- 09 Apr 2008
- Research & Ideas
The Matchmaker of the Modern Economy
In the wake of World War II, Georges Doriot helped found the world's first public venture capital firm, American Research and Development. Doriot (1899–1987) was also a professor at Harvard Business School for 40 years. Our book excerpt from Creative Capital: Georges Doriot and the Birth of Venture Capital (HBS Press) describes how ARD first came to "marry" investors and innovators. Key concepts include: A decorated brigadier general, favorite professor, and quirky personality, Georges Doriot shepherded many companies to life before launching American Research and Development (ARD) in 1946. The idea of venture capital was still so new in 1946 that ARD's founders were forced to reengineer aspects of various financial regulatory structures in order to make it viable. World War II was a watershed for entrepreneurialism. Closed for comment; 0 Comments.
- 08 Apr 2008
- First Look
- 07 Apr 2008
- Research & Ideas
The Debate over Taxing Foreign Profits
Corporate tax policy has suddenly become a hot topic in the U.S., including the issue of whether current tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor Mihir Desai makes a case for exempting foreign profit from taxes if proper safeguards are put in place. Key concepts include: The United States is increasingly an outlier in its taxation of corporate income earned on foreign soil. Critics argue the ability to defer U.S. taxation until profits are repatriated provides an incentive to ship jobs overseas. On the other hand, the current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition. An alternative may be to exempt foreign income from taxes paired with safeguards against an overly aggressive use of tax havens. Closed for comment; 0 Comments.
- 04 Apr 2008
- What Do You Think?
Who Owns Intellectual Property?
Online forum now closed. Is intellectual property becoming community property? While the impact of change on the valuation of IP is of concern to some respondents, others wonder whether the issues are overblown. HBS professor Jim Heskett sums up responses to this month's column. Closed for comment; 0 Comments.
- 03 Apr 2008
- Working Paper Summaries
Bridge Building in Venture Capital-Backed Acquisitions
The acquisition of new capabilities through the purchase of small venture capital-backed start-ups is a strategy that has been employed by many large technology firms including Cisco, Microsoft, Google, and EMC. Young venture capital-backed companies, for their part, often develop innovative technologies that can be exploited by existing technology companies. The value inherent in these start-ups is typically tied up in the intellectual property or human capital that has been developed during the early stages of the company's life. The opportunity to acquire valuable intangible assets, however, is balanced by the difficulty in assessing the value of the underlying assets. Unlike purchasing companies with substantial operating profits and a long track record of sales, the ability to fully assess the prospects of intangible assets is subject to substantial asymmetric information and uncertainty. This paper explores mechanisms for limiting the asymmetric information that potentially plagues the acquisition of young venture capital-backed companies. The results also shed light on the value that venture capitalists add to their portfolio companies as well as to companies in their venture capital network. Key concepts include: In the bridge-building alternative presented here, the personal relationship between the two firms is critical to conveying value-relevant information about both the target and the acquiring firm. The venture capital investor link between the acquirer and the target has a strong effect on how the purchase transaction is structured, how the market reacts to the announcement of the acquisition, and how the acquirer performs in the stock market in the long run. Recruitment of management and the identification of first-time customers may be improved through bridge building networks that the venture capitalist creates. Bridge building may be important in relationships with service providers and strategic partners. Closed for comment; 0 Comments.
- 02 Apr 2008
- Research & Ideas
Four Companies that Conquered America
Any self-respecting global company needs to compete in the United States, but many have floundered on its shores. Professor John Quelch spotlights the strategies of four that succeeded: Royal Bank of Scotland, IKEA, ING, and Dyson. Key concepts include: Royal Bank of Scotland built strong market share by acquiring regional banks and letting them maintain local identities. IKEA offers a unique furniture buying experience coupled with category-killer prices. ING gave its entrepreneurial general manager the green light to offer retail banking services exclusively on an online basis. Dyson started with a great product, then found a big-bang distributor: Best Buy. Closed for comment; 0 Comments.
