First Look

September 12, 2006

How did Sun Microsystems and Dell Computer vanquish much larger competitors in the 1980s and 1990s? One factor was their ability to use an invested capital advantage to drive the returns of competitors below their cost of capital. In these examples, the capital advantage was derived from Sun and Dell's understanding of architectural innovation and adoption of a "small footprint" strategy, argue Professor Carliss Baldwin and former HBS Dean Kim Clark in a new working paper. "We describe a dynamic strategy that can be employed by firms capable of architectural innovation," write the authors. Other HBS faculty work published recently includes a case study updating the "Cola Wars" between Coke and Pepsi, a look at the conditions that motivate scientists to become entrepreneurs, and Harvard Business Review articles on strategies for managing "complementors" and rethinking political correctness.
— Sean Silverthorne

Working Papers

How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages


The empirical literature finds mixed evidence on the existence of positive productivity externalities in the host country generated by foreign multinational companies. We propose a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages, shedding light on this empirical ambiguity. In a small open economy, final goods production is carried out by foreign and domestic firms, which compete for skilled labor, unskilled labor, and intermediate products. To operate a firm in the intermediate goods sector, entrepreneurs must develop a new variety of intermediate good, a task that requires upfront capital investments. The more developed the local financial markets, the easier it is for credit constrained entrepreneurs to start their own firms. The increase in the number of varieties of intermediate goods leads to positive spillovers to the final goods sector. As a result financial markets allow the backward linkages between foreign and domestic firms to turn into FDI spillovers. Our calibration exercises indicate that a) holding the extent of foreign presence constant, financially well-developed economies experience growth rates that are almost twice those of economies with poor financial markets, b) increases in the share of FDI or the relative productivity of the foreign firm leads to higher additional growth in financially developed economies compared to those observed in financially under-developed ones, and c) other local conditions such as market structure and human capital are also important for the effect of FDI on economic growth.

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Architectural Innovation and Dynamic Competition: The Smaller "Footprint" Strategy


We describe a dynamic strategy that can be employed by firms capable of architectural innovation. The strategy involves using knowledge of the bottlenecks in an architecture together with the modular operator "splitting" to shrink the "footprint" of the firm's in-house activities. Modules not in the footprint are outsourced—module boundaries are redrawn and interfaces designed for this purpose. The result is an invested capital advantage, which can be used to drive the returns of competitors below their cost of capital. We explain how this strategy works and model its impact on competition through successive stages of industry evolution. We then show how this strategy was used by Sun Microsystems against Apollo Computer in the 1980s and by Dell against Compaq and other personal computer makers in the 1990s.

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Cases & Course Materials


Harvard Business School Case 606-114

A123Systems was a young company that was founded on basic materials science research at the Massachusetts Institute of Technology. A co-founder of the company, Yet-Ming Chiang, was a full professor at MIT and served as scientific adviser. Intellectual property based on the science, which offered a radical way to construct lithium-ion batteries that promised higher energy densities, was licensed from MIT. The concept for the company was based on laboratory demonstrations that the three components of battery cells could be selected and treated so that they would self-assemble (due to intrinsic molecular forces). This resulted in finer battery structures and better performance. Following 14 months of research and development, the company found that it required more time and resources than originally anticipated to take the self-assembled battery to market. However, additional IP for a new cathode material, which presented an intermediate market opportunity, had also been licensed from Chiang's lab at MIT. The new material had advantages over the incumbent electrode material: It met the criteria for self-assembly, and it could replace the electrode in the millions of lithium-ion batteries currently in production. The management team needed to decide whether to pursue the breakthrough self-assembly technology or move resources to commercialize the new electrode material and then return to the original breakthrough technology.

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Adrian Ivinson at the Harvard Center for Neurodegeneration and Repair

Harvard Business School Case 406-111

Adrian Ivinson is the director of Harvard Center for Neurodegeneration and Repair (HCNR), a not-for-profit research center at the Harvard Medical School (HMS). The center was started in late 2000 with a gift of $37.5 million from an anonymous donor. Its mandate was to conduct research that could lead to actual treatments for neurodegenerative disease (i.e., ALS, Parkinson's, Alzheimer's, MS, and Huntington's) and do so by encouraging collaboration among researchers in the HMS community. When Ivinson takes the helm in 2001, he finds a dysfunctional center with little organization or structure. In addition, he has little formal authority to make changes and he must navigate the complex culture of the HMS neurological research community as well as the HMS academic culture. Demonstrates Ivinson's efforts to develop HCNR as a catalyst for aligning scientific researchers in the HMS community by creating incentives for innovation and collaboration. Also, profiles the issues he faces as general manager at various stages of the organization's development—and how his style, priorities, and approach must change as the needs of the organization change. Provides an opportunity for action planning to address the major issues facing the HCNR at the end of 2005. Focuses on organizational culture, alignment, leadership style/fit, and change management.

