R&D
Insights
into Business in Islamic World
Stocking
Up Can Build Customer Value
Underwater
Options May Not Sink Incentives
How-To
Book for General Mangers
Emerging
Research on Emerging Markets
Books
Charting
Luminary Leadership in Professional Service Firms
Dot
Vertigo
Breakthrough
International Negotiation
HBS
Press Books in Brief
Insights into Business in Islamic World
Bridging
differences in political and economic systems has always been
one of the challenges of international business. Where religious
beliefs influence those systems heavily, as is increasingly the
case in Islamic countries, the sensitivities can be even greater.
While appreciating the distinctiveness of Islam is important,
Americans can still find points of connection in such settings,
HBS professor emeritus Samuel Hayes told an HBS audience.
“Islam is a different culture, but the Western influence
is very strong because the current generation of decision-makers
has largely been educated in Western colleges and universities.”
Hayes’s comments, together with those of Harvard
Law School adjunct professor Frank Vogel, were delivered as part
of the School’s “Rising to the Challenge” program,
which addresses topics of particular relevance to business leaders
in the post–September 11 global context. Hayes and Vogel,
coauthors of the 1998 book Islamic Law and Finance: Religion,
Risk, and Return, explored issues of doing business in Islamic
countries at a presentation in late January.
Hayes noted that despite a common faith, styles of
practice among Muslim individuals or nations may be quite diverse.
Saudi Arabia and Pakistan, for example, are countries noted for
application of Islamic law beyond religious and family life to
civic, financial, and commercial affairs, he said. Since the 1970s,
other nations such as Jordan, Iran, and Egypt have also moved
in this direction. Vogel, who directs the Law School’s Islamic
Studies Program, explained that such legal systems do not rely
on precedents or written codes and have an inherent dependence
on religious beliefs. “This law is seen as deriving from
direct, divine commands from Islamic scriptures,” said Vogel.
Aspects affecting business practices include prohibitions
on paying or collecting interest, avoidance of any business dealings
considered speculative, ensuring that contracts are fair to all
parties, and treating distressed businesses with compassion. Hayes
noted, however, that it is often possible to work around differing
financial norms. “If you understand the religious principles
underlying these restrictions, you can sometimes create contracts
or other arrangements that accommodate them,” he said, citing
leases as one example of a familiar financial tool deemed fully
compatible with Islam.
— Laura Singleton (MBA ’88)
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Stocking Up Can Build Customer Value
A
classic business problem from the 1950s illustrates the tension
between inventory costs and missed sales. A newspaper vendor must
decide how many papers to buy each day based on typical demand.
His profit is optimized, the solution says, when he buys just
enough to run out a percentage of days matching the ratio between
his cost and the price he charges. For example, if he buys the
papers for ten cents and sells them for seventy cents, and his
records show that demand is typically ten papers or less six days
out of every week, he should always buy ten papers. This means
he will run out of papers (and miss one or more possible sales)
once a week, or one-seventh of the time. What’s ignored in
this equation, though, according
to HBS professor David Bell, is that customers care how
often a retailer runs out of stock. “The probability that
you’ll be in stock affects the customer’s willingness
to buy,” says Bell in his working paper titled “Incorporating
the Customer’s Perspective into the News Vendor Problem.”
He continues, “The knowledge that certain stores are bound
to have what you want is very important to a consumer.”
Reworking the news vendor scenario, Bell incorporated the customer’s expected value of a transaction — the difference between the price the customer is willing to pay and the store’s price (the magnitude of the perceived “bargain”), multiplied by the likelihood the customer will find the item in stock. The higher this expected value, the more likely the shopper is to visit the store.
Bell’s calculations demonstrate that profit is
maximized when “stock-outs” occur a percentage of days
matching the ratio between the vendor’s cost and the price
the customer is willing to pay. Compared to the classic solution,
this results in higher recommended inventory and fewer stock-outs,
regardless of item price.
