First Look

April 14, 2009

Sovereign wealth funds (SWFs) hold a certain sway in the global financial system—to the tune of assets estimated at $3.5 trillion in 2008. Yet such funds often remain mysterious because so little information is publicly available. HBS professor Josh Lerner and colleagues in their new working paper, "The Investment Strategies of Sovereign Wealth Funds" [PDF], investigate the objectives and constraints of such funds. The bottom line: "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," they write. Lean principles are the tenets of the Toyota Production System known in manufacturing as TPS. Do they help in service contexts, too? HBS doctoral student Bradley R. Staats and Professor David M. Upton put lean principles to the test at a large Indian software vendor, and saw improvement in problem solving, coordination, and standardization of work. Their working paper, newly revised, is titled "Lean Principles, Learning, and Software Production: Evidence from Indian Software Services" [PDF]. Other publications and cases cover a diverse range of topics from psychology to real estate.
— Martha Lagace

Working Papers

The Investment Strategies of Sovereign Wealth Funds


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.

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Monopolistic Competition Between Differentiated Products with Demand for More Than One Variety


We analyze the existence of pure strategy symmetric price equilibria in a generalized version of Salop's (1979) circular model of competition between differentiated products—namely, we allow consumers to purchase more than one brand. When consumers purchase all varieties from which they derive non-negative net utility, there is no competition, so that each firm behaves like an unconstrained monopolist. When each consumer is interested in purchasing an exogenously given number (n) of varieties, we show that there is no pure strategy symmetric price equilibrium in general (for n > 2 with linear transportation costs). In turn, if the limitation on the number of varieties consumers purchase comes from a budget constraint, then we obtain a multiplicity of symmetric price equilibria, which can be indexed by the number of varieties consumers purchase in equilibrium.

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Smith and Rawls Share a Room: Stability and Medians


We consider one-to-one, one-sided matching (roommate) problems in which agents can either be matched as pairs or remain single. We introduce a so-called bi-choice graph for each pair of stable matchings and characterize its structure. Exploiting this structure we obtain as a corollary the "lone wolf" theorem and a decomposability result. The latter result, together with transitivity of blocking, leads to an elementary proof of the so-called stable median matching theorem, showing how the often incompatible concepts of stability (represented by the political economist Adam Smith) and fairness (represented by the political philosopher John Rawls) can be reconciled for roommate problems. Finally, we extend our results to two-sided matching problems.

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Lean Principles, Learning, and Software Production: Evidence from Indian Software Services (revised)


While the concepts of lean production are frequently applied in service organizations, there is little work that rigorously has examined implementing lean production in contexts other than manufacturing, as well as lean production's impact on performance in these settings. In this paper we set out to accomplish both tasks by investigating the implementation of a lean production system at an Indian software services firm. Combining a detailed case study and empirical analysis we document the internal processes that the lean initiative influences. We find that lean projects perform better than the non-lean projects in our sample in many, but not all, cases. Building on this result we see that the impact of the techniques on problem solving, coordination, and standardization of work improve the way that the firm learns as well as its productivity. In so doing, we gain insight into how a company can build an operations-based advantage.

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Cases & Course Materials

Miles Everson at PricewaterhouseCoopers

Harvard Business School Case 409-002

Miles Everson, a partner at PricewaterhouseCoopers (PwC), is the Global Engagement Partner (GEP) for a large U.S. financial institution and about to take over this role for a much larger global financial institution. The GEP role is a critical one at PwC. GEPs have responsibility for the firm's largest and most important clients. They must manage a vast external network of client employees and an equally vast internal network of the firm's employees. The GEP needs to have a deep understanding of the client and its industry in order to identify opportunities and problems where the firm's resources can be brought to bear and to match the firm's capabilities to the client's needs. GEPs must be able to simultaneously manage a larger number of tasks, often under great time pressure. This case describes how a very effective GEP-Miles Everson, who was named one of the top 25 consultants for 2006 by Consulting magazine-performs this role and provides insights into the attitudes, skills, and subject matter expertise necessary to be successful in this role. Insights into how Everson does this job are provided by both PwC and client personnel. As is often the case, Everson is responsible for a business (in his case Governance, Risk, and Compliance), and so he has substantial internal management responsibilities as well. The case raises questions about whether he will be able to retain these internal management responsibilities when he takes over a much larger and more complex global client and becomes the Senior Engagement Partner (SEP) on his current client. (SEPs perform an oversight role for the work being done by the GEP and his or her team and are typically very senior members of the firm.) The case also raises areas where Everson can improve.

