First Look

May 21, 2013

Getting The Most Out Of Store Liquidation

Store liquidation is a brutal but necessary part of retail—a means for investors to recover capital and managers to correct failed strategy. The new working paper Improving Store Liquidation, by Nathan Craig and Ananth Raman, offers a method that can improve net recovery on cost by up to 7 percent. The paper also identifies shortcomings with current store liquidation practice.

Do Matching Grants Produce More Philantropy?

Almost any National Public Radio listener is familiar with the concept of the matching grant. If you, dear listener, donate $50, a company will match that donation with an equal amount. Do matching grants really encourage more charitable giving? A short paper by Michael Sanders, Sarah Smith, and Michael I. Norton suggests more efficient methods are available. Read their paper, Non-Standard Matches and Charitable Giving. The results are important in a number of fields, they point out. "While increasing donation rates is of natural interest to charities and their fundraisers, it is also of academic interest to both economists and psychologists seeking to understand altruistic behaviors, and to governments, many of which seek to encourage the charitable production of public goods."

Understanding That Big Pile Of Data

What good is Big Data is you don't know how to use it? The upcoming book Keeping Up with the Quants: Your Guide to Understanding and Using Analytics provides some of the techniques needed to better understand and use information. According to authors Thomas H. Davenport and Jinho Kim, "This book offers a variety of practical tools and examples to improve a manager's understanding of business analytics, and to enhance their thinking and decision processes." It is scheduled to be published in June by Harvard Business Review Press.

More details below.

— Sean Silverthorne


  • 2006
  • Harvard Business Review Press

Keeping Up with the Quants: Your Guide to Understanding and Using Analytics

By: Davenport, Thomas H., and Jinho Kim

Abstract—Managers today need to be able to analyze and make sense of data. They need to be conversant with analytical technology and methods and to make decisions on quantitative analysis. This book offers a variety of practical tools and examples to improve a manager's understanding of business analytics, and to enhance their thinking and decision processes.

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  • 2006
  • Strategic Management Journal

Location Strategies for Agglomeration Economies

By: Alcácer, Juan, and Wilbur Chung

Abstract—Geographically concentrated industry activity creates pools of skilled labor and specialized suppliers and increases opportunities for knowledge spillovers. The strategic value of these agglomeration economies may vary by firm, depending upon the relative value of each economy, and upon firm and agglomeration economy traits. To better determine when a firm will be attracted to agglomeration economies, we develop a three-layer framework. The first layer assesses the relative importance of skilled labor, suppliers, and knowledge spillovers. The second layer considers whether firms can benefit from geographic concentration without co-locating. The final layer examines why some firms are more inclined to co-locate than others based upon firm and agglomeration economy traits. We test our framework on the U.S. location choices of new manufacturing entrants between 1985 and 1994 and find that firms are far more attracted to skilled labor and specialized suppliers than they are to potential knowledge spillovers, even in R&D intensive industries. We also find that leading firms will be more attracted to pools of labor, suppliers, and potential knowledge spillovers when their own contributions are less fungible and cannot be easily leveraged for strategic advantage by proximate competitors.


Working Papers

Prosocial Bonuses Increase Employee Satisfaction and Team Performance

By: Anik, Lalin, Lara B. Aknin, Michael I. Norton, Elizabeth W. Dunn, and Jordi Quoidbach

Abstract—In two field studies, we explore the impact of providing employees and teammates with prosocial bonuses, a novel type of bonus spent on others rather than on oneself. In Experiment 1, we show that prosocial bonuses in the form of donations to charity lead to happier and more satisfied employees at an Australian bank. In Experiment 2, we show that prosocial bonuses in the form of expenditures on teammates lead to better performance in both pharmaceutical sales teams in Belgium and sports teams in Canada. These results suggest that a minor adjustment to employee bonuses-shifting the focus from the self to others-can produce measurable benefits for employees and organizations.

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Abstract—Minimum capital requirements are a central tool of banking regulation. Setting them balances a number of factors, including any effects on the cost of capital and in turn the rates available to borrowers. Standard theory predicts that, in perfect and efficient capital markets, reducing banks' leverage reduces the risk and cost of equity but leaves the overall weighted average cost of capital unchanged. We test these two predictions using U.S. data. We confirm that the equity of better-capitalized banks has lower systematic risk (beta) and lower idiosyncratic risk. However, over the last 40 years, lower risk banks have higher stock returns on a risk-adjusted or even a raw basis, consistent with a stock market anomaly previously documented in other samples. The size of the low risk anomaly within banks suggests that the cost of capital effects of capital requirements may be considerable. Assuming competitive lending markets, banks' low asset betas implied an average risk premium of only 40 basis points above Treasury yields in our sample period; a calibration suggests that a 10 percentage-point increase in Tier 1 capital to risk-weighted assets may have increased this to between 100 and 130 basis points per year. In summary, the low risk anomaly in the stock market produces a potentially significant cost of capital requirements.