“Retailers are shortsighted if they stock inventory
by thinking only in terms of their own economics,” says Bell.
His
findings offer the numbers to back up an intuitive assumption:
stock what the customer wants and she will return.
— Laura Singleton (MBA ’88)
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Underwater
Options May Not Sink Incentives
During
the bull market of the 1990s, stock grants and options formed
increasingly large components of executive compensation. Now,
however, with many options “underwater” as share values
have declined well below the strike price, boards of directors
are perplexed. Can a manager really remain motivated when payoff
requires such a daunting climb?
A clear temptation, and a path pursued by many firms, is to reduce strike prices or award new options reflecting lower stock values. But, as HBS associate professor Lisa Meulbroek notes, this gesture is problematic. “If you restrike the options every time the stock price dips, you’ve set up a situation where managers can never lose. What kind of incentive is that?” Meulbroek asks.
In fact, the assumption that underwater options dramatically weaken managerial incentives may itself be invalid, according to a working paper titled “Do Underwater Executive Stock Options Still Align Incentives?” by Meulbroek and HBS assistant professor Li Jin. Their study uses the option delta, which measures how a single option’s value is affected by a change in the stock price. Calculating this delta for firms in January 2000 and again in December of that year, when substantial stock price shifts had occurred, they found the effect on the delta, and thus the effect on incentive alignment, to be surprisingly low. For example, although Nasdaq stocks dropped an average of 19 percent in value over the year, the average delta declined only 5 percent.
Reasons for this include the ten-year maturity of typical option awards, which allows a long window for value recovery, plus the relatively high volatility of many stocks with significant price drops, making a similar rebound less far-fetched.
“I’m not convinced the answer is you never have to do a restrike,” says Meulbroek. “You just need to take a harder look to make sure the impact on incentives warrants it.”
— Laura Singleton (MBA ’88)
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How-To Book for General Managers
Effective
implementation often comes down to how well executives design,
direct, and influence their organization’s critical processes.
HBS professor David Garvin’s new book, General
Management: Processes and Action (McGraw-Hill), provides a
powerful foundation for acquiring these skills. It includes a
comprehensive collection of cases and readings — 38 in all
— from companies of all sizes, each featuring a protagonist,
typically a division president or higher, who is interacting with
a critical process. The book, which also has a hefty, user-friendly
instructor’s manual, is divided into six modules; each focuses
on a single process that is essential to general managers, such
as strategy development, resource allocation, decision-making,
or change. The cases include detailed process descriptions as
well as practical tools, allowing Garvin to show the nuts-and-bolts
aspects of how effective, highlevel general managers get the job
done.
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Emerging Research on Emerging Markets
Is
significant foreign direct investment in China a good thing? Conventional
wisdom says yes, but HBS associate professor Yasheng Huang
disagrees. “Large-scale absorption of foreign direct investment
by China is not a sign of the strengths of its economy but of
its fundamental weaknesses,” Huang asserted at the third
annual HBS Workshop on Emerging Markets, held on campus last December.
The two-day workshop, which attracted an impressive group of scholars
from as far away as Sweden and as nearby as MIT, provided a forum
to discuss how to support the efficient functioning of markets
in emerging economies.
Huang’s observations came on the first day of the
seminar, which centered on the architecture of financial systems.
Enrico Perotti of the University of Amsterdam discussed a related
topic — how to build confidence in emerging stock markets.
“Markets respond to reform policies by a gradual process
of confidence-building that leads investors to invest progressively
more and, ultimately, to market integration,” said Perotti.
Other presenters were Columbia’s Charles Himmelberg, who
spoke on investor protection, ownership, and capital allocation;
and the University of Chicago’s Luigi Zingales, who discussed
the real effects of local financial development.
