Organization Design for Distributed Innovation

MIT professor Eric von Hippel first coined the term "distributed innovation" to describe a system in which innovation emanates not only from the manufacturer of a product but from many sources including users and rivals. Over the years, systems of distributed innovation&8212;so-called business ecosystems&8212;have become increasingly prevalent in many industries. These entities generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system. In this paper, prepared for the 1st Organizational Design Conference, held at Harvard Business School in August 2012, HBS professor Carliss Baldwin examines four central themes: 1) Distributed innovation as the unintended consequence of modularity; 2) The advantage of business ecosystems for creative problem-solving; 3) Organizational design of business ecosystems; and 4) Competition and technological innovation in business ecosystems. Overall, Baldwin argues that the potential benefits of distributed innovation must be recognized, and the field of organization design must broaden its traditional focus on the individual firm to encompass this compelling new approach for creating value.

Is a VC Partnership Greater Than the Sum of Its Partners?

Venture capital investments are an important engine of innovation and economic growth, but extremely risky from an individual investor's point of view. Furthermore, there are large differences in fund performance between top quartile and bottom quartile venture capital funds. The ability to consistently produce top performing investments implies that there is something unique and time-invariant about venture capital firms. But to what extent are the important attributes of performance a part of the firm's organizational capital or embodied in the human capital of the people inside the firm? Michael Ewens and Matthew Rhodes-Kropf find that the partner is extremely important. Additionally, results suggest that venture capital partnerships are not much more than the sum of their partners. Partners are often significantly different from each other, but "good" firms are those with a group of better partners. Thus, firms that have maintained high performance across many funds may have simply been able to retain high quality partners rather than actually provide those partners with much in the way of fundamental help.

Creating an R&D Strategy

This note by Gary P. Pisano provides a framework for designing an R&D strategy. It starts with the simple notion that a strategy is a system approach to solving a problem. An R&D strategy is defined a coherent set of interrelated choices across decision concerning: organizational architecture, processes, people, and project portfolios. To illustrate the framework, we use examples of three pharmaceutical companies and examine how their different R&D strategies were rooted in different assumptions about the core driver of R&D performance. This suggests that the very first question to be answered in strategy development is: What's our shared understanding of the root cause of the problem we are trying to solve?

The Flattened Firm—Not as Advertised

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. While flattening is said to reduce costs, its alleged benefits flow primarily from changes in internal governance: by pushing decisions downward, firms not only enhance customer and market responsiveness, but also improve accountability and morale. But has flattening actually delivered on its promise and pushed decisions down to lower-level managers? In this paper, Julie Wulf shows that flattening actually can lead to exactly the opposite effects from what it promises to do.

Wulf used a large-scale panel data set of reporting relationships, job descriptions, and compensation structures in a sample of over 300 large U.S. firms over roughly a 15-year period. This historical data analysis was complemented with exploratory interviews with executives (what CEOs say) and analysis of data on executive time use (what CEOs do). Results suggest that flattening transferred some decision rights from lower-level division managers to functional managers at the top. Flattening is also associated with increased CEO involvement with direct reports—the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy. In sum, flattening at the top is a complex phenomenon that in the end looks more like centralization. Yet it is crucial to consider different types of decisions and activities and how they vary by level in the hierarchy.

No News Is Good News: CSR Strategy and Newspaper Coverage of Negative Firm Events

This study examines the gatekeeping role of the media in determining which negative corporate events reach a broader audience. Jiao Luo, Stephan Meier, and Felix Oberholzer-Gee test the idea that investments in corporate social responsibility (CSR) create public good will, leading the media to treat companies with a superior CSR track record in a favorable manner. They find the opposite. Newspapers are more likely to report negative news about companies if the companies invested heavily in CSR. For example, oil companies that invest in clean energy face a greater risk of media coverage in the event of an oil spill. An analysis of the tone of media coverage shows that news reports are no more positive for CSR leaders than for the average company.

Learning by Supplying

Offshore outsourcing of manufacturing and related activities to China and other emerging economies is changing the competitive landscape in many industries. Some predict that lessons learned by emerging market firms in their role as suppliers to major branded producers will allow them to develop the capabilities necessary to become viable world-class competitors, possibly at the expense of current market leaders. In this paper Juan Alcacer and Joanne Oxley subject this "learning by supplying" hypothesis to the test, analyzing data on evolving technological and marketing capabilities of suppliers in the mobile handset industry. Contrary to some of the more alarmist commentary in the popular press, the researchers' observations suggest that the progression from trusted supplier to threatening competitor among electronics manufacturing firms is far from inevitable. Findings also point to the existence of quite distinct pathways to technological and market learning for suppliers. The divergent learning outcomes for suppliers serving operators and branded producers reinforce the idea that, while operators involve suppliers in all aspects of production, branded producers strictly limit access to customer-facing activities, thus reducing suppliers' opportunities for learning in this domain.

