Where to begin: Understating how companies find new projects, by Nel Dutt

How do companies find projects in new niches?  Incumbent firms often find themselves in situations where they have been successful in their core business but are looking to expand in a new direction; how do they decide on a new business?  Entrepreneurial ventures may also find themselves in this situation as they must choose a specific market niche for their product; how do they decide which niche?  Although decision-making about areas in which a focal firm has experience may be straightforward, decisions about new projects are difficult.  Firms must balance knowledge gained from prior projects, with preferences of their top managers.

Business scholars have done a lot of research developing decision models to explain how firms choose in the case of measurable ambiguity or uncertainty.  However, understanding how firms choose new ventures, where there is a large amount of uncertainty, is less understood.  This is the focus of my dissertation, where I examine decision-making by utilities companies about a new industry niche – renewable electricity.

The utilities industry in USA is currently going through an interesting transition where incumbent firms, traditionally considered stable and profitable, are being mandated by the government to invest in a new and costly industry –renewable electricity.  Many companies have no experience with renewables; and none know which technology will be the most financially viable.  As a result, in the process of choosing a renewable source of electricity, we see different firms evaluating different technologies.  For example, some companies in the northeast are considering a variety of renewable electricity sources, while those in the southwest are mostly focused on wind energy.  These differences arise from differences in prior experience and attention to different renewable electricity sources by top managers.  

But what does this all mean for a business practitioner?  My research shows that firms with a greater amount of experience tend to only examine renewable electricity sources with which they have some experience.  While this may be a safe strategy in a stable industry, these firms risk missing out on a new but relevant renewable electricity source, by having a narrow scope.  Secondly, my research highlights the importance of always having top managers thinking about the future of their industry.  Even in a setting as stable as electricity, top managers that have been thinking about renewable electricity sources, have an easier time identifying pros and cons of new renewable sources of electricity.  Thus, while investing in a strategic planning unit might seem unnecessary for a successful firm in a stable industry, it carries a great deal of value when something changes.  In short, firms should consider the propensity for change in their industry before evaluating new ventures too narrowly; and acknowledge the role that top managers play in steering the direction of future change.  Building upon these results,  my future work also in the utilities industry examines the impact of lobbyists on shaping the kinds of information firms receive, and asks how and if they have an impact on firms’ chosen renewable electricity source. 

Nel Dutt

PhD Candidate in Strategy
Duke University, Fuqua School of Business

Business School Rankings: A Changing Perspective, by Gautam Bharti

Business education has played a transformative role in this contemporary global era. More so, the face of business education is also changing. For a very long time and very rightly, business schools such as Harvard, Stanford GSB and London Business School, amongst others, have been the pillars of business education, making a huge impact on the way business is done and fostered. The education they impart has been qualitative in building tomorrow's leadership and a different world. Enriching research, international scope and real world approach have helped them maintain a high level of B School experience for students and have made them virtually rule the world of business education.

However, some of the lesser known schools have started to appear in the much sought after worldwide rankings from nowhere and some of them have even made it to the top 15. Although, there is no absolute ranking which can be considered right but, they definitely give us a valuable evaluation parameter. Looking at the rankings, notable is the case of a few business schools from India such as Indian School of Management, Ahmedabad (IIMA) and Indian School of Business, Hyderabad (ISB), which have been successful in creating ripples right at the top. The big question is what is surprising and what is not.

What is not surprising is how they climbed their way up? They did it first by establishing themselves as silent powerhouses of academic excellence, professional expertise and continuous innovation which provide high return of investments to students. Secondly, students receive an immutable experience of intellectual boost, deepening of business acumen and a comprehensive framework for development. Not only this, the indigenous and visionary nature of their education is proving as one stop destinations for aspirants aiming self-advancement. Their top rank is well established from various comparative factors commonly considered such as acceptance rates to these B-Schools, percentage increase in salary, weighted salary, job placements, employment rates, companies which recruit at these schools etc.

