First Look

Abstract—We study the effects of the introduction of cross-channel functionalities on the overall sales dispersion of retailers and the implications of these effects for inventory management. To do that, we analyze data from a leading U.S. retailer who introduced a “ship-to-store” (STS) functionality that allows customers to ship products to their local store free of charge when those products are not available in their local store. Based on the fact that stores prioritize carrying products for which local demand is high, we test the hypothesis that introducing the STS functionality increased the retailer’s overall sales dispersion. We find that, on average, the contribution of the 90% lowest-selling products to total sales increased by 0.75 percentage points, increasing sales dispersion. Calibrating conventional inventory-ordering models, we show that to respond optimally to the observed increase in dispersion, the retailer would need to increase its cycle and safety inventories by approximately 2.7%. Our paper points out the effect of an increasingly important retail phenomenon (channel integration) on a key factor for inventory management (sales dispersion).

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=53103

Abstract—We propose three core principles that should inform the design of bank capital regulation. First, wherever possible, multiple constraints on the minimum level of equity capital should be consolidated into a single constraint. This helps to avoid a distortionary situation where different constraints bind for different banks performing the same activity. Second, while a regulatory framework that relies primarily on minimum capital ratios is appropriate for normal times, such a framework is inadequate in the wake of a large negative shock to the system. Following an adverse shock, it becomes critical to emphasize dynamic resilience, which involves forcing banks to actively recapitalize—i.e., regulation needs to focus on getting banks to raise new dollars of equity capital, rather than just maintaining their capital ratios. Third, the best way to deal with the inevitable gaming of any set of ex ante capital rules is not to propose further rules, but rather to allow the regulator sufficient flexibility to address unforeseen contingencies ex post. We use these principles to suggest a number of modifications to the current set of risk-based capital requirements, to the leverage ratio, and to the Federal Reserve’s stress-testing framework.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=53243

Abstract—This article analyzes India’s recent enactment of universal primary education. This programmatic policy change is puzzling given the clientelistic features of Indian democracy. Drawing on interviews and official documents, I demonstrate the catalytic role of committed state elites, who introduced incremental reforms over three decades. These officials operated beneath the political radar, layering small-scale initiatives on top of the mainstream school system. Following India’s globalization in the 1990s, support from the World Bank gave committed officials the political opportunity to experiment with new programs in underperforming regions, which they progressively extended across the country. These incremental reforms supplied the institutional blueprint for India’s universal primary education program. Along with state initiative from above, civil society mobilized from below, using the judiciary to hold the state legally responsible for policy implementation. Reforms exposed acute gaps in service delivery, propelling new civic demands for state accountability.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=53204

Abstract—People in low-power positions, whether due to gender or class, tend to exhibit other-oriented rather than self-oriented behavior. Women’s experiences at work and at home are shaped by social class, heightening identification with gender for relatively upper class women and identification with class for relatively lower class women, potentially mitigating, or even reversing, class-based differences documented in past research. Gender-class differences are reflected in women’s employment beliefs and behaviors. Research integrating social class with gendered experiences in homes and workplaces deepens our understanding of the complex interplay between sources of power and status in society.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=53199

Abstract—The field of strategy has mounted an enormous effort to understand, define, predict, and measure how organizational capabilities shape competitive advantage. While the notion that capabilities influence strategy dates back to the work of Andrews (1971, The Concept of Corporate Strategy, Irwin: Homewood), attempts to formalize a “capabilities-based” approach to strategy only began to take shape in the past 20 years. In particular, the publication of Teece and Pisano (1994, Industrial and Corporate Change, 3(3), 537–556), Teece et al. (1997, Strategic Management Journal, 3, 509–533), and Eisenhardt and Martin (2000, Strategic Management Journal, 21, 1105–1121) works on “dynamic capabilities” triggered a flood of debate and discussion on the topic. Unfortunately, the literature on dynamic capabilities has become mired in endless debates about definitions and has engaged in an elusive search for properties that make organizations adaptable. This article argues that the research program on dynamic capabilities needs to be reset around the fundamental strategic problem facing firms: how to identify and select capabilities that lead to competitive advantage. To this end, the article develops a framework that attempts to connect firms’ capability search strategies with their strategies in product markets. It frames firms’ capability search strategies as choices among different types of capability enhancing investments. The key distinguishing feature of capabilities in this framework is their degree of fungibility: capabilities span a continuum ranging from highly general purpose (e.g., quality management) to highly market specific (e.g., knowing how to manufacture an airplane wing). To illustrate the potential of the framework to shed new light on traditional strategy questions, the article applies the framework to explore some unexplained features of Penrosian diversification strategies. The article concludes by suggesting a research agenda for dynamic capabilities.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=53220

