Perspectives

Fall

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WORKPLACE BUZZ:

THE SOUND OF CREATIVITY

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

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Partnerships are an important currency in business

education, and this issue of Perspectives provides

examples of how those partnerships make a

difference to both academic and business communities.

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

colorfully illustrated on page 26, brought business and

academia together to brainstorm on how to best develop

the next generation of responsible leaders.

Many of these opportunities for our faculty and

students are available because of another important

partnership—the investment our Corporate Partners

make in the education of future business leaders. To all

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

ON THE COVERSilence 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 photoshoot either, as Ravi Mehta, assistant professor of business administration, found out when he put on noise-cancelling headphones.

"Many opportunities

for our faculty and

students are available

because of the

investment our

Corporate Partners

make in the education

of future business

leaders."

IN-DEPTH

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CORPORATE PARTNERS 2012-2013

Principal Partners$50,000 +Archer Daniels Midland CompanyBP America IncBusey BankCaterpillar IncCMEDeloitte LLPJohn Deere & CompanyState Farm Companies

Lead Partners $25,000 - $49,999KPMG LLPMotorola Solutions Inc.

Senior Partners$10,000 - $24,999Abbott LaboratoriesBaker Tilly Virchow Krause, LLPThe Boeing CompanyRobert Bosch, LLCErnst & Young LLPGrant Thornton LLPGrosvenor Capital Management, LPIllinois Mutual Life InsuranceMadison Dearborn Partners LLCMichael Best & Friedrich, LLPRockwell CollinsWal-Mart Stores, Inc.

Partners$5,000 - $9,999Abercrombie & FitchBaxter International, Inc. Crowe Horwath LLPExxon MobilHammer HaleyMetropolitan CapitalNavigant Consulting, Inc.Polygroup Services NA Inc.PricewaterhouseCoopers LLPTransco Products Inc.

Driving GrowthPredictive analytics create growth opportunities in the insurance industry.

Data DownpourInformation technology investments power profit.

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

Is Gray Here to Stay?Gray markets make an impact on business.

The Sound of CreativityGood ideas may begin with noise.

What's in Your Cart?E-commerce may give you less than you bargained for.

Inside JobHow can businesses reduce employee theft?

FALL 2012

DEANLarry DeBrock

MANAGING EDITORTracy McCabe

EDITORCathy Lockman

CONTRIBUTING WRITERSTom Hanlon

Cathy LockmanDoug McInnis

PHOTOGRAPHERSTricia Koning

Thompson • McClellan PhotographyL. Brian Stauffer

DESIGNERPat Mayer

The University of Illinois at Urbana-Champaign is an equal opportunity, affirmative action institution. Printed on recycled paper with soybean ink.

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8 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

SHORT TAKES

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[ INDUSTRY INNOVATION ]

mortality rates. This warehouse ofdata is the raw material of predictiveanalytics, a field that covers a lot ofterritory.

“Predictive analytics is puttingyour arms around all of the data thatyou can gather, mining it to discovervaluable business insights, and uti-lizing advanced statistical methodsto build models that predict theprobability of future outcomes. Pre-dictive analytics can drive strategicdecision making for an organiza-tion,” says Jonathan Ankney, the na-tional director of the Property &Casualty Actuarial Center of Excel-lence at Deloitte Consulting LLPand a 1996 ILLINOIS finance andactuarial science graduate.

In the insurance industry, thedata has traditionally been used forunderwriting purposes, that is, todetermine risk and then to pricecoverage so that the risk can bemanaged. For instance, in the past,auto insurers would use a formula

that took into account age, drivingrecord, year and make of the vehicle,miles driven, and home address todetermine their risk. Today, theyhave much more information andmuch more sophisticated comput-ing capabilities at their disposal.That can mean more precision andbetter decision making.

“Predictive analytics has come tothe forefront because of the analyticsoftware available,” says Scott Farris,manager of actuarial research anddevelopment at the State Farm R&DCenter at the University of Illinois.“When you have billions of rows ofdata, it’s problematic to filter out thecovariate you want to examine un-less you have the statistical softwareto do it. It’s not just the awakeningof new mathematics, it’s the soft-ware advancements that have driventhe growth of predictive analytics.”

THE ECONOMICS OF ANALYTICS

If improved computing capabili-ties make it easier for insurance com-panies to use predictive analytics,economics make it necessary.

“Insurance companies make theirmoney in two ways, from invest-ments and from operations,” saysMark Vonnahme, Investors in Busi-ness Education Clinical Professor of

It might look like just asmall black box, but an In-Drive Communicator canactually provide a lot ofcolorful data about yourdriving habits. Plug the

compact device into your car and itwill begin compiling information onhow many miles you drive, your av-erage speed, how often and how fastyou brake and accelerate, and howyou handle corners.

Depending on how you look at it,this tool is part spy, part calculator,part safety scout, and part perform-ance evaluator. Depending on whatit says about your driving habits, itcan also be part benefactor. That’sbecause the data it records can helpreduce your auto insurance premi-ums.

The In-Drive device is offered byState Farm as part of its Drive Safe &Save program. Policyholders whochoose to receive the device install itin their car’s diagnostic port, whichin most cars is under the dashboardnear the steering wheel. After amonth they can go online to satisfytheir curiosity and view how theirdriving measures up.

But drivers aren’t the only oneswho see the results of the monitor-ing. State Farm sees it too, and basedon the data, the company can offer

safe-driving discounts based on ac-tual driving performance metrics foran individual customer. Instead ofusing a calculation based on generaldemographic information, policy-holders get a rate that is based ontheir specific driving habits. For driv-ers who meet a certain set of per-formance criteria, it can mean lowerinsurance costs.

Some call it customized insur-ance. Some call it Big Brother. Butwhatever you call it, there’s no doubtthat access to personalized data, andthe analysis of that data, is changingthe way the insurance industry doesbusiness.

DATA AND DECISION MAKING

It seems like there is no end tothe data being collected today, fromindividual information related todriving, credit, purchasing, and In-ternet behavior to records on crimestatistics, weather patterns, and

Driving GrowthHOW PREDICTIVE ANALYTICS TRANSFORM BUSINESS

The magazines you subscribe to, the clubs you belongto, your favorite vacation destinations, maybe even

the music you buy when taken together say somethingabout you and the kind of risk you represent to an

insurance company.

