First Look

January 13, 2009

Chinese business settings can seem inscrutable to westerners, making negotiations difficult. To the rescue: two working papers that address negotiation, both by HBS professor James K. Sebenius and research associate Cheng (Jason) Qian. "Cultural Notes on Chinese Negotiating Behavior" [PDF], as its title suggests, looks at the fine points of decoding the negotiation styles you might encounter. "Etiquette and Process Puzzles of Negotiating Business in China: A Questionnaire" [PDF] presents 36 multiple-choice questions. Test your skill with a sample question. Ready? "Although you feel that the first meeting has gone well, many issues have yet to be covered, and now your Chinese hosts are proposing extensive socializing and entertainment in late afternoon or early evening." What should you do? The authors caution that no rulebooks exist for negotiating in China. "Given the vastness of its territory, ethnic diversity, and fast pace of change, China's business culture is not at all times and in all places the same. Its evolution during this transition period is dynamic, and any stereotype of 'the' Chinese business culture that portrays it as static or homogenous will be misleading," they write. Happy new year! (And happy Chinese new year, which begins January 26.)
— Martha Lagace

Working Papers

CPC/CPA Hybrid Bidding in a Second Price Auction


We develop a model of online advertising in which each advertiser chooses from multiple advertising measurement metrics—paying either for each click on its ads (CPC), or for each purchase that follows an ad-click (CPA). Our analysis extends classic auction results by allowing players to make bids using two different pricing schemes, while the driving information for bidders' endogenous selection—the conversion rate—is hidden from the seller. We show that the advertisers with the most productive sites prefer to pay CPC, while advertisers with lower quality sites prefer to pay CPA—a result that may be viewed as counterintuitive since low quality sites cannot proudly tout their conversion rates. This result holds even if an ad platform's assessment of site quality is correct in expectation. We also show that by offering both CPC and CPA, an ad platform can weakly increase its revenues compared to offering either alternative alone.

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Competition and Resource Sensitivity in Marriage and Roommate Markets


We consider one-to-one matching markets in which agents can either be matched as pairs or remain single. In these so-called roommate markets, agents are consumers and resources at the same time. We investigate two new properties that capture the effect a newcomer has on incumbent agents. Competition sensitivity focuses on the newcomer as additional consumer and requires that some incumbents will suffer if competition is caused by a newcomer. Resource sensitivity focuses on the newcomer as additional resource and requires that this is beneficial for some incumbents. For solvable roommate markets, we provide the first characterizations of the core using either competition or resource sensitivity. On the domain of all roommate markets, we obtain two associated impossibility results.

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Private Equity and Long-Run Investment: The Case of Innovation


A long-standing controversy is whether LBOs relieve managers from short-term pressures from public shareholders, or whether LBO funds themselves are driven by short-term profit motives and sacrifice long-term growth to boost short-term performance. We investigate 495 transactions with a focus on one form of long-term activities, namely investments in innovation as measured by patenting activity. We find no evidence that LBOs are associated with a decrease in these activities. Relying on standard measures of patent quality, we find that patents granted to firms involved in private equity transactions are more cited (a proxy for economic importance), show no significant shifts in the fundamental nature of the research, and are more concentrated in the most important and prominent areas of companies' innovative portfolios.

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Highbrow Films Gather Dust: Time-inconsistent Preferences and Online DVD Rentals (revised)


We report on a field study demonstrating systematic differences between the preferences people anticipate they will have over a series of options in the future and their subsequent revealed preferences over those options. Using a novel panel data set, we analyze the film rental and return patterns of a sample of online DVD rental customers over a period of four months. We predict and find that should DVDs (e.g., documentaries) are held significantly longer than want DVDs (e.g., action films) within-customer. Similarly, we also predict and find that people are more likely to rent DVDs in one order and return them in the reverse order when should DVDs are rented before want DVDs. Specifically, a 1.3% increase in the probability of a reversal in preferences (from a baseline rate of 12%) ensues if the first of two sequentially rented movies has more should and fewer want characteristics than the second film. Finally, we find that as the same customers gain more experience with online DVD rentals, the extent to which they hold should films longer than want films decreases. Our results suggest that present bias has a meaningful impact on choice in the field and that people may learn about their present bias with experience and, as a result, gain the capacity to curb its influence.

