First Look

July 21, 2009

Would increased competition improve the credit rating industry? The financial system hinges to a great extent on reliable and unbiased credit ratings. A recently revised paper by HBS professor Bo Becker and Washington University in St. Louis professor Todd Milbourn looks at the potential risks of more competition in this industry. "Reputation and Competition: Evidence from the Credit Rating Industry" [PDF] suggests that the reputational concerns of the rating agencies might be undermined if competition becomes too severe. Do black olives need to travel all the way from Greece before they may be officially labeled Kalamata? Geographical indications (GIs) identifying a product's origins are a controversial aspect of the global food trade, as one Australian farmer discovered when she attempted to ready her crop of Kalamata black olives for international export. A case on the topic ("Geographical Indications: I Say 'Kalamata,' the EU Says 'Black Olive' "), looks at the issues surrounding intellectual property via-à-vis the World Trade Organization, as well as strategic implications for potential exporters.
— Martha Lagace

Working Papers

In Favor of Clear Thinking: Incorporating Moral Rules into a Wise Cost-Benefit Analysis


Bennis, Medin, and Bartels (2009) have contributed an interesting paper on the comparative benefit of moral rules versus cost-benefit analysis (CBA). Many of their specific comments are accurate, useful, and insightful. At the same time, we believe they have misrepresented cost-benefit analysis and have reached a set of conclusions that are misguided and, if adopted wholesale, potentially dangerous. Overall, they offer wise suggestions for making CBA more effective, rather than eliminating CBA as a decision-making tool.

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Reputation and Competition: Evidence from the Credit Rating Industry (revised)


Fair and accurate credit ratings play an important role in the financial system, but investors and regulators who use ratings cannot easily verify their quality, and ratings are paid for by the firms whose bonds are rated. The provision of quality ratings is at least partially sustained by the reputational concerns of the rating agencies. We use the rise of a third ratings agency to examine competition and reputation. Consistent with Klein and Leffler (1981), competition leads to lower quality in the ratings market: the incumbent agencies produce more issuer friendly and less informative ratings when competition is stronger.

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Quality Management and Job Quality: How the ISO 9001 Standard for Quality Management Systems Affects Employees and Employers (revised)


Several studies have examined how the ISO 9001 Quality Management System standard predicts changes in organizational outcomes such as profits. This is the first large-scale study to explore how employee outcomes such as employment, earnings, and health and safety change when employers adopt ISO 9001. We analyzed a matched sample of nearly 1,000 companies in California. ISO 9001 adopters subsequently had far lower organizational death rates than a matched control group of non-adopters. Among surviving employers, ISO adopters had higher growth rates for sales, employment, payroll, and average annual earnings. Injury rates declined slightly for ISO 9001 adopters, although total injury costs did not. These results have implications for organizational theory, managers, and public policy.

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A Decision-making Perspective to Negotiation: A Review of the Past and a Look into the Future


Through the decision-analytic approach to negotiations, the past quarter century has seen the development of a better dialog between the descriptive and the prescriptive, as well as a burgeoning interest in the field for both academics and practitioners. Researchers have built upon the work in behavioral decision theory, examining the ways in which negotiators may deviate from rationality. The 1990s brought a renewed interest in social factors, as work on social relationships, egocentrism, attribution and construal processes, and motivated illusions were incorporated into our understanding of negotiations. Several promising areas of research have emerged in recent years, drawing from other disciplines and informing the field of negotiations, including work on the influence of ethics, emotions, intuition, and training.

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Culture Clash: The Costs and Benefits of Homogeneity


This paper develops an economic theory of the costs and benefits of corporate culture—in the sense of shared beliefs and values—in order to study the effects of 'culture clash' in mergers and acquisitions. I first use a simple analytical framework to show that shared beliefs lead to more delegation, less monitoring, higher utility (or satisfaction), higher execution effort (or motivation), faster coordination, less influence activities, and more communication but also to less experimentation and less information collection. When two firms that are each internally homogenous but different from each other, merge, the above results translate to specific predictions how the change in homogeneity will affect firm behavior. The paper's predictions can also serve more in general as a test for the theory of culture as homogeneity of beliefs.

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How to Manage Outside Innovation


Should external innovators be organized in collaborative communities or competitive markets? The answer depends on three crucial issues.

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Cases & Course Materials

Analyzing New Venture Opportunities

Harvard Business School Note 809-163

The note describes a systematic process for framing and researching the issues that should be analyzed in the course of considering a new venture idea.

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Arcor: Global Strategy and Local Turbulence (Abridged)

Harvard Business School Case 710-407

Argentine confectionery manufacturer, Arcor Group, seeks to implement an international strategy but in 2003, while recovering from the Argentine financial crisis, globalization plans are thwarted. Already Latin America's leading candy producer and an exporter to over 100 countries, Arcor analyzes how it can become truly global with production facilities and distribution networks in various regions, such as North America, Europe, and Asia. First, however, Arcor must stabilize its operations at home, where a devalued peso, economic uncertainty, and political instability still linger from the devastating financial crisis.

