Perspectives - Fall 2012

College of Business at the University of Illinois at Urbana-Champaign

Fall 2012

Perspectives

WORKPLACE BUZZ:

THE SOUND OF CREATIVITY

education, and this issue of Perspectives provides

for our faculty and

examples of how those partnerships make a

difference to both academic and business communities.

students are available because of the investment our Corporate Partners make in the education

Articles focusing on faculty research highlight how professors collaborate to uncover new strategies for business, such as the work of Frank Liu and Nick Petruzzi on page 19. Our Intersections feature on page 8 shows how the mentorship of a professor can create additional learning opportunities for a student. And the Partners in Business Ethics Conference, hosted by the College and

the next generation of responsible leaders.

Many of these opportunities for our faculty and

leaders."

students are available because of another important partnership—the investment our Corporate Partners make in the education of future business leaders. To all

[ MY ] PERSPECTIVE

Principal Partners $50,000 + Archer Daniels Midland Company BP America Inc Busey Bank Caterpillar Inc CME Deloitte LLP John Deere & Company State Farm Companies

colorfully illustrated on page 26, brought business and academia together to brainstorm on how to best develop

of future business

CORPORATE PARTNERS 2012-2013

of them and all of you who support our College’s efforts, our sincere thanks.

We value each and every partnership.

Sincerely,

Larry DeBrock Josef and Margot Lakonishok Endowed Dean

Lead Partners $25,000 - $49,999 KPMG LLP Motorola Solutions Inc. Senior Partners $10,000 - $24,999 Abbott Laboratories Baker Tilly Virchow Krause, LLP The Boeing Company Robert Bosch, LLC Ernst & Young LLP Grant Thornton LLP Grosvenor Capital Management, LP Illinois Mutual Life Insurance Madison Dearborn Partners LLC Michael Best & Friedrich, LLP Rockwell Collins Wal-Mart Stores, Inc. Partners $5,000 - $9,999 Abercrombie & Fitch Baxter International, Inc. Crowe Horwath LLP Exxon Mobil Hammer Haley Metropolitan Capital Navigant Consulting, Inc. Polygroup Services NA Inc. PricewaterhouseCoopers LLP Transco Products Inc.

DEAN Larry DeBrock

IN-DEPTH 2

Driving Growth Predictive analytics create growth opportunities in the insurance industry.

6

Data Downpour Information technology investments power profit.

10

True Confessions What's the best way for corporate America to say "Sorry"?

12

Is Gray Here to Stay?

Gray markets make an impact on business.

16

The Sound of Creativity Good ideas may begin with noise.

19

What's in Your Cart?

E-commerce may give you less than you bargained for.

24

Inside Job How can businesses reduce employee theft?

MANAGING EDITOR Tracy McCabe EDITOR Cathy Lockman

SHORT TAKES

CONTRIBUTING WRITERS Tom Hanlon Cathy Lockman Doug McInnis

8

PHOTOGRAPHERS Tricia Koning Thompson • McClellan Photography L. Brian Stauffer DESIGNER Pat Mayer

ON THE COVER Silence may be golden, but eliminating noise isn't always the best strategy for enhancing creativity. And it's not great for hearing directions during a photo shoot either, as Ravi Mehta, assistant professor of business administration, found out when he put on noise-cancelling headphones.

22

[ CONTENTS ]

P

artnerships are an important currency in business

FALL 2012

"Many opportunities

Intersections

15

60-Second Profile

22

History Lesson

26

The Main Event

28

Reality Check

30

100 Words or Less

32

The Reason Why

34

Parting Shot

The University of Illinois at Urbana-Champaign is an equal opportunity, affirmative action institution.

Printed on recycled paper with soybean ink.

[ INDUSTRY INNOVATION ]

Driving Growth HOW PREDICTIVE ANALYTICS TRANSFORM BUSINESS

2

The magazines you subscribe to, the clubs you belong to, your favorite vacation destinations, maybe even the music you buy when taken together say something about you and the kind of risk you represent to an insurance company. safe-driving discounts based on actual driving performance metrics for an individual customer. Instead of using a calculation based on general demographic information, policyholders get a rate that is based on their specific driving habits. For drivers who meet a certain set of performance criteria, it can mean lower insurance costs.

Some call it customized insurance. Some call it Big Brother. But whatever you call it, there’s no doubt that access to personalized data, and the analysis of that data, is changing the way the insurance industry does business.

DATA AND DECISION MAKING It seems like there is no end to the data being collected today, from individual information related to driving, credit, purchasing, and Internet behavior to records on crime statistics, weather patterns, and

mortality rates. This warehouse of data is the raw material of predictive analytics, a field that covers a lot of territory.

“Predictive analytics is putting your arms around all of the data that you can gather, mining it to discover valuable business insights, and utilizing advanced statistical methods to build models that predict the probability of future outcomes. Predictive analytics can drive strategic decision making for an organization,” says Jonathan Ankney, the national director of the Property & Casualty Actuarial Center of Excellence at Deloitte Consulting LLP and a 1996 ILLINOIS finance and actuarial science graduate.

In the insurance industry, the data has traditionally been used for underwriting purposes, that is, to determine risk and then to price coverage so that the risk can be managed. For instance, in the past, auto insurers would use a formula

that took into account age, driving record, year and make of the vehicle, miles driven, and home address to determine their risk. Today, they have much more information and much more sophisticated computing capabilities at their disposal.

That can mean more precision and better decision making.

“Predictive analytics has come to the forefront because of the analytic software available,” says Scott Farris, manager of actuarial research and development at the State Farm R&D Center at the University of Illinois.

“When you have billions of rows of data, it’s problematic to filter out the covariate you want to examine unless you have the statistical software to do it. It’s not just the awakening of new mathematics, it’s the software advancements that have driven the growth of predictive analytics.”

“Recent economic realities mean insurers can’t depend on the investment dollar for profitability, so they have to make good decisions on the operations side, that is, in risk selection and pricing. There isn’t much room for error in operations because of the lower return

THE ECONOMICS OF ANALYTICS If improved computing capabilities make it easier for insurance companies to use predictive analytics, economics make it necessary.

“Insurance companies make their money in two ways, from investments and from operations,” says Mark Vonnahme, Investors in Business Education Clinical Professor of

on investments. Predictive analytics help companies make better operations decisions.”

– Mark Vonnahme

Perspectives FALL 2012

I

t might look like just a small black box, but an InDrive Communicator can actually provide a lot of colorful data about your driving habits. Plug the compact device into your car and it will begin compiling information on how many miles you drive, your average speed, how often and how fast you brake and accelerate, and how you handle corners.

Depending on how you look at it, this tool is part spy, part calculator, part safety scout, and part performance evaluator. Depending on what it says about your driving habits, it can also be part benefactor. That’s because the data it records can help reduce your auto insurance premiums.

The In-Drive device is offered by State Farm as part of its Drive Safe & Save program. Policyholders who choose to receive the device install it in their car’s diagnostic port, which in most cars is under the dashboard near the steering wheel. After a month they can go online to satisfy their curiosity and view how their driving measures up.

But drivers aren’t the only ones who see the results of the monitoring. State Farm sees it too, and based on the data, the company can offer

3

–Jonathan Ankney

Finance. “Recent economic realities mean insurers can’t depend on the investment dollar for profitability, so they have to make good decisions on the operations side, that is, in risk selection and pricing. There isn’t much room for error in operations because of the lower return on investments.

Predictive analytics help companies make better operations decisions.”

And while the underwriting operation has been the focus of much of the analytics, Ankney says there is movement to broaden the scope of this form of business intelligence.

For instance, applying that intelligence to branding, marketing, and service initiatives may pay dividends by attracting and retaining customers. While those are all incomegenerating efforts, Ankney says there are important implications on the expense side as well.

“Due to market competitive forces, insurance premiums are at the lower end of the spectrum right now, which places more scrutiny on expenses. Predictive modeling techniques can impact your bottom line by helping you manage claims.”

How might that work? Ankney explains that savings can be realized by using analytics to predict which claims are most likely to be the most straightforward. You can then assign those claims to junior-level adjusters, so that the most complicated ones are handled by the highestpaid, most-senior adjusters.

