First Look

February 9, 2010

Ready to do business in a developing economy? Don't just focus on its market size or growth potential. It's better to first scope out opportunities to build or improve efficient business operations such as credit-card systems, intellectual-property adjudication, and data research firms, according to Winning in Emerging Markets: A Road Map for Strategy and Execution, a new guide set for release this spring from Harvard Business Press. Identifying and filling such "institutional voids" is key to long-term success, write the authors, HBS professors Tarun Khanna and Krishna G. Palepu, who are experts on strategy and governance in emerging markets worldwide. Khanna is faculty chair for HBS activities in India and the author of Billions of Entrepreneurs: How China and India are Reshaping Their Futures and Yours (2008). Palepu is the School's senior associate dean for International Development. Focusing on opportunities in the U.S. education sector, Senior Lecturer Stacey M. Childress highlights exciting innovations over the past decade in Transforming Public Education: Cases in Education Entrepreneurship. This just-released book uses 18 case studies to explore trends in education entrepreneurship, along the way explaining how to assess possibilities and constraints, evaluate impact, and recognize the challenges ahead.
— Martha Lagace

Working Papers

The Architecture of Complex Systems: Do Core-Periphery Structures Dominate?


Any complex technological system can be decomposed into a number of subsystems and associated components, some of which are core to system function while others are only peripheral. The dynamics of how such "core-periphery" structures evolve and become embedded in a firm's innovation routines has been shown to be a major factor in predicting survival, especially in turbulent technology-based industries. To date, however, there has been little empirical evidence on the propensity with which core-periphery structures are observed in practice, the factors that explain differences in the design of such structures, or the manner in which these structures evolve over time. We address this gap by analyzing a large number of systems in the software industry. Our sample includes 1,286 software releases taken from 19 distinct applications. We find that 75%-80% of systems possess a core-periphery structure. However, the number of components in the core varies widely, even for systems that perform the same function. These differences appear to be associated with different models of development—open, distributed organizations developing systems with smaller cores. We find that core components are often dispersed throughout a system, making their detection and management difficult for a system architect. And we show that systems evolve in different ways—in some, the core is stable, whereas in others, it grows in proportion to the system, challenging the ability of an architect to understand all possible component interactions. Our findings represent a first step in establishing some stylized facts about the structure of real-world systems.

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Quality Provision, Expected Firm Altruism and Brand Extensions


This paper studies quality choice in a model where consumers expect firms to act altruistically. It is shown that, under plausible assumptions regarding this altruism and the reaction of consumers to firms that demonstrate insufficient altruism, existing firms (or brands) can face a larger demand for new products than new entrants. Moreover, the failure of new products can reduce the demand for a brand's existing products even if the quality of these existing products is well understood by consumers. The model provides an interpretation for the dependence of the success of brand extensions on the "fit" between the original product and the extension. Lastly, the model can explain why a "high-end" firm that is expected to care only for its most quality-sensitive customers can have an advantage in introducing a product relative to a firm that is expected to be more widely altruistic.

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Transforming Public Education: Cases in Education Entrepreneurship


Based on a popular education entrepreneurship course at Harvard Business School, Transforming Public Education organizes 18 case studies into modules that reflect the predominant opportunities pursued by social entrepreneurs focused on public education in the United States over the last decade. The book offers an overarching framework for creating and evaluating social ventures as well as summaries of the potential for impact and the challenges in a number of opportunity areas.

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Transforming Public Education: Instructors Guide


Companion teaching and module notes for Transforming Public Education: Cases in Education Entrepreneurship.

Winning in Emerging Markets: A Road Map for Strategy and Execution


The best way to select emerging markets to exploit is to evaluate their size or growth potential, right? Not according to Krishna Palepu and Tarun Khanna. In Winning in Emerging Markets, these leading scholars on the subject present a decidedly different framework for making this crucial choice. The authors argue that the primary exploitable characteristic of emerging markets is the lack of institutions (credit-card systems, intellectual-property adjudication, data research firms) that facilitate efficient business operations. While such "institutional voids" present challenges, they also provide major opportunities for multinationals and local contenders. Palepu and Khanna provide a playbook for assessing emerging markets' potential and for crafting strategies for succeeding in those markets. They explain how to spot institutional voids in developing economies, including in product, labor, and capital markets, as well as social and political systems; identify opportunities to fill those voids, for example, by building or improving market institutions yourself; and exploit those opportunities through a rigorous five-phase process, including studying the market over time and acquiring new capabilities. Packed with vivid examples and practical toolkits, Winning in Emerging Markets is a crucial resource for any company seeking to define and execute business strategy in developing economies.

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The Architecture of Platforms: A Unified View

An abstract is unavailable at this time.

Opening Platforms: When, How and Why?


