Blog
Articles, news, resources, and to help you become a better CEO...
Alarm Company Outgrows Their Business Model
A regional alarm company had profitably grown for five years. But now they were hitting a plateau. Sales were growing by less than 5%. Profits had plateaued as well. There was nothing wrong with the business model other than it would not allow the company to grow. They had good market penetration and market share. […]
What's the Best Way to Make Careful Decisions?
| Published: | February 4, 2010 |
| Author: | Jim Heskett |
In his book Blink, discussed in this column in February 2005, Malcolm Gladwell advised us to place faith in intuition based on experience in deciding many things quickly. Now Michael Mauboussin, with his book Think Twice, makes the case for a more careful approach, suggesting that we place too much emphasis on intuition and personal experience as opposed to the “wisdom of crowds,” mathematical models, and systematically-collected data. He argues that “blink” serves us well in stable environments where feedback from previous decisions is clear and where cause-and-effect relationships can be identified. Unfortunately, in his view these conditions are more and more rare. As he puts it, “intuition is losing relevance in an increasingly complex world … more is different.” You ask, what’s new here? Perhaps these sound like “dog bites man” assertions.
I’ll risk oversimplifying a complex set of arguments this way: Mauboussin, citing a wide range of examples and research, argues that we use experts (as opposed to diverse “crowds”) too frequently, that we too often fail to: identify the nature of the problem, match solution techniques with problems, seek diversity in our feedback, and use technology where possible.
Among other things, he argues, we ignore the subtle and ignored biases that our experiences impose on our independence as decision-makers, we decide too frequently on our emotional reactions to risk (playing the lottery even when we know better, for example), and we succumb to pressures to follow the group. As decision-makers, we are products of our environment to a greater degree than we realize. We take credit for things out of our control while blaming others for failure in similarly uncontrollable circumstances. We hire “stars,” only to watch them burn out in a new and different managerial environment. We look for “best practice” (à la Jim Collins in Good to Great and others) in highly complex situations where there is little comparability and therefore no best practice, only “it all depends.” Worse yet, we are often not conscious of these influences.
Mauboussin maintains that we too often underestimate the importance of luck in the outcomes of our decisions, employing Nobel Prize-winner Daniel Kahneman’s observation that success requires some talent and some luck, while great success requires some talent and a lot of luck. The importance of this observation is that systems that involve significant amounts of luck, such as investing for many people, revert to the mean for the group over time, a fact that can be used to make better decisions without the influences described above. It’s why, for example, some successful investors simply choose stocks of the bottom companies in the Dow Jones average in the preceding year in making their investments for the coming year.
Is intuition losing its relevance in an increasingly complex world? Will we need to turn increasingly to such things as quantitative models, “prediction markets” (where people bet on their views), the wisdom of crowds, and even such things as models based on “system dynamics” developed at MIT in the 1960s? And should we rely less on so-called “experts” and “stars”? In short, should we be spending more time examining our true decision-making abilities and the things that influence our results, i.e., more time “thinking twice” than “blinking”? What do you think?
To read more:
Michael J. Mauboussin, Think Twice: Harnessing the Power of Counterintuition, (Boston: HBS Press, 2009) 
Accountability and Control as Catalysts for Strategic Exploration and Exploitation: Field Study Results
| Published: | February 3, 2010 |
| Paper Released: | January 2010 |
| Author: | Robert L. Simons |
Executive Summary:
The need for organizations to both exploit current resources and explore new opportunities is a central and long-standing theme in the literature of organizations. The challenge, of course, is that these two imperatives require very different structures and skills. Exploitation demands a focus on efficiency and effectiveness in executing preset plans and procedures. Exploration requires the ability to step outside these routines by emphasizing experimentation, creativity, and novelty. In this study, HBS professor Robert L. Simons focuses on the relationship between two organization design variables—span of control and span of accountability. Using data from 102 field studies, he illustrates how these variables can be manipulated by managers to tilt the balance toward either exploration or exploitation in response to different tasks, different organizational contexts, and changing competitive environments. Key concepts include:
- Managers can fine-tune their organization along the dimensions of exploitation and exploration more easily than we may have suspected. For these situations, accountability and control can be adjusted to create an opening for entrepreneurship.
