First Look

February 21, 2012

The User As Entrepreneur

User innovations are improvements to products either suggested or created directly by customers. But how often do users financially profit from those improvements themselves? The subject is studied in the forthcoming book chapter, When Do User Innovators Start Firms? A Theory of User Entrepreneurship by Sonali Shah and Mary Tripsas. Their model helps explain why "user entrepreneurs are likely to spawn the creation of altogether new product markets and even industries."

Bluffing For Innovation

One potentially effective method of deterring rivals from pursuing innovative attacks in your market is the old-fashioned bluff, it appears. In the forthcoming article, "Innovation Strategy and Entry Deterrence," Turut Ozge and Elie Ofek discuss ways firms can preemptively discourage entrants. One strategy is to pursue incremental advances and put off radical innovation, in part to avoid validating the high market potential to the entrant. The article will be published in an upcoming Journal of Economics and Management Strategy.

Making Of The Modern Firm

In The Rise of the Modern Firm, editors Geoffrey Jones and Walter A. Friedman chronicle the growth of the business enterprise from Ancient Phoenicia to modern day China. A number of scholars contribute chapters on topics as varied as "Josiah Wedgewood: An Eighteenth-Century Entrepreneur in Salesmanship and Marketing Techniques," "Acquisitions and Firm Growth: Creating Unilever's Ice Cream and Tea Business," and "The Trade Diaspora of Baghdadi Jews: From India to China's Treaty Ports."

— Sean Silverthorne


The Rise of the Modern Firm

This authoritative volume focuses on the rise of modern firms, from their early history to the present day. It considers the role of laws and contracts in shaping the growth and influence of business enterprises. It presents entrepreneurs, executives, and the firms they controlled as driving actors in national economies and international growth. Alongside an original introduction, we have selected work by scholars who have used corporate archives to explore the fine details of how firms actually operated. It also includes work by those who have been influenced by evolutionary, transaction cost, and resource-based theories of the firm. The book will be an essential source of reference for industrial economists, management scholars, and business historians.

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The Future of Boards

This book is a collection of chapters written by Harvard Business School faculty and alums who have experience with corporate boards. It will provide a uniquely HBS perspective on the future of boards.

Management Practices across Firms and Countries

For the last decade we have been using double-blind survey techniques and randomized sampling to construct management data on over 10,000 organizations across 20 countries. On average, we find that in manufacturing American, Japanese, and German firms are the best managed. Firms in developing countries, such as Brazil, China, and India tend to be poorly managed. American retail firms and hospitals are also well managed by international standards, although American schools are more poorly managed than those in several other developed countries. We also find substantial variation in management practices across organizations in every country and every sector, mirroring the heterogeneity in the spread of performance in these sectors. One factor linked to this variation is ownership. Government, family, and founder owned firms are usually poorly managed, while multinational, dispersed shareholder, and private-equity owned firms are typically well managed. Stronger product market competition and higher worker skills are associated with better management practices. Less regulated labor markets are associated with improvements in incentive management practices such as performance-based promotion.

Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India, and China

Our paper provides a comparative perspective on the development of public primary education in four of the largest developing economies circa 1910: Brazil, Russia, India, and China (BRIC). These four countries encompassed more than 50% of the world's population in 1910, but remarkably few of their citizens attended any school by the early 20th century. We present new, comparable data on school inputs and outputs for BRIC drawn from contemporary surveys and government documents. Recent studies emphasize the importance of political decentralization and relatively broad political voice for the early spread of public primary education in developed economies. We identify the former and the lack of the latter to be important in the context of BRIC, but we also outline how other factors such as factor endowments, colonialism, serfdom, and, especially, the characteristics of the political and economic elite help explain the low achievement levels of these four countries and the incredible amount of heterogeneity within each of them.

Salience in Quality Disclosure: Evidence from the U.S. News College Rankings

How do rankings affect demand? This paper investigates the impact of college rankings, and the visibility of those rankings, on students' application decisions. Using natural experiments from U.S. News and World Report College Rankings, we present two main findings. First, we identify a causal impact of rankings on application decisions. When explicit rankings of colleges are published in U.S. News, a one-rank improvement leads to a 1-percentage-point increase in the number of applications to that college. Second, we show that the response to the information represented in rankings depends on the way in which that information is presented. Rankings have no effect on application decisions when colleges are listed alphabetically, even when readers are provided data on college quality and the methodology used to calculate rankings. This finding provides evidence that the salience of information is a central determinant of a firm's demand function, even for purchases as large as college attendance.

