Eric J. Van den Steen
Associate Professor of Business Administration, Marvin Bower Fellow
Eric Van den Steen is an Associate Professor of Business Administration and Marvin Bower Fellow in the Strategy Unit. Professor Van den Steen's research studies the interaction between strategy and organization, and how both are shaped by managers' fundamental beliefs, vision, and potential strategic disagreements. His latest work focuses on the nature of strategy and of competitive advantage and how they interact with organization and leadership. He has also written on corporate culture, knowledge management, corporate governance, sources of managerial overoptimism, and the role of strategic disagreement in driving mergers and acquisitions.
Professor Van den Steen has taught the first-year Strategy course and developed and teaches the second-year elective Creating and Sustaining Competitive Advantage. In HBS executive education, he has taught in the Leadership Best Practices program and currently teaches the strategy component of the Program for Leadership Development.
Prior to joining the Business School, Professor Van den Steen was on the faculty of MIT's Sloan School of Management, where he was recognized for his teaching. He worked as a consultant, first at Arthur D. Little and later at McKinsey & Company, and holds a MS in Mechanical Engineering from the KULeuven (Belgium), an MBA from the University of Chicago, and a PhD from the Stanford Graduate School of Business.
-
Article
| Management Science
|
Overconfidence by Bayesian Rational Agents
Eric J. Van den Steen
This paper derives two mechanisms through which Bayesian-rational individuals with differing priors will tend to be relatively overconfident about their estimates and predictions, in the sense of overestimating the precision of these estimates. The intuition behind one mechanism is slightly ironic: in trying to update optimally, Bayesian agents overweight information of which they overestimate the precision and underweight in the opposite case. This causes overall an overestimation of the precision of the final estimate, which tends to increase as agents get more data.
Keywords: Decision Choices and Conditions;
Forecasting and Prediction;
Knowledge Acquisition;
Risk Management;
Prejudice and Bias;
-
Article
| RAND Journal of Economics
|
On the Origin of Shared Beliefs (and Corporate Culture)
Eric J. Van den Steen
This article shows how corporate culture, in the sense of shared beliefs and values, originates (often unintentionally) through screening, self-sorting, and manager-directed joint learning. It shows that such culture will be stronger among more important employees and in older and more successful firms where employees make important decisions and the manager has strong beliefs. It further shows how a manager's beliefs influence culture, how culture persists despite turnover, and why the suggested link between culture and performance may be a case of inverse causality. It finally shows that, from an outsider's perspective, organizations may tend to over-invest in corporate culture.
Keywords: Organizational Culture;
Learning;
Values and Beliefs;
Employees;
Decisions;
Power and Influence;
Performance;
Perspective;
-
Article
| Management Science
|
Culture Clash: The Costs and Benefits of Homogeneity
Eric Van den Steen
This paper develops an economic theory of the costs and benefits of corporate culture-in the sense of shared beliefs and values in order to study the effects of "culture clash" in mergers and acquisitions. I first use a simple analytical framework to show that shared beliefs lead to more delegation, less monitoring, higher utility (or satisfaction), higher execution effort (or motivation), faster coordination, less influence activities, and more communication, but also to less experimentation and less information collection. When two firms that are each internally homogenous but different from each other merge, the results translate to specific predictions on how the change in homogeneity will affect firm behavior. This paper's predictions can also serve more generally as a test for the theory of culture as shared beliefs.
