First Look

October 28, 2008

More than they realize, leaders can stoke creativity at their organizations, according to an article in the October Harvard Business Review by HBS professors Teresa M. Amabile and Mukti Khaire. In addition to cultivating diverse perspectives and an openness to receiving ideas from all ranks, leaders can skillfully manage processes that allow creativity to scale up. ("Provide paths through the bureaucracy" is just one piece of advice.) The article, "Creativity and the Role of the Leader," reports on the results of a two-day colloquium at HBS that brought together executives from companies big and small, including Google, Novartis, design consultancy IDEO, and technology innovator E Ink. Cases with a creative component this week look at smoothing the path for a software launch at Adobe Systems, and the potential for risk at an edgy and popular T-shirt creator.
— Martha Lagace

Working Papers

Platform Rules: Multi-Sided Platforms as Regulators


This paper provides a basic conceptual framework for interpreting non-price instruments used by multi-sided platforms (MSPs) by analogizing MSPs as "private regulators" who regulate access to, and interactions around, the platform. We present evidence on Facebook, TopCoder, Roppongi Hills, and Harvard Business School to document the "regulatory" role played by MSPs. We find MSPs use nuanced combinations of legal, technological, informational, and other instruments (including price-setting) to implement desired outcomes. Non-price instruments were very much at the core of MSP strategies.

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Platform Competition, Compatibility, and Social Efficiency


In their seminal 1985 paper, Katz and Shapiro study systems compatibility in settings with one-sided platforms and direct network effects. We consider systems compatibility when competing platforms are two-sided and there are indirect network effects to develop an explanation why markets with two-sided platforms are often characterized by incompatibility with one dominant player who may subsidize access to one side of the market. Specifically, we model competitive interaction between two platform providers that act as intermediaries between developers of platform-based products (applications) and users of such products. We show that the unique equilibrium under platform compatibility leads to higher profits than the symmetric equilibrium under incompatibility. Notwithstanding, incompatibility naturally gives rise to asymmetric equilibria with a dominant platform that captures all users and earns more than under compatibility. Our model allows a detailed analysis of social efficiency, and we show that entry by developers is socially excessive (insufficient) if competing platforms are compatible (incompatible). We conclude that while society would be better off if platforms were compatible, the quest for market dominance by competing platform providers prevents them from agreeing to a common standard.

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The Economics of Structured Finance


No abstract is available at this time.

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Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship (revised)


We examine entrepreneurship and creative destruction following U.S. banking deregulations using Census Bureau data. U.S. banking reforms brought about exceptional growth in both entrepreneurship and business closures. The vast majority of closures, however, were the new ventures themselves. Although we do find evidence for the standard story of creative destruction, the most pronounced impact was a massive increase in churning among new entrants. We argue that creative destruction requires many business failures along with the few great successes. The successes are very difficult to identify ex ante, which is why democratizing entry is an important trait of well-functioning capital markets.

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Exploring the Duality between Product and Organizational Architectures: A Test of the Mirroring Hypothesis


A variety of academic work argues a relationship exists between the structure of a development organization and the design of the products that this organization produces. Specifically, products are often said to "mirror" the architectures of the organizations from which they come. This dynamic occurs because an organization's problem-solving routines and normal patterns of communication tend to constrain the space of designs within which it searches for new solutions. Such a link, if confirmed empirically, would be important, given that product architecture has been shown to be an important predictor of product performance, product variety, process flexibility and industry evolution. We explore this relationship in the software industry by use of a technique called Design Structure Matrices (DSMs), which allows us to visualize the architectures of different software products and to calculate metrics to compare their levels of modularity. Our research takes advantage of a natural experiment in this industry, where products exist that fulfill the same function, but that have been developed using very different organizational modes—specifically, open source versus closed source development. We use DSMs to analyze a sample of matched-pair products—products that perform the same function but that have been developed via these contrasting modes of organization. Our results reveal significant differences in modularity, consistent with a view that larger, more distributed teams tend to develop products with more modular architectures. Furthermore, the differences between systems are substantial—the pairs we examine vary by a factor of eight, in terms of the potential for a design change to propagate to other system components. We conclude by highlighting some implications of this result for both innovating managers, as well as researchers in the field. We also assess how future work in this area might proceed, based upon these first steps in measuring "design."

