- 15 Apr 2010
- Working Paper Summaries
The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis
What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund. Angel investors as research subjects have received much less attention than venture capitalists, even though some estimates suggest that these investors are as significant a force for high-potential start-up investments as venture capitalists, and are even more significant as investors elsewhere. This study demonstrates the importance of angel investments to the success and survival of entrepreneurial firms. It also offers an empirical foothold for analyzing many other important questions in entrepreneurial finance. Key concepts include: Angel-funded firms are significantly more likely to survive at least four years (or until 2010) and to raise additional financing outside the angel group. Angel-funded firms are also more likely to show improved venture performance and growth as measured through growth in Web site traffic and Web site rankings. The improvement gains typically range between 30 and 50 percent. Investment success is highly predicated by the interest level of angels during the entrepreneur's initial presentation and by the angels' subsequent due diligence. Access to capital per se may not be the most important value-added that angel groups bring. Some of the "softer" features, such as angels' mentoring or business contacts, may help new ventures the most. Closed for comment; 0 Comments.
- 14 Apr 2010
- Working Paper Summaries
The Economic Crisis and Medical Care Usage
The global economic crisis has taken a historic toll on national economies and household finances around the world. What is the impact of such large shocks on individuals and their behavior, especially on their willingness to seek routine medical care? In this research, Annamaria Lusardi of Dartmouth College, Daniel Schneider of Princeton University, and Peter Tufano of Harvard Business School find strong evidence that the economic crisis—manifested in job and wealth losses—has led to large reductions in the use of routine medical care. Specifically, more than a quarter of Americans reported reducing their use of such care, as did between 5 and 12 percent of Canadian, French, German, and British respondents. Key concepts include: Large shares of Americans reduced their use of routine medical care since the economic crisis. These reductions were strongly related to economic distress brought on by the global financial crisis as measured by wealth loss and unemployment. The across-the-board reduction in medical care usage by Americans may speak to behavioral changes that reflect the national psyche broadly: The economic crisis in the United States—deeper and more widespread than elsewhere—may have touched the population at large, perhaps via negative expectations about the future. The cutbacks in health-care usage by people losing wealth or jobs, even in countries with "universal" systems, may reflect the fact that seeking care entails not only out-of-pocket expenses, but also costs of time away from work or job hunting. Reductions in routine care today might lead to undetected illness tomorrow and reduced individual health and well-being in the more distant future. Closed for comment; 0 Comments.
- 13 Apr 2010
- First Look
First Look: April 13
Article: "Just Say No to Wall Street: Putting a Stop to the Earnings Game" ... An early-bird look at Driven to Lead: Good, Bad, and Misguided Leadership ... Case: Dow Chemical Company and regulation. Closed for comment; 0 Comments.
- 12 Apr 2010
- Research & Ideas
One Report: Better Strategy through Integrated Reporting
Stakeholders expect it. And smart companies are doing it: integrating their reporting of financial and nonfinancial performance in order to improve sustainable strategy. HBS senior lecturer Robert G. Eccles and coauthor Michael P. Krzus explain the benefits and value of the One Report method. Plus: book excerpt from One Report: Integrated Reporting for a Sustainable Strategy. Key concepts include: Integrating reporting in One Report means to describe, simply and clearly, management's view of the relationships between financial and nonfinancial metrics. Companies like Philips, Novo Nordisk, Natura, and United Technologies are leaders in conducting and communicating integrated reporting. The four key benefits of integrated reporting are: greater clarity about the relationship between financial and nonfinancial key performance indicators; better management decisions; deeper engagement with the broad stakeholder community; and lower reputational risk. Closed for comment; 0 Comments.