Platform-mediated networks encompass several distinct types of participants, including end users, complementors, platform providers who facilitate users' access to complements, and sponsors who develop platform technologies. Each of these roles can be opened—that is, structured to encourage participation—or closed. This paper reviews factors that motivate decisions to open or close mature platforms. At the platform provider and sponsor levels, these decisions entail 1) interoperating with established rival platforms, 2) licensing additional platform providers, or 3) broadening sponsorship. With respect to end users and complementors, decisions to open or close a mature platform involve 1) backward compatibility with prior platform generations, 2) securing exclusive rights to certain complements, or 3) absorbing complements into the core platform. Over time, forces tend to push both proprietary and shared platforms toward hybrid governance models characterized by centralized control over platform technology (i.e., closed sponsorship) and shared responsibility for serving users (i.e., an open provider role).

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Too Many Cooks Spoil the Broth: How High Status Individuals Decrease Group Effectiveness


Can groups become effective simply by assembling high status individual performers? Though an affirmative answer may seem straightforward on the surface, this answer becomes more complicated when group members benefit from collaborating on interdependent tasks. Examining Wall Street sell-side equities research analysts who work in an industry in which individuals strive for status, we find that groups benefited—up to a point—from having high status members, controlling for individual performance. With higher proportions of individual stars, however, the marginal benefit decreased before the slope of this curvilinear pattern became negative. This curvilinear pattern was especially strong when stars were concentrated in a small number of sectors, likely reflecting suboptimal integration among analysts with similar areas of expertise. Control variables ensured that these effects were not the spurious result of individual performance, department size or specialization, or firm prestige. We discuss the theoretical implications of these results for the literatures on status and groups, along with practical implications for strategic human resource management.

The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies


This paper establishes a causal effect of product market competition on various characteristics of organizational design. Using a unique panel-dataset on firm hierarchies of large U.S. firms (1986-1999) and a quasi-natural experiment (trade liberalization), we find that competition leads firms to flatten their hierarchies: firms reduce the number of positions between the CEO and division managers and increase the number of positions reporting directly to the CEO. The results illustrate how firms redesign their organizational structure through a set of complementary choices in response to changes in their environment. We discuss several possible interpretations of these changes.

Managing Risk in the New World

An abstract is unavailable at this time.

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Behavioral Aspects of Price Setting, and Their Policy Implications


This paper starts by discussing consumers' cognitive and emotional reaction to posted prices. Cognitively, some consumers do not appear to make effective use of price information to maximize their consumption-based utility. Emotionally, prices can induce regret and anger among consumers. The optimal responses of firm's prices to these reactions can explain why firms charge prices below marginal cost for many goods and why they keep their prices rigid. This explanation of price rigidity has the advantage of being consistent with the observation that the typical size of price increases is nearly invariant to inflation. Lastly, the paper turns to some government policies regarding prices that appear to have some consumer support. It argues that both laws against price gouging and laws regulating the terms of mortgages may have support because consumers recognize that many people do not optimize their consumption effectively and because they are angry at firms that take advantage of this. These attitudes can also explain consumer support for monetary policies that maintain a low level of average inflation.


Cases & Course Materials

NovoCure Ltd.

William A. Sahlman and Sarah Greene Flaherty
Harvard Business School Case 810-045

Venture capitalist William Doyle must raise $35 million for a portfolio company with a promising, novel cancer therapy, just as global capital markets are imploding in the fall of 2008. NovoCure, Ltd., has developed an electrical-field-based therapy, called Tumor Treating fields, for the treatment of cancerous tumors. The therapy has shown significant efficacy with no side effects after five years of testing in human patients. Doyle believes NovoCure has the potential to become an important company with a major new cancer therapy platform but must complete pivotal (Phase III) clinical trials and receive FDA approval. Doyle's venture capital firm, WFD Ventures, has invested $25 million in three rounds to fund pilot clinical trials for glioblastoma and other non-small cell lung cancer, and the first pivotal clinical trial for glioblastoma. Additional financing is needed to proceed with the strategically important second pivotal trial. In the fall of 2008 Doyle was negotiating the final terms of an investment by two prominent hedge funds when the liquidity crisis caused the hedge funds to withdraw from the transaction. Dole must now reevaluate his options for securing the needed financing for this promising young company.

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Zara: Managing Stores for Fast Fashion

Zeynep Ton, Elena Corsi, and Vincent Dessain
Harvard Business School Case 610-042

Pablo Isla, the CEO of Zara, wanted to improve operational efficiencies in managing its store network. In particular, he wanted to improve labor productivity at the stores. He considered outsourcing certain store operations to third parties, changing the way store managers were compensated, and creating formal operating procedures for store operations. But he knew he had to be careful. Could an emphasis on improving labor productivity hurt other aspects of store operations?

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