Business Research in Action - Spring 2013

Business Research in Action Mays Business School, Texas A&M University

spring 2013

Merging passions to make a difference  Goals: Getting to the root of what motivates  Consumers and calculations don’t mix  Shrinking the invisible lines in online retailing  CEO confidence impacts accounting aggressiveness 

mays.tamu.edu

Merging passions to make a difference

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lmost 12 years ago, marketing Professor Leonard Berry went on a faculty development leave that changed the course of his career. “As a services scholar, I really needed to close a gap in my background,” explains Berry, a Regents Professor and University Distinguished Professor. “I needed to learn something about one of our most important services, and that’s health care.”

Berry started off studying patient service at Mayo Clinic, and got “hooked on health care.”

Since then, Berry has been working to combine his knowledge of services with what he has learned about health care to improve the health care systems in this country. He has been highly successful in the field, publishing articles in prestigious medical journals like Annals of Internal Medicine and Mayo Clinic Proceedings. A book he co-authored, Management Lessons from Mayo Clinic, has been published in at least 10 different languages, and has made a particularly big splash in China, selling more than 70,000 copies.

In December 2011, Berry returned from several months of health care research in Wisconsin, and is now working on research projects based on the data he collected.

Berry has already written two papers from his studies in Wisconsin that have been accepted for publication by Mayo Clinic Proceedings, a medical journal that has a circulation of more than 130,000 physicians around the world.

“My hope is that others will read this and say, ‘We should do this in our health system, too.’”

Research is an important part of teaching and learning for Berry.

“The personal growth, the continuous learning that I experience from being an active researcher is extremely rewarding,” says Berry. “I just love to learn. It’s inspiring to me and then I love to share what I’ve learned, whether it’s with my students or it’s in the pages of the books and articles I write.”

Teaching transformed by research Beyond doing research and publishing books and articles, Berry also teaches graduate-level students at Mays.

“The course is called Services Marketing, but I’ve been teaching for a long time and I have a lot of business experience as well as academic experience. It’s really a course about business philosophy, a way of doing business the right way, that benefits all parties, all stakeholders,” says Berry of how his teaching has been transformed over time.

Berry also makes a point to incorporate his research into his coursework so students have practical examples to help them grasp the concepts.

“I bring my research into my classroom every single day. My students learn a lot about health care, whether they want to or not. It’s very exciting for me to share the health care piece with my students because they may not get the perspective elsewhere in the business school.”

Berry says that one of the more rewarding results of his use of his research in the classroom is the influence on students’ interest in the field. Every semester he has had students ask him about how to get into health care, and some of his former students are working in the field now.

“Dr. Berry has served as not only an influential professor, but also a mentor and coach,” says Annica Fischer, a former student of Berry’s who works in the health care industry. “Dr. Berry provided me with a new perspective on the health care industry and helped redirect my career path to one inspired by his teaching and mentorship. I am truly grateful for his unwavering commitment to his students.”

Mays Dean Jerry Strawser says he learned of Berry’s intention to focus on health care when Strawser interviewed for the job as dean in 2000.

“I was curious,” says Strawser. “It is highly unusual for a scholar of his renown to transform themselves after achieving so much success. It speaks highly of Len, his inquisitive nature, and his continuous striving for excellence that he undertook this challenge.”

Berry is not only a successful researcher, but also a highly distinguished teacher. In 2008, he was selected as a Presidential Professor for Teaching Excellence and in 2012 he was named a Regents Professor by Texas A&M University, an honor reserved for professors who have made outstanding contributions to the university and their profession.

“It’s very meaningful for me to have the respect of my peers,” Berry says. “It means a lot to me, because I respect them.”

Berry founded the Center for Retailing Studies at Mays and served as its director from 1982 through June 2000. He is a former national president of the American Marketing Association.

“His accomplishments are enormous,” says Cheryl Bridges, current director of the Center for Retailing Studies. “He continues to be a mentor to me.”

Awards and Accolades

• Authored the following books: ² On Great Service: A Framework for Action (1995) ² Discovering the Soul of Service (1999) (which was cited in 100 Best Business Books of All Time) ² Marketing Services: Competing Through Quality (2004) ² Delivering Quality Service (2009) • Served as director, Center for Retailing Studies, 1982-2000 • Appointed Regents Professor in 2012 • Appointed Presidential Professor for Teaching Excellence in 2008 • Appointed university-wide Professor of Humanities in Medicine in 2004 • Appointed to M.B. Zale Chair in Retailing and Marketing Leadership in 2001 • Named University Distinguished Professor of Marketing in 1999 • Appointed to JCPenney Chair of Retailing Studies in 1991

Goals: Getting to the root of what motivates

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any research studies have been done using personality or job characteristics to predict performance through enhanced motivation, but neither has proved to be a consistently accurate predictor. Murray Barrick, professor of management and director of the Center for Human Resource Management at Mays Business School, wondered why personality didn’t predict performance as well as researchers thought it would.