Abstract—Emissions regulation is a policy mechanism intended to address the threat of climate change. However, the stringency of emissions regulation varies across regions, raising concerns over carbon leakage—an outcome where stringent regulation in one region shifts production to regions with weaker regulation. It is believed that such leakage adversely increases global emissions. It is also believed that leakage can be eliminated by carbon tariffs, which are taxes imposed on imported goods so that they incur the same emissions cost that they would have if they had been produced in the regulated region. Results here contradict these beliefs. This paper demonstrates that carbon leakage can arise despite a carbon tariff, but, when it does arise under a carbon tariff, it decreases emissions. Due in part to this clean leakage, results here indicate that a carbon tariff decreases global emissions. Domestic firm profits, on the other hand, can increase, decrease, or remain unchanged due to a carbon tariff, which suggests that carbon tariffs are not inherently protectionist as some argue. Rather, results here suggest that carbon tariffs improve the efficacy of emissions regulation, enabling it to reduce global emissions in many settings in which it would otherwise fail to do so.

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Abstract—Market design seeks to translate economic theory and analysis into practical solutions to real-world problems. By redesigning both the rules that guide market transactions and the infrastructure that enables those transactions to take place, market designers can address a broad range of market failures. In this paper, we illustrate the process and power of market design through three examples: the design of medical residency matching programs, a scrip system to allocate food donations to food banks, and the recent “Incentive Auction” that reallocated wireless spectrum from television broadcasters to telecoms. Our lead examples show how effective market design can encourage participation, reduce gaming, and aggregate information, in order to improve liquidity, efficiency, and equity in markets. We also discuss a number of fruitful applications of market design in other areas of economic and public policy.

Download working paper: http://www.hbs.edu/faculty/Pages/item.aspx?num=53214

This case examines the strategic choices and business model with regards to branding at Mavi, a leading Turkish apparel retailer. The case is presented from the perspective of the company CEO and its global brand director who is also part owner. In 2015, Mavi had sales of $419 million, up 20% from the previous year. Growth rates like these were becoming routine at Mavi. But, the path to growth was getting more challenging, and Turkven, Mavi’s private equity partner, was planning its options after seven years of investment. There were four growth levers Mavi could pull, but each involved selecting one growth path while neglecting another. Should the company invest in growth domestically or internationally? Should they change the price positioning of the brand to move upmarket or down market? Which value proposition offered the most future promise: functional differentiation, lifestyle differentiation, or celebrity endorsement? Should the company continue to serve both men and women of all ages, or were there specific consumer targets that offered the most promise? Managers realized that these choices would not only determine the company’s short-term growth trajectory, but also shape the longer-term value of the Mavi brand.

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This case examines the strategic choices and evolving business model of Imprimis Pharmaceuticals from the perspective of CEO Mark Baum. The (A) case provides a brief history of the company and of the compounding business, outlining the challenges faced by Imprimis in 2013. At the time, Imprimis was in the process of seeking FDA approval for a branded drug called Impracor. This process, already difficult, was further complicated by recent manufacturing issues. Meanwhile, the opportunity arose for Imprimis to purchase a technology related to compounded ocular injections. Because of the different competencies and business models required for the traditional pharmaceutical business vs. pharmaceutical compounding, Imprimis did not have the resources to pursue both of these options at once. Instead, Baum had to decide whether or not to abandon the company’s previous focus on Impracor and to delve headlong into the compounding business. The two paths would require vastly different approaches to marketing, R&D, and manufacturing, so that either decision would shape the future of the company for years to come.

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This case is a supplement to Imprimis (A). It describes the company’s decision to enter into the pharmaceutical compounding business in 2013–2014. Imprimis purchased a compounded ophthalmological medication called Dropless Therapy, which was injected into patients’ eyes post cataract surgery, with the aim of replacing a complex regimen of prescription eye drops. After a successful launch of the compounded medication, Imprimis ran into complications when Medicare changed its policy regarding payment for the drug. Under the new policy, not only would Medicare not cover the medication, but patients could no longer pay for it out of pocket. Instead, the cost had to be absorbed by the physician or surgery center. Imprimis now had to figure out a way to deal with the effects of this policy, whether that be by lobbying for a policy change, creating a compounded eye drop treatment of their own, or moving out of the cataract treatment business entirely.

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This case is a supplement to Imprimis (A & B). Set in 2015, it first describes Imprimis’s decision to introduce its own line of compounded eye drop medication called LessDrops. The case then examines the moral dilemma faced by CEO Mark Baum, who was struck by the problem of high drug prices in the United States. Recent, drastic price hikes on pharmaceutical drugs, such as those initiated by Turing Pharmaceuticals under CEO Martin Shkreli, had recently brought media attention to this issue. Baum believed it would be relatively easy for Imprimis to create compounded versions of many of the affected drugs, which could increase competition in the pharmaceutical industry and lessen the strain both on patients and the healthcare system as a whole. However, doing so would require the company to raise capital, strengthen its sales force, and increase its manufacturing capabilities. The decision was further complicated by the relatively low barrier to entry and by the ubiquitous nature of the drug pricing problem. Baum had to decide whether Imprimis should stick with its already successful ophthalmology business or begin the endeavor of combatting high drug prices, going up against powerful competitors in the drug industry.

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This case is a supplement to Imprimis (A, B, & C). It describes Imprimis’s 2015 decision to develop a $1 per pill compounded alternative to Daraprim, the branded drug that had recently undergone an extreme price hike, raising its price to $750 per pill. Imprimis also created compounded alternatives to several other branded drugs and made investments to increase its manufacturing capabilities. The company now had to decide where to focus its efforts in the future. In developing innovative compounded formulations, should it base its decisions on market size, either by population or dollar size? Should it concentrate instead on the level of exploitation by the branded drug manufacturers—how much they had raised prices by, in what amount of time? Or should it decide instead based on the life-threatening nature of the disease, regardless of how many people were afflicted? The company had to balance these choices with the expansion of its core ophthalmology business while continuing to raise funds from investors.

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Over the past several decades, rapid growth in Chinese investment and trade has created for Africa a new development partner. China represents an alternative to U.S. and European nations whose past imperialism, resource avarice, and economic dictates—through the conditionality of IMF and World Bank lending—remain a negative legacy. This case uses the story of Zambia's Chambishi copper mine, which was purchased in 1998 by the state-owned China Non-Ferrous Metals Mining Corporation, to illustrate China’s growing interest and involvement in the African continent. While many in Africa welcome the substantial Chinese investment, resentment over labor abuses, low pay, and substandard working conditions at some Chinese-owned enterprises fuels anti-China sentiment. At Chambishi copper mine, a 2005 explosion, caused by management's shoddy adherence to safety standards, killed nearly 50 miners and sparked outrage among Zambians. The explosion marked the first in a long series of protests and safety violations that would unfold at Chambishi over the next ten years.

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No abstract available.

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Tomohiro Ishibashi (Bashi), chief executive officer for B to S, and Julia Foote LeStage, chief innovation officer of Weathernews Inc., were addressing a panel at the HBS Digital Summit on creative uses of big data. They told the summit attendees about how the Sakura (cherry blossoms) Project, where the company asked users in Japan to report about how cherry blossoms were blooming near them day by day, had opened up opportunities for the company's consumer business in Japan. The project ultimately garnered positive publicity and became a foothold to building the company's crowdsourcing weather-forecasting service in Japan. It changed the face of weather forecasting in Japan. Bashi and LeStage wondered whether the experience could be applied to the U.S. market.

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