4

A second way to impact the bottom line relates to claims management, says Ankney. Insurance adjusters are trained to examine the fact patterns of certain types of claims and predict their likely payout. A fender bender in the daylight hours involving two middle-aged drivers in late model vehicles might be considered a standard claim with a standard payout. And in 9 out of 10 cases that might be exactly how it pans out. But if that last claim ends up breaking the pattern, it could also break the bank.

“Predictive modeling can help us triage claims and flag those that could be more costly, so claim severity can be managed,” explains Ankney. “If you set up a model based on the early fact pattern and then pull in other external factors, a predictive model can flag which one of those ten claims has the potential to cost the company $100,000 instead of $5,000.”

What are some of those “external factors”? That’s the million-dollar, or maybe the 10-million-dollar, question. Data such as credit scores, buying patterns, or leisure interests, for example, can have predictive

ability. The magazines you subscribe to, the clubs you belong to, your favorite vacation destinations, maybe even the music you buy when taken together say something about you and the kind of risk you represent to an insurance company. Just what that “something” is, however, is another million-dollar question.

“We continue to search for the ‘why’ behind statistical correlations, like why a person’s credit score is correlated with her or his future auto insurance losses,” says Rick Gorvett, director of the Actuarial Science Program at the University of Illinois. “Maybe it’s because someone who is careful with their money is also a careful driver or maybe there are other explanations. But while we try to understand the ‘why,’ we recognize that the statistics show it and that the predictive value of those statistics is important to the industry.”

That value is part economics, part competitive edge.

“Insurance is a tough business to grow in because there are so many competitors,” says Ankney. “The enterprise must decide what strategic initiatives it will adopt to distinguish itself in the marketplace.”

“Good, clean, reliable data is key to making accurate predictions about risk potential."

– Stephen D’Arcy

Analytics is a critically important strategy to use if you want to be competitive in pricing, Ankney explains, but for companies that have not adopted models it can be a big change.

“Agents and underwriters who are used to using their gut and their judgment may be put off when others in the company advocate that the technology of analytics will revolutionize the company. Buy-in is tricky. Getting the time needed from the IT department can be a challenge as well. But companies that prioritize, that communicate effectively, and that have a C suite that drives the buy-in can get the adoption right and make it sing. Those are the organizations that reap the most rewards from a competitive standpoint.”

lose their competitive edge by giving away the results of their work,” says Stephen D’Arcy, professor emeritus of finance. “There are lots of pockets of profitability that they can reap because they have sole access to that information until others catch up.”

It’s an insurance company’s version of their own secret recipe.

But there are disadvantages to this proprietary mindset as well, explains D’Arcy. “If you’re not transparent, it raises suspicion in the minds of the public who don’t know what kind of data you’re basing pricing decisions on or how accurate that data is. They might feel that the information is being used against them, and that can hurt the credibility of the industry. If the public doesn’t trust that they’re being dealt with fairly, they might not be as forthright regarding claims.”

And then there’s the question of accuracy. “The model is only as good as the data provided,” says D’Arcy.

“Good, clean, reliable data is key to making accurate predictions about risk potential.”

But there is another component that D’Arcy and Vonnahme both believe is critical, and that’s meshing the power of data with the power of common sense.

“Models are just that, models,” says Vonnahme, who has 35 years of experience in the insurance industry.

“We have to use a combination of management expertise and models to best serve clients and ensure the health of the company. Too much modeling and not enough common sense can be dangerous.”

Farris adds: “You can’t just take a model and use it. There are statutory requirements, social issues, and public opinion considerations that all enter in. You have to be able to understand the models and apply them to your specific jurisdictions.”

As Ankney puts it: “The smartest actuaries in the world can build the greatest model in the world, but if it isn’t understood and used effectively by the business, you’re missing the boat.”

D’Arcy agrees. “Models are developing so fast, and they are the purview of a very small, technically talented group who can understand the mathematical complexities but may not have the real-world experience that’s required to put them in perspective. There has to be an interface that knows both sides. Without that, I’m concerned that complicated models could lead to incorrect decisions that will then cost the company, and the industry, dearly in terms of both economics and reputation.”

Cathy Lockman

•

Careful Calculations

T

he University of Illinois is home to the largest actuarial science program in the United States, with more than 300 students.

And many of them spend a great deal of time studying finance in the College of Business. These graduates are the ones who compile and analyze statistics and use them to calculate insurance risks and premiums.

Traditionally, they’ve been considered the “numbers experts.” But as insurers mine their databases to gain a competitive edge, actuaries are also being called on to help build or implement complex predictive models to help their companies make good rating and pricing decisions.

Today’s actuarial students take classes in advanced mathematics, finance, computer science, and economics. And some of the most talented even have an opportunity to get real-world experience in the field before they graduate.

Scott Farris, manager of actuarial research and development at the State Farm R&D Center on campus, leads a team of three actuarial professionals and 25 student interns in actuarial science and other business and engineering disciplines. They work on pricing and reserving models as well as research on new predictive analytical methods.

It’s a unique opportunity, says Rick Gorvett, director of the Actuarial Science Program. “This is real actuarial research work, and the State Farm R&D Center is the kind of thing that doesn’t exist on any other campus with an actuarial science program. Students work on sophisticated projects and gain a high level of visibility because they present their projects to State Farm executives.”

It’s a partnership that provides benefits to State Farm as well.

“Our interns are some of the brightest students on campus, many of whom we’re fortunate to recruit to work for us after graduation,” says Farris. “We spend a lot of time developing students’ skill sets. We have an established progression where an intern first works more as a bench chemist and then takes on a leadership role in projects.”

A SECRET RECIPE?

PROFESSION PROGRESSION

Prior to the explosion of data and the introduction of sophisticated analytics, rating plans were fairly straightforward and relied on the collective judgment of underwriters and actuaries. Competitors had an understanding of how others in the industry were pricing their products.

Predictive analytics has changed all that, with companies developing their own models and ratings systems.

“Companies know the value they can obtain from data mining their information, and they don’t want to

While ILLINOIS students are learning about predictive analytics in both the classroom and beyond, what does the reliance on sophisticated models mean for those who have been in the actuarial profession for years?

“It means change and competition,” says Mark Vonnahme, clinical professor of finance and director of the Master’s in Finance program. “The best way for actuaries to respond is to continue to add to their skill set, even after receiving their actuarial credentials. As insurance organizations look at staffing needs, they will seek out not just actuaries but other professionals, like those in our MS Finance program, who have the quantitative skills, the communication skills, and the business background to understand both the math and the management needed to help the company grow.”

“You can’t just take a model and use it.

There are statutory requirements, social issues, and public opinion considerations that all enter in.”

–Scott Farris

•

Perspectives FALL 2012

“Predictive analytics is putting your arms around all of the data that you can gather, mining it to discover valuable business insights, and utilizing advanced statistical methods to build models that predict the probability of future outcomes."

5

[ INFORMATION TECHNOLOGY ]

D O W N P O U R

HOW DO YOU MEASURE TODAY’S

INFORMATION EXPLOSION? IN

2010, GOOGLE’S THEN-CEO ERIC

SCHMIDT TOLD A CONFERENCE OF

CHIEF INFORMATION OFFICERS THAT

BETWEEN “THE BIRTH OF THE

WORLD AND 2003,” THERE WERE

FIVE BILLION GIGABYTES CREATED.

TODAY, HE SAID, WE CREATE

THAT SAME AMOUNT OF

INFORMATION IN TWO DAYS.

6

W

hile it’s tough to get your head around just how much information that is, research from the College of Business indicates that companies who commit to harnessing the power of that data through investments in information technology find there’s a lot of might in the gigabyte—and a lot of it rests in profit potential.

Traditionally, information technology departments have been viewed by CEOs as cost centers.

When it came to enhancing profits, the focus was on research and development and on advertising.

CEOs who think this way are overlooking the impact of IT investments on profits, says Ali Tafti, assistant professor of business administration.

“IT is a broadly strategic investment, and it is not limited to what IT departments do,” says Tafti, who was part of a team that studied investment data from more than 400 global companies from 1998 to 2003.

“Increasingly, IT investments are en-

ablers of R&D and advertising. R&D depends on coordination, knowledge management, and the ability to derive insights from data. Advertising requires effective customer relationship management and business intelligence, knowing one’s customers and responding to them.

