First Look

August 9, 2011

Profit From Waste

In an example of the ultimate sustainable process, new research by Deishin Lee studies how companies can create market opportunities from their waste. The paper, "Turning Waste into By-Product," will be published in an upcoming edition of Manufacturing and Service Operations Management. Lee identifies "by-product synergy" that firms can use to reduce the marginal cost of the original product and/or the by-product. She writes, "Leveraging the synergies between the original product and by-product can lead to counterintuitive profit-maximizing operating strategies such as increasing the amount of waste generated, and strategically increasing the quantity of original product above the business as usual production volume."

Why The Powerful Don't Listen

Do powerful people listen to the counsel of others? The results of recent experimental research suggests that the powerful are hard of hearing when it comes to taking advice, which they routinely discount. The paper, "Power, Competitiveness, and Advice Taking: Why the Powerful Don't Listen," by Leigh Plunkett Tost, Francesca Gino, and Richard P. Larrick, is part of more extensive research from the trio exploring the relationship between power and effective leadership. The paper is scheduled to be published in a forthcoming issue of Organizational Behavior and Human Decision Processes.

The Current State Of Experimental Economics

Speaking of experimental research in the business sector, Alvin E. Roth asks the question, "Is Experimental Economics Living Up to Its Promise?" Roth writes: "The question that is the title of this essay already suggests that experimental economics has at least reached a sufficient state of maturity that we can try to take stock of its progress and consider how that progress matches the anticipations we may have had for the field several decades ago, when it and we were younger." The essay will be included in the soon-to-publish The Methods of Modern Experimental Economics, edited by Guillaume R. Frechette and Andrew Schotter.

— Sean Silverthorne


What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential


Successful leaders know that leadership is less often about having all the answers—and more often about asking the right questions. The challenge lies in being able to step back, reflect, and ask the key questions that are critical to your performance and your organization's effectiveness. In What to Ask the Person in the Mirror, HBS professor and business leader Robert Kaplan presents a process for asking the big questions that will enable you to diagnose problems, change course if necessary, and advance your career. He lays out areas of inquiry, including questions such as (1) Do I clearly articulate my vision and top priorities?; (2) Does the way I spend my time enable me to achieve my top priorities?; (3) Do I give subordinates timely and direct feedback they can act on? Have I developed a succession roadmap?; and (4) Is my leadership style still effective, and does it reflect who I truly am? This highly readable and practical guide helps you learn to ask the right questions—and work through the answers in ways that are right for you. By asking these questions, you can craft new strategies for staying on top of your game.

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Is It Time for Auditor Independence Yet?


Well before the collapse of Enron and Arthur Andersen, we argued that the auditing system had been corrupted by the incentives auditors face to please their clients. We stated that even honest auditors were incapable of independence within the current regulatory framework. We document the failure to make sufficient changes to our institutions, highlight the barriers to needed changes, and challenge society to act before the next disaster.

A Choice Prediction Competition for Social Preferences in Simple Extensive Form Games: An Introduction


Two independent, but related, choice prediction competitions are organized that focus on behavior in simple two-person extensive form games ( one focuses on predicting the choices of the first mover and the other on predicting the choices of the second mover. The competitions are based on an estimation experiment and a competition experiment. The two experiments use the same methods and subject pool and examine games randomly selected from the same distribution. The current introductory paper presents the results of the estimation experiment and clarifies the descriptive value of some baseline models. The best baseline model assumes that each choice is made based on one of several rules. The rules include rational choice, level-1 reasoning, an attempt to maximize joint payoff, and an attempt to increase fairness. The probability of using the different rules is assumed to be stable over games. The estimated parameters imply that the most popular rule is rational choice; it is used in about half the cases. To participate in the competitions, researchers are asked to email the organizers models (implemented in computer programs) that read the incentive structure as input and derive the predicted behavior as an output. The submission deadline is December 1, 2011; the results of the competition experiment will not be revealed until that date. The submitted models will be ranked based on their prediction error. The winners of the competitions will be invited to write a paper that describes their model.

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Organ Allocation Policy and the Decision to Donate


Organ donations from deceased donors (cadavers) provide the majority of transplanted organs in the United States, and one deceased donor can save numerous lives by providing multiple organs. Nevertheless, most Americans are not registered organ donors despite the relative ease of becoming one. We study in the laboratory an experimental game modeled on the decision to register as an organ donor and investigate how changes in the management of the organ waiting list might impact the donation rate. We find that an organ allocation policy giving priority on waiting lists to those who previously registered as donors has a significant positive impact on registration.

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The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees


Most research linking compensation to strategy relies on agency theory economics and focuses on executive pay. Departing from this work, in this paper we focus on the strategic compensation of non-executive employees and argue that while agency theory provides a useful framework for analyzing compensation, it fails to consider several psychological factors that increase costs from performance-based pay. We examine how psychological costs from social comparison and overconfidence reduce the efficacy of individual performance-based compensation, building a theoretical framework that predicts more prominent use of team-based, seniority-based, and flatter compensation. We propose that compensation is strategic not only in motivating and attracting the worker being compensated, but also in its impact on peer workers and the firm's complementary activities. The paper discusses empirical implications and possible theoretical extensions of the proposed integrated theory.