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“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.”

–Mark Vonnahme

Finance. “Recent economic realitiesmean insurers can’t depend on theinvestment dollar for profitability, sothey have to make good decisions onthe operations side, that is, in risk se-lection and pricing. There isn’t muchroom for error in operations becauseof the lower return on investments.Predictive analytics help companiesmake better operations decisions.”

And while the underwriting op-eration has been the focus of muchof the analytics, Ankney says there ismovement to broaden the scope ofthis form of business intelligence.For instance, applying that intelli-gence to branding, marketing, andservice initiatives may pay dividendsby attracting and retaining cus-tomers. While those are all income-generating efforts, Ankney saysthere are important implications onthe expense side as well.

“Due to market competitiveforces, insurance premiums are atthe lower end of the spectrum rightnow, which places more scrutiny onexpenses. Predictive modeling tech-niques can impact your bottom lineby helping you manage claims.”

How might that work? Ankneyexplains that savings can be realizedby using analytics to predict whichclaims are most likely to be the moststraightforward. You can then assignthose claims to junior-level ad-justers, so that the most complicatedones are handled by the highest-paid, most-senior adjusters.

A second way to impact the bot-tom line relates to claims manage-ment, says Ankney. Insuranceadjusters are trained to examine thefact patterns of certain types ofclaims and predict their likely pay-out. A fender bender in the daylighthours involving two middle-ageddrivers in late model vehicles mightbe considered a standard claim witha standard payout. And in 9 out of 10cases that might be exactly how itpans out. But if that last claim endsup breaking the pattern, it could alsobreak the bank.

“Predictive modeling can help ustriage claims and flag those thatcould be more costly, so claim sever-ity can be managed,” explainsAnkney. “If you set up a model basedon the early fact pattern and thenpull in other external factors, a pre-dictive model can flag which one ofthose ten claims has the potential tocost the company $100,000 insteadof $5,000.”

What are some of those “exter-nal factors”? That’s the million-dol-lar, 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 subscribeto, the clubs you belong to, your fa-vorite vacation destinations, maybeeven the music you buy when takentogether say something about youand the kind of risk you represent toan insurance company. Just whatthat “something” is, however, is an-other million-dollar question.

“We continue to search for the‘why’ behind statistical correlations,like why a person’s credit score iscorrelated with her or his futureauto insurance losses,” says RickGorvett, director of the ActuarialScience Program at the University ofIllinois. “Maybe it’s because someonewho is careful with their money isalso a careful driver or maybe thereare other explanations. But while wetry to understand the ‘why,’ we rec-ognize that the statistics show it andthat the predictive value of those sta-tistics is important to the industry.”

That value is part economics,part competitive edge.

“Insurance is a tough business togrow in because there are so manycompetitors,” says Ankney. “The en-terprise must decide what strategicinitiatives it will adopt to distinguishitself in the marketplace.”

Analytics is a critically importantstrategy to use if you want to becompetitive in pricing, Ankney ex-plains, but for companies that havenot adopted models it can be a bigchange.

“Agents and underwriters whoare used to using their gut and theirjudgment may be put off when oth-ers in the company advocate that thetechnology of analytics will revolu-tionize the company. Buy-in istricky. Getting the time needed fromthe IT department can be a chal-lenge as well. But companies thatprioritize, that communicate effec-tively, and that have a C suite thatdrives the buy-in can get the adop-tion right and make it sing. Thoseare the organizations that reap themost rewards from a competitivestandpoint.”

A SECRET RECIPE?Prior to the explosion of data and

the introduction of sophisticated an-alytics, rating plans were fairlystraightforward and relied on thecollective judgment of underwritersand actuaries. Competitors had anunderstanding of how others in theindustry were pricing their products.

Predictive analytics has changedall that, with companies developingtheir own models and ratings sys-tems.

“Companies know the value theycan obtain from data mining theirinformation, and they don’t want to

“Predictive analytics is putting your arms around allof the data that you can gather, mining it to discovervaluable business insights, and utilizing advancedstatistical methods to build models that predict theprobability of future outcomes."

–Jonathan Ankney

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lose their competitive edge by givingaway the results of their work,” saysStephen D’Arcy, professor emeritusof finance. “There are lots of pocketsof profitability that they can reap be-cause they have sole access to that in-formation until others catch up.”

It’s an insurance company’s ver-sion of their own secret recipe.

But there are disadvantages tothis proprietary mindset as well, ex-plains D’Arcy. “If you’re not transpar-ent, it raises suspicion in the mindsof the public who don’t know whatkind of data you’re basing pricing de-cisions on or how accurate that datais. They might feel that the informa-tion is being used against them, andthat can hurt the credibility of the in-dustry. If the public doesn’t trust thatthey’re being dealt with fairly, theymight not be as forthright regardingclaims.”

And then there’s the question ofaccuracy. “The model is only as goodas the data provided,” says D’Arcy.“Good, clean, reliable data is key tomaking accurate predictions aboutrisk potential.”

But there is another componentthat D’Arcy and Vonnahme both be-lieve is critical, and that’s meshingthe power of data with the power ofcommon sense.

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

“We have to use a combination ofmanagement expertise and modelsto best serve clients and ensure thehealth of the company. Too muchmodeling and not enough commonsense can be dangerous.”

Farris adds: “You can’t just take amodel and use it. There are statutoryrequirements, social issues, and pub-lic opinion considerations that allenter in. You have to be able to un-derstand the models and apply themto your specific jurisdictions.”

As Ankney puts it: “The smartestactuaries in the world can build thegreatest model in the world, but if itisn’t understood and used effectivelyby the business, you’re missing theboat.”

D’Arcy agrees. “Models are devel-oping so fast, and they are thepurview of a very small, technicallytalented group who can understandthe mathematical complexities butmay not have the real-world experi-ence that’s required to put them inperspective. There has to be an inter-face that knows both sides. Withoutthat, I’m concerned that complicatedmodels could lead to incorrect deci-sions that will then cost the com-pany, and the industry, dearly interms of both economics and repu-tation.” •

Cathy Lockman

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

–Stephen D’Arcy

Careful Calculations

The University of Illinois is home to the largest actuarial scienceprogram 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 com-pile and analyze statistics and use them to calculate insurance risksand premiums.

