First Look

July 14, 2009

How can your firm weigh demand from consumers and competitive pressures from rivals as you set the course for new product development? After all, market research and R&D are costly. An article in Marketing Science by HBS professor Elie Ofek and Rady School of Management colleague Dominique Olié Lauga provides guidance depending on the extent to which your rival also surveys the potential landscape for innovation. Asking yourself questions like "What type of market uncertainty do I face?" and "Which attribute should I attempt to innovate on?" reveal different answers when you care more about the attribute that consumers value rather than the size of the potential market segment, write Ofek and Lauga in "Market Research and Innovation Strategy in a Duopoly." Among cases this week, "Goldman Sachs: The 10,000 Women Initiative" looks at lessons learned at the one-year anniversary of a program offering business and management education to underserved women worldwide.
— Martha Lagace

Working Papers

Industry Equilibrium with Open Source and Proprietary Firms


We present a model of industry equilibrium to study the coexistence of Open Source (OS) and Proprietary (P) firms. Two novel aspects of the model are as follows: (1) participation in OS arises as the optimal decision of profit-maximizing firms, and (2) OS and P firms may (or may not) coexist in equilibrium. Firms decide their type and investment in R&D and sell packages composed of a primary good (like software) and a complementary private good. The only difference between both kinds of firms is that OS share their technological advances on the primary good, while P keep their innovations private. The main contribution of the paper is to determine conditions under which OS and P coexist in equilibrium. Interestingly, this equilibrium is characterized by an asymmetric market structure, with a few large P firms and many small OS firms.

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Anticommons and Optimal Patent Policy in a Model of Sequential Innovation


We present a model of sequential innovation in which an innovator uses several research inputs to invent a new good. These inputs, in turn, must be invented before they can be used by the final innovator. As a consequence, the degree of patent protection affects the revenues and cost of the innovator, but also determines the incentives to invent the research inputs in the first place. We study the effects of increases in the number of required inputs on innovation activity and optimal patent policy. We find that the probability of introducing the final innovation decreases (increases) as the number of inputs increases when inputs are complements (substitutes). We also find that the optimal strength of patents on research inputs is increasing in the degree of substitution between the inputs but decreasing in the number of inputs for any degree of substitution.

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Open to Negotiation: Phenomenological Assumptions and Knowledge Dissemination


Phenomenological assumptions—assumptions about the fundamental qualities of the phenomenon being studied and how it relates to the environment in which it occurs—affect the dissemination of knowledge from subfields to the broader field of study. Micro-process research in organizational studies rests on implicit phenomenological assumptions that vary in the extent to which micro-processes are viewed as parts of larger systems. We suggest that phenomenological assumptions linking micro-processes to organizational contexts highlight the relevance of micro-process research findings to broader organizational questions, and therefore increase the likelihood that the findings will disseminate to the larger field of organizational research. We test this assertion by analyzing studies of negotiation published in top peer-reviewed management, psychology, sociology, and industrial relations journals from 1990 to 2005. Our findings reveal a continuum of open systems to closed systems phenomenological assumptions in negotiation research. Analysis of the citation rates of the articles in our data set by non-negotiation organizational research indicates that more open systems assumptions increase the likelihood that a negotiation article will be cited in organizational studies, after controlling for other, previously identified effects on citation rates. Our findings suggest that subfields can increase the impact they have on the broader intellectual discourse by situating their phenomena in rich contexts that illuminate the connections between their findings and questions of interest to the broader field.

Market Research and Innovation Strategy in a Duopoly


We model a duopoly in which ex-ante identical firms must decide where to direct their innovation efforts. The firms face market uncertainty about consumers' preferences for innovation on two product attributes and technology uncertainty about the success of their R&D investments. Firms can conduct costly market research before setting R&D strategy. We find that the value of market information to a firm depends on whether its rival is expected to obtain this information in equilibrium. Consequently, one firm may forgo market research even though its rival conducts such research and learns the true state of demand. We examine both vertical and horizontal demand structures. With vertical preferences, firms are a priori uncertain which attribute all consumers will value more. In this case, a firm that conducts market research always attempts innovation on the attribute it discovers that consumers prefer and expends more on R&D than a rival that has not conducted market research. With horizontal preferences, distinct segments exist—each caring about innovation on only one attribute—and firms are a priori uncertain how many consumers each segment contains. In this case, a firm that conducts market research may follow a 'niche' strategy and attempt innovation to serve the smaller segment to avoid intense price competition for the larger segment. A firm that conducts market research may therefore invest less in R&D and earn lower post-launch profits than a rival that has forgone such research.

Backlash to Arbitration: Three Causes


There are at least three reasons for the current backlash among developing countries against the international regime that governs disputes between foreign investors and host governments. First is the inconsistency of the decisions rendered by arbitration panels established under bilateral investment treaties, investment provisions of regional trade agreements, clauses in investment contracts, and, occasionally, provisions of host countries' investment laws. Second, and perhaps most important, is the very rigid view of contracts that panels have tended to take, even when a host country acts as a result of an economic crisis. A third cause of backlash is closely related to the second: the seeming insensitivity of arbitration panels to signals that corruption or incompetency might have been involved in the original negotiations or subsequent renegotiations of agreements that gave rise to disputes. There are other reasons for reaction, but they pose less threat to the existing system. Although the ideal solution would be a multilateral agreement, past efforts to conclude one suggest that reaching agreement is unlikely in the near future. Building an appellate process, providing for symmetry in access to arbitration, and mid-point guidance might go some distance toward reducing the backlash.


Cases & Course Materials

The DiagnoFirst Opportunity

Harvard Business School Case 309-112

John Mason, a principle at Oldwell Partners, was facing a decision of whether or not to invest in DiagnoFirst, a molecular diagnostics firm. DiagnoFirst's key product was a genetic test that identified a subset of prostate cancer patients with a high risk of clinical progression and death. DiagnoFirst had applied for patents, in both the U.S. and EU, for the sequence of 40 genes, the new methodology for gene amplification, and the specific mechanics of the genetic tests. Mason's decision to invest in DiagnoFirst was based in part on the likelihood of obtaining patents and in part on the projected cash flows of the business under various scenarios. This case examines issues of intellectual property in science, international differences in patent law, and the decision-making process of venture capital in biotechnology deals.

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Goldman Sachs: The 10,000 Women Initiative

Harvard Business School Case 509-042

Describes the conception, development, and implementation of Goldman Sachs' five-year, $100 million philanthropic initiative to provide practical business and management education to 10,000 women around the globe. The initiative recently celebrated its first anniversary, and over 1,200 women were either enrolled in, or graduated from, sponsored certificate programs. The case addressees some key strategic decisions facing the firm as they rollout the program over the coming years. These include how to organize the network of schools that deliver the educational services, how to determine the best outside partners to provide additional services for the women entrepreneurs, how to best assess the impact of the program, and finally the extent to which the initiative provides contributions to the long-term strategy of the firm.

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India: Democracy and Development

Harvard Business School Case 709-032

India has experienced accelerated economic growth since adopting an outward-oriented market strategy. The services sector has largely driven GOP while manufacturing has expanded and foreign direct investment has become robust. Now, the country faces both internal and external challenges on the path to prosperity: a shift in political party dynamics, terrorist attacks, rising infrastructure and energy demands, and a global financial crisis. How can the nation's leaders implement economic reforms to ensure continued development?

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