the two parties regarding the preferences of each. We test these propositions by looking at how the timing of agreements (a proxy for environmental uncertainty) and exclusivity restrictions (a proxy for incentive conflict) impact the use of a subset of available performance measures. Consistent with a signaling model of the allocation of contingent control rights, we find that contracts involve fewer contingent control rights as industries have matured. Where incentive conflicts are potentially greater, more contingent control rights are used.

  • 2006
  • Strategic Organization

Digitization, Innovation, and Copyright: What Is the Agenda?

By: Lerner, Josh, Shane Greenstein, and Scott Stern

Abstract—This essay discusses the need for research on the consequences of digitization, as well as the impact of alternative policies governing the creation and use of digital information. This agenda focuses on the development of research to investigate the economics of digitization, to analyze the governance of intellectual property in this sector, particularly through copyright, and to pioneer approaches to analyzing measurement of digitization. This agenda overlaps with many related open questions in organizational and strategy research.

Publisher's link: http://soq.sagepub.com.ezp-prod1.hul.harvard.edu/content/11/1/110.full.pdf+html

  • 2006
  • Review of Corporate Finance Studies

Bridging the Gap? Government Subsidized Lending and Access to Capital

By: Lerner, Josh, and Kristle Romero-Cortes

Abstract—The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund's impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding.

Publisher's link: http://rcfs.oxfordjournals.org/content/2/1/98.full.pdf+html

  • 2006
  • Industrial and Corporate Change

Institutions and Venture Capital

By: Lerner, Josh, and Joacim Tåg

Abstract—We survey the literature on venture capital and institutions and present a case study comparing the development of the venture capital market in the United States and Sweden. Our literature survey underscores that the legal environment, financial market development, the tax system, labor market regulations, and public spending on research and development correlate with venture capital activities across countries. Our case study suggests these institutional differences led to the later development of an active venture capital market in Sweden compared with the United States. In particular, a later development of financial markets and a heavier tax burden for entrepreneurs have played a key role.

Publisher's link: http://icc.oxfordjournals.org/content/22/1/153.full.pdf+html

  • 2006
  • Boston Review

Can Global Brands Create Just Supply Chains? Promoting Political Mobilization

By: Short, Jodi L., and Michael W. Toffel

Abstract—Codes of conduct indicate that working conditions are improving overall at the factories being monitored by multinational corporations, and that these the codes of conduct also create possibilities for political mobilization that can improve labor conditions more broadly.

Publisher's link: http://www.bostonreview.net/BR38.3/ndf_jodi_short_michael_toffel_global_brands_labor_justice.php

Working Papers

The Impact of Supplier Reliability on Retailer Demand

By: Craig, Nathan, Nicole DeHoratius, and Ananth Raman

Abstract—To set inventory service levels, firms must understand how changes in service level affect customer demand. While the effects of service level changes have been studied empirically at the level of the end consumer, relatively little is known about the interaction between a retailer and a supplier. Using data from a manufacturer of branded apparel, we show increases in service level to be associated with statistically significant increases in retailer orders (i.e., demand, not just sales). Controlling for other factors that might affect demand, we find a 1% increase in historical service level to be associated with a 12% increase in demand from retailers, where historical service level is the type 1 service level performance of the apparel manufacturer over the prior year. Further, we find that retailers that order frequently exhibit a more substantial reaction to changes in service level, an outcome that is consistent with retailers learning about and reacting to changes in supplier service level. Our study not only provides the first empirical evidence of the impact of changes in service level on demand from retailers but also illustrates a method for estimating this relationship in practice.

Download working paper: http://www.hbs.edu/faculty/product/38678

Abstract—We analyze the incentives for a two-sided intermediary to divert consumers to its favored destinations. Using a quasi-experiment to control for search intent, we identify and measure the impact of a search engine's exclusive award of preferential placement to its own service. We find that Google's differential placement of its Flight Search service led to a 65% decrease in click-through rates for non-paid algorithmic links and an 85% increase in click-through rates for paid advertising listings of competing online travel agencies. Moreover, the exclusive integration of search engine services into search results disproportionately impacted traffic to popular sites.

