First Look

June 6, 2017

Among the highlights included in new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

VCs with daughters are more likely to hire female partners

Research by Paul Gompers and Sophie Q. Wang finds that when senior partners at VC firms are parents of daughters, those firms are more likely to hire female partners. And that leads to better fund performance. Their paper is titled And the Children Shall Lead: Gender Diversity and Performance in Venture Capital. “Taken together, our findings have profound implications on how the capital markets could function better with improved diversity,” the authors conclude.

Streamlining the US patent office

It’s busy over there at the United States Patent and Trademark Office (USPTO). According to a new case study by Prithwiraj Choudhury, Tarun Khanna, and Sarah Mehta, as of April 2016 it took the agency 26 months for a patent application to be evaluated, beyond the internal goal of 20 months. The case follows Andrew Hirshfeld, patent commissioner, as he explores tools such as machine learning and telework to get the job done faster. The case is The Future of Patent Examination at the USPTO.

Should the CEO also be chief strategist?

The forthcoming paper Strategy and the Strategist: How It Matters Who Develops the Strategy explores questions around who should develop company strategy. When should a CEO be responsible? When is it better to consult an outsider or other person inside the company? The paper, to be published by Management Science, was written by Eric J Van den Steen.

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

— Sean Silverthorne
 
  • forthcoming
  • American Economic Journal: Economic Policy

Selection and Market Reallocation: Productivity Gains from Multinational Production

By: Alfaro, Laura, and Maggie X. Chen

Abstract—Assessing the productivity gains from multinational production has been a vital topic of economic research and policy debate. Positive aggregate productivity gains are often attributed to within-firm productivity improvement; however, an alternative, less emphasized explanation is between-firm selection and market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We investigate the roles of the two different mechanisms in determining the aggregate productivity gains by exploring their distinct predictions on the distributions of domestic firms: within-firm productivity improvement shifts the productivity and revenue distributions rightward while between-firm selection and market reallocation raise the left truncation of the distributions and shift revenue leftward. Using a rich cross-country firm-level panel dataset, we find significant evidence of both mechanisms, but between-firm selection and market reallocation accounts for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of gains from multinational production.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52701

Abstract—Organizations today can use both crowds and experts to produce knowledge. While prior work compares the accuracy of crowd-produced and expert-produced knowledge, we compare bias in these two models in the context of contested knowledge, which involves subjective, unverifiable, or controversial information. Using data from Encyclopædia Britannica, authored by experts, and Wikipedia, an encyclopedia produced by an online community, we compare the slant and bias of pairs of articles on identical topics of U.S. politics. Our slant measure is less (more) than zero when an article leans towards Democratic (Republican) viewpoints, while bias is the absolute value of the slant. We find that Wikipedia articles are more slanted towards Democratic views than are Britannica articles, as well as more biased. The difference in bias between a pair of articles decreases with more revisions. The bias on a per word basis hardly differs between the sources because Wikipedia articles tend to be longer than Britannica articles. These results highlight the pros and cons of each knowledge production model, help identify the scope of the empirical generalization of prior studies comparing the information quality of the two production models, and offer implications for organizations managing crowd-based knowledge production.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52723

  • forthcoming
  • Management Science

A Formal Theory of Strategy

By: Van den Steen, Eric J.

Abstract—What makes a decision strategic? When is strategy most important? This paper formally studies these questions, starting from a (functional) definition of strategy as “the smallest set of choices to optimally guide (or force) other choices.” The paper shows that this definition coincides with the equilibrium outcome of a “strategy formulation game,” in which such strategy endogenously creates a hierarchy among decisions. With respect to what makes a decision strategic and what makes strategy valuable, the paper considers the effect of commitment, reliability, and irreversibility of a decision; the presence of uncertainty (and the type of uncertainty); the number and strength of its interactions and the centrality of a decision; its level and importance; the development of capabilities; and competition.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52725

  • forthcoming
  • Management Science

Strategy and the Strategist: How It Matters Who Develops the Strategy

By: Van den Steen, Eric J.

Abstract—This paper addresses primarily two questions. First, when (and why) should a company’s strategy be developed by its CEO versus by some outside analyst or other insider? Second, how does strategy interact with vision (in the sense of a strong belief about the right course of action)? The paper studies these questions using a functional definition of strategy as “the smallest set of choices to optimally guide other choices.” Among other things, the paper shows that strategy formulation by the CEO leads to both better strategy and better execution, and that a strategist’s vision may improve execution. In the process, the paper also identifies criteria that make a decision strategic and derives explanations why strategies often reflect the background of the strategist.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=52726