- It is the tension between the resources allocated by organizational architecture and accountability for those resources that provides a powerful catalyst for strategic exploitation and exploration.
- Most of the research on exploration and exploitation has focused on design architecture (centralization/decentralization, internal venture groups, alliances) and related organizational coordinating mechanisms. We must remember, however, that these structures are merely tools to affect the behavior of individuals. It is individuals, in the end, who must devote their energy and attention to either exploiting current resources or exploring new opportunities.
Abstract
This paper reports the collective finding from 102 field studies that look at the relationship between two organization design variables: span of control and span of accountability. Clustering the data yields propositions suggesting that the relationship between these variables may be an important determinant of strategic exploitation and exploration activities.
Data from the field studies suggest that, in accordance with the controllability principle, accountability and control are tightly aligned for exploitation activities. However, this result was found in only a small number of tasks and functions. In the majority of situations, spans of accountability were wider than spans of control. This “Entrepreneurial Gap” is posited to be a result of management’s desire for innovation and exploration-and used as a catalyst for changing strategy, creating high levels of customer satisfaction, or motivating people to navigate complex matrix organizations.
Keywords: Ambidextrous Organization, Strategic Exploration and Exploitation, Entrepreneurial Gap, Accountability, Span of Control.
35 pages.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: January 2010
- HBS Working Paper Number: 10-051
- Faculty Unit: Accounting and Management
First Look: Feb. 2
Is your company rigid or resilient? Breaking down silos is hard to do, but often necessary in the face of unpredictable market conditions. A new book by HBS professor Ranjay Gulati offers up a bevy of role models as well as practical suggestions.
As Gulati writes in Reorganize for Resilience: Putting Customers at the Center of Your Organization, “No firm that I know of has completely attained my definition of truly seamless, but companies such as Jones Lang LaSalle, GE Healthcare, Best Buy, Cisco, and Lafarge (the cement division) are well on their way to a high level of internal seamlessness. And all use the four internal levers of silo busting—coordination, cooperation, clout, and capabilities—in concert to drive strong customer centricity and to pull perspective from inside the firm looking out to outside it, looking in.”
This week also sees a working paper that studies when and why, in the design of development projects, technical architecture corresponds with or “mirrors” the firm’s organizational structure. HBS doctoral candidate Lyra Colfer and professor Carliss Y. Baldwin describe results and present examples from practice in “The Mirroring Hypothesis: Theory, Evidence and Exceptions” [PDF].
— Martha Lagace
Working Papers
The Mirroring Hypothesis: Theory, Evidence and Exceptions
| Authors: | Lyra Colfer and Carliss Y. Baldwin |
|---|
Abstract
The mirroring hypothesis asserts that the organizational patterns of a development project (e.g., communication links, geographic collocation, team and firm co-membership) will correspond to the technical patterns of dependency in the system under development. Thus the hypothesis predicts that developers with few or no organizational linkages will design independent system components, while developers with rich organizational linkages will co-design highly interdependent system components. (The hypothesis claims a correspondence between organizational structure and technical architecture, but allows causality to flow in either direction.) Scholars in a range of disciplines have argued that mirroring is either a necessary or highly desirable feature in the design of development projects, but empirical research shows that some projects deviate from strict mirroring, seemingly without harmful effects. In this paper, we formally define the mirroring hypothesis, describe its theoretical underpinnings, and systematically review the empirical evidence for and against it. Our review includes 129 studies spanning three levels of organization: within a single firm, across firms, and open community-based development. Across these levels, the hypothesis was supported in 69% of the relevant cases, but not supported in 31%. It was most strongly supported within firms, less strongly across firms, and often violated in community-based development settings. The exceptions in turn were of two types: In four cases, closely collaborating teams within single firms created modular systems comprised of independent components. More surprisingly, in 28 cases, independent and dispersed contributors made highly interdependent contributions to the design of a single technical system (or sub-system). Based on a detailed analysis of the latter 28, we introduce the concept of actionable transparency as a means of achieving coordination without mirroring. Contributors achieve actionable transparency by embedding their design in a centralized system with a shared design language and near-real-time updating, where everyone with an interest in improving the design has the right and the means to act on it. We present examples from practice and then describe the more complex organizational patterns that emerge in lieu of genuine mirroring when actionable transparency allows people to “break the mirror.”
