From the problems posed by the Great Recession to the devastation in Haiti and the Gulf of Mexico, from the continuing economic growth of India and China to a cascade of entrepreneurial ventures, the year 2010 offered a wide assortment of accomplishments and disappointments. We asked three Harvard Business School professors—former Medtronic chairman and CEO Bill George, economist and entrepreneurship expert Bill Sahlman, and innovation and strategy authority Rosabeth Moss Kanter—to offer their thoughts on some of the year's most significant developments in the world of business and economics.

Bill George, Professor of Management Practice

Social networking is the most significant business development of 2010, topping the resurgence of the U.S. automobile industry. During the year social networking morphed from a personal communications tool for young people into a new vehicle that business leaders are using to transform communications with their employees and customers, as it shifts from one-way transmission of information to two-way interaction. That's one reason Time magazine just named Facebook founder Mark Zuckerberg Person of the Year.

A year ago many people poked fun at Facebook as a place where kids shared their latest party news. Today more than 600 million users worldwide are active on the site. The most rapidly growing demographic is people over forty. More than 300 million people spend at least one hour a day on Facebook. Approximately two hundred million people are active on Twitter in spite of—or because of—its 140-character limitation. Another 100 million use LinkedIn. None of these social networks even existed at the beginning of the decade.

Leaders like IBM's Sam Palmisano, PepsiCo's Indra Nooyi, Apple's Steve Jobs, Microsoft's Steve Ballmer, Carlson's Marilyn Nelson, and Harvard Business School Dean Nitin Nohria are all active social network users. Why? Because these social networks are a unique way of broadly communicating real-time messages to the audiences they want to reach. They can write a message anywhere, anytime, and share it with interested parties without any public relations meddling, speech writers, airplane travel, canned videos, or voicemail messages. Now their words are much more authentic and can be remarkably empowering.

Social networking is also flattening organizations by distributing access to information. Everyone is equal on the social network. No hierarchies need get involved.

The biggest threat presented by social networks is to middle managers, who may become obsolete when layers of managers are no longer needed to convey messages up and down the organization. The key to success in the social networking era is to empower the people who do the actual work—designing products, manufacturing them, creating marketing innovations, or selling services—to step up and lead without a hierarchy.

Consumer marketing companies are lining up to use these networks to reach their tailored demographics with highly personalized messages. Already they are revolutionizing marketing by shifting dollars from purchased media advertisements to building their own outlets and content. Kraft Foods, for example, is now one of the largest publishers of food-related materials. IBM is launching thought leadership communities. PepsiCo uses social networks to reach millions of social entrepreneurs in lieu of advertising at the Super Bowl. From a leadership perspective, social networking is making authentic leadership a reality and a necessity for 21st century leaders. You can't hide on your social network when you're revealing who you are and what you really believe. Transparency is essential here.

Even more important, this new phenomenon is enabling business leaders to regain the trust and credibility they have lost over the last ten years. That's why social networking is the most important business development of the year.

William A. Sahlman, Dimitri V. D'Arbeloff-MBA Class of 1955 Professor of Business Administration

From where I sit as an economist, it's still all about the economy and the long-term impact of the problems laid bare by the Great Recession. During the financial crisis, the world came to the apparently shocking realization that debt financing entails risks. Financial institutions, households, and governments all suffered because they had too much leverage.

Though the corporate sector has generally decreased leverage, the same is not true of government, particularly in the United States. Every company and household here and abroad will ultimately be affected by the unabated and accelerating gap between government revenues and spending.

There is a great deal of confusion in the popular media about the level of the current budget deficit and outstanding debt. To illustrate, most press reports peg the current U.S. deficit at $1.5 trillion, roughly 10% of gross domestic product (GDP). Gross public debt is $14 trillion, or over 95% of GDP. Most observers believe that the government will run a sustained deficit for the next decade that could add over $10 trillion to outstanding federal debt.

But closer inspection of government data reveals that these figures grossly understate both the current deficit and level of debt. Consider, for example, that the estimated net present value of obligations under the Social Security system is approximately $8 trillion. As the ratio of retired people receiving benefits to working people paying into the system increases, there will be an ever-increasing deficit confronting the government.

Even more problematic is the fact the Medicare system has a vested unfunded net liability of approximately $38 trillion. Once again, the inexorable shift in demographics, combined with high and increasing healthcare costs, will result in a widening gap between tax intake and payment outflow for Medicare.

On another front, the government is also on the hook for insuring bank deposits (including money market funds at the peak of the crisis), pension liabilities, and a wide range of other loans and liabilities. The total value of explicit loan guarantees is well over $10 trillion.

In total, the estimated liabilities of the federal government are in the range of $70 trillion, over five times annual GDP. By implication, the annual deficit is equal to the reported deficit plus the change in the vested, unfunded liabilities incurred in that year (e.g., the change in the Medicare liability) plus the implicit net cost of the annual guarantee for various liabilities. Therefore, the current deficit is more like $4.5 trillion than $1.5 trillion, while the total net revenue for the government was only $2.2 trillion in fiscal 2009. Washington, we have a problem.

This kind of leverage is unsustainable. Though some will argue that higher taxes are required, the reality is that the total amount collected each year in personal and corporate taxes (excluding social security and Medicare taxes) is only a bit over $1 trillion. Spending must be cut.

The recent report of The National Commission on Fiscal Responsibility and Reform suggested a number of options for addressing the challenges posed by excessive government leverage. This report, and several others prepared by other objective bodies, must become part of our collective dialogue about the future of the country. Every business leader and every citizen has a responsibility to understand and help address these issues. Otherwise, as some scenarios in Europe have already made clear, the United States will ultimately suffer the same fate as all countries that spend way beyond their means.

Rosabeth Moss Kanter, Ernest L. Arbuckle Professor of Business Administration

In many ways the biggest business developments of 2010 were the things that didn't happen. Big companies with cash didn't spend it. Banks with cash didn't lend it. Small businesses didn't attract capital and thus didn't help reduce unemployment. Europeans were paralyzed by debt crises and transportation shutdowns caused by volcanic ash and disgruntled workers. Americans were paralyzed by fear of a Chinese takeover of the world. Google didn't exactly leave China or prevail in the face-off over government-banned content. The BP oil spill debacle in the U.S. Gulf region didn't destroy the company, didn't stop offshore oil drilling for very long, and didn't produce the political will to push for alternative energy sources.

Yet even in the midst of gridlock in Washington, economic anxiety around the world, and government liquidity crises in Europe, technology marched on, seemingly impervious to global events. Technology companies with the capabilities and courage to innovate were bright spots and signals of important trends for the future.

One enormous continuing development is the exponential growth of social networking media and the increasing use of social media by companies to crowdsource ideas, mount contests to award prizes and gather audiences, and attempt to create dialogues with customers. The year 2010 accelerated the trend toward the use of social networking sites for an increasing number of commercial purposes and gave social networking companies the confidence to remain independent rather than be acquired by existing players (witness upstart Groupon's recent rejection of Google's $6 billion offer, for instance).

