First Look

August 5, 2008

Matchmaking is not just designed for romance. In the case of U.S. college football bowls, for instance, it used to be that teams were matched to play each other when several games still remained in the regular fall season. Such matchings were rarely optimal: The best teams did not necessarily play each other, fans noticed the lack of chemistry, and television viewership suffered. Over the past decade, fortunately, the system has reorganized and matches, if not always made in heaven, are a lot more compelling for teams and fans both. A PDF explaining this research by HBS professor Alvin E. Roth and colleagues is available for download. This week also sees a PDF for download on stimulating creativity in organizations, and another one on the changing face of the advertising business. Newly available case studies explore strategic choices at a winery and on MySpace.
— Martha Lagace

Working Papers

Wellsprings of Creation: Perturbation and the Paradox of the Highly Disciplined Organization


Organizations face simultaneous imperatives to exploit and explore. Paradoxically, exploitation tends to drive out exploration, rendering organizations rigid and vulnerable to environmental change. Drawing on the Carnegie School, we propose a model where perturbation moderates the relationship between exploitation and exploration. We posit that highly disciplined organizations can sustain virtuous cycles of exploitation and exploration by deliberately perturbing their own processes. We provide illustrations from Toyota and formulate testable hypotheses about the mechanisms of perturbation.

Download the paper:

Fight or Flight? Portfolio Rebalancing by Individual Investors


This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We find some evidence that households rebalance towards a higher risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern which is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.

Download the paper from SSRN ($5):

Competing Complements


In Cournot's model of complements, the producers of A and B are both monopolists. This paper extends Cournot's model to allow for competition between complements on one side of the market. Consider two complements, A and B, where the A + B bundle is valuable only when purchased together. Good A is supplied by a monopolist (e.g., Microsoft) and there is competition in the B goods from vertically differentiated suppliers (e.g., Intel and AMD). In this simple game, there may not be a pure-strategy equilibria. In the standard case where marginal costs are weakly positive, there is no pure strategy where the lower quality B firm obtains positive market share. We also consider the case where A has negative marginal costs, as would arise when A can expect to make upgrade sales to an installed base. When profits from the installed base are sufficiently large, a pure strategy equilibrium exists with two B firms active in the market. Although there is competition in the complement market, the monopoly Firm A may earn lower profits in this environment. Consequently, A may prefer to accept lower future profits in order to interact with a monopolist complement in B.

Download the paper:

Unraveling Yields Inefficient Matchings: Evidence from Post-Season College Football Bowls


Many markets have "unraveled" and experienced inefficient, early, dispersed transactions, and subsequently developed institutions to delay transaction timing. However, it has previously proved difficult to measure and identify the resulting efficiency gains. Prior to 1992, college football teams were matched for post-season play up to several weeks before the end of the regular season. Since 1992, the market has reorganized to postpone this matching. We show that the matching of teams affects efficiency as measured by the resulting television viewership, and the reorganization promoted more efficient matching, chiefly due to the increased ability of later matching to produce "championship" games.

Download the paper:

The Internalization of Advertising Services: An Inter-Industry Analysis


The common perception appears to be that vertical integration of advertising services is more the exception than the rule in the U.S. advertising industry. This study investigates the extent of such outsourcing and examines inter-industry variation in the use of in-house rather than independent advertising agencies by U.S. advertisers. While the vast majority of large advertisers employ outside agencies, it comes as a surprise to find that when advertisers of all sizes are considered, about half operate some form of in-house agency. Internalization of advertising services is much more widespread than has hitherto been appreciated and varies widely across industries. To explain this variation, we draw on concepts from research on scale economies and transaction costs to develop a set of hypotheses which we test in cross-sectional analyses of data covering 69 two-digit SIC industries at two points in time, 1991 and 1999. Across industries, we find that the likelihood of internalization of advertising services decreases as the size of advertising outlays increase but increases as advertising intensity and technological intensity increase and is greater for "creative" industries.