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Just Keep My Money! Supporting Tax-time Savings with U.S. Savings Bonds


This paper reports the results of a 2007 experiment testing if specific process simplification can enhance savings by low-to-moderate income (LMI) households. Tax refund recipients at certain H&R Block (Block) tax preparation offices were given the option to purchase U.S. Savings Bonds in addition to existing Block savings products. The fraction of filers who did any savings at the tax-site was 8.5 times higher at these treatment sites offering bonds (7.05%) than at control sites where bonds were not available (0.74%). Even after controlling for filers' demographic factors and self-revealed savings intent, the likelihood of tax-site savings was 5.5 percentage points higher at treatment sites as compared with control sites. In contrast to the take up of many financial products, the rate of bond purchases by less well-to-do families was no lower, and in some cases was higher than for more well-to-do filers. Also, more than 63% of the treatment group savers were individuals who could be deemed to be "asset poor." Bond buyers were more likely than other tax-site savers to have "family-centered" savings goals (i.e., saving for education and/or children/family), were more likely to be married or heads of household, and were more likely to have more dependents. A large majority (69%) of all bond purchasers also bought bonds for others, in effect, "gifting" savings. These results demonstrate that simplification can have an impact on savings rates, that there is substantial additional potential for intra-family gifting, and that simple changes in tax "plumbing" may enhance savings.

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Cases & Course Materials

Adobe Systems: Working Towards a 'Suite' Release (A)

Harvard Business School Case 409-014

The case examines the tools a manager can use to keep her project on track and manage conflict and tension as Adobe prepares to launch Creative Suite 3, the biggest software release in the company's 25-year history. The protagonist, Yvonne Murray, is a group program manager at Adobe and responsible for coordinating the integration of her business unit's product—Device Central—in Creative Suite 3. Murray is copied on an email that warns the Device Central product team that Device Central may be pulled from the Creative Suite 3 marketing materials and from the launch entirely because it was in danger of missing a deadline. Murray wonders if and how to respond to the email that was addressed to her Device Central colleague, group product manager Carol Linburn.

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The American Express Card

Harvard Business School Case 509-027

Senior executives at American Express are reviewing the company's marketing strategy for charge and credit cards in the United States. A variety of growth options exists for students to consider, including further penetration of existing markets and the opening of new markets. Historical background information in the case enables instructors to analyze the phases of American Express's card strategy over the past 50 years.

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Pfizer Inc: Building an Innovation Center

Harvard Business School Case 609-037

The case describes Pfizer's efforts to build and run an innovation center in Cambridge, Massachusetts. As the center goes through different periods of leadership and strategic models, its relationship with the corporation and other research sites is explored. The case study describes in detail the challenges of building an innovation center within a large corporation, including organization, incentives, and scientific issues.

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Sex, Drugs, and Rock 'n Roll: The MTV Approach to Tackling HIV/AIDS

Harvard Business School Case 709-429

This case explores the role that MTV, with its heavy diet of music and general youth-oriented media content, plays in spreading public-service messaging to contain the scourge of HIV/AIDS worldwide. There is a focus especially on its efforts in several emerging markets, particularly the parts of Africa that have a heavy disease incidence. MTV has developed a DNA of public service announcements that it claims are of central relevance to its high-risk customer base. How core is this to the strategy of a for-profit firm like MTV? What role can a multinational play in helping develop the health care "soft" infrastructure in such emerging markets?

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Threadless: The Business of Community

Harvard Business School Interactive Multimedia Case 608-707, the online, Chicago-based t-shirt company, was not your typical fashion apparel company. The company, run by Jake Nickell, Jacob DeHart, and Jeffrey Kalmikoff, turned the fashion business on its head by enabling anyone to submit designs for t-shirts and asking its community of more than 500,000 members to help select winning designs. Threadless encouraged community members to actively participate by critiquing submitted designs, blogging about their daily lives, posting songs and videos inspired by the designs, and, most important, purchasing t-shirts that have won the weekly design competitions. In 2007, Threadless was well on its way to selling more than a million and a half t-shirts. The success of Threadless has garnered significant media attention, the New York Times and USA's National Public Radio highlighting its unique community-based business model and has piqued the interest of large traditional retailers. Nickell, DeHart, and Kalmikoff were now faced with making a decision about a potentially lucrative offer from a major retailer offering to carry large volumes of select Threadless t-shirts in its retail stores. Should they accept?