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The Board of Directors at Morgan Stanley Dean Witter (A)

Harvard Business School Case 405-105

Examines the resignation of Philip Purcell as chairman and CEO of Morgan Stanley as a result of poor performance and cultural problems, as well as his relationship to the board of directors.

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Cola Wars Continue: Coke and Pepsi in 2006

Harvard Business School Case 706-447

Examines the industry structure and competitive strategy of Coca-Cola and Pepsi over 100 years of rivalry. New challenges in 2006 include boosting flagging carbonated soft drink (CSD) sales and finding new revenue streams. Both firms also began to modify their bottling, pricing, and brand strategies. They looked to emerging international markets to fuel growth and broaden their portfolios of alternate beverages like tea, juice, sports drinks, energy drinks, and bottled water. Coca-Cola and Pepsi-Cola had vied for the "throat share" of the world's beverage market. The most intense battles of the cola wars were fought over the $66 billion CSD industry in the United States, where the average American consumes 52 gallons of CSD per year. In a "carefully waged competitive struggle," from 1975 to 1995, both Coke and Pepsi had achieved average annual growth of around 10%, as both U.S. and worldwide CSD consumption consistently rose. This cozy situation was threatened in the late 1990s, however, when U.S. CSD consumption declined slightly before reaching what appeared to be a plateau. Considers whether Coke's and Pepsi's era of sustained growth and profitability was coming to a close or whether this apparent slowdown was just another blip in the course of a century of enviable performance. A rewritten version of an earlier case.

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e-Types A/S

Harvard Business School Case 606-118

A successful young design firm faces a difficult decision: whether to compromise its creative values to win a big job. The client brief is very conservative. The company is pretty sure it can win the design competition, but the design staff hates what they think they will have to do to win it. Business managers and "creatives" disagree on the appropriate course of action. In debating the decision, staff members confront fundamental issues about who they want to be as a firm and how firms that rely on creative talent should be managed. Includes color exhibits.

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Ghana: National Economic Strategy

Harvard Business School Case 706-497

Set in the year 2001, as President John Kufuor contemplates a national economic strategy following his election in the first democratic transfer of power in Ghana's history. Focuses on Ghana's long history of poor economic performance and intractable poverty, highlighting the challenges of economic development in Africa and in other low-income countries. Provides a brief political and economic history of Ghana, focusing on the Nkrumah era of 1957-1966, the World Bank and IMF-led structural reforms of the 1980s, and the continuation of reforms after the first democratic elections in 1992. Details Ghana's economic and political context and cluster performance in 2001 and summarizes initiatives taken by the Kufuor administration to promote development. Detailed historical economic and social data allow an evaluation of policy results.

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Inniskillin and the Globalization of Icewine

Harvard Business School Case 805-129

Deals with the growth of the icewine industry and follows Vincor International as it creates an international market for its Inniskillin Icewine—a luxury alcoholic beverage consumed as a dessert wine. Gives the history of the alcoholic beverage industry in Canada and details trends in the current global wine industry. Follows Roger Provost (HBS MBA 1980), chief marketing officer for Canadian-based Vincor, as he develops Inniskillin's initial marketing strategy within Canada. Goes on to detail Inniskillin's challenges as it enters other markets, initially through the travel retail distribution channel. Deals with issues in brand management, product development, and international marketing. Explores the opportunities and challenges facing luxury niche products in the global economy.

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The Determinants of Faculty Patenting Behavior: Demographics or Opportunities?