- 08 Apr 2010
- Working Paper Summaries
Multinational Strategies and Developing Countries in Historical Perspective
HBS professor Geoffrey Jones offers a historical analysis of the strategies of multinationals from developed countries in developing countries. His central argument, that strategies were shaped by the trade-off between opportunity and risk, highlights how three broad environmental factors determined the trade-off. The first was the prevailing political economy, including the policies of both host and home governments, and the international legal framework. The second was the market and resources of the host country. The third was competition from local firms. Jones explores the impact of these factors on corporate strategies during the three eras in the modern history of globalization from the nineteenth century until the present day. He argues that the performance of specific multinationals depended on the extent to which their internal capabilities enabled them to respond to these external opportunities and threats. The paper highlights in particular the changing nature of political risk faced by multinationals. The era of expropriation has, for the moment, largely passed, but multinationals now experience new kinds of policy risk, and new forms of home country political risk also, such as the Alien Tort Claims Act in the United States. Key concepts include: The strategies of multinationals in the developing world have changed over time. Initially they sought access to resources through exclusive contracts. As anti-globalization policies increased, they needed enhanced political contacts, and strengthened local managements. The pursuit of markets and lower cost labor is now the central focus. They still need local political and business contacts, but also have to respond to local competition and demands to incorporate local relevance into global products. Multinationals initially enjoyed insider advantages in colonial regimes. With decolonization, political risk rose sharply. They were often expropriated, and many divested. Now multinationals face regular, adverse shifts in policy by host governments. The recent period of globalization has also seen the growth of home country political risk. In particular, multinationals face criticism and legal action for real or alleged environmental or human rights abuses in developing countries. Developing countries, or at least the larger and more fast-growing ones in Asia and Latin America, are increasingly seen as indispensable by multinationals in every industry. However recent decades have seen a sharp growth of highly competitive local firms, who can compete with frugal engineering, and are going global. Closed for comment; 0 Comments.
- 07 Apr 2010
- Working Paper Summaries
Location Strategies for Agglomeration Economies
Locations thick with similar economic activity expose firms to pools of skilled labor, specialized suppliers, and potential inter-firm knowledge spillovers that can provide firms with opportunities for competitive advantage. While certainly attractive, the lure of these agglomeration economies varies. Some firms should be wary of aiding their competitors by co-locating with them, for example, because each "agglomeration economy" differs in how readily competitors can leverage contributions made by others. HBS professor Juan Alcácer and Wilbur Chung of the University of Maryland develop a framework to better understand how firms respond to agglomeration economies. Key concepts include: Firms' location choices balance the perceived risk of aiding competitors with a recognition that some agglomeration economies will be of limited use to others. Firms, on average, place more value on pools of skilled labor and specialized suppliers than on potential knowledge inflows from competitors. The priority placed on labor and suppliers persists even for industries that are more R&D intensive. Economically larger firms are less attracted to industry employment, but more attracted to industry supplier activity. Closed for comment; 0 Comments.
- 06 Apr 2010
- First Look
First Look: April 6
Fashion entrepreneurs design a local niche ... The tenuous reputation of auditors ... Case: "Pandora Radio: Fire Unprofitable Customers?" Closed for comment; 0 Comments.
- 05 Apr 2010
- Research & Ideas
HBS Cases: iPads, Kindles, and the Close of a Chapter in Book Publishing
Book publishing is changing before our very eyes, even if the industry itself is fighting the transition with every comma it can muster. Harvard Business School professor Peter Olson, former CEO of Random House, wonders if books themselves may be in jeopardy. Key concepts include: The traditional book publishing and distribution system is under pressure to change to digital e-books. Publishers should consider a strategy of cooperation rather than competition with online retailers. Adding video and other multimedia capabilities will make e-books more attractive in the textbook industry. The fundamental question to be asked in the Internet age is, how popular will books remain? Closed for comment; 0 Comments.
- 02 Apr 2010
- What Do You Think?
Why Are Fewer and Fewer U.S. Employees Satisfied With Their Jobs?
This month's column yielded many hypotheses to explain why U.S. employees' job satisfaction is at a 23-year low, says HBS professor Jim Heskett. Readers also offered antidotes to job malaise. (Online forum now closed. New forum begins May 5.) Closed for comment; 0 Comments.
