First Look

November 24, 2009

Loans aren't enough. In microenterprise settings as diverse as Nicaragua and Ghana, small business owners often share something in common besides grit and ingenuity: a lack of basic knowledge about accounting and control. Common mistakes—such as mis-estimating their amount of inventory or the extent of credit—could easily be avoided. Even a little training in budgeting and in the concepts of cost control, process improvement, and risk management could "make the difference between a life of constant struggle and more sustained success," write HBS professor Srikant Datar, Marc J. Epstein, and Kristi Yuthas in "Management Accounting and Control: Lessons For and from the World's Tiniest Business" [PDF] in the November 2009 issue of Strategic Finance. Management accounting and control are key for anyone who runs a business as seemingly simple as a tortilla stand, Datar et al. continue. Recognizing that many microentrepreneurs they met lacked financial literacy skills, the researchers introduced a simple matrix using icons (instead of complicated math) to track cash flow. These and other ideas generated within local contexts could give more small business owners the financial breathing room they need to think outside the box. Professionals with expertise in accounting and control need to step up and play a role in turning problems throughout the world into opportunities, the authors conclude.
— Martha Lagace

Working Papers

Walking the Talk in Multiparty Bargaining: An Experimental Investigation


We study the framing effects of communication in multiparty bargaining. Communication has been shown to be more truthful and revealing than predicted in equilibrium. Because talk is preference revealing, it may effectively frame bargaining around a logic of fairness or competition, moving parties on a path toward or away from equal-division agreements. These endogenous framing effects may outweigh any overall social utility effects due to the mere presence of communication. In two experiments, we find that non-binding talk of fairness within a three-party, complete-information game leads toward off equilibrium, equal division payoffs, while non-binding talk focusing on competitive reasoning moves parties away from equal divisions. Our two studies allow us to demonstrate that spontaneous within-game dialogue and manipulated pre-game talk lead to the same results.

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Cost Structure Patterns in the Asset Management Industry


This chapter examines patterns in the cost structure of asset management firms and establishes two important trends in cost behavior. First, when revenues are growing, "indirect" costs related to sales, distribution, marketing, personnel, technology, and occupancy are far from fixed in this industry. In some cases they are "supervariable" or rising at a faster rate than sales. Second, and in contrast, such indirect costs appear relatively fixed in the face of sales declines in this industry. We discuss potential sources of these cost-structure patterns and their implications for cost management efforts as asset management firms move forward from the financial crisis of 2008.

Management Accounting and Control: Lessons for and from the World's Tiniest Businesses


The article discusses skills microentrepreneurs need to manage and expand their businesses. After interviewing hundreds of microfinance clients around the globe, the authors were able to identify five tools drawn from management accounting where improved knowledge would have a substantial impact including cost management, throughput enhancement, risk management, budgeting, and opportunity identification.

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Nameless + Harmless = Blameless: When Seemingly Irrelevant Factors Influence Judgment of (Un)ethical Behavior


People often make judgments about the ethicality of others' behaviors and then decide how harshly to punish such behaviors. When they make these judgments and decisions, sometimes the victims of the unethical behavior are identifiable, and sometimes they are not. In addition, in our uncertain world, sometimes an unethical action causes harm, and sometimes it does not. We argue that a rational assessment of ethicality should not depend on the identifiability of the victim of wrongdoing or the actual harm caused if the judge and the decision maker have the same information. Yet in five laboratory studies, we show that these factors have a systematic effect on how people judge the ethicality of the perpetrator of an unethical action. Our studies show that people judge behavior as more unethical when (1) identifiable versus unidentifiable victims are involved and (2) the behavior leads to a negative rather than a positive outcome. We also find that people's willingness to punish wrongdoers is consistent with their judgments, and we offer preliminary evidence on how to reduce these biases.

