First Look

May 25, 2010

Why do platforms that deliberately restrict consumer choice do just as well, if not better, than platforms offering unlimited choice? Examples abound in dating services, executive recruitment, and real-estate brokerage. In the online dating market, for instance, eHarmony restricts potential candidates for its members while rival lets its users browse as many profiles as they like. In the working paper "Platforms and Limits to Network Effects," HBS professors Hanna Halaburda and Mikolaj Jan Piskorski discuss competitive strategy in these environments and the options available to platform designers and proprietors who want to maximize the strength of network effects. Among other cases this week, "Zotter—Living by Chocolate" explores how entrepreneurs could create new markets for niche products. In the case HBS professor Mukti Khaire and coauthors detail how an Austrian-based chocolatier weighed options to cross borders and to scale up its time- and labor-intensive manufacturing process. Meanwhile, "Apple Inc. in 2010" by Professor David B. Yoffie and Renee Kim studies the iconic company's next steps in the midst of global competition.
— Martha Lagace


Heterogeneity and Graceful Technology Retreats: A New Perspective on Responding to Dominant Technological Threats


We explore the implications of a real and common alternative to attempting the transformation required to embrace a new, dominant technology—the choice to maintain focus on the old technology. In considering this choice we distinguish between "racing" strategies, which attempt to fight off the rise of the new technology by extending the performance of the old technology, and "retreat" strategies, which attempt to accommodate the rise of the new technology by repositioning the old technology in the demand environment. Underlying our arguments is the observation that the emergence of a new technology does more than just create a substitute threat—it can also reveal significant underlying heterogeneity in the old technology's broader demand environment. This heterogeneity is a source of opportunities that can support a new position for the old technology, in either the current market or a new one. Using this lens we explore the decision to stay with the old technology as a rational, proactive choice rather than as a mark of managerial and organizational failure. We then consider the distinctive challenges and organizational dynamics that arise in technology retreats and their implications for the ways in which managers and scholars should approach questions regarding the management of capabilities, lifecycles, and ecosystems.

Modern Management: Good for the Environment or Just Hot Air?


We use an innovative methodology to measure management practices in over 300 manufacturing firms in the U.K. We then match this management data to production and energy usage information for establishments owned by these firms. We find that establishments in better managed firms are significantly less energy intensive. This effect is quantitatively substantial: going from the 25th to the 75th percentile of management practices is associated with a 17.4% reduction in energy intensity. Better managed firms are also significantly more productive. These results suggest that management practices that are associated with improved productivity are also linked to lower greenhouse gas emissions.

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Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act


This paper analyzes the impact of the Homeland Investment Act of 2004, which provided a one-time tax holiday for the repatriation of foreign earnings and thereby reduced the cost to U.S. multinationals of accessing a source of internal capital. Lawmakers and lobbyists justified its passage by arguing that it would alleviate financial constraints. This paper's results indicate that repatriations did not lead to an increase in domestic investment, domestic employment, or R&D—even for the firms that appeared to be financially constrained or lobbied for the holiday. Instead, estimates indicate that a $1 increase in repatriations was associated with a $0.60 to $0.92 increase in payouts to shareholders—despite regulations stating that such expenditures were not a permitted use of repatriations qualifying for the tax holiday. The results indicate that U.S. multinationals were not financially constrained and were reasonably well governed. The fungibility of money appears to have undermined the effectiveness of the regulations.


Working Papers

Competing Ad Auctions: Multi-homing and Participation Costs (revised)


We model competing auctions for online advertising, with attention to the participation costs that limit advertisers' interest in using small ad platforms. When participation costs are large relative to the volume of traffic an ad platform can offer, an advertiser may forego use of an ad platform that the advertiser otherwise finds profitable. Mergers between ad platforms can increase advertiser welfare if the resulting click-through rate and volume of traffic are sufficiently improved relative to the offerings of the ad auctions when separate. When there is an insufficient improvement, such mergers can harm advertisers.

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Agency Costs, Mispricing, and Ownership Structure


Standard theories of corporate ownership assume that because markets are efficient, insiders ultimately bear agency costs and therefore have a strong incentive to minimize conflicts of interest with outside investors. We show that if equity is overvalued, however, mispricing offsets agency costs and can induce a controlling shareholder to list equity. Higher valuations support listings associated with greater agency costs. We test the predictions that follow from this idea on a sample of publicly listed corporate subsidiaries in Japan. When there is greater scope for expropriation by the parent firm, minority shareholders fare poorly after listing. Parent firms often repurchase subsidiaries at large discounts to valuations at the time of listing and experience positive abnormal returns when repurchases are announced.

