First Look

Abstract—Using survey data from a sample of senior investment professionals from mainstream (i.e., not SRI funds) investment organizations, we provide insights into why and how investors use reported environmental, social, and governance (ESG) information. Relevance to investment performance is the most frequent motivation for use of ESG data followed by client demand and product strategy, bringing change in companies as well as ethical considerations. Important impediments to the use of ESG information are the lack of reporting standards and as a result, lack of comparability, reliability, quantifiability, and timeliness. Among the different ESG investment styles, negative screening is perceived as the least investment beneficial while full integration into stock valuation and engagement are considered more beneficial, but they are all practiced with equal frequency. Current practices of different ESG styles, especially screening, are driven by product and ethical considerations. In contrast, integration is driven by relevance to investment performance. Future practices of ESG styles are driven by relevance to investment performance, bringing change in companies and concerns about data reliability.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54146

Abstract—Auctions were very popular in the early days of internet commerce, but today online sellers mostly use posted prices. We model the choice between auctions and posted prices as a trade-off between competitive price discovery and convenience. Evidence from eBay fits the theory: auctions are favored by less experienced sellers and for idiosyncratic products, and auction listings sell at a discount but with higher probability relative to comparable posted price listings. We then show that the decline in auctions was not driven by changes in the type of sellers and items. Instead, seller incentives changed. We estimate the demand facing individual sellers at different points in time and document falling sale probabilities and a fall in the relative demand for auctions. Both favor posted prices; our estimates suggest the latter is more important for explaining the shift away from auctions. We provide supporting evidence from a survey of eBay sellers and discuss why sellers might use a mix of auctions and posted prices in order to price discriminate.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=52341

Abstract—The federal government mandated adoption of certified electronic health record systems (EHR), at least in part, to reduce administrative costs for physicians. This study used time-driven activity-based costing to determine the administrative costs associated with billing and insurance activities at a large academic health care center that had a certified EHR system. The center enjoyed economies of scale by concentrating its bill paying functions within a single, dedicated unit. The study found that costs for processing a single bill ranged from $20 for a primary care visit, about 20% of revenues, up to $215 for an inpatient surgical procedure. The high costs were not caused by wasteful, inefficient processes, duplicate or redundant tasks, or the inappropriate use of high-wage personnel to perform low-skilled tasks. Rather, they were driven by the heterogeneous payment requirements across the multiple payers and health plans contracting with the academic health center.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54127

Abstract—It’s no secret that the American economy is suffering from the twin ills of slow growth and rising income inequality. Many lay the blame at the doors of America’s largest public corporations. The charge? These firms prefer to distribute cash generated from their businesses to shareholders through stock buybacks and dividends rather than invest for the long term, undermining job growth and putting the country’s economic future at risk, often pointing to the high ratio of shareholder payouts to net income. These claims are at odds with corporate leaders' statements about their commitment to long-term success. To understand the disconnect, we examine how S&P500 companies are actually allocating capital and show that firms are in fact plowing substantial amounts of capital into R&D and CAPEX. Moreover, we explain that the ratio of dividends and stock repurchases to net income is misleading and ignores two important factors: first, focusing on dividends and buybacks ignores the substantial (direct and indirect) equity issuances firms engage in; second, net income is a poor metric of income potentially available for investment. Taking these factors into account, we show that the data does not support the view that excessive payouts are draining corporations of investment capacity.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54123

Abstract—This paper analyzes the extent to which the internet’s global domain name resolution (DNS) system has preserved its distributed resilience given the rise of cloud-based hosting and infrastructure. We explore trends in the concentration of the DNS space since at least 2011. In addition, we examine changes in domains’ tendency to “diversify” their pool of nameservers—how frequently domains employ DNS management services from multiple providers rather than just one provider—a comparatively costless and therefore puzzlingly rare decision that could supply redundancy and resilience in the event of an attack or service outage affecting one provider.