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Cultural Notes on Chinese Negotiating Behavior


Western businesses negotiating with Chinese firms face many challenges, from initiating and smoothing communication to establishing long-lasting relationships and mutual trust, and from bargaining and drafting agreements to securing their implementation. Chinese negotiators can be at once warm hosts and friends and tough bargainers. Unique Chinese cultural elements such as complicated local etiquette, obscured decision-making processes, and heavy reliance on interpersonal relationships instead of legal instruments all add to the complexities of Sino-foreign business negotiations and can make the process tiresome and protracted. Besides talking past each other, Chinese and western negotiators often harbor mutually unfavorable perceptions. Many westerners find Chinese negotiators to be inefficient, indirect, and even dishonest; Chinese negotiators frequently perceive their western counterparts to be aggressive, impersonal, and insincere. The way to decipher the Chinese negotiating style and bring about mutually beneficial results is to better understand the key elements of Chinese culture to which Chinese negotiators attune their business mentality and manners.

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Etiquette and Process Puzzles of Negotiating Business in China: A Questionnaire


Cultural differences can affect negotiations in many ways, from influencing the basic motivations and perceptions of the players to guiding the surface aspects, such as etiquette, protocol, and process, of business interactions. Navigating the challenges of these surface behavioral issues is useful to plumb some of the deeper cultural factors and differences in governance and decision-making of cross-border business negotiation. As suggested by an iceberg analogy, though etiquette, protocol, and deportment comprise the visible tip, they might be linked to more deeply rooted, less obvious forces that are fully capable of sinking the ship. This working paper, through a questionnaire format—intended as an instrument to collect data from a range of people with varying China-related negotiating experience—presents a series of situations of a typical Sino-foreign business negotiation to address both the surface and the root cultural factors. This questionnaire will serve not only to evaluate subjects' appreciation for Chinese culture as it bears on negotiation, but also to better understanding of the process aspects of cross-border negotiation in general.

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Cases & Course Materials

Cola Wars: Going Global

Harvard Business School Case 709-451

This case is meant to be used in conjunction with the extant "Cola Wars" case studies. It outlines the global positions of Pepsi and Coca-Cola as of 2008 in the soft drink market, and then provides an overview of their competitive situations in three markets: Mexico, China, and India. The case raises the issue of whether any or all of these markets are a) structurally attractive for soft drink firms, and b) if so, how can Pepsi best "catch-up" with Coca-Cola in a given market.

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Diagnostic Genomics

Harvard Business School Case 309-040

Should this gene detection firm enter the business of providing tests for the detection of genetic diseases? If so, how should it prioritize the tests it could develop?

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Eden McCallum

Harvard Business School Case 409-060

This case illustrates the leadership and management challenges of starting a new firm based on a new business model and how success creates pressures that challenge the work/life balance which was one of the original goals of its two founders. The case also raises issues about the changing nature of careers and changing preferences people have for structuring their personal and professional lives.

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The Globalization of East Asian Pop Music

Harvard Business School Case 708-479

This case on the globalization of East Asian pop music is useful for teaching concepts of regional business strategy and also of cultural arbitrage. Music companies in the case must examine why certain markets are clearly more profitable than others. They must also decide whether to expand internationally with a regional focus on East Asia or, alternatively, a focus on the U.S. and other Western markets.

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HNA Group: Moving China's Air Transport Industry in a New Direction

Harvard Business School Case 309-029

HNA Group, the parent company of Hainan Airlines, was positioning itself to go global and make a mark for itself as the largest private airline in China. Positioned squarely behind the "Big Three" state-owned carriers, Hainan Airlines sought to create a world-class business. Following modern management practices, keeping sharp attention to cost control and capital operations, making aggressive entries into international markets, and maintaining a special corporate culture, Chairman Chen Feng was confident these factors were the engine that would drive HNA's continued growth.