- 01 Apr 2008
- First Look
- 01 Apr 2008
- Working Paper Summaries
No Harm, No Foul: The Outcome Bias in Ethical Judgments
Too often, workers are evaluated based on results rather than on the quality of the decision. Given that most consequential business decisions involve some uncertainty, the upshot is that organizations wind up rewarding luck rather than wisdom. From a rational decision-making perspective, people's decisions should be evaluated based on the information the decision maker had available to him or her at the time, and not based on the ultimate results. This paper tests predictions about this effect, known as the outcome bias, in two studies in which participants were asked to consider various ethically questionable behaviors. Participants were also given information about the outcome of such behaviors and were asked to rate the ethicality of the described actions with or without the outcome information. The findings extend prior research in psychology and ethics. Key concepts include: The tendency demonstrated in these two studies might lead people to blame others too harshly for making sensible decisions that have unlucky outcomes. The outcome bias could also partly explain the slow reactions that people tend to have when they observe others' unethical behavior. It is worth trying to understand a decision maker's state of mind. Judging decisions based on their outcomes will wind up condemning too many unlucky people and acquitting too many scoundrels. Closed for comment; 0 Comments.
- 31 Mar 2008
- HBS Case
JetBlue’s Valentine’s Day Crisis
It was the Valentine's Day from hell for JetBlue employees and more than 130,000 customers. Under bad weather, JetBlue fliers were trapped on the runway at JFK for hours, many ultimately delayed by days. How did the airline make it right with customers and learn from its mistakes? A discussion with Harvard Business School professor Robert S. Huckman. Key concepts include: JetBlue's dependence on a reservations system that relied on a dispersed workforce and the Web broke down when thousands of passengers needed to rebook at once. A crisis forces an organization to evaluate its operating processes rapidly and decide where it needs to create greater formalization or structure. Closed for comment; 0 Comments.
- 29 Mar 2008
- Research & Ideas
Creativity, Entrepreneurship, and Organizations of the Future
- 27 Mar 2008
- Working Paper Summaries
Exploring the Duality between Product and Organizational Architectures: A Test of the Mirroring Hypothesis
Products are often said to "mirror" the architectures of the organization from which they come. Is there really a link between a product's architecture and the characteristics of the organization behind it? The coauthors of this working paper chose to analyze software products because of a unique opportunity to examine two different organizational modes for development, comparing open-source with proprietary "closed-source" software. The results have important implications for development organizations given the recent trend toward "open" approaches to innovation and the increased use of partnering in research and development projects. Key concepts include: A product's architecture tends to mirror the structure of the organization within which it is developed. New organizational arrangements can have a distinct impact on the nature of the resulting design, and hence may affect product performance in unintended ways. There are substantial differences in relative levels of modularity between software systems of similar size and function. Closed for comment; 0 Comments.
- 26 Mar 2008
- First Look
- 26 Mar 2008
- Sharpening Your Skills
- 25 Mar 2008
- Working Paper Summaries
Incompatible Assumptions: Barriers to Producing Multidisciplinary Knowledge in Communities of Scholarship
Just as flows of knowledge within and across communities of practice improve the quality of new products, knowledge sharing among knowledge workers within interdisciplinary communities may be critical for new discoveries and for a more comprehensive and accurate understanding of phenomena. In spite of this, biologists tend to talk to biologists, economists tend to talk to economists, and lawyers tend to talk to lawyers. This paper argues that producing and disseminating knowledge within a multidisciplinary community of practice is enhanced when knowledge workers hold compatible assumptions, even when the form and content of knowledge generation across those workers varies. Key concepts include: Generating multidisciplinary knowledge may require communities of scholarship to acknowledge the presence and limitations of their assumptions. Within a community of scholarship, interpretive barriers to sharing knowledge arise when subgroups hold contrary assumptions about the appropriate questions to be asked or the fundamental nature of the phenomenon under investigation. Cross-discipline understanding may stem from the potential for members to recognize the relevance of others' findings to their own scholarship. Closed for comment; 0 Comments.
- 24 Mar 2008
- Working Paper Summaries
Optimal Deterrence when Judgment-Proof Agents Are Paid In Arrears—With an Application to Online Advertising Fraud
It is commonplace for large entities (both advertisers and ad networks) to enter into relationships with numerous small agents such as Web sites, blogs, search syndicators, and other marketing partners. For example, one well-known affiliate network boasts more than a million affiliates promoting offers from the network's hundreds of merchants, and Google contracts with numerous independent Web sites to show Google's "AdSense" ads. Although these advertising agents are often small, they can take advantage of technology to claim payments they have not earned. In practice, the legal system cannot offer meaningful redress to an aggrieved advertiser or ad network. This paper argues that delayed payment offers a more expedient alternative—a sensible stopgap strategy for use when primary enforcement systems prove inadequate. Key concepts include: Online advertising markets are one of many markets where agents may be effectively unreachable through the legal system. Online advertising contracts presently lack any institution by which the payment structure can enforce good practices. Improving detection technology remains the preferred deterrent of online advertising fraud. Appropriate selection of a payment delay can achieve the benefits offered by contingent payment in other markets. Closed for comment; 0 Comments.