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Abstract—This paper investigates the impact of customer compatibility—the degree of fit between the needs of individual customers and the capabilities of the operations serving them—on customer experiences and firm performance. We decompose the variance of 58,294 face-to-face transactions, quantifying the relative importance of customer, employee, process, location, and market-level effects on customer satisfaction. In our models, which explain roughly a quarter of the aggregate variance in customer satisfaction, differences among customers account for 96%–97% of this variance, while differences among employees, processes, locations, and markets make up the remainder. Further analysis reveals that customers tend to report relatively consistent satisfaction across transactions but that some customers are habitually more satisfied than others. An empirical investigation of the satisfaction of 149,389 customers surveyed by J.D. Power and Associates over a five-year period provides evidence that these customer-level differences are explained in part by customer compatibility. Customers whose demographic characteristics, and in turn needs, diverge more starkly from those of their bank’s average customers report significantly lower levels of satisfaction on a broad range of operating dimensions. Consistently, we find that banks that serve customer bases with more dispersed needs receive lower satisfaction scores than banks serving customer bases with less dispersed needs. Finally, a longitudinal analysis of the deposit growth of all federally insured banks in the United States from 2006 to 2017 reveals that customer compatibility affects financial performance. Branches with more divergent customers grow deposits more slowly than branches with less divergent customers. Institutions serving customer bases with more dispersed needs have branches that exhibit slower deposit growth than those of institutions serving customer bases with less dispersed needs.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=50612

Abstract—Three studies, using original experimental as well as field data from the city of Boston, Massachusetts, show that revealing the “submerged state”—ensuring that citizens can see the often-hidden work that government performs—enhances both perceptions of and engagement with government. In Study 1, viewing a video highlighting the work performed by the government of an archetypal American town increased trust in government and support for government services. In Study 2, Boston residents who interacted with a website that visualized both service requests (e.g., potholes) and efforts by the city government to address them became more supportive of government. Study 3 leverages proprietary data from a mobile phone application through which residents can submit service requests to Boston government. Users who received photographic evidence that their service requests had been addressed were more likely to continue to engage with government than users who did not receive such evidence.

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Abstract—We study the impact of targeted price controls for supermarket products in Argentina from 2007 to 2015. Using web scraping, we collected daily prices for controlled and non-controlled goods and measured the differential effects on inflation, product availability, and price dispersion. We first show that, although price controls are imposed on goods with significant CPI weight, they have a temporary effect on aggregate inflation and no downward effect on other goods. Second, contrary to common beliefs, we find that controlled goods are consistently available for sale. Third, firms compensate for price controls by introducing new product varieties at higher prices. This behavior, which increases price dispersion within narrow categories, is consistent with a standard vertical differentiation model in the presence of price controls.

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Abstract—We show that online prices can be used to construct quarterly purchasing power parities (PPPs) with a closely matched set of goods and identical methodologies in a variety of developed and developing countries. Our results are close to those reported by the International Comparisons Program (ICP) in 2011 and the OECD in 2014 and can be used to obtain more up-to-date estimates of real consumption across countries without the need for consumer price index extrapolations. We discuss advantages and limitations associated with the use of online prices for PPPs, including issues of representativeness and limited coverage of product categories and countries.

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Abstract—Expected return proxies (ERP) derived from a log-linear present-value (LPV) framework—combining the book value of equity, profitability, and market prices—predict the cross section of out-of-sample returns in 26 of 29 international equity markets, with a highly significant average slope coefficient of close to 1. In contrast, ERPs based on the implied cost of equity or standard factor models—even those with factors based on book-to-market and profitability—fail to exhibit systematic predictive power internationally. LPV models derived using common valuation anchors such as earnings or sales also exhibit predictive ability. LPV ERPs based on the book value of equity and sales subsume the predictive ability of all other ERPs we examine. Collectively, the LPV framework offers a parsimonious accounting-based framework for the estimation of expected returns across international markets.

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Abstract—We study the effects of enabling peer supply through Airbnb in the accommodation industry. We present a model of competition between flexible and dedicated sellers—peer hosts and hotels—who provide differentiated products. We estimate this model using data from major U.S. cities and quantify the welfare effects of Airbnb on travelers, hosts, and hotels. The welfare gains from Airbnb are concentrated in locations (New York) and times (New Year’s Eve) when hotels are capacity constrained. This occurs because peer hosts are responsive to market conditions, expand supply as hotels fill up, and keep hotel prices down as a result.

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Abstract—People often feel malicious envy, a destructive interpersonal emotion, when they compare themselves to successful peers. Across two online experiments and an experimental field study, we identify an interpersonal strategy that can mitigate others’ feelings of malicious envy: revealing one’s failures. People are reticent to reveal their failures—both as they are happening and after they have occurred. However, in two experiments, we find that revealing successes and the failures encountered on the path to success (compared to revealing only successes) decreases observers’ malicious envy. This effect holds regardless of whether the individual is ambiguously or unambiguously successful. Then, in a field experiment set in an entrepreneurial pitch competition, where pride displays are common and stakes are high, we find suggestive evidence that learning about the failures of a successful entrepreneur decreases observers’ malicious envy, increases their benign envy, decreases their perceptions of the entrepreneur’s hubristic pride (i.e., arrogance), and increases their perceptions of the entrepreneur’s authentic pride (i.e., confidence). These findings align with previous work on the social-functional relation of envy and pride. Taken together, our results highlight how revealing the failures encountered on the way to success can be a counterintuitive yet effective interpersonal emotion regulation strategy.

