First Look

July 15, 2014

How Information Sharers Squelch Innovation

An article in a recent Academy of Management Journal looks at one issue that arises when venture capital firms often team up with multiple startups in the same industry. "VCs may be inclined to redirect information from one startup to another to increase their chances of being an investor in one of the outsized winners," write researchers Emily Cox Pahnke, Rory McDonald, Dan Wang, and Benjamin Hallen. They explain how information sharing affects innovation in "Exposed: Venture Capital, Competitor Ties, and Entrepreneurial Innovation."

How Animals Inspire Innovation

Anyone who has seen a spider web or a beaver dam understands that the animal kingdom knows a thing or two about product design. The Center for Bioinspiration at the San Diego Zoo has made it its mission to build bridges between nature and industry by advancing "the development of nature-inspired products, services, and processes that benefit humanity, wildlife, and habitats." Karim R. Lakhani, Vish V. Krishnan, and Ruth Page discuss the organization's vision and business model in a new multimedia case, "Bioinspiration at the San Diego Zoo."

How The Uninformed Inform Our Decisions

The consequence of a decision often depends on how someone else responds to it—even when the respondent knows much less about the subject than the decision-maker does. In a new working paper, experimental researchers William Schmidt and Ryan W. Buell discuss how people make decisions when the decision's value is dependent on a less-informed party. Read "Decision Marking Under Information Asymmetry: Experimental Evidence on Belief Refinements."
— Carmen Nobel


  • August 2013
  • Strategic Entrepreneurship Journal

Business Model Evaluation: Quantifying Walmart's Sources of Advantage

By: Brea-Solís, Humberto, Ramon Casadesus-Masanell, and Emili Grifell-Tatjé

Abstract—We develop an analytical framework on the basis of the economics of business performance to provide quantitative insight into the link between a firm's business model choices and its profit consequences. The method is applied to Walmart by building a qualitative representation of its business model and mapping that representation on an analytical model that quantifies the company's sources of advantage over time. The analysis suggests that the effectiveness of a particular business model depends not only on its design (its levers and how they relate to one another) but also, most importantly, on its implementation (how the levers are pulled).

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  • August 2013
  • Journal of Financial Economics

Search-Based Peer Firms: Aggregating Investor Perceptions Through Internet Co-Searches

By: Lee, Charles M.C., Paul Ma, and Charles C.Y. Wang

Abstract—Applying a "co-search" algorithm to Internet traffic at the SEC's EDGAR website, we develop a novel method for identifying economically-related peer firms and for measuring their relative importance. Our results show that firms appearing in chronologically adjacent searches by the same individual (Search-Based Peers or SBPs) are fundamentally similar on multiple dimensions. In direct tests, SBPs dominate GICS6 industry peers in explaining cross-sectional variations in base firms' out-of-sample (a) stock returns, (b) valuation multiples, (c) growth rates, (d) R&D expenditures, (e) leverage, and (f) profitability ratios. We show that SBPs are not constrained by standard industry classification and are more dynamic, pliable, and concentrated. We also show that co-search intensity captures the degree of similarity between firms. Our results highlight the potential of the collective wisdom of investors―extracted from co-search patterns―in addressing long-standing benchmarking problems in finance.

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  • August 2013
  • Academy of Management Journal

Exposed: Venture Capital, Competitor Ties, and Entrepreneurial Innovation

By: Pahnke, Emily Cox, Rory McDonald, Dan Wang, and Benjamin Hallen

Abstract—This paper investigates the impact of early relationships on innovation at entrepreneurial firms. Prior research has largely focused on the benefits of network ties, documenting the many advantages that accrue to firms embedded in a rich network of inter-organizational relationships. In contrast, we build on research emphasizing potential drawbacks to examine how competitive exposure, enabled by powerful intermediaries, can inhibit innovation. We develop the concept of competitive information leakage, which occurs when firms are indirectly tied to their competitors via shared intermediary organizations. To test our theory, we examine every relationship between entrepreneurial firms and their venture capital investors in the minimally invasive surgical segment of the medical device industry over a 22-year period. We find that indirect ties to competitors impede innovation, and that this effect is moderated by several factors related to the intermediary's opportunities and motivation to leak important information.

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Working Papers

Abstract—We examine how people make decisions when the value they derive from those decisions depends on the response of a less informed party. Such situations are common, but they are difficult to analyze because of the plethora of justifiable equilibrium outcomes that result. To address this, researchers employ belief refinements, which pare the set of equilibrium outcomes by imposing assumptions on how people form their beliefs. The choice of which refinement to use is critical because it can lead to dramatically different predicted outcomes. To better understand which refinement is more predictive of actual behavior, we conduct a controlled experiment in a setting central to operations management-a capacity investment decision. We test whether subjects' decisions are consistent with those predicted by the Intuitive Criterion refinement, which is based on equilibrium domination logic, or the Undefeated refinement, which is based on Pareto optimization logic, and find the Undefeated refinement to be considerably more predictive. This is surprising because the Intuitive Criterion refinement is the most commonly utilized belief refinement in the literature, while the Undefeated refinement is rarely employed. Our results have material implications for both research and practice because the Undefeated and Intuitive Criterion refinements often produce divergent predictions. We show that subjects are particularly more likely to make decisions consistent with the Undefeated refinement if they report a higher understanding of the decision setting. This supports the use of the Undefeated refinement in operations management research, which often assumes that decision makers are rational and understand the implications of their choices.

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Cases & Course Materials

  • Harvard Business School Case 214-018

HgCapital and the Visma Transaction (A)

This case concerns the negotiations of a deal by HgCapital, a UK-based private equity firm, to buy Visma, ASA, a Norwegian software company. Visma has received an offer from Sage Group, a strategic acquirer. HgCapital must determine if it wants to bid and how to outbid a potential strategic acquirer. The case concerns bidding and negotiations strategies as well as deal structuring issues. In particular, the cross border nature of the investment, a UK firm investing in Norway, leads to a number of financing issues related to raising the debt for the LBO. The case provides an opportunity to role play both the PE fund perspective and the potential target.

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  • Harvard Business School Case 214-020

HgCapital and the Visma Transaction (B-2): Oystein Moan

No abstract available.

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  • Harvard Business School Case 114-086

Wawa Inc.

Retailing requires attention to detail and customer and employee loyalty. Wawa is a 50-year-old food retailer with an almost cult-like following. With $9 billion in revenues, Wawa is the 50th largest privately held company in the U.S. Learn how they have accomplished consistent 15% annual shareholder returns. The Wawa associates (name for employees) have an ESOP that plays a key role in Wawa's culture of ownership. This case explores the role of incentives and levers of control to create a successful retail chain.

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  • Harvard Business School Case 214-091

Texas Teachers and the New Texas Way

In 2011 Britt Harris, the chief investment officer for the $107.4 billion Teachers Retirement System of Texas (TRS), was considering whether to pursue strategic partnerships with a group of large private equity firms. After spending four years aggressively moving the fifth largest pension fund in the United States into alternative asset classes, Harris felt that TRS shouldn't just participate in private equity funds as a typical limited partner. Rather, under his proposal TRS would offer carefully vetted firms multi-billion-dollar investments through a customized fund structure that had fewer allocation mandates than traditional fund structures and guarantees to reinvest 50% of any investment gains back into the investment vehicle. In exchange, Harris hoped to receive a highly customized compensation structure and gain greater access to investment professionals within the participating firms.

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