- 12 May 2009
- First Look
- 11 May 2009
- Research & Ideas
The IT Leader’s Hero Quest
Think you could be CIO? Jim Barton is a savvy manager but an IT newbie when he's promoted into the hot seat as chief information officer in The Adventures of an IT Leader, a novel by HBS professors Robert D. Austin and Richard L. Nolan and coauthor Shannon O'Donnell. Can Barton navigate his strange new world quickly enough? Q&A with the authors, and book excerpt. Key concepts include: The role of CIO is one of the most volatile, high-turnover jobs in business. Why? The driving cause is more than rapid change in IT. Rather, IT is at the crossroads of major organizational change. Barton soon realizes that IT-specific knowledge is not a key to success. Instead, he must take care to collaborate equally with the senior management team and his own staff. Like Barton, today's senior executives are continuously confronted with situations with multiple uncertainties, needing collaboration and input from experts who may know more than they do about the specifics. Closed for comment; 0 Comments.
- 08 May 2009
- Working Paper Summaries
Capitalizing On Innovation: The Case of Japan
How can Japan create a better business environment for innovation? Japan presents a unique case of industrial structures that have produced remarkable developments in certain sectors but seem increasingly inadequate to do the same in modern technology industries, which rely on ecosystems of firms producing complementary products. Robert Dujarric and HBS professor Andrei Hagiu present three case studies of software, animation, and mobile telephony to illustrate potential sources of inefficiencies. Like all advanced economies, Japan faces two interconnected challenges. The first challenge is rising competition from lower-cost countries with the capacity to manufacture midrange and in some cases advanced industrial products. At the same time, Japan confronts changes in the relative weights of manufacturing and services, including soft goods, which go against the country's long-standing competitive advantage and emphasis on manufacturing. If Japan is to continue to prosper in a world where its ability to rely principally on manufacturing will diminish, its policymakers will need to capitalize on its untapped innovative power. Key concepts include: The Japanese hierarchical industry organizations can simply "lock out" certain types of innovation indefinitely by perpetuating established business practices. This is the case with software, an industry in which Japan is strikingly weak. Even when vertical hierarchies produce highly innovative sectors in the domestic market—as is the case with animation and wireless mobile communications—the exclusively domestic orientation of the "hierarchical industry leaders" can entail large missed opportunities for other members of the ecosystem, who are unable to fully exploit their potential in global markets. Private-sector initiative is critical in developing the venture-capital sector, which is a key and necessary ingredient for stimulating innovation in modern industries. Closed for comment; 0 Comments.
- 07 May 2009
- Working Paper Summaries
Broadening Focus: Spillovers and the Benefits of Specialization in the Hospital Industry
What is the optimal scope of operations for firms? This question has particular relevance for the US hospital industry, because understanding the effects of focus and spillovers might help hospitals determine how they should balance focusing in a single clinical area with building expertise in related areas. While some scholars argue that narrowing an organization's set of activities improves its operational efficiency, others have noted that seemingly unfocused operations perform at a high level and that a broader range of activities may in fact increase firm value. This study by HBS doctoral student Jonathan Clark and professor Robert Huckman highlights the potential role of spillovers—specifically complementary spillovers—in generating benefits from focus at the operating unit level. Key concepts include: Hospitals devoting a greater portion of their business to treating patients in related service categories (i.e., those with the potential for knowledge spillovers) experience higher returns to specialization in a focal service. Ultimately, these results provide a potential explanation for why there might be decreasing returns to focusing an organization on a single operating activity (or narrow set of activities), especially when it is possible to invest in other activities that complement the organization's area of concentration. Closed for comment; 0 Comments.