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Abstract—Previous research has revealed that expressing gratitude motivates prosocial behavior in cooperative relationships. However, expressing gratitude in competitive interactions may operate differently. Across five studies, we demonstrate that individuals interacting with grateful counterparts become more likely to engage in selfish behavior during competitive interactions. In Studies 1a and 1b, participants who interacted with counterparts expressing gratitude were more likely to make aggressive offers in distributive negotiations than those who interacted with counterparts expressing neutral emotion. In Study 2, we find that inferences of the tendency to forgive mediates the relationship between gratitude expression and selfish behavior. In Study 3, we contrast expressions of gratitude with another positive-valence emotion: excitement. We show that expressing gratitude promotes self-interested behavior compared to expressing excitement or neutral emotion. In Study 4, we find that gratitude expression triggers self-serving deception. Taken together, our findings suggest that expressing gratitude can be costly in competitive interactions: people infer that grateful counterparts are forgiving and, therefore, they are more likely to exploit their counterparts for selfish gain.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=54133

This case describes the business model and workplace philosophy of NatureSweet, a privately owned, vertically integrated greenhouse grower and marketer of fresh tomatoes with sales across the United States and $329 million in 2016 revenues. CEO Bryant Ambelang treated NatureSweet more like a consumer-packaged goods manufacturer than an agricultural producer, with a focus on consistency, branding, margin, and price stability, and a frontline-worker-centric production model inspired by the Toyota Production System. Workers—who, because of NatureSweet’s year-round greenhouse production model, were employed full time—were empowered with training and productivity incentives, allowing them to earn well above the minimum wage and advance their careers within the company. Indeed, improving the lives of workers was the explicit purpose of NatureSweet’s operations. Through its financial incentives, personal and professional development initiatives, and worker-appreciation programs, NatureSweet had cultivated a truly unique, uplifting workplace culture in its Mexico operations. Ambelang aspired to replicate the model in the United States as a way of demonstrating the potential to “transform the lives of agricultural workers in North America.” But in late 2017, the Arizona-based production operations that NatureSweet had acquired in 2014 were still struggling to attain the successes achieved in Mexico. This case describes NatureSweet’s history, achievements in Mexico, and challenges in Arizona, inviting students to evaluate the keys to NatureSweet’s success in Mexico and analyze their potential for replication in the United States. Will Ambelang succeed in Arizona and, in doing so, demonstrate that it is possible to transform the lives of agricultural workers in North America?

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Makena Lane has a gift for producing results, even in the challenging retail context of the 2010s, but she also has a knack for “ruffling some feathers” in the process. Recruited to a Fortune 500 grocery and pharmacy retailer after climbing to Associate Principal in McKinsey & Company’s retail practice, she successfully grew their high-margin yet highly competitive beauty category beyond anyone’s expectations. Yet then she was passed over for promotion, receiving the feedback that her “concerning” and “abrasive” interpersonal style had made it impossible to promote her. Instead of a promotion, Lane is offered an executive coach. The case offers a uniquely in-depth (and intimate) view of how Lane approaches the one-year coaching engagement and the outputs from it, including her pre-coaching self-reflection, agreed-upon purpose and outcomes, 360 feedback, the coach’s advice to her, an in-depth coach’s final report, and Lane’s one-pager of lessons learned. At the end of the year of coaching, Lane’s boss unexpectedly departs, leaving Lane with a direct path to promotion. Senior leadership now once again faces the difficult decision of whether to promote Lane, this time based on their assessment of whether Lane has authentically transformed through coaching or just taken superficial steps to check off boxes on the way to promotion.

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It is June 2016. Superstar basketball player LeBron James and his childhood friend and business partner Maverick Carter are celebrating James’ third NBA championship. The duo will soon have to decide on a strategy for their media businesses—their film and television production company SpringHill Entertainment as well as their digital sports platform Uninterrupted. In 2015, Carter and James negotiated a first-of-its-kind, three-year agreement with Hollywood studio Warner Bros. Entertainment that gave SpringHill Entertainment a first-look movie deal, an exclusive television deal, significant development resources that also could be used for the creation of digital content, and space on the studio lot. Later that year, Warner Bros. signed on as a lead investor in Uninterrupted. Were Carter and James right to partner with Warner Bros. in this manner? And with renewal negotiations just around the corner, how could they make the most of the opportunity?

