First Look

October 2, 2007

One of the enduring puzzles in innovative businesses is how to protect the value that is created. How do you keep imitators at bay? Counterintuitively, the key might be found in loosening the intellectual-property environment, rather than tightening it up. That's one surprising suggestion by HBS professor Gary P. Pisano and Haas School of Business colleague David J. Teece in their new paper (unfortunately not available for download), "How to Capture Value from Innovation: Shaping Intellectual Property and Industry Architecture." Also new this week, a handbook on the management of new product development, with a faculty-coauthored chapter on "Creativity in Product Development"; a working paper for download on "Harnessing Our Inner Angels and Demons"; and an interesting case note, "Take Advantage of Your Diaspora Network."
— Martha Lagace

Working Papers

Digital Interactivity: Unanticipated Consequences for Markets, Marketing, and Consumers


The digital interactive transformation in marketing is not unfolding, as many thought it would, on the model of direct marketing. That model anticipated that digital media using rich profiling data would intrude marketing messaging more deeply and more precisely into consumer lives than broadcast media had been able to do. But the technology that threatened intrusion is delivering seclusion. The transformation is unfolding on a model of consumer collaboration, in which consumers use digital media that lie beyond the control of marketers to communicate among one another, responding to marketing's intrusions by disseminating counterargument, information sharing, rebuttal, parody, reproach and, though more rarely, fandom. Globally the media of collaboration range from consumer review sites like Epinions and Trip Advisor, to collaborative networking sites like Bebo, Facebook, Orkut and Meetup, to trading sites like Craigslist and eBay, and user-generated content sites like YouTube, Cyworld, and blogs. This paper reviews five emerging paradigms governing marketing in this new media environment. It concludes that while meaning-making remains the central purpose of marketing communication, the shift from broadcasting to interaction within digital communities is moving the locus of control over meanings from marketer to consumer and rewarding more participatory, more sincere, and less directive marketing styles.

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The Impact of Shareholder Activism on Financial Reporting and Compensation: The Case of Employee Stock Options Expensing


In this paper we examine the economic consequences of over 150 shareholder proposals to expense employee stock options (ESO) submitted during the proxy seasons of 2003 and 2004—the first case where the SEC has allowed an accounting matter to be subject to an advisory vote at an annual meeting. We find evidence suggesting that ESO expensing shareholder proposals affected accounting and compensation choices. With respect to accounting choices, we find that: (i) targeted firms were more likely to adopt ESO expensing relative to a control sample of S&P 500 firms, (ii) within targeted firms, the likelihood of adoption increases in the degree of voting support for the proposal; (iii) non-targeted firms were more likely to adopt ESO expensing when a peer firm was targeted by a proposal. With respect to the effect on compensation practices, we find that: (i) targeted firms where the proposal was approved experienced a decrease in the level of CEO compensation relative to the control sample of S&P 500 firms; (ii) within targeted firms, the degree of voting support for the proposal was associated with a decrease in the level of CEO compensation and a decrease in the use of ESO in CEO compensation.

Paper not available at this time.

Team Familiarity, Role Experience, and Performance: Evidence from Indian Software Services


Much of the literature on learning views experience as a unidimensional concept captured by the cumulative production volume or number of projects completed by a team. Implicit in this approach is the assumption that teams are stable in their membership and internal organization. In practice, however, such stability is rare, as the composition and structure of teams often changes over time or between projects. In this paper, we use detailed data from an Indian software services firm to examine how such changes may affect the accumulation of experience within, and the performance of, teams. We find that the level of team familiarity (i.e., the average number of times that each team member has worked with every other member of the team) has a significant and positive effect on performance but that conventional measures of the experience of individual team members (e.g., years at the firm) do not impact performance. We do find, however, that the role experience of individuals in a team (i.e., years in a given role within a team) is associated with better team performance. We examine the impact of role experience separately for team managers and team members. We find that a manager's role experience is positively related to outcome measures that are easily observable in process but is not related to outcomes that are difficult to monitor in process. In comparison, a member's role experience is positively related to both types of outcomes. Our results offer an approach for capturing the experience held by fluid teams and highlight the need to study context-specific measures of experience, including role experience, in addition to offering further insight into how the interactions of team members may contribute to the development of broader firm capabilities.

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Harnessing Our Inner Angels and Demons: What We Have Learned About Want/Should Conflicts and How That Knowledge Can Help Us Reduce Short-Sighted Decision Making


Although observers of human behavior have long been aware that people regularly struggle with internal conflict when deciding whether to behave responsibly or indulge in impulsivity, psychologists and economists did not begin to empirically investigate this type of want/should conflict until recently. In this paper, we review and synthesize the latest research on want/should conflict, focusing our attention on the findings from an empirical literature on the topic that has blossomed over the last 15 years. We then turn to a discussion of how individuals and policy makers can use what has been learned about want/should conflict to help decision makers select far-sighted options.

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How to Capture Value from Innovation: Shaping Intellectual Property and Industry Architecture


In making strategic decisions about how to capture value from innovation, managers often look at two critical domains—the intellectual-property environment and the architecture of the industry—as beyond their control. Yet, the intellectual-property environment and the architecture of the industry can have profound influences on who wins (and who does not) from innovation. In this paper, we argue that under the right circumstances, these two domains can be shaped by managers in ways that favor one firm over another. By understanding these forces, managers will be in a better position to utilize the full tool kit of available mechanisms (and strategies) to capture value from innovation. Perhaps somewhat surprisingly, we show that more IP protection and building stronger barriers around innovation are not always the best path to capturing value. Paradoxically, innovators can sometimes benefit by weakening the intellectual-property environment and opening the architecture of the industry. In this article we explain why and how. We also show how management can shape the architecture of the industry in ways that have consequences for the distribution of profits amongst firms in an industry.