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Hidden Structure: Using Network Methods to Map System Architecture

By:Baldwin, Carliss Y., Alan MacCormack, and John Rusnak

Abstract—In this paper, we describe an operational methodology for characterizing the architecture of technical systems and demonstrate its application to a large sample of software releases. Our methodology is based upon network graphs and allows us to identify and define three fundamental architectural patterns, which we call core-periphery, multi-core, and hierarchical. We apply our methodology to a sample of 1,286 software releases from 17 applications and find that 70% to 80% of these systems possess a core-periphery architecture under our classification scheme. This type of architecture is characterized by having a single dominant cyclic group (the Core) that is large relative to other cyclic groups and above a threshold with respect to system size. We find that the size of the Core varies widely, even for systems that perform the same function. These differences appear to be associated with different models of development-open, distributed organizations tend to develop systems with smaller Cores, while closed collocated organizations tend to develop systems with larger Cores. Our findings represent a first step in establishing some "stylized facts" about the fine-grained structure of large, real-world technical systems.

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If Technology Has Arrived Everywhere, Why Has Income Diverged?

By: Comin, Diego A., and Martí Mestieri Ferrer

Abstract—We study the lags with which new technologies are adopted across countries and their long-run penetration rates once they are adopted. Using data from the last two centuries, we document two new facts: there has been convergence in adoption lags between rich and poor countries, while there has been divergence in penetration rates. Using a model of adoption and growth, we show that these changes in the pattern of technology diffusion account for 80% of the Great Income Divergence between rich and poor countries since 1820.

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Improving Store Liquidation

By: Craig, Nathan, and Ananth Raman

Abstract—Store liquidation is the time-constrained divestment of retail outlets through an in-store sale of inventory. The retail industry depends extensively on store liquidation, not only as a means for investors to recover capital from failed ventures, but also to allow managers of going concerns to divest stores in efforts to enhance performance and to change strategy. Recent examples of entire chains being liquidated include Borders Group in 2012, Circuit City in 2009, and Linens `n Things in 2008; the value of inventory sold during these liquidations alone is $3B. The store liquidation problem is related to but also differs substantially from the markdown optimization problem that has been studied extensively in the literature. This paper introduces the store liquidation problem to the literature and presents a technique for optimizing key decision variables, such as markdown, inventory, and store closing decisions during liquidations. We show that our approach could improve net recovery on cost (i.e., the profit obtained during liquidations stated as a percentage of the cost value of liquidated assets) by 2 to 7 percentage points in the cases we examined. The paper also identifies ways in which current practice in store liquidation differs from the optimal decisions identified in the paper and traces the consequences of these differences.

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Abstract—This paper, based on a five-year longitudinal study at two UK-based banks, documents and analyzes the practices used by risk managers as they aim to gather and establish influence in their organizations. Specifically, we examine how influence-seeking risk managers (1) establish and maintain interpersonal connections with decision makers and how they (2) adopt, deploy, and reconfigure tools-practices that we define collectively as toolmaking. Using prior literature and our empirical observations, we distinguish between influence activities to which toolmaking was not central, and those to which toolmaking was important. As for the influence activities which imply toolmaking, we can outline the contours of three modes of operation, which describe experts operating as Compliance Experts, Engaged Toolmakers, or Technical Champions, depending on the communicability of the tools and on the extent to which the experts are involved in practices related to those tools. Our study contributes to the accounting and management literature on influence-gathering, underlining that toolmaking plays a vital role in explaining how functional experts may compete in the intraorganizational marketplace for influential ideas and the attention of decision makers. Specifically, as risk management becomes more tool-driven and toolmaking may become more prevalent, our study provides a more nuanced understanding of the nature and consequences of risk managers' influence activities. An explicit focus on toolmaking extends accounting research that has hitherto focused attention on the structural arrangements and interpersonal connections when explaining the emergence of the influential financial expert.

