First Look

January 16, 2018

Of special interest among new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Drawing the line on personalization

Marketers are living in a golden age of personalization—“companies can now gain unprecedented insight into individual consumers and target them with tailored ads,” write Leslie John, Tami Kim, and Kate Barasz. But when does it all tip into invasion of privacy? Ads That Don't Overstep: How to Make Sure You Don't Take Personalization Too Far.

Can the new economy create good blue-collar jobs?

Authors Dennis Campbell, John Case, and Bill Fotsch explore the shifting debate over what a company should provide employees beyond a salary. More Than a Paycheck: How to Create Good Blue-Collar Jobs in the Knowledge Economy.

The novel drug dilemma

How much should pharmaceutical companies risk developing big-bang drugs versus proven “me-too” therapies? Developing Novel Drugs.

A complete list of new research and publications from Harvard Business School faculty follows.

— Sean Silverthorne
 
  • January–February 2018
  • Harvard Business Review

More Than a Paycheck: How to Create Good Blue-Collar Jobs in the Knowledge Economy

By: Campbell, Dennis, John Case, and Bill Fotsch

Abstract—Fifty years ago a good blue-collar job was with a large manufacturer such as General Motors or Goodyear. Often unionized, it paid well, offered benefits, and was secure. But manufacturing employment has steadily declined, from about 25% of the U.S. labor force in 1970 to less than 10% today. Now a decent living entails more than a generous wage; it involves sharing the company's success with employees. Some companies offer a direct stake in the company's performance through stock, a share in profits, or both. Companies with employee stock ownership plans report significantly higher sales growth and higher revenue per employee than do conventionally owned companies in the same industry. However, virtually all the gains to be had go to those that create an ownership culture, by building in participative management and helping employees learn to think and act like owners.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=53727

  • January–February 2018
  • Harvard Business Review

The Leader's Guide to Corporate Culture: How to Manage the Eight Critical Elements of Organizational Life

By: Groysberg, Boris, Jeremiah Lee, Jesse Price, and J. Yo-Jud Cheng

Abstract—Executives are often confounded by culture because much of it is anchored in unspoken behaviors, mindsets, and social patterns. But when properly managed, culture can help them achieve change and build organizations that will thrive in even the most trying times. In "The Leader's Guide to Corporate Culture," the authors describe eight distinct culture styles: caring, focused on relationships and mutual trust; purpose, exemplified by idealism and altruism; learning, characterized by exploration, expansiveness, and creativity; enjoyment, expressed through fun and excitement; results, characterized by achievement and winning; authority, defined by strength, decisiveness, and boldness; safety, defined by planning, caution, and preparedness; and order, focused on respect, structure, and shared norms. These styles fit into an "integrated culture framework" according to the degree to which they reflect independence or interdependence (people interactions) and flexibility or stability (response to change). They can be used to diagnose a culture and to model how likely an individual leader is to align with and shape it. The authors offer five insights regarding culture's effect on companies' success: (1) When aligned with strategy and leadership, a strong culture drives positive organizational outcomes. (2) Selecting or developing leaders for the future requires a forward-looking strategy and culture. (3) In a merger, designing a new culture on the basis of complementary strengths can speed up integration and create more value over time. (4) In a dynamic, uncertain environment, in which organizations must be more agile, learning gains importance. (5) A strong culture can be a significant liability when it is misaligned with strategy. The package includes four companion features: "What's Your Organization's Cultural Profile?" "How to Shape Your Culture," "Convergence Matters," and "Context, Conditions, and Culture."

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=53726

  • January–February 2018
  • Harvard Business Review

Ads That Don't Overstep: How to Make Sure You Don't Take Personalization Too Far

By: John, Leslie, Tami Kim, and Kate Barasz

Abstract—Data gathered on the web has vastly enhanced the capabilities of marketers. With people regularly sharing personal details online and internet cookies tracking every click, companies can now gain unprecedented insight into individual consumers and target them with tailored ads. But when this practice feels invasive to people, it can prompt a strong backlash. Marketers today need to understand where to the draw the line. The good news is that psychologists already know a lot about what triggers privacy concerns off-line. These norms—and the authors’ research—strongly suggest that firms steer clear of two ad-targeting techniques generally disliked by consumers: using information obtained on a third-party site rather than on the site on which an ad appears, which is akin to talking behind someone’s back, and deducing information about people (such as a pregnancy) from analytics when they haven’t declared it themselves. If marketers avoid those tactics, use data judiciously, focus on increasing trust and transparency, and offer people control over their personal data, their ads are much more likely to be accepted by consumers and help raise interest in engaging with a company and its products.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=53707