Download the paper:

Board Interlocks and the Propensity to be Targeted in Private Equity Transactions


In this paper, we examine the propensity for U.S. public companies to become targets for private equity-backed, take-private transactions. We consider the characteristics of 483 private equity-backed deals in the 2000-2007 period relative to public companies and find that, in addition to the financial drivers studied in previous works, board characteristics and director networks are also associated with deal generation. We find that a company that has a director who has had LBO experience through prior board service is ~40% more likely to receive a private equity offer and that the strength of this effect varies with the influence of the director and the quality of the prior LBO experience. This effect is robust to the most likely alternative explanations and supports the idea that directors and social networks play an influential role in change-of-control transactions.

Download the paper from SSRN ($5):

Cross-Functional Alignment in Supply Chain Planning: A Case Study of Sales and Operations Planning (revised)


In most organizations, supply chain planning is a cross-functional effort. Functional areas such as sales, marketing, finance, and operations traditionally specialize in portions of the planning activities, which results in conflicts over expectations, preferences, and priorities. We report findings from a detailed case analysis of a successful supply chain planning process. In contrast to traditional research on this area, which focuses on incentives, responsibilities, and structures, we adopt a process perspective and find that integration was achieved despite an incentive structure which did not support it. By drawing a distinction between the incentive landscape and the planning process, we identify process as an additional mediator, beyond structure and responsibilities, that can affect organizational outcomes. Thus, organizations may be capable of integration while different functions retain different incentives to maintain focus on their stakeholders' needs. We hypothesize that achieving alignment in the execution of plans can be more important than informational and procedural quality. We close by discussing the implications of our findings for organizations and researchers.

Download the paper:


Cases & Course Materials

Big to Small: The Two Lives of Barry Nalls

Harvard Business School Case 808-167

Barry Nalls describes lessons learned during his 25-year career-his rise at GTE and shorter-lived ventures—and how these prepared him to found MASERGY, a telecommunications start-up. Even as a young boy in a family of entrepreneurs, Nalls had a reputation as a hard worker, but instead of becoming an entrepreneur himself, he built a long career at "the biggest company around," GTE. After years of working there in sales and marketing, he decided to venture out on his own. His GTE experiences armed him for some entrepreneurial challenges but also caused additional problems as he tried to start, build, and grow MASERGY. Four years after founding the venture, he now feels that he should have "taken the entrepreneurial plunge" much earlier in life.

Purchase this case: /b01/en/common/item_detail.jhtml?id=808167

The Coartem Challenge (A)

Harvard Business School Case 706-037

In November 2005, Novartis, a major global pharmaceutical firm, is reviewing its Coartem program, an ambitious attempt to deliver life-saving malaria drugs, at cost, to millions of poor Africans. The company is deeply committed to the project, but it is also struggling with the organizational issues involved in dealing with international institutions like the World Health Organization and fitting nonprofit objectives into a for-profit structure.

Purchase this case: /b01/en/common/item_detail.jhtml?id=706037

Supplement (B), 707-025: /b01/en/common/item_detail.jhtml?id=707025

Competing Through Business Models (A)

Harvard Business School Module Note 708-452

This note defines the concepts of business model and the value loop. It also introduces business model representations and proposes four tests for evaluating business models in isolation. This is the first note in a series of three written for the HBS elective course "Competing through Business Models."

Purchase this module note: /b01/en/common/item_detail.jhtml?id=708452

Supplement (B), 708-475: "Competitive Strategy vs. Business Models" /b01/en/common/item_detail.jhtml?id=708475

Supplement (C), 708-476: "Business Model Evaluation - Analysis in Interaction" /b01/en/common/item_detail.jhtml?id=708476

The European Union in the 21st Century

Harvard Business School Case 707-021

Focuses on the challenges facing the European Union in 2006. Following the French and Dutch referendums in 2005, the fate of the European Constitution is in jeopardy. Ten new accession countries have just joined the EU, with Turkey in the beginning stages of the accession process. New member states and additional future members have provoked widespread debate on financial, political, and social issues. Growth within the EU has been sluggish, with high unemployment and low investment in R&D. The EU has launched a set of reforms to create a "single passport" system of mutual recognition within the EU for capital, services, and people. Still, terrorist attacks, an upsurge in domestic violence, budgetary problems, and foreign policy, enlargement, and immigration issues plague the EU. In light of these problems, what will be the future of the EU and its constitution?