These capabilities are enabled by IT.” Tafti and his colleagues found that companies investing in IT reaped the rewards of those investments. In fact, IT expenditures had a greater impact on a company’s profits than comparable spending in R&D or advertising.

In relating the power of investing in IT to CEOs, Tafti says, many information systems scholars are “beginning to adopt terms such as digital business strategy or digital business innovation. When we mention the success of Amazon versus Borders, or NetFlix versus Blockbuster video, the idea begins to resonate.”

More and more CEOs are getting the picture. According to CIO Insight, a publication that focuses on business strategies and technology operations, more than two-thirds of

– Ali Tafti

CEOs say they will increase IT investments this year. And that’s true even though 85 percent of the more than 220 executives surveyed believe their businesses will be impacted by an economic downturn in 2012.

U.S. companies are putting their money where their mouth is. According to the U.S. Department of Labor Bureau of Labor Statistics, 18,200 IT workers were added to the labor force in July 2012. And that addition is not an aberration: in May and June of this year, nearly 39,000 new IT employees joined the work force, and in the last two years, the IT segment has added more than 174,000 new jobs.

These companies focusing on IT understand what Tafti and his colleagues discovered: IT investments can enhance profitability both by reducing operating costs and increasing revenue.

“IT investments are essential to reducing costs, so the cost-reduction role of IT should not be ignored,” Tafti notes. But, he says, the role of IT in revenue enhancement can be

particularly strong.

“IT can facilitate new business models that bring in new customers.

Effective customer relationship management and business intelligence can help identify and bring in new customers, as can a great e-commerce site backed by great execution and customer service. These are all sources of new revenue.”

Tafti points to the Internet’s impact on social networking, viral marketing, crowd sourcing, online auctions, and peer-to-peer lending as examples of innovations that IT can facilitate in businesses.

“These are creative and fundamental innovations of business,” Tafti says. “But they are not just the product of creative business strategy.

They also require effective implementation in IT and skilled information technologists. These innovations are only possible because of the investments and innovations in IT made by firms such as eBay, Amazon, Google, Facebook, and many others.”

WORTH THE RISK? Tafti and his fellow researchers also found more variability in IT investments than in R&D and advertising expenditures. “IT initiatives can be costly, risky, and difficult to manage,” Tafti explains. Possible reasons for the risks include the novel technologies that IT embraces, which lend themselves to greater creativity and innovation, but also to greater risk. In addition, most businesses are more familiar with handling R&D and advertising risks.

The study found, though, that those IT investments had a significant positive impact on revenue. For every $1 increase in IT expenditures per employee, the researchers found a $12.22 increase in sales per employee.

Further, as industries become more competitive, IT’s effect on profitability increases. “IT has been particularly essential to survival and success in competitive industries, because the competition to reach out and maintain a customer base is particularly intense,” Tafti says. He defines “competitive industries” as those in which the pace of techno-

logical change has been rapid, where capabilities can become quickly obsolete, and where firms must innovate to survive. “Firms need to develop better ways to serve their customers or reach out to new customers, because the churn rate, the rate in which firms enter and exit the industry, is high.”

CEOs, Tafti says, should view IT investments as a strategic enabler across functional areas. “Generally, it is important to encourage employees across the organization, at all levels including the most junior, to find opportunities to reach out to customers or to coordinate or collaborate within and across the organization,” he adds.

“CEOs need to create an environment that encourages innovation from the ground up. Make sure that all ideas are heard and that the best are implemented. We find compelling evidence, in other research now under review, that these are the environments in which IT investments have the most beneficial impact.” • Tom Hanlon

Perspectives FALL 2012

D AT A

“IT is a broadly strategic investment, and it is not limited to what the IT departments do. Increasingly, IT investments are enablers of R&D and advertising.”

7

[ INTERSECTIONS ]

ORANGE & BLUE & GREEN BUSINESS

8

THE STUDENT

THE PROJECT

As a James Scholar, Mahek Parikh is a talented student pursuing an honors curriculum and double majoring in supply chain management and marketing. Last year, she was looking to conduct a one-on-one research project with a faculty member as part of her work in the James Scholar Program. This year, the junior from Niles, Illinois, has a successful research collaboration, and a case study, under her belt.

In addition, Parikh says the experience was eye opening: “There’s so much satisfaction in conceiving the project and then completing it and knowing that others can benefit from it in some small way. I learned a variety of new skills, such as interviewing techniques, and I found out that conducting research is more interactive and collaborative than I thought.”

As Agrawal explains, there are few companies that truly employ a comprehensive green supply chain strategy. Of those, Parikh choose Patagonia, a company that designs and manufactures clothing and gear for enjoying the outdoors. The products as well as the company’s commitment to sustainability captured her attention, but as Agrawal says, “Learning about Patagonia’s business might be interesting for blog posts, but research means discovering more. It means focusing in on a business question. For this project, we explored the questions: ‘What does it mean to be green? Can you sustain a profitable business by being committed to employing a green supply chain?’“ Parikh examined the company’s green strategies, such as its commitment to the renovation of existing

buildings rather than building new stores, to the use of energy-efficient processes in manufacturing and retail environments, and to unique strategies like the Common Threads Initiative, which focuses on manufacturing less merchandise, repairing damaged merchandise, often for free, providing an easy way for customers to resell or donate unused merchandise, and using recyclable materials in their apparel. She found that this strategy may be more costly, but it pays off in terms of efficiencies, product development, and employee and customer loyalty.

The project paid off, too. Next spring, the case study Agrawal and Parikh collaborated on will be used in two courses: an undergraduate course in logistics management and a graduate course in supply chain management. • Cathy Lockman

THE PEOPLE Anupam Agrawal and Mahek Parikh THE IDEA An academic research collaboration between a professor and student THE PLAN Study the green supply chain strategy of Patagonia THE RESULTS A case study to be used in classes in Spring 2013

Perspectives FALL 2012

THE PROFESSOR Before earning his Ph.D. in 2008, Anupam Agrawal had spent more than a decade working in the area of supply chain management for firms like Procter & Gamble and Tata Motors. Now an assistant professor of business administration, Agrawal teaches courses and conducts research that focus on operations and process management, project management, and supply chain management. He also has been a faculty sponsor for a James Scholar Researcher for each of the past three years.

Here’s what Agrawal has to say about the opportunity for collaboration: “The process of discovery is at the heart of the academic research process. Opportunities like this provide undergraduates with a chance to make discoveries about their interests and skills while doing meaningful work that can also be of interest to the business community. For ILLINOIS faculty, working with fresh, young minds and helping them navigate the research process and see the benefits is very gratifying.”

9

[ CORPORATE STRATEGY ]

True Confessions

C

ompanies have found a new weapon to soften the fallout when a corporate mea culpa needs to be made.

They bring out the CEO for a public apology via online video.

This marks a radical shift for the business world, which typically delivered bad news through a terse press release, by a PR representative, or by the company’s lawyers.

New research from the College of Business found that such video apologies can work much better than the old system—but only if they're done right, says W. Brooke Elliott, the study’s co-author and associate professor of accountancy. The winning formula includes a personal mea culpa by the top official accompanied by a formal apology and a vow to set things right, she says. A well-delivered video apology can lessen damage to the company’s image, its stock price, and its sales.

To test the best approach for issuing a video apology, the researchers simulated a corporate fiasco and then used an actor on video to deliver an apology using two scripts. In one version of the video, the CEO bites the bullet and takes full blame. In the second, he passes the buck. The difference between the two videos is a single sentence in a four-paragraph script. The changed sentence was spliced in, with everything else remaining the same. “You couldn’t tell it was spliced,” says Elliott.

The performances were watched and judged by executive MBA students at the University of Washington.

10

“We found that If you accept responsibility, it tends to curtail negative reactions,” says Elliott. “But if you try to shift the blame, using video is worse than using a text statement.”

The study, done with colleagues from the University of Washington and DePaul University, appeared in the March-April issue of The Accounting Review.

Of course, it’s possible that the boss will bungle his big chance. Video efforts by Netflix CEO Reed Hastings to mute customer anger over a large price hike backfired as customers dropped the company’s services like a hot potato. “He was dressed very casually,” Elliott recalls. “It looked like they shot the video in a parking lot. It came across as very insincere.”