- 31 Mar 2010
- Working Paper Summaries
When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge
Entrepreneurial firms rich in knowledge but poor in other resources can use superior architectural knowledge of a technical system to gain strategic advantage over larger and better endowed rivals. This paper presents a model and provides examples showing that architectural knowledge can be applied strategically to change a firm's scope and boundaries, make innovations more or less autonomous, and change the span of problems it must solve. Key concepts include: Architectural knowledge is knowledge about the components of a complex system and how they are related. Architectural knowledge includes knowledge about how the system performs its functions; how the components are linked together; and the behavior of the system, both planned and unplanned, in different environments. For a small entrepreneurial firm with limited financial resources facing larger rivals, the most valuable architectural knowledge pertains to bottlenecks and remodularizations that isolate the bottlenecks. Such knowledge can form the basis of a small footprint technical architecture that delivers an ROIC (higher return on invested capital) advantage. Technical systems that are susceptible to remodularization around bottlenecks are strategic targets of opportunity for entrepreneurial firms. Incumbents risk being displaced by smaller rivals with superior architectural knowledge leading to an ROIC advantage. Closed for comment; 0 Comments.
- 30 Mar 2010
- First Look
First Look: March 30
Angel financing breeds longer-lasting start-ups ... How economic uncertainty shapes demand for health care services ... Case: the making of Dubai Closed for comment; 0 Comments.
- 29 Mar 2010
- Research & Ideas
Ruthlessly Realistic: How CEOs Must Overcome Denial
Even the best leaders can be in denial—about trouble inside the organization, about onrushing competitors, about changing consumer behavior. Harvard Business School professor Richard S. Tedlow looks at history and discusses how executives can acknowledge and deal with reality. Plus: Book excerpt. Key concepts include: Denial is the unwillingness to acknowledge and deal with reality. What is different today is that the cost of denial has become so high. Being ruthlessly realistic with oneself is one of the greatest challenges for any CEO. Closed for comment; 0 Comments.
- 25 Mar 2010
- Working Paper Summaries
Local R&D Strategies and Multi-location Firms: The Role of Internal Linkages
While geographic co-location has obvious benefits for firm innovation, it can also have serious drawbacks. HBS professor Juan Alcácer and Ross School of Business professor Minyuan Zhao explore how firms tap into the rich resources of technology clusters while protecting the value of their innovations. To understand R&D dynamics in a cluster, the scholars argue, we must recognize that a firm located in a particular cluster may also be part of an extended network, with its operations strategically integrated across multiple locations and multiple business lines. Key concepts include: When surrounded by direct competitors, the technology leaders in a cluster favor technologies that can be quickly developed internally, and more of their R&D projects involve researchers from other locations, particularly from primary R&D sites. Internal linkages across a firm protect firm knowledge from appropriation not only in countries where intellectual property rights protection is weak, but also in risky competitive environments in general. Closed for comment; 0 Comments.
- 24 Mar 2010
- Working Paper Summaries
Fiduciary Duties and Equity-Debtholder Conflicts
Managerial decisions influence the distribution of value between different parties. This can lead to conflicting interests among financial claimants, such as holders of equity and debt. The Credit Lyonnais v. Pathe Communications bankruptcy ruling of 1991 before the Delaware court—a case widely perceived to have created a new obligation for directors of Delaware‐incorporated firms—provides an interesting opportunity to assess whether and how equity-debt conflict affects firm behavior. HBS professor Bo Becker and Stockholm School of Economics professor Per Strömberg outline important changes in behavior after Credit Lyonnais. Key concepts include: The Credit Lyonnais duties are a prime example of how important the Delaware courts are, and how the differences between Delaware corporate law and other jurisdictions can be of significance. After the ruling, behavior changed for Delaware firms in the vicinity of bankruptcy, which enabled them to enter Chapter 11 in a healthier state, thus making bankruptcy resolution easier. Firms in distress sometimes have an incentive to undertake actions that hurt debt and benefit equity. Such behavior leads to indirect costs of financial distress, discouraging leverage and reducing overall firm value. A reduction in such behavior took place after the Credit Lyonnais ruling. Closed for comment; 0 Comments.
