First Look

November 6, 2007

The scenario is this: You are seeking to negotiate a make-or-break deal with a significant potential client who holds all the advantages. What's more, this client is playing hardball at the table—demeaning remarks, misrepresentations, divide-and-conquer ploys—and that's just a start. What are effective ways to deal with a very hard bargainer? That's the central issue discussed in a new HBS case, "Peter Welz: When a Marquee Prospect Plays Hardball (A)," now available for purchase. Other new HBS-related publications this week include an essay on what works in market design, a Harvard Business Review article on looking at your company through the lens of a private equity firm, and research into the effects of collaboration networks on innovation.
— Sean Silverthorne

Working Papers

The Effects of a Centralized Clearinghouse on Job Placement, Wages, and Hiring Practices


New gastroenterologists participated in a labor market clearinghouse (a "match") from 1986 through the late 1990s, after which the match was abandoned. This provides an opportunity to study the effects of a match, by observing the differences in the outcomes and organization of the market when a match was operating and when it was not. After the GI match ended, programs hired fellows earlier each year, eventually almost a year earlier than when the match was operating. It became customary for GI program directors to make very short offers, rarely exceeding two weeks and often much shorter. Consequently many potential fellows had to accept positions before they finished their planned interviews, and most programs experienced cancellations of interviews they had scheduled. Furthermore, without a match, many programs hired more local fellows, and fewer from other hospitals and cities than they did during the match. Wages, however, seem not to have been affected. To restart the match, we proposed a policy, subsequently adopted by the gastroenterology professional organizations, that even if applicants had accepted offers prior to the match, they could subsequently decline those offers and participate in the match. This made it safe for programs to delay hiring until the match, confident that programs that did not participate would not be able to "capture" the most desirable candidates beforehand. Consequently it appears that most programs waited for the match in an orderly way in 2006, when the GI match was reinstated. The market for gastroenterologists provides a case study of market failures, the way a centralized clearinghouse can fix them, and the effects on market outcomes. In the conclusion we discuss aspects of the experience of the gastroenterology labor market that seem to generalize fairly widely.

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What Have We Learned from Market Design?


This essay discusses some things we have learned about markets, in the process of designing marketplaces to fix market failures. To work well, marketplaces have to provide thickness, i.e., they need to attract a large enough proportion of the potential participants in the market; they have to overcome the congestion that thickness can bring, by making it possible to consider enough alternative transactions to arrive at good ones; and they need to make it safe and sufficiently simple to participate in the market, as opposed to transacting outside of the market, or having to engage in costly and risky strategic behavior. I'll draw on recent examples of market design ranging from labor markets for doctors and new economists, to kidney exchange, and school choice in New York City and Boston.

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Cases & Course Materials

Best Practices: Decision Making Among Venture Capital Firms

Harvard Business School Note 804-176

Describes investment decision-making processes, based on interviews with 56 percent of the top 38 venture capital firms in the country. Discusses some implications for the future growth of the industry.

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Blue River Capital

Harvard Business School Case 708-448

Examines the strategy and experience of Indian private equity firm Blue River Capital. Blue River was established in 2005 to invest primarily in middle market, particularly family-run, businesses in India. Blue River caters to this niche as an active investor, providing capital and working with portfolio companies to improve their corporate governance. Describes the challenges faced by Blue River in identifying investments, performing due diligence, and working with portfolio companies and asks how Blue River should build itself into a top-tier private equity fund, particularly as more and more foreign firms target the growing Indian market.

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Children's Hospital and Clinics (B)

Harvard Business School Supplement 608-073

Explores the numerous initiatives Children's Hospital and Clinics has undertaken to improve Patient Safety since the late 1990s—from the perspective of 2007. The case thus updates the (A) case by revisiting the hospital to find out what happened as a result of the ambitious change program launched over eight years earlier. It elaborates the ways in which Children's COO Julie Morath seeks to continue to improve hospital operations by involving nurses, physicians and even patients' families in an ongoing organizational learning process. The two-case series is particularly distinctive in tracking an organizational change initiative for almost a decade and, as such, uncovers and promotes discussion of the important, granular details of change leadership in a messy, knowledge-based organization.

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Norway Sells Wal-Mart

Harvard Business School Case 308-019

In June 2006, Norway's Pension Fund decided to divest its position in Wal-Mart Stores, Inc. after an investigation by the Fund's Ethics Council. According to a spokesperson of Norway's Finance Ministry, "The recommendation to exclude Wal-Mart cites serious and systematic violations of human rights and labor rights." Before making its recommendation to the Ministry to divest Wal-Mart, the Council sent its findings to the retailer for comment, but received no response. While Wal-Mart did not respond, the company had taken several steps to strengthen its ethical standards worldwide in recent years.