Others have a special knack for delivering bad news. J.P. Morgan Chase CEO Jamie Dimon brings boyish good looks and an easy style to the hot seat. Earlier this year, he personally dropped the news that J.P. Morgan, the nation’s biggest bank, stood to lose $2 billion, and perhaps much more, through its trading operations.

Lesser talents can succeed as well.

“They may not look as good as Jamie Dimon, and may not be as dynamic, but the important thing is that they come across as sincere,” says Elliott.

“They have to give the impression that they personally will take action to remedy the situation so that investors will not be harmed again.”

Employers may go shopping for camera-ready top executives when an opening pops up. “The market may demand an individual who has a dif-

ferent set of skills, including the ability to look good on video,” Elliott says.

Executives who have the knack may find their skills useful to their career trajectory. “Most CEOs don't stay at the same company for their entire career,” says Elliott. “If you're a CEO who's very good at disclosures, you could be very marketable.”

At least two factors are driving the shift to video apologies. One is the desire to limit damage from business fiascos. “If you don't handle it right, your stock price might fall,” Elliott says. “Shareholders could lose value and sue. The company could become a takeover target.” The other is the transition to the digital age.

“The new investors have grown up with technology. They don't want to view the message via text.”

Elliott offers several notes of caution. “There may be some top executives who aren’t very good at it,” she says. “That’s the subject of a followup study.” And, she says, the apology must be delivered by a top executive—the CEO or CFO, for example.

“It has to be a high-level executive, or the message may come across as untrustworthy or that the CEO has something to hide.”

She also cautions that issuing the apology in a live format, where reporters or analysts can ask questions, entails risk. “You can come across as being flippant or aloof.

There's also a risk of answering on the fly when you haven't prepared for a question.”

•

Doug McInnis

“We found that if you accept responsibility, it tends to curtail negative reactions. But if you try to shift the blame, using video is worse than using a text statement.”

– Brooke Elliott

“SORRY!” f you’ve missed the rising tide of video apologies, The Wall Street Journal collected ten of the most memorable in a story that ran in its Deal Journal section last October under the headline, “How To Say You’re Sorry.”

The WSJ blog posted links to each and included the time it took the top executive to issue an apology. Eurostar won, taking just 5 seconds to apologize for a snow-related shutdown that left customers of its high-speed rail service stranded between London and Paris. Toyota clocked in second at seven seconds for its massive safety recalls.

Jet Blue CEO David Neeleman never did say he was sorry for system problems that stranded 130,000 customers, though he did outline policy changes in the wake of the fiasco. He was out of a job several months later. WSJ’s list also included BP CEO Tony Hayward’s 60-second spot in response to the Gulf Oil spill. He took 38 seconds to use the word “sorry” as he was filmed standing on the Gulf shoreline. He later resigned.

Domino’s President Patrick Doyle took 14 seconds to apologize in a video that was heavy on corrective action in the wake of an incident at a North Carolina outlet. “Two team members have been dismissed,” said Doyle, “And there are felony warrants out for their arrest.”

I

Perspectives FALL 2012

No one wants to be in the hot seat when it comes to delivering bad corporate news, but someone’s got to face the music. Just what’s the best way to do that in today’s 24/7 news cycle and high-velocity social media environment?

11

[ MANAGING MARKETS ]

ost people know of the black market—the illicit clearinghouse for stolen goods and pirated merchandise. But they may not be aware of its distant gray-market cousin, even though they may routinely buy from it.

The gray market is generally legal, though many manufacturers condemn it and in extreme cases have gone to court to try to shut it down. It operates on the wellknown principles of arbitrage—the practice of buying legitimate, branded goods cheaply in one market and reselling them in another market where they can get a better price. In the United States, the gray market exceeds $50 billion per year in the information technology sector alone, according to data from AGMA, an alliance of intellectual property-rights owners.

“The gray market is a sort of aberration in the supply chain,” says Udatta Palekar, associate professor of business administration and director of the Supply Chain Management Program at the College of Business.

“It takes advantage of price imbalances.”

In general, manufacturers condemn gray-market sales activity because it cuts into their wholesale profits. For instance, a car made in the United States will carry a higher wholesale and retail price in Canada than in the United States. The retail differential allows gray marketers to buy the car at full price in the United States and then resell it for a higher

12

“The gray market is a sort of aberration in the supply chain. It takes advantage of price imbalances.”

– Udatta Palekar

• • • • • • • • • • • • price in Canada. The carmaker loses because it gets only the lower U.S. wholesale price instead of the higher Canadian wholesale price, says Romana Autrey, assistant professor of accountancy.

Manufacturers also contend that gray-market operations undermine their networks of authorized distributors because they must compete with the cheaper gray-market price.

Numerous factors create the pricing imbalances that spur graymarket sales. Overstock and promotional sales are two examples. So are fluctuations in currency rates. But the gray market thrives in particular on the growth of global commerce, as multinational corporations attempt to sell their goods in more and

more countries. They usually follow a multi-tier pricing strategy designed to boost corporate profits and unit sales, says Autrey, a former senior manager at KPMG, where she conducted gray-market investigations for the firm’s clients. For example, prices are likely to be higher in the affluent United States than in developing nations.

But multi-tiered pricing may backfire when the price differential opens the door to arbitrage. “Whenever you have a price difference between markets, you will have gray-market firms which see a profit opportunity,” says Autrey. “They say, ‘I’m going to buy low and sell higher.’”

According to Palekar, those gray market firms “may be third-party

firms or authorized distributors who divert their authorized supplies.”

Omega watches fell victim to this strategy. Omega charged hundreds of dollars less in some markets than it did in the United States. Enterprising gray marketers spotted the differential, snapped up watches in cheap markets, and then sold them to U.S. discounter Costco. Costco resold them to consumers at far lower prices than Omega’s authorized U.S. distributors could charge.

Consumers won; Omega and its distributors lost.

Omega fought all the way to the U.S. Supreme Court in an effort to stop the practice, but the court deadlocked 4-4. Justice Elena Kagan abstained because she had previously represented the Obama administration in earlier stages of the case while serving as Solicitor General.

The court is set to hear another gray-market case this fall. A Thai businessman bought cheap Englishlanguage textbooks printed for Egyptian users and then resold them in the United States. The textbooks’ publisher, John Wiley & Sons, sued for alleged violations of the company’s copyrights. A jury ordered a $600,000 judgment, but the businessman, Supak Kirtsaeng, appealed.

Kagan was not involved in this case and is expected to cast the deciding vote.

If the court does act to curb the gray market, it won’t necessarily shut down unauthorized sales, but it could shift the venue in which they are sold, says Autrey. Gray-market

THE TRANSITION FROM OFFICIAL TO UNOFFICIAL

• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

The gray market operates on the well-known principles of arbitrage—the practice of buying legitimate, branded goods cheaply in one market and reselling them in another market where they can get a better price. While legal, the market is unofficial, unauthorized, or unintended by the original manufacturer.

Perspectives FALL 2012

M

IS GRAY HERE TO STAY?

13

[ 60-SECOND PROFILE ] • • • • • • • • • • • • • • • • • • • • • • • •

sales could simply become another player in the already huge black market.

This has already occurred in the one area where gray-market sales are illegal in the United States—prescription drugs. It’s now illegal to import prescription drugs into the United States from Canada, Europe, and other places where drug prices are much lower. But black-market offers for cheaper drugs from Canada abound on the Internet. Just type the words “buy prescription drugs from Canada” into a search engine, and you’ll find a variety of online pharmacies willing to fill your order.

POINT, COUNTERPOINT Even if the court upholds the legality of other types of gray-market sales, manufacturers might still take actions to try to curb it. In the past, for example, they have refused to honor warranties on gray-market products. Some gray marketers have countered with warranties of their own.

Manufacturers might also restructure their pricing, as one firm did, says Autrey. “That company said, ‘We’re so tired of this gray market

14

that we’re going to set one worldwide price.’ They subsequently failed as a company. In their fiercely competitive industry, they lost market share. You give up sales when you set one worldwide price because they were too high priced for many markets.”

While manufacturers have tried many tricks to restrict the gray market, nothing has proven effective in the long term. “It’s like point and counterpoint,” says Autrey. “No matter what you do to stop it, if there is a big enough profit margin then it’s still worth somebody’s time to get around it.”