We examine the individual, contextual, and institutional determinants of faculty patenting behavior in a panel dataset spanning the careers of 3,884 academic life scientists. Using a combination of discrete time hazard rate models and fixed effects logistic models, we find that patenting events are preceded by a flurry of publications, even holding constant time-invariant scientific talent and the latent patentability of a scientist's research. Moreover, the magnitude of the effect of this flurry is influenced by context—such as the presence of coauthors who patent and the patent stock of the scientist's university. Whereas previous research emphasized that academic patenters are more accomplished on average than their non-patenting counterparts, our findings suggest that patenting behavior is also a function of scientific opportunities. This result has important implications for the public policy debate surrounding academic patenting.

Interorganizational Cooperation between Not-for-profit Organizations: A Relational Analysis


Recent years witnessed a notable increase in cooperative arrangements between not-for-profit organizations. Yet, despite the richness of the existing alliance literature in the for-profit sector, interorganizational cooperative arrangements between not-for-profit organizations are still understudied and undertheorized. This study addresses this gap and develops a theoretical background for further theoretical and empirical work on interorganizational cooperation between not-for-profits. We emphasize that for not-for-profits, unlike for-profits, neither inputs nor outputs are simple transactions, making both their needs and the boundaries they need to manage more complex. Importantly it is not the reasons of cooperation or the way they engage in those arrangements that differ; it is the mechanisms behind those arrangements. In explaining these mechanisms, we explore what a not-for-profit organization is and in which dimensions these organizations differ from their for-profit counterparts; why they might seek cooperative arrangements with other not-for-profits; with whom they are likely to engage in cooperative relationships; and how integrative these arrangements are likely to be. Overall, this study highlights the differences in motives and activities of not-for-profit organizations, and the need to develop additional theories to address those differences in explaining interorganizational arrangements between them.

The Structural Determinants of Aggressive Behavior on the NASCAR Circuit.


This article examines how competitive crowding affects the conduct of actors in a tournament. We develop three claims: (i) crowding from below, which measures the number of competitors capable of surpassing a given actor in a tournament-based contest, predisposes that actor to take risks; (ii) as a determinant of risky conduct, crowding from below has a stronger influence than crowding from above, which captures the opportunity to advance in rank; and (iii) the effect of crowding from below is strongest after the rank ordering of the actors in a tournament becomes relatively stable, which focuses contestants' attention on proximately ranked competitors.

The empirical context we examine is the National Association for Stock Car Auto Racing (NASCAR). Using panel data on NASCAR's Winston Cup Series, we model the probability that a driver crashes his car in a race. Our findings are that drivers crash their vehicles with greater frequency when their positions are increasingly at risk of displacement by their nearby, lower ranked counterparts; the effect of crowding from below exceeds that of crowding from above; and the effect of crowding by lower ranked contestants is greatest when there is relatively little race-to-race churn in the rank ordering of drivers.

Self-Centered and Other-Regarding Behavior in the Solidarity Game


This paper revisits the experiment on the solidarity game by Selten and Ockenfels (1998). We replicate the basic design of the solidarity game and extend it in order to test the robustness of the 'fixed total sacrifice' effect and the applied strategy method. Our results only partially confirm the validity of the fixed total sacrifice effect. In a treatment with constant group endowment rather than constant winner endowment the predominance of 'fixed total sacrifice' behavior is replaced by 'fixed relative gift' behavior. Additionally, we introduce a measure of personality characteristics and compare its specific components with pro-social gift behavior in our experiments. We do not find correlations between actual gift behavior and measures of empathy-driven pro-social behavior used in social science.

Gender Difference in Patenting in the Academic Life Sciences


We analyzed longitudinal data on academic careers and conducted interviews with faculty members to determine the scope and causes of the gender gap in patenting among life scientists. Our regressions on a random sample of 4,227 life scientists over a 30-year period show that women faculty members patent at about 40% of the rate of men. We found that the gender gap has improved over time but remains large.