Traditionally, they’ve been considered the “numbers experts.” Butas insurers mine their databases to gain a competitive edge, actuar-ies are also being called on to help build or implement complex pre-dictive models to help their companies make good rating and pricingdecisions.

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

Scott Farris, manager of actuarial research and development at theState Farm R&D Center on campus, leads a team of three actuarialprofessionals and 25 student interns in actuarial science and other busi-ness and engineering disciplines. They work on pricing and reservingmodels as well as research on new predictive analytical methods.

It’s a unique opportunity, says Rick Gorvett, director of the Actu-arial Science Program. “This is real actuarial research work, and theState Farm R&D Center is the kind of thing that doesn’t exist on anyother campus with an actuarial science program. Students work onsophisticated projects and gain a high level of visibility because theypresent 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 ofwhom we’re fortunate to recruit to work for us after graduation,” saysFarris. “We spend a lot of time developing students’ skill sets. We havean established progression where an intern first works more as abench chemist and then takes on a leadership role in projects.”

PROFESSION PROGRESSIONWhile ILLINOIS students are learning about predictive analytics

in both the classroom and beyond, what does the reliance on sophis-ticated models mean for those who have been in the actuarial pro-fession for years?

“It means change and competition,” says Mark Vonnahme, clini-cal professor of finance and director of the Master’s in Finance pro-gram. “The best way for actuaries to respond is to continue to add totheir skill set, even after receiving their actuarial credentials. As in-surance organizations look at staffing needs, they will seek out notjust actuaries but other professionals, like those in our MS Financeprogram, who have the quantitative skills, the communication skills,and the business background to understand both the math and themanagement needed to help the company grow.” •

“You can’t just take amodel and use it.There are statutory requirements, social issues, and public opinion considerationsthat all enter in.”

–Scott Farris

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D A T A 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.

While it’s tough to getyour head around justhow much informationthat is, research fromthe College of Business

indicates that companies who com-mit to harnessing the power of thatdata through investments in infor-mation technology find there’s a lotof might in the gigabyte—and a lot ofit rests in profit potential.

Traditionally, information tech-nology departments have beenviewed by CEOs as cost centers.When it came to enhancing profits,the focus was on research and devel-opment and on advertising.

CEOs who think this way are over-looking the impact of IT investmentson profits, says Ali Tafti, assistant pro-fessor of business administration.

“IT is a broadly strategic invest-ment, and it is not limited to what ITdepartments do,” says Tafti, who waspart of a team that studied invest-ment data from more than 400global companies from 1998 to 2003.“Increasingly, IT investments are en-

ablers of R&D and advertising. R&Ddepends on coordination, knowl-edge management, and the ability toderive insights from data. Advertis-ing requires effective customer rela-tionship management and businessintelligence, knowing one’s cus-tomers and responding to them.These capabilities are enabled by IT.”

Tafti and his colleagues foundthat companies investing in ITreaped the rewards of those invest-ments. In fact, IT expenditures had agreater impact on a company’s prof-its than comparable spending inR&D or advertising.

In relating the power of investingin IT to CEOs, Tafti says, many in-formation systems scholars are “be-ginning to adopt terms such asdigital business strategy or digitalbusiness innovation. When we men-tion the success of Amazon versusBorders, or NetFlix versus Block-buster video, the idea begins to res-onate.”

More and more CEOs are gettingthe picture. According to CIO Insight,a publication that focuses on busi-ness strategies and technology oper-ations, more than two-thirds of

[ INFORMATION TECHNOLOGY ]

CEOs say they will increase IT in-vestments this year. And that’s trueeven though 85 percent of the morethan 220 executives surveyed believetheir businesses will be impacted byan economic downturn in 2012.

U.S. companies are putting theirmoney where their mouth is. Ac-cording to the U.S. Department ofLabor Bureau of Labor Statistics,18,200 IT workers were added to thelabor force in July 2012. And that ad-dition is not an aberration: in Mayand June of this year, nearly 39,000new IT employees joined the workforce, and in the last two years, the ITsegment has added more than174,000 new jobs.

These companies focusing on ITunderstand what Tafti and his col-leagues discovered: IT investmentscan enhance profitability both by re-ducing operating costs and increas-ing revenue.

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

particularly strong.“IT can facilitate new business

models that bring in new customers.Effective customer relationshipmanagement and business intelli-gence can help identify and bring innew customers, as can a great e-com-merce site backed by great executionand customer service. These are allsources of new revenue.”

Tafti points to the Internet’s im-pact on social networking, viral mar-keting, crowd sourcing, onlineauctions, and peer-to-peer lending asexamples of innovations that IT canfacilitate in businesses.

“These are creative and funda-mental innovations of business,”Tafti says. “But they are not just theproduct of creative business strategy.They also require effective imple-mentation in IT and skilled informa-tion technologists. These innovationsare only possible because of the in-vestments and innovations in ITmade 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 in-vestments than in R&D and advertis-ing expenditures. “IT initiatives canbe costly, risky, and difficult to man-age,” Tafti explains. Possible reasonsfor the risks include the novel tech-nologies that IT embraces, whichlend themselves to greater creativityand innovation, but also to greaterrisk. In addition, most businesses aremore familiar with handling R&Dand advertising risks.

The study found, though, thatthose IT investments had a signifi-cant positive impact on revenue. Forevery $1 increase in IT expendituresper employee, the researchers founda $12.22 increase in sales per em-ployee.

Further, as industries becomemore competitive, IT’s effect onprofitability increases. “IT has beenparticularly essential to survival andsuccess in competitive industries, be-cause the competition to reach outand maintain a customer base is par-ticularly intense,” Tafti says. He de-fines “competitive industries” asthose in which the pace of techno-

logical change has been rapid, wherecapabilities can become quickly ob-solete, and where firms must inno-vate to survive. “Firms need todevelop better ways to serve theircustomers or reach out to new cus-tomers, because the churn rate, therate in which firms enter and exit theindustry, is high.”