“I think two insights led me to the theory,” Barrick explains.

“One is that when we’re talking about personality predicting performance, we’re really talking about motivation arising from within the person.”

The other insight came to Barrick after reviewing a recent meta-analysis that showed job characteristics were also not a strong predictor of performance, despite the fact significant importance was placed on them.

“That led me to think – is there an overlapping point at which the motivation arising from within the person can be magnified by working in the right situation?” Barrick explains of how his research began.

Barrick and his colleagues, Michael K. Mount from the University of Iowa, and Ning Li, who received his Ph.D. from Mays and has since moved to the University of Iowa, designed their research to be different from past management research on this subject. “Historically, research looks at one company, one job, and you have 100 people in that job,” Barrick explains. “I think what you’re really doing with that research is testing the ten different supervisors’ effect on the 100 employees, maybe as much as the job characteristics.”

Instead, Barrick spread out his research pool, collecting responses from 83 different companies in one industry, coming to about 300 people in total. “We used this process to make sure that the situation was fundamentally different,” Barrick says of their research design. “We maximized variance on the situation and presumably on the person, too.”

“The Theory of Purposeful Work Behavior: The Role of Personality, Job Characteristics, and Experienced Meaningfulness” is forthcoming in Academy of Management Review. It is a collaboration among Murray Barrick of Mays and Ning Li and Michael K. Mount, both of the University of Iowa.

Barrick wanted to look at how four fundamental goals influenced an employee’s performance: • Achievement striving — the desire to get things done • Autonomy striving — the desire to be more in control of their work environment • Communion striving — the desire to get along with others • Status striving — the desire to gain status and prestige at work Though goals are influenced by personality, Barrick believes the purpose behind a person’s striving has a more direct impact on their motivation and performance at work. The results proved Barrick correct, with three of the four goals showing a significant interaction with a small set of relevant job characteristics, meaning that managers don’t have to change so much about the job to motivate their employees. Communion striving was not as significant as the others – an outcome the researchers did not expect.

Knowing what drives an employee is an important asset for managers. “If you understand an employee’s fundamental goal, his or her most important goal, all they have to do is change those three or four job characteristics that correspond to that goal,” Barrick says of how managers can use this research. “By making those changes, they’ll engage that person, get that person motivated.”

By recognizing an employee’s goal, managers can more accurately tweak the responsibilities of each employee so that they are more effective at what they’re doing. Barrick says it is much like tailoring the job to the person in the areas that matter most. For example, a manager with an employee whose primary goal is status striving should recognize that activities like giving presentations or heading up projects will fulfill what their employee most wants to accomplish at work, making them more motivated and effectively engaged than if they were simply assigned to work in a group where their individual efforts aren’t as readily recognized.

Determining what motivates employees doesn’t have to be difficult for managers either. Barrick and his colleagues have designed a 48-item questionnaire to help managers, but he also believes that the goals are easy to recognize.

“These four goals are broad enough, fundamental enough, that I think as an observer we can pick up which of the four is most important to that person,” says Barrick. “Ask them, ‘Which is more important to you?’ Get that confirmed, and I think you would know how to help that person re-craft their job so they’d be more motivated.”

Consumers and calculations don’t mix

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uantifying the marketing implications of customers’ lack of numerical ability is a favorite research topic of Haipeng “Allan” Chen, associate professor of marketing and a Mays Research Fellow.

In the past, Chen’s research used this problem as a starting point, working to understand how consumers’ incorrect calculations affect their purchasing decisions. Expanding on that concept with his current research, Chen wanted to see how consumers’ lack of basic math skills would affect their ability to differentiate between two promotions that have the same value.

Chen and his colleagues, Howard Marmorstein and Michael Tsiros, both from the University of Miami, and Akshay R. Rao from the University of Minnesota, tested consumers’ reactions to two different pricing strategies: price discounts and bonus packs, which offer consumers more of a product for the same price.

Chen wanted to know if consumers preferred a bonus pack or a price discount.

