| Published: | November 19, 2009 |
| Paper Released: | October 2009 |
| Author: | William A. Sahlman |
We have spent the past year mired in a global financial crisis that few saw coming and that will plague us for years to come. Such crises are gut-wrenching. Collectively and individually, we search for causes and solutions. Too often, we look for quick fixes that do long‐term damage, or we put the equivalent of duct tape on obvious problems, missing the true root causes. HBS professor William A. Sahlman argues that the macroeconomic problems were the result of terrible microeconomic decisions. The root cause of bad decision‐making resides in the nexus of culture, incentives, control and measurement, accounting, and human capital. We now have a unique opportunity to force a review of all the players in the financial system, from individual consumers to politicians and regulators to management teams at financial services firms. Key concepts include:
An abstract is unavailable at this time.
| Published: | November 18, 2009 |
| Paper Released: | October 2009 |
| Authors: | Laura Alfaro and Anusha Chari |
Between 1986 and 2005, Indian growth put to rest the concern that there was something about the "nature of India" that made rapid growth difficult. Following broad-ranging reforms in the mid-1980s and early 1990s, the state deregulated entry, both domestic and foreign, in many industries, and also hugely reduced barriers to trade. Laura Alfaro of Harvard Business School and Anusha Chari of the University of North Carolina at Chapel Hill analyze the evolution of India's industrial structure at the firm level following the reforms. Despite the substantial increase in the number of private and foreign firms, the overall pattern that emerges is one of continued incumbent dominance in terms of assets, sales, and profits in both state-owned and traditional private firms. Key concepts include:
Using firm-level data this paper analyzes, the transformation of India's economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms from across a wide spectrum of manufacturing and services industries and ownership structures such as state-owned firms, business groups, private and foreign firms. Detailed balance sheet and ownership information permit an investigation of a range of variables such as sales, profitability, and assets. Here we analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, the number, and size of firms of the ownership type evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new and large private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors. 55 pages.
| Published: | November 18, 2009 |
| Author: | Julia Hanna |
He's been called "the Salvador Dalí of the kitchen" for creations ranging from beetroot and yogurt ice-cream lollipops to a deconstructed Spanish omelet served in a parfait glass. Each year, some 2 million hopeful diners vie to be one of the fifty customers he serves each evening for the six months that elBulli, his restaurant, is open. The world is beating a path to Chef Ferran Adrià's door, but why?
"Creativity comes first; then comes the customer," he has said. So what can HBS students learn about marketing from a business owner who says he doesn't care whether or not customers like his product?
HBS assistant professor Michael Norton's interest in what motivates seemingly irrational consumer behavior has found a perfect subject in Adrià. To eat at elBulli, customers must navigate a mysterious reservations system. If they are lucky enough to be one of the 8,000 who get a booking that year, they are then given a date and time to show up. Reaching elBulli's coastal perch involves traveling to Barcelona, then negotiating two hours of narrow, twisting mountain roads. But then they enjoy a five-hour meal of thirty-some completely original, whimsical dishes prepared by Adrià and his team of thirty to forty cooks. The meal costs roughly 230 euros and represents hours of laborious research, testing, and preparation. In addition to engaging a diner's five senses, Adrià and his team hope to evoke irony, humor, and even childhood memories with their creations. "We have turned eating into an experience that supersedes eating," he has said.
"If the product is merely food, Adrià should move the restaurant to Barcelona or Madrid," says Norton, who has written a case on elBulli with Julián Villanueva and Luc Wathieu. "Another view is that the product is the whole experience, from start to finish—so driving for two hours in the mountains is a crucial aspect of the product."
The case also highlights the distinction between understanding and listening to customers. "Adrià's idea is that if you listen to customers, what they tell you they want will be based on something they already know," Norton observes. "If I like a good steak, you can serve that to me, and I'll enjoy it. But it will never be a once-in-a-lifetime experience. To create those experiences, you almost can't listen to the customer."