The second day of presentations focused on economic development
and context. “While virtually all countries, poor as well
as rich, have embraced capitalism, most developing countries are
still not converging toward rich-country income norms as predicted
by economic theory,” noted HBS professor Bruce Scott
in his talk on “Creating Capitalism.” Other speakers
and their topics were Erik Berglöf of the Stockholm School
of Economics on financial architecture in transition; Bernard
Yeung of NYU on corporate sector stability and economic growth;
John Sutton of the London School of Economics on industrial development;
and Chris Woodruff of the University of California, San Diego
on remittances and microenterprises in Mexico.
Although the colloquia was rescheduled due to the events of September 11, conference organizers were pleased with the strong turnout, and plans for the next workshop in early fall are under way.
Books
Charting the Luminary Leadership in Professional Service Firms
In
their new book Aligning the Stars: How to Succeed When Professionals
Drive Results (Harvard Business School Press), HBS professor
Jay W. Lorsch and former Bain & Company CEO Thomas J. Tierney
(MBA ’80) draw on five years of intensive research plus their
own wealth of practical and academic experience to examine the
unique challenges of leadership in professional service firms.
The result of what may be the first-ever collaboration between
an HBS faculty author and a CEO alumnus, Aligning the Stars
provides an indepth analysis of the factors that drive success
in an industry that attracts 65 percent of MBA graduates from
leading business schools — many of whom eventually leave
to run organizations of their own.
With revenues approaching a trillion dollars, professional service firms wield significant influence among the world’s top corporations. Why do some of these organizations enjoy generations of success while so many others flounder? “The answer,” say Lorsch and Tierney, “lies in the ability to develop and motivate star talent, while explicitly aligning individual needs with the strategic and organizational priorities of the business.” Because this alignment is difficult to accomplish, they argue, “it creates a powerful competitive advantage.”
How does a professional service
firm differ from a traditional corporation?
Lorsch: Professional service organizations —
such as accounting, advertising, IT, investment banking, law,
and management consulting firms — are unique in that they
have no products, manufacturing plants, or distribution systems.
Their financial success depends entirely upon the capability and
performance of their human resources. Unlike most corporations,
they are organized around the principles of partnership.
Tierney: In these businesses, the people you pay are more important than the people who pay you. Your people are your product. This creates a complex and unforgiving business: If a professional service firm’s top talent were to resign suddenly, there would be an almost immediate impact on its P&L. This is why people systems, governance, culture, and leadership are so critical in professional service firms.
How do “stars” differ
from other managers?
Tierney: We define stars as the professionals who
have the highest future value to the business — typically,
“partner-level” executives. They wear three hats: as
producers they generate revenue, as managers they guide teams,
and as leaders they help shape the destiny of the organization.
Absent stars, a professional service firm tends to drift toward
mediocrity.
Lorsch: A professional service firm’s
stars differ from the majority of corporate executives in two
important ways. First, they necessarily have highly developed
knowledge in their profession, be it investment banking, consulting,
or another area. And second, they tend to think and act independently.
Leading an organization largely made up of such individuals clearly
poses an extraordinary challenge. We refer to it as “leadership
without control.”
Explain the concept of alignment.
Lorsch: Alignment refers to the ongoing process
of designing organizational practices and structures that fit
both the strategic goals of the firm and the needs of its stars.
Successful professional service firms are able to do this more
or less consistently on a long-term basis. We found there are
four critical aspects to managing these firms effectively: strategy,
organization, culture, and leadership. Success demands that all
four aspects be closely aligned, both with each other and with
the needs of the firm’s stars. Because these firms compete
in a dynamic environment, maintaining alignment is a perpetual
and difficult task.
Tierney: Think about this from the star’s
viewpoint. What happens when the firm decides to pursue a strategy
that is inconsistent with its star’s interests and goals?
What if an organizational change prevents stars from undertaking
the type of assignments they most enjoy? What if the nature of
the firm’s culture and leadership is frequently at odds with
the way its stars prefer to work, act, and relate to one another?