But what is really surprising is why are these schools showing up in rankings now and not before? The answer to this is very elementary and very basic. Pluto rightly said:

“Necessity, who is the mother of invention”

Previously in the Indian education system, because of government regulations and protection, these schools didn’t face much threat from other more famous business schools and therefore they didn’t find the need to promote and market their brand like other schools did. As a result, their presence on the global arena was less/not felt. But with recent bills passed in developing nations such as the one in India, “The Foreign Education Bill”, schools from all over the world are coming and opening their campuses in the country and suddenly the stage on which these Indian business schools were operating has turned global. This triggered the need for the native schools to make themselves known for what they truly are and that’s how we see these schools as major rivals in the global arena.

This metamorphic change is not only exciting but also proving instrumental in increasing the options for quality business education elsewhere in the world. However, there are still some areas where these schools need to improve upon and learn, from their “better” counterparts. They still lack R&D, extensive international exposure, and a common entrance test like GMAT. This coupled with the slow moving government policies is doing a lot of damage to them. Reckoning the potential that they sheath within and the quality of education that they have been consistently delivering, they definitely are coming to join and lead this elite league race. The question is when and how?

Gautam Bharti

Fuqua School of Business, MMS 2112

Does Corporate Social Responsibility (CSR) affect firm performance? By Olga Hawn

I am engaged in multidisciplinary research on non-market strategy, including environmental, social, and corporate governance activities of the firm. By calling them non-market, I in no way want to take out their effects on performance of the firm. In fact, that is what I am mainly interested in - evaluating the strategic impact of non-market activities.

For instance, in one paper with my co-authors Ronnie Chatterji and Will Mitchell (Fuqua, Rotman) we are asking What happens to companies that are added or deleted from the Dow Jones Sustainability Index (DJSI)? How much do they gain or lose from the event? We find that it depends on how well they performed financially prior to the addition or deletion. Firms are added or deleted from the index based on their social, environmental and governance performance: while the addition to the DJSI demonstrates additional support from the society, the deletion reduces it. Overall, this additional (or reduced) societal support brings (or reduces) financial returns to the company. However, it brings significantly fewer financial returns (or losses) for firms that performed financially better before the addition (or deletion). We explain this effect with the idea of substitution: while societal support generates one type of asset for the firm (call it non-market or social), the previous performance produces another type of asset with market actors. Hence, by already possessing one type of asset that is aligned with market actors (i.e. financial market support for good past performance), firms that increase or decrease the stock in the other non-market asset (through addition or deletion from DJSI) will not benefit as much as when they did not have it. Therefore, managers should consider these alternative support bases (or audiences – market and non-market) when they consider the extent to which they would like to expand their social activities.

Assessing the strategic impact of non-market strategy on firm performance is only one direction in my research; I am also interested in what drives corporate social and environmental performance. So in another paper with Hyoung-Goo Kang (Hanyang) for instance, we conceptualize and evaluate the role of competitors or the market structure in affecting the focal firm’s social activities. By looking at about 540 US firms in 40 industries we find that greater competition drives greater corporate social responsibility (CSR), moreover, greater CSR of competitors results in greater CSR of the focal firm. The main implication for managers is that they should consider the characteristics of the competition in their industry before allocating limited resources to CSR; as for public policy makers, encouraging firms to engage in more CSR seems to increase social welfare (and theoretically, profits).