- 05 May 2009
- First Look
- 04 May 2009
- Working Paper Summaries
An Ounce of Prevention: The Power of Public Risk Management in Stabilizing the Financial System
The present financial crisis should remind us that private financial institutions and markets cannot always be counted upon to manage risk optimally on their own. Almost everyone now recognizes that the government has a critical role to play—as the lender, insurer, and spender of last resort—in times of crisis. But effective public risk management is also needed in normal times to protect consumers and investors and to help prevent financial crises from starting in the first place. According to HBS professor David Moss, the biggest threat to our financial system today is posed not by commercial banks (as in 1933), but rather by systemically significant institutions (outside of commercial banking) that have the potential to trigger financial avalanches. The threat posed by these financial institutions is only compounded by the unprecedented federal guarantees introduced in response to the current crisis and the pervasive moral hazard they spawn. Under the system that Moss proposes, no financial institution would be too big to fail. Key concepts include: Ensure financial stability in the future by identifying and regulating systemically significant institutions on an ongoing basis, before crisis strikes. The biggest risk management problem we face today in the financial sector is not commercial banks, but rather systemically significant institutions that pose a threat to the broader financial system (because of their size and interconnectedness) and, as a result, carry implicit federal guarantees. The fifty years of relative financial calm that followed the Glass-Steagall Act of 1933, the Securities Exchange Act of 1934, and the Banking Act of 1935 strongly suggest that sound public risk management can make a positive difference. To the extent that systematically significant financial institutions will receive federal support in the event of a general financial crisis, such support should be formalized (and paid for) in advance. Although all government guarantees can generate moral hazard, implicit guarantees are often the worst kind. Closed for comment; 0 Comments.
- 04 May 2009
- Research & Ideas
What’s Next for the Big Financial Brands
Some of the great financial brands such as Merrill Lynch built trust with customers over decades—but lost it in a matter of months. Harvard Business School marketing professor John Quelch explains where they went wrong, and what comes next. Key concepts include: Turmoil and distrust in the financial services sector is an open invitation to non-financial companies to exploit the brand vacuum created by the demise of the likes of Merrill Lynch and the Royal Bank of Scotland. Financial brands today must address the most basic of consumer concerns: Will my money be safe with this company? Financial brands should continue to advertise but with messages that help customers with recession-relevant product and service offerings. Closed for comment; 0 Comments.
- 01 May 2009
- What Do You Think?
Do Innovation and Entrepreneurship Have to Be Incompatible with Organization Size?
Like a good case study, this month's question divided respondents nearly down the middle, says professor Jim Heskett. Can managers lead both a large, established organization and encourage intrapreneurial effort inside it? Readers weighed in. (Online forum now closed. Next forum begins June 5.) Closed for comment; 0 Comments.
- 30 Apr 2009
- Working Paper Summaries
Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors
Although 99 percent of the companies operating in the United States are private, according to the American Institute of Certified Public Accountants, their accounting practices remain largely unknown due mainly to the lack of publicly available financial statements. In this study, HBS professor Sharon P. Katz used a unique database of firms with privately held equity and publicly held debt to examine how two different ownership structures-private equity sponsorship and non-private equity sponsorship-affect firms' financial reporting practices, financial performance, and stock returns in the years preceding and following the initial public offering (IPO). Key concepts include: Despite their economic importance and the management expertise they bring, little is known about the role private equity (PE) sponsors play in their portfolio companies' accounting practices. The presence of and monitoring by PE sponsors restrains upward earnings management and induces a higher frequency of timely loss recognition, both pre- and post-IPO. Majority ownership by a PE sponsor is associated with better stock price performance relative to management-owned firms. Larger PE sponsor size is positively associated with better long-term financial and stock price performance when a firm goes public. Closed for comment; 0 Comments.
- 29 Apr 2009
- Working Paper Summaries
Female Empowerment: Impact of a Commitment Savings Product in the Philippines
Does access to personal savings increase female decision-making power in the household? The answer could be important for policymakers looking to increase female empowerment. HBS professor Nava Ashraf and colleagues developed a commitment savings product called a SEED (Save, Earn, Enjoy Deposits) account with a small, rural bank in the Philippines. The SEED account requires that clients commit not to withdraw funds that are in the account until they reach a goal date or amount, but it does not explicitly commit the client to continue depositing funds after opening the account. This working paper examines the impact of the commitment savings product on both self-reported decision-making processes within the household and the subsequent household allocation of resources. Key concepts include: The commitment savings product positively impacts household decision-making power for women (i.e., the household is more likely to buy female-oriented durables) and self-perception of savings behavior (time-inconsistent females report being more disciplined savers), as well as actual consumption decisions regarding durable goods. A simple design feature such as a restriction on withdrawals or encouraging savings through marketing or door-to-door deposits can benefit women in search of self-control devices as well as those who desire to have more decision-making power in the household. Closed for comment; 0 Comments.
