First Look

July 20, 2010

This week sees a bumper crop of cases on everything from social networking to manufacturing, retailing, and health care. The majority of cases include a global focus with the spotlight on India, China, and Brazil in particular. ("Pratham—Every Child in School and Learning Well"), by Professor Srikant Datar, education specialist Stacey Childress, and coauthors from the HBS India Research Center, describes challenges faced by the founder of Pratham, an NGO in India, as he collaborates with the government to educate underprivileged children. Professor William C. Kirby and HBS Asia-Pacific Research Center senior researcher G.A. Donovan look at the expansion efforts of a private dental clinic business in China ("Jiamei Dental: Private Health Care in China"). And delving into business relations between China and Brazil, professors Tarun Khanna and Aldo Musacchio with Latin America Research Center senior researcher Ricardo Reisen de Pinho highlight the political pressures and evolving competitive dynamics between the two powerful countries ("Vale: Global Expansion in the Challenging World of Mining").
— Martha Lagace


Market Reaction to and Valuation of IFRS Reconciliation Adjustments: First Evidence from the UK


We investigate the market reaction to, and the value-relevance of, information contained in the mandatory transitional documents required by International Financial Reporting Standards (IFRS) 1 (2005). We find significant negative abnormal returns for firms reporting negative earnings reconciliation. Although the informational content of the positive earnings adjustments is value-relevant before disclosure, for negative earnings adjustments it is value-relevant only after disclosure. This finding is consistent with managers delaying the communication of bad news until IFRS compliance. A finer model shows that adjustments attributed to impairment of goodwill, share-based payments, and deferred taxes are incrementally value-relevant but that only the impairment of goodwill and deferred taxes reveal new information. Our results indicate that mandatory IFRS adoption alters investors' beliefs about stock prices.

Read the preview:

Ownership Structure and Financial Constraints: Evidence from a Structural Estimation


This study examines the impact of the divergence between insider control rights and cash-flow rights on firms' external finance constraints via generalized method of moments (GMM) estimation of an augmented investment Euler equation developed by Whited and Wu (2006). Using a large sample of U.S. firms during the period from 1995 to 2002, we find that the shadow value of external funds is significantly higher for companies with a wider divergence between the corporate insiders' control rights and cash-flow rights, suggesting that companies whose corporate insiders have larger excess control rights are more financially constrained. The effect of the insider excess control rights on external finance constraints is more pronounced for firms with higher degrees of informational opacity. Specifically, it is particularly strong for small firms, firms without debt ratings, firms that are not included in the S&P 500 stock index, and firms with relatively meager analyst coverage. The effect is also greater for firms with financial restatements, especially for those involved in fraudulent misreporting. In addition, we find that institutional ownership weakens the relationship between the insider excess control rights and financial constraints. Taken together, our results suggest that corporate insiders' excess control rights aggravate the potential risks of insider expropriation of outside investors and thereby increase firms' external finance constraints.

Cases & Course Materials

Woolf Farming and Processing

David E. Bell, Laura Winig, and Mary Shelman
Harvard Business School Case 510-033

Woolf Farming Company, a privately owned family farming business in California's Central Valley, found its business threatened by a lack of water, brought on by a combination of drought, poor quality well water, and unavailability of surface water due to federally imposed pumping restrictions. Woolf had been farming crops for more than 30 years, but this was the first time they suffered a water shortage so severe that crops had to be abandoned in the field. Even if there was short-term relief in the form of an increased allocation of water from the government, Woolf was concerned about water reliability and the need for additional infrastructure to provide long-term water security to the region. If convinced that the water problem would be resolved, then Woolf should move quickly to purchase more land, which was currently available at distressed prices. Yet some board members questioned the logic of additional investment in the region whose resources were so uncertain and wondered whether it was more prudent to pursue growth elsewhere. At the same time, some of Woolf's owners began to believe that more of the company's resources should be prioritized for dividends and other distributions as opposed to purely growth. What, if anything, could Woolf and other farmers do to influence the outcome?