Finally, being born outside of the US, I am interested in exploring the above-mentioned issues in the international context. Thus, for instance, for my dissertation I conducted interviews with Russian executives on the nature and drivers of CSR in that emerging market. Turns out that the relations with the state and the size of the firm play a significant role in defining social activities in Russia. For instance, large firms that view the relationship with the state as mutually beneficial sign socioeconomic partnership agreements with state representatives that describe in detail the amount and character of the social investment in the region where the firm operates (i.e. ‘beyond compliance’ behavior). Small and medium-sized enterprises (SMEs), on the other hand, view the state as the barrier to their operations and activities and thus, limit their engagement in CSR to charity, paying wages and taxes on time as well as abiding by the law. Thus, managers of US companies entering Russian market should not underestimate the role of the state in driving corporate social engagement, and should not expect much in terms of CSR when partnering with Russian SMEs

Olga Hawn, PhD Candidate in Strategy

The Euro debt crisis, a self-inflicted wound, by Baard Erik Haugen

During the current European debt crisis, Germany and France have often been seen as victims of the irresponsible fiscal policies of southern European governments. But reviewing recent history, one can argue that Germany and France have only themselves to blame.

When the Euro project started in the early 1990s, a strict framework was developed to maintain the financial stability of the currency. The Maastricht treaty of 1992 outlined some important criteria. First of all, countries joining the Eurozone could not have a national debt exceeding 60% of GDP. Secondly, the nations could not have a deficit of more than 3% of GDP. The purpose of these rules was to ensure fiscal uniformity and ultimately prevent the situation the European monetary union is facing today.

Although the proper framework was in place, it was not put to proper use. Both Greece and Italy had public debt of more than 100% of GDP. Even though they did not fulfill the Maastricht criteria, they were still allowed to join the Eurozone. Admitting Greece and Italy was the first mistake made by France and Germany, the financially strong countries of the Union.

The second mistake was made in the early 2000s. In the early days of the Euro, Greece and Italy had trouble keeping their deficits within 3% of GDP. This was a breach of the Maastricht treaty and should have resulted in sanctions. However, around 2002 Germany and France also had large deficits. With the two major Eurozone-nations also breaking the rules, there was no political will to impose penalties or sanctions. Although the Eurozone as a whole experienced growth during the boom years of 2003-2007, the seeds for a future disaster were now planted.

Fast forward to 2011 and Greece was facing bankruptcy. In this turmoil, a lot of anger was directed at Greece. Their hesitance to accept the European rescue package has been seen as stubborn and their unwillingness to give up Greece’s infamous welfare benefits is perceived as arrogance. 

Seeing this from Greece’s perspective, they have little to gain by accepting the so-called rescue package. The rescue package proposed by the Eurozone was not primarily designed to save Greece, but rather it’s creditors. Coincidentally, some of the large creditors are German and French banks.  By some reports, up to 80% of the funds in the bailout package would find their way to the creditors, leaving Greece with a mere 20% of the funds.

In my opinion, Greece should go bankrupt. The perceived losers in a default, Germany and France, did little to stop this crisis from developing until it was too late. By enforcing the rules of the Maastricht treaty properly, this situation would not have evolved, simply because Greece would never have adopted the euro. Germany and France are not victims of anything but their own ignorance.

The German and French banks will indeed suffer massive losses if Greece defaults. But like the German and French governments, neither the banks can claim to be victims. In the summer months of 2011, the interest on Greek bonds soared as the country issues new debt. Interest reflects the risk and the banks should have been well aware of the risks involved. If the authorities in the Eurozone bail out Greece, or rather it’s creditors, the banks will have earned an interest rate reflecting significant default risk without actually being in danger of losing their money.

For Greece the benefit of a default and return to the Drachma would be regaining control over their monetary policies.  With the Drachma they could devaluate their currency, something that would benefit their exporters. Often, this is a zero sum game because the exporters benefit while the rest of the country suffer from decreasing standards of living. A cheap Drachma would benefit the tourism industry, one of the country’s biggest employers, and would therefore benefit the population. Also, reducing the standard of living through devaluing the currency might be more edible politically than budget cuts. 

Finally, the Eurozone would be better of if Greece defaulted and went back to the Drachma. The Greek economy has never really showed the stability and fiscal discipline that should be required of a Eurozone country.  A default will definitely not be painless, not to Greece nor its creditors. But in my opinion the alternative is worse. By keeping Greece in the Eurozone, Europe runs the risk of simply prolonging the agony and bringing a potential problem with them into the future.