Rethinking Political Correctness


Legal and cultural changes over the past 40 years ushered unprecedented numbers of women and people of color into companies' professional ranks. Laws now protect these traditionally underrepresented groups from blatant forms of discrimination in hiring and promotion. Meanwhile, political correctness has reset the standards for civility and respect in people's day-to-day interactions. Despite this obvious progress, the authors' research shows that political correctness is a double-edged sword. Although it has helped many employees feel unlimited by their race, gender, or religion, the PC rule book can hinder people's ability to develop effective relationships across race, gender, and religious lines. Companies need to equip workers with skills—not rules—for building these relationships. The authors offer the following five principles for healthy resolution of the tensions that commonly arise over differences: Pause to short-circuit the emotion and reflect; connect with others, affirming the importance of relationships; question yourself to identify blind spots and discover what makes you defensive; get genuine support that helps you gain a broader perspective; and shift your mind-set from one that says, "You need to change" to one that asks, "What can I change?" When people treat their cultural differences—and related conflicts and tensions—as opportunities to gain a more accurate view of themselves, one another, and the situation, trust builds and relationships become stronger. Leaders should put aside the PC rule book and instead model and encourage risk taking in the service of building the organization's relational capacity. The benefits will reverberate throughout every dimension of the company's work.

Financial Contracting in Biotech Strategic Alliances


We analyze 125 strategic alliance contracts, all of which concern early-stage research at small, biotechnology R&D companies. Staged investment is ubiquitous, but solutions to agency problems vary. The cycle of equity participation in alliances resembles what we observe in venture capital contracts: they involve convertible equity and sometimes contain anti-dilution provisions, warrants, and board seats. Contracts rights vary explicitly with the size of the equity stake. Contracts contain explicit provisions linking equity participation to subsequent IPOs and contain clauses designed to insulate both parties from multi-tasking problems. Contracts often specify provisions that are unobservable or difficult to verify, suggesting a role for expected litigation as an enforcement tool in contract design.

Network Effects in the Governance of Strategic Alliances in Biotechnology


Strategic alliances are commonplace in the biotechnology sector. We posit that the stock of prior alliances between participants in the biotech industry produces a network—a communications infrastructure established by past transactions—through which information is transmitted. We argue that this network serves as a governance mechanism that substitutes for other forms of control in inter-firm transactions. To test our hypothesis, we examine how equity participation and the amount of funding pledged in strategic alliances vary with two features of the way alliance participants are positioned in the network of past deals: (i) centrality, a measure of how deeply embedded a firm is in the alliance network; and (ii) proximity, a measure of how close two counterparties are to one another in the network. The results establish that the alliance network mitigates holdup problems in interfirm transactions.

When Do Scientists Become Entrepreneurs? The Social Structural Antecedents of Commercial Activity in the Academic Life Sciences


The authors examine the conditions prompting university-employed life scientists to become entrepreneurs, defined to occur when a scientist (1) founds a biotechnology company, or (2) joins the scientific advisory board of a new biotechnology firm. This study draws on theories of social influence, socialization, and status dynamics to examine how proximity to colleagues in commercial science influences individuals' propensity to transition to entrepreneurship. To expose the mechanisms at work, this study also assesses how proximity effects change over time as for-profit science diffuses through the academy. Using adjusted proportional hazards models to analyze case-cohort data, the authors find evidence that the orientation toward commercial science of individuals' colleagues and coauthors, as well as a number of other workplace attributes, significantly influences scientists' hazards of transitioning to for-profit science.

With Friends Like These: The Art of Managing Complementors


Intel and Microsoft neither buy from nor sell to each other directly, but they are undeniably in business together. They are probably the world's most widely known pair of complementors—companies that independently provide complementary products or services to mutual customers. Complementors increase the value of each other's offerings and the size of the total market. So it's not surprising that so many just assume that their interests are aligned. Nothing could be further from the truth. Discord can develop in many areas, such as pricing, technology, standards, and control of the market—both in terms of which company has the most influence over customers and which one gets the biggest slice of the pie. The issue of pricing perfectly captures this tension. Ideally, you'd like to price your goods high while your complementors price theirs low. Airlines, for instance, would be happy to see vacation lodgings go for a song, while destination resorts could raise rates and still fill their rooms if customers could fly there for free. The first step in managing relationships with complementors is to develop a deep understanding of their economics, their strategies and goals, their existing capabilities, their incentives for cooperation, and any potential areas of conflict. Then, to gain the upper hand, companies can use a variety of tools that fall into two main categories: hard power (inducements or coercion to get what you want) and soft power (persuasion through indirect means to get others to want what you want). The authors explain how to build both hard power and soft, illustrate the strengths and limits of each, and offer guidelines for choosing one over the other. Conflict among complementors is inevitable, but together, hard and soft power can help companies manage the dark side of complementor relationships and take full advantage of the opportunities that cooperation should create.