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Electric Charge How Tesla Motors uses strategic alliances to power innovate green products.

“Dirty� Industry Bangladesh needs to clean up its controversial shipbreaking industry.

Global Gridlock Executive Chairman Bill Ford Jr. calls for evolution in the transportation ecosystem.

The American University Kogod School of Business | Fall 2012

Transporting Knowledge

From the Dean Transporting the world’s ever-expanding number of people and supply of goods requires continual growth and adaptation by dozens of industries which—directly and indirectly—move us and our materials by land, sea, or sky.

in this issue 1 From the Dean 2 Brazil Subsidizes Uncertain Success 6 System Failure 8

COVER STORY Shoot for the Moon

18 POsitive Charge 22 Buy Green, Become a Better Person 26 kogod standout Doubling Down in the Desert 28 The First 90 Days: Congressional Transitions Ahead

36 Bangladesh: Where Ships Go to Die 42 Filling the Skies 46 48

Practitioner Perspective Combating Global Gridlock William Clay “Bill” Ford Jr., Executive Chairman, Ford Motor Company Cross-Company Collaboration Howard “Ed” Trainor, MBA ’71

Across the seas in Bangladesh, alumnus Dylan Vogt, BSBA ’12, plumbs the murky waters of the ship dismantling industry. The controversial practice remains competitive because of low costs— made possible by deficient safety and wage standards—and is inadvertently incentivized by flexible international maritime laws, which keep bringing customers into port. In a global marketplace, competition is even fiercer, and businesses have taken note. Often, they need partners in order to succeed. Professor Stevan Holmberg is studying how companies such as Tesla Motors are now competing as part of alliancebased networks. Recognizing the relationship between economic and population growth is top of mind for Ford Motor Company Executive Chairman Bill Ford, who considers the future of mobility and transportation as the world population approaches nine billion. Meanwhile, Alvin Nichols, MPA ’78, argues that investment in public transportation is an investment in the region’s economic prosperity—not a subsidy. Managing transition is critical in every sector— including on Capitol Hill, where the upcoming election will bring new members in both parties. Executive-in-Residence Meredith Persily Lamel will provide the freshman members of the 113th Congress with a crash course on priorities for the first 90 days, so they can be ready to lead and legislate. We all know the old adage that the only constant is change. As academics and business practitioners, it is our capacity to recognize the shifting realities of the markets, and to take maximum advantage of those currents that separate the influencers from the observers. For our part at Kogod, we will keep our eyes on the horizon and our hands on the wheel as an active participant in shaping the global economy of tomorrow.

Letter by michael j. ginzberg Dean, kogod school of business

KOGOD NOW Fall 2012 |

Kogod Tax Center 32 Employers: Save Money, Retain Talent with Commuter Benefits


This perpetual state of change is fertile ground for academic research, as faculty members consider the diverse market forces and organizational and cultural dynamics impacting these industries. Within Kogod alone, we currently have faculty examining various aspects of the automotive, airline, and shipping industries. The intricate requirements to build, distribute, and grow in these industries have become vastly more complicated over the past century, increasing the need for effective knowledge and resource management. Assistant Professor Richard Linowes and Professor Tomasz Mroczkowski have analyzed the heterogeneous road of knowledge management between US and Japanese information appliance firms. They uncovered clear opportunities for the American automotive industry, among others, to further stabilize its recovery and invest in future growth. Professor Alberto Espinosa and Associate Professor Mark Clark use social networks to examine team knowledge, offering managers in the transit industry and elsewhere a model for how to staff and train their teams to maximize cohesion and reduce cliques. Assistant Professor Michelle Westermann-Behaylo goes a step further and considers the mobility of these knowledge workers, as well as how state or federal employment laws could be impeding innovation and what we can learn from our European counterparts. The interconnected nature of the public and private sectors defines daily business reality across the globe. Regulatory actions and government investments have consequences—intended and unintended—for the very industries they attempt to advance or protect. Transportation is no exception. Consider the two ends of the ship construction spectrum. In Brazil, the government has invested hundreds of millions to establish a shipbuilding cluster that will enable oil exports. Progress has been uneven; Associate Professor Frank DuBois is probing further to understand whether the endeavor can succeed despite delays, a lack of expertise, and increased infighting.

Brazil Subsidizes Uncertain Success

Unlike the samba beats that punctuate the late night air in Rio de Janeiro, it’s the clamor of construction equipment and hum of machinery that dictate the rhythm of daily life in the Brazilian state of Pernambuco. About 1,200 miles to the northeast of Rio, late nights in this part of the country are harder to come by outside of Carnival. The din of industrial activity rises with the sun. Situated just south of Recife, the state capital, the mills, processing plants, and technology centers of the Suape Port-Industrial Complex dominate the coastal landscape. The complex stretches over 52 square miles and is home to more than 100 companies, among them Estaleiro Atlântico Sul (EAS), the largest shipyard in the southern hemisphere. “It’s expansive, busy, and loud,” said Frank DuBois, an associate professor who specializes in operations management and international business. DuBois studied the development of EAS with a colleague at the University of Pernambuco. “You feel like you’re in a city, with vehicles and railroad cars and cranes in constant motion. The amount of activity is staggering.” DuBois has closely followed EAS’s progress, from breaking ground in 2007 through the recent launch of the first oil tanker. He grew up in Tidewater, Virginia, a region known for shipbuilding, and has a longstanding interest in international maritime business. While the hustle and bustle may seem to be contained within the complex, all the activity on land can be traced back to a thick, black substance just offshore. More than a mile below the ocean’s surface, oil, in vast amounts, is pooled under domes of salt.

A Young Cluster When the Brazilian government decided to expand its shipbuilding industry to support oil drilling and production, EAS was no more than an idea on paper. “Brazil took an area where there was nothing and carved out a shipyard,” said DuBois. “Everything was built from the ground up—a distinct advantage over using older, smaller shipyards.”

Article By Anna Miars

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Black Gold About 50 billion barrels’ worth of oil—enough to fully supply the US for more than seven years—was discovered off the coast over the last decade. These reserves rival those of Kuwait, Russia, or West Africa. Trapped under 65-million-year-old geological formations more than four miles below the seabed, these oil deposits have solidified expectations that Brazil could eventually become a major exporter of crude oil. Today, the country is the world’s 11th-largest oil producer, but output is expected to more than double

from current levels to 4.9 million barrels per day. By 2020 it should be in the top five—a prospect set to generate wealth on a transformative scale. Much of that capital will directly benefit the public sector; oil exploration and extraction is led by Petrobras, the majority state-owned energy company. The joy of discovery gave way to the realization that Brazil’s existing transportation and logistics infrastructure were not adequate, given the magnitude of the reserves and the complexity involved in reaching them. As the potential of the deposits was recognized, a need for new supply ships, tankers, drilling rigs, oil platforms, and associated equipment became evident. In 2011, 180 vessels supported Petrobras’s daily operations, directed by Transpetro, the transportation arm of Petrobras. Of those only 53 were owned; the rest were under charter. Petrobras decided to shift expenditures away from such short-term charters into a strategy of equipment ownership, DuBois noted. The Brazilian government, in an effort to ensure that this unexpected financial windfall would be put to good use, launched a fleet modernization and expansion initiative to reinvest oil revenues into the development of an internationally viable shipbuilding industry. This endeavor wasn’t entirely new, but rather a revival; Brazil’s shipyards had been among the largest in the world before falling into decline during the financial crisis of the 1980s. The government acknowledged that most shipbuilders in-country were incapable of implementing cutting-edge construction techniques, so a new player was considered.



tanker design, Samsung’s involvement was critical to EAS receiving the $4.63 billion contract. “EAS is trying to leapfrog the cluster development process by allying with Samsung,” DuBois said. “The expectation from the beginning has been that the project will come together very quickly so that the benefits can be derived as soon as possible.” But setting up a reliable supply chain and training thousands of workers is slowing down the pace. In emerging markets, economic investment and growth doesn’t happen over time the way it does in developed countries. Instead, it’s put on a fast track. “In Pernambuco, the economy was overly dependent on a limited number of agricultural and mineral commodities, with few prospects for progress,” DuBois wrote. “Yesterday many of the workers were fisherman and today they’re welders because of EAS.” Jump-starting the industry and meeting orders on schedule has proved ambitious. “All parties really took on more than was feasible,” he said. “You have to remember that NASA blew up a lot of rockets before it put a man on the moon.” A massive investment requires massive oversight, which in turn requires massive tolerance. Without a legacy of success on which to build, regionally or within management, EAS is grappling with the realization that it might have promised more than it can deliver.

Needed: Patience To top it off, EAS is on its third CEO in five years. It is clear that the government is unhappy with the way things are progressing. “Interviewees that we contacted in the initial stage of this research project in 2010 are no longer with the firm,” DuBois said. “Managerial competence—especially difficult to find in emerging markets—is going to be a big challenge.” All of these setbacks come as no surprise to DuBois. What EAS is facing is typical of a latecomer to a global industry as it tries to catch up to its competitors. “More than anything the government needs to be tolerant and allow EAS to go through the typical stages of a startup,” he said. “They’re going to make their share of mistakes.”





“Brazil took an area where there was nothing and carved out a shipyard,” said DuBois. “Everything was built from the ground up—a distinct advantage over using older, smaller shipyards.” Frank DuBois, assistant PROFESSOR

In South Korea, the automotive manufacturer Hyundai, which had no prior experience in shipbuilding, was able to build a completely integrated shipyard in the 1970s with help from the government. It is now the world’s largest shipbuilder. The scale of EAS puts it on the same level as Hyundai’s shipyards and others in Asia, which stand today at the forefront of the international shipbuilding industry. The precedent has been set and the requisite pieces are in place. Now EAS just needs to keep its head above water and follow the course.

DuBois’s study with Marcos Primo, “Technological Capabilities of Brazilian Shipbuilding Clusters,” was published in the Journal of Technology Management & Innovation in 2012.



Rough Seas Like the first tanker to go into operation, EAS has faced considerable challenges that have raised concerns about its capacity to meet demand. Stakeholders Camargo Correa and Queiroz Galvao now each hold 50 percent of EAS, after Samsung sold its stake in March because performance metrics were deemed unacceptable. The João Cândido, a 935-foot-long tanker capable of carrying up to a million barrels of oil, went to sea trials after 50 months and $180 million, taking five times longer to build than anticipated and costing three times more than international standards. It’s not uncommon for first vessels to suffer long delays and go over budget while a new yard finds its stride, but EAS has yet to settle into a steady state. Three years after its establishment, the shipyard has a backorder of 22 vessels. Despite wanting to believe that EAS can provide the industry with a fresh start, Petrobras has threat-

ened to take its business elsewhere if EAS can’t guarantee a reliable timetable for the construction of the ships. The energy giant has suspended the purchase of 16 ships from its original order. Purchasing contracts will remain suspended until EAS finds a partner with technical experience in shipbuilding. “Like any first endeavor, it will take a while to get down the learning curve,” DuBois said. “But now the pressure is on. If they want to stay in business, they’re going to have to resolve these issues promptly.” On top of these requirements, EAS is struggling to develop local supply sources for parts and components. The government has mandated that at least two-thirds of the content used at the shipyard be sourced from within the country. Local suppliers still must prove that they are qualified for the task, meeting protocols, labor standards, and environmental benchmarks. Everything from fire suppression equipment to lighting systems must comply with technical and safety requirements demanded by certification groups like the International Maritime Organization. If suppliers are not in compliance with regulations, the ships cannot be insured and will likely never see open water. Anticipating that EAS may flounder, mining billionaire Eike Batista—the Donald Trump of Brazil—has announced plans to build new yards and bid for the government’s business when the time comes.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Industries often develop organically with little encouragement from government (aside from protection of property rights and development of infrastructure), forming around naturally occurring resource deposits or where conditions are just right for cultivation. Diamonds in South Africa. Silk in China. Corn in the US Midwest. The same isn’t true of clusters. Industrial clusters—concentrations of supplier and buyer firms in a particular industry—are nurtured by proximity to geographic, cultural, and institutional advantages. Hollywood’s filmmaking moguls and the Italian footwear industry started this way. So did Bangalore, the Silicon Valley of India. It’s no accident that high-tech companies want to set up shop there: it’s an attractive environment for doing business. Brazil hoped to establish a shipbuilding cluster using a similar approach. In contrast to typical cluster formation, the Brazilian government played a critical role as an incubator. Without economic incentives in the form of subsidies, tax benefits, and other advantages, it is unlikely that the necessary resources and competencies would have amassed in Pernambuco independently. Limited research exists on the relationship between cluster development and the creation of globally competitive national industries in emerging markets. DuBois’s work is helping to fill this gap, examining unique qualities and tendencies in Brazil and creating a model from the findings that can be applied to other countries pursuing similar activities. Using business guru Michael Porter’s diamond factor model, which suggests that there are specific conditions necessary to support and reinforce cluster formation, DuBois argues that traditional forms of industrial policy are hostile to the emergence of globally competitive industries. Ideal conditions include cooperative partners to enter into the venture, a willingness to take risks, a supply base to support the industry, and talented labor supervised by competent management. In the case of EAS, without the demand conditions created by the government’s need to replace shipping and exploration infrastructure, privately held, local construction firms Camargo Correa and Queiroz Galvao would not have collaborated to attract foreign investor Samsung Heavy Industries to the project. Brought in to advise on shipyard layout and

System Failure Why the Public Transit Debate is Stalled

We need to stop calling public investment in “public transportation” a subsidy. America’s economic engine, and the very fabric of our society, is held together by its transportation infrastructure. Industry, jobs, schools, entertainment, public services delivery, police, fire, and other emergency services—the list goes on and on. We are a transit-dependent society that has built its very essence around the ability to go places safely and dependably. Our transportation networks are the arteries that nourish and sustain our way of life.