And for what it symbolizes, let me add the launch of the Apple iPad in April. This device quickly gained a 95% share of the tablet computer market and a big share of the public mind.

But the iPad represented more than just an extremely successful product launch. It also signified important technological directions that are reshaping other industries. The iPad extends and accelerates the webification of life whereby devices can connect to the "cloud" and provide functions on a mobile, as-needed basis. There is no more need to embed them in the guts of a stationary device. This makes an enormous amount of computing power available to individuals and small businesses and continues the importance of apps that can be accessed directly. The existence of the iPad extends and accelerates the trend toward digital content such as e-books and downloadable newspapers and magazines.

While uncertainty continues to cause wary businesses to wait before investing, innovation and entrepreneurship are invoked by leaders as the one sure way out of economic distress.

Abstract

An organization's compensation strategy plays a critical role in motivating workers and attracting high-performing employees. Most of the research linking compensation to strategy relies on the principal-agent model of economics, a model that has been largely unsuccessful in predicting the extent to which companies use performance-based pay. We argue that while agency theory provides a useful framework to analyze strategic compensation, it fails to consider a host of psychological factors that affect employee motivation and attraction. This paper examines how psychological costs from social comparison, overconfidence, and loss aversion reduce the viability of individual performance-based compensation systems and provides a framework that integrates insights from psychology and decision research into the traditional compensation framework of agency theory. The paper also discusses empirical implications and possible theoretical extensions.

Judging by the most-read articles and faculty working papers over the last year, our readers continue to be fascinated by the emergence of social networks and their potential impacts on business and management. Another developing area of interest is in the realm of managing teams, especially those dispersed around the globe.

But the one theme that has attracted the most HBS Working Knowledge readers over our 11-year history is how to improve personal leadership skills. A third of the articles on this page relate to improving work performance by learning to make better decisions, becoming a more effective negotiator, and motivating great work from others.

Here are the Top 10 articles and Top 10 working papers that appeared in HBS Working Knowledge in 2010. Now turn your attention to 2011 and tell us in the Comment section what you believe will be the top business management trends of 2011. Enjoy, and have a great new year!

TOP 10 MOST POPULAR ARTICLES OF 2010

1. Power Posing: Fake It Until You Make It
   Nervous about an upcoming presentation or job interview? Holding one's body in "high-power" poses for short time periods can summon an extra surge of power and sense of well-being when it's needed, according to Harvard Business School professor Amy J.C. Cuddy.
2. Introverts: The Best Leaders for Proactive Employees
   Think effective leadership requires gregariousness and charisma? Think again. Introverts actually can be better leaders than extraverts, especially when their employees are naturally proactive, according to Harvard Business School professor Francesca Gino.
3. What Is the Future of MBA Education?
   Why get an MBA degree? Transformations in business and society make this question increasingly urgent for executives, business school deans, students, faculty, and the public. In a new book, Rethinking the MBA: Business Education at a Crossroads, Harvard Business School's Srikant M. Datar, David A. Garvin, and Patrick G. Cullen suggest opportunities for innovation.
4. Understanding Users of Social Networks
   Many business leaders are mystified about how to reach potential customers on social networks such as Facebook. Professor Mikolaj Jan Piskorski provides a fresh look into the interpersonal dynamics of these sites and offers guidance for approaching these tantalizing markets
5. The 'Luxury Prime': How Luxury Changes People
   What effect does luxury have on human cognition and decision making? According to new research, there seems to be a link between luxury and self interest, an insight that may help curb corporate excesses. Roy Y.J. Chua of Harvard Business School discusses findings from his work conducted with /Xi Zou of London Business School.
6. Sharpening Your Skills: Successful Negotiation
   Can you out-negotiate Wal-Mart? Can women overcome gender stereotypes to win equitable pay? Recent research from Harvard Business School looks at important factors to consider before sitting down at the bargaining table.
7. HBS Cases: iPads, Kindles, and the Close of a Chapter in Book Publishing
   Book publishing is changing before our very eyes, even if the industry itself is fighting the transition with every comma it can muster. Harvard Business School professor Peter Olson, former CEO of Random House, wonders if books themselves may be in jeopardy.
8. What's the Best Way to Make Careful Decisions?
   Summing up reader responses, Professor Jim Heskett finds compelling arguments for a process involving intuition based on analysis and experience. Should people also make their own decision-making process more transparent to others and to themselves?
9. The Outside-In Approach to Customer Service
   Is your enterprise resilient or rigid? In this Q&A, HBS professor Ranjay Gulati, an expert on leadership, strategy, and organizational issues in firms, describes how companies can evolve through four levels to become more customer-centric.
10. What Top Scholars Say about Leadership
    As a subject of scholarly inquiry, leadership-and who leaders are, what makes them tick, how they affect others-has been neglected for decades. The Handbook of Leadership Theory and Practice, edited by Harvard Business School's Nitin Nohria and Rakesh Khurana, brings together some of the best minds on this important subject.