Putting Integrity into Finance: A Purely Positive Approach

Behavior that lacks integrity leads to value destruction. This paper analyzes some common beliefs, actions, and activities in finance that are inconsistent with being a person or a firm of integrity. Each of these beliefs leads to a system that lacks integrity, i.e., one that is not whole and complete and therefore creates unworkability and destroys value. Focusing on these phenomena from the integrity viewpoint, the authors argue, makes it possible for managers to focus on the value that can be created by putting the system back in integrity and correcting the non-value maximizing equilibrium that exists in capital markets. Overall, this paper summarizes a purely positive theory of integrity that has no normative elements whatsoever, and demonstrates how it applies to both individuals and organizations. In effect, integrity is a factor of production just like knowledge, technology, labor, and capital, but it is undistinguished—and its affect (by its presence or absence) is huge.

What Makes a Critic Tick? Connected Authors and the Determinants of Book Reviews

The professional critic has long been heralded as the gold standard for evaluating products and services such as books, movies, and restaurants. Analyzing hundreds of book reviews from 40 different newspapers and magazines, Professor Michael Luca and coauthors Loretti Dobrescu and Alberto Motta investigate the determinants of professional reviews and then compare these to consumer reviews from Amazon.com.

Why Every Company Needs a CSR Strategy and How to Build It

Despite certain criticisms, more and more companies in the world practice some form of corporate social responsibility. This paper offers a pragmatic alternative framework for CSR with a view towards developing its practice in an evolutionary way. The authors' extensive experience working with CSR practitioners convinces them that exhorting companies to hone their CSR practice under a shared value framework does not reflect the reality for a majority of businesses. CSR executives oversee a variety of social initiatives that may or may not directly contribute to a company's business goals. The role of an executive is to achieve the difficult task of reconciling the various programs, quantifying their benefits, or at least sketching a logical connection to the business, and securing the support of his or her business line counterparts. This role, when performed well, would lead to the development of a CSR strategy for the company.

Is India's Manufacturing Sector Moving Away from Cities?

One of the biggest challenges in development is urbanization. Within developing countries, nearly two billion people are expected to move from rural regions into cities in the next two decades. This paper closely examines the movement of economic activity in Indian manufacturing between urban and rural areas. The authors find that while the organized sector is becoming less urbanized, the unorganized sector is becoming more urbanized. This process has been most closely linked to greater urbanization changes in districts with high education levels; a second role is often evident for public infrastructure as well. On the whole, these urbanization changes have modestly improved the urban-rural allocation of industries within India's districts.

Technology Choice and Capacity Portfolios Under Emissions Regulation

What technologies should firms invest in when emissions are costly? With the European Union Emissions Trading Scheme in the EU, California's Assembly Bill 32, the Regional Greenhouse Gas Initiative in the northeastern US, and now Australia's Clean Energy Bill, more and more firms are having to ask themselves that question when planning their capacity portfolios. This paper uses formal theory to analyze firms' technology choice and capacity portfolios, both when emissions are taxed and when they are regulated under cap-and-trade. David Drake, Paul R. Kleindorfer, and Luk N. Van Wassenhove find that even when average emissions price is assumed to be equivalent to that under an emissions tax, firms are more profitable under cap-and-trade. The emissions price uncertainty under cap-and-trade that many argue will destroy value instead equips firms with a real option that increases value. In addition to comparing profits under emissions tax and cap-and-trade regimes, the authors identify a number of potential adverse outcomes that can arise as a consequence of emissions legislation that should be taken into consideration when formulating future climate policy.

Lords of the Harvest: Third-Party Signaling and Regulatory Approval of Genetically Modified Organisms

How do regulatory agencies make decisions? This paper suggests that regulatory agencies are influenced by the firms they regulate, but not exclusively via the direct influence of lobbying, sponsorship of scientific research, and advocacy. Instead, Hiatt and Park find that agency decision making is affected by the social influence of agency stakeholders and peer agencies. The research looks specifically at the approval by the U.S. Department of Agriculture between 1992 and 2007 of genetically modified organisms, or plants whose genetic material has been altered using genetic-engineering techniques to enhance such desired traits as herbicide resistance, pesticide properties, and nutritional content. The authors found that signals from salient stakeholders and a peer agency positively influenced GMO product approvals by reducing uncertainty surrounding the agency's pursuit of legitimacy. It is the presence of uncertainty, in conjunction with anxiety about legitimacy, that motivates regulatory agencies to look to third-party actors for additional information.

Clear and Present Danger: Planning and New Venture Survival Amid Political and Civil Violence

Strategy theory often takes for granted the role of state institutions in providing stable, predictable environments in which new firms are founded. Yet, many states around the world (such as Iraq, Sudan, South Sudan, Syria, and the Democratic Republic of Congo) lack political institutions of sufficient strength to ensure personal safety and public order, thereby creating environments where civil and political violence can ferment. This paper explores the impact of such violence on new venture processes. Results show that comprehensive planning was negatively correlated with venture survival in such environments. While there are implications for strategy theory, the study is also relevant to entrepreneurs and organizations promoting new venture planning in less-developed countries, particularly those experiencing political and civil turmoil. Currently, prospective entrepreneurs are taught the importance of business planning by both universities and non-governmental organizations that offer entrepreneurial training. But this study suggests that such training will have mixed effects on new venture survival, depending on the extent to which these entrepreneurs pursue ventures in violent and uncertain environments. In such contexts where governments fail to maintain public safety and order, these training programs may actually increase the likelihood of new venture failure.