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Platforms and Limits to Network Effects


We model conditions under which agents in two-sided matching markets would rationally prefer a platform-limiting choice. We show that platforms that offer a limited set of matching candidates are attractive by reducing the competition among agents on the same side of the market. An agent who sees fewer candidates knows that these candidates also see fewer potential matches, and so are more likely to accept the match. As agents on both sides have access to more candidates, initially positive indirect network effects decrease in strength, reach their limit, and eventually turn negative. The limit to network effects is different for different types of agents. For agents with few outside options, the limit to network effects is reached relatively quickly, and those agents choose the platform with a restricted number of candidates. This is because those agents value the higher rate of acceptance more than access to more candidates. Agents with higher outside options choose the market with a larger number of candidates. The model helps explain why platforms offering a restricted number of candidates coexist alongside those offering a larger number of candidates, even though the existing literature on network effects suggests that the latter should always dominate the former.

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Varied Experience, Team Familiarity, and Learning: The Mediating Role of Psychological Safety (revised)


Prior work examining the relationship of varied experience (i.e., the concurrent completion of multiple tasks) and learning by groups finds inconsistent results. We hypothesize that team familiarity, i.e., individuals' prior shared work experience, may help explain this difference, as familiar teams may be more effective than unfamiliar teams at using the knowledge gained from the concurrent completion of multiple tasks. A sense of psychological safety may be one reason that team familiarity could aid in the process of team learning. In an experimental study, we find that familiar teams learn at a faster rate than unfamiliar teams. Additionally, we find that team familiarity leads to the development of psychological safety and that the relationship between team familiarity and team learning is mediated by psychological safety. By separately examining task variety, team familiarity, and psychological safety, our work offers new insights and direction for the study of learning in teams.

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Cases & Course Materials

Harvard Business School Executive Education: Balancing Online and Offline Marketing

John Deighton and Leora Kornfeld
Harvard Business School Case 510-091

How does a small business set its online media budget? The HBS Executive Education Division can be viewed as a small-to-medium sized business unit with annual revenues of $107 million. As we watch it change its culture, practices, and organization from offline to online marketing, we have an opportunity not simply to see the metrics used in online marketing budget allocation, but also the stresses involved in the birth of a new go-to-market culture.

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Major League Baseball Advanced Media: America's Pastime Goes Digital

Anita Elberse and Brett Laffel
Harvard Business School Case 510-092

In January 2010, Bob Bowman, chief executive officer of Major League Baseball Advanced Media—MLB's digital arm—is facing a number of decisions related to its "app" for Apple's new iPad. What are the best name, price, and set of features for MLBAM's iPad app? The case describes what is often seen as one of the most successful paid-content businesses in sports and media. Provides in-depth information on MLBAM's four main sources of revenues and relates those to the league's overall revenues. Describes the company's online and mobile offerings in considerable detail and outlines the choices facing MLB's offering for Apple's iPad device, enabling a rich discussion of viable marketing strategies.

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Organizational Alignment, Performance, and Change in Professional Service Firms

John J. Gabarro
Harvard Business School Note 908-416

This note describes the relationship between organizational alignment and performance in professional service firms and how to use McKinsey 7S Alignment to diagnose a firm's or practice's alignment, identify misalignments, and determine how to bring about the changes needed to re-align, as well as the changes needed to re-align the organization with its existing or new strategy.

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Toby Johnson (A): Leading After School

Boris Groysberg, Leslie Danford, Amy Lodge, and Tereh Sayles
Harvard Business School Case 410-103

After completing her MBA in 2007, Toby Johnson, a former army pilot with the 18th Airborne Corps Rapid Deployment Force, joined PepsiCo's Leadership Development Program (LDP). For her first assignment with PepsiCo, Johnson accepted a position as a manufacturing manager at a Frito-Lay plant in Williamsport, Pennsylvania. The Williamsport plant had 200 employees and 54 million pounds of production per year. The case describes how Johnson took charge of the plant and her action plan for implementing a new set of changes. During Johnson's tenure at Williamsport, the plant was nominated as a potential site for a company-wide transformative initiative. This initiative would entail major changes in the current team structure and incentive program within Frito-Lay. Johnson needed to think carefully about this change implementation.

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Digital Media Group: The Shanghai Bid

G. Felda Hardymon and Ann Leamon
Harvard Business School Case 810-099

In December 2008, Thomas G. Tsao, acting CEO of Digital Media Group (DMG), a venture-backed provider of technology and media used primarily in subways, must decide how to structure the company's bid for the advertising concession in Shanghai's 13 existing and planned subway lines. This is complicated by the fact that he is also a general partner in Gobi Partners, one of DMG's largest investors. The company is bidding against its largest competitor, which also investigated acquiring DMG a few months before. DMG has very little cash, and the publicly traded competitor knows it. How does Tom structure the bid? How does he get the money for it? How does he manage the company, given its inability to attract a CEO and his firm's need to have an exit? Lastly, how does he manage his responsibilities—to his firm, his limited partners, his coinvestors, and the company?