TOP 10 MOST POPULAR WORKING PAPERS OF 2010

1. The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making
   What psychological consequences do luxury goods have on people? In this paper, authors Roy Y.J. Chua and Xi Zou argue that luxury goods can activate the concept of self-interest and affect subsequent cognition.
2. Speaking Up Constructively: Managerial Practices that Elicit Solutions from Front-line Employees
   How can front-line workers be encouraged to speak up when they know how to improve an organization's operation processes? In this paper, HBS doctoral student Julia Adler-Milstein, Harvard School of Public Health professor Sara Singer, and HBS professor Michael W. Toffel examine this question in a hospital setting.
3. Conceptual Foundations of the Balanced Scorecard
   This article documents the precursors of the Balanced Scorecard (BSC) strategic performance management tool and describes the evolution of the BSC since its introduction in 1992 in the Harvard Business Review. HBS professor Robert S. Kaplan, who created the concept and tool with David Norton, explains the roots and motivation for their original article as well as subsequent innovations that connect it to a larger management literature.
4. The Limits of Nonprofit Impact: A Contingency Framework for Measuring Social Performance
   Over the past 20 years, there has been an explosion in methodologies and tools for assessing social performance and impact, but with little systematic analysis and comparison across these approaches. In this paper, HBS professors Alnoor Ebrahim and V. Kasturi Rangan provide a synthesis of the current debates and, in so doing, offer a typology and contingency framework for measuring social performance.
5. The Many Faces of Nonprofit Accountability
   The challenge for nonprofit leadership and management is to prioritize among many competing accountability demands. This involves deciding both to whom and for what they owe accountability. HBS professor Alnoor Ebrahim provides an overview of the current debates on nonprofit accountability, while also examining the tradeoffs inherent in a range of accountability mechanisms.
6. Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting
   Advocates of goal setting argue that for goals to be successful, they should be specific and challenging, and countless studies find that specific, challenging goals motivate performance far better than "do your best" exhortations. Authors Lisa D. Ordóñez, Maurice E. Schweitzer, Adam D. Galinsky, and Max H. Bazerman argue that it is often these same characteristics of goals that cause them to "go wild."
7. From Strategy to Business Models and to Tactics
   Drivers such as globalization, deregulation, and technological change are profoundly changing the competitive game. Scholars and practitioners agree that the fastest-growing firms in this new environment appear to have taken advantage of these structural changes to compete "differently" and innovate in their business models. HBS professor Ramon Casadesus-Masanell and Joan Enric Ricart present an integrative framework to distinguish and relate the concepts of business model, strategy, and tactics.
8. The Consequences of Entrepreneurial Finance: A Regression Discontinuity Analysis
   What difference do angel investors make for the success and growth of new ventures? William R. Kerr and Josh Lerner of HBS and Antoinette Schoar of MIT provide fresh evidence to address this crucial question in entrepreneurial finance, quantifying the positive impact that angel investors make to the companies they fund.
9. Do Friends Influence Purchases in a Social Network?
   If friends influence the purchases of a user in a social network, it could potentially be a significant source of revenue for sites such as Facebook and their corporate sponsors. Using a unique data set from Cyworld, this study by Raghuram Iyengar, Sangman Han, and Sunil Gupta empirically assesses if friends indeed influence purchases. The answer: It depends.
10. The End of Chimerica
    For the better part of the past decade, the world economy has been dominated by a unique geoeconomic constellation that the authors call "Chimerica": a world economic order that combined Chinese export-led development with U.S. overconsumption. In this paper, economic historians Niall Ferguson of HBS and Moritz Schularick of Freie Universität Berlin consider the problem of global imbalances and try to set events in a longer-term perspective.

Abstract

This paper investigates the relationship between monitoring, decision making, and learning among lower-level employees. We exploit a field-research setting in which business units vary in the "tightness" with which they monitor employee decisions. We find that tighter monitoring gives rise to implicit incentives in the form of sharp increases in employee termination linked to "excessive" use of decision rights. Consistent with these implicit incentives, we find that employees in tightly monitored business units are less likely than their loosely monitored counterparts to (1) use decision rights and (2) adjust for local information, including historical performance data, in their decisions. These decision-making patterns are associated with large and systematic differences in learning rates across business units. Learning is concentrated in business units with "loose monitoring" and entirely absent in those with "tight monitoring." The results are consistent with an experimentation hypothesis in which tight monitoring of decisions leads to more control but less learning.

In light of the latest developments of the on-again, off-again, on-again government funding of human embryonic stem-cell research, it is time to consider the devastating implications of this chaotic funding environment. And to do that, one needs to understand how a modern research lab operates.

A typical lab has 20 to 40 people, led by a senior researcher (the "principal investigator''). Most people in a lab are doctoral or postdoctoral students who are pursuing careers in science.

Labs have many different projects under investigation simultaneously. Most labs have annual budgets of $1 million to $5 million, with most of that money coming from grants from institutions like the National Institutes of Health (NIH).

The NIH allocates money to researchers whose proposals are reviewed by a panel of scientists knowledgeable in the field. A typical grant proposal is 25 single-spaced pages and takes months to prepare. The NIH responds in approximately nine months.

Because the demand for money exceeds the supply, only 20 percent of the proposals get NIH funding. A researcher receiving his or her first major NIH grant is over 40 years old, on average.

Lab leaders spend a great deal of their energy recruiting the right people for their lab, nurturing a portfolio of interesting projects, and raising money. Most principal investigators, even the most successful ones in the world, spend at least 25 percent of their time trying to get money. If they can't get money, they lay off people and cancel projects.

Now imagine you are a postdoc in a lab and are working on a project to use human embryonic stem cells to cure diabetes by creating new beta cells in the pancreas.

This is difficult work that is high risk but high reward. You have come to grips with the many ethical considerations in working with stem cells derived from embryos that were created during IVF procedures and were destined to be destroyed before the donors agreed they could be used for research. You have begun to get traction in your career, and have been a prominent coauthor on several articles in well-respected journals.

When you read the news that your research is now illegal, you are horrified. You are back at square one. Years of research are potentially wasted.

You have no viable research projects under way. It will take well over a year to begin a new research stream, and there is a low probability you will get funded in a new area. You may be fired. In short, your career is in danger of total meltdown.

That is the real cost of our randomized model of research support in the United States, in which a change in administration or a court ruling can outlaw work that was previously supported by the government. Funding can be canceled with the stroke of a pen.

Great people abandon promising projects

The projects are less important than the people, particularly people who have invested years in developing their careers and selecting an area on which to focus their research. People need predictability--not in the research ideas they pursue, but in basic human issues such as pay and employment.

It may be possible to restart projects with private funds, but that is by no means certain. Raising philanthropic dollars can be as hard and time-consuming as raising money from the NIH. And these projects will have to be set up with duplicate equipment in geographically separate areas to avoid using government-funded facilities.

Sadly, great people will abandon promising projects. Great people will leave basic research and move to more predictable pastures. And some great young people will decide not to go into research careers at all. The precipitous shift in the legal and regulatory environment for human embryonic stem-cell work will have adverse implications for years to come.

Unpredictability inflicts a heavy cost on scientific progress, whether in domains like stem-cell research or in searching for safe alternative fuels. It damages the United States' competitive position because great projects won't be completed here, and more importantly, great people won't do the kind of work that is necessary to make progress on our most intractable challenges.

Society pays a high price for randomization of research support--a fact that, sadly, is not recognized by the public, the media, or politicians.

This article appeared in the Boston Globe on September 19, 2010. Reprinted with permission.

You've heard the advice that writing down sensitive things runs the risk of discovery in a legal case. The wise don't do it. But this can be a costly practice, given our faulty memories. And in the age of WikiLeaks and the Internet, when every "secret" seemingly becomes public before long, the new advice is to avoid trying to keep information secret.

Recently we were reminded about the insecurity of information stored and processed on Internet-based systems, a series of online reprisals against the Swedish government, Amazon, the Dutch police, Sarah Palin, MasterCard, Joe Lieberman, PayPal, and Visa. The connection? Individuals and organizations speaking out against and refusing service to WikiLeaks. The attacker and the cause? A crowd (I don't know what else to call it, since it is not an organized group) that calls itself Anonymous and that was spawned by ideas exchanged on an Internet message board, 4chan, in defense of Internet freedom. The weapon? According to the Financial Times, "Anonymous encouraged 'hactivists' to download a simple tool-known as the 'low orbit ion cannon'-that allows their computers to be used to inundate the targeted website with requests and bring it down."