Norton asks students to consider the operations and marketing of elBulli. There is much about the restaurant that is inefficient, as MBAs are quick to note: Adrià should lower his staff numbers, use cheaper ingredients, improve his supply chain, and increase the restaurant's hours of operation. But "fixing" elBulli turns it into just another restaurant, says Norton: "The things that make it inefficient are part of what makes it so valuable to people."
Adrià's other business ventures include publishing elBulli-related catalogs, consulting to large food manufacturers, and the launch of an elBulli hotel and a chain of reasonably priced restaurants called Fast Good. But what is the balance between leveraging the Adrià/elBulli brand and breaking its core meaning? In a classroom discussion of first-year Marketing students, Norton says opinion was divided. Some felt sure that Adrià should be doing more to cash in on his name; others said he would destroy what he has worked so hard to build.
In December, students had the opportunity to hear from the man himself when Adrià visited Norton's Marketing class, where his comments made it clear that for this particular business owner, creativity and innovation trump any traditional decisions about pricing and operations.
"I should charge 600 euros [for a meal at elBulli]," Adrià has said, "but I do not cook for millionaires. I cook for sensitive people."
Because Adrià doesn't adhere to business norms, the elBulli case shows just how broad the spectrum for marketing a "product" can be—and that's not a bad thing for MBAs to learn. "Marketing is a science, but it's also an art," Norton remarks.
"Adrià says he doesn't listen to customers, yet his customers are some of the most satisfied in the world. That's an interesting riddle to consider." 
Julia Hanna is associate editor of HBS Alumni Bulletin.
In the wake of the global financial crisis, HBS professor Bill Sahlman analyzes the fallout and suggests a new player to monitor management excess. What he envisions is a monitor that would "take an objective, hard-nosed look at major financial firms on a holistic basis. … [The] new monitor would learn from working with many players in an industry. Auditing the best and worst firms would create powerful tools for improving practice."
In his working paper "Management and the Financial Crisis (We Have Met the Enemy and He Is Us )" [PDF], Sahlman analyzes a host of management problems from the perspective of culture, incentives, control and measurement, accounting, and human capital. Opposed to quick fixes, Sahlman is in favor of soul-searching on the part of corporate managers, followed by clear steps to revise prevailing notions of risk and reward. "We have a unique opportunity to force a review of all the players in the financial system, from individual consumers to politicians and regulators to management teams at financial services firms," he concludes.
The changing economic relationship between the United States and China as a result of the 2007-2009 financial crisis is the subject of "The End of Chimerica" [PDF] by HBS professor Niall Ferguson and Moritz Schularick. As they argue, Chinese currency is undervalued in relation to the U.S. dollar. "A continuation of Chimerica and Beijing's undervalued dollar peg at a time of dollar weakness would introduce new and dangerous distortions to the global economy," the authors warn. "The dollar depreciation that seems a likely consequence of current U.S. fiscal and monetary policy would be accompanied by a further Chinese depreciation relative to other major currencies."
— Martha Lagace
| Authors: | Carliss Y. Baldwin and Eric von Hippel |
|---|
In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with—and may displace—producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare and so worthy of support by policymakers.
Download the paper: http://www.hbs.edu/research/pdf/10-038.pdf
| Authors: | Ramon Casadesus-Masanell and Francisco Ruiz-Aliseda |
|---|
Katz and Shapiro (1985) study systems compatibility in settings with one-sided platforms and direct network effects. We consider systems compatibility in settings with two-sided platforms and indirect network effects to develop an explanation why markets with two-sided platforms are often characterized by incompatibility with one dominant player who may subsidize access to one side of the market. We find that incompatibility gives rise to asymmetric equilibria with a dominant platform that earns more than under compatibility. We also find that incompatibility generates larger total welfare than compatibility when horizontal differences between platforms are small.