Keywords: Cost vs Benefits;
Organizational Culture;
Economics;
Information Management;
Forecasting and Prediction;
Values and Beliefs;
Mergers and Acquisitions;
Framework;
Satisfaction;
Motivation and Incentives;
Power and Influence;
Communication;
-
Article
| American Economic Review
|
Interpersonal Authority in a Theory of the Firm
Eric J. Van den Steen
This paper develops a theory of the firm in which a firm's centralized asset ownership and low-powered incentives give the manager, as an equilibrium outcome, interpersonal authority over employees (in a world with open disagreement). The paper thus provides micro-foundations for the idea that bringing a project inside the firm gives the manager control over that project, while explaining concentrated asset ownership, low-powered incentives, and centralized authority as typical characteristics of firms. The paper also leads to new perspectives on the firm as a legal entity and on the relationship between the Knightian and Coasian views of the firm. (JEL L22, D23, D81)
Keywords: Theory;
Assets;
Ownership;
Motivation and Incentives;
Governance Controls;
Power and Influence;
Projects;
Perspective;
Employees;
-
Article
| Management Science
|
Managing Know-How
Deishin Lee and Eric J. Van den Steen
We study how firms can use a knowledge management system to optimally leverage employee-generated know-how. In particular, we consider the following practical strategic questions for the manager of a knowledge-intensive firm: should her firm develop a formal knowledge system? And if so, how should it be managed, particularly in terms of what information to record? We find that firms benefit more from a knowledge system when they are larger, face the same issues more frequently, have higher turnover, and face problems about which there is less general knowledge. In terms of what information to record, a key insight is that recording moderately successful practices can be counter-productive, since doing so may inefficiently reduce employees' incentives to experiment. This "strong-form competency trap" forces firms into an exploration-exploitation trade-off. Firms that value a knowledge system most should also be most selective in recording information. We further find that recording successes is more valuable than recording failures, which supports firms' focus on best practice. Beyond these main principles, we also show that it may be optimal to disseminate know-how on a plant-level but not on a firm-level, and that recording back-up solutions is most valuable at medium levels of environmental change.
Keywords: Change;
Employees;
Information;
Knowledge Management;
Outcome or Result;
Practice;
Problems and Challenges;
Motivation and Incentives;
System;
Value;
Citation: Lee, Deishin, and Eric J. Van den Steen. " Managing Know-How." Management Science 56, no. 2 (February 2010): 270–285. (Articles in Advance published online on November 25, 2009.)
-
Article
| Journal of Law, Economics & Organization
|
Disagreement and the Allocation of Control
Eric J. Van den Steen
This article studies the allocation of control when there is disagreement—in the sense of differing priors—about the right course of action. People then value control rights since they believe that their decisions are better than those of others. More disagreement (due to, e.g., fundamental uncertainty) increases the value that players attach to control. The article shows that all income and control of a project should then be concentrated in one hand: income rights should go more to people with more control since such people value income higher (because they have a higher opinion of the decisions made); control rights should go more to people with more income since they care more (and believe that they make better decisions). Different projects may be optimally "owned" by different people. Furthermore—with residual income exogenously allocated—complementary decisions should be more co-located, whereas substitute decisions should be more distributed. Confident people with a lot at stake should—in a wide range of settings—get more control.
Keywords: Governance Controls;
Projects;
Decisions;
Value;
Agreements and Arrangements;
-
Journal Article
| American Economic Review: Papers and Proceedings
|
Authority versus Persuasion
Eric J. Van den Steen
This paper studies a manager's trade-off between using persuasion and using interpersonal authority to get an employee to 'do the right thing' from the manager's perspective (when the manager and employee disagree on the right course of action). It shows that persuasion and authority are complements at low levels of effectiveness but substitutes at high levels. Furthermore, the manager will rely more on persuasion when employee motivation is more important for the execution of the project, when the employee has strong intrinsic or extrinsic incentives, and, for a wide range of settings, when the manager is more confident about the right course of action.
Keywords: Employee Relationship Management;
Managerial Roles;
Projects;
Motivation and Incentives;
Power and Influence;
Citation: Van den Steen, Eric J. " Authority versus Persuasion." American Economic Review: Papers and Proceedings 99, no. 2 (May 2009): 448–453.
-
Article
| Journal of Law, Economics & Organization
|
Organizational Beliefs and Managerial Vision
Eric J. Van den Steen
Can managers have an impact on their firm that goes beyond their direct actions and decisions? This article shows that a manager with strong beliefs about the right course of action will attract, through sorting in the labor market, employees with similar beliefs. This alignment of beliefs gives direction to the firm and has important implications for incentives and coordination. The article then defines vision, in accordance with the management literature, as a strong belief about the right course of action, and shows that it may be optimal to hire managers with such strong beliefs. Vision will be most important when uncertainty is high and actions are difficult to contract on.
Keywords: Organizations;
Goals and Objectives;
Decisions;
Labor;
Markets;
Employees;
Motivation and Incentives;
Recruitment;
Risk and Uncertainty;
Values and Beliefs;
Citation: Van den Steen, Eric J. " Organizational Beliefs and Managerial Vision." Journal of Law, Economics & Organization 21, no. 1 (2005): 256–283. (Reprinted in The Economics of Organisation and Bureaucracy, Peter M. Jackson (ed.), Edward Elgar (Cheltenham, UK), 2013.)