Purchase this case: /b01/en/common/item_detail.jhtml?id=707021

Freemark Abbey Winery (Abridged)

Harvard Business School Case 606-004

Freemark Abbey must decide whether to harvest in view of the possibility of rain. Rain could damage the crop but delaying the harvest would be risky. On the other hand, rain could be beneficial and greatly increase the value of the resulting wine. This decision is further complicated by the fact that ripe Riesling grapes can be vinified in two ways, resulting in two different styles of wine. Their relative prices would depend on the uncertain preference of consumers two years later, when the wine is bottled and sold.

Purchase this case: /b01/en/common/item_detail.jhtml?id=606004

Glass Egg Digital Media

Harvard Business School Case 508-066

Glass Egg is an outsource games development firm in Vietnam. They are able to offer brand-name publishers—Microsoft EA, Atari—significant cost savings in the development of art assets for their video games. However, the firm's management find themselves at a point at which they feel they need to make a strategic decision that will enable Glass Egg to grow more substantially and more quickly. They are evaluating three possible directions including expanding the sales force, expanding the scope of art development services they offer and, more radically, going into the games publishing business themselves. Besides offering a picture of an interesting firm in a growing, dynamic country and business, the case allows for an exploration of two important general themes: (1) Assessing alternative growth strategies. When should one pursue "more of the same" business vs. offering another product vs. looking for new customers? When is it better to develop an entirely different line of business with different customers and different products? (2) What are the differences between marketing to businesses vs. marketing to consumers? Since one of the options the firm is considering involves a consumer product—online game development—the case supports a discussion about the important differences, not only in terms of the nature of the buying process and buying center but also in terms of the vastly different organizational resources and structures that are needed in each.

Purchase this case: /b01/en/common/item_detail.jhtml?id=508066

Kidney Matchmakers

Harvard Business School Case 908-068

In this case we look at the design and development of an unconventional market, where neither money nor traditional "goods" are exchanged. Kidney exchange is an idea pioneered by HBS professor and market designer Alvin Roth and a small group of innovative doctors. This case follows this group as they grapple with some of the complex questions associated with launching a national clearinghouse for kidney exchange. It raised critical questions about why and how value is created in markets and how important moral dilemmas (in this case, the buying and selling of human organs) complicate the connection between market exchange and value creation.

Purchase this case: /b01/en/common/item_detail.jhtml?id=908068


Harvard Business School Case 708-499

The case, set in late 2007, examines what MySpace—the largest online social network—should do to respond to its agile competitor, Facebook. Since its inception MySpace had experienced phenomenal growth, acquiring 20 million members in its first 20 months of operation, and another 70 million a year later, to become the most visited website in the United States. Its growth stalled around mid-2007, just a few months after Facebook had released its programming platform which allowed outside programmers to build applications using its social network data. The wealth of new applications on Facebook allowed the company to increase its membership by more than 15% in one month. To remain competitive MySpace had to release its own platform, and now it needs to decide whether to build its own proprietary application platform or join OpenSocial, a Google-sponsored open source platform.

Purchase this case: /b01/en/common/item_detail.jhtml?id=708499

Name Your Price: Compensation Negotiation at Whole Health Management (A)

Harvard Business School Case 908-064

MBA student Monroe Davies is asked by a potential employer to determine his own compensation package. This case follows Jim Hummer, President and CEO of Whole Health Management and Davies through a unique recruitment process that raises questions of compensation and employee incentives, negotiation strategy, and human resources management.

Purchase this case: /b01/en/common/item_detail.jhtml?id=908064

Supplement (B), 908-065: /b01/en/common/item_detail.jhtml?id=908065

Supplement (C), 908-066: /b01/en/common/item_detail.jhtml?id=908066

Punjab and Kerala: Regional Development in India

Harvard Business School Case 707-008

Between 2000 and 2004, India's economy grew by 6.35%. Focuses on the states of Punjab and Kerala, which emphasized sharply different development strategies. The states had to decide whether to focus their investment efforts on physical capital or improving social indicators. Both states faced constraints in the form of budget deficits, competition from other states, and coordination with central government policies.