Purchase this case:

Looking for Opportunity in Adversity: Iqbal Quadir and Grameenphone (A)

Bhaskar Chakravorti and David Lane
Harvard Business School Case 810-075

Iqbal Quadir, a former New York investment banker, set about to bring universal telecommunications to his native Bangladesh. He was convinced that GSM, the same advanced wireless technology that penetrated developed countries in Europe, was also the right solution for Bangladesh. He assembled a critical group of partners in a venture, GrameenPhone, which included Scandinavian telecom operators; Grameen Bank, the microfinance pioneer; Bangladesh Railways; as well as a Japanese investment firm. Each partner brought a different capability to the venture, but the coalition was fundamentally unstable. Quadir was facing roadblocks no matter which way he turned in his quest to assemble the venture. He came to a point where the rational decision seemed to be to abandon the venture and return to his secure investment banking job. This case highlights the role of bottlenecks and constraints in sparking innovations in business models by the creative entrepreneur.

Purchase this case:

Purchase this supplement (B):

The Guardian: Transition to the Online World

David J. Collis, Peter W. Olson, and Mary Furey
Harvard Business School Case 709-464

An abstract is unavailable at this time.

Purchase this case:

Pratham—Every Child in School and Learning Well

Srikant M. Datar, Stacey Childress, Rachna Tahilyani, and Anjali Raina
Harvard Business School Case 110-001

The case focuses on how Pratham, a non-governmental organization, provided quality education to underprivileged children in India by collaborating with the government. It focuses on the problem Madhav Chavan, the founder, is trying to solve, the contributing factors that have caused this problem to remain unsolved until now, Madhav's theory of change, questions about whether these activities (inputs) will affect the outputs and have an impact, what will it take and how will we know if Pratham is successful, and recommendations about what Madhav should do next.

Purchase this case:

An Overview of Project Finance and Infrastructure Finance—2009 Update

Benjamin C. Esty and Aldo Sesia Jr.
Harvard Business School Note 210-061

Provides an introduction to the fields of project finance and infrastructure finance and gives a statistical overview of project-financed investments over the years from 2005 to 2009. Examples of project-financed investments include the $1.4 billion Mozal aluminum smelter in Mozambique, $4 billion Chad-Cameroon pipeline, $6 billion Iridium global satellite telecommunications system, $900 million A2 Toll Road in Poland, $20 billion Sakhalin II gas field in Russia, and the $28 billion Dabhol power project. Globally, firms financed $240 billion of capital expenditures using project finance in 2009, down from $409 billion in 2008 as the financial crisis hit the Western markets. The use of project finance has grown at a compound rate of 0% over the last five years, 4% over the past 10 years, and 12% over the past 15 years. This note focuses primarily on private sector investment in industrial and infrastructure projects and contains four sections. The first section defines project finance and contrasts it with other well-known financing mechanisms. The second section describes the evolution of project finance from its beginnings in the natural resources industry in the 1970s, to the U.S. power industry in the 1980s, to a much wider range of industry applications and geographic locations in the 1990s, and most recently to infrastructure finance in the 2000s. The third section provides a statistical overview of project-financed investment over the last five years (2005 to 2009) and looks at industry, project, and participant specific data. The third section also provides recent data on infrastructure investments and public-private partnerships. The final section discusses current and likely future trends.

Purchase this note:

Target: Responding to the Recession

Ranjay Gulati, Rajiv Lal, and Catherine Ross
Harvard Business School Case 510-016

Within 10 months of Gregg Steinhafel's taking over as CEO at Target, the U.S. was mired in the most significant economic downturn in 50 years. Top competitor Wal-Mart had positioned itself well for the crisis, while Target's same-store sales began to slide. While Steinhafel believed that Target's long-term strategy and positioning were right, he pondered a set of strategic and operational challenges. Did Target have the right mix of offensive and defensive tactics to weather the downturn and position itself for the economy's eventual recovery? How far could Target go in emphasizing low price—the "pay less" side of its slogan—without eroding the company's core promise of offering unique and upscale products that customers would not see at other low-priced retailers? Would the benefits of adding fresh food to Target's general merchandise stores outweigh the associated challenges?