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Australia: The Riches and Challenges of Commodities

Harvard Business School Case 709-007

Australia's Prime Minister Kevin Rudd faced a daunting task that he never imagined he would have to face when he was elected two years ago. Australia at that time was poised to enter its 17th year of uninterrupted growth. Commodity exports were booming, largely driven by China's insatiable appetite for raw materials. Then the global financial crisis erupted in 2008, brewing challenges for the world's biggest exporter of coal and iron ore. Prime Minister Rudd pushed for massive stimulus packages to revive domestic consumption and demand. Yet as an economy heavily dependent on trade, tumbling commodity prices brewed difficult times for Australia's trade deficit and its persistent large current account deficit. What was in hold for Australia's deficit, which had been in the red all but four years since 1950? In addition, how should policymakers address the intense concerns regarding China's growing interest in Australia's prized natural resources sector?

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Busse Corporate Center

Harvard Business School Case 209-154

Busse Corporate Center's largest tenant recently declared bankruptcy, leaving the building 38% occupied and significantly overleveraged. In a depressed suburban Chicago office market, Marisa Sanchez, the leasing agent, has to negotiate lease proposals with three prospective tenants to try to fill the vacant space. Meanwhile, the building's owner, Collins Properties, must decide with its equity partner whether to continue funding the building's losses while trying to lease the vacant space, restructure the debt, or default on the loan and turn the building over to its lenders. The decision is made more complicated by Collins' use of a Commercial Mortgage Backed Security (CMBS) Loan, which involves multiple parties, ambiguous relationships, and bifurcated responsibilities.

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Cincinnati Children's Hospital Medical Center

Harvard Business School Case 609-109

The case describes an organization's use of the science of improvement to transform their process quality from below average to the top 10% in their industry. The case outlines the protagonist's strategy of developing internal experts who are trained in a common methodology for making improvement and spreading these ideas in their work units.

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Geographical Indications: I Say 'Kalamata,' the EU Says 'Black Olive' (A)

Harvard Business School Case 309-114

In April 2005, Alexandra was the owner of an Australian farm that produced olives, including Kalamata table olives. Alexandra had invested in the expansion of her farm in anticipation of the evolution of her market from domestic trade in Australia to international export. There was, however, a disruptive dispute before a WTO tribunal between Australia and the EU regarding the protection of Geographical Indications (GIs), which identify a product's origins and are treated as trademarks in some respects by international trade rules. Though Alexandra prepared her Kalamata olives in the traditional Kalamata technique, her use of the regionally specific name was threatened by the intellectual property rights provided by GIs. The case focuses on what should be the legal outcome of the WTO dispute, as well as possible business strategies by Alexandra in the event of an adverse outcome to Australia.

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HTC Corp. in 2009

Harvard Business School Case 709-466

Taiwan-based HTC Corp. had emerged as the world's fourth largest smartphone manufacturer by 2009. CEO Peter Chou was extremely proud of the remarkable achievements his company had made over the last 12 years since starting off as an unknown manufacturer of PDAs for other companies. Yet Chou faced several decisions in order to move his company forward. Competition for high-end, sophisticated mobile devices was intensifying as HTC faced big name players such as Nokia, Apple, and Samsung Electronics. Many companies were offering their own application stores. What did HTC have to do to become a more powerful global brand? Where should HTC participate in the value chain in one of the most exciting, innovative product categories in the technology world?

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iPremier (A): Denial of Service Attack (Graphic Novel Version)

Harvard Business School Case 609-092

Describes an IT security crisis, and raises issues of risk management, preparation for crisis, management of crises, computer security, and public disclosure of security risks.

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Mina O'Reilly at Logan Airport's TSA

Harvard Business School Case 409-116

Mina O'Reilly, an officer at Logan Airport's Transportation Security Administration (TSA) in Boston, must discipline an employee responsible for a security breach that resulted in a 45-minute terminal closure during peak hours, a potential threat to traveler safety, and travel delays across the U.S. O'Reilly considers the impact of her decision on a shifting labor force: the growing divide between those employees deeply committed to the mission and those joining to simply find a job. The senior TSA staff and airlines are calling for accountability, but the person responsible for the breach is a passionate and valued employee who has been with TSA since its formation. As her shift approaches, O'Reilly must decide whether or not she can clock in as usual.

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Philips versus Matsushita: Competing Strategic and Organizational Choices

Harvard Business School Case 909-415

Traces the evolving competition between two major multinationals over 40 years. Different strategic postures are reflected—and embedded—in different organizational postures. In 2009 the CEOs of both companies face new global strategic and organizational choices.

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The Role of the Audit Committee in Risk Oversight

Harvard Business School Case 409-016

An audit committee chair considers how he can help his committee become more effective given the increasing regulatory demands on audit committees. He also wrestles with the lack of specificity in audit committee duties and whether his committee should take on additional responsibilities. In particular, he considers the growing concern over risk oversight and wonders what kinds of risks the audit committee should consider and whether they should be the sole repository for risk management. This case includes a historical overview of the beginnings and evolution of audit committees, and the laws and regulations that have affected their role over time.

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Target Corporation: Ackman versus the Board

Harvard Business School Case 109-010

After 15 years of great performance, Target's faltering performance during an economic downturn led an activist shareholder to initiate a proxy fight. Target Corporation, the second largest discount store retailer in the U.S., had competed successfully against industry leader Wal-Mart for years by promoting an upscale discount shopping experience in comparison to Wal-Mart's focus on low prices. This strategy worked well for Target in good economic times. The economic crisis of 2008-2009, however, caused shoppers to abandon Target in favor of Wal-Mart. In the spring of 2009, one of Target's largest shareholders initiated a proxy fight to place his five director nominees on the board. Target won the proxy fight, but still faced questions about whether it had a strategy that could work in both good times and bad.

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