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Gobi Partners and DMG

G. Felda Hardymon, Josh Lerner, and Ann Leamon
Harvard Business School Case 810-095

Thomas G. Tsao, founding general partner of Gobi Partners, an early stage venture capital firm in China, must decide how to manage his firm's largest investment after the departure of the CEO. Tom has temporarily stepped in as CEO, but finding a replacement with the necessary technical and language skills is difficult. Moreover, the company is facing significant challenges in winning business and restructuring its own operations. Should Tom stay on as CEO? Revisit one of the candidates who had withdrawn? Try harder to sell the company? At what price? The case provides an opportunity to discuss the issue of active investment management in an emerging market from the perspectives of the many stakeholders involved.

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Zotter—Living by Chocolate

Mukti Khaire, Stefan Aichinger, Monika Hoffmann, and Maximilian Schnoedl
Harvard Business School Case 810-091

This case is about a boutique chocolate manufacturer's decision to grow. Zotter, an Austrian company that was a pioneer in the organic and Fairtrade chocolate movement, uses the traditional confit technique to make premium hand-scooped chocolates in unusual and innovative flavor combinations. Having done many novel things to educate the market about the value of premium organic and Fairtrade chocolate, Zotter consolidated its market position within the premium segment of the Austrian market for chocolate. The company only recently started to sell its product outside Austria. However, the time- and labor-intensive manufacturing process and the high prices of Zotter chocolates limit the scalability of the company, even though the founder desires to grow. While the founder has many ideas for the firm, it is not clear which path would be optimal for the kind of growth he desires. The case provides students an opportunity to discuss how entrepreneurs create markets for novel products, and how they can consolidate their position.

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CityCenter (C): Turmoil and Choices

John D. Macomber
Harvard Business School Supplement 210-066

"CityCenter (C)" follows the (A) and (B) cases chronologically. The (C) case explores the decisions facing MGM MIRAGE following a lawsuit by partner Dubai World and suspension of Dubai World's cash contributions to the project in early 2009. Issues include the discussion of activity by secured lenders and other involved financial actors, like Carl Icahn and James Packer, as well as MGM MIRAGE major stockholder Kirk Kerkorian. The firm considers various options and remedies with respect to the claim by Dubai World. "CityCenter (C)" can serve as an in-class handout to advance class discussion of the (A) and (B) cases to encompass events as they unfolded.

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CityCenter (D): Financial Crisis, Grand Opening, and a New Paradigm

John D. Macomber and Griffin H. James
Harvard Business School Supplement 210-067

"CityCenter (D)" follows the (A), (B), and (C) cases with subsequent chronological events through CityCenter's grand opening in December 2009 and financial results through March 2010. The case includes a simple valuation exercise intended to explore CEO Jim Murren's options as he seeks to avoid an MGM MIRAGE bankruptcy. The (D) case presents Murren with the choice of selling the Borgata casino in New Jersey or receiving an ownership stake in CityCenter itself. Students will draw on EBITDA comparables and projections to complete a simple valuation analysis to take a position on which asset to sell. "CityCenter (D)" can serve as an in-class exercise or homework assignment to follow discussion of the (C) case.

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Design Creates Fortune: 2000 Tower Oaks Boulevard

John D. Macomber and Griffin H. James
Harvard Business School Case 210-070

A real estate developer assesses its ability to capture the benefits of investing in LEED Platinum, Vedic Design, and EnergyStar components in new buildings. The building at 2000 Tower Oaks Boulevard in Rockville, Maryland is said to be the healthiest building in the National Capital Region. Does this matter? Can the developer realize higher rents because of this? The developer performs a detailed cost-benefit analysis of energy-saving measures that overlap and reduce their cumulative benefit. They consider the impact of these measures in combination with Vedic design features (aka Vastu) on the overall health, productivity, and business success of building occupants. "Green leases" are discussed as the developer tries to establish a leasing strategy that reflects these benefits and associated cost savings. The case takes a deep look at many of the critical on-the-ground issues involved with innovative real estate development.

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Apple Inc. in 2010

David B. Yoffie and Renee Kim
Harvard Business School Case 710-467

On April 4, 2010, Apple Inc. launched the iPad, the company's third major innovation released over the last decade under its iconic CEO Steve Jobs. Apple's strategy of shifting its business into non-PC products had thrived so far, driven by the smashing success of the iPod and the iPhone. Yet challenges abounded. Macintosh sales in the worldwide PC market still languished below 5%. Growth in iPod sales was slowing down. iPhone faced increasing competition in the smartphone industry. And would Apple's latest creation, the iPad, take the company to the next level?

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