Download the paper: http://www.hbs.edu/research/pdf/09-058.pdf
| Authors: | Ramon Casadesus-Masanell and Joan Enric Ricart |
|---|
The notion of business model has been used by strategy scholars to refer to "the logic of the firm, the way it operates, and how it creates value for its stakeholders." On the surface, this notion appears to be similar to that of strategy. We present a conceptual framework to separate and relate business model and strategy. Business model, we argue, is a reflection of the firm's realized strategy. We find that in simple competitive situations there is a one-to-one mapping between strategy and business model, which makes it difficult to separate the two notions. We show that the concepts of strategy and business model differ when there are important contingencies upon which a well-designed strategy must be based. Our framework also delivers a clear separation between tactics and strategy. This distinction is possible because strategy and business model are different constructs.
Download the paper: http://www.hbs.edu/research/pdf/10-036.pdf
| Authors: | Roy Y.J. Chua and Xi Zou |
|---|
Although the concept of luxury has been widely discussed in social theories and marketing research, relatively little research has directly examined the psychological consequences of exposure to luxury goods. This paper demonstrates that mere exposure to luxury goods increases individuals' propensity to prioritize self-interests over others' interests, influencing the decisions they make. Experiment 1 found that participants primed with luxury goods were more likely than those primed with non-luxury goods to endorse business decisions that benefit themselves but could potentially harm others. Using a word recognition task, Experiment 2 further demonstrates that exposure to luxury is likely to activate self-interest but not necessarily the tendency to harm others. Implications of these findings were discussed.
Download the paper: http://www.hbs.edu/research/pdf/10-034.pdf
| Authors: | Diego Comin and Bart Hobijn |
|---|
This note accompanies the Cross‐country Historical Adoption of Technology (CHAT) dataset. CHAT is an unbalanced panel dataset with information on the adoption of over 100 technologies in more than 150 countries since 1800. The data is available for download at http://www.nber.org/data/chat. We discuss the main aim of CHAT, its scope and limitations, as well as several ways in which we have used the data so far and ways to potentially use the data for other research.
Download the paper: http://www.hbs.edu/research/pdf/10-035.pdf
| Authors: | Niall Ferguson and Moritz Schularick |
|---|
For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with U.S. over-consumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China's economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.
Download the paper: http://www.hbs.edu/research/pdf/10-037.pdf
| Author: | William A. Sahlman |
|---|
The financial crisis of 2008-2009 has revealed that our broad model of corporate governance is broken, independent of the shortcomings in the regulatory system. Managers and boards of directors in scores of systemically important firms failed to protect employees, customers, or shareholders and placed the global financial system at risk. I assert that the root cause of the crisis can be found in five related systems: incentives, risk management and control, accounting, human capital, and culture. The worst firms had lethal combinations of strong incentives, weak control and risk management, flawed internal and external accounting, low skill and/or low integrity people, and corrosive cultures. Piecemeal attempts to fix elements of corporate governance will fail. The problem, to illustrate, is not just the structure of compensation. Nor will increasing required capital prevent problems at companies with strong incentives and weak controls. I believe that we may need a new kind of external agency for systemically risky firms that would take a holistic look at the five systems to identify weaknesses, make recommendations to managers and boards, and set regulatory policies, including assessing charges for insuring against losses. Without such a comprehensive assessment and improvement plan, boards cannot do their jobs, and the system will remain as subject to calamitous events as it was before the crisis.
Download the paper: http://www.hbs.edu/research/pdf/10-033.pdf
| Author: | Kenneth A. Froot |
|---|---|
| Publication: | In The Irrational Economist: Making Decisions in a Dangerous World, edited by Erwann Michel-Kerjan and Paul Slovic. New York: Public Affairs Books, forthcoming. |
Of the 20 most costly catastrophes since 1970, more than half have occurred since 2001. Is this an omen of what the 21st century will be? How might we behave in this new, uncertain, and more dangerous environment? Will our actions be rational or irrational? A select group of scholars, innovators, and Nobel Laureates was asked to address challenges to rational decision making both in our day-to-day life and in the face of catastrophic threats such as climate changes, natural disasters, technological hazards, and human malevolence. At the crossroads of decision sciences, behavioral and neuro-economics, psychology, management, insurance, and finance, their contributions aim to introduce readers to the latest thinking and discoveries. The Irrational Economist challenges the conventional wisdom about how to make the right decisions in the new era we have entered. It reveals a profound revolution in thinking as understood by some of the greatest minds in our day and underscores the growing role and impact of economists and other social scientists as they guide our most important personal and societal decisions.