Download the paper: http://www.hbs.edu/research/pdf/10-058.pdf
Criminal Recidivism after Prison and Electronic Monitoring
| Authors: | Rafael Di Tella and Ernesto Schargrodsky NBER Working Paper Series, No. 15602, December 2009 |
|---|
Abstract
We study the re-arrest rates for two groups: individuals formerly in prison and individuals formerly under electronic monitoring (EM). We find that the recidivism rate of former prisoners is 22% while that for those “treated” with electronic monitoring is 13% (40% lower). We convince ourselves that the estimates are causal using peculiarities of the Argentine setting. For example, we have almost as much information as the judges have when deciding on the allocation of EM—the program is rationed to only some offenders—and some institutional features (such as bad prison conditions) convert ideological differences across judges (to which detainees are randomly matched) into very large differences in the allocation of electronic monitoring.
Download the paper from SSRN ($5): http://papers.nber.org/papers/w15602
Publications
Seven Lessons for Leading in Crisis
| Author: | Bill George |
|---|---|
| Publication: | Warren Bennis Series. San Francisco, Calif.: Jossey-Bass, 2009 |
Abstract
Seven Lessons for Leading in Crisis outlines the seven critical lessons leaders need to learn when facing crises. The book contains numerous examples of successful and failed leaders, with stories to illustrate their experiences and the author’s advice to readers who may face similar crises.
Purchase this book: http://www.wiley.com/WileyCDA/PressRelease/pressReleaseId-55338.html
Reorganize for Resilience: Putting Customers at the Center of Your Organization
| Author: | Ranjay Gulati |
|---|---|
| Publication: | Harvard Business School Press, forthcoming |
Abstract
In an era of raging commoditization and eroding profit margins, survival depends on resilience: staying one step ahead of your customers. Sure, most companies say they’re “customer focused,” but they don’t deliver solutions to customers’ thorniest problems. Why? Because they’re stymied by the rigid “silos” they’re organized around. In Reorganize for Resilience, Ranjay Gulati reveals how resilient companies prosper both in good times and bad, driving growth and increasing profitability by immersing themselves in the lives of their customers. This book shows how resilient organizations cut through internal barriers that impede action, build bridges between warring divisions, and transform former competitors into collaborators. Based on more than a decade of research in a variety of industries, and filled with examples from companies including Cisco Systems, La Farge, Starbucks, Best Buy, and Jones Lang LaSalle, Gulati explores the five levers of resilience: 1) Coordination: connect, eradicate, or restructure silos to enable swift responses. 2) Cooperation: foster a culture that aligns all employees around the shared goals of customer solutions. 3) Clout: redistribute power to “bridge builders” and customer champions. 4) Capability: develop employees’ skills at tackling changing customer needs. 5) Connection: blend partners’ offerings with yours to provide unique customer solutions.
Purchase this book: http://cb.hbsp.harvard.edu/cb/web/product_detail.seam?R=1721-HBK-ENG&conversationId=355532&E=3159
Merchants to Multinationals
| Author: | Geoffrey Jones |
|---|---|
| Publication: | Tokyo: Nihon Keizai Hyoronsha, 2009, Japanese edition |
Abstract
Merchants to Multinationals examines the evolution of multinational trading companies from the eighteenth century to the present day. During the Industrial Revolution, British merchants established overseas branches which became major trade intermediaries and subsequently engaged in foreign direct investment. Complex multinational business groups emerged controlling large investments in natural resources, processing, and services in Asia, Latin America, and Africa.
