First Look

July 19, 2016

Among the highlights included in new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

What happens to white-collar criminals?

Male white-collar criminals are treated more leniently than female perpetrators, a new research paper concludes. In addition, “punishment severity is significantly lower for senior executives, for perpetrators of crimes that do not directly steal from the company, and at smaller companies,” conclude researchers Paul Healy and George Serafeim. Their working paper is titled Who Pays for White-Collar Crime?

Has Walmart reached the end of its run?

A new case study looking at Walmart’s dominant run in retail joins CEO Doug McMillon in 2015 as he ponders how to get the company back on track. “Many feared that this was the end of the 50-plus year inexorable rise of Walmart,” note case authors John R. Wells and Gabriel Ellsworth. Buy the case study.

The real story behind Kodak’s fade

Kodak’s demise is often Example No. 1 trotted out to demonstrate the consequences of companies that become too reliant on one product or technology. Willy C. Shih, a former Kodak executive and now a professor at Harvard Business School, offers a different perspective in the summer issue of MIT Sloan Management Review. “Kodak suffered from a technology transition in which it lost the benefits of a learning curve to a general-purpose technology platform where there were no entry barriers,” Shih writes. “It also suffered from difficulty in scaling down its traditional business as well as partners in its ecosystem whose interests were not aligned.”

A complete list of new research and publications from Harvard Business School faculty follows.

— Sean Silverthorne
 
  • in press
  • Journal of Systems and Software

Technical Debt and System Architecture: The Impact of Coupling on Defect-related Activity

By: MacCormack, Alan, and Daniel J. Sturtevant

Abstract—Technical debt is created when design decisions that are expedient in the short-term increase the costs of maintaining and adapting this system in future. An important component of technical debt relates to decisions about system architecture. As systems grow and evolve, their architectures can degrade, increasing maintenance costs and reducing developer productivity. This raises the question if and when it might be appropriate to redesign (“refactor”) a system, to reduce what has been called “architectural debt.” Unfortunately, we lack robust data by which to evaluate the relationship between architectural design choices and system maintenance costs, and hence to predict the value that might be released through such refactoring efforts. We address this gap by analyzing the relationship between system architecture and maintenance costs for two software systems of similar size but with very different structures: one has a “Hierarchical” design, the other has a “Core-Periphery” design. We measure the level of system coupling for the 20,000+ components in each system and use these measures to predict maintenance efforts or “defect-related activity.” We show that in both systems, the tightly coupled Core or Central components cost significantly more to maintain than loosely coupled Peripheral components. In essence, a small number of components generate a large proportion of system costs. However, we find major differences in the potential benefits available from refactoring these systems, related to their differing designs. Our results generate insight into how architectural debt can be assessed by understanding patterns of coupling among components in a system.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51343

  • in press
  • Journal of Experimental Psychology: General

Experience Theory, or How Desserts Are Like Losses

By: Martin, Jolie M., Martin Reimann, and Michael I. Norton

Abstract—While many experiments have explored risk preferences for money, few have systematically assessed risk preferences for everyday experiences. We propose a conceptual model and provide convergent evidence from seven experiments that, in contrast to a typical “zero” reference point for monetary gambles, reference points for experiences that are set at more extreme outcomes, leading to concave utility for negative experiences but convex utility for positive experiences. As a result, people are more risk-averse towards negative experiences, such as eating disgusting foods—as for monetary gains—but more risk-seeking towards positive experiences, such as eating desserts—as for monetary losses. These risk preferences for experiences are robust to different methods of elicitation.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51381

  • Summer 2016
  • MIT Sloan Management Review

The Real Lessons From Kodak's Decline

By: Shih, Willy C.

Abstract—Eastman Kodak is often mischaracterized as a company whose managers didn't recognize soon enough that digital technology would decimate its traditional business. However, what really happened at Kodak is much more complicated—and instructive. Kodak suffered from a technology transition in which it lost the benefits of a learning curve to a general-purpose technology platform where there were no entry barriers. It also suffered from difficulty in scaling down its traditional business as well as partners in its ecosystem whose interests were not aligned.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=51375

Shareholder Activism on Sustainability Issues

By: Grewal, Jody, George Serafeim, and Aaron Yoon

Abstract—Shareholder activism on sustainability issues has become increasingly prevalent over the years, with the number of proposals filed doubling from 1999 to 2013. We use recent innovations in accounting standard setting to classify 2,665 shareholder proposals that address environmental, social, and governance (ESG) issues as financially material or immaterial, and we analyze how proposals on material versus immaterial issues affect firms’ subsequent ESG performance and market valuation. We find that 58% of the shareholder proposals in our sample are filed on immaterial issues. We document that filing shareholder proposals is effective at improving the performance of the company on the focal ESG issue, even though such proposals nearly never received majority support. Improvements occur across both material and immaterial issues. Proposals on immaterial issues are associated with subsequent declines in firm valuation while proposals on material issues are associated with subsequent increases in firm value. We show that companies increase performance on immaterial issues because of agency problems, low awareness of the materiality of ESG issues, and attempts to divert attention from poor performance on material issues.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51379

Who Pays for White-Collar Crime?