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Abstract—How do certain risk measurements in organizations come to be seen as more reliable and acceptable than others? Taking a multiple-control perspective, I investigate the aftermath of a control debacle at a financial services company (MultiBank), focusing on its insurance division (EurInsurance), which suffered large losses in the European insurance crisis of 2002-2003. At MultiBank, the insurance crisis opened up a field of contestability in which new control agents got the opportunity to become implicated in divisional control. The struggle for custody over divisional control was a micropolitical process of interprofessional competition, played out between accountants and risk controllers who promoted conflicting measures of the key strategic uncertainty, EurInsurance's capital adequacy. The control agents engaged in credentializing strategies (Power, 1992); they mobilized and drew on different cultural resources to construct the reliability of their techniques and to discredit and "minoritize" the others. This credibility contest was won by the accountants who (unlike their opponents) were able to demonstrate the "institutional appropriateness" of their controls. Importantly, the fate of the competing control systems was contingent, not on how well their technologies addressed the problem of EurInsurance's capital adequacy, but rather on the controllers' capacity to generate top managerial acceptance and a widespread consensus among both internal and external stakeholders. The outcome of this type of professional competition is not determined by claims about representing the underlying economic reality, but by claims about representing those who care about it most. While competing controller groups have been observed to appeal to top management's logic of functionalism, this paper argues that, in certain circumstances, controller groups may successfully draw on the logic of appropriateness as they supply new control systems.

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Abstract—Enterprise Risk Management (ERM) has become a crucial component of contemporary corporate governance reforms. Now that principles, guidelines, and standards abound, it is time to take stock. Has the idea of ERM reached maturity with proven, unambiguous concepts and tools? Or is it still emerging and unproven? Or is it simply taken for granted, its value "proven" by the apparent demand? This paper portrays ERM as an evolving discipline and presents empirical findings on its current state of maturity, as evidenced by academic surveys and our own field research. Reviewing academic surveys, we observe that contingency theories of ERM have become a current trend but have produced few significant results. By surveying the development and content of these theories we argue that they have been based on an inadequate and insufficiently specified concept of ERM. Based on a ten-year field project, over 250 interviews with senior risk officers, and three detailed case studies in high reliability organizations, we put forward a more nuanced specification of ERM, outlining its emerging design parameters that suggest observable variation in the "ERM mix" adopted by organizations. We also propose a so far misunderstood or neglected contingent variable: the type of risk that the ERM practices address. We outline a "minimum necessary contingency framework" (Otley, 1980) that is sufficiently nuanced, yet observable to empirical researchers so that they may, in due course, hypothesize about "fit" between contingent variables, such as risk types and the ERM mix, as well as outcomes (organizational effectiveness).

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Non-Standard Matches and Charitable Giving

By: Sanders, Michael, Sarah Smith, and Michael I. Norton

Abstract—Many organizations, including corporations and governments, wish to encourage charitable giving, and offer incentives for their employees, customers, and citizens to do so. The most common of these incentives is a match rate, where the organization agrees to pay, for example, $1 for every $1 donated. However, these incentives may not be efficient. In this short article we suggest alternative ways of matching that existing theory and data suggest might be more effective at encouraging donations. These include non-linear matching, social (and team) matching, and lottery matching-each of which novel schemes could be tested empirically against a standard match incentive.

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The Rich Get Richer: Enabling Conditions for Knowledge Use in Organizational Work Teams

By: Valentine, Melissa, Bradley R. Staats, and Amy C. Edmondson

Abstract—Individuals benefit from accessing others' expertise, known as knowledge sourcing. Previous research has theorized supply-side explanations (e.g., availability of knowledge) and demand-side explanations (e.g., a challenging task) for why people source knowledge, but thus far the influence of information processing-how people interpret and synthesize information-on knowledge sourcing has received little attention. In this paper, we introduce an information processing perspective on knowledge sourcing by theorizing how knowledge sourcing is enabled by conditions known to influence individual and group information processing. We develop a multi-level model to examine knowledge sourcing from an electronic knowledge repository (KR) and find that when individuals have strong information processing capabilities-stemming from experiential knowledge-bases like work experience or experience with the organizational context-they engage in more frequent KR sourcing. Also, when individuals are embedded in teams with strong social information processing capabilities, such as teams with experience working together, they engage in more KR sourcing. The multi-level perspective is critical: we also find that team experience moderates the relationship between individual experience and KR sourcing. Our paper advances theory on knowledge management and offers insight for supporting team performance.