CEOs, Tafti says, should view ITinvestments as a strategic enableracross functional areas. “Generally, itis important to encourage employeesacross the organization, at all levelsincluding the most junior, to find op-portunities to reach out to customersor to coordinate or collaboratewithin and across the organization,”he adds.

“CEOs need to create an envi-ronment that encourages innovationfrom the ground up. Make sure thatall ideas are heard and that the bestare implemented. We find com-pelling evidence, in other researchnow under review, that these are theenvironments in which IT invest-ments have the most beneficial impact.” •

Tom Hanlon

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

– Ali Tafti

THE PROFESSORBefore earning his Ph.D. in 2008,Anupam Agrawal had spent morethan a decade working in the area ofsupply chain management for firmslike Procter & Gamble and Tata Motors. Now an assistant professorof business administration, Agrawalteaches courses and conducts re-search that focus on operations andprocess management, project man-agement, and supply chain manage-ment. He also has been a facultysponsor for a James Scholar Re-searcher for each of the past threeyears.

Here’s what Agrawal has to sayabout the opportunity for collabora-tion: “The process of discovery is atthe heart of the academic researchprocess. Opportunities like this pro-vide undergraduates with a chance tomake discoveries about their interestsand skills while doing meaningful workthat can also be of interest to the business community. For ILLINOISfaculty, working with fresh, youngminds and helping them navigate theresearch process and see the benefitsis very gratifying.”

THE STUDENTAs a James Scholar, Mahek Parikh is atalented student pursuing an honorscurriculum and double majoring insupply chain management and mar-keting. Last year, she was looking toconduct a one-on-one research proj-ect with a faculty member as part ofher work in the James Scholar Pro-gram. This year, the junior from Niles,Illinois, has a successful research col-laboration, and a case study, underher belt.

In addition, Parikh says the expe-rience was eye opening: “There’s somuch satisfaction in conceiving theproject and then completing it andknowing that others can benefitfrom it in some small way. I learned avariety of new skills, such as inter-viewing techniques, and I found outthat conducting research is more in-teractive and collaborative than Ithought.”

THE PROJECTAs Agrawal explains, there are few companies that truly employ acomprehensive green supply chainstrategy. Of those, Parikh choosePatagonia, a company that designsand manufactures clothing and gearfor enjoying the outdoors. The prod-ucts as well as the company’s com-mitment to sustainability capturedher attention, but as Agrawal says,“Learning about Patagonia’s businessmight be interesting for blog posts,but research means discoveringmore. It means focusing in on a busi-ness question. For this project, weexplored the questions: ‘What doesit mean to be green? Can you sustaina profitable business by being com-mitted to employing a green supplychain?’“

Parikh examined the company’sgreen strategies, such as its commit-ment to the renovation of existing

buildings rather than building newstores, to the use of energy-efficientprocesses in manufacturing and re-tail environments, and to uniquestrategies like the Common ThreadsInitiative, which focuses on manufac-turing less merchandise, repairingdamaged merchandise, often for free,providing an easy way for customersto resell or donate unused merchan-dise, and using recyclable materials intheir apparel. She found that thisstrategy may be more costly, but itpays off in terms of efficiencies,product development, and employeeand customer loyalty.

The project paid off, too. Nextspring, the case study Agrawal andParikh collaborated on will be used intwo courses: an undergraduatecourse in logistics management anda graduate course in supply chainmanagement. •

ORANGE & BLUE & GREEN BUSINESS

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[ INTERSECTIONS ]

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THE PEOPLEAnupam Agrawal and Mahek Parikh

THE IDEAAn academic research collaboration between a professor and student

THE PLANStudy the green supply chain strategy of Patagonia

THE RESULTSA case study to be used in classes in Spring 2013

Cathy Lockman

10

[ CORPORATE STRATEGY ]

If you’ve missed the rising tide of video apologies,The Wall Street Journal collected ten of the mostmemorable in a story that ran in its Deal Journal

section last October under the headline, “How ToSay You’re Sorry.”

The WSJ blog posted links to each and includedthe time it took the top executive to issue an apol-ogy. Eurostar won, taking just 5 seconds to apologizefor a snow-related shutdown that left customers ofits high-speed rail service stranded between Londonand Paris. Toyota clocked in second at seven secondsfor its massive safety recalls.

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

Domino’s President Patrick Doyle took 14 seconds to apologize in a video that was heavy oncorrective action in the wake of an incident at aNorth Carolina outlet. “Two team members havebeen dismissed,” said Doyle, “And there are felonywarrants out for their arrest.”

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

– Brooke Elliott

“SORRY!”

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Companies have found a newweapon to soften the fall-out when a corporate meaculpa needs to be made.They bring out the CEO for

a public apology via online video.This marks a radical shift for thebusiness world, which typically de-livered bad news through a tersepress release, by a PR representative,or by the company’s lawyers.

New research from the College ofBusiness found that such videoapologies can work much better thanthe old system—but only if they'redone right, says W. Brooke Elliott, thestudy’s co-author and associate pro-fessor of accountancy. The winningformula includes a personal meaculpaby the top official accompaniedby a formal apology and a vow to setthings right, she says. A well-deliveredvideo apology can lessen damage tothe company’s image, its stock price,and its sales.

To test the best approach for issu-ing a video apology, the researcherssimulated a corporate fiasco and thenused an actor on video to deliver anapology using two scripts. In one ver-sion of the video, the CEO bites thebullet and takes full blame. In the sec-ond, he passes the buck. The differ-ence between the two videos is asingle sentence in a four-paragraphscript. The changed sentence wasspliced in, with everything else re-maining the same. “You couldn’t tellit was spliced,” says Elliott.

The performances were watchedand judged by executive MBA stu-dents at the University of Washington.

“We found that If you accept re-sponsibility, it tends to curtail nega-tive reactions,” says Elliott. “But ifyou try to shift the blame, using videois worse than using a text statement.”The study, done with colleagues fromthe University of Washington andDePaul University, appeared in theMarch-April issue of The AccountingReview.