- 23 Mar 2010
- First Look
First Look: March 23
The entrepreneurial bug: How to catch it … History looks at multinationals in developing countries … Case: "A Letter from Prison." Closed for comment; 0 Comments.
- 22 Mar 2010
- Research & Ideas
One Strategy: Aligning Planning and Execution
Strategy as it is written up in the corporate playbook often becomes lost or muddled when the team takes the field to execute. In their new book, Professor Marco Iansiti and Microsoft's Steven Sinofsky discuss a "One Strategy" approach to aligning plan and action. Key concepts include: The book combines practical experience at Microsoft with conceptual frameworks on how to develop strategies that are aligned with execution in a rapidly changing competitive environment. "Strategic integrity" occurs when the strategy executes with the full, aligned backing of the organization for maximum impact. The chief impediment to strategy execution is inertia. The One Strategy approach is less about formal reviews and more about one-on-one conversation. Blogs can be a powerful asset in managing an organization. Closed for comment; 0 Comments.
- 18 Mar 2010
- Working Paper Summaries
Matching Firms, Managers, and Incentives
Do different kinds of firm ownership drive the adoption of different managerial practices? HBS professor Raffaella Sadun and coauthors focus on the difference between the two most common ownership modes, family firms and firms that are widely held, namely that have no dominant owner. They find that the greater weight attached by family firms to benefits from control induces a conflict of interest between family-firm owners and high-ability, risk-tolerant managers. Key concepts include: Family firms systematically offer low-powered incentive contracts to external managers compared with widely held firms. The differences are economically large. Where incentives are more powerful, managers exert more effort, are paid more, and are more satisfied. Firms that offer high-powered incentives are associated with better performance. This result holds even after controlling for the type of ownership. Economies where family firms prevail because of institutional or cultural constraints are also economies where the demand for highly skilled, risk-tolerant managers languishes. Closed for comment; 0 Comments.
- 17 Mar 2010
- Working Paper Summaries
Conceptual Foundations of the Balanced Scorecard
This article documents the precursors of the Balanced Scorecard (BSC) strategic performance management tool and describes the evolution of the BSC since its introduction in 1992 in the Harvard Business Review. During the last 15 years, the BSC has been adopted by thousands of private, public, and nonprofit enterprises around the world. HBS professor Robert S. Kaplan, who created the concept and tool with David Norton, explains the roots and motivation for their original article as well as subsequent innovations that connect it to a larger management literature. Key concepts include: The BSC was not original for advocating that nonfinancial measures be used to motivate, measure, and evaluate company performance. Early pioneers included General Electric, Nobel Economics Laureate, Professor Herb Simon, at the Carnegie Institute of Technology (later Carnegie-Mellon University), and management theorist Peter Drucker in his now-classic book, The Practice of Management in the 1950s. The BSC differs from stakeholder theory by embedding stakeholder interests within a strategy framework. It also extends the economics-based agency theory by offering the instrumentation to guide a multi-period shareholder value creation process. The BSC continues to grow and evolve. Future developments will, for example, formally embed enterprise risk management into the strategy execution framework. Closed for comment; 0 Comments.
- 16 Mar 2010
- First Look
First Look: March 16
Avoiding conflicts of interest takes more than the right incentives ... New book explores the roots and continuing evolution of capitalism ... Case note: "Ben Bernanke: Person of the Year?" Closed for comment; 0 Comments.
The History of Beauty
Fragrance, eyeliner, toothpaste—the beauty business has permeated our lives like few other industries. But surprisingly little is known about its history, which over time has been shrouded in competitive secrecy. HBS history professor Geoffrey Jones offers one of the first authoritative accounts in Beauty Imagined: A History of the Global Beauty Industry. Closed for comment; 0 Comments.