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Creativity and the Role of the Leader


In today's innovation-driven economy, understanding how to generate great ideas has become an urgent managerial priority. Suddenly, the spotlight has turned on the academics who've studied creativity for decades. How relevant is their research to the practical challenges leaders face? To connect theory and practice, Harvard Business School professors Amabile and Khaire convened a two-day colloquium of leading creativity scholars and executives from companies such as Google, IDEO, Novartis, Intuit, and E Ink. In this article, the authors present highlights of the research presented and the discussion of its implications. At the event, a new leadership agenda began to take shape, one rooted in the awareness that you can't manage creativity—you can only manage for creativity. A number of themes emerged: The leader's job is not to be the source of ideas but to encourage and champion ideas. Leaders must tap the imagination of employees at all ranks and ask inspiring questions. They also need to help their organizations incorporate diverse perspectives, which spur creative insights, and facilitate creative collaboration by, for instance, harnessing new technologies. The participants shared tactics for enabling discoveries, as well as thoughts on how to bring process to bear on creativity without straitjacketing it. They pointed out that process management isn't appropriate in all stages of creative work; leaders should apply it thoughtfully and manage the handoff from idea generators to commercializers deftly. The discussion also examined the need to clear paths through bureaucracy, weed out weak ideas, and maximize the organization's learning from failure. Though points of view varied, the theories and frameworks explored advance the understanding of creativity in business and offer executives a playbook for increasing innovation.

Seeing Race and Seeming Racist? Evaluating Strategic Colorblindness in Social Interaction


One strategy practiced by many Whites to regulate the appearance of prejudice during social interaction is to avoid talking about race, or even acknowledging racial difference. Four experiments involving a dyadic task investigated antecedents and consequences of this tendency. Observed colorblindness was strategic in nature: Whites' acknowledgment of race was highly susceptible to normative pressure and most evident among individuals concerned with self-presentational aspects of appearing biased (Study 1). However, this tendency was often counterproductive, as avoiding race during interracial interaction predicted negative nonverbal behavior (Study 1), a relationship mediated by decreased capacity to exert inhibitory control (Study 2). Two studies examining White and Black observers' impressions of colorblind behavior revealed divergent assessments of actors' prejudice in situations where race was clearly relevant (Study 3) but convergent assessments when race was less relevant (Study 4). Practical and theoretical implications for interracial interaction are considered.

Households' Willingness to Pay for Public Goods: Evidence from Patagonia's Introduction of Organic Cotton Sportswear


To shed light on individuals' willingness to pay for "green" goods (i.e., goods that are supposed to have lower adverse environmental impacts either in production or in use), we study data from the introduction by Patagonia, Inc., of organic cotton sportswear in the mid 1990s. Patagonia, a maker of high-end outdoor wear, substituted organic cotton for conventionally grown cotton in all of its sportswear (i.e., casual clothing for travel and leisure) in 1996. We find that customers were willing to pay significant premiums for organic cotton garments although the organic cotton provided no demonstrable private incremental benefits to the customer.

Turbulent Firms, Turbulent Wages?


Has greater turbulence among firms fueled rising wage instability in the U.S.? Gottschalk and Moffitt [1994] find that rising earnings instability was responsible for one-third to one-half of the rise in wage inequality during the 1980s. These growing transitory fluctuations remain largely unexplained. To help fill this gap, this paper further documents the recent rise in transitory fluctuations in compensation and investigates its linkage to the concurrent rise in volatility of firm performance documented by Comin and Mulani [2006]. We find strong support for the hypothesis that rising high-frequency turbulence in the sales of large publicly traded U.S. firms over the past three decades has raised their workers' high-frequency wage volatility. The evidence comes from two datasets: the Panel Study of Income Dynamics (detailed longitudinal information on workers), and COMPUSTAT (detailed firm information, plus average wage and employment levels). Through controls and instrumental variable probes, we rule out straightforward compositional churning as an explanation for the link between firm sales and wage volatility. We also observe that the relationship between sales and wage volatility at the firm level is stronger since 1980, is present only in large companies, and is stronger in services than in manufacturing companies.