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Maggie Lena Walker and the Independent Order of St. Luke

Harvard Business School Case 409-057

As America struggled to regain its balance in the aftermath of the American Civil War, Maggie Lena Walker did her best to actively effect change by finding solutions to the social and economic problems facing blacks and especially black women. Taking charge of the flailing Independent Order of St. Luke in 1899, Walker transformed the organization into a vibrant and thriving economic engine for blacks. With a vision of economic self-sufficiency, she established a newspaper in 1902, chartered the St. Luke Penny Savings Bank in 1903, becoming the first woman bank president in the United States, and opened a store run by and for blacks. Throughout her life, Walker persevered and thrived despite personal, social, and professional obstacles.

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A Managerial Perspective on Clinical Trials

Harvard Business School Note 709-033

This note describes the history and regulation of clinical trials, managerial challenges related to pharmaceutical product testing, and current debates regarding prescription drug safety. Since clinical testing takes between five and seven years, and consumes up to 70 percent of a drug's total development costs, pharmaceutical and biotechnology leaders need to understand clinical trial management. Likewise, with a growing variety of new product introductions requiring pre-market testing, managers and analysts in many business sectors will benefit from understanding clinical trials.

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Note on Medical Travel

Harvard Business School Note 308-084

Background notes for MedVal and Fortis case studies.

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Primus, 2007

Harvard Business School Case 208-099

Primus is a credit derivative product company. How will they weather the credit crisis of 2007?

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Ownership Quotient: Putting the Service Profit Chain to Work for Unbeatable Competitive Advantage


Ownership behaviors have a profound impact on profit and growth. Customer/owners are those who actually recommend a company's products or services, recruit new business, and provide constructive feedback resulting in product, service or process improvements. Employee/owners recruit talent to an organization while also providing ideas for new or improved products, services, and processes. A customer/owner may be worth more than a hundred customers with more casual relationships with an organization. A series of case studies is presented to illustrate ways in which organizations measure, create, sustain, and build ownership behaviors among customers and employees. This work is an extension of research into the design and effectiveness of service profit chain relationships.

On Competition, Updated and Expanded Edition


For the past two decades, Michael Porter's work has towered over the field of competitive strategy. On Competition, Updated and Expanded Edition brings together more than a dozen of Porter's landmark articles from the Harvard Business Review. Five are new to this edition, including the 2008 update to his classic "The Five Competitive Forces That Shape Strategy," as well as new work on health care, philanthropy, corporate social responsibility, and CEO leadership. This collection captures Porter's unique ability to bridge theory and practice. Each of the articles has not only shaped thinking, but also redefined the work of practitioners in its respective field. In an insightful new introduction, Porter relates each article to the whole of his thinking about competition and value creation and traces how that thinking has deepened over time. This collection is organized by topic, allowing the reader easy access to the wide range of Porter's work. Parts I and II present the frameworks for which Porter is best known—frameworks that address how companies, as well as nations and regions, gain and sustain competitive advantage. Part III shows how strategic thinking can address society's most pressing challenges, from environmental sustainability to improving health-care delivery. Part IV explores how both nonprofits and corporations can create value for society more effectively by applying strategy principles to philanthropy. Part V explores the link between strategy and leadership.

Risk Frameworks and Biomonitoring: Distributed Regulation of Synthetic Chemicals in Humans


The ability to detect and measure the presence of synthetic chemicals at trace levels in humans coupled to increased environmental NGO mobilization concerning chemical exposure has challenged risk and regulatory frameworks built up over the past quarter-century. This article analyzes changing definitions of risk in U.S. environmental regulation and describes challenges posed by emerging detection techniques, government and NGO surveys of chemicals in citizens, and reduction of information asymmetries through the Internet. A new framework for regulation is proposed involving a networked approach among industry, NGOs, and government regulators.