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Cases & Course Materials

  • Harvard Business School Case 309-004

Loews Corporation: Corporate Strategy as a Portfolio

In 2007, Loews Inc., under the leadership of James Tisch, was considering whether to buy natural gas properties from Dominion Resources. The question is whether the acquisition fits the corporate strategy. In exploring the questions, students will have the chance to consider what is in fact a corporate strategy, how Loews' corporate strategy adds value, and how the way Loews is managed contributes to the results-a tripling of market value in five years.

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  • Harvard Business School Case 213-100

Assured Guaranty

Nate Katz at Yokun Ridge Capital Management is evaluating an investment in Assured Guaranty, a municipal bond insurance company that is trading at a discount to book value.

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  • Harvard Business School Case 113-094

BTG Pactual: Preserving a Partnership Culture

No abstract available.

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  • Harvard Business School Case 613-031

Microsoft Server & Tools

In 2011, Microsoft's Server & Tools Business (STB) was large, fast growing, and highly profitable on the strength of traditional packaged product lines led by the Windows Server operating system. Even as the current packaged business was performing exceptionally well, Microsoft's leadership understood that cloud-based solutions would become more prevalent in the future. As the newly appointed president of STB, Satya Nadella had to find a balance between managing the current packaged business and building the cloud offering.

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  • Harvard Business School Case 613-046

Microsoft Server & Tools (B)

Supplement for case 613-031. Update on progress of Microsoft's Server & Tools Business through July 2011. Satya Nadella and his team explore whether or not to support Linux on Windows Azure.

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  • Harvard Business School Case 613-047

Microsoft Server & Tools (C)

Supplement for case 613-031. Update on progress of Microsoft's Server & Tools Business through August 2012. Pleased with the Windows Azure product, Satya Nadella must decide how to attract customers to the cloud-based platform.

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  • Harvard Business School Case 813-018

Messer Griesheim (A) (Abridged)

The case explores the steps taken by private equity investors to restructure a European industrial gas concern held by Hoechts and complicated by partial family ownership. The case considers the relationship the partners forged with the family owners to bring about a favorable exit for the private equity partners and ownership for the Messer family.

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  • Harvard Business School Case 113-001

Agero: Enhancing Capabilities for Customers

This case illustrates the importance of choosing a primary customer as the basis for organization design. Cross Country Group managers adjusted resource allocation, organization design, and performance measures over time to transform Cross Country Group from an opportunistic family business into a sophisticated industry leader. Cross Country (renamed Agero in 2011) operated call centers that coordinated with thousands of small, independent towing companies-Cross Country's "service provider network"-to deliver roadside assistance services, such as vehicle towing and tire changes, to motorists covered by automakers' warranties and insurers' policies. The case describes Cross Country's evolution from 1972 to 2012 in three phases. This allows students to, at various stages, grapple with defining Cross Country's business (what business is it, and should it be, in?) and its primary customer (vehicle makers and insurers? motorists? service providers?). The answers to these questions have important implications for organization design. From 1972 to 1998, founder Sidney Wolk built the business through personal relationships with clients. A passionate entrepreneur, his approach to growth-secure customers first, figure out how to make money later-was remarkably successful, if sometimes chaotic. Facing an increasingly commoditized marketplace, in 1998 Wolk hired professional managers who implemented formal performance management systems and invested in sophisticated data analytics. From 1998 to 2007 (phase two), these investments allowed Cross Country to quantify service providers' impact on motorist satisfaction, monitor service providers' performance, and introduce programs to strengthen top-performing service providers' loyalty to Cross Country. Concurrently, the company undertook a two-step organization redesign to focus more resources on service providers (the new primary customer?), improve market-focused innovation, and increase client satisfaction. In phase three, from 2008 to 2012, Cross Country entered the high-tech telematics/connected-vehicle business, invested in additional innovations to strengthen its service provider network, and rebranded itself as "Agero." Wolk and his team believed Cross Country had "more driver information than any other company." The case ends with key decisions for the future.

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  • Harvard Business School Case 613-054

Groom Energy Solutions: Selling Efficiency

Groom Energy Solutions helps organizations reduce their energy use and costs through the implementation of energy efficiency measures, which create long-term financial and environmental benefits. With early success serving customers in the cold storage and industrial manufacturing sectors, the seven-year-old company must now decide whether to continue expanding within these segments or transition into commercial retail and office buildings, which offer growth potential and unique challenges. Groom Energy must also decide which geographic regions provide the best opportunity. This case study provides background on the history of the energy efficiency industry, the energy efficiency paradox, and the benefits and challenges of a business focused on implementing efficiency measures. The case is particularly relevant to courses focused on energy management, environmental sustainability, and entrepreneurship within the energy and sustainability areas.

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