First Look

November 2, 2010

Do bonuses and quotas motivate the sales force to sell more? A new paper sheds light on how different elements of a compensation plan can enhance sales productivity. Harvard Business School professor Thomas Steenburgh, working with two colleagues from Yale School of Management, demonstrates that, indeed, bonuses do motivate increased sales, that overachievement commissions encourage more sales after quotas are reached, and that annual bonuses are not as effective for the sales force without quarterly bonuses. Read "Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans."

To app or not to app? That is the question many businesses face these days as their customers increasingly do their web business on smartphones and the new iPad. The case "Developing an App for That: Mobile Application Strategy (Banking)" looks at how the fictional Thorsen Bank approached the dangers and opportunities of launching a downloadable application for mobile devices.

Carliss Y. Baldwin, a leading thinker on modularity, updates an earlier paper, "When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge," which reveals how Sun Microsystems and Dell used architectural knowledge and the identification of bottlenecks in existing systems to gain strategic advantage.

— Sean Silverthorne


Meeting the Challenges of a Person-Centric Work Psychology

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Perceiving Freedom Givers: Effects of Granting Decision Latitude on Personality and Leadership Perceptions


A perennial question facing managers is how much decision latitude to give their employees at work. The current research investigates how decision latitude affects employees' perceptions of managers' personalities and, in turn, their leadership effectiveness. Results from three studies using different methods (two experiments and a survey) indicate an inverted-U shaped relationship between degree of decision latitude and leadership effectiveness perceptions. The increase in leadership effectiveness perception between low and moderate decision latitude was explained by an increase in perceived agreeableness; the decrease in leadership effectiveness perception between moderate and high decision latitude was explained by a decrease in perceived conscientiousness. Theoretical and practical implications of these findings are discussed.

Keeping the Illusion of Control Under Control: Ceilings, Floors, and Imperfect Calibration


Prior research has claimed that people exaggerate probabilities of success by overestimating personal control in situations that are heavily or completely determined by chance. We examine whether such overestimation of control persists in situations where people do have control. Our results suggest a simple model that accounts for prior findings on illusory control as well as for situations where actual control is high: people make imperfect estimates of their level of control. By focusing on situations marked by low control, prior research has created the illusion that people generally overestimate their level of control. Across three studies, we show that when they have a great deal of control, people underestimate it. Implications for research on perceived control and co-variation assessment are discussed.

Conflict and Development: Lessons from South Asia

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Working Papers

When Open Architecture Beats Closed: The Entrepreneurial Use of Architectural Knowledge


This paper describes how entrepreneurial firms can use superior architectural knowledge to open up a technical system to gain strategic advantage. The strategy involves, first, identifying "bottlenecks" in the existing system, and then creating a new open architecture that isolates the bottlenecks in modules and allows others to connect to the system at key interfaces. An entrepreneurial firm with limited financial resources can then focus on supplying superior bottleneck modules, while outsourcing and allowing complementors to supply non-bottleneck components. I show that a firm pursuing this strategy will have a higher return on invested capital (ROIC) than competitors with a less modular, closed architecture. Over time, the more open firm can drive the ROIC of competitors below their cost of capital, causing them to shrink and possibly exit the market. The strategy was used by Sun Microsystems in the 1980s and Dell Computer in the 1990s.

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Do Bonuses Enhance Sales Productivity? A Dynamic Structural Analysis of Bonus-Based Compensation Plans


We estimate a dynamic structural model of sales force response to a bonus-based compensation plan. The paper has two main methodological innovations: First, we implement empirically the method proposed by Arcidiacono and Miller (2010) to accommodate unobserved latent class heterogeneity with a computationally light two-step estimator. Second, the bonus setting helps estimate discount factors in a dynamic structural model using field data. This is because, quarterly and annual bonuses help generate the instruments necessary to identify both discount factors in a hyperbolic discounting model. Substantively, the paper sheds insights on how different elements of the compensation plan enhance productivity. We find clear evidence that (1) bonuses enhance productivity, (2) overachievement commissions help sustain the high productivity of the best performers even after attaining quotas, and (3) sales people exhibit present bias consistent with hyperbolic discounting. Given such present bias, frequent quarterly bonuses tied to high demand end-of-quarter months serve as pacers to keep the sales force on track to achieve their annual sales quotas.

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Cases & Course Materials

The Random House Response to the Kindle

Bharat N. Anand and Peter W. Olson
Harvard Business School Case 710-444

In early 2010, e-readers, like Amazon's Kindle and Apple's impending iPad, threatened to disrupt the book publishing industry. The case provides an overview of the industry, describes the broader trends regarding e-readers, and asks: how should major publishers like Random House respond to these trends?

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AQR's Momentum Funds

Daniel B. Bergstresser, Lauren H. Cohen, Randolph B. Cohen, and Christopher Malloy
Harvard Business School Case 211-025

AQR is a hedge fund based in Greenwich, Connecticut, that is considering offering a wholly new line of product to retail investors, namely the ability to invest in the price phenomenon known as momentum. There is a large body of empirical evidence supporting momentum across many different asset classes and countries. However, up until this point, momentum was a strategy employed nearly exclusively by hedge funds, and thus not an available investment strategy to most individual investors. This case highlights the difficulties in implementing this "mutual fund-itizing" of a hedge fund product, along with the challenges that the open-end and regulatory features that a mutual fund poses to many successful strategies implemented in other contexts. In addition, it gives students the ability to calculate and interpret various horizons of correlations between many popular investment strategies using long time-series data and then thinking about the potential complementarities of strategies from a portfolio construction context.

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News in the Digital World: Who Pays?

