First Look

September 9, 2008

Are corporations influenced to action when they are given a poor environmental rating by an independent agency? Recent research by Harvard Business School's Michael W. Toffel and colleague Aaron K. Chatterji looks at how some 600 U.S. firms responded to ratings pressure. "While negative ratings may 'shame' firms that are performing poorly, the threat of regulatory action and the presence of 'low hanging fruit' are important drivers of how firms respond to information-based incentives," the researchers report. Also released this week, a case looking at how a Sun Microsystems exec handled tension in his globally dispersed team solving (or not) a customer emergency, and another case on how the CEO of the popular Japanese social networking site Mixi is deciding between two varied strategic options to take the site forward.
— Sean Silverthorne

Working Papers

How Firms Respond to Being Rated


While many independent rating systems are designed primarily to help buyers overcome information asymmetries when making purchasing decisions, we investigate whether these same ratings might also influence the companies being rated. We focus on corporate environmental ratings, the primary purpose of which is to help investors select "socially responsible" and avoid "socially irresponsible" companies. We hypothesize that company ratings are particularly likely to spur responses by firms that receive poor ratings, especially those that face lower cost opportunities to improve and that operate in highly regulated industries. Our empirical analysis examines how nearly 600 firms in the United States respond to corporate environmental ratings issued by a prominent independent social rating agency and avoids selection issues by taking advantage of a natural experiment that arose when the agency expanded the scope of its ratings. We find empirical support for our hypotheses and present implications for managers of rated companies and of private and public rating agencies. While negative ratings may "shame" firms that are performing poorly, the threat of regulatory action and the presence of "low hanging fruit" are important drivers of how firms respond to information-based incentives.

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Deterring Online Advertising Fraud Through Optimal Payment in Arrears


I develop a screening model with delayed payments and probabilistic delayed observation of agents' types. I derive conditions in which a principal can set its payment delay to deter rogue agents and to attract solely or primarily good-type agents. Through the savings from excluding rogue agents, the principal can increase its profits while offering increased payments to good agents. I apply the model to online advertising markets widely perceived to be a hotbed for fraud. I estimate that a leading affiliate network could have invoked an optimal payment delay to eliminate 71% of fraud without decreasing profit.

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Secrets of the Academy: The Drivers of University Endowment Success

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The Contingent Nature of Public Policy and Growth Strategies in the Early Twentieth-Century U.S. Banking Industry


While effects of public policy are one of the foundations of organizational theory, less explored is how these effects may depend on other external environmental factors. We focus on how policy is a necessary, but not sufficient, condition to understand the growth of banking in the U.S., 1896-1978. Three characteristics of banks-simultaneous production and distribution, pooled intra-organizational coordination, and agency relationships—result in a trade-off between centralized and dispersed growth strategies. Which strategy prevails depends on how policy—enabling branching interacts with technological, economic, and cultural environments. Our findings contribute to understanding the contingent effects of policy on organizations and the rise of large corporations in the twentieth century.

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Over-reaction to Demand Changes Due to Subjective and Quantitative Forecasting


In this paper, we study managers' errors in decision making for inventory replenishment and how these errors affect their inventory system. In particular, primarily for its expected relationship with the bullwhip effect, we focus on the error of the over-reaction to demand changes and a common contributor of decision-making biases: forecasting of demand. By over-reaction we mean that the manager over (under) orders when seeing a change in demand. We show that our representative manifestations of forecasting—managers' subjective response to demand signals and the use of simple quantitative forecasting techniques—share similar consequences: both can result in an increase in internal costs and in the uncertainty and volatility of the system's replenishment orders. Further results of this paper provide argument and thus incentive for mitigating the bullwhip effect by relating it to decision making that would help reduce costs for the manager as well.

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Cases & Course Materials

Affinity Labs, Inc.

Harvard Business School Case 809-019

In November 2006, Chris Michel left, which he founded in 1999, to start Affinity Labs, a global network of online communities. That month, Michel raised a Series A round of venture funding and established a partnership with Monster, which he had sold to. Within its first year of operations, Affinity Labs launched eight vertical portals including PoliceLink, NursingLink, TechCommunity, and IndiaOn. While the company was well ahead of its original plan to release four portals in 2007, Michel still faced a number of challenges. He had learned a great deal from and Affinity Labs' first launches, but in the case of each new community was faced with how best to construct the vertical and attract a sufficiently large audience. While the model seemed highly scalable because each vertical used the same core technology, every sector had its unique features. In the fall of 2007, executives from Monster opened up a dialogue with Michel about selling the company or expanding their relationship. Michel wondered if the time was right to sell or if he should grow Affinity Labs further with the hope of creating a company that could command the high valuations seen recently by a number of social networking concerns.