• The Internal Revenue Service Public Transportation Subsidy Program (PTSP) was established to encourage employees to use public transportation when commuting to and from work. • A column in the Huffington Post, “A Sustainable City Requires Increased Mass Transit Subsidies,” noted that “Bridge tolls and business taxes have been used to subsidize mass transit, along with funds from the state’s budget.”

• The Senate on March 14 passed a surface transportation bill (S. 1813) that includes a measure to increase the mass transit portion of the employee transportation subsidy to $240 per month, wrote the Federal Daily News. This polarizing national dialogue, so intensely focused on the notion that public spending on public transportation is a subsidy, has throttled the economic progress of our communities. When it comes to funding daily maintenance, repairs, and expansion of our transportation infrastructure, it is the friend that we pretend not to know in its time of greatest need. Meanwhile, the trains and the rails that carry them, the roads that shoulder our buses and cars, and indeed even the pathways that our bicycles traverse fall into disrepair. Even as family budgets are strained to buy cars and fuel, as roads are overcrowded and crumbling, and as commuting takes a heavy toll on our time, wallets, the environment, and our way of life, we illogically continue to mobilize with great effectiveness to reduce gasoline taxes and funds dedicated to repairing both rails and roads. Critical Juncture America’s diminishing investment in its vital public infrastructure has reached a crisis stage. Daily we experience collapsing roads and bridges, urban and rural water systems operating on infrastructure decades beyond its useful life, and power systems and grids that fail all too often.

actions, whether they are residents in Takoma Park, Maryland, or businesspeople conducting commerce at the Port of Baltimore. Case in Point Currently, I serve as a member of the board of directors of the Washington Metropolitan Area Transit Authority (WMATA). Metro, as it is commonly known, operates the regional rail and bus transit system. It is the nation’s second-largest heavy rail system, sixth-largest bus network, and fifth-largest paratransit service. With its $2.5 billion annual budget, Metro’s economic impact by its spending alone has extraordinary effects on the region and its quality of life. WMATA’s budget tells only a fraction of its story. On peak days, ridership approaches 1 million people; in 2011, Metro accounted for 217,052,000 rail passenger trips and 124,173,000 bus trips. Ferried by a workforce of 11,000 WMATA employees, these trips carried workers to their jobs, tourists to national monuments, students to school, elderly residents to health-care providers—you get the picture. Forty-two percent of employees working in Washington, DC’s center core—which includes parts of Arlington County—use mass transit. And more than a third of the federal government workforce depends upon Metro for its daily commute. All these figures add up to the point that public spending on public transportation, whether in DC or in the nation at large, is not an optional subsidy, it is an economic necessity. It is a required investment in our very survival and success. It is a fact that state and local governments fund 42 percent of the daily operating cost of WMATA and its fleet of buses and rail operations. But it is also a fact that without this investment in the region, the local and regional economy would collapse under its own weight. This public funding of our public transportation enables the jobs, industry, and vitality that support our region. It’s time now to reframe our discussion. It’s time to aggressively support sufficient and sustained investment in our public transportation facilities, for the preservation of our way of life.

Alvin Nichols, MPA ’78, serves on the board of directors of the Washington Metropolitan Area Transit Authority (WMATA ), and is principal of the real estate development advisory firm NICHOLS Creative Development. Previously he was a gubernatorial appointee to the Maryland Port Commission, and director of corporate real estate at Fannie Mae.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

This is why “subsidy”—the very definition of which is “a grant or gift of money”—is not a suitable term. Nothing in my 35-year career in public service and private industry evidences the case for labeling public spending on public transportation this way. Public spending on public transportation, in all of its many forms, is undeniably an investment, with the objective of leveraging income, profit, and overall improvement in the well-being of greater society. These investments relieve road congestion, improve air quality and access to leisure and commerce centers, enable the development of new “transit-oriented” communities, and are the anchor to sustainability efforts. Regrettably, as a society, we have built an inappropriate yet universally embraced vocabulary around public infrastructure issues. We blithely conduct critically important local and national dialogue using the term “public transportation subsidy” in one form or another. Consider these examples:



This alarming state of our public affairs is not new or surprising information to most Americans. It is a condition and risk that we have come to accept with seeming indifference, until the next inevitable catastrophic infrastructure failure jolts us to our very core. And even then, our outrage and demand for change and renewed investment are often shortlived; we soon drift back to a dangerous state of underinvestment. The evidence of lack of investment in our public infrastructure is well documented, and few argue that substantially more investment in the country’s infrastructure is urgently required. However, framing the discussions and investment decisions, and building support for making those investments, continues to be our undoing. In spite of the seemingly obvious need for greater and accelerated investment in our infrastructure, we have failed miserably to make the case. My professional career, in both the public and private sectors, was launched and largely built around development and implementation of transportation public policy, infrastructure investment, and transit facilities construction and maintenance. In my experience, whether sponsored and financed with public resources or private ones (and often a combination), the pathway to final “go/no go” decisions is always preceded by careful cost/benefit analysis, with particular emphasis on public benefit. Even public infrastructure financed and built entirely with private resources, to enable private for-profit investment, must be viewed through the same “public benefit” lens. However, somewhere along the way in our society, we lost track of the idea that funding and ensuring safe, effective, and reliable transportation systems is a necessity for the prosperity of our communities. It is not an optional public investment that can be dramatically curtailed. My career in public service is largely rooted in state and local government and quasi-government agencies, where “on-the-ground” transit investment decisions are shaped, formalized, and implemented. Lives, communities, and economies are shaped and changed by those decisions and


for the

Moon Knowledge Management

in the Global Economy Article by Jackie Sauter

Less than 30 miles from the White House, the space shuttle Discovery silently rests on its laurels in a behemoth cargo hanger, an inanimate but undeniable American hero.

Despite its unnatural retirement on the ground, the spacecraft’s mission soars on. New designs are still born from the most complex thing ever built; civil servants and privateers take heart from one of the most conspicuous examples of a successful publicprivate partnership.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

In 30 years of service, beginning with its first-of-its-kind launch in 1984, the embodiment of innovation flew 39 times—more than any other shuttle.



Cover Story Shoot For the Moon

The researchers met with 171 executives from 28 major Japanese and US automotive and information appliance firms—competitive, knowledgeintensive global industries. They uncovered a surprising commonality in successful knowledge creation activities. Supportive HR practices were crucial for successful knowledge creation: things like crossfunctional group training, e-learning, and career development programs. Job rotation was also seen as valuable, though the Japanese were far more likely to report using this tool. “One of the keys to Japanese success is their system of knowledge creation and knowledge management, which has not been well understood in the West,” Mroczkowski said. “Our research explains how their approach to knowledge augmentation works.”

Location, Location, Location Linowes’s team also found that a firm’s location— regardless of the origins of its ownership—had an impact on the success of its knowledge creation system. Despite the Americans’ professed love for knowledge management, firms located in Japan reported better knowledge creation than firms located in the United States. This even applied to Japanese firms that happened to be located in the United States. Linowes wasn’t surprised. He had spent extensive time in Japan, and witnessed firsthand the country’s cohesive culture. For knowledge creation to be effective, management vision and business strategy must permeate an organization; Japanese respondents were much more likely to report that this was the case. Culture can even impact the design of a product. Such was the case when Toyota discovered that its cars in the Middle East would benefit from strategically repositioned air conditioning vents. Instead of having cool air blow on the customer’s knees— which, in that part of the world, are often covered by long robes—Toyota designers moved the vents to

How does a pipe dream— like the space shuttle, or the electric car—become a product? position them near the driver’s ankles. Toyota now has 80 percent market share in Oman. Linowes admits that the tools and attitudes behind knowledge creation are only worth this amount of introspection if they result in return on investment. “What counts is success in the marketplace,” he said. “If you are introducing things customers want, it should pay off.” The Right Crew If we accept that knowledge creation in an innovation-driven industry is critical, the next logical step is to determine how much knowledge our employees possess. How do you assemble the right team for a project? How should you disperse expertise across that team? In the space shuttle’s tangle of alliances, the only challenge bigger than the technological was the human: the scientists and engineers behind the project worked for a diverse set of bosses and battled over turf both physical and ideological. Considering the need for coordination in a space mission, not to mention the close quarters of the shuttle, it was essential for astronauts to share knowledge and get along well enough to use it. Even after the shuttles were built, it was still about people: the few, proud astronauts who relied



Moon in Their Eyes The team uncovered a telling difference in attitude about knowledge management between the Japanese and the Americans. While the Japanese managers displayed a more methodical approach to the practice, Americans were more enthusiastic about the little bit of knowledge management they had. The Japanese “take in stride the improvements brought on by [knowledge management enhancements],” the authors wrote. “Americans, by contrast, are more ‘romanced’ by them.” Linowes found that the Japanese were more thorough, more systematic, and displayed less ego involvement. They excelled at the implementation of knowledge management tools; they were more likely to use cross-functional training, e-learning, career development, and job rotation. The Americans’ romanticism was another common part of the puzzle. “It may also be that American firms are starved for these improvements, so they’re especially appreciative of the ones they’ve got,” he acknowledged. But the Japanese were more likely to say their organizations emphasized customer satisfaction, and they were more likely to make informed decisions based on data-proven theories. For example, a knowledge portal for the automobile industry could be a website where dealers and manufacturer share details about new models of cars. The data showed that Japanese firms were

more likely to report using a tool like this, while the Americans were more likely to see positive benefits in using it. Here’s another telling anecdote. General Motors and Toyota used to jointly operate the NUMMI automobile manufacturing plant in Fremont, California. Toyota needed help selling cars in the US, and GM wanted to learn about lean manufacturing from the Japanese leader. NUMMI built roughly 6,000 vehicles a week from 1984 until it closed in 2010 (the plant has now reopened as a Tesla Motors production facility). When the GM executives arrived at the plant, they were surprised to see carpet spread throughout the factory floor. They scoffed. “Why do you need carpet in a production factory?” they asked. “What a waste. You really caved into union demands.” The Toyota executives politely informed them that their research had shown when parts were dropped on an uncarpeted floor, workers would not pick them up. When the floor was carpeted, the behavior changed. After thorough analysis of the data, the Japanese managers adopted a policy of carpeting their plants to better control inventory levels.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

NASA took 12 years to build the space shuttle, with help from at least five other contractors; contrast that with Henry Ford’s development of the assembly line, which took only seven years and internal resources to change the world. The shuttle’s design was the epitome of knowledge creation before the term took off. Thousands of employees—and, more important, their ideas—stood behind the development of the iconic vehicle. We’ve come a long way since the shuttle’s glory days. The processing power required to send a man to space has been eclipsed by a single smartphone. Now, the procedures to gather, share, and grow knowledge are increasingly viewed as an economic driver rather than a patriotic duty. The words “knowledge management” are a resounding anthem for the business world. Knowledge is the heart of innovation, and a justification for job creation, mergers, acquisitions, and alliances. As in space exploration, innovation in the transportation sector is crucial, according to Assistant Professor Richard Linowes, who has spent much of his career comparing innovation in multinational firms. Linowes was interested in discovering how new ideas come to fruition in such industries. How does a pipe dream—like the space shuttle, or the electric car—become a product? He recognized that knowledge management spans all units within a firm; it happens long before a prototype reaches the production floor, where it had most widely been studied. In 2005, data collection began; in 2010, Linowes set off for Japan, Southeast Asia, the Middle East, and Europe, visiting headquarters and subsidiaries of the big guns: General Motors, Ford, Toyota. Linowes created a model to frame the research, along with his Kogod colleague, Professor Tomasz Mroczkowski, Hideo Ueki of Tokyo Keizai University, and Mariko Ueki of Kyoto Sangyo University. The model suggests that a change in the global business environment influences top leadership, which in turn changes management philosophy, vision, and strategy. Those choices trickle down to shape brand value, which reflects customer satisfaction and a product’s fate in the marketplace. In other words, external trends impact the internal organizational culture, which provides the backdrop for knowledge creation to occur. Human resource systems develop the people who develop the ideas.

