First Look

December 11, 2012

Marketing Jay-z's decoded

David Droga and Andrew Essex, cofounders of ad agency Droga5, have a complicated challenge. They must broker a deal among hip-hop star Jay-Z, Microsoft, and Random House in order to create a groundbreaking marketing campaign behind the artist's new book. Read the case, written by Anita Elberse and Kwame Owusu-Kesse, ''Droga5: Launching Jay-Z's Decoded.''

The Next Disney?

Does Angry Birds—already a game, a toy, a cookbook—have enough brand life left in it to support a movie? That's the essential question facing Rovio Entertainment CEO Mikael Hed, who believes his characters could make the company the next Disney. Read "Angry Birds," by Sunil Gupta and Dharmishta Rood.

Assessing Vulnerable Banks

In their new working paper Vulnerable Banks, researchers Robin Greenwood, Augustin Landier, and David Thesmar explore how a troubled bank's asset sales can spread contagion through the industry. "Our framework explains how the distribution of bank leverage and risk exposures contributes to a form of systemic risk," according to the authors.

— Sean Silverthorne


How Much Is Sweat Equity Worth?


The article presents a case study of a business decision related to the valuing of sweat equity in a start-up business. One man starts a premium vodka business, bringing in his cousin at an early stage, but with no initial discussion of the eventual split of equity or managerial control between the two. The article offers each man's case for his ownership stake in a narrative style, and then presents various views of how and what they should decide.


When Identities, Interests, and Information Collide: How Subgroups Create Hidden Profiles in Teams


Purpose-We review how team members' identities and interests affect team functioning, paying special attention to subgroup dynamics triggered by fault lines and coalitions. This review sets the stage for describing novel pathways through which identities and interests, when considered together, can affect team processes and outcomes. Design/approach-We use an extended example of a hypothetical team's decision-making process to illustrate how team members' identities and interests intertwine to affect the distribution and flow of information, subgroup dynamics, and team decisions. Findings-We develop three specific ideas to demonstrate the utility of this integrative approach. First, we show how the formation of identity-based subgroups can shape information sharing to create a hidden profile where there was none initially. Second, we describe how individual defection can weaken subgroup competition and, paradoxically, increase the chance that a team will optimize its collective welfare. Third, we analyze how shared identities can shape team members' side conversations in ways that create shared interests and information among those with similar identities, even before the team begins its formal meetings. Originality/value-By identifying new routes through which identities and interests can affect team functioning, we provide a foundation for scholars in this domain to theoretically develop and empirically test these and related ideas. More generally, we encourage scholars to study the interplay among identities, interests, and information in their own research to paint a more complete picture of how individuals, subgroups, and teams perform.


The Political Economy of Bilateral Foreign Aid


Despite its developmental justification, aid is deeply political. This paper examines the political economy of aid allocation first from the perspective of the donor country, and then the political economy of aid receipt and implementation from the perspective of the recipient country. When helpful, it draws from studies of multilateral aid. Following those discussions, the paper explores solutions, employed by the development community, to the distortions brought about by the political economy of bilateral aid-distortions that steer aid away from achieving economic development in the recipient country. As it turns out, none of these solutions can shield foreign aid from the heavy hand of politics. Developing countries heavily influenced by foreign aid end up with a different, and novel, governing apparatus.



Working Papers

Leading Amidst Competing Technical and Institutional Demands: Revisiting Selznick's Conception of Leadership


An abstract is unavailable at this time.

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The Spatial Diffusion of Technology


We empirically study technology diffusion across countries and over time. We find significant evidence that technology diffuses slower to locations that are farther away from adoption leaders. This effect is stronger across rich countries and also when measuring distance along the south-north dimension. A simple theory of human interactions can account for these empirical findings. The theory suggests that the effect of distance should vanish over time, a hypothesis that we confirm in the data and that distinguishes technology from other flows like goods or investments. We then structurally estimate the model. The parameter governing the frequency of interactions is larger for newer and network-based technologies, and for the median technology, the frequency of interactions decays by 73% every 1000 kms. Overall, we document the significant role that geography plays in determining technology diffusion across countries.

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Pricing and Efficiency in the Market for IP Addresses


We consider market rules for the transfer of IP addresses, numeric identifiers required by all computers connected to the Internet. Excessive fragmentation of IP address blocks causes growth in the Internet's routing table, which is socially costly, so an IP address market should discourage subdividing IP address blocks more than necessary. Yet IP address transfer rules also need to facilitate purchase by the networks that need the addresses most, from the networks that value them least. We propose a market rule that avoids excessive fragmentation while almost achieving social efficiency, and we argue that implementation of this rule is feasible despite the limited powers of central authorities. We also offer a framework for the price trajectory of IP addresses. In a world without uncertainty, the unit price of IP addresses is constant until all addresses are in use and begins decreasing at that time. With uncertainty, the price before that time is a martingale, and the price trajectory afterwards is a supermartingale. Finally, we explore the role of rental markets in sharing information about address value and assuring allocative efficiency.