Download working paper: http://www.hbs.edu/faculty/product/44724

Abstract—Platforms use search diversion in order to trade off total consumer traffic for higher revenues derived by exposing consumers to products other than the ones that best fit their preferences. Our analysis yields three key and novel insights regarding search diversion incentives, which have direct implications for platforms' strategies and empirical predictions. First, platforms that charge positive access fees to consumers have weaker incentives to divert search relative to platforms that cannot (or choose not to) charge such fees. Second, endogenizing the affiliation of products that consumers are not interested in (advertising) leads to stronger incentives to divert search relative to the exogenous affiliation (vertical integration) benchmark, whenever the marginal product yields higher profits per consumer exposure relative to the average product. Third, the effect of platform competition on search diversion incentives depends on the nature of competition. Competition for advertising leads to more search diversion relative to competition for consumers. Both types of competition lead to at least as much search diversion as a monopoly platform. Nevertheless, in the case of competing platforms, the equilibrium level of search diversion increases with the degree of horizontal differentiation between platforms.

Download working paper: http://www.hbs.edu/faculty/product/40488

Marketplace or Reseller?

By: Hagiu, Andrei, and Julian Wright

Abstract—An intermediary can choose between functioning as a marketplace, on which suppliers sell their products directly to buyers, or as a reseller, purchasing products from suppliers and selling them to buyers. In our model, this choice comes down to whether residual control rights over non-contractible decision variables are better held by suppliers (the marketplace mode) or by the intermediary (the reseller mode). We focus on a single non-contractible decision variable―the level of demand-enhancing marketing activities. The reseller is better able to coordinate these activities across products, whereas the marketplace mode benefits from allowing independent suppliers to tailor their marketing activities to local information about buyer demand. In the benchmark setting, the marketplace mode is preferred if and only if the variance of local information exceeds the squared value of spillovers from marketing activities across products. We explore several generalizations, showing how the benchmark tradeoff is modified in different settings.

Download working paper: http://www.hbs.edu/faculty/product/44784

Cases & Course Materials

  • Harvard Business School Case 413-068

OrganJet and GuardianWings

No abstract available.

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  • Harvard Business School Case 513-060

Amazon, Apple, Facebook and Google

Four businesses had, by 2012, grown to dominate the infrastructure that all firms rely on to reach online customers. Will the balance of power among the four persist, will one take command at the expense of the other three, or are all four more vulnerable than they seem to outside forces? What are the implications for the pace at which consumers go online? Amara's Law claims that we tend to overestimate change in the short run and underestimate it in the long run.

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  • Harvard Business School Case 813-002

Greylock Partners

In 1965 William Elfers left Georges Doriot's American Research and Development Corporation to found Greylock, his own venture capital firm. Over the ensuing three decades followed a series of eight Greylock partnerships, during which time Elfers never lost a general partner or saw a colleague leave to start his own venture capital firm. Furthermore, each of the investors in Greylock's first fund participated in all succeeding partnerships. Elfers was among the first to pioneer the limited partnership structure of the modern venture capital firm with Greylock being organized as a series of limited partnerships, each of which pooled the investment capital that its general partners and limited partners committed for finite lifetimes. Greylock was established against a long historical tradition of New England financial innovation going back to at least the nineteenth century. In essence Elfers helped to create a new organizational approach to venture capital through mechanisms that deeply reflected New England's financial investment culture.

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As U.S. Secretary of State, Hillary Rodham Clinton acted on a long-standing interest in public-private partnerships to elevate and activate an Office of Global Partnerships reporting directly to her. One major initiative that also addressed her interest in women's empowerment was to create an alliance for clean cookstoves, a significant environmental and public health issue in developing countries. This case examines the change process within the State Department and across the federal government as well as the process of developing partnerships and looks at what happens on the ground to deploy resources. It raises the question of whether the alliances are sustainable when Sec. Clinton leaves office.