When Do User Innovators Start Firms? A Theory of User Entrepreneurship

A rich and distinguished body of research has documented the importance of user innovations. For the most part, this literature has found that users innovate but do not commercialize their innovations. Instead, users benefit from using their innovations and allow manufacturers to commercialize innovations with financial value. Yet scholars have recently shown that entrepreneurial activity by users is more widespread than previously believed. We present data and statistics documenting the prevalence, technological impact, and economic impact of user entrepreneurship. Then, to reconcile these divergent empirical findings, we develop a theoretical model that explains when user innovations are commercialized by users, by manufacturers, or not commercialized at all. At the core of our model is the notion that users and manufacturers differ along two critical dimensions: their estimates of the financial returns to entering the product market, and their profit thresholds. Depending upon the magnitude of these differences, we propose alternative commercialization outcomes. This model helps to explain why user entrepreneurs are likely to spawn the creation of altogether new product markets and even industries. We illustrate our model with examples from the field of consumer sporting goods. The significance of user entrepreneurship and the implications of our model for theories of innovation, entrepreneurship, and industry emergence are discussed.

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Innovation Strategy and Entry Deterrence

We model an incumbent's decision to pursue radical or incremental innovation when facing a rival entrant. The radical innovation may yield lucrative financial returns but entails significant technological and market-related uncertainties. It is also particularly attractive to the rival entrant: if the market for it pans out, such an innovation obsoletes the existing technology and any incremental improvements to it. Each firm has its own assessment of the market potential for the radical innovation, and the reliability of these market forecasts can differ. We show that when the entrant's market-assessment capability is weak, the incumbent will pursue incremental innovation and postpone its plans to develop radical innovation even when it thinks highly of the market potential for the radical innovation. The incumbent does so to avoid validating the high market potential to the entrant, who may otherwise be encouraged to invest aggressively. The incumbent thus prefers to look 'soft' with respect to its innovation strategy in order to discourage entry. Even if its innovation strategy is not observable, we show that an incumbent that assesses the commercial potential for a radical innovation favorably may pursue an incremental path and communicate its plans publicly; this strategy serves to reduce entry by affecting the entrant's beliefs about the market potential of the innovation. Finally, we extend the model to investigate the entrant's decision to communicate its innovation intentions. We find that the entrant communicates its plans to aggressively pursue radical innovation only if the incumbent's market-assessment capabilities are strong. In doing so, the entrant acts preemptively to discourage the incumbent from pursuing the radical innovation and is less concerned with validating market potential.


Working Papers

Span of Control and Span of Activity


For both practitioners and researchers, span of control plays an important role in defining and understanding the role of the CEO. In this paper, we combine organizational chart information for a sample of 65 companies with detailed data on how their CEOs allocate their work time, which we define as their span of activity. Span of activity provides a direct measure of the CEO's management style, including the attention devoted to specific subordinates and functions, the time devoted to individual work and outside constituencies, a preference for multilateral or bilateral interaction, the degree of planning, etc. We find that CEOs with a larger number of reports spend more time with subordinates, more time on large meetings, less time on unplanned activities. The presence of a delegate, such as the COO, allows the CEO to reduce the time spent with insiders and to focus on bilateral and unplanned activities. These results suggest that time-use information is helpful in interpreting how span of control determines management style.

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Cases & Course Materials

"L'Occitane en Provence

Bo Becker, Daniela Beyersdorfer, Scott Mayfield, and Mayuka Yamazaki
Harvard Business School Case 212-051

Cosmetics company L'Occitane en Provence must decide if it is the right time to go public, and, if so, where to list. The firm could list on Euronext in Paris, close to the firm's headquarters in southern France, on one of the large exchanges in the U.S., or perhaps in Asia, where much of the firm's future growth is expected. The case provides opportunities to discuss the benefits and costs of going public, including valuation implications, and illustrates the choices faced by a prospective IPO firm that operates in a global setting.

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SKS and the AP Microfinance Crisis

Shawn Cole and Yannick Saleman
Harvard Business School Case 212-018

SKS, India's leading microfinance firm, is challenged when politicians declaim microfinance as exploitation of the poor and severely restrict business practices.

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Dow Chemical: Innovating for Sustainability

Robert G. Eccles, George Serafeim, and Shelley Xin Li
Harvard Business School Case 112-064

Dow Chemical is one of the few major American industrial corporations founded in the late 19th century that is still in existence. From its origins producing bromine out of the brine underneath Midland, Michigan, the company has evolved from a diversified commodity chemical company to an advanced materials company whose products and services can make its clients more sustainable. During the 1960s and 1970s the company received a series of external shocks in the form of negative public opinion for some of its activities. These challenged the company's perception as being a "good company" and made it realize it needed to more proactively seek outside perspectives on how the company was viewed and what it should do. This led to the formation of the Corporate Environmental Advisory Council in 1992, which was renamed the Sustainability External Advisory Council (SEAC) in 2008. With substantial input from the SEAC, the company set two ambitious sets of ten-year goals: 1996-2005 and 2006-2015 and was largely successful in meeting them or on the way to doing so. In 2011, Neil Hawkins, vice president of sustainability and EH&S (environmental, health and safety) is trying to decide what the content and format of the next ten-year goals should be to ensure the company's viability on its 200th birthday. Should they be incremental goals like the ones for 2005 or ambitious stretch targets like the ones for 2015? Or should they be broad statements of principles that encourage innovating for sustainability throughout the company? A further challenge facing the company is that it was rapidly globalizing with a large portion of its workforce outside its Midland, Michigan headquarters, making it even more difficult to preserve a common culture and commitment to sustainability.