Paper not available at this time.


Cases & Course Materials

Cable & Wireless America

Harvard Business School Case 908-004

Describes the auction of Cable & Wireless America (CWA), a bankrupt subsidiary of the British telecommunications company Cable & Wireless. While an initial "stalking-horse" bid valued the assets at $125 million, after a long day and night of bidding between eight groups, the best bid was in the high $60-million range. The sell-side team, comprised of bankers from the Blackstone Group and Greenhill, and lawyers from Wachtell Lipton and Kirkland & Ellis, is forced to regroup and reconsider their options for galvanizing the bidding process. Describes these events in detail, while providing information for students on CWA's history, the nature of Section 363 auctions, and the bidders who were involved in the process.

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H&R Block 2006

Harvard Business School Case 307-091

Mark Ernst, the Chairman, CEO and President of H&R Block, has to decide how to respond to a competitive threat posed by a competitor's refund-lending product. Block is the largest U.S. tax preparation firm, which competes not only on its tax preparation services, but also through the provision of related financial services. A rival offers a pre-season refund-lending product that has drawn away Block customers. Ernst feels that the product as structured is not good for Block, its customers, or the industry. As an added complication, Block is facing an imminent suit brought by Eliot Spitzer about one of its saving products.

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The Lapdesk Company: A South African FOPSE

Harvard Business School Case 808-008

Shane Immelman, founding CEO of Lapdesk (South Africa), is facing several acute problems: a conflict between his director of marketing and his director of field operations; a dramatic increase in prices by a key supplier; and a major strategic alliance that does not seem to be moving forward. Lapdesk is a for-profit social enterprise (FOPSE) dedicated to eradicating the shortage of classroom desks in public schools. What should Immelman do? Will Lapdesk achieve its mission?

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Lobbying for Love? Southwest Airlines and the Wright Amendment

Harvard Business School Case 707-470

The fall of 2004 brought exciting news to Love Field, the Texas headquarters of Southwest Airlines. Delta Airlines, one of Southwest's main competitors, had announced that it would dramatically decrease service from the nearby Dallas/Fort Worth International (DFW) airport, cutting the number of daily flights from 250 to a mere 21. Gary Kelly, Southwest's newly minted CEO, thought about what appeared to be a golden opportunity. How could Southwest best capitalize on Delta's withdrawal? As Kelly saw it, Southwest had several options to pursue the new business opportunities. A first was to service the canceled Delta routes from Love Field. A second possibility was to encourage members of Congress to repeal the Wright Amendment, which limited Southwest's flight offerings from Love Field. An alternative to fighting for the repeal of the Wright Amendment was for Southwest to lease the 18 gates that Delta had left at DFW. Kelly carefully considered his options. Was now the time to call his lobbyist?

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Stryker Corporation: Capital Budgeting

Harvard Business School Case 208-046

Examines some parts of Stryker Corporation's systems and procedures for approving and authorizing capital spending of many different types, including buildings, machinery, and working capital for existing businesses, as well as transactions with third parties such as acquisitions, joint ventures, and licensing agreements. Set in early 2007, nearly two years after significant modifications in these systems and procedures. Stryker has compiled a remarkable track record of consistently high growth in profitability over more than 20 years. The modifications to its capital-budgeting procedures are partly intended to support the company's efforts to continue this success.

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Take Advantage of Your Diaspora Network

Harvard Business School Note 808-029

Diaspora networks (DNs) are an important resource for global entrepreneurs. Discusses several features of DNs, combining both academic and practitioner perspectives. Describes the history and prevalence of DNs in many ethnicities, documents the broad resources DNs can provide to founders, and specifies potential pitfalls or traps from working through DNs. Closes with some practical advice for entrepreneurs accessing and utilizing their DNs.

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Texas Pacific Group—J. Crew

Harvard Business School Case 808-017

Describes Texas Pacific Group's purchase and operation of J. Crew, the catalog and specialty clothing retailer. Highlights the issues involved in financing such a transaction, and then focuses on the operational challenges of turning around the business, and of TPG's intensive involvement in the running of the business. Details the improvements in the business, and then the retrenchment, leaving the business facing a significant debt payment coming due. TPG must decide whether to sell the business and get out "whole," or whether it can develop and execute a more successful strategy going forward.

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Creativity in Product Development


Managing new product development is a key area of management, straddling strategy, innovation and entrepreneurship and macro-organizational behaviour. All of the contributors in the Handbook of New Product Development Management are well-known and leading exponents to theory of New Product Development and to methods used in practice. They draw upon their experience and work to offer a comprehensive view of the challenges in managing the development of new products. Existing knowledge in the different topics is examined and the key management challenges, and the important gaps in our knowledge are discussed. Most of the chapters draw upon systematic interaction with companies and practice and this is presented in the examples and the case studies cited. The Handbook of New Product Development Management surveys this area in the context of an overall framework that explains how aspects interact and combine in a successful NPD process. Each chapter outlines open questions and highlights needs for future research.

Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase Versus Pooling


This paper examines the effect of corporate governance on investor reactions to accounting choice in the context of accounting for business combinations. Using a sample of 324 recent stock swap acquisitions I find that, contrary to practitioners' belief that capital markets penalize purchase accounting, the opposite appears to be true; there is a negative and significant differential market reaction of approximately 4 percent for acquiring firms that announce pooling transactions. This return differential declines to negative 8 percent for firms with ineffective corporate governance. These findings are consistent with capital markets interpreting the choice of purchase accounting as a signal of management's confidence in the likelihood of a successful merger. This signal is particularly relevant when corporate governance is considered ineffective.