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OppenheimerFunds and Take-Two Interactive (A)

Harvard Business School Case 408-074

Describes the dilemma faced by Emmanuel Ferreira, a fund manager at OppenheimerFunds. As the largest shareholder and a long-time investor in software publisher Take-Two Interactive, Ferreira contemplates whether or not to get involved with other investors in trying to replace the board of directors at Take-Two Interactive. The company has been encountering a number of problems with its accounting methods and in the design of its products, etc. All of this has led to a depressed stock price, which is of serious concern to the manager(s) at OppenheimerFunds as well as to other investors. This leads a media turnaround firm to contact OppenheimerFunds and other large Take-Two shareholders with the intention of ousting the company's board, replacing management, and rejuvenating the company. No fund manager at OppenheimerFunds has ever pursued such an action, and the case invites readers to weigh the pros and cons of Ferreira's options.

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TravelCenters of America

Harvard Business School Case 209-030

A New York-based hedge fund must decide whether to invest in TravelCenters of America (TA), a recent spin-off from a U.S.-based real estate investment trust. The case confronts students with the question: To what extent is this spin-off opportunity attractive from a value-investing standpoint? Historically, spin-offs have been attractive investments because of supply-demand dynamics associated with their investor base. The case is an opportunity to ask whether the same dynamics will operate for TA.

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The Role of Execution in Managing Product Availability

No abstract is available at this time.

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The Harvard Economic Service and the Problems of Forecasting


The Harvard Economic Service pioneered the business of economic forecasting by publishing a weekly newsletter on economic conditions starting in 1922. The Harvard forecasting model, developed by the statistician and economist Warren Persons, gained international renown for its three-curve A-B-C chart, which rendered business fluctuations as the ebb and flow of speculation (A), business (B), and banking (C). The service was directed by C.J. Bullock, who promoted Harvard's forecasting service around the world by forming collaborative agreements with John Maynard Keynes, Lucien March, Corrado Gini, and other prominent economists of the time. The Harvard Economic Service, however, attracted criticism for its purely empirical approach, its failure to make consistently accurate predictions, and its pursuit of commercial objectives in a university setting. The Harvard group's efforts to build a forecasting service are an early chapter in the evolution of the social sciences, the growth of a class of financial analysts, and the commercialization of academic knowledge.

Are They Really That Happy? Exploring Scale Recalibration in Estimates of Well-Being


Objective: The authors addressed a lingering concern in research on hedonic adaptation to adverse circumstances. This research typically relies on self-report measures of well-being, which are subjective and depend on the standards that people use in making judgments. The authors employed a novel method to test for, and rule out, such scale recalibration in self-reports of well-being.

Design: The authors asked patients with chronic illness (either lung disease or diabetes) and nonpatients to evaluate quality of life (QoL) for the patients' disease. In addition, the authors also asked them to rank and rate the aversiveness of a diverse set of adverse circumstances, allowing examination of both the numerical ratings and ordering among items.

Main Outcome Measures: The authors compared patients' and nonpatients' ratings and rankings for the patients' disease and other conditions.

Results and Conclusion: The authors found that patients not only assigned higher numerical QoL ratings to their own disease than did nonpatients but also ranked it higher among the broad set of conditions. These results suggest that scale recalibration cannot account for discrepant QoL ratings between patients and nonpatients. More generally, this study presents a new approach for measuring well-being that is not subject to the problem of scale recalibration.