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The case examines how Marriott should respond to the potential threats from new home-sharing platforms and the rise of online travel agencies. In 2017 Marriott was the largest hotel chain, with more than one million rooms and 7% of worldwide room supply. In the previous decade the growing ubiquity of internet-based commerce had facilitated the rise of technology platforms such as Expedia and Airbnb. The case enables students to explore the forces that might lead to industry transformation and the appropriate response strategies of a large incumbent.

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No abstract available.

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In two short years, Viacom’s Data Science & Advanced Analytics team built a web platform called Science Central that allowed employees from Viacom’s 20+ cable networks to access television audience insights through three data science apps. In the past, employees would have approached the team to carry out these requests. Vice President of Data and Audience Development Fabio Luzzi, who oversaw the 10-person team, believed that making data science instantly available in accessible formats would allow teams to make better-informed decisions. By June 2017, the platform had 600 regular users, but Luzzi wanted to expand its reach. He considered whether the team should focus on strengthening the platform or devote more resources to custom analytics requests that would allow the team to explore new problems and develop new insights.

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Cameron (Cam) Barker, founder and CEO of Blake Sports Apparel and Switch Activewear, manufacturers and distributers of sports apparel and accessories, was facing a challenge with his executive team. Their inability to work together on seemingly simple issues was a chronic problem. Although they were a competent group of executives, most of whom had been with Barker for a number of years and had played an integral role in the growth of his company, the team’s dynamics were dysfunctional. Lack of communication, mistrust, and refusal to collaborate were some of their biggest challenges. Barker had had enough and was ready to take action, but what action should he take? How could he teach the executive team to work together? Did he have the right people in the right roles? Was the team appropriately structured and managed? How could Barker bring his executive team together in order to maximize performance and face the challenges and opportunities that would be presenting themselves to his young company in the months and years ahead?

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Unlike its rival Airbus, Boeing had used a practice called program accounting to record its commercial aircraft expenses since the 1980s. Program accounting allowed Boeing to expense estimated average costs instead of the actual production costs of an aircraft. This practice lowered the effect of the initially high costs of manufacturing new aircraft models on Boeing’s profitability and reflected potential learning efficiencies that could drive down manufacturing costs over time. By 2016, Boeing had deferred about $27 billion in production costs related to its 787 program. If Boeing had been forced to expense these costs, it would have shown profits of $1.4 billion between 2012 and 2016 instead of $25.2 billion, raising questions about Boeing’s true profitability.

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Great strategists rely heavily on numbers as they go about their work. This note offers an overview of the highbrow and lowbrow quantitative tools that individuals commonly encounter during strategy courses and in actual strategy work. The note focuses especially on simple calculations that often produce important insights.

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Joe Morrisroe, executive director for NYC311, had some gut instincts but no definitive answer to the question he was just asked by one of the mayor’s deputies: “Are some communities being underserved by 311? How do we know we are hearing from the right people?” Founded in 2003 as a phone number for residents to dial (311) from a landline for information on city services and to log complaints, the city launched a 311 website and mobile app in 2009 and social media support in 2011. In 2016, NYC311 received over 35 million requests for services and information. Technological progress had made it considerably easier to hear from NYC residents. Were those gains from innovation being shared equally? More recently, the city began using the data to create predictive models that might help direct inspectors and other workers. Morrisroe and his team had considered the potential downsides of agencies relying too heavily on NYC311 data or on its predictive power. In the sheer volume of the data and its potential to enable a new approach to city services, were biases around income, education, race, gender, neighborhood, home ownership, and other factors hiding too? Morrisroe considered the question posed to him and its implications. He asked for the data and a team to assess it: Are we hearing from everyone?

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As JOE & THE JUICE began its rapid U.S. expansion in 2017, its founder and CEO, Kaspar Basse, fretted about how he could keep his employees feeling like they were doing meaningful work. Founded in 2001, JOE & THE JUICE had always focused on making healthy juices, banning prepackaged or processed foods, and providing meaningful work for front-line food services employees. To instill employees with a sense of ownership, JOE & THE JUICE had developed a transparent promotion and compensation scheme, a rigid training program, and an explicit promise to promote only from within (the CFO was 31-years-old and had spent a decade working at the company). On the other hand, employees were encouraged to make the juice bars their homes. There were no required uniforms or scripts on how to interact with customers. This strategy had led to great success in Europe. In a decade, JOE & THE JUICE had spread across the continent and was immensely profitable. But as it moved into the United States and prepared for a potential IPO, the company began struggling to retain talent and worried about how it could successfully import its internal culture while maintaining its rapid growth.

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