-
Article
| American Economic Review
|
Rational Overoptimism (and Other Biases)
Eric J. Van den Steen
Rational agents with differing priors tend to be overoptimistic about their chances of success. In particular, an agent who tries to choose the action that is most likely to succeed, is more likely to choose an action of which he overestimated, rather than underestimated, the likelihood of success. After studying the comparative statics of this mechanism, I show that it also causes agents to attribute failure to exogenous factors but success to their own choice of action, to disproportionately believe that they will outperform others, to overestimate the precision of their estimates, and to overestimate their control over the outcome.
Keywords: Prejudice and Bias;
Decision Choices and Conditions;
Performance Expectations;
Outcome or Result;
Opportunities;
Risk and Uncertainty;
Failure;
Success;
Management Analysis, Tools, and Techniques;
Personal Characteristics;
Values and Beliefs;
Ethics;
-
Chapter
| Corporate Governance: Essays in Honor of Horst Albach
| 2001
Human Capital and Corporate Governance
Eric J. Van den Steen and John Roberts
Keywords: Human Capital;
Corporate Governance;
Citation: Van den Steen, Eric J., and John Roberts. "Human Capital and Corporate Governance." In Corporate Governance: Essays in Honor of Horst Albach, edited by Horst Albach, and Joachim Schwalbach, 128–144. Publications of the Society for Economics and Management at Humboldt University Berlin. Berlin: Springer-Verlag, 2001.
-
Working Paper
| HBS Working Paper Series
| 2012
A Theory of Explicitly Formulated Strategy
Eric Van den Steen
When a CEO tries to formulate 'a strategy,' what is she looking for? What exactly is 'a strategy,' why does it matter, and what are its properties? This paper defines an explicitly formulated 'strategy' as the 'smallest set of choices and decisions sufficient to guide all other choices and decisions,' which formally captures the idea of strategy as a plan boiled down to its most essential choices. I show that this definition coincides with the equilibrium outcome of a game where a person can–at a cost–look ahead, investigate, and announce a set of (intended or actual) choices to the rest of the organization. Strategy is also–in some precise sense–the smallest set of decisions that needs to be decided centrally to ensure that all decisions are consistent (by giving a clear direction). The paper analyzes what characteristics make a decision 'strategic' and when and how having a strategy creates value, including when a strategy 'bet' can create value. It shows how understanding the structure of strategy may enable a strategist to develop the optimal strategy without a comprehensive optimization. And it derives some broader organizational implications.
Keywords: Strategy;
Value;
Decisions;
Planning;
Theory;
-
Working Paper
| 2006
Too Motivated?
Eric J. Van den Steen
I show that an agent's motivation to do well (objectively) may be unambiguously bad in a world with differing priors, i.e., when people openly disagree on the optimal course of action. The reason is that an agent who is strongly motivated is more likely to follow his own view of what should be done. As a result, the agent is more willing to disobey his principal's orders when the two of them disagree on the right course of action. This effect has a number of implications. First of all, agents who are subject to authority will have low-powered incentive pay. Second, intrinsically motivated agents will be more likely to disobey and less likely to be subject to authority. Firms with intrinsically motivated agents will need to rely on other methods than authority for coordination. Moreover, an increase in intrinsic motivation may decrease all players' expected utility, so that it may be optimal for a firm to look for employees with low intrinsic motivation. Finally, subjective performance pay may be optimal, even when the true outcome of the project is perfectly measurable and contractible. Through this analysis, the paper identifies an important difference between differing priors and private benefits (or private information): with differing priors, pay-for-performance can create agency problems rather than solving them. Keywords: Governance Controls;
Employees;
Wages;
Measurement and Metrics;
Outcome or Result;
Performance;
Agency Theory;
Motivation and Incentives;
Citation: Van den Steen, Eric J. " Too Motivated?" Sloan School of Management Working Paper, No. 4547–05, April 2006. (Available at SSRN.)