Of course, it’s possible that theboss will bungle his big chance. Videoefforts by Netflix CEO Reed Hastingsto mute customer anger over a largeprice hike backfired as customersdropped the company’s services like ahot potato. “He was dressed very ca-sually,” Elliott recalls. “It looked likethey shot the video in a parking lot. Itcame across as very insincere.”

Others have a special knack fordelivering bad news. J.P. MorganChase CEO Jamie Dimon brings boy-ish good looks and an easy style to thehot seat. Earlier this year, he person-ally dropped the news that J.P. Mor-gan, the nation’s biggest bank, stoodto lose $2 billion, and perhaps muchmore, through its trading operations.

Lesser talents can succeed as well.“They may not look as good as JamieDimon, and may not be as dynamic,but the important thing is that theycome across as sincere,” says Elliott.“They have to give the impressionthat they personally will take actionto remedy the situation so that in-vestors will not be harmed again.”

Employers may go shopping forcamera-ready top executives when anopening pops up. “The market maydemand an individual who has a dif-

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

Executives who have the knackmay find their skills useful to theircareer trajectory. “Most CEOs don'tstay at the same company for theirentire career,” says Elliott. “If you'rea CEO who's very good at disclo-sures, you could be very marketable.”

At least two factors are drivingthe shift to video apologies. One isthe desire to limit damage from busi-ness fiascos. “If you don't handle itright, your stock price might fall,” El-liott says. “Shareholders could losevalue and sue. The company couldbecome a takeover target.” The otheris the transition to the digital age.“The new investors have grown upwith technology. They don't want toview the message via text.”

Elliott offers several notes of cau-tion. “There may be some top execu-tives who aren’t very good at it,” shesays. “That’s the subject of a follow-up study.” And, she says, the apologymust be delivered by a top execu-tive—the CEO or CFO, for example.“It has to be a high-level executive, orthe message may come across as un-trustworthy or that the CEO hassomething to hide.”

She also cautions that issuingthe apology in a live format, wherereporters or analysts can ask ques-tions, entails risk. “You can comeacross as being flippant or aloof.There's also a risk of answering onthe fly when you haven't preparedfor a question.” •

Doug McInnis

No one wants to be in the hot seat when it comes to delivering bad corporatenews, 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?

True Confessions

Most people know of theblack market—the illicitclearinghouse for stolengoods and pirated mer-chandise. But they may

not be aware of its distant gray-mar-ket cousin, even though they mayroutinely buy from it.

The gray market is generallylegal, though many manufacturerscondemn it and in extreme caseshave gone to court to try to shut itdown. It operates on the well-known principles of arbitrage—thepractice of buying legitimate,branded goods cheaply in one mar-ket and reselling them in anothermarket where they can get a betterprice. In the United States, the graymarket exceeds $50 billion per yearin the information technology sec-tor alone, according to data fromAGMA, an alliance of intellectualproperty-rights owners.

“The gray market is a sort ofaberration in the supply chain,” saysUdatta Palekar, associate professor ofbusiness administration and directorof the Supply Chain ManagementProgram at the College of Business.“It takes advantage of price imbal-ances.”

In general, manufacturers con-demn gray-market sales activity be-cause it cuts into their wholesaleprofits. For instance, a car made inthe United States will carry a higherwholesale and retail price in Canadathan in the United States. The retaildifferential allows gray marketers tobuy the car at full price in the UnitedStates and then resell it for a higher

price in Canada. The carmaker losesbecause it gets only the lower U.S.wholesale price instead of the higherCanadian wholesale price, says Ro-mana Autrey, assistant professor ofaccountancy.

Manufacturers also contend thatgray-market operations underminetheir networks of authorized distrib-utors because they must competewith the cheaper gray-market price.

Numerous factors create thepricing imbalances that spur gray-market sales. Overstock and promo-tional sales are two examples. So arefluctuations in currency rates. Butthe gray market thrives in particularon the growth of global commerce,as multinational corporations at-tempt to sell their goods in more and

more countries. They usually followa multi-tier pricing strategy designedto boost corporate profits and unitsales, says Autrey, a former seniormanager at KPMG, where she con-ducted gray-market investigationsfor the firm’s clients. For example,prices are likely to be higher in the af-fluent United States than in develop-ing nations.

But multi-tiered pricing maybackfire when the price differentialopens the door to arbitrage. “When-ever you have a price difference be-tween markets, you will havegray-market firms which see a profitopportunity,” says Autrey. “They say,‘I’m going to buy low and sell higher.’”According to Palekar, those graymarket firms “may be third-party

firms or authorized distributors whodivert their authorized supplies.”

Omega watches fell victim to thisstrategy. Omega charged hundredsof dollars less in some markets thanit did in the United States. Enterpris-ing gray marketers spotted the dif-ferential, snapped up watches incheap markets, and then sold themto U.S. discounter Costco. Costcoresold them to consumers at farlower prices than Omega’s author-ized U.S. distributors could charge.Consumers won; Omega and its dis-tributors lost.

Omega fought all the way to theU.S. Supreme Court in an effort tostop the practice, but the court dead-locked 4-4. Justice Elena Kagan ab-stained because she had previouslyrepresented the Obama administra-tion in earlier stages of the case whileserving as Solicitor General.

The court is set to hear anothergray-market case this fall. A Thaibusinessman bought cheap English-language textbooks printed forEgyptian users and then resold themin the United States. The textbooks’publisher, John Wiley & Sons, suedfor alleged violations of the com-pany’s copyrights. A jury ordered a$600,000 judgment, but the busi-nessman, Supak Kirtsaeng, appealed.Kagan was not involved in this caseand is expected to cast the decidingvote.

If the court does act to curb thegray market, it won’t necessarily shutdown unauthorized sales, but itcould shift the venue in which theyare sold, says Autrey. Gray-market

12

[ MANAGING MARKETS ]

I S GRAY HERE TO STAY?

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

of price imbalances.”– Udatta Palekar

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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.

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

THE TRANS IT ION FROM OFF IC IAL TO UNOFF IC IAL

sales could simply become anotherplayer in the already huge black market.