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Vulnerable Banks


When a bank experiences a negative shock to its equity, one way to return to target leverage is to sell assets. If asset sales occur at depressed prices, then one bank's sales may impact other banks with common exposures, resulting in contagion. We propose a simple framework that accounts for how this effect adds up across the banking sector. Our framework explains how the distribution of bank leverage and risk exposures contributes to a form of systemic risk. We compute bank exposures to system-wide deleveraging, as well as the spillover of a single bank's deleveraging onto other banks. We show how our model can be used to evaluate a variety of crisis interventions, such as mergers of good and bad banks and equity injections. We apply the framework to European banks vulnerable to sovereign risk in 2010 and 2011.

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Boardroom Centrality and Firm Performance


Firms with central or well-connected boards of directors earn superior risk-adjusted stock returns. Initiating a long position in the most central firms and a short position in the least central firms earns an average risk-adjusted return of 4.68% per year. Firms with central boards also experience higher future growth in return-on-assets (ROA) with analysts failing to fully reflect this information in their earnings forecasts. Return prediction, growth in ROA, and analyst forecast errors are concentrated among firms with high growth opportunities or firms confronting adverse circumstances, consistent with boardroom connections mattering most for firms that stand to benefit most from the information communicated and resources exchanged through the network of board members. Overall, our results suggest that board of director networks provide economic benefits that are not immediately reflected in stock prices.

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Cost of Capital Dynamics Implied by Firm Fundamentals


We provide a tractable stock valuation model to study the dynamics of discount rates using only two firm fundamentals: the book-to-market ratio and expected ROE. We find that the model is easily applied to a large cross section of firms and that firm-level discount rates vary over time and are highly persistent. The model can forecast stock returns up to three years into the future and tracks economic conditions. During normal or expansion periods in the economy, the dynamics of cost of capital generate an upward sloping term structure; however, in times of high economic uncertainty, the term structure flattens and can be downward sloping.

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Cases & Course Materials

Natural Gas

Abdelal, Rawi, and Sogomon Tarontsi
Harvard Business School Case 713-020

In an overview of natural gas as a fossil fuel and traded commodity, the case describes various regional markets of natural gas, highlighting diversity of price formation mechanisms across and within those markets. Recent changes in the economics of unconventional natural gas extraction-"the shale revolution"-could potentially remake those markets, steering the world toward the "golden age" of natural gas.

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Comin, Diego, Rohan Gopaldas, and Diego Rehder
Harvard Business School Case 713-022

The case presents the unique business model of Inkaterra, a leading eco-tourism organization in Peru, and the different strategies the company can pursue to grow. Through the experience of Inkaterra the case studies two general issues. First, it discusses the potential barriers that exist for the development of the tourism sector. Second, it presents the debate of whether governments may want to use tourism as an engine of growth, and if so, what is the best strategy to preserve the environment.

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Integrated Reporting in South Africa

Eccles, Robert G., George Serafeim, and Pippa Armbrester
Harvard Business School Case 413-038

This case presents a 20-year history of the evolution of corporate governance and corporate reporting in South Africa starting in 1992 with a focus on the three King codes of corporate governance (King I in 1994, King II in 2000, and King III in 2009). From a reporting perspective these reforms culminated in the "apply to explain why not" mandate for integrated reporting by all companies listed on the Johannesburg Stock Exchange.

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Droga5: Launching Jay-Z's Decoded

Elberse, Anita, and Kwame Owusu-Kesse
Harvard Business School Case 513-032

In 2010, David Droga and Andrew Essex, co-founders of advertising agency Droga5, hope to convince both John Meneilly, manager of hip-hop star Shawn Carter-better known as Jay-Z-and a partner in Carter's company Roc Nation and Yusuf Mehdi, senior vice president of Microsoft's Online Services division, to enter into an unprecedented, high-stakes partnership to benefit the launch of Carter's new lyrical memoir, Decoded. Droga5 wrestles with two disparate challenges: developing a campaign for the book's launch and finding a way to drive trial for Bing, Microsoft's new search engine. Droga5's innovative solution is to kill two birds with one idea: a massive, interactive scavenger hunt involving outdoor, bespoke, and digital media. Because Spiegel & Grau, a Random House imprint that holds the rights to the book, lacks the funds to market Carter's memoir at a scale deserving of a superstar, Droga5 is asking Microsoft to shoulder most of the campaign's costs. How can Droga5 broker a deal between Roc Nation, Random House, and Microsoft, and ensure success for each of the parties? And is pursuing this campaign idea a smart investment for the young agency? The case describes a set of decisions that paved the way for a groundbreaking advertising campaign that would win major advertising-industry awards, including the Grand Prix at the 2011 Cannes Lions International Festival of Creativity and a 2012 Gold Effie.

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Creating the First Public Law Firm: The IPO of Slater & Gordon Limited

Esty, Benjamin C., and E. Scott Mayfield
Harvard Business School Case 213-019

Slater & Gordon (S&G), a midsized Australian law firm with a high-growth consolidation strategy, had an initial public offering (IPO) scheduled for May 2007. Due to a series of regulatory changes in Australia in recent years, the IPO provided an opportunity for S&G to become the first publicly traded law firm in the world. The firm and its underwriters had just issued a prospectus and were now in the process of lining up investors for the offering. Gloria Rosen, a portfolio manager at Freemantle Securities, was trying to decide whether to buy the stock for her small-cap growth fund. With only a few days left to place an order for the offering, she had to decide whether to invest and, if so, how much to invest. To make her investment decision, Rosen had to understand the value implications of the firm's business model and its growth strategy, as well as the relevant risks.