Nominal versus Indexed Debt: A Quantitative Horse Race
| Authors: | Laura Alfaro and Fabio Kanczuk |
|---|---|
| Publication: | Journal of International Money and Finance (forthcoming). (Also Harvard Business School Working Paper No. 05-053 and NBER Working Paper No. 13131.) |
Abstract
The main arguments in favor of and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.
Performance Measure Aggregation, Career Incentives, and Explicit Incentives
| Authors: | Romana L. Autrey, Shane S. Dikolli, and D. Paul Newman |
|---|---|
| Publication: | Journal of Management Accounting Research (forthcoming) |
Abstract
We examine a setting in which managers have differential career concerns and firm performance is publicly observed using disaggregated measures that are incrementally informative but costly to contract upon. In such a setting, when do firms contract on aggregated rather than disaggregated performance measures? We show that at intermediate levels of managerial career concerns contracting on an aggregate measure can be welfare enhancing. In this case, the net cost of both contracting directly on an aggregate measure and exploiting career incentives based on disaggregated measures is smaller than the cost of contracting directly on disaggregate measures. Our findings also imply that detailed performance disclosures will be accompanied by lower incentive weights based on aggregate performance when career incentives mitigate distortions caused by aggregation. Further, if performance measures become noisier due to transient shocks, we find that contractual incentive weights on aggregate performance can be either increasing or decreasing, depending on the magnitude of a manager’s career incentives.
Altruistic Utility Functions for Joint Decisions
| Authors: | David E. Bell and Ralph L. Keeney |
|---|---|
| Publication: | In The Mathematics of Preference, Choice and Order, edited by Steven Brams, William V. Gehrlein, and Fred S. Roberts, 27-38. Studies in Choice and Welfare Series. Springer Verlag, 2009 |
Abstract
All of us make decisions that are not entirely self-centered; we voluntarily anticipate what we think to be the preferences of others and incorporate them into our decision making. We do this, not because of legal requirements or social norms, but because we are altruistic; we care intrinsically about the welfare of others. In this paper, we illustrate for these types of decisions how confusion may arise because the distinction between our personal (egotistical) preferences and our altruistic concerns is not carefully distinguished. We first define the distinction between personal and altruistic preferences, and then show how to use both of these kinds of preferences in prescriptive decision making methodologies.
Purchase the book: http://www.springer.com/economics/economic+theory/book/978-3-540-79127-0
Loan Syndication and Credit Cycles
| Authors: | Victoria Ivashina and David S. Scharfstein |
|---|---|
| Publication: | American Economic Review, Papers and Proceedings (forthcoming) |
Abstract
Cyclicality in the supply of business credit has been the focus of a considerable amount of research. This cyclicality can stem from shocks to borrowers’ collateral, which affect firms’ ability to raise capital if agency and information problems are significant (Ben S. Bernanke and Mark Gertler, 1989). Or it can stem from shocks to bank capital, which affects the supply of bank loans if agency and information problems limit the ability of banks to raise additional capital (Bernanke, 1983). In this paper, we examine cyclicality in the supply of credit in the context of modern forms of banking, often referred to as the “originate-to-distribute” model. In particular, we focus on the role of syndicated lending.
Download the paper from SSRN ($5): http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1538892
Exploration and Exploitation within and across Organizations
| Authors: | Dovev Lavie, Michael Tushman, and Uriel Stettner |
|---|---|
| Publication: | The Academy of Management Annals (in press) |
Abstract
Jim March’s framework of exploration and exploitation has drawn substantial interest from scholars studying phenomena such as organizational learning, knowledge management, innovation, organizational design, and strategic alliances. This framework has become an essential lens for interpreting various behaviors and outcomes within and across organizations. Despite its straightforwardness, this framework has generated debates concerning the definition of exploration and exploitation and their measurement, antecedents, and consequences. We critically review the growing literature on exploration and exploitation discuss various perspectives, raise conceptual and empirical concerns, underscore challenges for further development of this literature, and provide directions for future research.