This has already occurred in theone area where gray-market sales areillegal in the United States—pre-scription drugs. It’s now illegal to im-port prescription drugs into theUnited States from Canada, Europe,and other places where drug pricesare much lower. But black-marketoffers for cheaper drugs fromCanada abound on the Internet. Justtype the words “buy prescriptiondrugs from Canada” into a search en-gine, and you’ll find a variety of on-line pharmacies willing to fill yourorder.

POINT, COUNTERPOINTEven if the court upholds the le-

gality of other types of gray-marketsales, manufacturers might still takeactions to try to curb it. In the past,for example, they have refused tohonor warranties on gray-marketproducts. Some gray marketers havecountered with warranties of theirown.

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

that we’re going to set one world-wide price.’ They subsequently failedas a company. In their fiercely com-petitive industry, they lost marketshare. You give up sales when you setone worldwide price because theywere too high priced for many mar-kets.”

While manufacturers havetried many tricks to restrict the graymarket, nothing has proven effectivein the long term. “It’s like point andcounterpoint,” says Autrey. “No mat-ter what you do to stop it, if there isa big enough profit margin then it’sstill worth somebody’s time to getaround it.”

These days, gray marketershave plenty of opportunity thanks tochanges in technology and the globaleconomy. They have benefitted fromthe rise of Internet sales sites such aseBay, which offer a quick way tolegally link gray-market sellers withbuyers. And they have profited fromthe global economic slowdown, nowin its fifth year. “People are cost con-scious,” says Autrey. “The recessiondrives people to the gray market because they have less money tospend.” •

Doug McInnis

14

C A N GRAY B E G O O D ?

Companies may go to considerable lengths to curb gray-market ac-tivity in their products. But a growing body of research suggeststhat isn’t necessarily the right tactic.

“The biggest message of our research is that the gray market is not al-ways bad,” says Romana Autrey, assistant professor of accountancy. “Insome cases, you wouldn’t want to eliminate the gray market, even if youcould do so for free.” Autrey and colleagues from the University of Torontoexamined the gray market in a series of four research papers.

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

“Our research shows you would sometimes be better off to allow for-eign units to set their own prices. That will maximize profits and sales ineach foreign market. While you may be creating a bigger gray market foryour products, you will still be better off because you will be increasingglobal market share, thus weakening the competition, which will be losingmarket share.”

Other ILLINOIS researchers have conducted studies that likewise con-clude that the profit motive may lead companies to let gray-market salesslide.

“It’s commonly known that many manufacturers won’t do anythingabout the gray market,” says Udatta Palekar, director of the Supply ChainManagement Program. “Occasionally, we would see articles that said man-ufacturers were not objecting to the gray market because they were ben-efitting. 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. can-didate.

To test this theory, the researchers created an analytical model to ex-amine hypothetical gray-market scenarios. The model showed instances inwhich manufacturers earned the same wholesale margins regardless ofwhether their product was sold via authorized dealers or gray-market sell-ers. The two sellers had to compete for business, forcing them to lowertheir prices. This, in turn, expanded the number of customers who couldafford to buy the product, boosting the number of units sold. “Since themanufacturer keeps his margins the same, he makes more money,” Palekarsays. “However, manufacturers only benefited when the gray marketerwas a third-party and not an authorized distributor.”

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

–Romana Autrey

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20The percentage of MBA enrollment growth underStig’s leadership in the pastthree years

ASSOCIATE DEAN OF MBA PROGRAMS

1990The year Stig received his

bachelor’s degree in marketingfrom the University of Illinois;he earned his ILLINOIS MBA

two years later

80The percentage of MBA

students participating in the GlobalConsulting Program, a client-based

immersion project in one of four emerging market countries

29The number of countries Stig is proud to

say are represented in the enrollment of the current full-time MBA class of

240 students

12,610The amount of lunch money Stig’s

counted every Monday for the last nineyears while volunteering at the school his

four children have attended

100,000The dollar value of goods donated to the

Pine Ridge Indian Reservation throughKOLA, a non-profit established by MBA

students after visiting the Reservationwith Stig in 2010

2Margin of votes that

earned him a seat on theChampaign Unit 4 Board

of Education in 2009

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[ 60-SECOND PROFILE ]

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16

[WORKPLACE BUzz ]

CREATIVITY

can come up with a good idea [for astudy]?’ I replied, ‘This is backgroundnoise; it is distracting. It actuallyshould help us think outside of thebox.’”

Mehta, whose research empha-sis is on creativity, knew that studiesabounded in examining the impactof noise on human cognition andbehavior, but the literature wasscarce on the effects of noise on cre-ativity. So he and colleagues JulietZhu of the University of British Co-lumbia and Amar Cheema of theUniversity of Virginia designed fiveexperiments to study the relation-ship between noise and creativity.

Here’s what they found:• A moderate level of ambient

noise—again, the ideal is 70 deci-bels—induces processing disflu-ency. In other words, it disruptsthe flow of thought. And suchdisfluency leads to abstractthinking, which in turn enhancescreativity.

• There is an inverted-U relation-ship between noise level and cre-ativity. Creativity is not enhancedwith either low or high noise lev-

els. It’s only in the middle—withthat moderate level— that cre-ativity increases.

• Increasing levels of noise lead tohigher construal levels—so bothmoderate and high levels of noiseresult in more abstract process-ing than is achieved at low levelsof noise. But when the noise levelgets too high, creativity is inhib-ited.

THE POWER OF DISTRACTION“Distraction makes you think at

a broader level, a more abstract level,”Mehta says. “So moderate noise isgood. But we found that while dis-traction increases creativity, yourbrain’s ability to process informationgoes down as distraction increases.So when people are too distracted,they may not be processing the rele-vant information.”

Mehta and his colleagues meas-ured the creativity of students byusing the Remote Associates Test, anassessment widely used to evaluatecreative thinking in both psychologyand market research. Students weregiven three or four stimulus words

Your initial thoughts on anew product design aredue tomorrow. Whichmeans you better shut

your door and block out all distrac-tions so you can get those creativejuices flowing. Right?

Wrong, says Ravi Mehta, assis-tant professor of business adminis-tration at the University of Illinois.What you actually need to stir thosecreative juices is some noise. About70 decibels’ worth—equivalent to aradio or TV on in the background, orsomeone running a vacuum cleaner.