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AMD Dresden: Copy Inexactly!

Harvard Business School Case 609-004

The establishment and growth of AMD's Dresden, Germany manufacturing site illustrates how processes develop in an organization and how those processes get institutionalized into a unique culture. Located in the Free State of Saxony in the eastern part of Germany (the former GDR), AMD's investment in the region leverages a historic and rather unique skill base in engineering and the sciences and catalyzes the rebirth and growth of one of the largest semiconductor clusters in Europe. Contrary to conventional wisdom in the semiconductor industry, the Dresden team only copied from its home corporate locations in the United States those processes and practices that it felt would work in Germany rather than follow a "copy exactly" strategy. Dresden becomes AMD's sole worldwide manufacturing location for microprocessors, but now the company is faced with the question of whether it can successfully transplant the highly successful culture to other global locations because of favorable investment incentives.

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Harvard Business School Case 608-174

The case explores the rapid and highly effective turnaround at AREVA's transmission and distribution (T&D) business by focusing on the division's operations. The division was struggling in 2004 when newly-appointed CEO Philippe Guillemot and his team improved performance substantially by focusing on four levers- industrial footprint realignment, competitive sourcing, process efficiency, and a competitive product offering. In 2008, the case challenges students to identify the best path forward. How can the progress achieved from 2004 to 2007 be sustained? AREVA T&D hopes to surpass ABB and Siemens in sales and profitability by focusing on superior product offerings, through "customer intimacy" (e.g., involving customers in new product development) and developing a reputation for environmentally friendly behavior. What is the role of operations management in this context?

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Ashdown Contracting

Harvard Business School Case 808-120

Ashdown's "growth" plan called for Mustafa Khalaf to leave his job as Chief Operating Officer (COO) of Ashdown Contracting and to focus his attention on the growth of a separate business entity, Ashdown Pipeline, where Ashdown believed the greatest potential for the future existed. It seemed odd to Mustafa that finding a financial partner capable of providing tens, even hundreds of millions of dollars to reshape an industry was proving to be remarkably easy, while finding a single individual capable of replacing him in his old job was proving to be remarkably hard. As he flagged down a cab, Mustafa's mind wandered back to the challenge that he had been grappling with for many months: how to find his replacement as COO at Ashdown Contracting.

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Customer Management Strategy in Business Markets

Harvard Business School Note 503-060

Describes in detail customer management strategies in business markets, including selection decisions, design and management of customer relationship strategies, monitoring the health of customer relations, and linking the vendors' customer management effort to customer profitability.

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Delaware Worldwide Corporation

Harvard Business School Case 205-047

Discusses the bankruptcy reorganization process, with an emphasis on valuation and capital structure. Serves as the basis for a bankruptcy reorganization game that has been used for many years in Creating Value Through Corporate Restructuring, a second-year finance course. The game is played in Chapter 11, after previous efforts to complete an out-of-court restructuring failed. Students are divided into five claimholder groups—secured debt holders, unsecured senior debt holders, etc.—and these groups, under the supervision of a bankruptcy judge, must negotiate a satisfactory plan of reorganization or suffer significant incremental losses through liquidation. Provides the background information with respect to Delaware's history, prospects, and financial condition necessary to play the game. A rewritten version of an earlier case.

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Divisive Reorganizations

Harvard Business School Note 209-042

The note (1) describes "spin-offs" and "split-offs," (2) summarizes the requirements to qualify for tax postponement, and (3) identifies the public policy considerations justifying this favorable treatment.

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elBulli: The Taste of Innovation

Harvard Business School Case 509-015

Ferran Adriá, chef at elBulli, the highest-ranked restaurant in the world for two consecutive years, faces two related decisions. First, Adriá and his team must continue to develop new and different dishes for the ground-breaking cuisine at elBulli to guarantee a continuous stream of innovation, the cornerstone of the restaurant's success. In addition, they are also faced with the challenge of growing the business, exploring whether the core concepts from elBulli--this "taste of innovation"--can be applied to domains ranging from consulting to fast food. The case walks readers through an evening at elBulli by using the rave reviews of former patrons to capture the full experience, from the long trip required to get to the restaurant, to the tour, to descriptions of the meal itself.

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Greg James at Sun Microsystems, Inc.: Managing a Global Team

Harvard Business School Case 409-003

Greg James, a global manager at Sun Microsystems, Inc., sets out to meet with his entire 43-member customer implementation team spread across India, France, the United Arab Emirates, and the United States of America to resolve a dire customer system outage as required by a service agreement. Rather than finding a swift resolution to the rapidly escalating customer situation that motivated his trip, he finds himself facing distributed work, global collaboration, conflict, and management issues that are threatening to unravel his team.