“The beauty of the network analysis approach is that we can actually look at all the different relationships within a team.” Mark Clark, Associate PROFESSOR

on each other for survival. When Discovery retired to northern Virginia, former astronaut Piers Sellers said that handwritten notes from former pilots sometimes guided him on missions. “We had sheets of paper that said, ‘When this alarm goes off, ignore it.’ Or, ‘This fuel gauge doesn’t work’…[Discovery] had a lot of little quirks, but her heart was solid,” he told the Washington Post. Without that transfer of knowledge from one pilot to the next, who knows how many missions would have been compromised? A richer network within the team (the more members who share knowledge with others) leads to better performance outcomes. If the same amount of knowledge exists on another team but is not shared, the latter will lose. Associate Professor Mark Clark and Professor J. Alberto Espinosa have spent several years determining the best way to measure and represent team knowledge in order to better understand its influence on performance. Clark brought his extensive background in leadership, teams, and diversity to the research, while Espinosa has previously studied how teams coordinate through communication, knowledge sharing, and technology. They know that team knowledge is a combination of two components: • The individual knowledge possessed by each team member that others don’t have; and • The relational knowledge that is shared between members, allowing them to coordinate tasks.

Cliques < Cohesion The pair further collected data from 57 graduate student teams; each team managed a simulated firm. They collected peer ratings of each teammate’s knowledge in specific domains (finance, production, marketing) and evaluated the pairs’ task and strategy coordination. When the network approach was used in the analysis, they found more nuanced relations. For example: • The degree of knowledge isolation had a negative effect on task coordination; • Team knowledge centrality had a strong positive effect on strategy coordination; • The proportion of cliques in the team was a negative predictor of team cohesion.



That’s right—the fewer the cliques, the more cohesive the team. The results suggest that some of the effects of shared knowledge within a team can be attributed to isolated members, cliques, and (lack of) centrality. Isolated people may be detrimental to coordination; centrally knowledgeable members may help build strategies; and shared task knowledge with a minimal number of cliques is good for teams. Beyond that, their preliminary evidence suggests that the network characteristics of team knowledge—centrality, cliques, isolates—have

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

“Fundamentally, organizations spend so much on the human capital within teams that they want to recoup their investment,” Clark explained. “You want a return not just financially, but also in developing team members for the best learning experience and employee satisfaction.” Here’s the twist: Clark and Espinosa used a network analysis approach to measure and represent team knowledge. And it’s way beyond Facebook or Six Degrees of Kevin Bacon. “The beauty of the network analysis approach is that we can actually look at all the different relationships within a team,” Clark said. “We view teams not as a collection of individuals but as a collection of dyads [pairs of individuals], with each dyad having individual and relational knowledge

attributes,” Espinosa explained. “When you put all the dyads together, what you have is a network of nodes (or members) and links (or relationships).” The end result is a sociogram, or visual representation of the network, and its corresponding sociomatrix, or the mathematical matrix representation. The strategy is particularly useful in looking at larger teams, when it is imperative to understand relationships: who talks to whom, who knows what others know. Social network analysis also reveals cliques and isolates, among other things, and enables members who are both highly knowledgeable and centrally connected to stand out. Most prior research has treated team knowledge as an aggregate, Espinosa said: the team as a whole knows a lot or a little about something. “We argue that the network perspective provides a more nuanced understanding of the knowledge structure within a team…team knowledge is essentially a social construct.”

Cover Story Shoot For the Moon

Social network analysis also reveals cliques and isolates, among other things, and enables members who are both highly knowledgeable and centrally connected to stand out.

stronger predictive power on team interaction, coordination, and performance than previously used aggregate methods. In sum, network analysis provides a more complete picture of a team’s knowledge distribution, Clark and Espinosa determined. It also enables the extraction of a “slice” to analyze a particular relationship or clique of interest. Managers can use the resulting models to staff and train their teams. The pair has spoken with companies and at conferences, where executives are very interested in using it. “This has a big connection to enterprise architecture,” Clark said. “The multidimensional network approach is growing in popularity.” It’s not just about knowledge residing within one organization, either. Clark used the example of automotive design that is outsourced. The design team can, and often does, expand beyond an organization. The designers of the Ford Fusion might work for Ford, for Lear Seating, or a smaller subcontractor, but they are all on the same team, even if their paychecks have different logos. What connects them? Their collective knowledge, and the task at hand. Fundamentally, members must have a shared understanding of what other team members know so they can make more effective assignments. Laboratory validation studies with colleagues at the University of Central Florida will next test how task content and structure, shared and unshared within a team, affect performance.

• Noncompete agreements, where the employment contract restricts employees who leave from working for competing firms for a period of months or even years. • The Doctrine of Inevitable Disclosure, where the former employer asks a court for an injunction that prevents the former employee from beginning a new job with a competitor on the grounds that trade secrets will be divulged. • Garden leave, which specifies that an employee leaving a job has a cooling-off period where he remains on the payroll of his employer while staying away from work; he receives his normal salary but must retain confidentiality and may not work for a competitor until the period concludes.



These tools are anticompetitive, the authors say, and anything that falls into that category could ultimately stifle innovation. Consider California, home to one of the world’s innovation hubs—accounting for one-third of all venture capital investment in the United States. Many people claim the free exchange of ideas in the tech center formed the basis for the Silicon Valley, where companies such as Oracle, Google, and Apple thrive. The state made a calculated decision not to have employment mobility limitations so as to preserve such advances. And Westermann-Behaylo believes that all parties—employers, employees, and society at large—benefit from the lack of employment mobility restraints in the Golden State.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

When Knowledge Calls It Quits As Clark and Espinosa demonstrate, knowledge workers are literally human capital. And in a knowledge-driven economy, those humans are more mobile than ever. Neil Armstrong didn’t have as many options as today’s talented workers: if he wanted to go to the moon, he had to work for NASA. Modern would-be astronauts have options, thanks to the privatization of spaceflight. Neil Armstrong wasn’t alone on Apollo 11, of course—he had pilots Buzz Aldrin and Michael Collins. That team dynamic was important. But sometimes one member of the team is the most crucial to performance. And employees are a source of competitive advantage like never

before. So what happens when that source gives his two weeks’ notice? Linowes studied the birth of innovation; Clark and Espinosa focused on the collaborative process. Assistant Professor Michelle Westermann-Behaylo wanted to see how employment laws can support—or hinder—both. A former attorney turned business ethics scholar, Westermann-Behaylo teamed with Norman D. Bishara at the University of Michigan to survey the ethics of employee mobility. She increasingly is studying employees as a specific stakeholder group: their compensation, rights, and mobility. The authors outlined three types of legal tools that affect an employee’s mobility:

Creating the cover story “Sometimes letting knowledge bubble up is best for innovation as a whole. The rapid-exchange employment pools can be a natural way to spread ideas.” Michelle Westermann-Behaylo, assistant PROFESSOR

“Often legal opinions out there don’t dig down really deep and explicate the principles underlying the beliefs they’re applying,” Westermann-Behaylo said. Though none of the mobility restrictions are optimal, garden leave minimizes the potential negative impacts on all parties: • Employees have the certainty of being paid in the period they are prevented from working for competitors. • Employers pay only for the time period they need protection from competition and avoid litigation fees. • Through this price mechanism, society has a cap on the restraints on innovation and development.

Academic papers that gave rise to the cover story: Richard Linowes, Tomasz Mroczkowski, Hideo Ueki, and Mariko Ueki, “A Comparative Study of Enablers of Knowledge Creation in Japan and US-based Firms,” Asian Business & Management (2010). Mark A. Clark and J. Alberto Espinosa, “Team Knowledge: Dimensional Structure and Network Representation,” Theories of Team Cognition: Cross-Disciplinary Perspectives (E. Salas, S. Fiore, & M. Letsky, Eds.) (2011). Norman Bishara and Michelle Westermann-Behaylo, “The Law and Ethics of Restrictions on an Employee’s Post-Employment Mobility,” American Business Law Journal (2012).



Westermann-Behaylo conceded there is certainly a basis for some businesses to protect their knowledge through limiting post-employment mobility, especially in sectors known for poaching of top employees. And as firms and agencies prepare to lose a sizable generation of knowledge workers to retirement and a shifting landscape, perhaps a new strategy will have to take flight. With the retirement of the space shuttle program in 2011, NASA cut 3,200 personnel, amid more staff reductions at its contractors. At the same time, commercial pioneers are vying to take future astronauts into orbit through the Commercial Crew Development Program, which is spurring private spaceflight through new players like Jeff Bezos’s Blue Origin and Colorado-based Sierra Nevada Corporation, along with Boeing and SpaceX. “Innovation is what America has always been about,” President Obama declared in his 2012 State of the Union address. “Don’t let other countries win the race for the future. Support the same kind of research and innovation that led to the computer chip and the Internet.”

But the brute willpower of the mid-20th century—the combination of American bravado and work ethic that led to Neil Armstrong’s first steps on the moon’s surface—is no longer enough. As the country struggles to emerge from recession, instead of focusing on the financial recovery of the American automotive industry, a broader question demands to be asked: Is the American way to solve a problem still preeminent? Or is it time to update American management thinking? What got us to the moon may not keep us at the forefront of the global economy. To come out on top this time, America should mine the great ideas of the globe to build a modern infrastructure for the knowledge economy. We should learn from the knowledge management disciplines of the Japanese, and the practices that England and others have adopted to protect employees and their ideas. “For over a decade, some observers were ready to write the Japanese off,” Mroczkowski said. “However, today Japan’s economic growth is well ahead of Europe and the US, and the country has retained leadership in a number of key industries.” The race for the future—unlike the race to the moon—may end up being an Olympian sport, requiring the best of the best from all corners of the globe, working together.

KOGOD NOW Fall 2011 2012 | |

KOGOD NOW fall 2012 |

“Sometimes letting knowledge bubble up is best for innovation as a whole,” she said. “The rapidexchange employment pools—high-velocity labor markets, they are called—can be a natural way to spread ideas.” She points to a 2008 HBS finding that the pair referenced in their own work, on noncompete agreements in Michigan. In 1985, employment law in the state inadvertently changed to strengthen enforcement of such agreements. The result: a marked reduction in the mobility of Michigan inventors compared to other states— especially among those with a specific skill set that was not widely marketable beyond direct competitors (think the Big Three.) Fewer patents, less movement of engineers and creative thinkers between (car) companies. Salaries were also held down overall, since star employees didn’t move from one place to another and set the bar. “These things really do have impacts, and they’re not all good for business,” Westermann-Behaylo explained. “After that point, the automotive industry in Michigan didn’t do well…they were already on their way down.” What the authors found was that the British, who are among the most common implementers of garden leave, have the right idea. Londoners often read about “gardeners” in the Financial Times coverage of banking executives who are between positions. Garden leave limits the period of time during which the employee—and her innovative skills—are kept out of the labor market. Though it’s very rare in the US (only a few cases have been litigated, with just a couple of mentions in mainstream media), the authors say it’s a win-win-win situation. The authors provide recommendations to policy makers such as judges and legislatures to aid them in making close ethical and legal calls in a world where litigation between firms and former employees is likely increasing.