So much for the stereotypical li-brarian shushing anything above awhisper, or the junior high teachercalling for silence in his writing class,so students can “be creative withoutbeing disturbed.”

Actually, a bit of disturbancedoes wonders for creativity, saysMehta, who headed a study thatlooked at how ambient noise affectscreativity. “We actually got the ideafor the study when we were in anoisy coffee shop,” he says. “One ofmy colleagues said ‘With all thisbackground noise, do you think we

that related to a fourth or fifth tar-get word not given. Their task was tocome up with that target word. Forexample, for “shelf,” “read,” and“end,” the target word was “book.”The students worked through a se-ries of stimulus words in varyingnoise conditions. For backgroundnoise, the researchers piped invoices, traffic noise, airplanes flyingoverhead, and other sounds thatwould be heard in an environmentsimilar to a roadside restaurant.

“We didn’t find any difference be-tween 42 and 50 decibels,” Mehtasays. (Forty decibels is roughly equiv-alent to a library, birdcalls, or the low-est limit of urban ambient sounds.Fifty decibels equates to a quiet sub-urb or conversation at home.) “So wewent up to 70 decibels. That’s wherewe found the highest creativity. Themaximum decibel level for creativitywas 72 to 74 decibels. That is whatyou find in a normal consumer envi-ronment. When people are talking, itis about 72 decibels.”

Mehta cautions that the idealambient noise level depends on thetype of work you are doing. Creativ-

ity is enhanced by moderate ambientnoise, but analytical, detail-orientedwork may not be.

“Most of the time the work wedo is not creative,” he says. “We’renot thinking about new ideas all thetime, or solving problems, or devel-oping new products. For example,when I’m in my office writing apaper, I don’t want distractions.

“When I’m thinking about a newidea, though, I like to go to a coffeeshop. I like to work from there,where there is background noise andI can see some movement. It helpsus to think out of the box if we havesome moderate level of distraction.But if I’m writing an academic paper,I don’t want any distractions.”

He adds that his study did notlook at the ideal sound level for ana-lytical work, though he says it seemslogical that such work would be bestcarried out in quieter environments.

CREATIVE SPACESSometimes noisier environ-

ments and big open spaces are justwhat the corporate doctor ordered.

“If a company relies on a lot of cre-ativity, open space will help spur thatcreativity,” Mehta says. He points tothe example of Google, which hasopen office spaces. “They want peo-ple to come and talk,” he says. “Youget that ambient sound throughpeople talking in the backgroundand moving around. You see peopleworking and talking. You get thisnatural distraction—but you alsohave spaces where people can gowhen they don’t want distractions.”

That ambient sound, he says,can also be piped through speakers,but his study didn’t test for the ef-fects of listening to music whileworking. “There are so many differ-ent types of music,” he says. “Thatwould take a study all its own.”

But open spaces and back-ground noise can only do so muchto enhance creativity. You have to al-ready be creative to reap the bene-fits. “People are different in theirlevels of creativity,” he explains. “Itmakes sense that this impact on cre-ativity will be greater for those whohave higher levels of creativity, be-

“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

18

[ E-COMMERCE ]

What’s in Your Cart?E-commerce offers infinite variety and

rock-bottom pricing. But sometimes it offersmuch less than you bargained for.

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

He adds that creativity can beimproved through training. “Ifsomeone is being creative over andover, thinking about problems andhow to solve them, then they be-come more creative,” he says.

APPLYING THE RESEARCHMehta’s research applies not

only to creativity among officeworkers, but among marketers aswell. For example, he says, marketersmight consider equipping show-rooms with a moderate level of am-bient noise to encourage customersto buy their new and innovativeproducts. He found that his subjectswere more willing to buy innovativeproducts when they had a moderatelevel of ambient noise in the back-ground.

This creativity enhancement ex-tends beyond the office and show-room, too. Mehta notes that peopleuse creativity away from work all thetime—whether it’s subbing for amissing recipe ingredient, decorat-

ing a room, or solving various home-owner problems.

Want to increase the likelihoodof arriving at a creative solution inyour home? Turn on the radio or TV.Or get out the vacuum.

“We as consumers are being cre-ative, working things out,” Mehtasays. “And that process of being cre-ative is enjoyable for many people. Iknow my intrinsic happiness is en-hanced when I am being creative.”

A final word on enhancing cre-ativity through ambient noise: Youcan get too much of a good thing. “Ifyou are exposed to background noisefor eight hours a day, that might havea negative effect,” Mehta says. “Butinstances of 15 to 25 minutes of back-ground noise may help.” •

Tom Hanlon

These days, you can buylow-cost goods online di-rect from manufacturers,skipping the middleman

entirely. But this new brand of re-tailing hasn't changed one of thefundamental truths of economics,according to a new research paperfrom the College of Business. “Youstill get what you pay for,” sums upNicholas C. Petruzzi, associate pro-fessor of business administrationand co-author of the new study.

In other words, if the price ischeap, you may get a cheaply madeproduct, he says.

Petruzzi collaborated with FrankLiu, associate professor of businessadministration, and Hongyan Shi, aformer graduate student now at the

Nanyang Technological Universityin Singapore. The paper, scheduledto appear in Management Science,casts new light on the evolution ofretailing in the digital age.

“This research points out someof the negatives about e-commerce,”says Liu. “The consumer can get low prices, but the manufacturermay have less incentive to providequality.”

He cites Dell, a direct marketerof computers, as an example of thetrend. “Dell's business model wasnot possible before the Internet,

when the manufacturer had to sellthrough retailers and could actuallysee what they were buying. But thencame the Internet. The manufac-turer could say, 'I don't have to sellthrough the retailer. I can offer a lowprice. Plus, I don't have to work ashard to provide quality.'”

But if low price and convenienceare the consumers’ primary objec-tives, then they may be completelysatisfied with this business model.Liu cites his own experience. “WhenI was a student, I was really happybuying cheap Dell computers. I did-n't have the money to buy an expen-sive computer, and quality wasn’t myfirst concern.” But that changed overtime for Liu, as it does for many con-sumers. For some, it’s a matter ofmore financial resources; for others,it’s a choice that for certain pur-chases, whether that’s technologyproducts or designer jeans, qualitymatters more than price.