Entry, Exit and Labour Productivity in U.K. Retailing: Evidence from Micro Data


The paper investigates the U.K. retail sector using store and firm-level data between 1998 and 2003. First, we present the first exhaustive description of the U.K. retail sector using micro data sources. Second, in the spirit of Foster, Haltiwanger, and Krizan (2002), we look at the contributions of firm entry and exit for the productivity growth of the sector. Third, we provide some new evidence of the recent shift of large U.K. retailers toward smaller retail formats, which followed the introduction of new and more restrictive planning constraints for the opening of large retail stores. We suggest that this change in the store configurations of the major retailers might be one of the factors behind the recent TFP slowdown experienced by the industry in the U.K.

Negotiation Analysis: From Games to Inferences to Decisions to Deals


Exemplified by the pioneering work of Howard Raiffa and often expressed in the pages of the Negotiation Journal, the emergent prescriptive field of "negotiation analysis" progressively developed from Raiffa's early contributions to game theory and to his later foundational work in statistical decision theory and decision analysis. Drawing from each of these fields but methodologically distinct from them, negotiation analysis has mainly adopted an "asymmetrically prescriptive/descriptive" orientation. It develops the best possible advice for what one or more parties should do conditional on empirically grounded assessment of what the other side(s) actually will do. An extensive negotiation analytic literature has developed, often making the traditional assumption of a well-specified and fixed situation for analysis. Relaxing this requirement, however, more recent work systematically puts the "setup" of a negotiation itself—its parties, their interests, their no-deal options, the sequence and basic process choices or design-into the realm of strategic and tactical choice.

Hiding the Evidence of Valid Theories: How Coupled Search Processes Obscure Performance Differences Among Organizations


Theorists argue that an organization's high-level choices, such as its organizational design or the attributes of its top management team, should influence its performance, yet empirical researchers have struggled to detect such influence. The impact of high-level choices may appear weak, we theorize, because the choices are embedded in coupled search processes. A coupled search process exists in an organization when managers search for high-level choices that shape the search for low-level, operational choices, which in turn determine performance. Using a simulation model, we show that coupled search processes obscure the performance impact of high-level choices through two mechanisms: (1) a survivor effect, arising because firms that persist with poor high-level choices are those that luckily happened on good low-level choices despite their poor high-level choices and (2) a wanderer effect, arising when firms use good high-level choices to find good low-level choices and achieve strong performance, but then wander toward poor high-level choices. We show that these effects are particularly strong in stable environments, and we identify empirical strategies that can tease out the true performance impact of high-level choices.


Cases & Course Materials

Adult Life Stages

John A. Davis
Harvard Business School Note 809-097

This note describes basic concepts of adult life stage theory and summarizes Daniel Levinson's research findings on the adult development of men and women.

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Choosing a GAAP for Canada

Karthik Ramanna and Beiting Cheng
Harvard Business School Case 110-023

Explores Canadian regulators' decision to adopt International Financial Reporting Standards (IFRS). The Canadian decision in 2005 to adopt IFRS is particularly interesting because Canada had well-developed domestic accounting standards and because a significant fraction of Canadian industry was lobbying for the adoption of U.S. Generally Accepted Accounting Principles (GAAP) and not IFRS. The case positions the student as an advisor to an important local politician. Based on cultural, economic, and political information available in 2005, the case requires the student to choose between (1) retaining Canadian GAAP, (2) adopting U.S. GAAP, or (3) adopting IFRS.

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Nantucket Nectars: The Exit

Joseph B. Lassiter, III, William A. Sahlman, and Noam T. Wasserman
Harvard Business School Case 810-041

The founders of Nantucket Nectars are trying to decide whether and how to sell their company.

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Wiwa v. Royal Dutch/Shell

Lynn S. Paine and Lara Adamsons
Harvard Business School Case 310-038

On the eve of trial, and after nearly 14 years of pre-trial litigation, the parties in Wiwa v. Royal Dutch/Shell jointly announced that the four U.S. lawsuits stemming from the execution of the Ogoni Nine in 1995 had been settled.

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