Baard Erik Haugen

Motivation and Sorting in Open Source Software Innovation, by Sharon Belenzon

Why do people spend time and effort on innovative projects without direct compensation? In a recent paper with Mark Schankerman (London School of Economics), I explore this question in the context of open source software development.  In open source software (OSS), programmers are typically unpaid, and the code is available for public use and development under project-specific conditions which often make it essentially free.

But how is open source innovation sustained when its workforce doesn’t usually get paid? This question has broader applications, since we see similar situations in other areas in which “open commons” production has been proposed, including biotechnology and nanotechnology. Scholars have proposed four broad explanations: ideology, reputation, enjoyment or other personal value, and future gain.

In our paper, we observe code contributions in order to quantify how each of these motivations drives open source innovation. We exploit  the fact that there are different types of projects. Though open, unrestricted access was the original driving force behind the “free software” movement, many OSS projects now include licenses that limit terms of use. For the sake of clarity, we call these "closed" projects.

We focus on four distinct groups of developers, whose profile we infer based on the types of open source license governing the projects with which they are affiliated: open, closed, mixed, and anonymous. Open developers are developers that are associated only with projects that keep the code essentially free. On the other extreme lie the closed developers who belong only to projects that allow the commercial exploitation of the code. Mixed developers are developers that are not strongly affiliated with either open or close projects. Lastly, anonymous developers are developers that do not reveal their identity when making code contributions. The key to our approach is that we examine the pattern of contributions –what economists call the “revealed preference” of developers -- to infer their underlying incentives. That is, we try to match patterns of code contributions to each developer type, according to theoretical predictions underlying different motivations. Our results show that software developers have a variety of motivations to contribute to OSS projects:

1) Strong identification with the “ideology” underlying the open source movement. Open contributors almost exclusively contribute to projects with open licenses, indicating dedication to the ideology of the open source movement. This very important findings suggests that intrinsic, as opposed to extrinsic, motivation governs effort decisions. In other words, how much a developer identifies with the mission of the project should determine his or her level of involvement in the venture.

2) Increased reputation. Contributors from closed projects are more likely to contribute to larger and corporation-sponsored projects. This findings suggest that gaining reputation is also important for OS participation, extending support to extrinsic reasons to devote efforts to specific projects. But importantly, extrinsic type in the form of increased reputation is likely to affect more specific type of developers (closed), and may actually have no effect on others (anonymous). Importantly, we find a small effect of project size for anonymous developers (who cannot gain reputation, as they do not reveal their identity), and a negative effect of corporate sponsorship.

3) Enjoyment. For “hobbyists,” enjoyment may outweigh the effort they put in. Open contributors are much more likely to contribute to projects aimed at end users (e.g., computer games), while closed contributors target developer-oriented projects (e.g., programming tools). This suggests that open source development is more viable as a substitute for proprietary software innovation on the end-product side.

4) Future gains through reciprocity. The last theory suggests that developers may expect future gains from projects to which they have contributed. We find, however, that reciprocity plays a limited role. Developers are more likely to contribute to projects from which they have previously received contributions, and it is more common among closed developers than open developers. This suggests that reciprocity is associated more with building reputations than with intrinsic motivation.

So what does this all mean? The implication is that whether or not a project has an open source license, and the openness of the license, affects contributions to the project. For example, a more open license increases contributions by one kind of developer but reduces those of other developer types. In the context of setting license criteria, open source managers face an important trade-off: on the one hand, choosing a more closed license would mean more potential profits due to fewer commercialization restrictions. But on the other hand, the same closed license would substantially reduce contributions that come from developers that strongly identify with the open source ideology.

These findings -- that motivations are varied and induce sorting behavior -- should also be relevant beyond the OSS context. A combination of indirect and direct rewards can be more useful than just direct rewards. When indirect motivation is strong (e.g., in the academic and NGO sectors), low-powered incentives may be more effective, and direct incentives may even cancel out indirect motivation.