Abstract—With an overall lack of gender and ethnic diversity in the innovation sector documented in Gompers and Wang (2017), we ask the natural next question: Does increased diversity lead to better firm performances? In this paper, we attempt to answer this question using a unique dataset of the gender of venture capital partners’ children. First, we find strong evidence that parenting more daughters leads to an increased propensity to hire female partners by venture capital firms. Second, using an instrumental variable set-up, we also show that improved gender diversity, induced by parenting more daughters, improves deal and fund performances. These effects concentrate overwhelmingly on the daughters of senior partners than junior partners. Taken together, our findings have profound implications on how the capital markets could function better with improved diversity.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=52703

Homophily in Entrepreneurial Team Formation

By: Gompers, Paul A., Kevin Huang, and Sophie Q. Wang

Abstract—We study the role of homophily in group formation. Using a unique dataset of MBA students, we observe homophily in ethnicity and gender increases the probability of forming teams by 25%. Homophily in education and past working experience increases the probability of forming teams by 17% and 11 % respectively. Homophily in education and working experience is stronger among males than females. Further, we examine the causal impact of homophily on team performance. Homophily in ethnicity increases team performance by lifting teams in bottom quantiles to median performance quantiles, but it does not increase the chance of being top performers. Our findings have implications for understanding the lack of diversity in entrepreneurship and the venture capital industry.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=52704

Abstract—This working paper examines how innovations in transparent packaging, specifically cellophane in the mid-twentieth century United States, helped retailers create full self-service merchandising systems, including selling perishable food. While self-service stores began appearing in the late 1910s, self-service was initially applied only to grocery and dry goods, such as canned foods and boxed breakfast cereals. It was not until after World War II that the majority of American grocers adopted self-service to meat and produce sections. Business historians have explored the development of this self-service merchandising from the perspectives of marketing strategies, store operations, and relationships between customers and store clerks. However, the significance of the development of cellophane as a new packaging material, and the role of packaging manufacturers in promoting self-service, has yet to be analyzed. This working paper fills this void by showing that the expansion of self-service operation and the increasing use of transparent packaging had a significant impact not only on how consumers purchased foods but also on how they understood food quality.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=52718

Abstract—Relative TSR (rTSR) is increasingly used by market participants to judge and incentivize managerial performance. We evaluate the efficacy, reasons, and implications of firms' benchmarks in rTSR-based contracts. Although compensation consultants suggest that a primary objective of rTSR is to filter shocks unrelated to managerial performance, following the informativeness principle, we document that a significant subset of firms that choose index-based benchmarks do not adequately achieve this objective. Further, the index-benchmark selection is associated with governance-related frictions and is not driven by plausible alternative theories. Both structural calibration and reduced-form estimates reveal significant negative performance implications from suboptimal peer-selection.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51919

Designing an Agile Software Portfolio Architecture: The Impact of Coupling on Performance

By: MacCormack, Alan, Robert Lagerström, Martin Mocker, and Carliss Y. Baldwin

Abstract—The modern industrial corporation encompasses a myriad of different software applications, which must work in concert to deliver functionality to end users. However, the increasingly complex and dynamic nature of competition in today’s product markets dictates that this software portfolio be continually evolved and adapted in order to meet new business challenges. This ability—to rapidly update, improve, remove, replace, and reimagine the software applications that underpin a firm’s competitive position—is at the heart of what has been called IT agility. Unfortunately, little work has examined the antecedents of IT agility with respect to the choices a firm makes when designing its “Software Portfolio Architecture.” We address this gap in the literature by exploring the relationship between software portfolio architecture and IT agility at the level of the individual applications in the architecture. In particular, we draw from modular systems theory to develop a series of hypotheses about how different types of coupling impact the ability to update, remove, or replace the software applications in a firm’s portfolio. We test our hypotheses using longitudinal data from a large financial services firm, comprising over 1,000 applications and over 3,000 dependencies between them. Our methods allow us to disentangle the effects of different types and levels of coupling. Our analysis reveals that applications with higher levels of coupling cost more to update, are harder to remove, and are harder to replace than those with lower coupling. The measures of coupling that best explain differences in IT agility include all indirect dependencies between software applications (i.e., they include coupling and dependency relationships that are not easily visible to the system architect). Our results reveal the critical importance of software portfolio design decisions in developing a portfolio of applications that can evolve and adapt over time.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=52707

  • Harvard Business School Case 617-027

The Future of Patent Examination at the USPTO

The U.S. Patent and Trademark Office (USPTO) is the federal government agency responsible for evaluating and granting patents and trademarks. In 2015, the USPTO employed approximately 8,000 patent examiners who granted nearly 300,000 patents to inventors. As of April 2016, it took roughly 26 months for a patent application to move through the evaluation process, which exceeded the office’s processing goal of 20 months. In August 2016, Andrew Hirshfeld, the commissioner for patents at the USPTO, considered the current state of patent examination and future possibilities. In recent years, a number of new and exciting tools enabled by advances in telework, machine learning, and other approaches had emerged. Hirshfeld hoped to maximize these tools’ utility in order to enhance patent examiners’ work and productivity. Helping examiners become more productive could in turn help the USPTO achieve its joint goals of processing patent applications more quickly and granting better quality patents. But the new tools and organizational changes would bring challenges, too. Any changes would have to be implemented at the grassroots of the USPTO organization, and ongoing pilots would not be successful without the buy-in and cooperation of both individual examiners as well as the union.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/617027-PDF-ENG