What has happened to Internet security, you might ask? Apparently it still exists to some degree for one third of the organizations that have taken precautions to protect themselves. It works, too, for individuals who are careful about changing passwords regularly (so that, if you're like me, you can't even remember your own password from time to time). But user names, passwords, and Internet addresses have been pilfered from sites like Gawker, reportedly giving the hackers access to planned web site changes and advertising strategy.

So the possibilities of damage are endless, ranging from random (at least not formally organized) theft by amateur hackers, organized theft by criminals, and efforts by international terrorists to target and shut down, or threaten to shut down, everything from bank accounts to nuclear processing facilities.

There has been an immediate call for risk management plans in those business and governmental organizations that don't already have them. But let's assume that such plans only deter the amateurs and criminals for fleeting periods of time and that in fact it becomes impossible to hide or otherwise keep information confidential.

What implications does this have for the management of a medium- to large-size organization that has become wedded to the economies and convenience of the Internet? For example, assuming that email even exists five years from now, will we be able to use it for business purposes? Will large data files have to be "disconnected" from networks so that their security can be preserved, with the attendant loss of connectivity with other files? Will the ultimate irony occur that the Internet becomes essentially useless to managers for strategic and other important matters?

What, if anything, can or should be done to combat Internet theft and terrorism? How will Anonymous and friends affect management in the future? What do you think?

Reference:

Tim Bradshaw, "Anonymous cyberwarriers stun experts," Financial Times, December 12, 2010, p. 3.

At first blush, the two-year-old online start-up Groupon seems a bit audacious.

For starters, there's the news that the deal-of-the-day website turned down a $6 billion acquisition offer from Google last month.

Then there's the company's business model: selling discount vouchers to restaurants, spas, paintball parties, etc., at a major markdown—up to 90 percent off a retailer's usual prices—and then requiring the retailer to pay a big chunk of the voucher revenues back to Groupon.

But the Chicago-based firm is "the fastest growing company in web history," according to Forbes, and may file for an initial public offering by the end of 2011, according to the New York Times. "Groupon has attracted remarkable interest," says Harvard Business School professor Benjamin G. Edelman. "With the economy lagging, consumers are increasingly responsive to discounts. And Groupon has found a way to feature small businesses that haven't traditionally advertised online."

For consumers, there's an obvious appeal to scoring a $50 meal for 15 bucks—especially in a recession. But for retailers offering the deals through Groupon, does the publicity compensate for the deep hit to profit margins? A new working paper, To Groupon or Not to Groupon: The Profitability of Deep Discounts, sets out to help small businesses decide whether offering large discount vouchers is a profitable decision.

HBS Working Knowledge recently discussed the topic with Edelman, who cowrote the paper with Harvard graduate students Sonia Jaffe (Department of Economics) and Scott Duke Kominers (Harvard Business School).

Carmen Nobel: How can a discount voucher service like Groupon benefit retailers?

Ben Edelman: Our paper looks at two distinct benefits a discount voucher service can offer. First, discount vouchers can provide price discrimination, letting merchants reach customers who value the merchant less than the merchant's ordinary customers do. For instance, some customers are willing to pay full price for a given restaurant—great! The restaurant would like to keep charging those customers full price, while charging a lower price to new customers who aren't willing to pay as much but who are still willing to pay something above the restaurant's costs.

Second, vouchers can provide an advertising benefit—announcing a merchant's existence to thousands of consumers en masse, and potentially building buzz among consumers above and beyond sales to the consumers who actually buy the vouchers. This effect is more difficult to measure, but many merchants perceive it to be real. Where it exists, it's an important source of value that a discount voucher service can deliver.

Q: Explain the theoretical model you describe in your paper and how it can help retailers decide whether a voucher service like Groupon makes sense for them.

A: We present a model of online discount vouchers that [offer deals] to consumers who may or may not value the merchant's offering. Importantly, some consumers already know and patronize the merchant, so a voucher discount combines multiple effects—it attracts new customers but it may also offer an unnecessary discount to existing customers.

We then extend the model to consider both the possibility of merchants raising their prices in anticipation of offering discounts and the possibility of consumers buying multiple discount vouchers.

By demonstrating the importance of these factors, and exploring the relationship between these factors, we hope to help retailers predict whether a discount voucher promotion is likely to be profitable for them. Our approach can also help retailers design discounts that better serve their objectives.

Q: You recommend that retailers disallow the purchase of multiple discount vouchers from a single customer, or else run the risk that the customer will never come back and pay full price. Are there some practical steps that merchants can take to prevent multiple purchases?

A: In practice, it's not easy to prohibit the purchase of multiple vouchers. A voucher service can configure its systems so that a single account only lets a user purchase a given offer once. But then users can open multiple accounts—a tactic that consumers have already used at many online retailers. And industry norms let consumers find ways around almost any rule intended to block multiple purchases. For example, even when consumers are limited to a single voucher, they are typically permitted to buy additional vouchers as gifts for others. So if three customers each want three vouchers, each can buy one for himself and one for each of his two friends, complying with the rules but obtaining multiple vouchers.

Q: What are some of the other risks that businesses run when deciding to participate in a discount voucher program like Groupon? What steps can they take to mitigate those risks?

A: Stories abound of consumers who try to game the system. Consider a customer who wants to dine on a weekend using a voucher valid on weekdays only. Some consumers surely make that error by accident, failing to read all the terms and conditions. Sophisticated consumers might try to game the system by posing as customers who failed to read the "small print." What exactly is a merchant to do when a consumer violates one of various small-print rules? Requiring customers to present vouchers before ordering is one solution, but they understandably dislike this approach, finding it especially tacky.

One first step is for merchants to review the exact text to be shown to consumers. Be wary of vague language: "excludes special offers" invites disputes over whether the chef's special and a child portion are eligible; "not valid on major holidays" raises the question of which days are "major." We've been surprised to see such imprecise wording on vouchers, and we think merchants and voucher services can do better.

Merchants should also confirm their legal obligations when accepting discount vouchers. Once customers prepay, they often enjoy consumer protections with regard to gift certificates-including special rules as to expiration and partial refunds. Here in Massachusetts, a gift certificate that is 90 percent used may be redeemed in cash if the customer so requests.

Even sales tax can be complicated: if a customer pays $20 to eat food that costs $35 at a restaurant's menu prices, should the customer pay sales tax on $20 or $35? (In Massachusetts, the Department of Revenue has confirmed the former—though in my experience, few restaurants follow that rule.)

As retailers gain experience with discount vouchers, these matters may become routine. But for now, there's ample room for error, creating important risks for retailers that fall short of applicable consumer protections.

Q: How does the service affect business with existing customers who historically have paid full price?

