First Look

May 16, 2017

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

Billion-dollar choices at GE Capital

A new case study joins GE Capital CEO Keith Sherin as he “faced a decision on which hinged billions of dollars and the fate of one of America’s most storied companies.” In GE Capital After the Crisis, Sherin contemplates whether the company should be spun apart or left to stay the course. The case was written by John Coates, John Dionne, and David S. Scharfstein.

Mental models and strategy

The new working paper Rationalizing Outcomes: Mental-Model-Guided Learning in Competitive Markets explores how mental models affect the analysis of dynamic strategic interactions. “We find that incorrect mental models can easily ‘rationalize’ market outcomes and shape how a firm and its rival learns," according to authors Anoop R. Menon and and Dennis Yao.

Revisiting agency theory

Formulated in the 1970s, agency theory says the primary goal of company management is to serve the interest of shareholders, even if those interests are against the long-term interests of the company. Joseph L. Bower and Lynn S. Paine argue in a Harvard Business Review article that shareholders do not face the accountability problems that corporate officers do. Read The Error at the Heart of Corporate Leadership.

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

  • May–June 2017
  • Harvard Business Review

Neurodiversity as a Competitive Advantage

By: Austin, Robert D., and Gary P. Pisano

Abstract—Many people with neurological conditions such as autism spectrum disorder and dyslexia have extraordinary skills, including those in pattern recognition, memory, and mathematics. Yet they often struggle to fit the profiles sought by employers. A growing number of companies, including SAP, Hewlett Packard Enterprise, and Microsoft, have reformed their HR processes in order to access neurodiverse talent—and are seeing productivity gains, quality improvement, boosts in innovative capabilities, and increased employee engagement as a result. The programs vary but have seven major elements in common. Companies should 1) team with governments or nonprofits experienced in working with people with disabilities, 2) use noninterview assessment processes, 3) train other workers and managers in what to expect, 4) set up a support system, 5) tailor methods for managing careers, 6) scale the program, 7) mainstream the program. The work for managers will be harder, but the payoff to companies will be considerable: access to more of their employees’ talents, along with diverse perspectives that will help them compete.

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  • May–June 2017
  • Harvard Business Review

The Error at the Heart of Corporate Leadership

By: Bower, Joseph L., and Lynn S. Paine

Abstract—Agency theory, a new model of governance promulgated by academic economists in the 1970s, is behind the idea that corporate managers should make shareholder value their primary concern and that boards should ensure they do. The theory regards shareholders as owners of the corporation—but raises grave accountability problems: shareholders have no legal duty to protect or serve the companies whose shares they own; they are shielded by the doctrine of limited liability from legal responsibility for those companies’ debts and misdeeds; they may buy and sell shares without restriction and are required to disclose their identities only in certain circumstances; and they tend to be physically and psychologically distant from the companies’ activities. Joseph Bower and Lynn Paine examine the agency-based model’s foundations and flaws and its implications for companies before proposing an alternative model that would have at its core the health of the enterprise rather than near-term returns to its shareholders. Their model would refocus companies’ attention to innovation, strategic renewal, and investment in the future.

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Digital Labor Markets and Global Talent Flows

By: Horton, John, William R. Kerr, and Christopher Stanton

Abstract—Digital labor markets are rapidly expanding and connecting companies and contractors on a global basis. We review the environment in which these markets take root, the micro- and macro-level studies of their operations, their ongoing evolution and recent trends, and perspectives for undertaking research with micro-data from these labor platforms. We undertake new empirical analyses of Upwork data regarding 1) the alignment of micro- and macro-level approaches to disproportionate ethnic-connected exchanges on digital platforms, 2) gravity model analyses of global outsourcing contract flows and their determinants for digital labor markets, and 3) quantification of own- and cross-country elasticities for contract work by wage rate. Digital labor markets are an exciting frontier for global talent flows and are growing rapidly in importance.

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Abstract—A key aspect of the governance process inside organizations and markets is the measurement and disclosure of important metrics and information. In this chapter, we examine the effect of sustainability disclosure regulations on firms’ disclosure practices and valuations. Specifically, we explore the implications of regulations mandating the disclosure of environmental, social, and governance (ESG) information in China, Denmark, Malaysia, and South Africa using differences-in-differences estimation with propensity score matched samples. We find that relative to propensity score matched control firms, treated firms significantly increased disclosure following the regulations. We also find increased likelihood by treated firms of voluntarily receiving assurance to enhance disclosure credibility and increased likelihood of voluntarily adopting reporting guidelines that enhance disclosure comparability. These results suggest that even in the absence of a regulation that mandates the adoption of assurance or specific guidelines, firms seek the qualitative properties of comparability and credibility. Instrumental variables analysis suggests that increases in sustainability disclosure driven by the regulation are associated with increases in firm valuations, as reflected in Tobin’s Q. Collectively, the evidence suggest that current efforts to increase transparency around organizations’ impact on society are effective at improving disclosure quantity and quality as well as corporate value.

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Abstract—Many service organizations empower frontline employees to experiment with different ways to meet diverse customer needs across different locations. We conducted a field experiment in a retail chain to test the effects of an information sharing system recording employees’ creative work—a control system often used to promote local experimentation—on the quality of creative work, job engagement, and financial performance. While, on average, the mere introduction of the information sharing system did not have a statistically significant effect on any of these outcomes, we find that the system had a significantly positive effect on the quality of creative work when it was more frequently accessed. It also had a positive effect on the quality of creative work in stores with fewer same-company nearby stores (i.e., with less natural exposure to peers’ creative work) and on the value of creative work and the attendance of salespeople working for stores in divergent markets where customers had distinctive needs requiring customized service. We also find weak evidence that the system led to better financial results when salespeople had lower rather than higher creative talent prior to introducing the system. The findings of our study shed light on when information sharing systems can affect the quality and performance consequences of employees’ creative work.