  • Harvard Business School Case 817-025

Financing Astroscale

No abstract available.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/817025-PDF-ENG

  • Harvard Business School Case 317-085

Shisong Cardiac Center: Kumbo, Cameroon

Shisong Cardiac Center in Kumbo, Cameroon, is a regional cardiac referral center in central Africa. As the continent transitions from communicable to non-communicable diseases, there is a critical shortage of surgical care required to treat these conditions. This case describes an innovative solution to the shortage of professional skills: an international collaboration between a hospital in Milan and a hospital in Cameroon. The case highlights the challenges of building and staffing the facility and then discusses the ongoing operational and financial challenges of operating a heart center in Africa. Can this model be sustained? Can Cameroon develop its own capability to deliver advanced cardiac services domestically? These are critical questions to consider. In spite of these challenges, co-founder Sr. Alphonsa finds hope in her favorite African proverb, “Your heart can take you where your feet cannot.”

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/317085-PDF-ENG

  • Harvard Business School Case 316-095

AbbVie

This case focuses on the impact of a novel regulatory pathway, the biosimilars pathway, on the strategy of a major pharmaceutical firm that finds its largest product (60% of revenue) at risk. The case reviews the rationale for the pathway, the emerging biosimilars market entrants, and a series of adverse financial forecasts for AbbVie. Given all of these risks, did the acquisition add value to shareholders? AbbVie made headlines in March 2015 when it announced its $21 billion acquisition of Pharmacyclics. AbbVie, a research-based pharmaceutical company, was founded in 2013 when Abbott split into AbbVie and Abbott Laboratories. Pharmacyclics is a biotechnology company that had received FDA approval in late 2013 for its flagship asset Imbrivica (ibrutinib), a biologic treatment for chronic lymphocytic leukemia and two other even rarer blood malignancies. Entering its second year on the market, Imbrivica was considered a breakthrough, with revenue expectations of $1 billion in 2015. At the time of the acquisition, AbbVie received more than 60% of its sales from the drug Humira, a biologic agent used to treat several autoimmune diseases and malignancies. However, Humira would soon lose patent protection and face competition from the new class of follow-on biologics, or biosimilars.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/316095-PDF-ENG

  • Harvard Business School Case 316-106

Aggressive Growth Plans for Zimmer Spine

Steve Healy, the President of Zimmer Spine, has to transform his organization into a market leader. Zimmer is a major medical device firm, but the Spine division has underperformed, and its core technology did not get the expanded FDA label that had been expected. The case reviews the industry, the competitive landscape, and the potential growth strategies for Zimmer Spine to consider.

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https://cb.hbsp.harvard.edu/cbmp/product/316106-PDF-ENG

  • Harvard Business School Case 817-077

Rapid7

That Corey Thomas, vice president at Boston-based Rapid7, Inc., was about to enter his investor’s boardroom to negotiate a potential acquisition of Metasploit, LLC, was already an unlikely achievement of sorts. After all, Rapid7 was a venture-backed, corporate client-focused cybersecurity company, and Metasploit was a white-hat hacker community with a reputation that ranged from esoteric to “notorious.” And awaiting Thomas for the deliberations wasn’t a typical business partner, but rather HD Moore, Metasploit’s founder, chief contributor, and in 2009 one of the most well-known hackers on the planet. The groundwork that had been laid to convince Moore to come to Boston for the discussions would all be for naught if Thomas couldn’t come to terms with Moore . . . and if Thomas couldn’t persuade his own executive team and board of directors that whatever package he ultimately agreed to with Moore was a reasonable one, even though an acquisition of Metasploit would come with no meaningful revenue and considerable execution, legal, and reputational risks.

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https://cb.hbsp.harvard.edu/cbmp/product/817077-PDF-ENG

  • Harvard Business School Case 716-469

Numenta: Inventing and (or) Commercializing AI

In March 2016, Donna Dubinsky (co-founder and CEO) and Jeff Hawkins (co-founder) were struggling with a key question: Could Numenta be successful in both creating fundamental technology and building a commercial business? Located in Redwood City, CA, Numenta was founded in 2005 to expand Hawkins' research on the human brain, with the goal of "reverse engineering the neocortex" and then creating machines based on biological principals. Ultimately, Hawkins believed that Numenta could be a catalyst in creating intelligent machines that would lay the foundation for the next generation of computing with potentially broad ranging commercial opportunities.

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https://cb.hbsp.harvard.edu/cbmp/product/716469-PDF-ENG