A: We've seen two main effects. First, some discount voucher services send users to merchants en masse. The day after a Groupon is released, hundreds of buyers tend to swamp a small business unprepared for the rush. That barrage of customers can disrupt service to full-price customers, who may end up waiting for service. That said, we don't think this kind of disruption is inevitable; other services have found ways to spread customers over time. For example, Restaurant.com sends customers on an ongoing basis rather than all at once.

Second, full-price customers may be unhappy when they realize others are getting large discounts. We've all had the experience on an airplane of talking to a nearby passenger whose fare was vastly different. But that's a new experience at local retailers. Existing customers might "revolt," becoming less willing to pay full price once they realize that others are paying less.

Q: When Groupon first came on the scene, most of the participating retailers were small, local food- or service-oriented businesses. Eventually, though, we started seeing Groupons from national retailers such as The Gap, which sold some 400,000 Groupons in a single day. Based on what you've learned, do you think discount vouchers make sense for large retailers?

A: Discount vouchers seem to be most compelling for merchants with a low cost of goods sold and with a highly perishable product. Restaurants fit the bill in that ingredients are often just 30 percent of menu price, and every hour a table sits empty is lost revenue that can never be recovered. So too for spas, gyms, hotels, and many other services.

Retailers of durable products, like manufactured goods and clothing, are in a somewhat different position. Typically, their business requires a higher cost of goods sold, giving them less room to discount. And if they don't sell a product one day, they can hold it in inventory for future sale. So marginal business is less urgent for them.

We're not prepared to say Gap's Groupon was a mistake. Getting customers into Gap stores with a Groupon might lead to big sales—above and beyond the voucher value. Plus, those customers might tell their friends. And we suspect that Groupon charged Gap less than its usual fee. Still, Gap might have been able to run a similar promotion itself, without going through Groupon; Gap's established brand would have attracted substantial consumer interest. Other large merchants can also handle their own offers; the Groupon-style brand and infrastructure are most valuable to smaller firms.

Q: Explain how the efficacy of Groupon will change in the future, especially if more and more consumers continue to use these vouchers. How do you expect Groupon and its competitors to respond to these changes?

A: One natural change is for fees to drop. Groupon has charged merchants a remarkable 50 percent of voucher purchase price, but it seems that competition is already driving fees down.

A major problem for discount voucher services is that as they grow, their customers necessarily come to resemble the general population. So long as discount voucher users tend to be low-end customers who are unwilling to pay full price, voucher services can offer retailers the ability to price discriminate-charging some customers more than others. But once discount voucher services become known to most consumers, price discrimination will become considerably more difficult.

In principle, discount offers can be customized for—indeed, targeted to—individual users. For example, a restaurant could tell a voucher service that it wants to offer a discount only to customers who live more than a mile from the restaurant's location, on the view that customers in the immediate vicinity already know about the restaurant's offerings.

Furthermore, since spas and gyms know their customers' names, they could give discount voucher services a list of consumers to exclude, preventing an offer from reaching existing customers. On one hand, this kind of targeting would make voucher services less attractive to users. But if merchants are confident that existing customers won't receive discounts, then they can offer larger discounts, which will increase consumer interest in voucher services. We think these targeting innovations are feasible, and if Groupon doesn't offer them, a competitor may.

Q: A decade ago, Microsoft cofounder Paul Allen threw millions behind a start-up called Mercata, through which online customers would sign up en masse to buy the same product, and the price of the product would fall as more and more customers signed up. After about a year and a half, Mercata shut its doors. Other than timing, what is it about Groupon that would make it succeed where a company like Mercata failed?

A: Mercata focused on general merchandise, where retailers have a high cost of goods sold and where low perishability lets merchants hold inventory for an extended period. In contrast, recent discount voucher services have focused on sectors with low cost of goods sold and high perishability. We think this altered focus has been the key to success of current discount voucher services.

Q: Do you have any plans to continue researching this subject?

A: Absolutely. We're currently talking to merchants that have used discount voucher services, and we hope to conduct empirical analyses of discount voucher profitability and demographics.

Have you seen success or failure with a discount voucher service like Groupon? Please share your story in the Comment section.

Abstract

We measure the value of shareholder proxy access by using a recent development in the ability of shareholders to nominate candidates for board seats. We use the SEC's October 4, 2010 announcement that it would significantly delay implementation of its August 2010 proxy access rule as a natural experiment. Because firms with substantial institutional ownership would have been most affected by the SEC's now-delayed changes, we use the share and composition of institutional investors to sort firms into those more and less affected by the October 4 news. Firms that would have been most affected by proxy access, as measured by institutional ownership, lost value on that day. The value drop was 55 basis points for a 10 percentage point change in activist institution ownership. These results suggest that financial markets placed a positive value on shareholder access, as implemented in the SEC's August 2010 rule.

Abstract

The existing theory of modularity explains how modular designs create value. We extend this theory to address value appropriation. A product or process design that is modular with respect to intellectual property (IP) allows firms to better capture value in situations where knowledge and value creation are distributed across many actors. We propose a theory of IP modularity based on value maximization net of transaction and agency costs. We then use case examples to extend the theory into practical settings and derive strategic recommendations and empirical predictions.

Nineteen years ago, Harvard Business School professor Linda A. Hill wrote the first edition of her book Becoming a Manager, detailing the experiences of several first-year supervisors who were making the daunting transition from star performer to novice boss. Since then, she has found that the now-classic book is popular not just among newbies but also among leaders with decades of experience.

"I've always been surprised by why on earth they're reading a book about becoming a manager," Hill says. "What I've come to understand is that many of them never really made the psychological transformation from being an individual contributor to being a manager, and it really resonates with them when they read the book. Many of them are not fulfilling their potential. They're well intended, but a fair number of them derail or kind of get stuck."

Hill specifically targets that audience in her new book, Being the Boss: The 3 Imperatives for Becoming a Great Leader, cowritten with Kent Lineback.

"This book was written to benefit experienced people who are trying to go from good to great," Hill says.

Being the Boss describes the challenges that good bosses face as they endeavor to manage themselves, manage their networks, and manage their teams. In short, being a good boss is about much more than wielding authority.

"I've seen so many people get that wrong," says Lineback, himself a former executive. "They think authority defines them. I've had bosses who had to resort to saying, 'I'm the boss!' And when you get to that point, you've lost it."

In the following interview, Hill talks about the difficulties of striking a balance between management and leadership in the age of globalization and remote offices.

Carmen Nobel: Your book discusses three imperatives for becoming a great leader: managing yourself, managing your network, and managing your team. What are some of the issues inherent in each of them?

Linda Hill: It starts with using yourself as an instrument to get things done. And because you're the instrument, you've got to know that instrument very well and use it appropriately, so that your imprint matches your impact. We talk a lot about what it really means to be the boss. For instance, although you do have formal authority, you don't want to have to rely on that too much to get things done.