POsitive Charge A new paradigm that is changing the nature of business competition calls to mind two kids prepping for a street fight, gathering friends, older siblings, and allies. Suddenly, “me against you” becomes “me and all my friends against you and all your friends.” Article By Amy Burroughs



Pulling Ahead As far as startups go, breaking into the car business is one of the tougher roads to follow. According to Holmberg, vehicle startups compete against huge, global firms with a mature infrastructure, established supply and distribution systems, and strong ties to customers and political entities. Auto manufacturing is expensive, and the business is sensitive to economic cycles. Another recession could be the death knell for a fledgling EV or HEV manufacturer. At the same time, a number of things have happened to make it easier for entrepreneurs to develop green vehicle technologies. Holmberg describes a kind of perfect storm of “push” and “pull” factors that both drive entrepreneurs toward EV innovations and draw them in. Previous research identified three factors in eco-innovation—a technology push, a regulatory push, and a market pull—but Holmberg expanded that to encompass six factors that facilitate eco-innovation by entrepreneurs inside and outside the auto establishment. “Push” factors are technology, the federal government, and state or local governments—the latter through carrots, such as tax rebates, and sticks, such as regulations setting stricter emission and fuel economy standards. “Pull” factors include entrepreneurs’ demonstrated success (Toyota’s success with the Prius spurred others to follow suit), market demand, and a growing infrastructure for EV cars—for example, the battery recharging stations on the American University campus. These factors are in keeping with those that traditionally have set the stage for entrepreneurial growth, Holmberg said. Innovations often emerge from industries experiencing a technological discontinuity, or a technology so new that it spurs a different way of looking at an industry: say, the vast shift from a car that runs on gas-powered internal combustion to a car that runs partially or wholly on electricity. Substantial shifts in public policy and societal attitudes, both on the upswing, also drive green vehicle innovation. Societal attitudes are a market

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

A rough analogy, perhaps, but not so different from an emerging model in which companies are competing less firm-to-firm and more on an alliancebased network-to-network basis. Alliances are key to entrepreneurial success, potentially playing a role in every stage of startup evolution, according to Professor Stevan Holmberg. Innovative firms use alliances to overcome weaknesses ranging from insufficient funds to gaps in distribution channels. The right alliances can even boost a firm’s reputation, if it partners with a wellknown brand whose participation yields a stamp of approval. Holmberg analyzed the alliances used by Tesla Motors, an entrepreneurial company well outside the automobile manufacturing establishment, to develop and launch its electric vehicle (EV) Roadster in 2008. For his next project, he is working on a comparative study of EVs and HEVs in the United States and Scandinavia, which has been a global leader in adopting innovative and clean vehicle technologies. According to the US Department of Energy’s Alternative Fuels and Advanced Vehicles Data Center, 15 auto manufacturers offer alternative fuel vehicles or hybrid electric vehicles (HEVs) in 2012, up from two in 1991. America’s current interest in EVs marks the fourth time in history such cars have been on the market. According to the Electric Auto Association, more than 100 years ago, electric cars actually outnumbered gas-fueled cars, thanks to Thomas Davenport’s 1834 invention of a battery-powered car. But the rise of the internal combustion engine and the scarcity of electricity outside cities pushed electrics off the road. EVs enjoyed short-lived resurgences in the energy-conscious late 1960s and early 1970s, and in the early 1990s. Now, however, a confluence of factors is taking shape that may enable EVs to take hold once and for all. Holmberg’s work analyzes this landscape in which companies like Tesla, trying to put down a very different kind of root in an entrenched industry, might actually have a chance to succeed.

Strategic Alliance Portfolio map “push,” exemplified by early adopters of EV technology who flocked to the Toyota Prius because it was neat, different, cost-effective, and appealing to environmentally conscious consumers. Cost-conscious government buyers who purchase low-maintenance EVs for car fleets also are a market driver, Holmberg pointed out. “There’s a growing awareness of the impact of vehicles, both on the cost of individual ones as well as the environment,” Holmberg noted. “And then you have that reinforced by all of the public policy initiatives, and you have that reinforced by the general growing awareness of sustainability issues.”

“Tesla does not have the paradigm that legacy manufacturers have, so they think about a vehicle or a car in a very different kind of way.” Stevan Holmberg, PROFESSOR

BorgWarner (US)

Lotus (UK)

OEM Alliances



Panasonic+Others (Japan)


Sotira (France)

(owned by Daimler)

Toyota (US Operations)

Other OEMs

Tesla Motors

R&D Alliances

Dana Holding

(US & Canada)

Car Leasing Alliances

Panasonic (Japan) Athon (Europe)

Manufacturing & Purchasing Alliances

Government Loans/Alliances

Toyota (US Operations)

Government Loans

Tesla’s competencies, technologies, and ability to deliver results,” Holmberg wrote. Although alliances are critical for early-stage entrepreneurs, Holmberg emphasized that they also have a role to play as a company matures. Alliances can help companies survive the “valley of death” that strikes many middle-stage companies, when they have gained some traction but lack funding for full-scale production. If a company survives that phase, alliances can help it grow. One of Tesla’s most significant alliances is with Toyota. In a series of deals, Tesla agreed to help Toyota create a plug-in EV version of its RAV4 SUV and to develop the electric powertrain for the RAV4. In turn, Toyota has helped Tesla source parts and provided production and engineering expertise for Tesla’s Model S. The Toyota alliance also enabled Tesla to secure its manufacturing facility, Holmberg noted. He described Tesla’s alliance with Toyota as a perfect example of a partnership that can push the company forward: “This is a huge, transforming kind of alliance for this stage of Tesla. They couldn’t have done it early on. It wouldn’t have been appropriate, and Tesla didn’t have the pieces put together to be attractive at that point.”


Aim High Entrepreneurs whose alliances work tend to do two things correctly, Holmberg said. The first is to think strategically, from the beginning, about a portfolio of alliances. They ask two questions: What are the critical success factors for my entrepreneurial venture? What are the roles of alliances in those critical success factors? The second is to choose partners carefully, performing due diligence to ensure that conflicts in culture, resources, or relationships do not cause an alliance to implode. “It’s not an uncommon strategy, but it is one that’s fraught with a lot of problems, and a high proportion of alliances fail,” Holmberg said. All alliances are not created equal, but Holmberg believes that Tesla has figured them out. When it comes to going head-to-head, or network-tonetwork, with the big car guys, Tesla just might prove itself to be the scrappy new kid on the block who wins the day.



“Emerging Green-Technology Entrepreneurs: Entrepreneurial Pathways to Growth in the Hybrid and Plug-In Hybrid/Electric Vehicle Space” was presented in June 2011 at the International Council for Small Business World Conference in Sweden.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Together, these events have catalyzed the growth of EV vehicles. Figuring out how to take advantage of these events is another story, and Holmberg believes Tesla has a unique story to tell—one that is becoming more common for innovative entrepreneurial firms. One reason Tesla stands out is that its founders by and large came from outside the auto industry. In their own words, Tesla was founded “by a group of intrepid Silicon Valley engineers who set out to prove that electric vehicles could be awesome.” Chairman and CEO Elon Musk had previous success as the co-founder of SpaceX and PayPal. “They don’t have the paradigm that legacy manufacturers have, so they think about a vehicle or a car in a very different kind of way,” Holmberg said. That includes Tesla’s approach to production and rollout. Its strategy more closely resembles that of the consumer electronics industry: start with a highprice, low-volume model and move to lower prices and higher volume as technology improves and manufacturing efficiencies increase. Tesla’s Roadster 2.5, an upgrade of the Roadster it launched in 2008, carried a starting price tag of $101,500. The Model S, now in production with its first deliveries scheduled for June, can be had for $49,900 after a $7,500 tax credit. According to Holmberg, that approach has more in common with Apple’s strategy in launching the iPad than with automakers, which traditionally start with mass volume and large-scale production. “The whole product, design, development, manufacturing, and rollout strategy was not an automobile vehicle manufacturing strategy,” he explained. “It was a computer tech and consumer electronic strategy, and that’s part of where alliances become a critical strategic factor.”

Ally-Driven Enhancements Tesla has served itself well, Holmberg said, by creating a strategic portfolio of alliances that helped it overcome the “liability of newness” that plagues all entrepreneurs. Faced with insufficient capital, knowledge gaps, or a need for product components, often a company’s best option is to seek out others who hold the missing pieces. “There are all kinds of alliances in the traditional auto industry today, but I think there are more compelling reasons for entrepreneurs to look at alliances,” he said. “It’s an amazing opportunity to leverage and get resources that, frankly, are almost impossible to initially develop internally in a capitalintensive industry.” As an example, he pointed to Vizio, maker of high-definition TVs and other consumer electronics. The company launched in 2002 and one year later signed a deal with Costco to sell Vizio products; two years later, Vizio signed a similar deal with Sam’s Club. Just three years after its founding, Vizio TVs were in two of the largest distribution channels in the country. “That’s what put them on the map to be successful,” Holmberg said. The growth didn’t stop there, by the way: in 2006 and 2007, Vizio signed on with Circuit City, Sears, BJ’s, Kmart, and Wal-Mart. Tesla’s alliances include suppliers, research and development experts, and original equipment manufacturers, or OEMs. Supplier alliances are crucial to entrepreneurs using new technologies, and they can take a variety of forms. Tesla’s alliances range from a non-equity arrangement with the French company Sotira, which manufactures the cars’ carbon fiber bodies, to an equity alliance with Panasonic, which provides battery cells for the Tesla battery pack. Holmberg pointed out that even as it partnered with other companies, Tesla protected its core technology by assembling the cars at its own manufacturing facility in California. Companies that fail to create alliances wisely can put proprietary innovations at risk. Tesla also has created R&D partnerships. The Dana Holding Corporation, for example, helped it overcome a technological obstacle by designing a system that could control heat buildup in the cars’ batteries. In some cases, Tesla has served as the OEM for other companies, providing battery packs and chargers for Daimler’s Smart fortwo, or “Smart car.” For Tesla, the benefits were both financial—according to Holmberg, Daimler gave Tesla a reported $50 million for a 10 percent stake in the startup’s equity—and reputational. “The Daimler alliance represented an endorsement by a premier automotive manufacturer that further enhanced and verified for the broader market

supplier Alliances

Buy Green, Become a Better Person* *at least in others’ minds

Look at me



A Toyota Prius sends a message. It tells the other cars on the road that its driver probably shops at Whole Foods or Trader Joe’s with reusable grocery bags, doesn’t have a Hummer for a second car, is eco-conscious. “Simply adding a green component to a product and not allowing people to express themselves through consumption of it, that limits you,” Majid said. “You’re not getting the full value of it.” It’s Not Easy… In theory, a hybrid car should retain more value to consumers over time. Hybrids are often seen as an investment, one that cuts the cost incurred from paying $4 a gallon at the pump. But hybrid technology is less than 20 years in the making. Only now is the industry beginning to achieve an economy of scale, and the technology is developing quickly. “Technology is evolving and people are still skeptical of it, of the maintenance costs,” Majid said. As part of an independent statistics project, Golomb talked with local dealers and examined National Automobile Dealers Association data on the sales of 10 models of hybrid cars: • Mercury Milan

• Ford Fusion

• Nissan Altima

• Honda Civic

• Toyota Highlander

• Honda Accord

• Toyota Camry

• Honda Insight

• Toyota Prius



• Ford Escape

article by Lindsey Anderson

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

“When you see people drive a Prius, you have a certain perception of them,” said Kashef Majid, a former Kogod instructor and current visiting professor at George Washington University. “But you don’t have the same perception about hybrid Honda Civic drivers.” A Toyota Prius is distinct; there is no gas-guzzling, non-hybrid version of a Prius. A Honda Civic, on the other hand, can come in hybrid and non-hybrid forms. And that can make all the difference to a buyer. “A huge component of why we buy certain things is symbolic value—what it communicates to others about us,” said co-author and Assistant Professor Cristel Russell. Hybrid cars that have non-hybrid alternatives, like the Civic, lose value faster than hybrid cars that have no alternative, like the Prius, according to a recent study by Majid and Russell, with support from Alexandra Golomb, BA ’12. “A hybrid car loses [resale] value faster if there is a non-hybrid alternative because hybrid technology is rapidly changing,” Majid said. “With a Prius, technology is changing, but you’re still driving a Prius; you’re projecting an image.” Their findings provide crucial information to manufacturers of green products: It’s not enough for a product to simply be green. Marketers need to develop the consumer expression angle as well.