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Turning Waste into By-Product


This paper studies how a firm can create and capture value by converting a waste stream into a useful and saleable by-product (i.e., implementing by-product synergy [BPS]). We show that BPS creates an operational synergy between two products that are jointly produced. In essence, BPS is a process innovation that reduces the marginal cost of the original product and/or the by-product. The firm creates value through this process innovation and can capture this value by capturing newly created market opportunities, taking market share from competitors, or licensing the innovation to its competitors. We determine the optimal operating and licensing strategies for the firm and find market conditions under which the firm would benefit most from implementing BPS. We show that the optimal operating and licensing strategies are driven by the size of the cost reduction enabled by the BPS process innovation. We also show that leveraging the synergies between the original product and by-product can lead to counterintuitive profit-maximizing operating strategies such as increasing the amount of waste generated, and strategically increasing the quantity of original product above the business as usual production volume. We present a framework for assessing the environmental impact of BPS which incorporates the impact of the optimal operating and licensing strategies.

Is Experimental Economics Living Up to Its Promise?


The question that is the title of this essay already suggests that experimental economics has at least reached a sufficient state of maturity that we can try to take stock of its progress and consider how that progress matches the anticipations we may have had for the field several decades ago, when it and we were younger. So it will help to begin by reconstructing what some of those anticipations were.

Power, Competitiveness, and Advice Taking: Why the Powerful Don't Listen


Four experiments test the prediction that feelings of power lead individuals to discount advice received from both experts and novices. Experiment 1 documents a negative relationship between subjective feelings of power and use of advice. Experiments 2 and 3 further show that individuals experiencing neutral and low levels of power weigh advice from experts and experienced advisors more heavily than advice from novices, but individuals experiencing high levels of power discount both novice and expert advice. Experiments 3 and 4 demonstrate that this tendency of individuals experiencing high levels of power to discount advice from experts and novices equally is mediated by feelings of competitiveness (Experiment 3) and confidence (Experiments 3 and 4). Finally, Experiment 4 shows that inducing high-power individuals to feel cooperative with their advisors can mitigate this tendency, leading them to weigh expert advice more heavily than advice from novices. Theoretical and practical contributions are discussed.

Deception and Its Detection: Effects of Monetary Incentives and Personal Relationship History


The study examined detection of deception in unsanctioned, consequential lies between either friends or strangers using an ultimatum game. The sender was given an amount of money to divide with the receiver. The receiver did not know the precise amount the sender had to divide, and the sender had the ability to deceive the receiver about the monetary amount. Not surprisingly, senders were more likely to deceive strangers than friends, and receivers were more suspicious of strangers than friends. When senders lied, they stated their offer more times and gave more supporting statements for their offer. Receivers had a strong truth bias, although the majority of senders were truthful, and friends had more of a truth bias than strangers. Receivers were not able to detect deception at a rate above chance. Friends were not better at detecting deception than strangers. However, because most participants were truthful and there was a strong truth bias, a high percentage of participants were able to detect when their partner was truthful, in confirmation of the veracity effect.

Kidney Paired Donation


Kidney paired donation (KPD) was first suggested in 1986, but it was not until 2000 when the first paired donation transplant was performed in the U.S. In the past decade, KPD has become the fastest growing source of transplantable kidneys, overcoming the barrier faced by living donors deemed incompatible with their intended recipients. This review provides a basic overview of the concepts and challenges faced by KPD as we prepare for a national pilot program with the United Network for Organ Sharing. Several different algorithms have been creatively implemented in the U.S. and elsewhere to transplant paired donors, each method uniquely contributing to the success of KPD. As the paired donor pool grows, the problem of determining allocation strategies that maximize equity and utility will become increasingly important as the transplant community seeks to balance quality and quantity in choosing the best matches. Financing for paired donation is a major issue, as philanthropy alone cannot support the emerging national system. We also discuss the advent of altruistic or non-directed donors in KPD, and the important role of chains in addition to exchanges. This review is designed to provide insight into the challenges that face the emerging national KPD system in the U.S., now five years into its development.

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Working Papers

The Power of Political Voice: Women's Political Representation and Crime in India


Using state-level variation in the timing of political reforms, we find that an increase in female representation in local government induces a large and significant rise in documented crimes against women in India. Our evidence suggests that this increase is good news, driven primarily by greater reporting rather than greater incidence of such crimes. In contrast, we find no increase in crimes against men or gender-neutral crimes. We also examine the effectiveness of alternative forms of political representation: large-scale membership of women in local councils affects crime against them more than their presence in higher level leadership positions.

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Cases & Course Materials

Leading by Values: Sam Palmisano and IBM

William W. George
Harvard Business School Case 411-097

An abstract is unavailable at this time.

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Note on U.S. Pension Accounting

Robert C. Pozen and Brij Khurana
Harvard Business School Note 311-115

The purpose of this note is to describe the manner in which publicly traded corporations and local governments in the United States account for their pension plans.

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Scale Effects, Network Effects, and Investment Strategy

Willy Shih
Harvard Business School Note 611-082

This technical note discusses scale economies and direct and indirect network effects in the context of building better business models. Some of the great business disasters of the dot-com bubble were companies that scaled their infrastructure without working through the scaling effects. This note also discusses multi-sided platforms, the skewing of business models reflecting a mispricing to get one side on board, and suggests the importance of testing in establishing viable business models.

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Knowledge Creation at Eisai Co., Ltd

Hirotaka Takeuchi, Ikujiro Nonaka, and Mayuka Yamazaki
Harvard Business School Case 711-492

Eisai has used knowledge creation as the engine of growth for its operation in Japan and was wondering if it can be utilized on a global scale.

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Carbon Footprints: Methods and Calculations

Michael W. Toffel and Stephanie van Sice
Harvard Business School Note 611-075

Describes methods to calculate the carbon footprint (greenhouse gas emissions) of an organization's operations and supply chain and a product or service. Illustrates concepts with examples of calculating the carbon footprint of an organization (Harvard Business School) and a product (a newspaper). Provides data necessary for carbon footprint calculations.

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