Quality Management and Job Quality: How the ISO 9001 Standard for Quality Management Systems Affects Employees and Employers
| Authors: | David I. Levine and Michael W. Toffel |
|---|---|
| Publication: | Management Science (forthcoming) |
Abstract
Several studies have examined how the ISO 9001 Quality Management System standard predicts changes in organizational outcomes such as profits. This is the first large-scale study to explore how employee outcomes such as employment, earnings, and health and safety change when employers adopt ISO 9001. We analyzed a matched sample of nearly 1,000 companies in California. ISO 9001 adopters subsequently had far lower organizational death rates than a matched control group of non-adopters. Among surviving employers, ISO adopters had higher growth rates for sales, employment, payroll, and average annual earnings. Injury rates declined slightly for ISO 9001 adopters, although total injury costs did not. These results have implications for organizational theory, managers, and public policy.
Download the paper: http://www.hbs.edu/research/pdf/09-018.pdf
Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930
| Authors: | André Martínez-Fritscher and Aldo Musacchio |
|---|---|
| Publication: | Financial History Review (forthcoming) |
Abstract
There is a large amount of literature that aims to explain what determines country risk (defined as the difference between the yield of a sovereign’s bonds and the risk-free rate). In this paper, we contribute to the discussion by arguing that an important explanatory factor is the impact that commodities have on the government’s capacity to pay. We use a newly created database with state-level fiscal and risk premium data for Brazil states between 1891 and 1930 to show that in Brazilian states that exported commodities that were in high in demand (e.g., rubber and coffee) the state governments ended up having higher tax revenues per capita and, thus, lower cost of capital. We also explain that the variation in revenues per capita was both a product of the variation in natural endowments and a commodity boom that had asymmetric effects among states. These two effects generated variation in revenues per capita at the state level thanks to the extreme form of fiscal decentralization that the Brazilian government adopted in the Constitution of 1891, which gave states the sole right to tax exports. We also use indices of export prices for each state as instruments for revenues per capita. Our instrumental variable estimates confirm our results that states with commodities that had higher price increases had lower risk premia.
Download the paper: http://www.hbs.edu/research/pdf/10-027.pdf
Elections and Discretionary Accruals: Evidence from 2004
| Authors: | Karthik Ramanna and Sugata Roychowdhury |
|---|---|
| Publication: | Journal of Accounting Research (forthcoming) |
Abstract
We examine the accrual choices of outsourcing firms with links to U.S. congressional candidates during the 2004 elections, when corporate outsourcing was a major campaign issue. We find that politically connected firms with more extensive outsourcing activities have more income-decreasing discretionary accruals. Further, relative to adjacent periods, the evidence is concentrated in the two calendar quarters immediately preceding the 2004 election, consistent with heightened incentives for firms to manage earnings during the election season. The incentives can be attributed to donor firms’ concerns about the potentially negative consequences of scrutiny over outsourcing for themselves and for their affiliated candidates.
Fair Pricing
| Author: | Julio J. Rotemberg |
|---|---|
| Publication: | Journal of the European Economic Association (forthcoming) |
Abstract
This paper explores the consequences of supposing that consumers see a firm as fair if they cannot reject the hypothesis that the firm is somewhat benevolent towards them. When consumers can reject this hypothesis, some become angry, which is costly to the firm. The desire to appear benevolent can lead firms to adopt third-degree price discrimination based on the income of different consumer classes while foreswearing third-degree price discrimination based on differences in the elasticity of demand. It can also explain why prices seem to be more responsive to changes in factor costs than to changes in demand that have the same effect on marginal cost. Lastly, if consumers experience regret or disappointment when faced by increased prices, the model can explain why prices can be more rigid in response to disasters that increase demand dramatically than they are when there is a less substantial increase in demand.