- 24 Mar 2008
- Research & Ideas
Reducing Risk with Online Advertising
Fraud is fairly easy in the world of online advertising, particularly for determined adversaries. In this Q&A, HBS professor Ben Edelman, who designs electronic markets, explains how contract terms can be managed to both reduce advertisers' risks of being defrauded and reward good suppliers. "The idea here is to make everyone better off, except of course the fraudsters," Edelman says. Key concepts include: Delaying payment separates the wheat from the chaff and good affiliates from bad ones. Rule breakers know that the longer they have to wait to be paid, the more likely they are to get caught. In online advertising, it is often hard to know whether you've received the service you've contracted to receive and have paid for. Online affiliate programs are a big source of fraud. Because these programs are perceived to be low-fraud marketplaces, advertisers omit many ordinary protections they use when dealing with little-known suppliers. How to compute the optimal delay for payments is different depending on how prevalent bad affiliates are, the profit margins of bad affiliates, and how quickly your good suppliers need to get paid. Closed for comment; 0 Comments.
- 20 Mar 2008
- Working Paper Summaries
Sell Side School Ties
Certain agents play key roles in revealing information into securities markets. In the equities market, security analysts are among the most important. A large part of an analyst's job (perhaps the majority) is to research, produce, and disclose reports forecasting aspects of companies' future prospects, and to translate their forecasts into stock recommendations. Therefore, isolating how, or from whom, analysts obtain the information they use to produce their recommendations is important. Do analysts gain comparative information advantages through their social networks—specifically, their educational ties with senior officers and board members of firms that they cover? This paper investigates ties between sell-side analysts and management of public firms, and the subsequent performance of their stock recommendations. Key concepts include: Equity analysts outperform on their stock recommendations when they have an educational link to that company. A simple portfolio strategy of going long the buy recommendations of analysts with school ties and going short the buy recommendations of analysts without ties earns returns of 5.40% per year in the full sample. Informal information networks are an important, yet under-emphasized channel through which private information gets revealed into prices. Closed for comment; 0 Comments.
- 19 Mar 2008
- Research & Ideas
Finding Success in the Middle of the Market
Let's face it—the middle market isn't sexy. Sears isn't Victoria's Secret. But it can be very profitable to know how to play "midfield" adroitly, says professor and soccer enthusiast John Quelch. Key concepts include: Midfield represents the middle of the market, to which one end of the market aspires to trade up while the other end may have to trade down. A company controls midfield by fielding a complete product line that includes backs and forwards. Cost and service tradeoffs are required of companies that continue to dominate the middle ground. Closed for comment; 0 Comments.
- 18 Mar 2008
- Working Paper Summaries
Modeling Expert Opinions on Food Healthiness: A Nutrition Metric
Despite an increased standard of living in the United States and other developed countries, health problems attributable to poor nutrition persist in part due to consumers' inability to translate the dietary advice of nutrition experts into anything actionable. Citing the improvement of public health as a primary objective, numerous studies have highlighted the need for a nutritional scoring system that is both comprehensive in its coverage of food products and easily understood by consumers. In this paper the researchers advance this objective by proposing a nutrition metric that is based on the current views of leading experts in the field. The metric can be used to score any food or beverage for which several component nutrient quantities are known. Key concepts include: This model encompasses the factors that matter most to the professional judgment of nutrition experts. Previous models focusing solely on either positive or negative nutrients have omitted critical information that experts take into account when assessing a food's healthiness. This model could be used to generate healthiness ratings that are displayed on or near food and beverage labels, allowing consumers to make more informed choices about which products to purchase and consume. Closed for comment; 0 Comments.
Where Does it Go? Spending by the Financially Constrained
Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates. Key concepts include: The conclusion that a material fraction of funds was used to pay for necessities suggests that the federal Earned Income Tax Credit program is central to the lives of the poor. Loans tended to be used to obtain necessities, especially funds spent in the first few days of the loans. Consumer advocates who seek to ban settlement products should consider how a ban would affect households' ability to smooth consumption. Similarly, businesses that are pricing and marketing these products should be mindful that the products are not a luxury for the users. These findings document the fairly rapid speed of spending of refunds, which may help policymakers think about the economic stimulus impact of tax refunds and rebates. Closed for comment; 0 Comments.