Hybrids: A History

“People don’t just want to drive a hybrid, People want to drive a hybrid that others recognize is a hybrid.” Cristel Russell, Assistant PROFESSOR

By comparing sales of used hybrids with sales of their used non-hybrid alternatives, the researchers found that hybrid cars lose value faster than non-hybrids. “There are really two competing arguments here,” Majid said. “One is that it saves money, so it should have a greater value as you go along. And two, it’s an evolving technology, and every newer version outdates the previous version. Retain value, lose value.” Hybrids, moreover, may soon be replaced by other technologies, such as fully electric or diesel-powered vehicles. Thus, the introduction of a new green technology cannibalizes the old, and the hybrid model loses some value.

The lovable gay couple in ABC’s Emmy Awardwinning series Modern Family drives a Prius. The world’s top-selling hybrid has also starred in The West Wing, Curb Your Enthusiasm, and a slew of other movies and shows. Roots of the Research The project grew from Majid’s own experience as a consumer. A little over a year ago, he and his wife considered buying a hybrid car but doubted the technology. They ended up purchasing a non-hybrid Toyota Camry. The experience got Majid thinking about the value of hybrid cars and whether there’s a difference between having a green product, like a Prius, and adding a green component to a product, like making a Civic into a hybrid. When Golomb asked to do an independent statistics project with him, he had her crunch the numbers and interview auto dealers. Majid said her contribution went beyond the norm; she “added valuable insights on the green marketplace that we had not thought of.” “Not many undergrads have the opportunity to co-author research,” Golomb said. “I couldn’t be more grateful.”

Majid, Russell, and Golomb’s study, currently titled “It’s Not Easy Being Green—The Impact of Green Technology on Product Valuations Over Time,” is scheduled for review this fall.

Although electric cars have existed since the turn of the 19th century, hybrid technology is still relatively new. For decades, cars ran on fossil fuels pumped into an internal combustion engine. Then came the 1973 oil embargo. In response to the crisis, the US Congress in 1975 passed the Energy Policy and Conservation Act, establishing, among other fossil fuel-regulations, the Corporate Average Fuel Economy (CAFE) for passenger automobiles. The CAFE standards set a minimum number of miles per gallon (MPG) a car has to achieve, which at the time was 18 MPG. (In 2011, the standards changed to a “footprint” measurement, determining the minimum fuel economy a car must achieve based on its size in square feet.) Car manufacturers were disgruntled, so the US government also partnered with domestic manufacturers GM, Ford, and Chrysler to create a car that achieved 80 MPG. By the late 1990s, thanks to the Partnership for a New Generation of Vehicles, all three manufacturers had developed a hybrid car. But none of the models could be mass-produced at a cost consumers would pay. Meanwhile, Japanese manufacturers Honda and Toyota both developed hybrids, introducing the Honda Insight into the US market in 1999 and the Toyota Prius in 2000. By 2011, Toyota, Honda, Ford, Lexus, and Nissan all had hybrid models, making up more than 94 percent of the hybrid market that year. Now, Prius sales alone have topped 4 million worldwide. — Lindsey Anderson

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |



Projecting An Image The study shows that “pure hybrids”—those like the Prius or Insight that have no non-hybrid version— lose value less quickly than their “non-pure” counterparts, like the hybrid Toyota Camry or Honda Civic. Both new to Kogod last fall, Majid and Russell met at new-faculty events. Recognizing her experience in consumer behavior, Majid brought Russell in to help explain the difference in residual value. They discovered it all comes down to image. “People don’t just want to drive a hybrid,” said Russell, herself a Prius driver. “People want to drive a hybrid that others recognize is a hybrid.” It comes down to projecting a persona through car ownership—not unlike the clichéd example of a mid-life crisis leading to the purchase of an expensive sports car. Take a hybrid Honda Civic. It looks just like the non-hybrid Honda Civic. Contrast that with the Prius

or the Insight, which stand out. When a family pulls out of the garage in a Prius, the neighbors all know, “They’re driving a hybrid; they’re eco-friendly.” “Brands communicate something about our identity, and pure hybrids symbolize greenness more than other cars,” Russell said. “I’m a hybrid car driver myself, so a lot of those things were very personally relevant to me. I could identify with the fact that driving a Prius is a social signal. It says, ‘Hey, look at me. I’m green.’” Their findings provide valuable insight to makers and sellers of green products. Perhaps manufacturers should create more visually distinct non-pure hybrids or advertisers should develop the self-expression angle when selling the cars, the professors said. “Companies should do something with their advertising campaigns or with the way the cars look that also says to others immediately, ‘Oh wow, this is not just any kind of car; this is a hybrid car’ and it’s a signal of coolness or greenness,” said Russell, who studies product placement. New brands are a blank slate, she explained, and advertisers create strong associations with the product through entertainment marketing, embedding a message of sorts. The visually distinct Prius is portrayed as cool yet eco-friendly. “The hybrid, the Prius, actually got its start with a lot of really good plugs in Hollywood because there were a lot of Hollywood stars that were driving it,” Russell said. “They had some good product placements in TV series. So cool people driving it also enhances the symbolism that the brand represents and carries.”

Hybrid cars use both an electric battery and an internal combustion engine to power the vehicle. Generally, the battery powers the vehicle at low speeds, capturing power lost when braking, and the gas-fueled combustion engine kicks in at higher speeds.

Kogod Standout

Doubling Down in the Desert

Would you like a view of the Strip? A penthouse overlooking the pool? A photo of yourself flanked by showgirls? If you’re like most Las Vegas visitors, you’re not looking for the standard treatment; you want the experience of a lifetime. Danielle Gaccione, BSBA ’99, is on it. Gaccione’s mission as Director of Omnichannel Innovation at Caesars Entertainment is simple: “My work is focused on creating new technology-enabled customer experiences that surprise and delight our guests,” she said.

For Gaccione, the possibilities are endless, with the digital space changing daily: “We strive to create next-generation customer experiences today.” And Gaccione delivers.



Photographer: Jason Skinner

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Gaccione works magic behind the scenes, harnessing emerging channels in custom ways that fit the unique needs of the gaming, entertainment, and hospitality industries. Her team looks for how guests can use mobile apps, iPads, digital signs, touchscreen kiosks, and other tools to check in, order room service, make spa reservations, or browse entertainment options at more than 40 properties—brands like Caesars, Flamingo, and Harrah’s.

The First 90 Days Congressional Transitions Ahead


Make decisions about personal circumstances 1

You won!


Are you going to relocate to DC, or maintain permanent residence in your home state and commute when Congress is in session? If you commute, find somewhere close to Capitol Hill to stay, because you probably won’t be bringing a car.

If you relocate, where will you live? Will your spouse need to find a new job? Which school will your children attend, assuming you have them?

• Few representatives will choose to raise their families in DC to start. They may later move their families if they gain leadership positions that make it difficult to return home.

Relax and release stress from the campaign trail, but don’t take too long—a few days are all you can spare.

• Representatives who relocate often live near Capitol Hill, in upper Northwest DC, or in lower Montgomery County, Maryland. • Popular schools for children of representatives include Georgetown Day School, Maret School, and Gonzaga College High School, as well as various DC public schools.

Determine your overall goals

What kind of member do you want to be—a party insider, or one who serves constituents but may not be well known in Washington?


The House has 21 permanent committees; most have many subcommittees. The ratio of Republicans to Democrats on committees is approximately the same as the ratio of the overall House. Thus, if the Dems take back more overall seats this year, they’ll also be able to take back more committee seats.








Technology is passed down between individual district representatives, not by physical offices. Check your inventory: is there a discrepancy between what it states and what is actually in your office? Freshmen will be randomly assigned to the least sought-after physical offices. Returning members have the chance to upgrade to a better office based on their seniority—but many will choose to stay put, so as not to deal with the hassle of relocating.

Consider how remote access and telecommuting will work. How will you communicate with your staff? Will everyone get a BlackBerry or iPhone? What types of data security measures will you take, and how will emails be read and answered?

Determine your office management structure Begin hiring core staff, such as your chief of staff, legislative directors, and press secretary.


Contact predecessor's staff to discuss transition and request documents.

Committee assignments will not be finalized until December or January, but informal jockeying for open committee positions begins immediately after Election Day. Be prepared for disappointment: very few freshmen get appointed to their first-choice committees.

Management Foundation (CMF), she facilitated 30 retreats annually for House and Senate offices, and ran numerous leadership and management training programs. Newly elected members of Congress especially seek her expertise, as they arrive at the Capitol from divergent professional backgrounds. They don’t always have extensive experience managing day-to-day business operations, including office staff and payroll. “Meredith brought the skills she developed in the private sector and applied them to the congressional environment,” said Bradford Fitch, CMF’s president and CEO. “We’re always looking for ways to put her in front of senior managers in Congress.”

And this year’s election is particularly ripe for congressional transition, due to recent redistricting that was carried out to reflect the results of the 2010 Census. These changes in district representation, combined with the retirement of 42 House incumbents and the possibility of a party switch in the Oval Office, mean that there will be a great many handoffs in the House. Even victorious incumbents may have staff movement if they are granted different committee assignments requiring outside expertise. States such as New York (-2) and Ohio (-2) will lose seats in the House, while Texas (+4) and Florida (+2) will gain seats. Others will retain the same total number of representatives, but redistricting within the states

has many predicting that the partisan divide will shift in favor of the Republicans (North Carolina, Indiana) or Democrats (Maryland, California), according to the Cook Political Report as of June 2012. Persily Lamel recognizes that up until Election Day, all that matters is getting elected. Yet while the natural inclination of members-elect may be to take November and December to relax after a hard-fought campaign, they need to make the most of the transition period. The critical first step for incoming freshmen is to nail down their priorities. Determining their overall goals will help answer the logistical questions that must be addressed in the weeks leading up to the day they assume office.



With so much focus on the presidential faceoff in November, it can be easy to forget that the executive branch is only one-third of the US government. Regardless of the presidential victor, there are sure to be significant shake-ups in Congress, where all 435 seats in the House of Representatives are up for grabs. Right now, those aspiring representatives are fixated on November 6, and rightly so. But once they’re voted into office—indeed, that very week— they will need to begin the arduous process of transitioning into a foreign role. That’s where Executive-in-Residence Meredith Persily Lamel comes in. As the former Director of Training and Consulting for the Congressional

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Article By Charlie Dale

Informal lobbying for committee assignments

See what technology you have inherited from your district predecessor, and determine remaining technological needs

What Kind of Member Do You Want to Be?

DEC JAN Complete the hiring of

core staff


Attend orientation programs and party caucuses.


Finalize your first-year



3 4

 ou will want to have at least one office open by the first day of the new Congress, Y to demonstrate that you are “open for business.”

You don’t want to overcommit, however, to too many district offices. It will be much easier to open new offices later than to shut down one that you opened prematurely. By the way, draw up plans for these offices first, then work on actually opening them. Symbolism counts: you may want to keep your predecessor’s district office(s), but if your strategic plan calls for more or fewer offices, or in different parts of town, now is the time to “sell” these changes to the public.

and resources necessary to hire the right candidates.” In many cases, this does not occur until late April or early May. The key is to be politically savvy early on, according to Persily Lamel. The congressional schedule can be merciless, so new members need to be ready to serve their constituents as soon as the election is over. If not, they may be headed back home in just two short years.

Open the first district state office (if applicable)

• Excellent people skills, enjoys legislative process, forms alliances, comfortable with media

• Promotes interests of own party, seeks to move up party structure • Interested in big picture rather than details of legislation, skilled at organizing and strategizing, excellent media/communication skills

• Sees the interests of constituents as primary concern; receives high visibility back home but less in Washington • More service-minded than ideologically minded; interested in tangible outcomes rather than broad policy questions • Advocates good public policy, tries to do “what is right” vs. politically expedient, wants to be seen as rising above the political fray • Interested in big-picture ideas, doesn’t enjoy insider politics, good communication skills and ability to frame ideas • Influences process by influencing debate through rhetoric and criticism, promotes change or new approaches, wants to be viewed as bold and honest • Comfortable operating independently, outspoken and often risk-taking, does not enjoy courting colleagues



Courtesy of the Congressional Management Foundation

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Incoming freshmen need to deal with relocation to DC, and then quickly start informal lobbying for prime committee assignments and acclimating to the congressional environment. Hiring a core staff to begin serving constituents is very important. But members should be careful not to over-hire too quickly, even if it means starting their terms short-staffed. The CMF guidebook Setting Course, first developed as a joint publication with American University, explains that while a core staff should be hired in November and December, the remainder should be hired only “when you have finalized your goals, understand your budget, and have the time

additional office staff

Make sure your core staff is ready to go by the first day of the new Congress. Someone needs to answer the phones and handle the mail.