When any of these elements drift out of alignment, stars may take
their talent and skills elsewhere. And should they leave, experience
shows that clients and other stars will often follow. The preeminent
challenge, then, for a firm’s senior management is to assure
that they nurture an organizational system that both satisfies
stars and fulfills the strategic imperatives of the business.
Did your research unearth surprises?
Tierney: One of the biggest surprises, I think,
was how similar most professional service firms really are when
you look beneath the surface, especially when you consider the
diverse professions in which they operate. Whether you examine
law firms, advertising agencies, investment banks, or management
consulting firms, the business model and the challenges they must
successfully meet to prosper over the long term are amazingly
similar. All of these firms are almost entirely dependent on their
star talent and its motivation and productivity. As our economy
shifts more toward “knowledge workers,” we believe that
professional service firms will be a model for many other types
of businesses — from technology to health care to communications
to financial services.
Lorsch: The rampant turmoil within the
sector also surprised us. During the course of our research, there
were dozens of significant mergers and acquisitions. Many leading
firms went public. After decades of relative stability, most professional
service firms today find themselves confronting unstable markets
and competitive threats, amplifying questions about globalization,
scale, and diversification. These challenges are unlikely to go
away anytime soon.
— Peter K. Jacobs
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Dot Vertigo
by Richard Nolan
(John Wiley
& Sons)
In
Dot Vertigo: Doing Business in a Permeable World, HBS professor
Richard Nolan shows how the next shift in Internet technology
— the I-Net — is helping both bricks-and-mortar and
first-generation Web companies stave off the competition while
meeting the challenges of an increasingly unpredictable economic
environment. The I-Net, Nolan explains, merges a firm’s intranet
seamlessly with the Internet, creating “fluid, permeable,
and connected” enterprises that “truly reflect the speed,
collaboration, and scalability of the network economy.” Organizations
that overlook the I-Net opportunity, however, risk falling prey
to “dot vertigo” — Nolan’s term for the first
signs of trouble when an organization starts to fail because of
inadequate understanding or deployment of technology.
Drawing on case-based management lessons, Nolan illustrates
how the dot-com revolution has incorporated technology as a strategy
rather than just a solution in firms of all kinds. “My work,”
Nolan writes in the book’s preface, “has led me to the
conclusion that by their very nature, which is to be permeable
and fluid, dot companies have refined traditional business thinking
and approaches.” In these organizations, Nolan says, technology
has so thoroughly penetrated every aspect of the business that
its activities, strategies, and functions have become transparent,
thereby circumventing any possibility of the disorienting dot
vertigo (symptoms of which include lack of shareholder value,
plummeting stock prices and market capitalizations, loss of market
share, failure to innovate, and reactionary cost-cutting).
Organized in three parts, Dot Vertigo addresses
the issue of business disorientation; the execution of the I-Net
infrastructure to increase the value of the corporation; and real-world
lessons from companies such as Cisco and drugstore.com and powerhouses
such as Charles Schwab, Merrill Lynch, and Ford that have networked
their organizations to a strategic advantage. The book ends with
a discussion dispelling what Nolan calls the “Five Myths
of the Internet”: that dot companies are “dot nothings”;
that legacy systems can be built upon; that the United States
is the Internet leader; that PCs provide the only access to the
Internet; and that English is the language of the Internet.
Nolan urges senior managers to look beyond these common assumptions about the Internet and instead to give careful consideration to its strategic role as their companies move forward. “The dot companies have given us a peek into the future of emerging organization structures and new management approaches,” he observes. “We need to overcome dot vertigo to see clearly the implications.”
— Nancy O. Perry
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Breakthrough International Negotiation
by Michael Watkins and Susan Rosegrant
(Jossey-Bass)
When
the stakes are high — in business, politics, or everyday
life — it pays to take a page from the playbook of the world’s
greatest negotiators. And if you want to learn how to be a world-class
negotiator, consider how Richard Holbrooke helped defuse the war
in Bosnia, or how George H.W. Bush and Dick Cheney built an international
coalition to support the Gulf War. In Breakthrough International
Negotiation: How Great Negotiators Transformed the World’s
Toughest Post–Cold War Conflicts, HBS associate professor
and negotiation expert Michael Watkins and Kennedy School of Government
researcher Susan Rosegrant urge business leaders to learn from
the lessons of negotiators who have helped to shape recent world
history.
