First Look

August 25, 2009

Think of the low-cost carriers Continental Lite, Song, and Ted: short-lived airlines-within-airlines, designed to compete against mighty Southwest. Like many other companies especially in the service industry, each adopted an innovative (but incomplete) model, that of a "plant within a plant" first articulated 35 years ago in an influential Harvard Business Review article by Wickham Skinner. Professor Robert C. Huckman critiques and updates the model in the September issue of HBR and suggests how industries including hospitals, pharmaceuticals, and airlines can benefit from implementation lessons learned. As he writes in "Are You Having Trouble Keeping Your Operations Focused?", companies need to conceive and develop their plant within a plant as a system-wide change within the firm. Accepting that it is more than an add-on to a firm's operational structure, companies can avoid common pitfalls that afflicted the three would-be challengers to Southwest. This week also sees cases on the globalization strategy of fashion house Christian Dior and a founder dispute at Lynx Solutions.
— Martha Lagace

Working Papers

Anger and Regulation


We propose a model where voters experience an emotional cost when they observe a firm that has displayed insufficient concern for other people's welfare (altruism) in the process of making high profits. Even with few truly altruistic firms, an equilibrium may emerge where all firms pretend to be kind and refrain from charging "abusive" prices to their customers. Our main result is that, as competition decreases, the set of parameters for which such pooling equilibria exist becomes smaller, and firms are more likely to anger consumers. Regulation can increase welfare, for example, through fines (even if there are no changes in prices). We illustrate these gains in a monopoly setting, where regulation affects welfare through three channels: (i) a reduction in monopoly price leads to the production of units that cost less than their value to consumers (standard channel); (ii) regulation calms down existing consumers because a reduction in the profits of an "unkind" firm increases total welfare by reducing consumer anger (anger channel); and (iii) individuals who were out of the market when they were excessively angry in the unregulated market, decide to purchase once the firm is regulated, reducing the standard distortions described in the first channel (mixed channel).



Entrepreneurs, Managers, and Leaders: What the Airline Industry Can Teach Us About Leadership

Publisher's Book Abstract

Entrepreneurs, Managers, and Leaders examines the role that business leaders play in shaping industries and how the evolving context of industries shapes leaders in turn. This co-evolutionary process of leadership and industry development is told through the story of the American airline industry across the 20th century. Entrepreneurs, who explored a variety of different airline concepts in search of a viable business model, dominate the industry's early history. As the industry evolved, a new breed of managers emerged who built a dominant business model that enables their companies to grow dramatically. Later, after the industry matured, leaders took center-stage as agents of change to rebuild and revitalize the industry. The lessons of entrepreneurs, managers, and leaders from the airlines can be applied to understanding any industry's evolution.

Board of Directors' Responsiveness to Shareholders: Evidence from Shareholder Proposals


In recent years, boards have become significantly more likely to implement non-binding, majority-vote (MV) shareholder proposals. Using a sample of 620 MV proposals between 1997 and 2004, we find that shareholder pressure (e.g., the voting outcome and the influence of the proponent) and the type of proposals are the main determinants of the implementation decision, while traditional governance indicators do not seem to affect the decision. We then examine the labor market consequences of the implementation decision for outside directors and find that directors implementing MV shareholder proposals experience a one-fifth reduction in the likelihood of losing their board seat as well as other directorships.

Are You Having Trouble Keeping Your Operations Focused?


As a business broadens over time, it can lose the operational edge that led to its original success. Core strengths atrophy, efficiency or quality suffers, and sharper rivals close in to take advantage of the loss of focus. In his classic article "The Focused Factory" (HBR May-June 1974), Wickham Skinner proposed that manufacturers whose product lines had proliferated create specialized units, each dedicated to a distinct task. To make this economically feasible, he suggested the plant within a plant, or PWP, model, whereby an existing facility is physically and organizationally divided into autonomous operations. Many organizations—from airlines to hospitals to department stores—have since adopted the model, in the form of focused units that share people, equipment, and other assets to some extent. But they've found it difficult to implement. That's because, the author writes, they don't give every unit narrowly defined objectives; they underestimate the challenges related to sharing resources; they don't fully consider to what degree best practices, knowledge, and talent should be shared; and they don't anticipate the political tensions that can arise. Huckman provides guidelines for setting clear objectives, getting the boundaries between units right, establishing rules for sharing, and customizing performance criteria. And, he says, leaders must continually remind units of their individual and collective goals and purposes whenever decisions about resources, performance measurement, and compensation are made.


Cases & Course Materials

Affinity Plus (A)

Harvard Business School Case 209-026

The executive team at Affinity Plus Federal Credit Union has pushed the concept of members first deeply throughout the organization, empowering employees to put member-owners' interests ahead of either the organization's interests or their own interests. As a result of this focus, the credit union must determine what to do with its profitable indirect auto lending business, which some see as inconsistent with the strategic direction set by the management team.

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Christian Dior: A New Look for Haute Couture

Harvard Business School Case 809-159

The case describes the foundation of Christian Dior, the leading Parisian fashion house, in 1946 and its subsequent globalization strategy. After explaining the historical origins of France's preeminence in upscale fashion, the case explores the challenges to this position from New York after World War 2, and the importance of Christian Dior's New Look in restoring French fashion to world leadership. The case examines, in particular, Dior's innovative strategy to combine a high-fashion business in Paris with a ready-to-wear business in New York, and his subsequent pursuit of licensing opportunities in jewelry and other luxury products. The case provides an opportunity to explore the role of creativity in the luxury fashion industry, and the challenges and opportunities of globalizing such an industry.

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The Tale of the Lynx (B)

Harvard Business School Supplement 810-029

The founders of Lynx Solutions have survived major challenges within their board of directors, the firing of Lynx's founder-CEO and departure of its successor CEO, and a crisis sparked by media allegations that it had been spying on its users. Now that the company is finally becoming profitable, the two remaining founders are embroiled in exhausting fights over how aggressively the company should try to grow, and those fights are threatening to derail Lynx's recent success.

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Wareham SC Systems, Inc.

Harvard Business School Case 110-015

CFO tests company's revenue recognition practices against the recently issued SAB 101 requirements and proposes plan for adoption of SAB 101.

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