Purchase this case:

Vale: Global Expansion in the Challenging World of Mining

Tarun Khanna, Aldo Musacchio, and Ricardo Reisen de Pinho
Harvard Business School Case 710-054

In 2009 the management of Vale, a Brazilian diversified mining company and the largest iron ore producer in the world, was under pressure from at least two fronts. First, the emergence of China as the most important consumer of iron ore in the last few years had changed the pricing system for iron ore from long-term contracts based on negotiated "benchmark prices" to contracts based on spot prices, usually forcing mining companies to pay for shipping. Second, for Brazil's charismatic president, Lula, a former union leader, Vale's layoffs during the global financial crisis and its perceived move away from Brazil (as Vale increased its exports to China and purchased Chinese vessels to ship iron ore to Asia) were reasons to start an open campaign to pressure Vale and Roger Agnelli to invest in integrated steel mills in Brazil. In October of 2009, the CEO of Vale, Agnelli was going to meet with Lula and had to decide what to do to attenuate these political pressures. What could Agnelli do to deal with political pressures at home? Was the purchase of large vessels to ship iron ore to Asia a good decision at a time when the shipping industry had spare capacity?

Purchase this case:

Jiamei Dental: Private Health Care in China

William C. Kirby and G.A. Donovan
Harvard Business School Case 910-404

With the recent announcement from the Chinese government that the country's healthcare system was about to undergo reform, Jiamei Dental Chairman Liu Jia wondered what that meant for his 15-year-old dental clinic business. Founded in 1993, Jiamei Dental Medical Management Group ("Jiamei") rode the wave of China's rapid economic development and had become China's largest private dental chain with 84 clinics in Beijing and seven other major cities. But China was changing fast, and Liu acknowledged that Jiamei's ongoing expansion depended on many factors beyond its control, notwithstanding government reform, Jiamei was also faced with pressures from its private equity general partners. The year 2009 was shaping up to be a pivotal one for Jiamei. It had planned to open dozens of more clinics during the year. At the same time, Liu was facing stiff competition from regional and international private dental clinic competitors, high-end private hospitals, and now possibly the government. These factors offered new complexities into the expansion plans of this entrepreneurial firm.

Purchase this case:

IDFC India: Infrastructure Investment Intermediaries

John D. Macomber and Viraal Balsari
Harvard Business School Case 210-050

Indian financial intermediary matching international capital to local infrastructure decides how to balance range of services, risk-adjusted return, margin pressure, and nation building. IDFC was chartered with partial ownership from the Indian government to help evaluate policy and be a model for how private finance could be attracted to public infrastructure. As the nation and company grow, the firm also grows and embarks on a strategy of rapid expansion, offering a wide new range of financial products and participating in many aspects of the supply chain. Teaching questions include revisiting the original mission, contemplating the reduced margins and increased risks that come with entering a number of domains that already have established incumbents, and the trade-offs between maximizing shareholder return (for example through investments in full tariff power projects in rich cities) and maximizing the benefit to the nation (for example through subsidized tariff water projects in poor states).

Purchase this case:

Mexico: Crisis and Competitiveness

Aldo Musacchio, Richard H.K. Vietor, and Regina Garcia-Cuellar
Harvard Business School Case 710-058

In 2010, the bicentennial anniversary of Mexico's revolution against Spain, President Felipe Calderon hoped he could orchestrate several crucial reforms that Mexico needed. Mexico had not grown much over the course of the last decade, losing competitiveness to China and other Asian countries. Several of its institutions, including labor, education, healthcare, energy, and antitrust seemed uncompetitive. But with a weaker peso and greater governmental attention to infrastructure, Calderon hoped that Mexico's higher-tech exports could recapture U.S. market share and make headway in Europe and Latin America.

Purchase this case:

In the Spotlight: The Market for Iron Ore

Aldo Musacchio, Tarun Khanna, and Jenna Bernhardson
Harvard Business School Note 710-049

This note discusses the structure and functioning of the market for iron ore. This market has traditionally functioned using a benchmark pricing mechanism, in which large steel mills in Japan (now in China) negotiate the benchmark price with the largest of the big three iron ore producers (Vale do Rio Doce). Yet this market is changing rapidly—with the rise of China as the main consumer of iron ore, the rules seem to be changing. The note examines the increasing importance of the spot market for iron ore and the advantages and disadvantages of abandoning the benchmark price system for both consumers and miners.