These days, gray marketers have plenty of opportunity thanks to changes in technology and the global economy. They have benefitted from the rise of Internet sales sites such as eBay, which offer a quick way to legally link gray-market sellers with buyers. And they have profited from the global economic slowdown, now in its fifth year. “People are cost conscious,” says Autrey. “The recession drives people to the gray market because they have less money to spend.”

Doug McInnis

•

C A N G R AY B E G O O D ? ompanies may go to considerable lengths to curb gray-market activity in their products. But a growing body of research suggests that isn’t necessarily the right tactic.

“The biggest message of our research is that the gray market is not always bad,” says Romana Autrey, assistant professor of accountancy. “In some cases, you wouldn’t want to eliminate the gray market, even if you could do so for free.” Autrey and colleagues from the University of Toronto examined the gray market in a series of four research papers.

Among other things, their research found that it may actively boost a company’s sales and profits not to put a wrench in the gray market. For example, companies typically fight the gray market by raising prices at foreign units to shut down the opportunity for arbitrage.

“Our research shows you would sometimes be better off to allow foreign units to set their own prices. That will maximize profits and sales in each foreign market. While you may be creating a bigger gray market for your products, you will still be better off because you will be increasing global market share, thus weakening the competition, which will be losing market share.”

Other ILLINOIS researchers have conducted studies that likewise conclude that the profit motive may lead companies to let gray-market sales slide.

“It’s commonly known that many manufacturers won’t do anything about the gray market,” says Udatta Palekar, director of the Supply Chain Management Program. “Occasionally, we would see articles that said manufacturers were not objecting to the gray market because they were benefitting. We wanted to see if that was true, and under what conditions.”

Palekar conducted the research with ILLINOIS colleague Yunchuan Liu, associate professor of business administration, and Ying Xiao, Ph.D. candidate.

To test this theory, the researchers created an analytical model to examine hypothetical gray-market scenarios. The model showed instances in which manufacturers earned the same wholesale margins regardless of whether their product was sold via authorized dealers or gray-market sellers. The two sellers had to compete for business, forcing them to lower their prices. This, in turn, expanded the number of customers who could afford to buy the product, boosting the number of units sold. “Since the manufacturer keeps his margins the same, he makes more money,” Palekar says. “However, manufacturers only benefited when the gray marketer was a third-party and not an authorized distributor.”

C

100,000

1990

The dollar value of goods donated to the Pine Ridge Indian Reservation through KOLA, a non-profit established by MBA students after visiting the Reservation with Stig in 2010

The year Stig received his bachelor’s degree in marketing from the University of Illinois; he earned his ILLINOIS MBA two years later

2

Margin of votes that earned him a seat on the Champaign Unit 4 Board of Education in 2009

20 The percentage of MBA enrollment growth under Stig’s leadership in the past three years

29 The number of countries Stig is proud to say are represented in the enrollment of the current full-time MBA class of 240 students

80

The percentage of MBA students participating in the Global Consulting Program, a client-based immersion project in one of four emerging market countries

12,610 The amount of lunch money Stig’s counted every Monday for the last nine years while volunteering at the school his four children have attended

•

A SSOCIATE D EAN

OF

MBA P ROGRAMS

Perspectives FALL 2012

–Romana Autrey

• • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

“Whenever you have a price difference between markets, you will have gray-market firms which see a profit opportunity. They say, ‘I’m going to buy low and sell higher.’”

15

[ WORKPLACE BUzz ]

our initial thoughts on a new product design are due tomorrow. Which means you better shut your door and block out all distractions so you can get those creative juices flowing. Right?

Wrong, says Ravi Mehta, assistant professor of business administration at the University of Illinois.

What you actually need to stir those creative juices is some noise. About 70 decibels’ worth—equivalent to a radio or TV on in the background, or someone running a vacuum cleaner.

So much for the stereotypical librarian shushing anything above a whisper, or the junior high teacher calling for silence in his writing class, so students can “be creative without being disturbed.”

Actually, a bit of disturbance does wonders for creativity, says Mehta, who headed a study that looked at how ambient noise affects creativity. “We actually got the idea for the study when we were in a noisy coffee shop,” he says. “One of my colleagues said ‘With all this background noise, do you think we

Y

16

can come up with a good idea [for a study]?’ I replied, ‘This is background noise; it is distracting. It actually should help us think outside of the box.’”

Mehta, whose research emphasis is on creativity, knew that studies abounded in examining the impact of noise on human cognition and behavior, but the literature was scarce on the effects of noise on creativity. So he and colleagues Juliet Zhu of the University of British Columbia and Amar Cheema of the University of Virginia designed five experiments to study the relationship between noise and creativity.

Here’s what they found: • A moderate level of ambient noise—again, the ideal is 70 decibels—induces processing disfluency. In other words, it disrupts the flow of thought. And such disfluency leads to abstract thinking, which in turn enhances creativity.

• There is an inverted-U relationship between noise level and creativity. Creativity is not enhanced with either low or high noise lev-

•

els. It’s only in the middle—with that moderate level— that creativity increases.

Increasing levels of noise lead to higher construal levels—so both moderate and high levels of noise result in more abstract processing than is achieved at low levels of noise. But when the noise level gets too high, creativity is inhibited.

THE POWER OF DISTRACTION “Distraction makes you think at a broader level, a more abstract level,” Mehta says. “So moderate noise is good. But we found that while distraction increases creativity, your brain’s ability to process information goes down as distraction increases.

So when people are too distracted, they may not be processing the relevant information.”

Mehta and his colleagues measured the creativity of students by using the Remote Associates Test, an assessment widely used to evaluate creative thinking in both psychology and market research. Students were given three or four stimulus words

that related to a fourth or fifth target word not given. Their task was to come up with that target word. For example, for “shelf,” “read,” and “end,” the target word was “book.”

The students worked through a series of stimulus words in varying noise conditions. For background noise, the researchers piped in voices, traffic noise, airplanes flying overhead, and other sounds that would be heard in an environment similar to a roadside restaurant.

“We didn’t find any difference between 42 and 50 decibels,” Mehta says. (Forty decibels is roughly equivalent to a library, birdcalls, or the lowest limit of urban ambient sounds.

Fifty decibels equates to a quiet suburb or conversation at home.) “So we went up to 70 decibels. That’s where we found the highest creativity. The maximum decibel level for creativity was 72 to 74 decibels. That is what you find in a normal consumer environment. When people are talking, it is about 72 decibels.”

Mehta cautions that the ideal ambient noise level depends on the type of work you are doing. Creativ-

Perspectives FALL 2012

CREATIVITY

17

[ E-COMMERCE ]

“When I’m thinking about a new idea, I like to go to a coffee shop. I like to work from there, where there is background noise and I can see some movement. It helps us to think out of the box if we have some moderate level of distraction. But if I’m writing an academic paper, I don’t want any distractions.”

– Ravi Mehta

CREATIVE SPACES Sometimes noisier environments and big open spaces are just what the corporate doctor ordered.

18

“If a company relies on a lot of creativity, open space will help spur that creativity,” Mehta says. He points to the example of Google, which has open office spaces. “They want people to come and talk,” he says. “You get that ambient sound through people talking in the background and moving around. You see people working and talking. You get this natural distraction —but you also have spaces where people can go when they don’t want distractions.”

That ambient sound, he says, can also be piped through speakers, but his study didn’t test for the effects of listening to music while working. “There are so many different types of music,” he says. “That would take a study all its own.”

But open spaces and background noise can only do so much to enhance creativity. You have to already be creative to reap the benefits. “People are different in their levels of creativity,” he explains. “It makes sense that this impact on creativity will be greater for those who have higher levels of creativity, be-

cause if I don’t have any creativity, how can I increase it?”

He adds that creativity can be improved through training. “If someone is being creative over and over, thinking about problems and how to solve them, then they become more creative,” he says.

APPLYING THE RESEARCH Mehta’s research applies not only to creativity among office workers, but among marketers as well. For example, he says, marketers might consider equipping showrooms with a moderate level of ambient noise to encourage customers to buy their new and innovative products. He found that his subjects were more willing to buy innovative products when they had a moderate level of ambient noise in the background.

This creativity enhancement extends beyond the office and showroom, too. Mehta notes that people use creativity away from work all the time—whether it’s subbing for a missing recipe ingredient, decorat-

ing a room, or solving various homeowner problems.

Want to increase the likelihood of arriving at a creative solution in your home? Turn on the radio or TV. Or get out the vacuum.

“We as consumers are being creative, working things out,” Mehta says. “And that process of being creative is enjoyable for many people. I know my intrinsic happiness is enhanced when I am being creative.”

A final word on enhancing creativity through ambient noise: You can get too much of a good thing. “If you are exposed to background noise for eight hours a day, that might have a negative effect,” Mehta says. “But instances of 15 to 25 minutes of background noise may help.”

Tom Hanlon

•

What’s in Your Cart?

E-commerce offers infinite variety and rock-bottom pricing. But sometimes it offers much less than you bargained for.

Perspectives FALL 2012

ity is enhanced by moderate ambient noise, but analytical, detail-oriented work may not be.

“Most of the time the work we do is not creative,” he says. “We’re not thinking about new ideas all the time, or solving problems, or developing new products. For example, when I’m in my office writing a paper, I don’t want distractions.

“When I’m thinking about a new idea, though, I like to go to a coffee shop. I like to work from there, where there is background noise and I can see some movement. It helps us to think out of the box if we have some moderate level of distraction.

But if I’m writing an academic paper, I don’t want any distractions.”

He adds that his study did not look at the ideal sound level for analytical work, though he says it seems logical that such work would be best carried out in quieter environments.

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What’s in Your Cart?

“Some consumers would rather have two pairs of cheap jeans for their money than one more costly but higher quality pair.”

– Nicholas Petruzzi

20

hese days, you can buy low-cost goods online direct from manufacturers, skipping the middleman entirely. But this new brand of retailing hasn't changed one of the fundamental truths of economics, according to a new research paper from the College of Business. “You still get what you pay for,” sums up Nicholas C. Petruzzi, associate professor of business administration and co-author of the new study.

In other words, if the price is cheap, you may get a cheaply made product, he says.

Petruzzi collaborated with Frank Liu, associate professor of business administration, and Hongyan Shi, a former graduate student now at the

T

“This research points out some of the negatives about e-commerce. The consumer can get low prices, but the manufacturer may have less incentive to provide quality.”

when the manufacturer had to sell through retailers and could actually see what they were buying. But then came the Internet. The manufacturer could say, 'I don't have to sell through the retailer. I can offer a low price. Plus, I don't have to work as hard to provide quality.'”

But if low price and convenience are the consumers’ primary objectives, then they may be completely satisfied with this business model.

Liu cites his own experience. “When I was a student, I was really happy buying cheap Dell computers. I didn't have the money to buy an expensive computer, and quality wasn’t my first concern.” But that changed over time for Liu, as it does for many consumers. For some, it’s a matter of more financial resources; for others, it’s a choice that for certain purchases, whether that’s technology products or designer jeans, quality matters more than price.

And when that’s the case, consumers do have an option—the bricks-and-mortar store. The price may be higher, says Liu, but so may be the quality. That’s because not only can you see the product for yourself, but the retailers who stock it in their stores have also vetted that merchandise. You pay a price for having the middlemen, not only because they provide a place where you can try on or try out the products

but because they have expectations that manufacturers must meet for products to be carried in their stores.

THE RIPPLE EFFECTS OF LOW PRICE Still, many people want the low price, with two factors driving this trend. One is the desire to have more stuff. Some consumers would rather have two pairs of cheap jeans for their money than one more costly but higher quality pair, says Petruzzi.

The other factor is the economy.

Unemployment and underemployment impact consumers’ purchasing decisions. “Consumers who have lost their jobs don't have the money,” says Liu. “We have more and more consumers who are price sensitive and cannot afford high-quality goods.” In turn, manufacturers are adapting to serve this market. Says Liu, “We may see more manufacturers tapping into this market by providing low price and low quality.”

Ironically, the desire for low price may be costing the United States even more jobs. “It's possible that some firms are moving manufacturing out of the United States to get cheap production costs so they can offer lower prices,” says Liu. “China and Mexico don't have the technology to produce high-quality goods. But they do have the capacity to provide low-quality products. As

people settle for lower-quality goods, it's possible more and more production will go to foreign countries.

These two things may seem unrelated, but based on our research, they are.”

New research from the non-partisan Economic Policy Institute shows huge job losses to China after 2001—a period that roughly parallels the surge in e-commerce. In a new paper, EPI economist Robert Scott concluded that 2.4 million U.S. jobs were lost from 2001 to 2008 as a result of rising trade with China. Every U.S. state suffered China-related job losses. California lost the most— 370,000 jobs. Illinois, Texas, Florida, and New York each lost more than 100,000 jobs.

Even consumers who haven't lost their jobs have been hurt by the lowprice trend because it's harder to find quality goods, says Liu. “The manu-

facturers are catering to the lowestcommon denominator,” which he says is a strategy that consumers should be aware of in their purchasing decisions.

“I think scholars need to tell this story to consumers so they can see the potential problems of the Internet. The price is easy to see on the Internet. The quality is not. The brand name may be the same as it was ten years ago, but the quality may not be the same. Most people celebrate the Internet. They think it's a good thing. But we also have to think about the potential drawbacks. The quality problem is one.”

“Dell’s business model was not possible before the Internet, when the manufacturer had to sell through retailers and could actually see what they were buying. But then came the Internet.”

– Frank Liu

•

Doug McInnis Perspectives FALL 2012

Nanyang Technological University in Singapore. The paper, scheduled to appear in Management Science, casts new light on the evolution of retailing in the digital age.

“This research points out some of the negatives about e-commerce,” says Liu. “The consumer can get low prices, but the manufacturer may have less incentive to provide quality.”

He cites Dell, a direct marketer of computers, as an example of the trend. “Dell's business model was not possible before the Internet,

“Even consumers who haven’t lost their jobs have been hurt by the low-price trend because it’s harder to find quality goods.

The manufacturers are catering to the lowestcommon denominator.”

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HISTORY LESSON

LOOKING AT THE BIG PICTURE

O

ur College has a long history of actively engaging with businesses to help them find solutions

to the challenges they face. In 1948, that assistance came in the form of a new initiative called the Business Management Service. It was a service that The Wall Street Journal described as

“a four-man staff [that] relies heavily on personal consultations to solve business problems.” For the first director, Earl Strong, that meant advising factories on reorganization strategies, assisting small town retailers on merchandising practices, and providing expertise on inventory control.

More than 60 years later, the College’s commitment continues through Illinois Business Consulting.

Today’s team includes nearly 200 students as well as a professional staff who together offer a wide range of services, including market analysis, financial modeling, customer survey design and analysis, new product assessment, and business strategy development. Over the past 15 years, the IBC team has assisted businesses of all sizes in all industries, ranging from entrepreneurial startups to Fortune 50 multinationals.

As Dean Howard Bowen said when BMS was established in 1948, “A college like ours must have connections with business so it won’t be operating in a vacuum. The close relationship [this] service builds with business helps us to find the real problems of the day. It helps get business education down to earth.”

Times may have changed, but the need for objective, knowledgeable advice and the College’s

Photo gallery:

willingness to provide it have not.

At left, Robert Loken of BMS presents retail merchandising strategies to Charles C. Strohl, a businessman in Bement, Illinois.

Center, Earl Strong, director of BMS, and Al Smith, owner of the Karmelkorn Shop, discuss exterior improvements to his business on Goodwin Avenue in Urbana.

Perspectives FALL 2012

At right, A.J. Kirstin, president of National Aluminum Company in Peoria, confers with Howard R. Bowen, dean of the College of Commerce and Business Administration, about services provided by the College's BMS staff.

22

23

Inside Job

[ EMPLOYMENT MATTERS ]

American outlaws Robert LeRoy Parker and Harry Alonzo Longabaugh—better known as Butch Cassidy and the Sundance Kid—went to to deliver the payroll of a Bolivian mine, they did what came naturally to them. They stole the payroll. They got their comeuppance two days later, when they were gunned down by Bolivian authorities.

businesses to commit theft. It’s very hard for management to detect.”

Chen, the Raymond A. Hoffman Fellow in Accountancy, co-wrote a study with Tatiana Sandino, associate professor of business administration at Harvard University, delving into data sets from 2003 and 2004 from the U.S. convenience store industry. Previous research studies of this industry, which typically provide minimum-wage jobs, have examined how wages earned impact turnover and effort, but few—until Chen and Sandino—have measured the impact of higher wages on employee theft.

They focused on cash shortage and inventory shrinkage to measure employee theft. Chen acknowledges that the inventory shrinkage measure can include some customer shoplifting.

Among their findings: • Employees who receive relatively higher wages—that is, higher in

•

•

•

relation to those in similar stores in areas where the cost of living is comparable—are less likely to commit theft, because they want to retain their jobs or because they feel they are treated fairly and want to respond in a like manner—a “gesture of reciprocity,” as Chen puts it.

Theft might also be reduced by employers who offer relatively higher wages because that might attract more ethical people.

There is a “tipping point”—where the cost of paying higher wages is greater than the cost of employee theft. “Employers have to find their own tipping points,” Chen says.

When multiple workers are present, cash shortage goes down, but inventory shrinkage goes up. As Chen explains: “Research shows that people have different perceptions about stealing cash and

•

stealing inventory. So, with other workers around, people are less likely to steal cash, but with inventory, it’s less of a big deal, and people might even collude to steal things.”

Relatively higher wages offered by employers contribute to a more ethical group norm, which makes workers less likely to collude to steal inventory when multiple workers are present.

A REASON TO STEAL Chen notes that there are several reasons for employee theft. “First, many people have financial stress and economic needs, and it’s especially bad in a recession.” Other reasons include revenge, job dissatisfaction, the thrill of potentially being caught, ego, peer pressure, addictions, and family problems.

Whatever the reason, employee theft is all too common. In fact, the

U.S. Chamber of Commerce reports that three out of four employees will steal from their employer this year.

What’s worse, 75 percent of employee crime goes undetected.

“Even if retailers install security cameras, employees can find ways to circumvent the cameras,” Chen says.

“For example, they can figure out which angles are not captured by the camera. They can circumvent whatever control system you put in.”

Chen speaks of the “Fraud Triangle,” a term first identified by sociologist Donald Cressey: “To commit fraud, you have to have motivation, opportunity, and rationalization,” she says. “Many employees rationalize their behavior by saying their employers are unfair to them, so there’s a reason to steal.”

Once motivation and opportunity are in place, rationalization can quickly follow. “People have varying perceptions of what crime is,” Chen

“Most people consider taking cash a crime, but some employees do not perceive stealing inventory as a crime— like stealing beer or cigarettes or food.”

– Clara Chen

says. “Most people consider taking cash a crime, but some employees do not perceive stealing inventory as a crime—like stealing beer or cigarettes or food.”

DISCOURAGING THE INSIDE JOB So what can retail employers do to combat theft?

Measures suggested by various human resources specialists include using background checks, security protocols, ongoing training, and confidential offense reporting.

In addition, she says, having multiple employees in the store does not necessarily reduce theft unless there is an ethical group norm. “When you have multiple workers, it’s even more

important to have an environment of positive reciprocity, because employees can either collaborate to do something good for their employer, or they can collude to harm their employer. And when they collude, it’s very hard for the organization to do much about it.”

For employers who cannot afford to raise wages, they can generate positive reciprocity by giving recognition to employees, such as Employee of the Month awards or “any recognition that makes them feel their efforts are acknowledged and they are treated well,” Chen says.

The accountancy professor notes that her study on convenience stores translates well to other retail stores, but not to settings where the stakes— and the average amount of theft—is much higher. “The payoff from stealing from a casino or a jewelry store can’t be offset by a $1 wage increase,” she smiles.

•

Tom Hanlon

24

Perspectives FALL 2012

A

s famous and infamous as they were then, today Robert and Harry would have lots of company.

In fact, in the United States there are more than 69,000 employees caught every year stealing from their employer.

The aggregate heist of those apprehended total between $44 and $50 million per year, according to Annual Retail Theft Surveys conducted by Jack L. Hayes International.

And those are just the known thefts. The tip of the iceberg, says Clara Chen, assistant professor of accountancy at the University of Illinois.

“Those numbers represent only a small fraction of the actual number of people who steal from their employers,” she says. “There are a lot of opportunities for employees in retail

Bolivia in 1908 to get away from the law. Hired

25

[ THE MAIN EVENT ]

The Writing’s on the Wall

T

he writing was literally on the wall at the Third Annual Partners in Business Ethics Conference held in Chicago in September. The conference was hosted by the College of Business and the Center for Professional Responsibility in Business and Society and was sponsored by BP and Deloitte. Sue Keely, a graphic recorder, used her artistic talents to create a visual representation of the conference proceedings, some of which is shown here.

It was just part of the lively and creative thinking process on display at the conference, which focused on how business and academic leaders can enhance the teaching of professional responsibility. Corporate ethics professionals from diverse industries along with deans and professors from business schools across the country met to brainstorm on how to develop the next generation of ethical leaders. To view the complete graphic recording of the conference, visit www.business.illinois.edu/responsibility/.

The conference was one of several events hosted by the College this fall.

Join us for more brainstorming at an upcoming alumni event in Chicago.

November 1: Roundtable: Leveraging Your Personality to Drive Performance December 5: Roundtable: Health Care Reform: The HR Perspective December 13: Business Alumni Holiday Party January 17: Roundtable: Being Your Own Career Advocate February 20: Roundtable: Corporate Responsibility March 1: MBA Alumni Banquet March 13: Roundtable: Accountancy

Participants in the Partners in Business Ethics Conference included from left: Crystal Ashby, executive vice president of BP America; Howard Engle, Deborah DeHaas, and Michael Zychinski from Deloitte; Gretchen Winter, executive director of the Center for Professional Responsibility in Business and Society at ILLINOIS; and Gwyn Blanton, director of ethics and compliance at Deloitte, Charalambos Iacovou, vice dean of the Schools of Business at Wake Forest, and Lester McKeever, managing principal, Washington, Pittman & McKeever and a member of the University of Illinois Board of Trustees

26

Perspectives FALL 2012

The Roundtable series is sponsored by the Department of Accountancy at ILLINOIS and PwC.

27

[ REALITY CHECK ]

The Reality Check

D The Reality

T

DEEPAK SOMAYA is an associate professor of business administration and the Stephen V. and Christy C. King Faculty Fellow. His work on innovation in multi-invention contexts, in collaboration with David Teece of the University of California, Berkeley, and Simon Wakeman of the European School of Management & Technology, recently received the 2012 Best Article Award from the California Management Review.

The reality is he does not own a smartphone.

Perspectives FALL 2012

here is no more lucrative or fast-growing market in business than mobile computing. Innovation is the why, and patents are the how.

Companies have spent billions of dollars developing those innovations by acquiring patents and millions of dollars protecting their intellectual property by suing companies that infringe on patents. In fact, Steve Jobs once said that he would go “thermonuclear” in a patent war between Apple and Google, whom he accused of copying Apple’s mobile software.

In August, this battle came to a head when a federal court in California ordered Samsung to pay Apple more than $1 billion in damages for patent infringement. The jury believed that Samsung smartphone and tablet products violated a series of six Apple patents related to the design and functionality of their mobile devices, such as the rectangular shape and rounded edges of the iPhone as well as specific scrolling and zooming methods. Apple had been on the losing side of a different patent battle over smartphones just the year before when the company agreed to pay an undisclosed amount to settle a lawsuit with Nokia. Today’s winner could be yesterday’s loser.

eepak Somaya, an expert on patent and intellectual property strategies in the high-tech industry, says the reality check is not about who wins or who loses in litigation. In fact, an all-out “thermonuclear” patent war is likely to be counterproductive because as Somaya says, “it can limit your vision for innovation.”

Instead, it’s about finding a way to rise to the challenge of commercializing multi-invention products, like smartphones, where so many firms own “pieces” of the inventions needed for building new products. It’s a challenge, he says, that requires “business models and patent strategies that are devised simultaneously and aligned with each other. And it requires high-tech companies to navigate through a thicket of very complex, uncertain, and contentious issues.”