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Supplements the (A) case, 412-002.

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  • Harvard Business School Case 813-108

TerraPower

John Gilleland, CEO of TerraPower, returned to his office after a lengthy meeting with potential investors. It was October 2012, and TerraPower was in the process of raising a $200M Series C round to finance the ongoing development of its next-generation nuclear reactor. Though early in the fundraising process, Gilleland noted that this most recent conversation was similar to conversations with other interested cleantech growth equity investors. The conversations circled around a common theme: "This is the biggest idea that's ever been presented at our partners' meeting. We love what you're doing, but it's not right for us as an investment." Outside of raising money from typical growth equity and infrastructure funds, Gilleland could partner with a government and/or form a joint venture with an existing nuclear power player. Reliance Industries as an investor in TerraPower could provide an entry point into the fast growing Indian market. At the same time, Gilleland and Gates had talked with China National Nuclear Corp. about a possible cooperation with TerraPower. Whom should Gilleland call next?

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]]> 7259 First Look Hillary Clinton and social change

Where is the economic research on digitization?

Innovation at Greylock Partners

]]> <![CDATA[How to Spot a Liar]]> http://hbswk.hbs.edu/rss/7234.html Mon, 13 May 2013 10:00:00 EDT http://hbswk.hbs.edu/rss/7234.html

Want to know if someone's lying to you? Telltale signs may include running of the mouth, an excessive use of third-person pronouns, and an increase in profanity.

These are among the findings of a recent experimental study that delves into the language of deception, detailed in the paper Evidence for the Pinocchio Effect: Linguistic Differences Between Lies, Deception by Omissions, and Truths, which was published in the journal Discourse Processes. Asked why the topic of deception is important to business research, negotiation expert Deepak Malhotra responds wryly: "As it turns out, some people will lie and cheat in business!"

Malhotra, the Eli Goldston Professor of Business Administration at Harvard Business School, coauthored the paper with Associate Professor Lyn M. Van Swol and doctoral candidate Michael T. Braun, both from the University of Wisconsin—Madison. "Most people admit to having lied in negotiations, and everyone believes they've been lied to in these contexts," Malhotra says. "We may be able to improve the situation if we can equip people to detect and deter the unethical behavior of others."

"Evidence for the Pinocchio Effect" fills a key gap in the field of deception research, says Van Swol, the study's lead author. Previous studies have examined the linguistic differences between lies and truthful statements. But this one goes a step further to consider the differences between flat-out lying and so-called deception by omission—that is, the willful avoidance of divulging important information, either by changing the subject or by saying as little as possible.

The ultimatum game

To garner a sample of truth tellers, liars, and deceivers by omission, the researchers recruited 104 participants to play the ultimatum game, a popular tool among experimental economists. In the traditional version of the game, one player (the allocator) receives a sum of money and proposes how to divvy it up with a partner (the receiver). The receiver has the option of either accepting the proposed split or refusing the allocator's proposal—in which case neither player gets any of the money. Because receivers will often reject offers they perceive as unfair, leaving both parties with nothing, it behooves the allocator to offer an amount that will be deemed fair by the receiver. In many instances, allocators choose to share half, Malhotra says.

For the purposes of the deception experiment, the rules of the ultimatum game differed from the traditional version in three ways. First, in this version, the allocator received an endowment of either $30 or $5 to share with the receiver. The receiver had no way of verifying how much money the allocator had been given, information which the allocator was not required to divulge. Hence, an allocator could conceivably give the receiver $2 and keep $28, and the receiver would be none the wiser, perhaps assuming only $5 was in play. The second change was that if the receiver rejected the allocator's offer he or she would receive a default amount of $7.50 (or $1.25)—whereas the allocator would get no money at all.

