First Look

June 10, 2014

Using Crowdsourcing To Fund The Arts

Ethan R. Mollick and Ramana Nanda analyze the wisdom of the crowds in making funding decisions on proposed theater projects—one of the first experiments that tests a crowd's choices based on taste and judgment rather than prediction. The surprising result: Experts and crowds agree most of the time. Their working paper is Wisdom or Madness? Comparing Crowds with Expert Evaluation in Funding the Arts.

Innovation—it's Magic. Really.

Stefan Thomke, a student of magic, compares innovation and the art of illusion for the European Business Review. After all, "leading magicians are constantly under pressure to come up with new 'effects' that wow audiences. They have to innovate frequently and rely on a systematic way of doing so." His article, coauthored with practicing magician Jason Randal, is titled "The Magic of Innovation."

Standing Up To Wall Street

Why do Wall Street and the financial sector hold such a disproportionate amount of power over CEOs of public companies? Writes Gautam Mukunda in the June issue of Harvard Business Review: "This 'financialization' of the economy has serious downsides: it increases volatility, inhibits growth, and misallocates resources, such as talent and capital, away from wealth creation and toward wealth distribution." Mukunda calls for tax reforms and legislation limiting the size of banks in the article "The Price of Wall Street's Power."

— Sean Silverthorne


  • August 2013
  • pub

Cannibalization and Option Value Effects of Secondary Markets: Evidence from the U.S. Concert Industry

By: Bennett, Victor Manuel, Robert Seamans, and Feng Zhu

Abstract—We examine how reducing search frictions in secondary markets affects the value appropriated by firms in primary markets. We characterize two effects on primary market firms caused by intermediaries entering secondary markets: the "cannibalization" and "option value" effects. Separation between primary and secondary markets can drive which of the two effects dominates. Firms selling valuable and scarce products are more likely to have separate primary and secondary markets and will therefore appropriate more value when secondary markets thicken. Firms selling products that are not valuable and scarce will be hurt. Further, we hypothesize that firms have incentives to engineer scarcity by limiting supply when secondary markets thicken to separate primary and secondary markets. We find support for these hypotheses in the U.S. concert ticket industry.

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  • August 2013
  • Research Policy

Clusters, Convergence, and Economic Performance

By: Delgado, Mercedes, Michael E. Porter, and Scott Stern

Abstract—This paper evaluates the role of regional cluster composition in regional industry performance. On the one hand, diminishing returns to specialization in a location can result in a convergence effect: the growth rate of an industry within a region may be declining in the level of economic activity of that industry. At the same time, positive spillovers across complementary economic activities can provide an impetus for agglomeration: the growth rate of an industry within a region may be increasing in the "strength" (i.e., relative presence) of related industries. Building on Porter (1998, 2003), we develop a systematic empirical framework to analyze the role of regional clusters-groups of closely related industries operating within a particular region-in the growth of regional industries. We exploit data from the U.S. Cluster Mapping Project to examine the effects of agglomeration within regional clusters after controlling for convergence at the region-industry level. Our findings suggest that industries located in a strong cluster register higher employment and patenting growth. Regional industry growth also increases with the strength of related clusters in the region and with the strength of similar clusters in adjacent regions. We also find evidence of the complementarity between employment and innovation performance in regional clusters: both the initial employment and patenting strength of a cluster have a separate positive effect on the employment and patenting growth of the constituent industries. Finally, we find that new regional industries emerge where there is a strong cluster. These findings are consistent with multiple types of externalities arising in clusters, including knowledge, skills, and input-output linkages.

Abstract—Many companies depend on powerful platforms that distinctively influence buyers' purchasing. (Consider, Google, Amazon, and myriad others in their respective spheres.) I consider implications of these platforms' market power and then suggest strategies to help companies recapture value or at least protect themselves from abuse.

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  • August 2013
  • Business History

Making 'Green Giants': Environment Sustainability in the German Chemical Industry, 1950s-1980s

By: Jones, Geoffrey, and Christina Lubinski

Abstract—This article examines the evolution of corporate environmentalism in the West German chemical industry between the 1950s and the 1980s. It focuses on two companies, Bayer and Henkel, that have been identified as "green giants," and traces the evolution of their environmental strategies in response to growing evidence of pollution and resulting political pressures. The variety of capitalism literature has suggested that the German coordinated market economy model was more conducive to green corporate strategies than liberal market economies such as the United States. This article finds instead that regional influences were more important, supporting sociological theories about the importance of visibility in corporate green strategies. It identifies major commonalities between corporate strategies in the German and American chemical industries until the 1970s, when the two German firms diverged from their American counterparts in using public relations strategies not only to contain fallout from criticism, but also as opportunities for changes in corporate culture aimed at promoting a positive bond with consumers based on new green brand identities.

