First Look

January 27, 2009

Does a more competitive environment automatically compel managers to make choices in the best interests of the firm? Not necessarily. New research by HBS postdoctoral fellow Christian A. Ruzzier suggests how to get optimal performance from managers by striking a balance between good and bad levels of competition. Ruzzier challenges the notion that competition is always good. In his working paper [PDF] "Product-Market Competition and Managerial Autonomy," he develops a model and concludes that managers might take excessive risks in the face of increasing competition. In those situations, it makes sense to rein in managerial autonomy. "At first, a strengthening of competition induces the manager to make decisions more in line with the interests of the organization, and therefore leads to increased managerial autonomy—as commonly argued," writes Rozzier. "Further increases in competitive forces, however, might as well lead the manager to take excessive risks if the threat to his rents is strong enough. To curb this possibility of having the manager gamble for his resurrection, the principal optimally reduces the degree of autonomy granted to the manager. With an intermediate level of competition the threat on incumbency rents is just enough to align the manager's interests with those of the organization without pushing him to take value-reducing risks." Also up this week, an article forthcoming in the Review of Financial Studies suggests that "outsider" CEOs in multi-divisional firms use the capital budget differently—and more generously—than CEOs who rose up through the ranks. The article, "Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions," is by Assistant Professor Yuhai Xuan.
— Martha Lagace

Working Papers

When Does Domestic Saving Matter for Economic Growth?


Can a country grow faster by saving more? We address this question both theoretically and empirically. In our theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic saving matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic saving does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries. The same result is found when the regression is run on data generated by a calibrated version of our theoretical model.

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Dirty Work, Clean Hands: The Moral Psychology of Indirect Agency (revised)


When powerful people cause harm, they often do so indirectly through other people. Are harmful actions carried out through others evaluated less negatively than harmful actions carried out directly? Four experiments examine the moral psychology of indirect agency. Experiments 1A, 1B, and 1C reveal effects of indirect agency under conditions favoring intuitive judgment, but not reflective judgment, using a joint/separate evaluation paradigm. Experiment 2A demonstrates that effects of indirect agency cannot be fully explained by perceived lack of foreknowledge or control on the part of the primary agent. Experiment 2B indicates that reflective moral judgment is sensitive to indirect agency, but only to the extent that indirectness signals reduced foreknowledge and/or control. Experiment 3 indicates that effects of indirect agency result from a failure to automatically consider the potentially dubious motives of agents who cause harm indirectly. Experiment 4 demonstrates an effect of indirect agency on purchase intentions.

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Product-Market Competition and Managerial Autonomy


It is often argued that competition forces managers to make better choices, thus favoring managerial autonomy in decision making. I formalize and challenge this idea. Suppose that managers care about keeping their position or avoiding interference, and that they can make strategic choices that affect both the expected profits of the firm and their riskiness. Even if competition at first pushes the manager towards profit maximization as commonly argued, I show that further increases in competitive forces might as well lead him to take excessive risks if the threat on his position is strong enough. To curb this possibility, the principal-owner optimally reduces the degree of autonomy granted to the manager. Hence higher levels of managerial autonomy are more likely for intermediate levels of competition.

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Innovation Corrupted: The Origins and Legacy of Enron's Collapse

Publisher's Abstract

Although much has already been written about the rise and fall of Enron, four important questions remain unanswered: What management behavior and practices led Enron down the path from truly innovative to fraudulent management? How could Enron’s board of directors have failed to detect the business, ethical, and legal risks embedded in the company’s aggressive financial strategies and accounting practices? Why did Enron’s external watchdogs—security analysts, credit-rating agencies, and regulatory agencies—fail to bark? What actions can prevent Enron-type breakdowns in the future? Innovation Corrupted addresses each of these questions.