Establish district and/or state offices 1


• Advocates ideological interests, seeks to accumulate more legislative power and rise up committee ladder

kogod Tax Center

Employers: Save Money, Retain Talent with Commuter Benefits

commuting related expenses

FICA Tax Without Plan 1

FICA Tax With Plan

For most employees, the single most expensive work-related cost incurred on a daily basis is that of commuting from home to work. Despite the dreamy, technology-enabled promise of pajama-clad working from home, the reality is that most people spend a pretty penny getting from Point A to Point B, 9-to-5, Monday through Friday. Transit-goers suffer frequent fare hikes, maintenance delays, and the loss of complete scheduling freedom; car owners incur the cost of maintenance and gas, and many also pay mightily for parking.


FICA Tax Savings

Income Tax Without Plan

Income Tax With Plan Article By David J. Kautter and Andrew R. Zank

of commuting for their employees. The first involves arrangements where employees still pay for the cost of commuting, but do so on a pre-tax basis. The second involves arrangements where employers pay employees’ commuting costs in such a way that it is tax free to the employee. Do not pass “Go” just yet, however: there are limits on the amount of benefits that can be provided under both plans. Pay Less? Here’s one way to go about it. Under a form of compensation reduction agreement, employees can elect to have a portion of their salary withheld and applied on a pre-tax basis to purchase “qualified transportation fringe benefits”—say, $100 a month automatically loaded onto a farecard. From a tax perspective, this is the equivalent of allowing employees to deduct their commuting costs.


Income Tax Savings

Total Federal Tax Savings

(1) 75,000 x 7.65% (2) (75,000-2,400) x 7.65 (3) 75,000-2,400 = 72,600











$783.60 Assumes Monthly commuting expense $200 Annual commuting expense $2,400 Taxable wages and income $75,000

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |



Currently, only 14 percent of employers provide a taxfree commuter benefit program to their employees, according to PayFlex Systems USA. But here’s a newsflash for small business owners: your employees’ transportation woes affect you, too. Not just as a means of incentivizing talent, but also right in the pocketbook. What might seem like an unnecessary “fringe” benefit—transportation—is worth considering to retain your stars and save your bottom line. Depending on their take-home pay and tax bracket, employees can save up to 42.65 percent of their commuting costs with these benefits, while you—the employer—save 7.65 percent on every dollar set aside for transit. To the taxman, the cost of commuting to work is considered a personal expense and is not deductible in computing taxable income. If the employer pays an employee’s commuting costs, the amount is considered taxable income to the employee. Under the Internal Revenue Code, however, there are two ways in which employers can reduce the cost


if you had To make the most of the tax code here, the arrangement must meet the following five requirements: 1. The decision must be made before the employee would otherwise have received their pay. 2. That decision must be in writing or verifiable electronic form, and contain the date, the amount of the reduction, and the time period covered. 3. The amount may not exceed the monthly statutory limits for all qualified transportation benefits, excluding qualified bicycle expenses (more on this later). 4. Once the designated time period begins, the decision cannot be revoked. 5. If the employee quits, he cannot receive a refund of amounts withheld in excess of the transportation benefits received before his last day.

Employees may be allowed to carry over their unused benefits to future periods, but only for purposes of receiving qualified transportation; there’s no swapping for cash. And while salary reduction arrangements can be used to fund multiple modes of transportation, bicyclists are out of luck: they cannot be used to reimburse qualified bicycle expenses. Qualified Transportation Fringe Benefits The second way in which an employer can reduce commuting costs for employees is by paying certain costs outright. These are known as qualified transportation fringe benefits. This is obviously more advantageous to employees than receiving benefits under a salary reduction arrangement. There are four types of expenses that qualify here:

If these requirements are met, the value of the service is excludable from income. The combined monthly limit for commuter highway vehicle transportation and transit passes is $125. Qualified Bicycle Commuting Reimbursement The final type of qualified transportation fringe benefit is for two-wheelers: bicyclists. Under these arrangements, an employee may exclude from income any reimbursement paid by an employer to an employee for reasonable commuting expenses. Reimbursements can be paid any time during a 15-month period beginning with the first day of a calendar year and ending the following March 31st. “Reasonable” expenses include the purchase of a bicycle, if the main purpose is for commuting, and any bicycle improvements, repair, and storage costs necessary. The exclusion limit for bicycle commuting reimbursement is equal to $20 multiplied by the number of qualified months during the calendar year. If an employee has expenses every month in 2012, the maximum amount excludable from an employee’s income would be $240—the same as one month of parking. A qualified bicycle commuting month is any month in which the employee regularly uses the bicycle for a substantial portion of the commuting travel from home to work, and in which the employee does not receive any transit pass, qualified parking benefits, or transportation in a commuter highway vehicle.

10 employees you’d save $1,863

25 employees you’d save $4,590

50 employees you’d save $9,180

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Transit Passes A transit pass is any pass, token, farecard, voucher, or similar item that entitles a person to transportation on mass transit facilities, including bus, rail, or ferry transportation. In 2012, the limit on the monthly value of transit passes that may be excluded from income is $125. That’s a combined limit for both transit passes and commuter highway vehicles. Any amount received over the $125 limit must be included in the taxpayer’s wages for the year. The law provides no substantiation requirements for employer-distributed transit passes; substantiation is required, however, if the employer reimburses employees for the cost of purchasing transit passes on their own. Qualified Parking Qualified parking equals employer-provided parking, located on or near the workplace or “at a location from which the employee commutes to work,” such as carpool. This includes work locations where the employee provides services for the employer. However, qualified parking does not include parking on or near property that the employee also uses for residential purposes. Parking is considered “provided by an employer” if the parking is located on property that the employer owns or leases, the parking is paid for by the employer, or the parking expenses incurred by the employee are reimbursed by the employer. The amount of exclusion allowed for 2012 is $240 per month. Much like transit passes, any value of qualified parking provided by the employer over the $240 per month limit is required to be included in the employee’s wages for the year. The value of the parking benefits is calculated on a monthly basis. Commuter Highway Vehicle Transportation in a commuter highway vehicle between the employee’s residence and place of employment is also eligible. To qualify for favorable tax treatment, the service must be provided to the employee in a commuter highway vehicle; the vehicle must have a seating capacity of at least six adults, not including the driver, and 80 percent of the vehicle’s yearly mileage must be for:

1. Transit passes 2. Qualified parking 3. Transportation in a commuter highway vehicle between the employee’s residence and place of employment 4. Qualified bicycle commuting reimbursements

1. Transporting employees in connection with travel between their residences and their place of employment, and 2. On trips during which the number of employees transported for commuting is at least one-half of the adult seating capacity of the vehicle (excluding the driver)



100 employees you’d save $18,360

Bangladesh: Where Ships Go to Die

Blowtorches light up the night on the beaches of Chittagong, Bangladesh. Aside from the moon, the blue-orange glow is the only light by which workers in the southeastern port city of five million people labor under harsh conditions, dismantling large ships that lie like whale carcasses washed ashore. Economic Importance As of 2009, Bangladesh had scrapped 200 to 300 ships annually, accounting for 30 percent of the total market share in the global ship dismantling industry, according to the World Bank. More recently, the number has spiked to 400 ships, or eight million gross tons of salvage. The industry provides more than 20,000 direct jobs in Bangladesh, reports the Bank, and an additional 200,000 jobs for workers in related industries. In a country devoid of the natural resources to make steel, the ship dismantling industry contributes over 1.5 million tons each year to the Bangladesh steel industry; the steel is broken down in one of the country’s more than 350 re-rolling mills. Bars and rods that are often used in construction, also known as rebar, are the most common product. For this reason, the dismantling industry is often referred to as “the steel mines of Bangladesh.” And the steel mines are big business: each ship equates to just under $1 million in profit. Revenues come from the sale of salvaged steel and other materials like electrical wires, toilets, sinks, and canned food. The ships’ owners aren’t complaining. Disposing of old ships overseas is a benefit to ship companies as it often results in a net gain on a major balancesheet item with little to no value. But there are debits to every credit. With an average 16 percent profit margin, the only way to keep shipyards viable is to process ships quickly. “It’s chaos,” Vogt said. “They just go at it without any real organization.” Of the major costs related to dismantling, labor is one of the cheapest. Taxes, tariffs, and duties are double the cost of labor. “Blowtorches are the most advanced technology used,” Vogt said. “Large pieces of a ship either fall by gravity or by men pulling them off with ropes.”

Article By Anna Miars

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Oil tankers, military ships, and cargo vessels, football-fields long and weighing 5,000 or more tons apiece, await an inevitable fate. In three to six months, these ships will be reduced to little more than a pile of scraps at the hard-worn hands of thousands of men. A fortuitous incident gave rise to what is now a controversial but principal industry. In 1960, a Greek ship crashed onto the shores of Chittagong in a severe cyclone. The ship owner was unable to free it, and soon the surrounding villagers began to strip the ship, making use of everything on board. Today, Bangladesh’s ship dismantling yards directly benefit the country’s economy, providing jobs, steel, and other resources by offering an essential service to the international ship industry. The country, however, has come under fire for the poor labor and environmental conditions that exist across its 40 dismantling yards. Dylan Vogt, BSBA ’12, believes revitalization is the only way Bangladesh’s industry can ultimately survive. He became interested in the country from a young age thanks to a family friend; the shipbreaking industry first captured his attention in an international business course. “It was clear to me that there was a lot of criticism of the industry, but not many ideas about how to fix it,” Vogt said. He has spent the last two years researching the trade and building a proposal to do just that. In his plan, Vogt proposes tactics to grow and innovate, from raising capital to installing new equipment, while meeting the requirements of national and international regulatory bodies. He believes addressing the industry’s questionable practices could position Bangladesh as a global leader.



Those workers lack safety equipment, often even basic protection like shoes and gloves, and are exposed to toxins and chemicals such as asbestos and PCBs. Cadmium, mercury, chromium, and lead have been found on the shipyard beaches in noxious amounts, leading to lung and nervous-system problems and cancer. Shipbreaking is now considered one of the most dangerous jobs on the planet: 600 workers have been killed in Bangladesh in the last 20 years, according to Young Power in Social Action, a nonprofit organization in Chittagong.

“ship owners in Bangladesh say that if they were to follow all the regulations that exist they’d be out of business.” Dylan Vogt, BSBA ’12

A Turning Point In February 2011, the Bangladesh Ministry of Industries officially recognized ship breaking as an industry, citing its “huge potentials and economic impact.” A 56-page document established a Ship Building and Ship Recycling Board (SBSRB), which will monitor and audit incoming ships for hazardous materials. As Bangladesh makes incremental progress toward a more regulated industry, a new stakeholder has come on the scene: the Norwegian government. Norway initiated a foreign direct investment program with the Bangladesh government in 2011, directing large sums toward improving the ship dismantling industry. An acute need for the safe disposal of Norwegian military ships was the impetus. “It’s very encouraging,” Vogt said. “An investor providing capital and support can result in a lot of great outcomes.” Pavement of service roads and footpaths, installation of lighting arrangements, and the establishment of a permanent training institute are just some of the improvements the program will bring. Despite these positive developments, however, Vogt believes that the industry in Bangladesh remains “extremely narrow-minded and lacks a long-term vision for future growth and sustainability.” A lengthy list of new requirements for shipyard owners will not alone produce a more efficient and productive industry, he argues. The threat of closure for noncompliance, after a long history of following the same unregulated business model, is perceived as antagonistic rather than encouraging. A Plan for Bangladesh To present tangible solutions to the industry’s impediments, Vogt offers three recommendations: • Engage all stakeholders in active dialogue to increase industry transparency, in order to • develop and pursue an economically feasible plan to enable ship dismantling companies to become international leaders and innovators in ship recycling, while



• establishing corporate social responsibility and adherence to international labor and environmental regulations as a key industry focus.