Purchase this note:


Mikołaj Jan Piskorski and David Chen
Harvard Business School Case 710-408

Meetup, an online company providing means of arranging face-to-face meetings, is deciding between two options of increasing its revenue by investing to (i) increase new sign ups and (ii) improve the engagement of existing users.

Purchase this case:

C.K. Claridge, Inc

James K. Sebenius
Harvard Business School Case 910-045

Sued for patent infringement, chemical manufacturer C.K. Claridge (CKC) tries to design a settlement strategy taking into account a decision analysis of litigating v. negotiating. The plaintiffs are the patent holder and its sole licensee, who is also a CKC competitor. (This case is a revised, alternative version of "C.K. Coolidge, Inc. (Abridged)," HBS No. 607-006.)

Purchase this case:

From Imitation to Innovation: Zongshen Industrial Group

Willy Shih and Nancy Dai
Harvard Business School Case 610-057

As Zuo Zongshen drove the transformation of the Zongshen Industrial Group from an early imitator in the motorcycle business to a company that increasingly focused on innovation as a way to get out of the hyper-competitive commodity business, he continually faced new challenges. The company had become a leader in gasoline powered motorcycles and small gas engines, but increasing taxes and restrictions on the use of motorcycles in congested urban areas had spawned a new industry, electric motorbikes, which posed a threat to the company's core business. Sourcing the technology for these e-bikes, and hiring and retaining the management and creative talent the company needed, were continuing challenges. The case traces the development of capabilities in the Zongshen Industrial Group, how it used the early imitation phase to foster rapid technological learning and upgrading, and how it used a unique corporate structure and listing strategy to finance the acquisition of important technologies.

Purchase this case:

Pfizer: Letter from the Chairman (B)

Robert L. Simons and Kathryn Rosenberg
Harvard Business School Supplement 110-004

This case continues the story begun in "Pfizer: A Letter from the Chairman" (HBS No. 110-003), revealing the letter Chairman and CEO Jeff Kindler wrote for the 2008 Annual Report.

Purchase this supplement:

The LCA Ethics Lens

Sandra J. Sucher
Harvard Business School Note 610-050

A practical framework for evaluating the ethical dimensions of a proposed course of action for managers and executives.

Purchase this note:

Dassault Systèmes

Stefan Thomke and Daniela Beyersdorfer
Harvard Business School Case 610-080

Dassault Systèmes, a leader in product lifecycle management software, has enjoyed a very profitable business model in 3D engineering design. In the past, it has successfully managed market disruptions and opportunities through acquisition and organic innovations. Its latest brands, 3DVIA, offers 3D models and lifelike experiences to a new non-professional client category, the consumer. In November 2009, President and CEO Bernard Charlès has to decide how to best address this new market segment, characterized by rapidly expanding open communities and new pricing models. What is the right business model for the new brand, and how will it affect the future of Dassault Systèmes?

Purchase this case:

Knight the King: The Founding of Nike

Noam Wasserman and Kyle Anderson
Harvard Business School Case 810-077

It had taken Phil Knight 16 long years to build Nike into the number one athletic-shoe company in the country. When Knight had first conceived of the company for an MBA class project, Adidas had had more than 80% market share, but Knight's marketing approach had revolutionized the industry, his company had developed several ground-breaking shoe technologies, and Nike's brand had become one of the most recognizable in the world. In 1980, the same year that Nike had knocked Adidas off its throne, Nike had gone public and Knight, its founder-CEO, still owned close to half of the company. He had led the company through dramatic changes as it evolved from a scrappy start-up to a large public company. However, now, barely half a decade later, Knight had just received the news that Nike itself had been dethroned by Reebok, an upstart competitor. Knight closeted himself in his office, faced the wall, and sat there, weak and sick and devastated for hours.

Purchase this case:

Moral Decision-Making: Reason, Emotion & Luck

Michael A. Wheeler and Julianna Pillemer
Harvard Business School Note 910-029

This extensive note synthesizes current psychological and neuroscientific research on how people make decisions with moral implications. Research summaries and scenarios illustrate critical issues.

Purchase this note: