First Look

September 6, 2016

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

How to make the other side play fair

How can a negotiator who wants to be fair from the start ensure that his or her counterpart will be reasonable as well? Max Bazerman and Daniel Kahneman address that question in How to Make the Other Side Play Fair: The Final-Offer Arbitration Challenge Gives Negotiators a Valuable New Tool, which appears in the September issue of Harvard Business Review.

Why organic agriculture thrives in some countries but not others

Geoffrey Jones and Simon Mowatt look at why organic agriculture and food consumption developed more strongly in some countries than others between the 1970s and the 2000s, focusing on the limited growth of one nation's organic sector. National Image as a Competitive Disadvantage: The Case of the New Zealand Organic Food Industry appears in the journal Business History.

When humor works

Using humor can boost your reputation at work, but only if your jokes are funny, according to experminetal research by T.B. Bitterly, A.W. Brooks, and M.E. Schweitzer. "The successful use of humor can increase status in both new and existing relationships, but unsuccessful humor attempts (e.g., inappropriate jokes) can harm status," they write in the article, Risky Business: When Humor Increases and Decreases Status, which will be published in the Journal of Personality and Social Psychology.

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

— Carmen Nobel
  • September 2016
  • Harvard Business Review

How to Tackle Your Toughest Decisions

By: Badaracco, Joseph L.

Abstract—The toughest calls managers have to make come in situations when they have worked hard to gather the facts and have done the best analysis they can, but they still don’t know what to do. Then judgment—a fusion of thinking, feelings, experience, imagination, and character—becomes critical. The author offers five practical questions to improve your odds of making sound judgments: What are the net, net consequences of all my options? What are my core obligations? What will work in the world as it is? Who are we? What can I live with? All five questions must be answered. According to the author, “Each question is an important voice in the centuries-long conversation about what counts as a sound decision regarding a hard problem with high stakes for other people.” If you work through these questions, you’ll know that you’ve approached the problem in the right way—not just as a good manager but as a thoughtful human being.

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  • September 2016
  • Harvard Business Review

How to Make the Other Side Play Fair: The Final-Offer Arbitration Challenge Gives Negotiators a Valuable New Tool

By: Bazerman, Max H., and Daniel Kahneman

Abstract—In legal disputes, contested insurance claims, and similarly adversarial negotiations, one party is likely to open with an inflated claim or a lowball offer. And if the other side’s position is unreasonable, it may make little sense to be reasonable yourself. But if everyone routinely came to a dispute with a realistic starting position, the offers would be more or less aligned, and any negotiation that followed would most likely be relatively civil, speedy, and fair. How can a negotiator who wants to be fair from the start ensure that his or her counterpart will be reasonable as well? The authors propose the final-offer arbitration challenge, which leverages an approach first applied in labor negotiations in the 1960s. You can employ this tactic by opening with a demonstrably fair offer and then—if the other party is unreasonable—extending a challenge to take the competing offers to an arbitrator who must choose one or the other rather than a compromise between them (the usual outcome of conventional arbitration). The authors describe how AIG used the approach and how other companies can begin to adopt it.

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  • Forthcoming
  • Review of Financial Studies

Does Aggregated Returns Disclosure Increase Portfolio Risk-Taking?

By: Beshears, John, James J. Choi, David Laibson, and Brigitte C. Madrian

Abstract—Many experiments have found that participants take more investment risk if they see returns less frequently, see portfolio-level returns (rather than each individual asset’s returns), or see long-horizon (rather than one-year) historical return distributions. In contrast, we find that such information aggregation treatments do not affect total equity investment when we make the investment environment more realistic than in prior experiments. Previously documented aggregation effects are not robust to changes in the risky asset’s return distribution or the introduction of a multi-day delay between portfolio choice and return realizations.

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  • In Press
  • Journal of Personality and Social Psychology

Risky Business: When Humor Increases and Decreases Status

By: Terence Lim, Andrew W. Lo, Robert C. Merton, and Myron S. Scholes

Abstract—Across eight experiments, we demonstrate that humor can influence status, but attempting to use humor is risky. The successful use of humor can increase status in both new and existing relationships, but unsuccessful humor attempts (e.g., inappropriate jokes) can harm status. The relationship between the successful use of humor and status is mediated by perceptions of confidence and competence. The successful use of humor signals confidence and competence, which in turn increases the joke teller’s status. Interestingly, telling both appropriate and inappropriate jokes, regardless of the outcome, signals confidence. Although signaling confidence typically increases status, telling inappropriate jokes signals low competence and the combined effect of high confidence and low competence harms status. Rather than conceptualizing humor as a frivolous or ancillary behavior, we argue that humor plays a fundamental role in shaping interpersonal perceptions and hierarchies within groups.

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  • September 2016
  • Harvard Business Review

Know Your Customers' 'Jobs to Be Done'

By: Christensen, Clayton M., Taddy Hall, Karen Dillon, and David S. Duncan

Abstract—Firms have never known more about their customers, but their innovation processes remain hit-or-miss. Why? According to Christensen and his coauthors, product developers focus too much on building customer profiles and looking for correlations in data. To create offerings that people truly want to buy, firms instead need to home in on the job the customer is trying to get done. Some jobs are little (pass the time); some are big (find a more fulfilling career). When we buy a product, we essentially “hire” it to help us do a job. If it does the job well, we’ll hire it again. If it does a crummy job, we “fire” it and look for something else to solve the problem. Jobs are multifaceted. They’re never simply about function; they have powerful social and emotional dimensions. And the circumstances in which customers try to do them are more critical than any buyer characteristics. Consider the experiences of condo developers targeting retirees who wanted to downsize their homes. Sales were weak until the developers realized their business was not construction but transitioning lives. Instead of adding more features to the condos, they created services assisting buyers with the move and with their decisions about what to keep and to discard. Sales took off. The key to successful innovation is identifying jobs that are poorly performed in customers’ lives and then designing products, experiences, and processes around those jobs.

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  • September 2016
  • Harvard Business Review

The Scandal Effect

By: Groysberg, Boris, Eric Lin, George Serafeim, and Robin Abrahams

Abstract—Executives with scandal-tainted companies on their résumés pay a penalty on the job market, even if they clearly had nothing to do with the trouble. Because the scandal effect is lasting, a company you left long ago could have an impact on your current and future job mobility, not to mention your compensation. Overall, executives who suffer from the effect are paid nearly 4% less than their peers. You can’t control this risk, the authors write, but you can and should plan for it. They offer three steps to help you survive a corporate scandal. 1. Be forthright. Transparency and full disclosure are key to overcoming the stigma. Executive recruiters, who do due diligence on candidates, can help you create a full, clear, and succinct narrative for hiring managers. 2. “Borrow” reputation and legitimacy from others in your network, establishing innocence by association. Executive search firms can also act as references and sponsors. 3. Take a “rehab job,” one at which you so clearly excel that it creates a persuasive story to compete with the scandal narrative.

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  • August 2013
  • Business History

National Image as a Competitive Disadvantage: The Case of the New Zealand Organic Food Industry

By: Jones, Geoffrey, and Simon Mowatt

Abstract—This article examines why organic agriculture and food consumption developed more strongly in some countries than others between the 1970s and the 2000s. The focus is the limited growth of the New Zealand organic sector, which contrasts with countries such as Denmark, which were similar in size and shared significant export agribusiness sectors, but whose organic food sector became significantly larger. While the power of incumbent vested interests and unsupportive public policies emerge as major explanatory factors, the article argues that the long-established national image of New Zealand as a clean and green country may have been the major constraint.

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Abstract—American Honda was founded in 1959 as a wholly owned subsidiary of the Honda Motor Company to facilitate sales and distribution in the United States. The details of American Honda’s early history have long served as evidence in debates among scholars and practitioners about the managerial determinants of the subsidiary’s success. In particular, it is debated whether American Honda operated according to a deliberate or emergent strategy, i.e., whether or not strategic decisions made in the States conformed to the intentions of upper management. This paper presents evidence that Kihachiro Kawashima, president of American Honda from 1959 to 1965, made important decisions according to precedent set by his boss and mentor, Honda’s chief strategist, Takeo Fujisawa. It presents further evidence that these decisions may have contributed to the recovery of American Honda from its sales crisis during the late 1960s and its continued success thereafter. Addressing ourselves to concepts in the management literature, we argue that strategy realized by the appeal of subordinates to the historical precedent of their superiors defies categorization as deliberate or emergent.

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Abstract—This paper uses laboratory experiments to directly test a central prediction of disclosure theory: that market forces can lead businesses to voluntarily provide information about the quality of their products. This theoretical prediction is based on unraveling arguments, which require that consumers hold correct beliefs about non-disclosed information. Instead, we find that receivers are insufficiently skeptical about nondisclosed information, and as a consequence, senders do not always disclose their private information. However, when subjects are informed about non-disclosed information after each round, behavior slowly converges to full unraveling. This convergence appears to be driven by an asymmetric response in receiver actions after learning that they were profitably deceived. Despite the change in receiver behavior, stated beliefs about sender strategies remain insufficiently skeptical, which suggests that while direct and immediate feedback induces equilibrium behavior, it does not reduce strategic naïveté.

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Economic Uncertainty and Earnings Management

By: Stein, Luke C.D., and Charles C.Y. Wang

Abstract—In the presence of managerial short-termism and asymmetric information about skill and effort provision, firms may opportunistically shift earnings from uncertain to more certain times. We document that firms report more negative discretionary accruals when financial markets are less certain about their future prospects. Stock-price responses to earnings surprises are moderated when firm-level uncertainty is high, consistent with performance being attributed more to luck rather than skill and effort, which can create incentives to shift earnings toward lower-uncertainty periods. We show that the resulting opportunistic earnings management is concentrated in CEOs, firms, and periods where such incentives are likely to be strongest: (1) where CEO wealth is sensitive to change in the share price, (2) where announced earnings are particularly likely to be an important source of information about managerial ability and effort, and (3) before the implementation of Sarbanes-Oxley made opportunistic earnings management more challenging. Our evidence highlights a novel channel through which uncertainty affects managerial decision making in the presence of agency conflicts.

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  • Harvard Business School Case 716-468

World Wildlife Fund (WWF)

Nearly all environmental organizations have a similar aim: to stop the degradation of the natural environment. However, the strategies that environmental organizations choose to employ are sometimes starkly different. This case compares the models of two dissimilar environmental powerhouses: Greenpeace and World Wildlife Fund for Nature (WWF). Active in 100 countries, WWF works with governments, businesses, other NGOs, and communities to set up conservation programs to preserve natural habitat. In contrast, Greenpeace works to campaign for environmental change against governments and corporations and accepts funding only through individuals and foundation grants. Explores the detailed history and business models of both organizations.

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  • Harvard Business School Case 416-022

Linda Rabbitt at rand* construction

Linda Rabbitt, founder and CEO of rand* construction, walked into her office at the company's headquarters in Alexandria, VA, and closed the door behind her. It was 10:00 a.m. on Monday, September 22, 2014, and she had just addressed her staff after the sudden and tragic death of the company's well-loved president, Jon Couch, the previous Friday afternoon. It had been an emotional address, as Rabbitt tried to inspire the company to move forward, while holding back her own tears. For Rabbitt and for everyone else at the company, the loss was both professional and personal. Furthermore, Couch's death signified for Rabbitt the loss of her entire succession plan. Now in her mid-60s, Rabbitt was preparing to turn over the reins of the company to Couch, whom she had partnered with and mentored for 18 years. What should Rabbitt do now? What should she plan for the future now that Couch was gone?

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  • Harvard Business School Case 116-063

Controversy over Executive Remuneration at BP

In March 2016, BP disclosed that its chief executive officer, Bob Dudley, would receive a $19.6 million compensation package, a 20% increase in total compensation over the previous year. BP justified the amount, emphasizing that the company delivered strong results despite an exceptionally challenging environment, which included a nearly 50% drop in oil prices. However, shareholders questioned the massive payout and ultimately rejected BP's remuneration report in April 2016. Was BP right to give a generous pay package despite the industry slump? Or was it “unreasonable and insensitive,” as shareholder Royal London Asset Management claimed?

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  • Harvard Business School Case 716-407

Moleskine (A)

Describes the founding and growth challenges facing Moleskine, an Italian-based consumer products company known for its oilcloth-covered notebooks once used by Ernest Hemingway and Vincent van Gogh. CEO Arrigo Berni and co-founder Maria Sebregondi aim to transform the company from a founder-led company to a professionally managed firm by expanding into new geographies, product categories, and distribution channels. They have also recently developed several strategic partnerships with Silicon Valley firms to expand into an array of digital products. However, after going public, stock prices continue to fluctuate below analysts' expectations, raising concerns about whether the company has grown too quickly. The leaders must now decide how to expand the firm's capabilities while continuing to preserve its organizational identity and creative culture.

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  • Harvard Business School Supplement 716-464

Moleskine (B): A Cultural Icon

This case discusses the decisions and outcomes of CEO Arrigo Berni and founder Maria Sebregondi that the Moleskine (A) case laid out.

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  • Harvard Business School Case 716-462

A Note on Activist Investors and the Tech Sector

This short note provides background and data on the growing role of corporate activists, especially in high-technology industries.

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