The threat of closure for noncompliance is perceived as antagonistic rather than encouraging.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Lacking Regulation As the need for and attractiveness of disposing of ships abroad has increased, new regulations have been created to attempt to oversee the expanding industry. Growth of the global ship dismantling industry has accelerated since the US passed the Double-Hull Tanker Oil Pollution Act of 1990, which required that all single-hull oil tankers of 5,000 gross tons or more cease operation in US waters, including all foreign ship companies. This meant that countries around the world needed to dispose of old, single-hull tankers by the end of 2010 in order to continue maritime business interactions with the United States. The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, the most comprehensive global environmental agreement of its kind, has had a manifest impact on dismantling industries in low-income countries such as Bangladesh. It requires that developed countries ban the export of hazardous materials to countries that are unable to manage the toxins in an environmentally friendly manner.

To further track the movement of hazardous waste, the Hong Kong Convention for the Safe and Environmentally Sound Recycling of Ships in 2009 established that ship owners must maintain an inventory of hazardous materials on board their vessels for use by ship dismantling facilities during the recycling process. “In the US, before many of the ship dismantling yards closed, there were full dry-dock facilities with cranes and high-tech machinery to take apart ships,” Vogt said. “Every precaution was taken to protect workers and minimize pollution. However, ship owners in Bangladesh say that if they were to follow all the regulations that exist they’d be out of business.” Numerous loopholes allow ship owners and dismantlers to bypass current standards. Here’s one: many countries provide open registry for international ships—a practice known as the flag of convenience. This allows ships to fly a different country’s flag—and take down their own—to avoid conforming to regulation that they would otherwise have to follow. The result: Liberia, not part of the Basel or Hong Kong conventions, has the highest ship registry of any country—3,700 ships, or 11 percent of the world’s oceangoing fleet. Intermediaries that purchase ships for cash and sell them to recycling yards are not bound by regulation either. Above all, international organizations have no criminal authority to enforce the regulations they create. Although regulations seek to make ship dismantling safer for both workers and the environment, they have spurred a destructive race to the bottom in countries where it’s difficult just to keep the industry afloat. Bangladesh has kept labor rates low, disregarded environmental standards, and avoided expenditures on capital improvements in order to remain competitive with other nonregulated ship-breaking rivals in the region. Until regulations are met, the industry in Bangladesh is restricted to dismantling ships from countries that don’t comply with international standards, further compounding existing problems. Recent developments, however, may rectify this conflict between compliance and the bottom line.

He outlines six solutions that cater to the needs of shipyard owners, workers, regulators, environmentalists, and ship companies: 1. Establishment of a pre-cleaning facility 2. Beaching of ships in a proper setting 3. Purchase of improved property and equipment 4. Institution of strict operating and dismantling procedures 5. Creation of formal monitoring methods 6. Founding of a public-private partnership involved in towing services

“If Bangladesh were to establish the proper facilities to handle toxic wastes, it would be able to open up to a whole new market.” Dylan Vogt, BSBA ’12

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |



Together, the solutions have the potential to position the country’s ship dismantling industry as a model for others, such as India and Pakistan. “There is so much capacity out there,” Vogt said. “It’s a matter of getting the industry to a point that it can meet the capacity.” A domestic pre-cleaning facility, offering full inspection and services in preparation for dismantling, would function as the point of initial port for ships entering the country. Removing chemicals and wastes prior to dismantling would substantially decrease health and safety risks to workers and reduce the industry’s impact on the coastal environment. Additional jobs and financial gain would also result from the provision of an advanced and much sought-after service. “If Bangladesh were to establish the proper facilities to handle toxic wastes, it would be able to open up to a whole new market of countries that are currently restricted from sending ships there,” Vogt said. The continental shelf off of Chittagong provides a long extension between the shore and ocean—deep enough to allow ships to almost completely reach the beach. Vogt envisions making use of this distinct geographic feature in a new way. Using ship-lifting technology like a Roll-Royce Syncrolift or a patent slip—that is, mechanical ship elevators—ships could be transferred from beaches into controlled facilities, where toxins and chemical residue would be captured rather than washed away with the outgoing tide.

“The installation of such a system could provide the centerpiece of revitalizing the ship dismantling process,” Vogt wrote. He also proposes the purchase of substantial equipment, including lighting, cranes, trucks, and other capital investments to create a proper facility for dismantling. Implementing strict dismantling procedures that comply with safety measures would ensure that new facilities are run efficiently and new equipment is operated appropriately. And to convince foreign countries with high disposal needs to export ships to Bangladesh, the government will have to conduct regular audits that confirm adherence to international standards. Lastly, Vogt suggests that shipyard owners launch their own towing and crewing operations, instead of using expensive and unreliable intermediary organizations to transport purchased vessels. To integrate corporate social responsibility, he advocates the introduction of education, training, medical treatment, and rescue services; housing for workers and their families; increased workers’ rights and wages; and clothing and safety equipment for workers. “It is possible to revitalize this ‘dirty’ industry to the advantage of the local Chittagong community and the Bangladesh economy as a whole,” Vogt wrote. He has spoken with Bangladesh’s ambassador to the US, Akramul Qader, and the executive director of the US Bangladesh Advisory Council, Shamarukh Mohiuddin, about his ideas. He’s also worked closely with Bernhard Gunter, an adjunct professor at American University and president of the Bangladesh Development Research Center. Gunter helped refine the proposal for submission to the Bangladesh Development Initiative’s March 2013 international conference in Berkeley, California. Vogt hopes he can offer some kind of assistance in the future, and is watching closely as new rules and renewed awareness offer optimism for real change. “Something needs to happen; something will happen.”

g n i l l i F e h t s e i k $ e c n e i c The S venue of Re gement Mana ew for N e Routes Airlin

For industries such as airlines and hotels, finding the best pricing model is the difference between survival and certain death. If an airline charges more than the market will bear and flies a row of empty seats from Dulles to Los Angeles, it can never regain that lost revenue. Finding the right mix of fares to maximize profits, while still filling the plane, is the science of revenue management. Article By Amy Burroughs



airline or an existing carrier opening a new route. Flying blindly, as it were, is too risky for an industry already on shaky financial ground, so airlines need a reliable way to make those decisions. Enter Karaesmen. She has helped create a new decision-making model that would work even if you didn’t have historical data. The research relies on judgmental forecasts and is based on the concept of nesting, in which an algorithm determines the best mix of fares. Nesting might indicate, for example, that an airline will sell no more than 10 tickets for $100 or less, 15 tickets for $200 or less, and 20 tickets for $300 or less. As random as fare fluctuations may appear to consumers, they are actually far from it. If an airline’s nesting algorithm determines that it can sell no more than 10 tickets for $100, the 11th person will be out of luck (though still able to buy a pricier ticket). Then again, suppose the next day’s weather forecast calls for an ugly weekend in Chicago, causing leisure travelers with flexibility to postpone their visit. An airline analyst might reopen the lower fare so that buyers can once again buy a $100 ticket.

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

“There’s always a sweet spot between how many seats you want to sell or target to each segment, and that becomes a complicated decision,” said Assistant Professor Itir Karaesmen Aydin, whose expertise is in pricing optimization and revenue management in the travel, hospitality, and service industries. Airlines, hotels, and similar businesses have finite inventory, making them profitable only to the extent that they maximize revenue for each unit. At the same time, they must be careful not to set prices so high that no one buys. Air travel is unique in that passengers have varying degrees of need: a business traveler meeting an important client in Chicago may be willing to pay handsomely for a seat leaving Atlanta at 6:35 a.m. on Friday, while the leisure traveler spontaneously visiting the Windy City may go only if she gets a great deal. Airlines traditionally rely on historical passenger data, feeding these into mathematical algorithms that determine the best mix of fares for a particular flight and how many seats to overbook in case passengers cancel. But this method isn’t feasible for a new

Numbers Rising “There’s a constant interaction between the algorithm and the system and the revenue, and the analyst can actually override a decision as the flight time gets closer,” Karaesmen said.

Small improvements to decisionmaking data can have exponential benefits, considering that a major carrier may have hundreds of thousands of flights in a single year.

The study applies not only to competitor carriers, but also to multiple routes by the same carrier. In a sense, US Airways is competing against itself by offering six DC-to-New York flights on the same day. The researchers used game-theory analysis, a study of strategic decision making, to examine the effect of competition on fare decisions in their mathematical model, with limited data on consumer demand in a worst-case scenario. They found, Karaesmen said, that the nesting algorithms hold up, despite using less data. “We did a lot of simulations and analysis afterward to show that the quality of the decisions is as good as if I had more information such as probabilities,” she explained. “The quality of the decision is still as good if you use our framework versus the old framework, so the framework we brought is extremely useful for new flights, new routes, new hotels.” This research garnered a good bit of attention from airline employees when presented at conferences, according to Karaesmen. Transitioning to a new model would be difficult for airlines, however, because their current systems are so complicated. “If you wanted to run my algorithm as opposed to theirs, it would require a significant investment,” she said. “Airline employees understand its value, they definitely see potential in that, but implementation [throughout the whole network] is difficult.”


Buyers Beware The next step in her research may be the toughest one yet: understanding consumer behavior. The explosion of information available to travelers has made them significantly more sophisticated than travelers of 20 years ago, Karaesmen said, which means airlines must adapt. “So far in the airlines, the algorithms will treat everyone like it’s a herd: there’s a herd of passengers and 10 will pay $100, 20 will pay $200, and so on. But for the individual passenger, the decision making is more complicated. So then the question becomes, is there a way to incorporate individual decision making and choice behavior to model demand? Will worst-case analysis or models that use the regret criterion be effective in this more complicated setting?”

The percentage of formal complaints to US airlines that concerned overbooking in the first five months of 2012: 192 out of 5,071 complaints

Sources: Y. Lan, H. Gao, M. Ball and I. Karaesmen, "Revenue Management With Limited Demand Information." Management Science (2008). H. Gao, M. Ball and I. Karaesmen, “Competitive Seat Inventory Control Decisions Under the Regret Criterion.” Journal of Revenue and Pricing Management (2010). Y. Lan, M. Ball and I. Karaesmen, “Regret in Overbooking and Fare Class Allocation on a Single Leg.” Manufacturing & Service Operations Management (2011).

The number of passengers who rode US airlines in 2011, on 9,455,092 domestic and international flights

6,306 Jets and other planes that made up the US passenger airline fleet in 2011



1,150 Complaints about cancellations, delays, and misconnections, for comparison

3 The number of formal compliments passengers bestowed on US airlines during the same time period



Sources: Airlines for America, Bureau of Transportation Statistics, US Department of Transportation

KOGOD NOW Fall 2012 |

KOGOD NOW fall 2012 |

Turbulence Ahead According to the Federal Aviation Administration, the airline industry’s financial woes are unlikely to improve in the foreseeable future. Its forecast predicts a slow recovery from setbacks ranging from the 9/11 attacks to the recent recession, and says airlines will need new strategies to ensure profitability. Maximizing revenue on each flight is a critical component of that profitability. Karaesmen explained that small improvements to decision-making data can have exponential benefits, considering that a major carrier may have hundreds of thousands of flights in a single year. Delta Air Lines, for example, had a fleet of 740 planes in 2009 and carried 108.6 million passengers, according to the trade group Airlines for America. On the flip side, poor data can be disastrous to decision making. Researchers who work on mathematical algorithms have a term for this, Karaesmen said: “Trash in, trash out.” Before joining the faculty at American University, Karaesmen co-led a group of doctoral students studying revenue management with limited demand information. While the traditional practice of revenue management assumes that airlines will use historical data to create probability distributions about passenger demand, the study provided a distributionfree mathematical model for cases where that data did not exist. Instead, the researchers set upper and lower bounds on the range of possible scenarios by considering worst-case and best-case outcomes. The mathematical models that airlines traditionally use to make decisions require heaps of information, Karaesmen said, and data must be of high quality or the algorithm results will be skewed. Trash in, trash out. “The argument in our paper is, especially for new routes, that figuring out these probabilities is difficult and you will get inaccurate numbers,” she said. “The question is, ‘Can I build an alternate model that would work even if you didn’t specify any probabilities?’” The new model is so different from previous approaches that it poses a fundamental question about the validity of existing decision-making processes. Research succeeded, confirming that airlines can make effective fare decisions and retain the nesting structure even without probability data.