Managing your network is in the middle of the book, before the section on managing your team. That kind of throws some people because when you think about being the boss, you mostly think about the people who report to you. But unless you manage the context in which your team resides, there's no way that your team can be successful. So you have to understand the political dynamics, you have to understand how to build a network with peers and bosses, and you have to set the right expectations for your team and the right resources. We really think that's at the heart.

The last piece is your team. That's about all the complexities of what it means to build a team—a team is different from just a group—and how you think about managing the performance of individuals. We also talk about preparing for the future—that managing isn't all about today, it's also about managing your team for tomorrow.

Q: You include a chapter called "Don't Forget Your Boss." Managers often fail to realize their role in their relationships with their bosses. What do they need to keep in mind?

A: It's common to let the person up the chain be most responsible for whether you have a healthy relationship, but you're equally responsible. If you don't manage that relationship right, your team is not going to be able to do what it needs to do.

Powerlessness corrupts as much as power. You shouldn't feel powerless with your boss. That's not the deal. You have to figure out the sources of power you have to influence the boss. You also have to see the boss as human and fallible in all the ways that you're human and fallible, and figure out how to deal with the reality of who that person is—rather than the ideal of what you'd like that person to be like. There are really bad bosses, and you can't be naive or cynical about this. It's hard to be successful with a bad boss, and sometimes success means figuring out how to get out of that situation. But before you decide that's the deal, you need to take responsibility for the relationship, because it's definitely two-way. I'm building on the traditions of [HBS professors emeriti] John Kotter and John Gabarro, who [in 1980] wrote an article about managing your boss, which was very radical at the time. (http://hbr.org/2005/01/managing-your-boss/ar/1)

Today many people have multiple bosses, and we also discuss the challenges there. One of the most common missteps is to deal with the boss who's closest to you physically and treat your relationship with your other boss as out of sight, out of mind. So we talk about how you have to manage the priorities between those two bosses and how to negotiate what will be your priorities, given their priorities.

Q: Due to technological advances and globalization, more and more managers find themselves leading, collaborating with, and reporting to colleagues in remote offices—people they rarely if ever see in person. What challenges do they need to consider?

A: When I teach executives, we talk about how you give feedback virtually to people you'll never see in person—giving performance appraisals to people you never see and understanding the complexities of that, and understanding the limitations of e-mail and telephone calls. We really rely on nonverbal cues, generally, to help us understand the credibility of the message. For instance, to tell whether I'm telling the truth, you'll listen to my tone, you'll look at my face. We're prepared by evolution to read the whole person and figure out whether that person is credible.

Often you're dealing with the fact that the person is not only far away but might be of a different culture as well. And you've got to figure out how to interpret him or her. So what we have to explain is that when you don't have those nonverbal cues, then you have to realize that it's really an impoverished method of communication. You can't act like it's face-to-face communication when it isn't. We all know, because we've experienced it, how fast conflict can escalate with e-mail because the nonverbals are not there.

When you're building trust virtually, it's really important that you deliver on what you say you're going to do. If you tell someone [in a remote office], "By four o'clock on Wednesday afternoon you'll have X," it matters more that you actually get it [done] on time, because that person will use those cues to figure out whether you're trustworthy rather than the nonverbal cues that are not available. Whereas, you might tell someone down the hall that you'll get something to him by 5 o'clock next Thursday, but when the deadline approaches [and you haven't completed it], you can go [to his office] and say, "You know this other thing is happening, can I get it to you tomorrow?" And he can read you in person.

Another tip is that when you're working virtually, silence does not indicate agreement. So you have to actively inquire more than you would with a face-to-face interaction. On the phone I can't see whether you're shaking your head, so I have to ask, actively, if everything is OK.

Q: What are you working on next?

A: My next book is on leadership for innovation—on what kind of leadership is most appropriate if sustained breakthrough innovation is what you need to be doing. The key to competitiveness these days is not just about having the right strategy but also about being able to do these breakthrough innovations more than once.

Book excerpt from Being the Boss: 3 Imperatives for Becoming a Great Leader

By Linda A. Hill and Kent Lineback

"I'm the boss!"

It's a common mistake to think management is defined by formal authority—the ability that comes with a title to impose your will on others. In fact, formal authority is a useful but limited tool.

People Want More Than a Formal, Authority-Based Relationship with the Boss

Many managers—especially those who were achievement-driven stars as individual performers—don't even think about relationships. They're so task oriented that they put the work to be done and their authority as boss at the heart of what they do and assume they can ignore the human aspects of working with others. ¹

The problem is that most people don't want your authority to be the be-all and end-all of the relationship. They want a personal, human connection, an emotional link. They want you to care about them as individuals. They want you to encourage their growth and development. Research tells us this kind of human relationship with the boss is a key factor determining an employee's level of engagement with the work. ²

We know of a small-company owner, a warm, decent woman, so pressed for time she consciously decided to avoid small talk at the office. She never opened up to people about herself or asked about their lives and interests. She didn't, that is, until her people rose up and expressed, through an intermediary, that they hated how she treated them. They wanted a real human connection with her, even if she was "the boss."

The Limits of Formal Authority

Most managers soon discover, often to their dismay, that authority isn't very effective for influencing people and getting results.

Your Formal Authority Often Fails to Produce Compliance

You may think people are perverse or stubborn, but there are many reasons they don't always follow your instructions.

They disagree with you. They think there's a better way and feel free to exercise their own judgment.

They think something else is more important. It's up to you to set deadlines and make your priorities clear.

They don't understand what you want. Making directions more and more explicit can only go so far. Most work today requires some judgment and thought, and so it's almost impossible to give instructions specific enough to eliminate all misunderstanding or cover every contingency.

They find circumstances have changed, invalidating your directions and forcing them to improvise.

They dislike being bossed around. Peremptory orders given in a tone of voice or choice of words that's belittling only invite minimal compliance or subtle disobedience. As someone told us, "I fixed my boss. I did exactly what he said to do." Be aware that some people are especially sensitive to "being bossed around." They bring to work a history of troubled dealings with authority figures. By the time you meet them, they've accumulated a set of ambivalent and even negative feelings about authority, which they apply to you and any instructions you give. At the extreme, these are the people from whom a simple directive can produce angry resistance.

People may have a view of authority that differs from yours. They may bring to work generational or cultural attitudes that lead them to distrust and question authority. That will make them less likely to comply. This is not personal. It's simply a different point of view that you and they will need to work through. As companies and work groups become more diverse, these differences will appear more often.

Finally, people may not comply because they're confused. The growing complexity of the workplace and more fluid organizational structures with multiple bosses and temporary teams can complicate and blur lines of authority. Many employees may be confused by what seem to them conflicting demands and expectations.

Also, in virtual teams with members spread far apart, distance diminishes the ability of formal authority to create compliance. It's easy to forget about a boss 3,000 miles away, especially when there's another just down the hall.

All of these reasons create a workplace in which authority is at best an uncertain means of influence.