Watkins, who teaches the popular HBS elective Corporate Diplomacy, worked with Rosegrant, a political case writer, to cull the most essential elements of skilled negotiation from a collection of diplomacy cases developed in the last decade. Through in-depth interviews with top diplomats and negotiators on the front lines of tense international conflicts, Watkins and Rosegrant have distilled a set of basic principles that can be applied to any situation requiring negotiation, not the least of which is the corporate arena. “Brokering a deal requires the same ability to assess complex situations and craft breakthrough strategies as brokering a peace agreement,” says Watkins. “Leaders of companies and leaders of countries must possess many of the same skills.”
Recently awarded the Center for Public Resources’
2001 prize for outstanding book in the field of negotiation and
dispute resolution, Breakthrough International Negotiation
is organized around four core concepts of negotiation: diagnosing
the structure of the situation, identifying barriers to agreement,
managing conflict, and building momentum. The authors guide readers
through detailed accounts of complex negotiations involving North
Korea, Bosnia, the Middle East, and Kuwait, raising questions
and providing commentary at critical junctures in the text. They
provide a framework to help readers manage the dynamic nature
of negotiation, to anticipate and defuse conflict where possible,
and to become proactive in moving toward resolution.
These skills are not intuitive, the authors say, but once learned they give corporate leaders and others an enhanced ability to recognize familiar patterns in negotiations and to respond appropriately, bringing about a desired outcome in a wide range of scenarios. “The ultimate goal of learning breakthrough negotiation is to be an architect of structure and process and not a passive participant in situations defined by others,” notes Rosegrant. “The payoff is the ability to reconfigure any landscape in ways that make agreement possible that wasn’t possible before.”
— Margie Kelley
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HBS Press Books in Brief
(Harvard Business School Press)
Total Access: Giving Customers What They Want in an Anytime, Anywhere World. Regis McKenna, the renowned “father of high-tech marketing,” sets forth a new marketing paradigm in which machines and networks do most of the work, marketers must become IT-centered systems integrators, and leaders must embrace a new mindset in which marketing is viewed as an enterprise-wide responsibility.
Marketing Moves: A New Approach to Profits, Growth, and Renewal. The Internet, globalization, and hyper-competition are forcing companies to redefine their markets and operations so that they can compete successfully in both the old and the new economies. Authors Philip Kotler, Dipak C. Jain, and Suvit Maesincee show how to build a complete marketing platform around the exploration, creation, and delivery of superior value to customers, collaborators, and the company itself.
From the Harvard Business Review Paperback Series:
Harvard Business Review on Customer Relationship Management. This collection of cutting-edge articles will help organizations understand how to build customer loyalty through relationship-building strategies such as partnerships, branding, and superlative customer service.
Harvard Business Review on Managing Diversity. From managing diversity to exploring alternative workplaces to debunking myths about compensation, the topics covered in this compilation address how to build organizations with judicious and effective systems for managing people.
Harvard Business Review on Compensation. This set of articles will help managers and human-resources professionals weigh the pros and cons of different compensation plans and provide a framework for thinking about this important aspect of the competition for talent.
Harvard Business Review on Marketing. Featuring all-star names in marketing such as Don Peppers, Martha Rogers, David Aaker, and Kevin Keller, this dynamic collection provides a diverse look at the field of marketing. From global branding to one-to-one marketing to managing “buzz,” this indispensable volume will help managers plan and implement strategic marketing programs.
To order HBS Press books, call 800-545-7685 or visit www.hbsp.harvard.edu. Other books by HBS
authors are available at the Business School Coop (617-499-3248;
617-547-5003 fax).