Stephen P. Bradley and Nancy Bartlett
Harvard Business School Note 710-456

Models to monetizing news in the digital landscape, which is real-time, searchable, sharable, multi-sourced, anytime, and any screen, were emerging in 2010. Could content creators get people to pay for what they watched, read, listened to, and shared online? Were news aggregators riding on the backs of the new content generators? Or were they providing a new stream of audience directly to new sites that needed to create innovative models to monetize their content? As more delivery models were on the horizon (location-based breaking headlines via cell phones) and more content production unhinged from a commercial entity (images captured and uploaded from personal cell phone cameras), the news industry landscape became freewheeling and individualistic. The straight-line model of content generator to distributor to reader was gone.

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A Chronology of Integrated Reporting

Robert G. Eccles and Michael P. Krzus
Harvard Business School Note 411-049

This technical note traces the development of integrated reporting through published materials, research, and the formation of various committees. Readers will gain an understanding of how the topics of nonfinancial information, sustainable development, corporate disclosure, and integrated reporting, among others, overlap.

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Belco Global Foods

C. Fritz Foley and Matthew Johnson
Harvard Business School Case 211-033

This case introduces students to the fundamental issues that managers face when deciding what international trade finance terms to use when transacting with other firms. In late 2009, Pam Arnold, the head of global credit at Belco Global Foods, must decide which trade finance terms to offer to two new customers and how to pursue a claim against a customer who has missed a payment deadline.

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Developing an App for That: Mobile Application Strategy (Banking)

Hanna Halaburda, Joshua Gans, and Nathaniel Burbank
Harvard Business School Case 711-415

At a time when ever-rising smartphone sales are driven as much by demand for devices that run must-have third-party "apps" as by the quality of traditional voice and data services, there is a myriad of challenges facing the software developer who is looking to choose which mobile development software platform to invest in. Written from the perspective of an established consumer bank that is about to commence development on its first downloadable application for mobile devices, the case surveys the state of the smartphone market in 2010 and considers the challenges of a platform landscape that includes significantly varying installed device base sizes, growth rates, application distribution models, and hardware device profiles. Focusing on Apple's market leading iOS platform and "App Store," for iPhones and other devices, and Google's developing Android OS and associated Android Market, the case considers potential benefits and pitfalls of each, as well as touching on the reasons that other longer standing platforms, such as RIM's BlackBerry platform, are less appealing to modern day application developers.

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Retiree Pension and Health Benefits

David F. Hawkins
Harvard Business School Note 111-033

Note on accounting for retiree pension and health benefits under IFRS and U.S. GAAP.

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HBS Class of 2009: All Talk As They Prepare to Walk?

Rakesh Khurana, Nitin Nohria, and Dalia Rahman
Harvard Business School Case 411-024

Max Anderson, HBS Class of 2009, founded the MBA Oath Initiative. The oath was a voluntary pledge "to create value responsibly and ethically." Anderson and a team of students and faculty worked to launch the first MBA Oath Ceremony conducted on campus during Harvard graduation week.

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Highland Capital Partners: Investing in Cleantech

Joseph B. Lassiter and David Kiron
Harvard Business School Case 811-009

One day during the summer of 2008, Paul Maeder, co-founder and general partner of Highland Capital Partners (HCP), was walking with his wife around Reykjavik, Iceland, marveling at how clean the city felt and at the widespread use of naturally occurring geothermal energy to power everything from trams to buildings. "They don't treat their air and water like an open sewer," Maeder thought. "This is the way people need to live and this is the way people are going to have to start living in 10 or 20 years." To his wife, Maeder said aloud, "I think Highland should revisit the idea of investing in cleantech."

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Leadership in Corporate Reporting Policy at Tata Steel

Karthik Ramanna and Rachna Tahilyani
Harvard Business School Case 111-028

The case describes the challenges faced by Tata Steel, India's largest private sector steel company, as it transitions from Indian GAAP to IFRS. It first describes those challenges in the context of the institutional voids that make IFRS adoption difficult in India. The case then focuses on how companies in emerging markets might represent their interests at the IASB, the standard setting body for IFRS.

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Alnylam Pharmaceuticals: Building Value from the IP Estate

Willy Shih and Sen Chai
Harvard Business School Case 611-009

The learning objective of this case is to help students recognize the interplay between intellectual property (IP) rights and corporate strategy. We do this by examining what is a fairly atypical circumstance today in which a single firm is able to secure what it perceives to be a frontier IP "estate" that blocks competitors from "practicing" in a significant part of the field. Those who elect to sign a license agreement must pay a high license fee and therefore help to fund the company's R&D. The company, meanwhile, must balance the immediate benefit of non-dilutive financing obtainable from the license fees vs. enabling a potential future competitor. The case setting is a lawsuit over a seemingly arcane issue: whether one of the co-owners of a key patent application is properly prosecuting the application. Understanding the issue requires students to progressively build up an understanding of some key aspects of U.S. patent law. Then by piecing together the strategy of the company and how it is driven by its IP position, students can understand why the litigation represents such a high stakes gamble.

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Windward Investment Management

Luis M. Viceira and Ricardo De Armas
Harvard Business School Case 211-005

Windward Investment Management has experienced rapid growth in assets under management in just ten years, from under $30 million at year-end 1999 to $3.6 billion in 2010. Windward is one of the leading firms in the Registered Investment Advisor (RIA) industry that seeks to value for its investors through asset diversification and active macro-level investing. The firm implements its proprietary investment model by trading exclusively exchange-traded funds (ETF). Windward is considering a range of future growth opportunities and how to finance those opportunities, including raising external capital. The case focuses on the decision of what opportunities Windward should consider and on the valuation of the firm if it decides to raise external capital.

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