Purchase this case: /b01/en/common/item_detail.jhtml?id=707008

Vignettes on Governance of Private Equity Firms

Harvard Business School Case 808-168

In a series of vignettes, Nigella Hardy-Smyth of an international development agency that invests in emerging markets private equity firms must decide how to handle various situations that arise. As a member of the Limited Partner Advisory Board of each of the five firms, she must contend with a fund manager with an indistinct mandate, a manager who wants to exceed the concentration limit in an investment, tension between a star investor and her other partners, a founding partner who wants to fire the rest of his senior team, and a limited partner seeking preferential treatment that might benefit his fund to the detriment of the other limited partners. The process of discussing these helps the class explore the nuanced role of a limited partner in a private equity firm.

Purchase this case: /b01/en/common/item_detail.jhtml?id=808168

Year Up

Harvard Business School Case 308-032

Year Up, a nonprofit job-skills training program for low-income, urban youth has run four successful programs in four cities for the past seven years. Now, after an ambitious capital campaign, the organization is poised to grow into a national program in an attempt to reach the 4.3 million disconnected youth in the United States, but will the organization be able to maintain high-quality results as it goes to scale?

Purchase this case: /b01/en/common/item_detail.jhtml?id=308032



Moral Gray Zones: Side Productions, Identity, and Regulation in an Aeronautic Plant

Publisher's Abstract

Anyone who has been employed by an organization knows not every official workplace regulation must be followed. When management consistently overlooks such breaches, spaces emerge in which both workers and supervisors engage in officially prohibited, yet tolerated practices—gray zones. When discovered, these transgressions often provoke disapproval; when company materials are diverted in the process, these breaches are quickly labeled theft. Yet, why do gray zones persist and why are they unlikely to disappear? In Moral Gray Zones, Michel Anteby shows how these spaces function as regulating mechanisms within workplaces, fashioning workers' identity and self-esteem while allowing management to maintain control. The book provides a unique window into gray zones through its in-depth look at the manufacture and exchange of illegal goods called homers, tolerated in a French aeronautic plant. Homers such as toys for kids, cutlery for the kitchen, or lamps for homes, are made on company time with company materials for a worker's own purpose and use. Anteby relies on observations at retirees' homes, archival data, interviews, and surveys to understand how plant workers and managers make sense of this tacit practice. He argues that when patrolled, gray zones like the production of homers offer workplaces balanced opportunities for supervision as well as expression. Cautioning against the hasty judgment that gray zone practices are simply wrong, Moral Gray Zones contributes to a deeper understanding of the culture, group dynamics, and deviance found in organizations.

Book link:

Hedgehogs and Foxes: Character, Leadership, and Command in Organizations

Publisher's Abstract

In this compelling look at charismatic leaders and their leadership styles, Abraham Zaleznik asserts that leaders are either "hedgehogs," who view leadership as a single-minded track driven by unwavering rules, or "foxes," who assess and re-evaluate their goals and strategies based on ever-changing factors in business, politics, and culture. Covering dynamic personalities from Dwight Eisenhower to Martin Luther King, Jr., Zaleznik draws illuminating conclusions about psycho-politics and negotiations of power and command, celebrating innovative problem-solving skills.

Book link:

Employee Motivation: A Powerful New Model


Motivating employees begins with recognizing that to do their best work, people must be in an environment that meets their basic emotional drives to acquire, bond, comprehend, and defend. So say Nohria and Groysberg, of Harvard Business School, and Lee, of the Center for Research on Corporate Performance. Using the results of surveys they conducted with employees at a wide range of Fortune 500 and other companies, they developed a model for how to increase workplace motivation dramatically. The authors identify the organizational levers that companies and frontline managers have at their disposal as they try to meet workers' deep needs. Reward systems that truly value good performance fulfill the drive to acquire. The drive to bond is best met by a culture that promotes collaboration and openness. Jobs that are designed to be meaningful and challenging meet the need to comprehend. Processes for performance management and resource allocation that are fair, trustworthy, and transparent address the drive to defend. Equipped with real-world company examples, the authors articulate how to apply these levers in productive ways. That application should not be selective, they argue, because a holistic approach gets you more than a piecemeal one. By using all four levers simultaneously, and thereby tackling all four drives, organizations can improve motivation levels by leaps and bounds. For example, a company that falls in the 50th percentile on employee motivation improves only to the 56th by boosting performance on one drive, but way up to the 88th percentile by doing better on all four drives. That's a powerful gain in competitive advantage that any business would relish.