“We were able to show that the sales volume was actually much bigger with the bonus pack versus the equivalent price discount.”

“In one scenario, consumers were given a price discount of 20 percent off the original price,” Chen explains of the research design. “In the other scenario, consumers were told they would pay the same original price but get 25 percent more of the product. But, if you calculate the promotion the per-unit price is identical.”

While the two deals are the same once the consumer gets to the register, the research question is which strategy will generate more sales for the retailer.

“It turns out consumers prefer the bonus pack to the price discount,” Chen says of the results. “We were able to show that the sales volume was actually much bigger with the bonus pack versus the equivalent price discount.”

However, the response is not always so clear-cut. Chen and his colleagues also explored other factors influencing the purchase

decision. For example, in the case of a familiar product like toothpaste, a bonus pack is preferred. For an unfamiliar product, however, consumers prefer a price discount because it lowers their perceived risk of buying a new product. Consumers also prefer price discounts when products are more expensive.

Of course, the amount discounted versus the amount of bonus is also an important factor to consider. “There is a golden middle ground for the retailer,” explains Chen. For example, an 11-percent bonus pack versus a 10-percent price discount is too small of a difference to impact a consumer’s decision. On the other end of the spectrum, a 100-percent bonus pack versus a 50-percent price discount is too easily recognized as equivalent by consumers for them to have a preference.

After the study was published in the Journal of Marketing, Chen and his colleagues received inquiries from marketing practitioners looking to utilize the research in their stores. The research has been referenced in articles featured in The Economist, the Financial Times and various other news outlets.

Chen thinks this research could impact management as well as public policy.

“I think a lot of companies, manufacturers and retailers are already using both bonus packs and price discounts, but they are not necessarily aware of the marketing implications,” Chen explains. “You can also think about the public policy implications: How do we make sure consumers are not lured to a seemingly better deal without really getting an objectively better deal?”

“When More is Less: The Impact of Base Value Neglect on Consumer Preferences for Bonus Packs Over Price Discounts” was published in the Journal of Marketing.

It is a collaboration among Haipeng “Allan” Chen of Mays and Howard Marmorstein, associate professor of marketing at the University of Miami; Michael Tsiros, professor of marketing at the University of Miami; and Akshay R. Rao, the General Mills Chair in Marketing at Carlson School of Management, University of Minnesota.

Shrinking the invisible lines in online retailing

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hen visiting a store, getting stuck in a long line at the register is often inevitable, but today’s consumers assume they have the option of shopping online and avoiding lines altogether. Unfortunately, many consumers have experienced waiting for slow sites while shopping online. These delays are usually an invisible line of customers dealing with a retailer that does not have the information technology (IT) capacity to serve them in a timely manner.

This is the problem Subodha Kumar, associate professor of information and operations management at Mays Business School, discovered while working with e-commerce firms in Seattle. “I was trying to see what issues they were having,” Kumar says. After talking to such groups, including one from Microsoft, Kumar realized that one major issue was how the groups were using marketing strategies to drive customers to their sites.

“Our old marketing practice has been to get as many customers to the store as possible,” Kumar explains. “In the traditional store setting, that strategy worked very well. As more people came, you always got a benefit. In the e-commerce setting they tried to do exactly the same thing, and that’s where the problems started happening.”

The difference between the physical store and the online store was essentially in the “lines.” If a retailer advertises more, it will bring more people to the store. Even though that might make the lines longer, consumers expect to wait and are served on a first come, first serve basis. For online retailers, bringing in five more people through advertising might mean slowing down the site enough for 10 people to leave out of impatience.

“Advertising Strategies in Electronic Retailing: A Differential Games Approach” was published in Information Systems Research. It is a collaboration among Subodha Kumar, an associate professor of information and operations management at Mays; Dengpan Liu, assistant professor at the College of Business Administration, University of Alabama; and Vijay S. Mookerjee, a professor of information systems at the University of Texas at Dallas.

“When more people come, the purchasing experience becomes slow for everyone. There is no concept of who came first or who came second,” Kumar says. “So, even though the person who came first is very interested in buying, he may leave the system before making a purchase.”

It’s easy to think the solution to this issue is to increase IT capacity so that the site can handle more customers.

Unfortunately, that is not always the case. Kumar’s research takes into account differential game theory, which says that if company A does X, then company B will do Y. If one company decides to increase its IT capacity so it can increase its advertising, its competitor will also increase its advertising, even though it may not have the IT capacity to handle more customers efficiently.

“As an overall system, it will hurt customers,” Kumar says of the scenario.