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Abstract—This paper explores how mental models affect the analysis of dynamic strategic interactions. We develop an explanation-based view of mental models founded on a regression analogy and implement this view in simulations involving market competition between two firms with possibly differing mental models regarding the structure of demand. The paper addresses the following questions: (1) How sticky are incorrect mental models, and how are market observations interpreted in such models? (2) What is the impact of the interaction of different mental models on each firm’s learning? (3) Can firms with less accurate mental models outperform firms with more accurate mental models and, if so, why? We find that incorrect mental models can easily “rationalize” market outcomes and shape how a firm and its rival learns. Furthermore, this learning process does not push the firms to make increasingly convergent output choices, but rather causes those choices to diverge slowly. Finally, we identify situations where the firm with the less accurate mental model outperforms the firm with the more accurate mental model.

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  • Harvard Business School Case 217-071

GE Capital After the Crisis

Keith Sherin, CEO of GE Capital, faced a decision on which hinged billions of dollars and the fate of one of America’s most storied companies. On his desk sat two secret analyses: Project Beacon, a proposal to spin off most of GE Capital to GE shareholders, and Project Hubble, a proposal to sell off GE Capital in parts. A third document sketched out the implications should GE “stay the course” on its present strategy: a continued, massive build-up of regulatory and compliance personnel to meet GE Capital’s obligations as a “SIFI”—systemically important financial institution—in the wake of the 2010 Dodd-Frank Act. No path forward was clear. A divestiture, either through a spin-off or sell-off, would reduce GE’s size and financial connectedness and address market unease about GE’s position as the seventh-largest U.S. financial institution. It would also unlock substantial value not currently reflected in the stock. Each faced major obstacles and execution risks, however. In particular, no one knew the precise cut-off for a SIFI designation or the time required to shed the designation. If the process took too long, or generated unexpected costs, a divestiture might destroy more value than it would create. Retaining GE Capital was risky, too, of course. Which set of risks was the right one to propose that the GE board accept?

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  • Harvard Business School Case 817-114

Flatiron School

In late 2016, the founders of Flatiron School, a startup offering 12-week coding bootcamps, are formulating their growth strategy. Their new online-only program has matched the excellent job placement results for their in-person bootcamps. Should Flatiron shift investment to aggressively expand online or grow online and in-person bootcamps in tandem? Should they pursue opportunities to sell online programs to universities and corporations, in addition to their direct-to-consumer offer?

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In early 2013, Central European Distribution Corporation (CEDC), a large publicly traded producer and distributer of vodka and spirits in Eastern and Central Europe, has suffered significant declines in its financial performance, is at risk of defaulting on its debt, and is under pressure from its largest shareholders to give them control of the board and to restructure its debt to avoid bankruptcy. The largest shareholder, billionaire Russian investor Roustam Tariko, has proposed an out of court exchange offer for CEDC's publicly traded bonds and investment in CEDC's stock that would give him full ownership of the company. If the exchange offer fails, the company will file for prepackaged Chapter 11 bankruptcy in the United States.

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  • Harvard Business School Case 217-041

The Rise and Fall of Lehman Brothers

The September 2008 bankruptcy of Lehman Brothers was the largest in U.S. history. In 2007, Lehman achieved record earnings. What happened? Who is to blame?

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  • Harvard Business School Case 217-055

The Case of the Unidentified Equity Managers

No abstract available.

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In October 2016, Nevzat Aydin, co-founder and CEO of Yemeksepeti, the Turkish online food-ordering company, was looking over the company's quarterly results and projections for the upcoming year with his management team. It had been almost a year and a half since Aydin had agreed to sell the company's shares to Delivery Hero, the Berlin-based global leader in online and mobile food ordering, for $589 million. In 2016, the company had grown to include more than 13,000 member restaurants servicing six million users and achieved a 41% year-on-year growth. Yemeksepeti operated with an EBITDA margin of over 50%. Although the company had introduced other revenue streams over the years, commissions remained as the main source of income. Aydin believed that, while there was plenty of room to grow by taking market share from phone orders, much could be done by revenue diversification; the company simply had too much valuable data to be ignored. What should the company do to take advantage of its data analysis capabilities and the new technologies on the market? What kind of outside-the-box solutions could create additional revenue streams and vertical growth capabilities? What about the cohort analysis and data generated from order histories? He motivated the management team to come up with new ideas to put the vast amount of transaction data to use. The case describes potential avenues for a company to monetize its data and illustrates the pros and cons of each option. The case will help students think about how to prioritize growth over diversification and forward think with regards to new technologies and customer trends.

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  • Harvard Business School Case 217-001

Baskits Inc.

Soon after Robin Kovitz (MBA 2007) acquired Baskits Inc., the largest gift basket company in Canada, she became convinced that the business needed to make significant operational improvements. In her first year as CEO, she introduced an ERP system to help with sales and purchasing and relocated the business to a more efficient facility. She wondered if she moved too quickly.

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  • Harvard Business School Case 117-021

OXXO's Turf War Against Extra (A)

In 2006, Mexican convenience store chain OXXO faced a threat from a formidable competitor, the rival convenience chain Extra. OXXO had embarked on an initiative to fortify its corporate culture and operating system, but the threat of Extra raised the question of whether they should focus on opening as many stores as possible and as quickly as possible in order to maintain market leadership. CEO Eduardo Padilla had to define his strategy and decide whether to focus on improving culture and operations or on relentlessly beating his rival.

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  • Harvard Business School Case 117-022

OXXO's Turf War Against Extra (B)

Supplements the (A) case.

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