An Exploration of Luxury Hotels in Tanzania

Tanzania is justly famous for its incredible natural landmarks such as the Rift Valley, Ngorongoro Crater, Lake Manyara, Mount Kilimanjaro, Zanzibar, and, above all, the Serengeti and the Great Migration. Why, despite being so richly endowed in touristic resources, does Tanzania receive relatively few tourists and little revenue from tourism?

Diego Comin explored the drivers and influencing factors on the size of the tourism sector, using as a starting point the abnormally high prices of upscale hotels in Tanzania, especially in the safari areas. Findings suggest that the cost of supplying upscale hotel services is not sufficient to explain the abnormally high prices, and the more likely candidate is high markups. Interviews with hotel managers supported this conclusion. In addition, while cross-country differences in demand are large, once we control for these differences, discrepancies in upscale hotel prices account for a significant share of cross-country differences in demand, and cross-country differences in demand are very persistent.

On the basis of the role of word-of-mouth, learning by doing, and pecuniary externalities in driving differences in demand, there may be room for the Tanzanian government to induce lower hotel prices and to try to independently increase the foreign perception of the country's attractiveness.

When Performance Trumps Gender Bias: Joint versus Separate Evaluation

Gender-based discrimination in hiring, promotion, and job assignments is difficult to overcome. This paper suggests a new intervention aimed at avoiding biased assessments: an "evaluation nudge," in which employees are evaluated jointly rather than separately regarding their future performance. While joint evaluation is common for most hiring decisions, especially at the lower levels, it is rarely used when job assignments and promotions are being considered. The research shows that a joint-evaluation mode succeeds in helping employers choose based on past performance, irrespective of an employee's gender and the implicit stereotypes the employer may hold. While it is not always feasible to bundle promotion decisions and explicitly compare candidates, the research suggests that, whenever possible, joint evaluation would increase both efficiency and equality. Findings have implications for organizations that want to decrease the likelihood that hiring, promotion, and job-assignment decisions will be based on irrelevant criteria triggered by stereotypes.

The Stock Selection and Performance of Buy-Side Analysts

Important differences between buy- and sell-side analysts are likely to affect their behavior and performance. While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds). This paper examines buy recommendation performance for analysts at a large, buy-side firm relative to analysts at sell-side firms throughout the period of mid-1997 to 2004. The researchers find evidence of differences in the stocks recommended by the buy- and sell-side analysts. The buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts' clients) prefer that buy-side analysts cover less volatile and more liquid stocks. The study also finds that the buy-side firm analysts' stock recommendations are less optimistic than their sell-side counterparts, consistent with buy-side analysts facing fewer conflicts of interest. This and future studies may help sell-side and buy-side executives to allocate their financial and human resources more strategically.

Expertise Dissensus: A Multi-level Model of Teams' Differing Perceptions about Member Expertise

Team members typically assume that they agree about how much knowledge everyone else on the team has, but research by Heidi K. Gardner and Lisa Kwan shows this is not the case, posing a major barrier to team effectiveness. The researchers introduce the concept of expertise dissensus—the opposite of consensus—which represents the variance in team members' perceptions of one another's levels of expertise. Expertise dissensus lowers team effectiveness by hampering coordination and increasing team conflict, so that teams' clients are ultimately less satisfied, teams are less able to function well together in the future, and individual team members experience less personal growth from their work with the team.

Causes and Consequences of Firm Disclosures of Anticorruption Efforts

Academic research on corruption has typically focused on its macro causes and consequences. While the country level is certainly important to understand, it is at the firm level where many questions remain unanswered. This study examines 480 of the world's largest companies, using ratings by Transparency International of firms' public disclosures of strategy, policies, and management systems for combatting corruption. Professors Paul Healy and George Serafeim find that firm disclosures are related to enforcement and monitoring costs, such as home country enforcement, US listing, big four auditors, and prior enforcement actions. Disclosures also reflect industry and country corruption risks. Meanwhile the financial implications of fighting disclosure are more nuanced.

Competition and Illicit Quality

Competition is typically thought to generate many positive outcomes including lower prices and higher productivity. But competition can also lead firms to increase quality for their customers in ways that are both illegal and socially costly. This paper examines the impact of competition on the vehicle emissions testing market, and finds that firm misconduct increases with competitive pressure and the threat of losing customers to rival firms. These results have serious implications for policy makers and managers. This paper is among the first to empirically demonstrate that increased competition can motivate firms to provide illicit quality to avoid losing business.

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China

Economists have argued that the "Great Divergence" between the developed and underdeveloped world in the nineteenth century was reinforced—if not caused—by rapid improvements in schooling that occurred in the advanced economies. Explaining differences in economic development today may hinge on understanding why most societies failed to develop adequate primary education in the late nineteenth and early twentieth centuries. This study sheds new light on the comparative experiences of Brazil, Russia, India, and China (BRIC) during the formative years of their primary education systems.