| Authors: | Victoria Ivashina and David S. Scharfstein |
|---|---|
| Publication: | Journal of Financial Economics (forthcoming) |
This paper documents that new loans to large borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to the peak of the credit boom (second quarter of 2007). New lending for real investment (such as working capital and capital expenditures) fell by only 14% in the last quarter of 2008 but contracted nearly as much as new lending for restructuring (LBOs, M&A, share repurchases) relative to the peak of the credit boom. After the failure of Lehman Brothers in September 2008 there was a run by short-term bank creditors, making it difficult for banks to roll over their short-term debt. We document that there was a simultaneous run by borrowers who drew down their credit lines, leading to a spike in commercial and industrial loans reported on bank balance sheets. We examine whether these two stresses on bank liquidity led them to cut lending. In particular, we show that banks cut their lending less if they had better access to deposit financing, and thus they were not as reliant on short-term debt. We also show that banks that were more vulnerable to credit line drawdowns because they co-syndicated more of their credit lines with Lehman Brothers reduced their lending to a greater extent.
| Authors: | Robert C. Merton, Paul A. Samuelson, and Robert M. Solow |
|---|---|
| Publication: | Chap. 1 in The Future of Life-Cycle Saving and Investing: The Retirement Phase, edited by Zvi Bodie, Laurence B. Siegel, and Rodney N. Sullivan, 1-14. Charlottesville: CFA Institute, Research Foundation Publications, 2009. (Monograph.) |
Book link: http://www.cfapubs.org/toc/rf/2009/4
Michael W. Toffel and Aldo Sesia Jr.
Harvard Business School Case 610-008
Genzyme Corporation is in the midst of planning its new corporate headquarters, which incorporates many innovative green building features. After learning that the building as planned would likely earn a LEED Silver rating, an intermediate score in the LEED green building rating scheme, the CEO charged the building team with exploring opportunities that would enable the building to earn the highest rating, LEED Platinum. Five additional green building features are described, and students are asked to analyze and recommend which, if any, of these features to pursue based on their cost, likelihood of earning LEED credits, and their influence on the building's environmental performance.
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Andrei Hagiu, David B. Yoffie, and Alison Berkley Wagonfeld
Harvard Business School Case 710-423
Intellectual Ventures (IV) creates and acquires intellectual property (IP), which it then seeks to monetize through non-exclusive licensing. In early 2009, as an increasing number of companies were trying to position themselves as leading intermediaries in the market for intellectual property, IV was looking for the best business model to become such a leading intermediary. Its model was predicated on making it easy for small inventors to monetize their inventions and IP (by selling it to IV) and then using its scale and aggregate IP portfolio to extract revenues from potential licensees (usually technology companies).
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C. Fritz Foley, Michael Shih-Ta Chen, Matthew Johnson, and Linnea Meyer
Harvard Business School Case 210-021
What role does trade finance play in facilitating global supply chain management? Richard S. Elman, founder and CEO of Noble Group Ltd., a global commodities trading company based in Hong Kong, must raise capital to support the firm's working capital and investment needs. In evaluating by which means Elman should raise capital, students must consider issues relating to the payment terms and financing arrangements used in world trade, as well as the risk management and operating decisions of a trade intermediary.
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William A. Sahlman, and Sarah Greene Flaherty
Harvard Business School Case 810-050
"ZINK Imaging" describes the issues confronting CEO Wendy Caswell as she uses a partnership model to commercialize ZINK's disruptive printing technology platform, ZINK Paper. The case focuses on the frameworks ZINK has used to decide which markets to target and which business partners to choose. Caswell contemplates changes to the partnership model in an effort to speed product introduction to manage the company's burn rate and reach profitability. The context for the case is the company's imminent need to raise an additional $25 million.
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