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Angry Birds

Gupta, Sunil, and Dharmishta Rood
Harvard Business School Case 512-033

Within months of its launch in December 2009, Angry Birds, a mobile game created by a small Finnish company, Rovio Entertainment Ltd., became an international hit. By late 2011, Rovio was not only making Angry Birds games for the iPhone, Android, and other mobile platforms, but it had also expanded into plush toys, cookbooks, animation videos, and licensing arrangement with major brands. With the goal of making Rovio the next Disney, Mikael Hed, CEO of Rovio, was planning to create an Angry Birds movie. Was Angry Birds a fad that would fade away or was Rovio on a path to build a media empire?

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Colorscope, Inc. (Abridged)

Narayanan, V.G.
Harvard Business School Case 113-025

A small company in the graphic design business faces severe price competition. The company must respond by cutting costs and making process improvements.

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TWA Parts (A) (Abridged)

Narayanan, V.G.
Harvard Business School Case 113-030

Transworld Auto Parts had to implement its new strategy flawlessly to survive the auto industry upheaval. The new CEO asked her leadership team to craft strategy maps and balanced scorecards to help each division implement its strategies.

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Whaling Ventures

Nicholas, Tom, and Jonas Peter Akins
Harvard Business School Case 813-086

: Whaling was a prominent global industry in the nineteenth century and the United States was dominant. By 1850 there were about 900 whaling ships in the world and 700 of these were American. Rates of return on capital were high compared to benchmark investments, at least in the early years of the nineteenth century. The whaling industry was one of the earliest to grapple with complex issues in relation to the provision of high-risk investment capital, syndication, organizational form, ownership structure, incentives, team building, and principal-agent tradeoffs. It represents an important starting-point for exploring the origins of American entrepreneurship and venture financing.

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Horizon Blue Cross Blue Shield of New Jersey-Managing in the Shadow of Health Care Reform

Oberholzer-Gee, Felix, Raffaella Sadun, and Richard G. Hamermesh
Harvard Business School Case 711-403

Per the Patient Protection and Affordable Care Act (PPACA), which President Obama signed in 2010, states would be required to create state-wide health insurance marketplaces-the Health Benefit Exchanges (HBEs)-in which individuals and small employers could choose from a set of easy-to-compare, tightly regulated health plans. This case explores how Horizon Blue Cross Blue Shield of New Jersey would have to decide whether and how to compete in New Jersey's HBEs.

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Against the Grain: Jim Teague in Tanzania (B)

Ramanna, Karthik
Harvard Business School Supplement 113-042

Supplements the (A) case.

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Industrial Metrology: Getting In-Line? (B)

Shih, Willy.
Harvard Business School Supplement 613-041

Rainer Ohnheiser, the president of Carl Zeiss's Business Group Industrial Metrology (IMT), was focused on the threat that in-line metrology posed to Carl Zeiss IMT's core business. Historically, coordinate measurement machines (CMMs) that employed tactile measurement had fueled great market success for the division, but alternative non-contact measurement methods that employed optical or x-ray technologies were rapidly gaining ground in the market. This case follows the progress that the IMT division has made since the (A) case and examines the challenges that lie ahead.

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Intraoperative Radiotherapy for Breast Cancer (B)

Shih, Willy
Harvard Business School Supplement 613-040

The intraoperative radiotherapy (IORT) business at Carl Zeiss Meditec had struggled with growth since the time of the (A) case. Though the unit had grown revenues in excess of 50% and had exceeded its EBIT target, it faced several key strategic choices. Should it continue to specialize in the breast cancer segment, or should it focus more on surgery with radiotherapy as one technical solution. Should it continue its focus on more mature markets, or should it be making focused investments in emerging markets? The (A) case poses IORT as a disruptive technology, and the (B) case offers the instructor an opportunity to gauge the progress the protagonist has made in applying that framework.

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Tough Mudder's Global Expansion

Siegel, Jordan, and Christopher Poliquin
Harvard Business School Case 712-415

Tough Mudder is a start-up in the obstacle course industry that has seen rapid success in its home market of the United States and is contemplating how best to expand abroad. In doing so, the company tackles the following universal questions: How strong and sustainable is the home-market strategy? Which markets should the company enter first? And does the company need to adapt its business model for those markets?

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Soltes, Eugene, and Sara Hess
Harvard Business School Case 113-024

Monocle, a magazine on global affairs, culture, and business, was founded by Tyler Brûlé to counter a perceived deterioration in the quality of print publications available at the newsstand. Monocle differentiates itself from other publications through its diverse international coverage and related newspaper, radio, and shop offerings. The case investigates the growth of Monocle and how the publication has developed its unique relationship with readers and advertisers.

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