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Mission-Driven Governance


The purpose of this paper is to provide a useful, easily applied theory of governance performance. The existing model is fundamentally adversarial, rooted in the paradigm of principal-agent conflict. At its base is an image of governance as a never-ending struggle between board members and executives—"principals" who guard the organization's resources but have limited information to "monitor" how these resources are used—and "agents" who have insider knowledge and control the information-filtering apparatus of the organizations. Many of the concepts and ideas in this traditional model are shaped by a long history of governance failure and organizational pathology. It suffices as a solution to the challenge of meeting legal compliance standards through formal systems, but we believe it utterly fails to show how to create a governance system that supports organizational effectiveness. We propose a framework that gives equal weight to creating a governance system whose effectiveness is measured by the achievement of the organization's mission or purpose. In this article, we argue that this reluctance to evaluate an organization's governance against an organization's stated mission, coupled with a narrow focus on a rules-based approach to governance, are jointly responsible for the persistence of problems in governance performance, despite decades of high-priority attention. These governance misconceptions translate into four basic barriers to effecting change: 1) Many leaders who are dissatisfied with the state of their organizations' affairs are nevertheless resigned to it because they do not think it can be changed. They are schooled to think that solutions require new rules, but new rules are inadequate to treat the performance problems that they encounter most often; 2) The refusal to see governance as a performance element that can be improved may be viewed at least in part as a defense mechanism. No one likes to be evaluated, and board members have the power to avoid it. This might explain why only about one in ten nonprofit organizations have implemented governance evaluation routines; 3) When confronted with governance problems, we tend to follow the path of least resistance, seeking simplistic solutions with bright-line rules such as the policy/implementation division of labor for board and management. The difficulty, of course, is that governance is a highly complex activity, requiring decision makers to integrate many kinds of knowledge into a coherent whole; and 4) The dominant model of governance that persists is fundamentally flawed and out of date. It simply doesn't fit experience on the ground. Without a broadly accepted theory of governance performance to provide a standard against which organizations can evaluate and improve their practices, every decision maker applies their own tacit theory. These, in turn, tend to cancel each other out in a lowest-common-denominator way. An organization's definition of "good governance" should be explicit and agreed to by all, not left to individual interpretation.

Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship


We examine entrepreneurship and creative destruction following U.S. banking deregulations using Census Bureau data. U.S. banking reforms brought about exceptional growth in both entrepreneurship and business closures. The vast majority of closures, however, were the new ventures themselves. Although we do find evidence for the standard story of creative destruction, the most pronounced impact was a massive increase in churning among new entrants. We argue that creative destruction requires many businesses failures along with the few great successes. The successes are very difficult to identify ex ante, which is why democratizing entry is an important trait of well-functioning capital markets.

From Regional Star to Global Leader


Yang Jianguo was recently promoted from country manager for China to global head of product development at a staid French perfume maker. He was chosen for his technical smarts and his knowledge of emerging markets—a critical avenue for growth, given that sales in the company's core markets have stalled. Eager to succeed in his new role in Paris, Jianguo has lots of fresh ideas, but they seem to be falling on deaf ears. Members of the executive team, for their part, find Jianguo to be largely indifferent to their input. Can Jianguo adjust to this new culture? And can he succeed without sacrificing his identity? Three experts comment on this fictional case study in R0901A and R0901Z. Katherine Tsang, the CEO of Standard Chartered Bank in Shanghai, explains the cultural differences between China and France and recommends that Jianguo push his thinking beyond the Chinese market. She also suggests that the company give all its executive team members multicultural training so they have the tools to understand one another and work together effectively. Mansour Javidan, the dean of research and a professor at Thunderbird School of Global Management, acknowledges that Jianguo's transition would be easier if he had the full support of the CEO, Alain Deronde. But since that isn't forthcoming, he advises Jianguo to work with Alain to develop targets for growth in emerging and traditional markets and a plan for building an infrastructure to achieve those goals. James Champy, the chairman of consulting for Perot Systems, is surprised that a family business would choose an "outsider" for this important post, but he recognizes it as a wise strategic move. He says that Jianguo needs a coach and should focus on learning the home market first, before trying to make inroads further afield.

Planning a Start-Up? Seize the Day...Then Expect to Work All Night


If you dream of starting your own business, it's better to leave the corporate nest sooner than later, before you get too comfortable with the big-company amenities every start-up lacks. Get going before you're 40—or even earlier, if you want to make entrepreneurship your career.