The question remained: How does a firm advertise just enough or have enough IT capacity without creating an undesirable environment for consumers overall? Kumar and his colleagues, Dengpan Liu from the University of Alabama and Vijay S. Mookerjee from the University of Texas at Dallas, were able to create a model using their research that e-commerce groups can implement to make sure they keep a good balance between advertising and IT capacity.

“Our model will tell, in a given setting, how much advertising a firm should do, and how much IT capacity it should keep, because everything is costly,” Kumar explains.

The model takes into account factors that change across firms and industries, like how many customers are coming to the site, how fast they are being served and how patient the average customer is.

“By picking the appropriate value, you can apply it to many different settings,” Kumar explains.

Kumar hopes that this research will help companies cut down on wasteful expenditures that arise from over-advertising or too much IT capacity. However, he points out that it may be difficult to make sure the consumer isn’t getting hurt in the process. Since businesses cannot collude, he believes that there may be a place for public policy makers in this situation.

“In such cases, some policy makers should tell firms you cannot do more [advertising] than this,” Kumar says of possible implications of his research. “That will help both the firms and consumers, which will help the economy.”

CEO confidence impacts accounting aggressiveness

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t can be difficult to understand why companies make decisions that lead to value destruction for a firm, especially when with financial reporting. Reporting appears to be a black-and-white practice. However, as most business professionals can tell you, financial reporting has significant gray areas.

“GAAP (Generally Accepted Accounting Principles) allows some flexibility,” explains Anwer Ahmed, Ernst & Young Professor of Accounting at Mays Business School. “When you start pushing the envelope on judgments within GAAP, it can almost be a precursor to fraud.”

In his recent research, Ahmed wanted to study whether the confidence level of a company’s CEO would have an effect on the aggressiveness of their financial reporting. Ahmed and his colleague, Scott Duellman from Saint Louis University, gathered historical data for 14,641 firms from 1993 to 2009, and looked for differences in reporting aggressiveness based on whether or not a company’s CEO was overconfident.

“When you start pushing the envelope on judgments within GAAP, it can almost be a precursor to fraud.”

“How to measure overconfidence is actually very tricky,” says Ahmed of one of the challenges of the research.

Ahmed used several measures, one of which was based on CEO option data and their exercise price behavior. For example, an overconfident CEO may hold on to options longer because he or she believes the value of the firm will continue to increase. As another measure, Ahmed used a CEO’s tendency to purchase more of their firm’s shares relative to other CEOs. Ahmed compared firms with different types of CEOs, and also looked at changes within the same firm after transitioning from one CEO to another.

“If a firm had an overconfident CEO and then transitioned to a new CEO who is less confident, does the accounting behavior change?” asks Ahmed of the basis of the research. “Or,

if a firm has a CEO who is not overconfident, and then gets a new CEO who is overconfident, does the firm, exhibit an increase in aggressive reporting?” Based on Ahmed’s research, the answer to both questions is “yes.”

Ahmed also studied whether strong external monitoring from shareholders, like boards of directors, would lessen the impact of an overconfident CEO. “We were expecting that firms with strong governance shouldn’t exhibit this effect, but we didn’t find that,” says Ahmed, who says he was surprised by the findings. “There may be good reasons why firms want overconfident CEOs. There are costs and benefits of hiring an overconfident CEO, and in some cases the benefits exceed the costs. That’s one potential explanation of why we didn’t find that effect.”

Some industries and companies are better suited for an overconfident CEO, Ahmed says. For example, firms in industries that engage in significant innovation and research may benefit from an overconfident CEO because of the amount of risk associated with innovating. Though some firms may want an overconfident CEO to get things moving, Ahmed says he realizes there is a fine line between aggressive reporting and fraud. For instance, companies like Enron and WorldCom crossed the lines years ago, leading to the Sarbanes-Oxley Act. “It’s a slippery slope,” says Ahmed. “Whatever we can do to understand why managers engage in this behavior can help us to identify firms that may be engaging in aggressive reporting and take preventive steps.”

“Managerial Overconfidence and Accounting Conservatism” is forthcoming in Journal of Accounting Research. It is a collaboration by Anwer Ahmed, an accounting professor at Mays, and Scott Duellman, an assistant professor of accounting at Saint Louis University.

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Business Research in Action illustrates the research conducted by Mays Business School faculty and its application to current and emerging business issues.

Editor: Kelli Levey Writer: Kailah Gonzalez Designer: Linda Orsi