Maximum Capacity Next, Karaesmen analyzed whether the model established in the previous paper could apply to overbooking. The practice affects more travelers than you might think. In the second quarter of 2012, 13,236 passengers on 16 airlines were bumped involuntarily as a result of overbooking, according to the US Department of Transportation (DOT). Another 155,051 passengers were bumped voluntarily, meaning they accepted travel vouchers or other compensation to give up their seats. From the airlines’ perspective, overbooking is crucial. If they don’t overbook, they run the risk of flying with empty seats, which means lost revenue. In her paper, Karaesmen noted that in 2006, US Airways would have lost at least $1 billion had it not engaged in overbooking. The trick, of course, is deciding how far to push it. Airlines need a scientific method for making those decisions to ensure they don’t leave anything to chance—the financial stakes are simply too high, Karaesmen said. The practice hasn’t always gone smoothly, however; in exchange for letting airlines overbook, the DOT mandates certain protections for passengers. Between 2007 and 2011, the DOT assessed fines against eight airlines for violations related to oversales practices. Alleged violations by Delta, including failing to properly compensate passengers for their missed flights, triggered a $375,000 fine. In April 2011, the DOT amended overbooking rules to increase passenger compensation and set stricter requirements for airlines. In addition to studying whether they could apply their mathematical model to overbooking, the researchers removed the standard assumption that the decision maker is risk-neutral—that is, someone who takes the long view so that as long as the carrier performs well on average, it isn’t too concerned about short-term lows. A new airline carrier likely will feel differently, Karaesmen argued. It will be more concerned about the worst-case scenario because if the carrier doesn’t break even soon, it may go out of business. Improving its worst-case scenario would enable a carrier to improve all possible scenarios. “We’re saying that in a new business, you don’t have too much time,” she added. “You want to make sure you do well from the start.” They also took into account the regret criterion, which measures the effectiveness of a policy by benchmarking it to the performance of the ideal action, as determined by 20-20 hindsight. When the researchers put their new model to the test, it produced “effective, consistent, and robust decisions” for overbooking and fare allocation and proved that nested booking limits are the best way for airlines to maximize revenue. The third article in the series built on the findings of the first two studies, but introduced a curveball: What happens when there is competition on the route?

Practitioner Perspective

Combating Global Gridlock Ford Motor Company on the Future of the Automotive Industry

The auto industry has faced many challenges during the 30 years that I have been part of it. And over those decades we have evolved our products, and at times our whole way of doing business, in an effort to address them. William Clay “Bill” Ford Jr. is the Executive Chairman of Ford Motor Company. The greatgrandson of founder Henry Ford, he has been with the company for more than three decades, serving as President, CEO, and COO. Under Ford’s direction, the company has made progress toward improving fuel efficiency and introduced the world’s first hybrid-electric SUV.

nine billion in our lifetime. At the same time, the world is growing more prosperous, and consumers in emerging markets increasingly can afford to buy automobiles. Right now there also are about a billion cars on the road worldwide. With more people and greater prosperity, that number could grow to four billion by mid-century. Even with zero emissions and renewable energy sources, the sheer number of vehicles that will be on the road could present a serious challenge to economic, environmental, and social progress if we do nothing. In the decades to come, 75 percent of the world’s population is expected to live in cities, and 50 of those cities will have more than 10 million people. Combined with four billion vehicles on the road, that raises the possibility of “global gridlock,” a never-ending traffic jam that wastes time, energy, and resources.

Bill Ford Jr., Executive Chairman, Ford Motor Company

I am confident we will see many of these advances on the road by 2025 because the early versions are already being designed, and in most cases tested. In the long term, the transportation landscape will be radically different from what we know today. By 2050, we will have a true network of mobility solutions, all operating together. Pedestrians, bicycles, and cars, as well as commercial and public transportation, will be woven into a single, interlinked system. In this fully connected world, automobiles will be very different from today’s vehicles. We will see the first vehicles intelligent enough to navigate complex environments on their own, and the arrival of autonomous valet functions. Not only will you be able to plot and reserve parking spaces in most major city centers around the world before your trip, your car will also park itself when you drop it off at the garage, maximizing parking density. Gridlock, even in urban centers, will be dramatically reduced. Environmental gains will be substantial as we manage a mix of transportation and energy systems toward maximum efficiency. Personal ownership will remain, but it will be complemented by sharing services that can instantaneously match you with the right vehicle for your task. Software will be able to plot the most efficient, or most enjoyable, route for your day, mixing a variety of transportation modes. Instead of building a transportation infrastructure and asking humans to adapt to it, we will have a system that adapts to us. We will also be able to save many of the lives lost each year to tragic accidents. In the years to come, as more people around the world gain access to the mobility we all take for granted, the realities of global gridlock will become apparent. With all aspects of a network fully aware of and integrated with the world surrounding it, we can envision a time when transportation helps us regain our most precious commodity: our time.



A Blueprint for Mobility To address this issue, we will once again need new technologies, as well as new ways of looking at the world. At Ford, we have developed a Blueprint for Mobility, which is the start of our thinking on what transportation will look like in the future and what we must do to get there—from the technology roadmap to the new business models that must be explored. To start, we need to view the automobile as one element of a transportation ecosystem, and look for new ways to optimize the entire system. A truly sustainable long-term solution will require a global transportation network that includes vehicle, infrastructure, and mobile communications. We need cars that can communicate with each other, and the world around them, to make driving safer and more efficient. This smart system will tie all modes of travel into a single network linking public and personal transportation. It will use real-time data to enable personal mobility on a massive scale, without tradeoffs or compromises for individual travelers. Pedestrian walkways, bicycles, buses, planes, trains,

“To start, we need to view the automobile as one element of a transportation ecosystem, and look for new ways to optimize the entire system.”

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For much of that time, the most pressing issue has been sustainability, and reducing the environmental impact of automobiles. This issue is a personal passion of mine, and one where I have spent years advocating for change. Though the road has not always been easy, we have now made technological breakthroughs that are allowing improvements we could only dream about in the past. I am now confident that in my lifetime our vehicles will dramatically reduce their carbon footprint. However, looking solely at the emissions produced by the vehicles themselves would have addressed just one part of the issue. Not only have we been focused on reducing tailpipe emissions, but we also have invested substantially in making improvements to the way in which we manufacture our cars and trucks. By doing so, we have significantly improved the energy and water efficiency of our factories and have greatly cut the emissions that result from the manufacturing process. We still have a long way to go, but the industry is now on its way to meeting the environmental sustainability challenge with new technology, electric motors, and vastly cleaner solutions to the internal combustion engine and our system of manufacturing. We’ve taken a holistic view of the environmental challenge, and are in better shape for it. If you focus too narrowly on the issues you face, you eventually will find yourself on the wrong side of history. That is why we must take a broader view of sustainability. Environmental impact is only one part of the overall challenge. For the automotive industry, sustainability means products, processes, and policies that add economic, environmental, and social value over time. When I look at the future in that context, another challenge looms on the horizon that goes beyond individual vehicles: the issue of urban mobility. Although it has economic and environmental implications, urban mobility is primarily a social problem that impacts health, safety, and human rights. Today, there are about seven billion people in the world. That number is expected to grow to

automobiles: everything will be fully integrated and optimized to save time, conserve resources, and lower emissions. This connection process is already under way through the introduction of technologies such as Ford SYNC, which allows drivers to bring in and operate their digital devices using voice commands. The Ford Evos Concept vehicle, introduced last year, begins to explore the next level of connection possibilities. Evos demonstrates how cloud technology can give drivers a personalized connection to the outside world. It can fine-tune its suspension for changing driving conditions; route you around traffic jams; monitor your health; even turn out the lights, lower the thermostat, and close the garage door when you leave home. Looking further into the future, in the next five years communication technologies will continue to improve and become more widely available. The proliferation of 3-D digital maps and cell-based communications will provide better driver information and entertainment features. We will have ever more sophisticated driver interfaces to manage information flow without leading to distraction. We will be able to use these same systems to proactively alert drivers to traffic jams and accidents. Vehicle computing power will continue to grow, enabling limited autonomous functions for parking and driving in slow-moving traffic jams. Vehicles increasingly will talk to one another, and the mountains of data they generate will no longer be selfcontained and of limited use. In the mid-term period, to 2025, the amount of data that will flow to, from, and through cars will continue to increase. Vehicle-to-vehicle and vehicle-to-infrastructure communication technologies will make possible improved safety and denser driving. New technologies will allow more complicated semi-autonomous maneuvers such as limited “auto pilot” functions, including highway lane changing and exiting. The first efforts to integrate the various pieces of the transportation network will also begin in this time frame. Cars will be plugged into public databases to recommend alternative options such as trains, buses, and carpools when congestion is unavoidable. We increasingly will take advantage of the car as a rolling collection of sensors, improving reporting of road conditions and weather and coming closer to eliminating accidents at intersections.

Practitioner Perspective

Cross-Company Collaboration KOGOD NOW Editor

Jackie Sauter Publisher

Lara Kline Contributors

Transit, in one form or another, has followed me for much of my career. I have served as the chief information officer for a freight airline, a transporter and distributor of natural gas, and a passenger railroad, among other companies.

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The companies I was privileged to serve generally competed based on customer focus and service. However, each of these companies certainly wanted to aggressively deploy new and unproven technology, which would enable it to better serve its customers and improve its operations. My first role as CIO came in 1985 with the Flying Tiger Line, at the time the world’s largest bulk cargo carrier. The company made some unfortunate strategic decisions and missed the creation of the fast-growing courier segment of the market. Federal Express subsequently acquired Flying Tigers, and as a result I moved into the CIO position at the Southern California Gas Co. (now Sempra Energy), a dominant transporter and distributor of natural gas. After a multiyear stint as CIO at Paramount Pictures, I accepted an opportunity to return to Washington, DC, as Amtrak’s CIO. While working collaboratively with the leaders of these firms’ business units over the years, I developed an appreciation for the importance of creating a shared strategic vision for technology investments between the business and IT sides. We also needed a shared understanding of an appropriate governance model and clearly defined roles to be successful. The importance of this approach slowly dawned on me, and my business colleagues also eventually shared it, as we stacked our successful project implementations—and, of course, some less than successful ones. During my career-long journey, I came to realize that the successful projects seemed to have one thing in common: a true partnership between business and IT existed in each of them. Indeed, the

opposite kind of relationship was usually the common denominator at the core of the less successful efforts. Amtrak’s recent implementation of a revolutionary e-ticketing application based on the iPhone illustrates how such partnerships can lead to critically successful technology deployments. Amtrak’s eTicketing process allows conductors to monitor passenger checkins in real time on an iPhone-powered system, which makes it possible for them to manage seating and the needs of disabled passengers, and to report equipment failures to mechanics. This complex project was implemented successfully because a true partnership existed among the business units: marketing and product development, operations, IT. The business units took strong ownership of the effort within the framework of this partnership—a partnership that developed because Amtrak’s senior management had created a shared vision for deploying technology. Those leaders put in place the expectations for teamwork, which made effective implementation possible. Based on my experience, this is truly the “secret sauce” for deploying technology successfully—not only in transit but in all other sectors as well. It requires the right corporate culture, which emphasizes collaboration, sets high expectations, and demands commitment from senior management to work together toward shared objectives. Interdepartmental teams must have a mutual stake in their project’s success or failure. It also requires that the business units take ownership of the effort, since at the end of the day they will be the owners and operators of the resulting system.

Lindsey Anderson Amy Burroughs Charlie Dale David J. Kautter Anna Miars Alvin Nichols Andrew R. Zank

Finally, it requires that the IT department play an important and clearly defined role in leading the technology aspects of the project. With the great benefit of hindsight, I can clearly see several common opportunities that we either exploited to our competitive advantage or missed to our detriment:


1. The importance of the partnerships between the IT leaders and the business leaders—that “secret sauce”—with both working closely together to capitalize on the company’s investment in IT;

Copy Editor

2. The need to focus the strategy of the company, and the corresponding investment in technology, on the core customers—something that is not always the case in my experience; and 3. The critical need for a strategic blueprint, or architecture, for the deployment of technology in the company. The first of these is key to the other two. But only when all three ingredients are in place can a business begin to fully realize the true payback on the considerable capital investment that is being made in information technology. When this “secret sauce” of real partnership becomes a dominant part of the corporate culture, truly revolutionary things begin to happen.

Howard “Ed” Trainor, MBA ’71, retired as CIO of Amtrak in 2011. He spent more than 25 years as a CIO , also holding the position at Southern California Gas Co. (now Sempra Energy) and Paramount Pictures.

Charlie Dale Erin Willcher Digital Support

Laura Caruso Design and illustration

Design Army Carmel Ferrer

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Kogod Now - Fall 2012  

Kogod Now, a bi-annual, web-based publication of the Kogod School of Business at American University, examines business trends through an in...