By: Healy, Paul, and George Serafeim

Abstract—Using a proprietary dataset of 667 companies around the world that experienced white-collar crime, we investigate what drives punishment of perpetrators of crime. We find a significantly lower propensity to punish crime in our sample, where most crimes are not reported to the regulator, relative to samples in studies investigating punishment of perpetrators in cases investigated by U.S. regulatory authorities. Punishment severity is significantly lower for senior executives, for perpetrators of crimes that do not directly steal from the company, and at smaller companies. While economic reasons could explain these associations, we show that gender and frequency of crimes moderate the relation between punishment severity and seniority. Male senior executives and senior executives in organizations with widespread crime are treated more leniently compared to senior female perpetrators or compared to senior perpetrators in organizations with isolated cases of crime. These results suggest that agency problems could partly explain punishment severity.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51341

Abstract—Worker rights advocates seeking to improve labor conditions in global supply chains have engaged in private political strategies prompting transnational corporations (TNCs) to adopt codes of conduct and monitor their suppliers for compliance, but it is not clear whether organizational structures established by TNCs to protect their reputations can actually raise labor standards. We extend the literature on private politics and organizational self-regulation by identifying several conditions under which codes and monitoring are more likely to be associated with improvements in supply chain working conditions. We find that suppliers are more likely to improve when they face external compliance pressure in their domestic institutional environment, when their buyers take a cooperative approach to monitoring, and when their auditors are highly trained. We find, further, that a cooperative approach to monitoring enhances the impact of auditor training, and that auditor training has a greater impact on improvement when coupled with a cooperative approach than with external compliance pressures. These findings suggest key considerations that should inform the design and implementation of monitoring strategies aimed at improving conditions in global supply chains as well as theory and empirical research on the organizational outcomes of private political activism for social change.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51347

The Costs of Sovereign Default: Evidence from Argentina

By: Schreger, Jesse, and Benjamin Hebert

Abstract—We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. We find that a 10% increase in the probability of default causes a 6% decline in the value of Argentine equities and a 1% depreciation of a measure of the exchange rate. We examine the channels through which a sovereign default may affect the economy.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=51376

  • Harvard Business School Case 516-060

The Climate Corporation

Climate Corporation is a San Francisco–based data analytics company focused on agricultural applications. It was acquired by Monsanto in 2013. In 2015, Climate's decision support platform was used on 75 million acres of farmland in the U.S.; however, most of those acres were "free" acres. To build a viable business, Climate had to convince farmers to subscribe to and pay for premium offerings. The case describes Climate's technology approach, product offerings, marketing plans, and the competitive environment for "digital agriculture."

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/516060-PDF-ENG

  • Harvard Business School Case 216-074

Estimating the Equity Risk Premium

No abstract available.

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https://cb.hbsp.harvard.edu/cbmp/product/216074-PDF-ENG

  • Harvard Business School Case 316-156

Business and the Building of Inclusive Institutions

No abstract available.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/316156-PDF-ENG

In early 2010, senior partners at Warburg Pincus met to review a report on Bausch & Lomb Incorporated, the firm's largest investment at the time. Warburg Pincus had led a group of investors in acquiring Bauch & Lomb on October 26, 2007, taking the company private and becoming its largest and controlling shareholder. Since the acquisition, there had been significant progress at Bausch & Lomb through changes in senior leadership and in its business model. But, shortly after the second anniversary of the investment, the senior partners were beginning to question whether the depth and pace of change was enough. They had some tough decisions to make.

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/216021-PDF-ENG

  • Harvard Business School Case 216-077

Trian Partners and DuPont (A)

No abstract available.

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https://cb.hbsp.harvard.edu/cbmp/product/216077-PDF-ENG

  • Harvard Business School Case 216-078

Trian Partners and DuPont (B)

No abstract available.

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https://cb.hbsp.harvard.edu/cbmp/product/216078-PDF-ENG

  • Harvard Business School Case 716-426

The Inexorable Rise of Walmart? 1988–2016

In October 2015, Walmart surprised investors by announcing that it expected flat sales growth for 2015 and growth of only 3% to 4% over the coming three years. Profits would also fall due to significant investments in people and technology. The company’s stock price dropped 10% on the news, the largest one-day decline since 1998. In February 2016, Walmart reported that revenues for 2015 had dropped 0.7% to $482.1 billion, the first decline in Walmart’s history. The company also downgraded its sales forecast for the coming year, suggesting sales would now be flat. Meanwhile, online retailer Amazon was growing rapidly and, despite being less than one-quarter of the size of Walmart, now boasted a higher market capitalization. Moreover, in April 2016, Alibaba of China announced that it had passed Walmart in global sales to become the biggest retail platform in the world. To add to Walmart’s woes, in the United States traditional dollar discount stores and convenience outlets were gaining ground, and wage rises were putting pressure on profits. Meanwhile, international markets continued to underperform. Indeed, some analysts had suggested that Walmart retreat to its U.S. home base to improve performance. Many feared that this was the end of the 50+ year inexorable rise of Walmart. However, CEO Doug McMillon remained determined to get the company back on track and vowed to eschew short-term profits and invest in the future. Investors were not impressed. They had waited a long time for improvements; in 2015, Walmart generated three times the sales and profits it had achieved in 1999, and yet the stock price had barely changed. Patience was running out.

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https://cb.hbsp.harvard.edu/cbmp/product/716426-PDF-ENG

  • Harvard Business School Case 716-446

IC Group A/S

IC Group owned several of Scandinavia's leading premium fashion brands. How should it respond to the decline of its primary wholesale distribution channels (independent fashion boutiques and department stores)? Should it open more physical stores or focus on e-commerce? Where should the Group focus its international expansion? How could it best leverage its operating platform to drive the profitability of its brands? Should it acquire existing brands or build new ones itself? In short, what should its "omni-channel retailing" strategy be?

Purchase this case:
https://cb.hbsp.harvard.edu/cbmp/product/716446-PDF-ENG