  • January–February 2018
  • Harvard Business Review

Inclusive Growth: Profitable Strategies for Tackling Poverty and Inequality

By: Kaplan, Robert S., George Serafeim, and Eduardo Tugendhat

Abstract—More than a billion people in the developing world remain in extreme poverty and outside the formal economy. Traditional CSR programs have done little to alleviate the situation and rarely produce transformative change. Instead of trying to fix local problems, the authors argue, corporations need to reimagine the regional ecosystems in which they participate. They should search for systemic, multisector opportunities; mobilize complementary partners; and obtain seed and scale-up financing from organizations with a mission to alleviate poverty. They should also align the various stakeholders around the new strategy, using proven tools such as a co-created strategy map. These principles are informed by the authors’ experience with several successful inclusive-growth projects. An initiative in Uganda is bringing small maize farmers into the mainstream regional economy, while a training program in El Salvador is giving unemployed youths the skills to work in the country’s growing service sector.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=53719

  • 2018
  • The China Questions: Critical Insights into a Rising Power

Will Urbanization Save the Chinese Economy or Destroy It?

By: Rithmire, Meg

Abstract—The Chinese leadership under Xi Jinping has announced its intentions to transition the economy from one driven by investment and exports to one driven by domestic demand. The main strategy to achieve this transformation involves massive state-led urbanization. This essay explores whether the strategy will save the Chinese economy or generate social and political problems that imperil the country's growth and stability.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=53716

Lone Wolves in Competitive Equilibria

By: Jagadeesan, Ravi, Scott Duke Kominers, and Ross Rheingans-Yoo

Abstract—This paper develops a class of equilibrium-independent predictions of competitive equilibrium with indivisibilities. Specifically, we prove an analogue of the “Lone Wolf Theorem” of classical matching theory, showing that when utility is perfectly transferable, any agent who does not participate in trade in one competitive equilibrium must receive her autarky payoff in every competitive equilibrium. Our results extend to approximate equilibria and to settings in which utility is only approximately transferable.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=53705

Developing Novel Drugs

By: Krieger, Joshua, Danielle Li, and Dimitris Papanikolaou

Abstract—We analyze firms' decisions to invest in incremental and radical innovation, focusing specifically on pharmaceutical research. We develop a new measure of drug novelty that is based on the chemical similarity between new drug candidates and existing drugs. We show that drug candidates that we identify as ex-ante novel are riskier investments, in the sense that they are subsequently less likely to be approved by the FDA. However, conditional on approval, novel candidates are, on average, more valuable—they are more clinically effective; have higher patent citations; lead to more revenue and to higher stock market value. Using variation in the expansion of Medicare prescription drug coverage, we show that firms respond to a plausibly exogenous cash flow shock by developing more molecularly novel drug compounds, as opposed to more so-called "me-too" drugs. This pattern suggests that, on the margin, firms perceive novel drugs to be more valuable ex-ante investments but that financial frictions may hinder their willingness to invest in these riskier candidates.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=53708

Abstract—The duration of a vertical relationship depends on two types of costs: (i) the transaction costs of reselecting a supplier and (ii) the cost of being matched to an inefficient supplier when the relationship lasts too long. For commodified goods and services, this tradeoff can be the primary determinant of the duration of supply contracts. I develop a model of optimal contract duration that captures this tradeoff, and I provide conditions that identify underlying costs. Latent transaction costs are identified even when the exact supplier selection mechanism is unknown. I estimate the model using federal supply contracts and find that transaction costs are a significant portion of total buyer costs. I use the structural model to estimate the value of the right to determine duration to the buyer, compared to a standard duration. Finally, a counterfactual analysis illustrates why quantifying transaction costs is important for the accurate analysis of welfare.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=53718

Abstract—Why do incumbent firms frequently reject non-incremental innovations? Beyond technical, structural, or economic factors, we propose the degree of frame flexibility (i.e., the capability of the top management team (TMT) to expand an innovation’s categorical boundaries and to cast the innovation as emotionally resonate with the organization’s identity, capabilities, and competitive boundaries) plays a role. We argue that forces of inertia constrict how TMTs perceive innovations but that frame flexibility can overcome these perceptions, increasing the likelihood of adoption and the breadth of the organization’s innovation practices. We advance a theoretical model that relaxes the assumption that cognitive frames are static, showing how they become flexible via categorical positioning and introducing a role for emotional frames that appeal to organizational sentiments and aspirations in innovation adoption.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=52571