- 28 Apr 2009
- First Look
- 27 Apr 2009
- Research & Ideas
Building Businesses in Turbulent Times
An economic crisis is a charter for business leaders to rewrite and rethink how they do business, says Harvard Business School professor Lynda M. Applegate. The key: Don't think retrenchment; think growth. Key concepts include: Companies that survive the financial crisis by identifying and exploiting innovation will serve as economic growth engines in the future—and will be the industry leaders of tomorrow. This is a time of unprecedented opportunity to rethink offerings, markets, business processes, and organizational structure—and to improve them to achieve growth. Success will depend on leaders who are able to stabilize the company as they identify and exploit opportunities, find new market niches, create innovative new offerings, and restructure and reposition. Closed for comment; 0 Comments.
- 24 Apr 2009
- Working Paper Summaries
Corporate Social Entrepreneurship
Accelerated organizational transformation faces a host of obstacles well-documented in the change management literature. Because corporate social entrepreneurship (CSE) expands the core purpose of corporations and their organizational values, it constitutes fundamental change that can be particularly threatening and resisted. Furthermore, it pushes the corporation's actions more broadly and deeply into the area of social value creation where the firm's experiences and skill sets are less developed. The disruptive social innovations intrinsic to the CSE approach amplify this zone of discomfort. Fortunately, the experiences of innovative companies such as Timberland and Starbucks show how these challenges may be overcome. Key concepts include: Values-based leadership, the synergistic generation of social and economic value, and strategic cross-sector alliances are key ingredients to achieving a sustainably successful business. For companies to move their corporate social responsibility (CSR) activities to the next level, they need to rethink their current approaches to CSR, tapping into the creativity of each individual. Like all entrepreneurship, CSE is about creating disruptive change in the pursuit of new opportunities. It combines the willingness and desire to create joint economic and social value with the entrepreneurial redesign, systems development, and action necessary to carry it out. Closed for comment; 0 Comments.
- 23 Apr 2009
- Working Paper Summaries
Does Public Ownership of Equity Improve Earnings Quality?
The quality of accounting information is influenced by an array of factors, most of which stem from the demand for such information for use in contractual arrangements and from the incentives and opportunities of management to manage the reported numbers. Both the demand for quality accounting information for contractual purposes and management incentives to adjust the reported earnings are likely to be influenced by whether the equity of the company is privately held or publicly traded. This study examines the differential earnings quality of private equity and public equity firms in order to shed light on how public ownership of equity affects the quality of firms' earnings. The research highlights how the presence of public equity investors affects management's reporting behavior. Key concepts include: While public equity and private equity firms differ along various quality and financial attribute dimensions, neither type of firm "dominates" the other as having the highest quality of financial reports. Management of firms whose equity is publicly traded has stronger incentives to manage earnings, thus reducing the reliability and usefulness of financial reports. Public equity firms report more conservatively than privately held firms, although this result does not necessarily imply a higher quality of reporting for the former group of firms. Closed for comment; 0 Comments.
- 22 Apr 2009
- Working Paper Summaries
Where is the Pharmacy to the World? International Regulatory Variation and Pharmaceutical Industry Location
The era of paternalistic medicine has passed, but the notion that patients can act as consumers and make appropriate decisions concerning medical treatment poses countervailing risks of its own. A better accommodation among key players needs to be struck to foster the safe use of pharmaceuticals, according to HBS professor Arthur Daemmrich. The "pharmacy to the world," once located at the intersection of Germany, Switzerland, and France, today is found in the United States. Studies of the industry have attributed this sustained competitive advantage to a variety of factors, including U.S. intellectual property policies, funding for biomedical research through the National Institutes of Health, the absence of government controls on drug prices, and the availability of venture capital and other factors that fostered the growth of the biotechnology industry. The data and analysis presented in this working paper, however speculative, are an initial step toward deepening the understanding of interrelationships between government regulation, patients' mobilization both as regulators and as consumers, and the functioning of the pharmaceutical industry. Key concepts include: An open question is whether the current "pharmacy to the world" of the United States will lose ground to competitors from developing countries, especially India and China. Regulation plays a role in the success and failure of the pharmaceutical industry. The consumer mode that has emerged in the United States has proven easy to manipulate for the industry, as in cases of corporate-financed organizations claiming to be self-organized by patients. The consumer mode in the United States has also driven a focus on disease prevalent in wealthy countries, to the detriment of research into HIV/AIDS, malaria, and other ailments prevalent in the developing world. The combination of public attention to drug prices, health concerns from product withdrawals due to adverse reactions, and criticisms of the failure to deliver medicines to patients in developing countries pose significant challenges to the industry and regulators. The emergence of a consumer model of regulation poses a number of critical, unresolved questions about the longer-term role of government, industry, the medical profession, and citizens. Closed for comment; 0 Comments.