How do you do it? It’s a two-part management challenge, explains Somaya. First, companies must determine their organizational model—that is, how to accomplish the design, manufacturing, and distribution of their end products based on their inventions. Specifically, should the innovator assemble many of the complementary technologies within the same firm— a more integrated model—or should the innovator rely more on implementing cooperative arrangements (e.g., licensing or component outsourcing) between owners of the different inventions? Second, innovators must devise a patent strategy— that is, how to access patented technology that is held by others and manage patent rights on their own inventions.

Ultimately, these two aspects—organizational model and patent strategy—are inter-dependent and must therefore be developed together, become mutually aligned, and, in turn, become aligned with the company’s overall corporate strategy and goals.

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100 WORDS OR LESS

is key, as is the ability to be nimble in the face of changing circumstances. You must be persistent when obstacles arise and, like a marathon steeplechase contestant, be able to combine power, speed, and flexibility to achieve your goal. You learn through action, so you must be willing to experiment with different solutions. And you must focus on not just the intellectual pursuit of what needs to be done but on the emotional task of how to get it done. The path to successful entrepreneurship is never straight; it sometimes meanders like a river before it reaches its goal.

as a requirement for my ‘Creativity in Engineering Design’ course. We were to collect and connect ideas, and I continued to use the skills from that experience during my professional career, first in industry and now in academia. Leaders create, so leaders need creative skills. They must be able to imagine and implement new ideas with impact. We want education to enhance creativity and entrepreneurship in ways that help students become international leaders who envision innovations addressing the grand challenges of our time.

Developed a course on subsistence marketplaces, which was named one of the top entrepreneurship courses in the country in 2011

by Inc. magazine; runs a social enterprise that provides entrepreneurial literacy education in subsistence marketplaces

”

Bruce Elliott-Litchfield, professor of agricultural and biological engineering Developed the course, “Creativity, Innovation and Vision,” and leads a team researching creativity enhancement in undergraduate engineering education as part of a National Science Foundation grant

“

Entrepreneurs need to be willing to fail. In my experience, entrepreneurs with a failure or two under their belts have learned well from those and are able to take what they’ve learned and subsequently create a successful venture. We all love the story of the entrepreneur who has the right innovation at the right time to create a great success story. But those who learn from failure and create success with that knowledge are the truly inspiring stories to me.

”

Rhiannon Clifton, program director, Department of Advertising Designed a course in entrepreneurial media, which will launch next spring

DEANA MCDONAGH

CARLA SANTOS

“

Entrepreneurs execute well. They move from the big picture of strategy, purpose, and performance down to operational details like who’s on the night shift. Good execution can bring even modest ideas to life, but bad execution will strangle even the best ideas.

”

Steve Michael, professor of business administration, teaches courses in technology management and entrepreneurship.

For the past ten years, he has served as academic co-director of the Hoeft Technology and Management Program, where he works with the Colleges of Engineering and Business as well as global corporations to train the next generation of leaders for the innovation economy.

of flexibility and creativity are essen“tialAinmixanything you do, but particularly when you are viewing an opportunity through an entrepreneurial lens. By embracing creativity you’re able to create something bigger out of smaller, disparate ideas. And by employing flexibility of thought you detach yourself from the notion that you must be right. Entrepreneurship is less about whether you have the right answer and more about trusting that the answer you do come up with will make a contribution to the effort. You have to be able to see a ‘problem’ as an embedded opportunity.

”

Carla Santos, associate professor and director of graduate studies, Department of Recreation, Sport, and Tourism Developed an entrepreneurial course on heritage tourism in the European Union and also uses that curriculum in her course entitled: “Social Cultural Aspects of Tourism Development”

“

The most important characteristic for entrepreneurs is the ability to imagine what does not yet exist if they want to develop radical not just incremental changes. Imagining a future where everything is possible, while not developing ‘design fixations’ to all their ideas is key. In addition, they need to be able to communicate their initial ideas and concepts before a language and terminology has been developed. Being observers of authentic human behavior provides them with key insight into entrepreneurial opportunities.

”

Deana McDonagh, chair of the industrial design program, School of Art + Design in the College of Fine and Applied Arts Has brought her expertise in industrial design to collaborative efforts that have established entrepreneurial courses in Disability & Design and Designing for Gender

Perspectives FALL 2012

is key. As a mechanical engineer“ingCreativity student here, I kept a ‘creativity notebook’

Madhu Viswanathan, professor of business administration and Diane and Steven N. Miller Endowed Professor

STEVE MICHAEL

RHIANNON CLIFTON

of setting goals and finding ways “toAgetmindset there, rather than waiting for resources,

”

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BRUCE ELLIOTT-LITCHFIELD

MADHU VISWANATHAN

“WHAT CHARACTERISTICS DO YOU THINK ARE MOST IMPORTANT FOR ENTREPRENEURIAL SUCCESS?”

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[ THE REASON WHY ]

WHO Geeta Singh, executive director of Bin Donated WHAT A new business model for nonprofits WHERE Bin Donated of Chicago WHEN Founded 2009 WHY To reduce costs for charitable organizations and help sustain the environment

BIN THERE, DONE THAT.

T

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HOW IT’S DONE

WHY IT WORKS

WHAT IT MEANS

Bin Donated partners with Chicago hotels, businesses, residential and commercial buildings, and foundations to collect and distribute in-kind donations for local nonprofits. For hotels, the donations are remnant toiletries; for dentists, it could be new toothbrushes and toothpaste samples; for corporate partners, it could be books, school supplies, toys, winter coats, or other needed items.

Here’s how it works. Big, blue Bin Donated bins are placed in the business where items can be easily collected. That could be anywhere from the housekeeping area of a hotel to a corporate break room to the lobby of a bank. When the bins are full, the Bin Donated truck—yes, there’s only one—and its part-time driver pick up the donations and deliver them to other nonprofits across the city that then distribute them as needed. It may sound simple, but logistics is one of the biggest challenges for the nonprofit and the corporate partners. The Bin Donated model makes it easy.

“Even though we’re a very young organization, we’ve been able to make a sizeable impact. In just under 3 years, our 150 nonprofit partners have received more than 120,000 pounds of in-kind donations worth more than $1.25 million,” says Singh.

And there is no cost to the charities, as corporate partners help fund both the costs of collection and distribution. That frees up other monies for the organizations to carry out their social mission so more people are served.

It works for businesses, too, because they have one partner that organizes all the pieces of the collection and distribution, which makes it an easy, efficient, and effective way for the business and its employees to give back to the community.

And then there’s the environmental benefit. Thousands of pounds of essential goods are diverted from landfills and get reused by people who need them. That’s a triple-bottom-line winner.

For the past two decades, Singh's career has included work in international corporate finance, global mergers and acquisitions, strategic business development for startups, and even running a casino hotel. So why make this move to the nonprofit field?

“This is an opportunity to utilize my extensive corporate and professional skills and help put form and structure around an unstructured marketplace,” she says. “I could see that with Bin Donated it was possible to move the needle in a very quick and meaningful way that was also extremely innovative. Nobody else in the country is addressing the need that Bin Donated fills in the manner we do. Our model is to create a systematic, scalable solution that has wide-ranging benefits for business, for charitable organizations, and for the at-risk communities.”

•

Cathy Lockman Perspectives FALL 2012

here are more than 6,600 nonprofits in the Chicagoland area doing great work to combat a variety of social problems, from homelessness to poverty to literacy. Most run their own collection drives and then distribute goods to their beneficiaries.

While that model has its benefits, it can also create significant duplication of effort for philanthropic organizations and an inundation of donation requests for the business community.

Geeta Singh, a 1989 ILLINOIS finance graduate, believes there’s another business model that has merit in the nonprofit environment, and as executive director of Bin Donated, she’s working to put that aggregator model to work.

“For nonprofits, the process of conducting drives and collecting for their wish lists is resource-exhaustive,” explains Singh. “Our collaborative model streamlines the entire collect and distribute process, which maximizes efficiency. It also helps reduce costs for nonprofits, and for our partners it adds another dimension of corporate social responsibility.”

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[

PARTING SHOT

]

Excellence. Our name’s all over it. In fact, 4,000 of our names are all over it. This sign, which lists the names of all current students, faculty, and staff in the College, welcomes visitors to the Business Instructional Facility. It’s also our way of reminding everyone who comes through our doors that if they’re looking for excellence, they’ve come to the right place.