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In-Vitro Fertilization: Outcomes Measurement

Harvard Business School Case 709-403

As of 2007, there were very few examples of widespread measurement and reporting of health outcomes, a critical quality measure. In-vitro fertilization clinics have been required to report their patient's health outcomes since 1995. The protagonist of the case, Dr. James Goldfarb, faces a number of challenges. As the medical director of a nationally-renowned fertility program at the Cleveland Clinic, he must run an efficient and effective practice that draws patients from both the surrounding area and from around the world. As a leader of the Society for Assisted Reproductive Technology, he must contribute toward the continuing evolution of the practice of in-vitro fertilization and ensure that the outcome measurement system is creating proper incentives and delivering timely, accurate, and useful information to patient, physicians, and researchers.

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Launching Telmore (A)

Harvard Business School Case 708-414

When the Danish mobile phone service provider Telmore entered the market in October 2000, few people took notice. Its business model was not perceived as particularly aggressive or threatening to the industry. Less than three years later, Telmore's creative adaptation of the well-known, no-frills model of the airline industry had taken the Danish market by storm. With a combination of rock-bottom prices, simplicity, and a focus on customer satisfaction backed by a unique low-cost infrastructure, Telmore's business model, with its powerful virtuous cycles, proved to be the most successful innovation the industry had seen in many years.

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Harvard Business School Case 709-413

Kasahara, the founder and CEO of mixi, the most successful Japanese on-line social network, is deciding between two strategic options: (i) B2C or (ii) C2C to leverage the power of the social network. In the B2C option, mixi would become a portal for on-line shopping for both digital content and tangible goods and charge the business sellers a fee. In the C2C option, mixi would facilitate exchanges between mixi's members through on-line flea markets or auctions and charge the members for successful transactions. In choosing between the two options he has to consider other upstart networks, particularly in the field of mobile social networking.

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Philipp Justus at eBay Germany (C)

Harvard Business School Supplement 409-029

This case traces the development of eBay Germany, eBay Inc., and the career of eBay Germany's first country manager, Philipp Justus. The case covers from 2000 through the fall of 2007. This case details how eBay Germany, once a small start-up, became one of eBay's most successful locations. The case reveals how Justus added seasoned leaders and structure to the group, while allowing for improvisation. The case also traces Justus's career, as he moved to running eBay Europe and ultimately, the auctions group, which took him to headquarters. Like eBay Germany, eBay itself grew tremendously, in part from acquisitions like PayPal and Skype. But, growth in core areas, like auctions, had slowed. This case explains how eBay Inc. and eBay Germany tried to keep their "secret sauce."

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Unmasking Manly Men


This article reports on a case study of offshore oil platforms—a workplace that has traditionally rewarded men for masculine displays of prowess and interactions centered on proving masculinity—in which such displays and interactions were absent. In this case, organizational features designed to enhance safety and effectiveness had the unintended effect of changing how men enacted their masculine identities at work. Rather than seeking to garner masculinity credentials, these workers engaged in mutual expressions of vulnerability: they acknowledged their physical limitations, learned from their mistakes, and attended to their own and others' emotions.

Loss Aversion, Diminishing Sensitivity, and the Role of Experience in Repeated Decisions.


Three experiments are presented that explore the assertion that loss aversion and diminishing sensitivity drive the effect of experience on choice behavior. The experiments are focused on repeated choice tasks where decision makers choose repeatedly between alternatives and get feedback after each choice. Experiments 1a and 1b show that behavioral tendencies that were previously interpreted as indications of loss aversion in decisions from experience are better described as products of diminishing sensitivity to absolute payoffs. Experiment 2 highlights a nominal magnitude effect: A decrease in the magnitude of the nominal payoffs eliminates the evidence for diminishing sensitivity. These and related previous results can be captured with a model that assumes reliance on small samples of subjective experiences and an increase in diminishing sensitivity with payoff variability.


From Clusters to Cluster-Based Economic Development


Over the last decades, changes in the global economy and the emergence of Global Value Chains (GVCs) have raised the interest in understanding the specific conditions and cross-company interactions within and across locations. For companies, the need to choose the right location for specific activities moved from an operational to a strategic issue. For countries, regions and cities, competition raised the stakes of understanding how to improve productivity and attract firms in specific fields beyond providing low factor costs and subsidies. Many countries, from natural-resource-rich, to transition economies, to developed countries have launched competitiveness policies and cluster initiatives involving various stakeholders. The paper addresses how clusters can be leveraged for economic policy and what the role of different stakeholders in this process is. This paper summarizes the cluster concept, focusing on the main theoretical framework and on recent empirical findings and discusses key pillars of a cluster-based economic policy approach. The paper concludes with an application of the concept to resource-rich, oil-dependent economies.