Lone Inventors as Sources of Technological Breakthroughs: Myth or Reality?
| Authors: | Jasjit Singh and Lee Fleming |
|---|---|
| Publication: | Management Science 56, no. 1 (2010) |
Abstract
Are lone inventors more or less likely to invent breakthroughs? Recent research has attempted to resolve this question by considering the variance of creative outcome distributions. It has implicitly assumed a symmetric thickening or thinning of both tails, i.e., that a greater probability of breakthroughs comes at the cost of a greater probability of failures. In contrast, we propose that collaboration can have opposite effects at the two extremes: it reduces the probability of very poor outcomes—because of more rigorous selection processes—while simultaneously increasing the probability of extremely successful outcomes—because of greater recombinant opportunity in creative search. Analysis of over half a million patented inventions supports these arguments: Individuals working alone, especially those without affiliation to organizations, are less likely to achieve breakthroughs and more likely to invent particularly poor outcomes. Quantile regressions demonstrate that the effect is more than an upward mean shift. We find partial mediation of the effect of collaboration on extreme outcomes by the diversity of technical experience of team members and by the size of team members’ external collaboration networks. Supporting our meta-argument for the importance of examining each tail of the distribution separately, experience diversity helps trim poor outcomes significantly more than it helps create breakthroughs, relative to the effect of external networks.
Complex Business Models: Managing Strategic Paradoxes Simultaneously
| Authors: | Complex Business Models: Managing Strategic Paradoxes Simultaneously |
|---|---|
| Publication: | Long Range Planning (in press) |
Abstract
As our world becomes more global, fast paced, and hypercompetitive, competitive advantage may increasingly depend on success in managing paradoxical strategies—strategies associated with contradictory, yet integrated tensions. We identify several types of the complex business models organizations will need to adopt if they are to host such paradoxical strategies. Managing complex business models effectively depends on leadership that can make dynamic decisions, build commitment to both overarching visions and agenda specific goals, actively learn at multiple levels, and engage conflict. Leaders can engage these functions through team-centric or leader-centric structures.
On Knowing and Doing: A Perspective on the Synergies between Research and Practice
| Author: | Michael Tushman |
|---|---|
| Publication: | In Doing Research That Is Useful for Theory and Practice. Berrett-Koehler Publishers, in press |
Abstract
The current rigor/relevance debate is a central strategic issue for business schools and their faculty. I argue that ongoing relationships with firms, rooted on the joint acknowledgement of the importance of faculty research by firms and respect for practice by faculty, increase the quality and impact of faculty research. With roles and boundaries clear, such ongoing relationships with firms, particularly those rooted in executive education venues, increase the insightfulness of our research questions and the quality of our data. Such relationships also benefit doctoral training. Further, to the extent that these relationships help faculty translate our field’s research into practice, we are able to live into our institutions’ promise to shape managerial practice. These engaged relationships with firms help faculty and their business schools excel in both rigor as well as relevance. This paper provides a personal example of these synergistic relationships and discusses boundary issues associated with these faculty/firm collaborations. Executive education in general, and custom programs in particular, may be an underleveraged vehicle in reducing the rigor/relevance gap between business schools and the world of practice.
Cases & Course Materials
Akin Ongor’s Journey
Rosabeth Moss Kanter
Harvard Business School Case 306-072
A retired bank CEO, one of Turkey’s most admired leaders, wants to start a leadership institute to develop emerging leaders in the eastern Mediterranean region. Describes his biography and values, the models he established for excellent financial performance and corporate social and environmental responsibility at the bank, and his attempt to partner with an American university to establish the institute. His first approach did not work; what should he do now?
Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/306072-PDF-ENG
Communispace
Anat Keinan
Harvard Business School Case 510-018
Communispace is the market leader in creating and managing private, brand-focused online communities for major corporate clients. These communities have provided its clients with insights into how consumers view their brands, with quick feedback on potential marketing decisions, and with a sounding board for new product ideas. Now, a potential client has asked Communispace to build and manage an online community for the sole purpose of fostering word-of-mouth for a new brand it was launching. Should Communispace take on this assignment?
Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/510018-PDF-ENG
Hulu: An Evil Plot to Destroy the World?
Anita Elberse and Sunil Gupta
Harvard Business School Case 510-005
In July 2009, Jason Kilar, the chief executive officer of Hulu, is debating
online video aggregator should move away from a purely advertising-supported model, and whether it should participate in an industry-wide initiative to develop and test “authentication” technology that can facilitate a subscription or pay-per-view model. The case traces the early years of Hulu, a joint venture between News Corp. and NBC Universal, that was initially met with strong skepticism but quickly became on the most celebrated and popular online video business. Provides in-depth information on how the company serves content owners, users, and advertisers. Describes the online video space in considerable detail, also covering economic and viewership statistics that enable a rich discussion of viable business models.
Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/510005-PDF-ENG
The Investment Fund for Foundations (TIFF) in 2009
Luis M. Viceira and Brendon C. Parry
Harvard Business School Case 210-008
In late June 2009, management at The Investment Fund for Foundations (TIFF) was considering expanding the footprint of the TIFF Diversified Fund (TDF), the first truly comprehensive endowment management vehicle offered under the TIFF banner. The recent large capital losses suffered by most endowments, including those of Harvard and Yale, had motivated some to question the two basic premises of the endowment investment model—that investors get rewarded for bearing illiquidity, and that a diversified blend of asset classes and strategies provides meaningful protection against capital losses under virtually all market conditions. Despite this questioning, the investment professionals at TIFF were convinced that this model remained viable as a means of generating superior long-term returns, and that TDF was a vehicle that provided TIFF’s current and potential clients access to this model. But they were aware that they would need to increase their efforts to educate their clients on the benefits of this comprehensive approach to investing and also reflect on whether to modify the current structure of TDF, particularly regarding its liquidity provisions.
Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/210008-PDF-ENG
The University of Notre Dame Endowment
Andre F. Perold and Paul Buser
Harvard Business School Case 210-007
The Endowment Model of Investing, which was based on creating high risk-adjusted performance through diversification, a long time horizon, top-notch outside managers, and illiquid investments, had served Notre Dame and other large universities well over the past several decades. Scott Malpass, Notre Dame’s Chief Investment Officer, was confident that this was a successful way to invest if implemented effectively, but he also saw the top university endowments experience 25% to 35% declines in portfolio value during the second half of 2008 that eviscerated the investment gains from the past several years. Notre Dame had weathered the crisis relatively well, but there were several key questions Malpass had to address. Should Notre Dame continue to make illiquid investments in the context of rising unfunded commitments relative to liquid funds? Was compensation adequate for the illiquidity of these types of investments? In relation to manager selection, how could the Notre Dame investment team continue to find the best managers to create alpha? To what extent would the performance of managers during the crisis be predictive of future performance in other portions of the economic cycle? How would the long-established industry terms of contract between clients and managers change going forward? Was there an opportunity for clients to negotiate better terms? These issues all needed to be addressed in the context of protecting the University’s operating budget and supporting the mission of the institution.
Purchase this case:
http://cb.hbsp.harvard.edu/cb/product/210007-PDF-ENG
What would the GEICO Caveman do in the recession?
Human nature really hasn’t changed much since the caveman days. Back then it was fight or flight. Entrepreneurs in this recession are facing the same emotions. Do you hide in the cave or venture out?
It’s time for most entrepreneurs to venture out of the cave. Most businesses are working on projects that affect 2011, not […]
Irish Startup Raises $230K in 8 Days Using Only LinkedIn
Who says a social media marketing model is only for teenagers and rock stars? In this tough banking environment, this Irish firm adjusted their fundraising model. The difficult banking environment ended up being a blessing in disguise. When is the last time you closed a bank loan in eight days?
Read the rest of the story […]