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  • August 2013
  • Harvard Business Review

The Price of Wall Street's Power

By: Mukunda, Gautam

Abstract—Over and over again, executives make decisions that aren't in their companies' best interests, in response to pressure from Wall Street. Though many believe this happens because firms have a "fiduciary duty" to maximize shareholder returns, U.S. executives do not, as a matter of law, have any such obligation. Yet it's hard for them to resist demands from a quarter that has amassed such a huge and disproportionate share of power. In the past few decades, as legislation that put controls on Wall Street was largely undone, the size and profits of the financial sector grew enormously. That increased its influence, particularly its ability to sway the government by spending billions of dollars on lobbyists and political contributions. Even after the financial crisis, Wall Street was able to slow down and weaken new regulations meant to rein in its risky practices. This "financialization" of the economy has serious downsides: it increases volatility, inhibits growth, and misallocates resources, such as talent and capital, away from wealth creation and toward wealth distribution. It distorts thinking. Restoring the balance of power is critical to the competitiveness and the health of the rest of the economy. Limits on the size and leverage of banks and changes to the tax code could promote better equilibrium-but courage will be needed to put such reforms in place.

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  • August 2013
  • European Business Review

The Magic of Innovation

By: Thomke, Stefan, and Jason Randal

Abstract—Why do certain product and service experiences seem to have that undeniable "wow" factor, while others disappoint customers? Perhaps there's no better place to turn to than the world of magic. Consider that leading magicians are constantly under pressure to come up with new "effects" that wow audiences. They have to innovate frequently and rely on a systematic way of doing so.

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Working Papers

Creating Reciprocal Value Through Operational Transparency

By: Buell, Ryan W., Tami Kim, and Chia-Jung Tsay

Abstract—We investigate whether organizations can create value by introducing visual transparency between consumers and producers. Although existing theory posits that increased contact between the two parties can diminish work performance, we conducted two field and two laboratory experiments in food service contexts that suggest that the introduction of operational transparency improves service quality and efficiency. The introduction of reciprocal operational transparency contributed to a 22.5% increase in customer-reported quality and reduced throughput times to 67.5% of standard. Customers who observed employees engaged in labor perceived greater effort, appreciated that effort, and valued the service more. Employees who observed customers felt more appreciated and, in turn, were more satisfied with their work and exerted increased levels of effort. We find that transparency, by visually revealing operating processes to both producers and consumers, generates a positive feedback loop through which value is created for both parties.

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Abstract—This paper tracks the evolution of the role of two chief risk officers (CROs) and the tools and processes they have implemented in their respective organizations. While the companies are from very different industries (one is a power company; the other is a toy manufacturer), they both embraced the concepts and tools of Enterprise Risk Management. Over a number of years, at both firms, risk management transformed from a collection of "off-the-shelf" acquired tools and practices into a seemingly inevitable and tailored control process. The paper investigates the role of the CRO in making these transformations happen. The two cases highlight that the role of the CRO may be less about the packaging and marketing of risk management ideas to business managers, but instead about the facilitation of the creation and internalization of a specific type of "risk talk" as a legitimate, cross-functional language of business. Thereby the risk-management function may be most successful when it resists conventional and conflicting demands to be either close to, or independent from, business managers. Instead, by acting as a facilitator of risk talk the CRO can enable the real work of risk management to take place not in his own function but in the business. In both cases, facilitation involved a significant degree of humility on the part of the CRO, manifest in limited formal authority and meagre resources. Their skill was to build an informal network of relationships with executives and business managers, which allowed them to resist being stereotyped as either compliance champions or business partners. Instead they created and shaped the perception of their role which was of their own making: a careful balancing act between keeping one's distance and staying involved.

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Abstract—In fields as diverse as technology entrepreneurship and the arts, crowds of interested stakeholders are increasingly responsible for deciding which innovations to fund, a privilege that was previously reserved for a few experts, such as venture capitalists and grant‐making bodies. Little is known about the degree to which the crowd differs from experts in judging which ideas to fund, and, indeed, whether the crowd is even rational in making funding decisions. Drawing on a panel of national experts and comprehensive data from the largest crowdfunding site, we examine funding decisions for proposed theater projects, a category where expert and crowd preferences might be expected to differ greatly. We instead find substantial agreement between the funding decisions of crowds and experts. Where crowds and experts disagree, it is far more likely to be a case where the crowd is willing to fund projects that experts may not. Examining the outcomes of these projects, we find no quantitative or qualitative differences between projects funded by the crowd alone and those that were selected by both the crowd and experts. Our findings suggest that the democratization of entry that is facilitated by the crowdfunding has the potential to lower the incidence of "false negatives," by allowing projects the option to receive multiple evaluations and reach out to receptive communities that may not otherwise be represented by experts.

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Handshaking Promotes Cooperative Dealmaking

By: Schroeder, Juliana, Jane Risen, Francesca Gino, and Michael I. Norton

Abstract—Humans use subtle sources of information-like nonverbal behavior-to determine whether to act cooperatively or antagonistically when they negotiate. Handshakes are particularly consequential nonverbal gestures in negotiations because people feel comfortable initiating negotiations with them and believe they signal cooperation (Study 1). We show that handshakes increase cooperative behaviors, affecting outcomes for integrative and distributive negotiations. In two studies with MBA students, pairs who shook hands before integrative negotiations obtained higher joint outcomes (Studies 2a and 2b). Pairs randomly assigned to shake hands were more likely to openly reveal their preferences on trade-off issues, which improved joint outcomes (Study 3). In a fourth study using a distributive negotiation, pairs of executives assigned to shake hands were less likely to lie about their preferences and crafted agreements that split the bargaining zone more equally. Together, these studies show that handshaking promotes the adoption of cooperative strategies and influences negotiation outcomes.