Research shows that liars are wordier than truth tellers during negotiationsFinally, each game included two minutes of videotaped conversation in which the receiver could grill the allocator with questions, prior to deciding whether to accept or reject the offer. This provided ample opportunity for the allocator to tell the truth about the money, lie, or try to avoid the subject altogether. "We wanted to create a situation where people could choose to lie or not lie, and it would happen naturally," Van Swol says.

Ultimately, the receiver had to decide whether the proposed allocation was fair and honest, based only on a conversation with the allocator. Thus, it behooved the allocator to be either a fair person or a good liar.

As it turned out, 70 percent of the allocators were honest, telling the receivers the true amount of the endowment and/or offering them at least half of the pot. The remaining 30 percent of allocators were classified either as liars (meaning they flat-out lied about the amount of the endowment) or as deceivers by omission (meaning they evaded questions about the amount of the endowment, but ultimately offered the receiver less than half).

After a graduate student transcribed all the allocator/receiver conversations, the researchers carefully analyzed the linguistic content, comparing the truth tellers against the liars and deceivers in order to suss out cues for deception. They looked for both strategic and nonstrategic language cues.

"A strategic cue is a conscious strategy to reduce the likelihood of the deception being detected," Van Swol explains, "whereas a nonstrategic cue is an emotional response, and people aren't usually aware that they're doing it."

Key findings: word count, profanity, and pronouns

In terms of strategic cues, the researchers discovered the following:

  • Bald-faced liars tended to use many more words during the ultimatum game than did truth tellers, presumably in an attempt to win over suspicious receivers. Van Swol dubbed this "the Pinocchio effect." "Just like Pinocchio's nose, the number of words grew along with the lie," she says.
  • Allocators who engaged in deception by omission, on the other hand, used fewer words and shorter sentences than truth tellers.

Among the findings related to nonstrategic cues:

  • On average, liars used more swear words than did truth tellers—especially in cases where the recipients voiced suspicion about the true amount of the endowment. "We think this may be due to the fact that it takes a lot of cognitive energy to lie," Van Swol says. "Using so much of your brain to lie may make it hard to monitor yourself in other areas."
  • Liars used far more third-person pronouns than truth tellers or omitters. "This is a way of distancing themselves from and avoiding ownership of the lie," Van Swol explains.
  • Liars spoke in more complex sentences than either omitters or truth tellers.

The researchers also examined when and whether the receivers trusted the allocators—noting instances when receivers voiced doubts about the allocators' statements, and correlating the various linguistic cues with the accuracy of the receivers' suspicions. They also noted instances in which receivers showed no suspicion toward deceivers.

On average, receivers tended to trust the bald-faced liars far more than they trusted the allocators who tried to deceive by omission. In short, relative silence garnered more suspicion than flat-out falsehoods. "It turns out that omission may be a terrible deception strategy," Van Swol says. "In terms of succeeding at the deception, it was more effective to outright lie. It's a more Machiavellian strategy, but it's more successful."

Possible applications

In the latest phase of their research, the team is investigating the linguistic differences between lying in person and lying via email. Results regarding the latter may be increasingly useful as a larger portion of business is now being conducted via email, and such communications leave a transcript that can be analyzed carefully—and at leisure—by suspicious counterparts. "People detect lies better over the computer than they do face-to-face," Van Swol says.

That said, the researchers are quick to emphasize that linguistic cues are most definitely not a foolproof method of detecting lies, even among those who are trained to look out for them.

"This is early stage research," Malhotra says. "As with any such work, it would be a mistake to take the findings as gospel and apply them too strictly. Rather, the factors we find to be associated with lies and deception are perhaps most useful as warning signs that should simply prompt greater vigilance and further investigation regarding the veracity of the people with whom we are dealing."

—To learn more about how to deal with liars during business negotiations, read Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond by Deepak Malhotra and Max H. Bazerman. Follow Malhotra on Twitter at @Prof_Malhotra.

About the author

Carmen Nobel is senior editor of Harvard Business School Working Knowledge.

]]> 7234 189290http://sands.hbs.edu/photos/facstaff/Ent189290.jpg Research & Ideas