-
Working Paper
| 2006
The Limits of Authority: Motivation versus Coordination
Eric J. Van den Steen
This paper studies the effects of open disagreement on motivation and coordination. It shows how, in the presence of differing priors, motivation and coordination impose conflicting demands on the allocation of authority, leading to a trade-off between the two. The paper first derives a new mechanism for delegation: since the agent thinks, by revealed preference, that his own decisions are better than those of the principal, delegation will motivate him to exert more effort when effort and correct decisions are complements. A need for implementation effort will thus lead to more decentralization. The opposite is true when effort and decisions are substitutes. Delegation, however, reduces coordination when people disagree on the right course of action. The paper shows that, with differing priors, the firm needs to rely more on authority (as opposed to incentives) to solve coordination problems, relative to the case with private benefits. An interesting side-result here is that the principal will actively enforce her decisions only at intermediate levels of the need for coordination. The combination of the two main results implies a trade-off between motivation and coordination, both on a firm level and across firms. I derive the motivation-coordination possibility frontier and show the equilibrium distribution of effort versus coordination. I finally argue that strong culture, in the sense of homogeneity, is one (costly) way to relax the trade-off. Keywords: Decisions;
Governance Controls;
Organizational Culture;
Agency Theory;
Conflict and Resolution;
Motivation and Incentives;
-
Case
| HBS Case Collection
|
2013
(Revised from original 2011 version)
Akamai's Edge (A)
Eric Van den Steen
In 2009, Paul Sagan, CEO of Akamai, the leading online content delivery network with a 60% market share, needs to decide how to respond to aggressive entry in its market, whether and how to pursue the explosive growth in online video, and whether to stay with its distributed network model or move towards its competitors' more centralized design.
Keywords: Competitive Advantage;
Market Entry and Exit;
Business Model;
Competitive Strategy;
Network Effects;
Values and Beliefs;
Citation: Van den Steen, Eric. " Akamai's Edge (A)." Harvard Business School Case 712-455, April 2013. (Revised from original December 2011 version.)
-
Supplement
| HBS Case Collection
|
2011
Bananas (B)
Eric Van den Steen
Citation: Van den Steen, Eric. " Bananas (B)." Harvard Business School Supplement 712-452, December 2011.
-
Case
| HBS Case Collection
|
2010
(Revised from original 2004 version)
Akamai Technologies
Benjamin G. Edelman, Thomas R. Eisenmann and Eric J. Van den Steen
As the leading content delivery network, Akamai helps Internet companies deliver Web site content to end users with fewer delays and lower costs. Describes the strategic management challenges facing Akamai in early 2004. The company is poised to offer its next generation of services for enterprise customers, which will allow them to run Internet-enabled applications ("Web services")--on demand, with minimal capital investment--from Akamai's network of 15,000 servers located in ISP facilities at the Internet's "edge"--close to end users. Many large enterprise software companies have developed proprietary platforms for creating and managing Web services. Akamai must decide which of these software companies would be attractive partners and whether it can and should remain uncommitted to a platform as it helps customers deploy Web services. A rewritten version of an earlier case.
Keywords: Market Platforms;
Partners and Partnerships;
Strategy;
Internet;
Technology Networks;
Citation: Edelman, Benjamin G., Thomas R. Eisenmann, and Eric J. Van den Steen. " Akamai Technologies." Harvard Business School Case 804-158, June 2010. (Revised from original March 2004 version.) ( request a courtesy copy.)
-
Teaching Note
| HBS Case Collection
|
2009
Microsoft's Search (TN)
Jan W. Rivkin and Eric J. Van den Steen
Teaching Note for [709461].
Keywords: Competition;
Online Advertising;
Search Technology;
Strategy;
Markets;
Computer Industry;
Information Technology Industry;
Citation: Rivkin, Jan W., and Eric J. Van den Steen. " Microsoft's Search (TN)." Harvard Business School Teaching Note 710-416, July 2009.
-
Case
| HBS Case Collection
|
2009
Microsoft's Search
Jan W. Rivkin and Eric J. Van den Steen
In 2008, executives at Microsoft must decide how to compete against Google in the market for Internet search and advertising. The case describes how Microsoft has responded to a set of competitive threats in the past, how Google has gained a dominant position in Internet search and advertising, and what Microsoft has done so far in its as-yet-unsuccessful effort to catch up with Google. The case then challenges students to construct a strategy that will allow Microsoft to achieve its objectives in the evolving market for search and advertising.
Keywords: Online Advertising;
Competitive Strategy;
Internet;
Search Technology;
United States;
Citation: Rivkin, Jan W., and Eric J. Van den Steen. " Microsoft's Search." Harvard Business School Case 709-461, January 2009.
|
|