A Sense of Urgency

Publisher's Abstract

Most organizational change initiatives fail spectacularly (at worst) or deliver lukewarm results (at best). In his international bestseller Leading Change, John Kotter revealed why change is so hard and provided an actionable, eight-step process for implementing successful transformations. The book became the change bible for managers worldwide. Now, in A Sense of Urgency, Kotter shines the spotlight on the crucial first step in his framework: creating a sense of urgency by getting people to actually see and feel the need for change. Why focus on urgency? Without it, any change effort is doomed. Kotter reveals the insidious nature of complacency in all its forms and guises. In this exciting new book, Kotter explains: How to go beyond "the business case" for change to overcome the fear and anger that can suppress urgency; Ways to ensure that your actions and behaviors—not just your words—communicate the need for change; How to keep fanning the flames of urgency even after your transformation effort has scored some early successes. Written in Kotter's signature no-nonsense style, this concise and authoritative guide helps you set the stage for leading a successful transformation in your company.

Spousal Control and Intra-Household Decision Making: An Experimental Study in the Philippines


Using an experimental design I elicit causal effects of spousal observability and communication on financial choices of married individuals in the Philippines. Making choices public moves men from putting money into their own account to consumption; communication with their spouse drives men to put income in their wives’ account. The strong effect on men but not women of information and communication appears to be driven not as much by gender as by control: men whose wives control household savings are much more likely to exhibit this treatment effect, and women whose husbands control savings exhibit the same pattern as men. These results suggest that existing household models and policies are incomplete without taking into account the bargaining process and, in particular, the way in which this process interacts with underlying control structures in the household.

Testing the Commitment Hypothesis in Contractual Settings: Evidence from Soccer


This paper designs and implements an empirical test to discern whether the parties to a contract are able to commit not to renegotiate their agreement. We study optimal contracts with and without commitment and derive an exclusion restriction that is useful to identify the relevant commitment scenario. The empirical analysis takes advantage of a data set on Spanish soccer player contracts. Our test rejects the commitment hypothesis. We argue that our conclusions should hold a fortiori in many other economic environments.

Productivity Leadership and Strategic Investments in Innovation: The Adoption of E-Business Capabilities


This study focuses on whethermore-productive firmsare more likely to adopt processinnovations and why. The empirical context is the adoption of e-business practices among U.S. manufacturing plants in early 2000. Based on detailed data from the U.S. Census of Manufactures, the empirical results indicate that market leadership is, in general, positively correlated with the use of e-business practices. However,there is an important distinction between e-buying and e-selling. In e-buying, the likelihood of adoption is increasing in both relative productivity and in market share. By contrast in e-selling, only market share has a positive (and noisy) relationship with adoption.Plausible explanations for the difference are explored, centering on tradeoffs between stand-alone vs. strategic motivations for adopting as well as important distinctions between the two technologies.

Download the paper: documents/opim/seminars/Steffenson_McElheran_JMP_011408.pdf

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


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.

Empire-Building or Bridge-Building? Evidence from New CEOs' Internal Capital Allocation Decisions


This paper investigates how the job histories of CEOs influence their capital allocation decisions when they preside over multi-divisional firms. I find that, after CEO turnover, divisions not previously affiliated with the new CEO receive significantly more capital expenditures than divisions through which the new CEO has advanced. The pattern of reverse-favoritism in capital allocation is more pronounced if the new CEO has less authority or if the unaffiliated divisions have more bargaining power. I find evidence that having a specialist CEO negatively affects segment investment efficiency. The results suggest that new specialist CEOs use the capital budget as a bridge-building tool to elicit cooperation from powerful divisional managers in previously unaffiliated divisions.


Cases & Course Materials

Advanced Electron Beams

Harvard Business School Case 608-083

No abstract is available at this time.

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A.J. Washington: Retaining an NFL Star

Harvard Business School Case 909-033

General Manager Luke Kolville, of the Los Angeles Spartans, struggles with the best approach to negotiate a long-term contract for his star quarterback. The agent for Washington is relatively new to the industry and has his sights set particularly high. Kolville needs to weigh a number of effects this negotiation will have on the player, his teammates, and the long-term prospects of the team.

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Clutch Group: Should Abhi Shah Grab This Opportunity?

Harvard Business School Case 809-065

Abhi Shah ('06), co-founding CEO of Clutch Group in the U.S. and Bangalore, must decide whether to risk a law suit by recruiting an entire legal services team from a large U.S. corporation. His decision and how he implements it will have a dramatic impact on the legal process outsourcing startup.