Your Formal Authority by Itself Cannot Generate Commitment

You need more than people's simple compliance. You need them to be engaged with their work and want to do it well. You can command how your people spend their time, even where they direct their attention, but you cannot decree what's essential for good work—you must win their commitment by winning over their heads and hearts.

When you rely primarily on your formal authority, you're fundamentally managing through fear—fear of the consequences of disobedience.

Fear is a limited, ultimately corrosive and demeaning way to get what you want from others. It certainly will not generate personal commitment or real engagement with the work and the team.

Your Formal Authority Cannot Create Genuine Change

Change often brings uncertainty, loss, and pain for those it touches. Yet those are usually the very people who must embrace the change and make it work. Real solutions can only come from those involved, and real change requires that they alter not only their behavior but their thinking, assumptions, and values as well. Authority cannot compel such change.

Your Formal Authority Is Less Likely to Elicit People's Knowledge and Insight

Every individual in an organization possesses knowledge, skills, and new ideas of potential value. (If they don't, it's your responsibility to replace them with people who do.) Managing people primarily by exercising your formal authority—by telling them what to do without truly seeking their input—is far less likely than a more open approach to capture that full value. Insisting on "I'm the boss!" places a huge burden on you. The head of a large high-tech company told us of a discussion she once had with her head of HR. Her company had installed a program to encourage broader participation in decision making, and she was frustrated that product development seemed to be moving too slowly.

"Maybe we have to go back to the old command-and-control system," she said.

"If that's what you want," said the HR person, "I'll help you. But there's one problem. You have to be right all the time."

Laughing, the CEO said, "I'll never forget what he said. I told him, 'That's never going to work.' "

No one person can possibly possess the knowledge, experience, and wisdom needed to make every decision. Organizational success today requires the involvement of everyone at all levels. Less authority-driven organizations are more likely to elicit and take full advantage of the talent and experience of their people.

Public company shareholders have long complained that corporate boards don't always act in the best interest of their investors. But does the addition of a shareholder-sponsored board member increase the market value of the firm?

The answer is important because it could support or thwart the US government's regulatory efforts to increase shareholder power at the board level following the recent financial crisis.

To help answer that question, three Harvard Business School professors performed a natural experiment made possible by changes to federal proxy rules, which began last summer.

In August 2010, the US Securities and Exchange Commission passed Rule 14a-11, also known as the shareholder proxy access rule, which would allow large investors to nominate board members in the company's proxy materials, forgoing the traditional time-consuming and expensive election process that was rarely successful. In short, the rule would make it much easier for dissident shareholders to nominate and put in place new directors.

The shareholder proxy access rule limited which owners could nominate directors. In order to qualify, shareholders had to have owned at least 3 percent of a firm's shares for at least the prior three years. Still, the announcement drew ire from some business groups, including the US Chamber of Commerce and the Business Roundtable.

They argued that the rule might shift too much power to unions and special interest groups, and that highly experienced directors might not want to serve on a board if they had to work alongside shareholder-sponsored candidates. In addition, shareholders would be penalized by a decrease in the company's market value.

In September, the two organizations jointly filed a lawsuit against the SEC, arguing that the rule violated the Administrative Procedure Act and that the SEC failed to properly assess the rule's effects on "efficiency, competition and capital formation" as required by law.

The complaint did not come as a surprise to industry observers, but the SEC's reaction did. On October 4, the SEC unexpectedly announced that it was indefinitely postponing the implementation of shareholder proxy access, pending the outcome of the lawsuit.

A natural experiment

The delay was just what the HBS professors needed to conduct an impromptu experiment. They hypothesized that the market reaction to the SEC announcement could help determine whether increasing shareholder power would be considered good or bad in the eyes of the stock market. They detail their research in a new paper: Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge.

"The delay was a big surprise," says Bo Becker, who coauthored the paper with colleagues Daniel B. Bergstresser and Guhan Subramanian. "Nobody thought the case had much merit. But all of a sudden you sort of pulled the rug out from under any owners planning to use this rule as a tool. It was a unique situation for [research] because it was unpredicted and legally important for a subset of firms with large activist owners who might take advantage of a proxy access rule."

The professors compared stock market returns for different firms on October 4, the day the SEC announced the delay.

In particular, they compared the return for companies where investors known for being activists held large stakes. ("Activist investors" is used here to refer to hedge funds with a history of trying to change company behavior.) Presumably, these were the shareholders who would have been most likely to nominate new board members if the SEC hadn't delayed the rule.

"The Business Roundtable could be right that some shareholders have ideas that destroy firm value," Becker says. "But it is also possible that some activist hedge funds go through the trouble of taking concentrated risk for an extended time only when they believe they have good ideas for improving the firm's performance. If this is true, and if they are sometimes right, taking the proxy access rule out of their toolbox is going to reduce firm value."

The latter possibility appears more consistent with stock market evidence. The overall market fell on October 4. More importantly, the news had an especially negative effect on companies that would have been most heavily affected by the proxy access rule because they had activist investors. The stocks of those companies fell the most.

"We find that share prices of companies that would have been most exposed to shareholder access declined significantly compared to share prices of companies that would have been most insulated from the rule," the professors write in their report.

Firms in which historically activist institutions held significant ownership stakes lost considerable value on the announcement: a drop in 55 basis points for a 10 percentage point change in activist institution ownership.

"The biggest conclusion we draw from this is that allowing owners to have more power and influence with corporate decision-making, on balance, seems to be valuable in the eyes of the stock market," Becker says. "And this particular rule or some similar rule seems like it might be one way to do it."

Most people who study corporate governance and large firms, both inside and outside academia, would say that it's plausible that there are at least a few firms in the S&P 1500 where shareholders might have some useful ideas, Becker says. "This is not to say that firms in general are mismanaged, but that there are some firms out there where owners could have a positive influence."

The research could prove to be a helpful tool for the SEC.

"The best argument that the Business Roundtable raised in its criticism of the SEC rule was that the SEC did not have a careful analysis showing that the rule would be helpful, which it is required to do," Becker explains. "The SEC needs to justify its rules. So, potentially, the SEC could look at our paper to support the idea that this type of rule might be useful."

Abstract

Since Durkheim, sociologists have believed that dense network structures lead to fewer norm violations. Coleman (1990) proposed one mechanism generating this relationship and argued that dense networks provide an opportunity structure to reward those who punish norm violators, leading to more frequent punishment and in turn fewer norm violations. Despite ubiquitous scholarly references to Coleman's theory, little empirical work has directly tested it in large-scale natural settings with longitudinal data. We undertake such a test using records of norm violations during the editing process on Wikipedia, the largest user-generated on-line encyclopedia. These data allow us to track all three elements required to test Coleman's mechanism: norm violations, punishments for such violations, and rewards for those who punish violations. The results are broadly consistent with Coleman's mechanism.