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Ganging up on Cancer: Integrative Research Centers at the Dana-Farber Cancer Institute (B)

Heidi K. Gardner, Edo Bedzra, and Shereef M. Elnahal
Harvard Business School Supplement 412-098

Dr. Barrett Rollins, chief scientific officer of the Dana-Farber Cancer Institute, attempts to engender cross-scientist collaboration by applying project management principles to medical research. The resulting innovation, Integrative Research Centers, are novel in this field and present a substantial challenge to the institute's culture, which had previously allowed faculty scientists complete autonomy over their research. Center leaders are required to develop a business plan, adhere to agreed-upon performance metrics, and undergo regular progress reviews conducted by a peer-led oversight committee. The (B) case outlines the decisions Rollins took in terms of leadership and other strategic matters and shows how the center is performing a year after its initial disappointing progress.

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The IPO of Agricultural Bank of China (ABC) (A)

Li Jin, Aldo Musacchio, and Hania Dawood
Harvard Business School Case 712-006

An abstract is unavailable at this time.

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The IPO of Agricultural Bank of China (ABC) (B)

Li Jin, Aldo Musacchio, and Hania Dawood
Harvard Business School Supplement 712-008

An abstract is unavailable at this time.

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Padraig O'Ceidigh and Aer Arann: Building a Business in the Context of a Life

Janet Kraus and Shirley M. Spence
Harvard Business School Case 811-072

In April 2010, the eruption of a volcano wreaked havoc in the airline industry and placed Aer Arann on the brink of liquidation. For founder, sole owner, and chairman, Padraig O'Ceidigh, the airline has been a personal as well as a business passion. The case provides a number of options for addressing the crisis. It also places the story in the context of Padraig's life journey and search for multi-dimensional success.

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Padraig O'Ceidigh and Aer Arann: Building a Business in the Context of a Life—What Happened

Janet Kraus and Shirley M. Spence
Harvard Business School Supplement 811-090

Provides an epilogue to the problem posed in the companion case: "What to Do in the Face of Potential Liquidation?"

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New Resource Bank: In Pursuit of Green

Christopher Marquis and John Almandoz
Harvard Business School Case 412-060

New Resource Bank was founded in San Francisco in 2006 with a mission focused on environmental sustainability. The case illustrates the opportunities and challenges of banking on values and the challenges of organizations defining a social and environmental commitment. The case also highlights the tension and potential synergies between social mission and shareholder value in the context of the crisis of 2008, the taken-for-granted expectations and norms arising from a commercial bank charter, and the distinct perspectives of bank regulators, founders, investors, and other stakeholders of the newly founded bank.

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Pakistan: Is Foreign Aid Helping or Hindering Development?

Aldo Musacchio, Ada Chu, Shahnawaz Nawabi, Jonathan Schlefer, and Emil Staykov
Harvard Business School Case 712-005

An abstract is unavailable at this time.

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Sovereign Wealth Funds: Barbarians at the Gate or White Knights of Globalization?

Aldo Musacchio and Emil Staykov
Harvard Business School Case 712-022

An abstract is unavailable at this time.

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Akamai's Edge (A)

Eric Van den Steen
Harvard Business School Case 712-455

In 2009, Paul Sagan, CEO of Akamai, the leading online content delivery network with a 60% market share, needs to decide how to respond to aggressive entry in its market, whether and how to pursue the explosive growth in online video, and whether to stay with its distributed network model or move towards its competitors' more centralized design.

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Bananas (A)

Eric Van den Steens
Harvard Business School Case 712-451

As owner and CEO, Wim Van der Borght had grown Bananas in eight years from a 4.5 million euro company into a 40 million euro group of companies with a range of field marketing activities in Belgium and the Netherlands. The core of the group consisted of two companies-Bananas and Demonstrate-which were operationally completely independent and acted as competitors in the market. The two companies had different strengths and different cultures. In August 2008, Wim needed to decide on the right degree of interaction or integration of Bananas and Demonstrate. He also wanted to expand the companies' activities to a more comprehensive marketing offering and needed to consider international expansion opportunities.

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