World Technology Lags


We present evidence on the differences in the intensity with which ten major technologies are used in 185 countries across the world. We do so by calculating how many years ago these technologies were used in the U.S. at the same intensity as they are used in the countries in our sample. We denote these time lags as technology usage lags and compare them with lags in real GDP per capita. We find that (i) technology usage lags are large, often comparable to lags in real GDP per capita, (ii) usage lags are highly correlated with lags in per-capita income, and (iii)usage lags are highly correlated across technologies. The productivity differentials between the state-of-the-art technologies that we consider and the ones they replace combined with the usage lags that we document, lead us to infer that technology usage disparities might account for a large part of cross-country TFP differentials.

Typosquatting: Unintended Adventures in Browsing—Cybercrime Gets Personal


"Typosquatting" is the practice of registering domain names, identical to or confusingly similar to trademarks and famous names, in hopes that users will accidentally request these sites-whereupon they will receive, typically, advertisements. This piece presents the basic typosquatting business model, based on my analysis of more than 80,000 typosquatting domain names. I analyze the advertising intermediaries that make typosquatting profitable, and I assess the legislation and litigation that are beginning to put a check on this practice.

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Evaluating the CEO: First Person


After Kaufman became a CEO, he was struck by how perfunctory the board was in its feedback on his performance. The chair of the compensation committee would pop by his office following the year-end board meeting, congratulate him on the company's making its numbers, and then hand him an envelope containing the details of his comp package before walking out the door. The entire exchange would last no more than 10 minutes. That sort of review was a big contrast from the intense evaluations Kaufman received as a senior executive—assessments based on input from many sources and on multiple dimensions of his performance. As chief executive, all of sudden his total worth was summed up in just three or four financial measures. Although CEOs should have autonomy, reducing performance management to only financial measures makes little sense. All the financial incentives in the world won't transform CEOs into better decision makers. And bad decisions can bring companies down. Boards have an obligation to shareholders to ensure that companies are led well, and the sooner they can spot problems with leaders' performance, the better. With that in mind, Kaufman encouraged Arrow Electronics, where he was CEO for 14 years, to adopt a formal process that obliged independent directors to talk to executives and observe operations firsthand. Directors considered CEO performance in five key areas: leadership, strategy, people management, operating metrics, and relationships with external constituencies. As a result, they picked up on problems Kaufman might not have noticed, provided counsel that made him a stronger leader—and avoided disasters along the way.

Early 20th Century Wholesale and Retail Networks in Argentina (Comercio y redes de comercialización mayoristas y minoristas en la Argentina de comienzos del siglo XX)


This article looks at wholesale and retail networks operating in Argentina in the early 20th century. Its first section describes the entrepreneurs involved in consumer product imports, while its second section discusses retail sector operations and transformations (particularly in rural areas). Overall, this article intends to depict the role and performance of Argentine trade intermediaries in the early years of the 20th century.

It's Time to Make Management a True Profession


In the face of the recent institutional breakdown of trust in business, managers are losing legitimacy. To regain public trust, management needs to become a true profession in much the way medicine and law have, argue Khurana and Nohria of Harvard Business School. True professions have codes, and the meaning and consequences of those codes are taught as part of the formal education required of their members. Through these codes, professional institutions forge an implicit social contract with society: Trust us to control and exercise jurisdiction over an important occupational category, and, in return, we will ensure that the members of our profession are worthy of your trust—that they will not only be competent to perform the tasks entrusted to them, but that they will also conduct themselves with high standards and great integrity. The authors believe that enforcing educational standards and a code of ethics is unlikely to choke entrepreneurial creativity. Indeed, if the field of medicine is any indication, a code may even stimulate creativity. The main challenge in writing a code lies in reaching a broad consensus on the aim and social purpose of management. There are two deeply divided schools of thought. One school argues that management's aim should simply be to maximize shareholder wealth; the other argues that management's purpose is to balance the claims of all the firm's stakeholders. Any code will have to steer a middle course in order to accommodate both the value-creating impetus of the shareholder value concept and the accountability inherent in the stakeholder approach.