Abstract

We explore the specificity of volume-based learning in an outsourced setting. When producing a unit of output, the content of the knowledge gained can vary dramatically from one unit to the next. This suggests that while aggregate experience in learning-by-doing is generally valuable, not all prior experience has an equal impact on performance. To examine these differences we introduce a framework to unpack the multiple dimensions of experience that exist within one unit of work. We then empirically examine the customer-, domain-, and technology-specificity of learning. Our empirical setting is the context of outsourced radiological services where individual doctors at an outsourcing firm complete radiological reads for hospital customers. We find that customer-, domain-, and technology-specific experience-as compared to other experience-leads to improved productivity. We discuss the implications of our results for the study of learning and experience, as well as for outsourcers and the firms that use their services.

On November 26, 2008, 175 people died in Mumbai, India, when 10 terrorists simultaneously struck sites. Of the five locations—all well-known landmarks—the beautiful domes of the hotel known as the Taj Mahal Palace and Tower would become most closely associated with the horrific attacks in the world's collective conscience.

A new multimedia case by HBS professor Rohit Deshpandé offers a flip side to the nightmarish scenes that unfolded in real time on television screens around the globe. Produced in collaboration with Ruth Page and David Habeeb of the HBS Educational Technology Group, "Terror at the Taj Bombay: Customer-Centric Leadership" documents the bravery and resourcefulness shown by rank-and-file employees during the siege. (The case is not yet available to the public.)

Video interviews with hotel staff and senior executives, combined with security footage of the attack, create a documentary-like account of events that took place over the course of 59 hours. The case also covers the hotel's history, its approach to training employees, the "guest is God" philosophy inherent in Indian culture, and the question of how the hotel will recover after the attacks.

Underlying this framework is a central conundrum: Why did the Taj employees stay at their posts, jeopardizing their safety in order to save hotel guests? And is this level of loyalty and dedication something that can be replicated and scaled elsewhere?

"Not even the senior managers could explain the behavior of these employees," says Deshpandé. "In the interview, the vice chairman of the company says that they knew all the back exits—the natural human instinct would be to flee. These are people who instinctively did the right thing. And in the process, some of them, unfortunately, gave their lives to save guests." A dozen employees died.

Most difficult case

Deshpandé, a native of Bombay (now Mumbai), says it took a full week to conduct the interviews. "This is the hardest case I've ever worked on. One reason is that I had no conception of what it would be like to have people confront the trauma again. We objectify it, keep emotion at a distance, but after 15 minutes of questions with a video camera in a darkened room, there are deeper, more personal reflections of what happened. It was really, really hard.

"The other thing is that I grew up there. So the Taj is part of my memories, too. As one of the interview subjects said, the Taj is their Taj, meaning anyone who has ever walked through its doors. It's a place that means many things to many people."

In one interview, Taj general manager Karambir Singh Kang describes his father, a military man, telling him that his job is like being the captain of a ship. "I think that's the way everyone else felt, too," says Kang. "A sense of loyalty to the hotel, a sense of responsibility to the guests." Several hours into the siege, Kang's wife and two young sons died in a fire that swept through their apartment on the hotel's top floor. Even after receiving the news, he insisted on staying at his post to help direct a response to the ongoing attack. (The battle for control at the Taj would continue a full two days after other locations had been secured.)

Nothing in the employees' training could have prepared them for such an unprecedented situation, Deshpandé says. Yet further interviews and text documents from the case provide background on the unique culture of Tata Sons, the Taj's parent company, while also revealing the exacting process for selecting, training, and rewarding Taj employees for their work.

Mandate to delight

Awards are given for longer terms of service, for example, with Group Chairman Ratan Tata (HBS AMP 71, 1975) personally recognizing those who have served 10 to 35 years and more. Employees who have demonstrated outstanding service are selected for inclusion in the Managing Directors Club and recognized across the organization.

Such incentives aren't so unusual, of course. But interviews with senior management demonstrate how seriously the task of building a customer-centric culture and value system is taken at the Taj and its parent company, Indian Hotels.

"Every time they interact with a guest they should look for an opportunity to delight him," says H.N. Srinivas, senior vice president of human resources. During a 24-hour stay, a guest will have an average of 40 to 42 contacts with employees. "We've mapped it," he explains.

When it comes to selecting employees, Indian Hotels CEO Raymond N. Bickson describes how he first looks for "nice people who are not afraid of serving people." He can teach them to be a bellman, a waiter, or a desk clerk, he continues. "But I can't teach them to be nice. I can't teach that spirit of ownership."

"In India and the developing world, there's a much more paternalistic equation between employer and employee," says Ratan Tata, chairman of Tata Sons. "I think that creates a kinship." Every employee donates a small portion of their salary to a pool that can be drawn on in the event a colleague suffers an accident or other significant personal setback.

To date, Deshpandé has taught the case in the School's Owner/President Management Executive Education program; he expects it to be used more widely, particularly since it can also be taught as an example of managing the postcrisis recovery of a flagship corporate brand.

No clear answer

The question of why the Taj employees demonstrated such loyalty elicited a variety of responses from students, Deshpandé says.

"For example, some suggested that it has to do with governance of the Tatas; two-thirds of their profits are donated to charitable causes, so the employees feel that they are working for a higher good." But the IT firm Tata Consultancy Services has had many of the same difficulties with employee retention that other Indian IT firms experience. "In that case, the loyalty might be more to self rather than to the organization," he says.

A definitive answer to the question of why the Taj employees behaved as they did may not be possible; but managers who read and view the case will likely come away with a clearer sense of what it takes to build a particular culture and value system and how to recruit, train, and reward employees in nonmonetary ways.

"It's all of those very specific things that build a customer-centric culture in an organization," Deshpandé says. "This example far exceeds anything I've seen before."

Abstract

In this paper we present the results from a "corruption game" (a dictator game modified so that the second player can accept a side payment that reduces the overall size of the pie). Dictators (silently) treated to have the possibility of taking a larger proportion of the recipient's tokens, take more of them. They were also more likely to report believing that the recipient would accept a low price in exchange for a side payment; and selected larger numbers as their best guess of the likely proportion of recipients acting "unfairly". The results favor the hypothesis that people avoid altruistic actions by distorting beliefs about others.

Abstract

This article describes the consumer finance sector in the U.S. since World War II. We first define the sector in terms of the functions delivered by firms (payments, savings/investing, borrowing, managing risk, and providing advice). We provide time series evidence on major trends in consumption, savings, and borrowing. Examining consumer decisions, changes in regulation, and business practices, we identify four major themes that characterize the sector: (1) innovation that increased the choices available to consumers; (2) enhanced access in the form of broadening consumer participation in financial activities; (3) do-it-yourself consumer finance, which allowed and forced consumers to take greater responsibility for their own financial lives; and (4) the resultant increase in household risk taking.