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Evan Williams: From Blogger to Odeo (A)

Harvard Business School Case 809-088

For several months, founder-CEO Evan Williams has felt trapped, unable to control Odeo and its strategic direction. He longs for the "simple" days of Blogger, the previous venture he had co-founded. Although his Blogger experiences had included a major blow-up with his co-founder that had resulted in legal proceedings, a brush with near-bankruptcy, and the laying off of his entire team, Williams has become even more disillusioned with his current venture, Odeo. Odeo, a podcasting pioneer, had debuted almost two years before and had gotten off to a very strong start, with a high-profile debut at a prominent industry conference, coverage on the front page of the New York Times' Business section, and the raising of a large round of financing from a top-tier venture capital firm. His attempts to find an acquirer have failed, layoffs have begun, and he is now facing a meeting with an increasingly hostile board of directors. At that meeting, he is very tempted to resign so he can move on to his next project and regain the thrill of being an entrepreneur.

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Iris Running Crane: March 2011

Harvard Business School Case 809-071

In Spring 2011, Iris Running Crane, a 2009 HBS MBA, has finally achieved her goal of job offers from private-equity oriented jobs. Two are from true private equity operations; the other is a government agency charged with creating a clean energy economy for the United States. Each opportunity will help Iris achieve her long-term goal of a career as a private equity investor specializing in the clean energy sector, but each has drawbacks as well. Which should she choose?

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JBS Swift & Co.

Harvard Business School Case 509-021

Brazilian meat packer JBS surprised many in the U.S. beef industry when it acquired Swift & Co.—a company more than five times its size—in 2007, then moved to acquire the U.S.'s fourth and fifth largest beef producers in 2008. The new JBS Swift slashed costs and restructured, turning around a quarterly loss of $99 million to a gain of $140 million within 6 months. JBS aimed to position itself to supply beef markets around the world, but it faced a perfect storm of rising feed and fuel prices, a global credit crisis, and industry analysts skeptical about the company's debt load.

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Obama versus Clinton: The YouTube Primary

Harvard Business School Case 509-032

What was the role of the Internet in the contest for the Democratic presidential nomination between Senators Obama and Clinton? How does the role change in the shift from the Primary to the National election? The case examines media and content choices by each candidate and allows students to explore the role of new media in political campaigns. The focus is on fundraising in 2007 and campaigning for Primary delegate votes in 2008.

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Offering the Right Service in the Right Place: Growing Orthopedics at the Brigham and Women's/Faulkner (BW/F) Hospitals

Harvard Business School Case 108-016

After the merger of two local hospitals, hospital leaders much decide how to reorganize services to take advantage of newly created efficiencies. Focuses on the Orthopedics department at one of the hospitals.

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Rachael Ray: Cooking Up a Brand

Harvard Business School Case 409-011

The case details the rapid rise of Rachael Ray's career, beginning with her first appearance on NBC's Today show in March 2001. The case chronicles her success, exploring her various brands, promotional work, and expansion into new media markets. The case also allows students to grapple with the challenges Rachael Ray might face in terms of the continued sustainability of her successful brand.

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Right Media's Media Guard

Harvard Business School Case 909-032

Right Media considers systems and policies to make sure that ads are only shown on web sites where they are appropriate, and vice versa. Setting standards is particularly challenging given the large and growing marketplace, the numerous participants, their diverse requirements, and the dynamics of policy enforcement when market participants are competing intensely.

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Savage Beast (A)

Harvard Business School Case 809-069

For several months, things had been spiraling downwards at Savage Beast, the music-recommendation company started three years before by Tim Westergren. The company's founder-CEO recently left due to pressures both at home and within the venture. Dozens of investors turned thumbs-down on the venture; salaries had been cut; and, tensions had risen within the founding team. Now Westergren, the founder who has taken over as CEO, is facing even deeper pressures as he finds out about a lawsuit filed by former employees, and he is wondering if it is time to give up on ever achieving his vision.

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