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Abstract—Transnational business regulation is increasingly implemented through private voluntary programs-such as certification regimes, codes of conduct, and social monitoring-that seek to enforce global standards governing business practices. But little is known about the conditions under which companies are more likely to comply with the standards these programs impose. Using data from tens of thousands of code-of-conduct audits, we conduct one of the first large-scale comparative studies to determine which international, domestic, civil society, and market institutions promote supply chain factories' compliance with the global labor standards embodied in codes of conduct imposed by multinational buyers. We find that supplier factories are more likely to comply when they are embedded in states that are active participants in the International Labour Organization treaty regime and that have highly protective domestic labor regulation and high levels of press freedom. We further demonstrate that supplier factory compliance is associated not only with institutions in the supplier's home country, but also with institutions in the global buyer's home country: suppliers are more compliant with global labor standards when they serve buyers located in countries where consumers are wealthy and socially conscious. Taken together, these findings suggest the importance of overlapping state, civil society, and market governance regimes to meaningful transnational regulation.

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Cases & Course Materials

  • Harvard Business School Case 314-115

School of One: Reimagining How Students Learn (B)

This supplements the "A" case. Joel Rose and Chris Rush decide to spin-off from School of One to found New Classrooms Innovation Partners. Rose and Rush navigate the strategic complexities of the spin-off process to make their mission-driven product a reality. The case explores the co-founders' decision to pursue either a for-profit or nonprofit structure and their strategy for scaling their product, Teach to One.

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  • Harvard Business School Case 614-034

Samsung Electronics: TV in an Era of Convergence

From the late 1990s to 2006/2007, Samsung Electronics moved from one of 170 TV manufacturers to gain dominant TV market share year over year from 2007 to 2013. As digital technologies increasingly converged in 2013-2014, the industry faced new questions: What was the future of TV? The case considers Samsung Electronics TV Group's product development processes, as the company's mobile and TV offerings increasingly converged and consumer demands and behavior pushed the historically clear boundaries of product, content, engagement, and interaction.

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The Delhi-Mumbai Industrial Corridor (DMIC) was an ambitious $90 billion infrastructure project covering the 1483-km distance between Delhi and Mumbai. The project would create new industrial townships, high speed freight lines, six-lane expressways, airports, ports, and power plants. It would also give the country a unique opportunity to plan, develop, and build new cities that were economically, socially, and environmentally sustainable. The DMIC could boost India's flailing manufacturing sector, increase foreign investments, augment exports, generate jobs, and situate the country on a higher growth trajectory. While the project held many promises for India, there were many risks involved. Its success would depend on land acquisition and unprecedented levels of coordination across various government agencies. This case examines whether Amitabh Kant, CEO, Delhi-Mumbai Industrial Corridor Development Corporation (DMICDC), the nodal agency for planning and implementing the project, would be able to deliver on the project's promises.

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  • Harvard Business School Case 314-104

China Vanke (A-1)

As China's largest homebuilder, China Vanke Co. Ltd. (Vanke) was facing an industry downturn sparked by strong government intervention. Faced with falling prices, Vanke's president must decide whether to keep the company's pricing and product positioning intact and how aggressively to pursue its greener building strategy. Follow-up cases present additional decisions, including how, and how aggressively, to improve safety and quality (A-2) and whether to expand into other asset classes, such as commercial real estate.

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  • Harvard Business School Case 314-105

China Vanke (A-2)

China Vanke's president and his team must decide on a plan of action after reviewing the quality issues the company faced in early 2012 after a series of highly publicized incidents concerning the quality of the homes they built.

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  • Harvard Business School Case 314-106

China Vanke (A-3)

China Vanke's president is considering whether and how the company might make further inroads into the commercial real estate sector, while continuing to lead in the residential sector. He is also considering whether to branch into overseas residential markets such as Hong Kong, Singapore, and the United States.

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  • Harvard Business School Case 314-107

China Vanke (B)

The case describes Vanke's response to the decisions posed in the A1, A2, and A3 cases and asks whether Vanke should expand its strategic scope by defining itself as an "urban facilities provider" rather than a "residential housing developer." The management team is also reviewing the company's forays in places such as Hong Kong, Singapore, the United States, and Europe.

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  • Harvard Business School Case 314-108

China Vanke: Supplement

At China Vanke, the assistant to the Chairman asks whether a business model posted in an online discussion thread correctly explains Vanke's rapid growth over the previous two decades. He uses the post, which emphasized leverage and quick inventory turnover, as an internal training tool to develop employees' understanding and Vanke's success.

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