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Peter Welz: When a Marquee Prospect Plays Hardball (A)

Harvard Business School Case 908-010

Describes the hardball tactics facing Peter Welz, who seeks to negotiate a make-or-break contract with a vastly larger potential client. Welz's counterpart team is led by Preston Spitzer, a notoriously tough player who fully understands his side's massive advantages in the process. With the economic fate of Welz's newly public smaller firm in the balance, Welz and his team must figure out how to handle some very tough tactics by Spitzer and his minions aimed at extracting lopsided contract concessions. These tactics include demeaning remarks, repeated threats to opt for a competitor, misrepresentations, repudiation of previously agreed provisions, last-minute demands, divide-and-conquer moves, and a waiting game that exploits the smaller firm's evidently urgent need for a closure. The (A) case sets up the negotiations and poses an immediate tactical challenge in the context of the overall process. The (B) case describes the strategies, tactics, and results of these negotiations, along with Welz's broader insights into a more productive approach to the common challenge of dealing with very hard bargainers.

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Tad O'Malley: December 2004

Harvard Business School Case 806-024

Tad O'Malley, a second-year student at Harvard Business School, must choose among three offers from private equity firms. Each firm presents a unique combination of history, culture, and compensation. Traces Tad's strategy in obtaining these offers and lets students decide which he should accept.

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Solve the Succession Crisis by Growing Inside-Outside Leaders


This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading. In his interviews and data analysis, Harvard Business School professor Bower found that companies performed better when they appointed insiders to the job of CEO. Other researchers, including Jim Collins in "Good to Great," have come to similar conclusions working from different data sets. Yet Bower finds far too many companies are managed without leadership development as an objective; as a result, when the time comes to name a new chief executive, those firms turn to outsiders. Both insider and outsider CEOs have strengths and weaknesses at the start. Insiders know the company and its people but are often blind to the need for radical change. Outsiders see the need for a new approach but can't make the necessary changes because they don't know the organization or industry sector well enough. What companies must do, then, is find a way to nurture what Bower calls inside-outsiders—internal candidates who have outside perspective. Often such executives have spent much of their time away from the mainstream of the organization, and away from headquarters, living with new opportunities and threats. Before becoming CEO, Procter & Gamble's A.G. Lafley, for instance, worked for years building P&G's Chinese operation rather than the core detergent business. IBM's Sam Palmisano was a champion of software and open systems at a time when Big Blue was essentially a closed-system, hardware-oriented company. To groom potential leaders, a development process for inside-outsiders needs to be in place. Ideally, by the time they are 30, a talented manager can be given the opportunity to manage a whole business, so that they become good insiders. But they also need to be mentored with an eye toward preserving their outsider perspective, so they learn how to turn their new ideas into great businesses and are protected from senior managers who believe out-of-the-box thinkers need a lesson.

Should I Stay or Should I Go? Mood Congruity, Self-monitoring and Retail Context Preference


This article extends the discussion of congruity or the preference by consumers for alternatives similar to themselves 1) by examining the effect in a retail context, and 2) by considering the moderating role of self-monitoring, or the tendency to regulate one's mood in line with the social context, on congruity. Two experiments find that when low self-monitors imagine a context that differs in valence from their mood, they feel more distinctive from the environment while high self-monitors do not. The feelings of low self-monitors, in turn, seem to lead them to prefer contexts that are congruent in valence with their mood. High self-monitors on the other hand prefer a context that differs in valence from their mood. It is argued that high self-monitors seek a mood-incongruent context to achieve normative regulation of their mood. The implications of these results for retail atmospherics are discussed.

Small Worlds and Regional Innovation


Small-world networks have attracted much theoretical attention and are widely thought to enhance creativity. Yet empirical studies of their evolution and evidence of their benefits remain scarce. We develop and exploit a novel database on patent co-authorship to investigate the effects of collaboration networks on innovation. Our analysis reveals the existence of regional small-world structures and the emergence and disappearance of giant components in patent collaboration networks. Using statistical models, we test and fail to find evidence that small-world structure (cohesive clusters connected by occasional non-local ties) enhances innovative productivity within geographic regions. We do find that both shorter path lengths and larger connected components correlate with increased innovation. We discuss the implications of our findings for future social network research and theory as well as regional innovation policies.

If Private Equity Sized Up Your Business


As the dust settles on the recent frenzy of private-equity deals (including transactions topping $20 billion), what lessons can companies glean? Directors and executives of public companies may now be slightly less fearful of imminent takeover, yet the pressure remains: They face shareholders who wonder why they aren't getting private-equity-level returns. Rather than dismiss the value private equity has created as manipulated or aberrant, public company leaders should recognize the disciplined management that often underlies it. Pozen, a longtime leader in the financial services industry, finds that in the aftermath of buyouts, companies undergo five major thrusts of reform. These translate into five key questions that directors should pose to senior management: Have we left too much cash on our balance sheet instead of raising our cash dividends or buying back shares?; Do we have the optimal capital structure, with the lowest weighted after-tax cost of total capital, including debt and equity?; Do we have an operating plan that will significantly increase shareholder value, with specific metrics to monitor performance?; Are the compensation rewards for our top executives tied closely enough to increases in shareholder value, with real penalties for nonperformance?; Finally, does our board have enough industry experts who have made the time commitments and been given the financial incentives necessary to maximize shareholder value? The era of private equity is far from over—the top funds have become very large and are likely to play an influential role in future market cycles. Boards that ask these questions, and act on them, won't just beat the takeover artists to the punch. They will build stronger businesses.