- 21 Apr 2009
- First Look
- 20 Apr 2009
- Research & Ideas
Misgovernance at the World Bank
Board members may be inclined to advance their own interests at voting time. This appears true for the World Bank's Board of Executive Directors, too. The problem? Many countries are being shut out of development funding. New research by Harvard Law School student Ashwin Kaja and HBS professor Eric Werker tells why misgovernance at the World Bank should be corrected. Key concepts include: A majority of the 185 World Bank member countries never or rarely get a seat on the Board of Executive Directors. Kaja and Werker's research shows that a developing country sitting on the board may see its normal funding levels doubled during its service on the board. Appropriations committees at other large international organizations should be scrutinized for similar conflicts of interest. Closed for comment; 0 Comments.
- 20 Apr 2009
- Working Paper Summaries
Corporate Misgovernance at the World Bank
This paper examines the politics of corporate governance at the world's largest appropriations committee, the World Bank's Board of Executive Directors, and exposes a weakness in the design of the World Bank's decision-making structure. Any large public organization faces a challenge of representation and management. Since all decisions cannot be made by all members, founders often grant a more nimble body with decision-making powers. But representatives on the decision-making body may face a temptation to govern in the interests of their own wallet or narrow constituency rather than in the interests of the larger body. In 2008, the Bank's two primary component institutions—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA)—committed nearly $25 billion in loans and grants through some 300 development projects around the globe. Where did it go? By exploring the political dynamics and corporate governance of an international appropriations committee, we not only learn about international organizations but also the nature of the international system itself. Key concepts include: A majority of World Bank member countries never or rarely get a seat at the table. The Executive Board is used as a platform to channel more or greater Bank loans and grants to the home countries of the directors. Countries receive a large increase in Bank loans and grants during years when they have a seat on the board. On average, a developing country serving on the board can expect a doubling of its normal funding levels. In absolute terms, board membership is rewarded with a nearly $60 million bonus, on average. Finding that countries can take advantage of their position of power has implications for other international appropriations committees like the European Union, International Monetary Fund, regional development banks, and United Nations agencies. Closed for comment; 0 Comments.
- 17 Apr 2009
- Working Paper Summaries
The Investment Strategies of Sovereign Wealth Funds
The role of sovereign wealth funds (SWFs) in the global financial system has been increasingly recognized in recent years, and many reports suggest that SWFs are often employed to further the geopolitical and strategic economic interests of their governments. The resources controlled by these funds—estimated to be $3.5 trillion in 2008—have grown sharply over the past decade. Projections, while inherently tentative due to the uncertainties about the future path of economic growth and commodity prices, suggest that they will be increasingly important actors in the years to come. Despite this significant and growing role, financial economists have devoted remarkably little attention to these funds. The lack of scrutiny must be largely attributed to the deliberately low profile adopted by many SWFs, which makes systematic analysis challenging. Bernstein, Lerner, and Schoar analyze how SWFs vary in their investment styles and performance across various geographies and governance structures. Taken as a whole, results suggest that high levels of home investments by SWFs, particularly those with the active involvement of political leaders, are associated with trend chasing and worse performance. Key concepts include: Sovereign wealth funds (SWFs) present an ideal object of investigation to understand the interaction between finance and political economy. The direct private equity investments analyzed here are one of the few dimensions of SWF investments on which it is possible to obtain comprehensive information. 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. SWFs where politicians are involved have a much greater likelihood of investing at home than those where external managers are involved. Funds with politicians involved invest in higher P/E (price earnings ratio) industries, which have a negative valuation change in the year after the investment. Much research remains to better understand the underlying investment objectives of SWFs, their investment strategies, and their organizational differences, as well as the constraints they face due to internal and external pressures. Closed for comment; 0 Comments.
Sharpening Your Skills: Managing Teams
The ability to lead teams is fast becoming a critical skill for all managers in the 21st century. Here are four HBS Working Knowledge stories from the archives that address everything from how teams learn to turning individual performers into team players. Closed for comment; 0 Comments.