And when that’s the case, con-sumers do have an option—thebricks-and-mortar store. The pricemay be higher, says Liu, but so maybe the quality. That’s because notonly can you see the product foryourself, but the retailers who stockit in their stores have also vetted thatmerchandise. You pay a price forhaving the middlemen, not only be-cause they provide a place where youcan try on or try out the products

20

“This research points out some of the negatives about e-commerce. The

consumer can get lowprices, but the

manufacturer may have less incentive toprovide quality.”

“Some consumerswould rather have twopairs of cheap jeansfor their money than one more costly buthigher quality pair.”

– Nicholas Petruzzi

What’s in Your Cart?

but because they have expectationsthat manufacturers must meet forproducts to be carried in their stores.

THE RIPPLE EFFECTS OF LOW PRICE

Still, many people want the lowprice, with two factors driving thistrend. One is the desire to have morestuff. Some consumers would ratherhave two pairs of cheap jeans fortheir money than one more costlybut higher quality pair, says Petruzzi.

The other factor is the economy.Unemployment and underemploy-ment impact consumers’ purchasingdecisions. “Consumers who havelost their jobs don't have the money,”says Liu. “We have more and moreconsumers who are price sensitiveand cannot afford high-qualitygoods.” In turn, manufacturers areadapting to serve this market. SaysLiu, “We may see more manufactur-ers tapping into this market by pro-viding low price and low quality.”

Ironically, the desire for lowprice may be costing the UnitedStates even more jobs. “It's possiblethat some firms are moving manu-facturing out of the United States toget cheap production costs so theycan offer lower prices,” says Liu.“China and Mexico don't have thetechnology to produce high-qualitygoods. But they do have the capacityto provide low-quality products. As

people settle for lower-quality goods,it's possible more and more produc-tion will go to foreign countries.These two things may seem unre-lated, but based on our research,they are.”

New research from the non-par-tisan Economic Policy Instituteshows huge job losses to China after2001—a period that roughly parallelsthe surge in e-commerce. In a newpaper, EPI economist Robert Scottconcluded that 2.4 million U.S. jobswere lost from 2001 to 2008 as a re-sult of rising trade with China. EveryU.S. state suffered China-related joblosses. California lost the most—370,000 jobs. Illinois, Texas, Florida,and New York each lost more than100,000 jobs.

Even consumers who haven't losttheir jobs have been hurt by the low-price trend because it's harder to findquality goods, says Liu. “The manu-

facturers are catering to the lowest-common denominator,” which hesays is a strategy that consumersshould be aware of in their purchas-ing decisions.

“I think scholars need to tellthis story to consumers so they cansee the potential problems of the In-ternet. The price is easy to see on theInternet. The quality is not. Thebrand name may be the same as itwas ten years ago, but the qualitymay not be the same. Most peoplecelebrate the Internet. They thinkit's a good thing. But we also have tothink about the potential draw-backs. The quality problem is one.”•

Doug McInnis

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“Dell’s business modelwas not possible beforethe Internet, when themanufacturer had tosell through retailersand could actually see what they werebuying. But then came the Internet.”– Frank Liu

“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 lowest-

common denominator.”

LOOKING AT THE BIG

PICTUREOur 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

willingness to provide it have not.

22

Photo gallery:

At left, Robert Loken of BMSpresents retail merchandisingstrategies to Charles C. Strohl, abusinessman in Bement, Illinois.

Center, Earl Strong, director of BMS, and Al Smith, owner ofthe Karmelkorn Shop, discuss exterior improvements to hisbusiness on Goodwin Avenue inUrbana.

At right, A.J. Kirstin, president of National Aluminum Companyin Peoria, confers with HowardR. Bowen, dean of the College of Commerce and Business Administration, about servicesprovided by the College's BMSstaff.

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HISTORY LESSON

U.S. Chamber of Commerce reportsthat three out of four employees willsteal from their employer this year.What’s worse, 75 percent of em-ployee crime goes undetected.

“Even if retailers install securitycameras, employees can find ways tocircumvent the cameras,” Chen says.“For example, they can figure outwhich angles are not captured by thecamera. They can circumvent what-ever control system you put in.”

Chen speaks of the “Fraud Trian-gle,” a term first identified by sociol-ogist Donald Cressey: “To commitfraud, you have to have motivation,opportunity, and rationalization,”she says. “Many employees rational-ize their behavior by saying their em-ployers are unfair to them, so there’sa reason to steal.”

Once motivation and opportu-nity are in place, rationalization canquickly follow. “People have varyingperceptions of what crime is,” Chen

says. “Most people consider takingcash a crime, but some employees donot perceive stealing inventory as acrime—like stealing beer or ciga-rettes or food.”

DISCOURAGING THE INSIDE JOB

So what can retail employers doto combat theft?

Measures suggested by varioushuman resources specialists includeusing background checks, securityprotocols, ongoing training, andconfidential offense reporting.

In addition, she says, having mul-tiple employees in the store does notnecessarily reduce theft unless thereis an ethical group norm. “When youhave multiple workers, it’s even more

important to have an environmentof positive reciprocity, because em-ployees can either collaborate to dosomething good for their employer,or they can collude to harm their em-ployer. And when they collude, it’svery hard for the organization to domuch about it.”

For employers who cannot af-ford to raise wages, they can gener-ate positive reciprocity by givingrecognition to employees, such asEmployee of the Month awards or“any recognition that makes themfeel their efforts are acknowledgedand they are treated well,” Chen says.

The accountancy professor notesthat her study on convenience storestranslates well to other retail stores,but not to settings where the stakes—and the average amount of theft—ismuch higher. “The payoff from steal-ing from a casino or a jewelry storecan’t be offset by a $1 wage increase,”she smiles. •

Tom Hanlon

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s famous and infamousas they were then,today Robert andHarry would havelots of company.In fact, in theUnited Statesthere are more

than 69,000 employees caught everyyear stealing from their employer.The aggregate heist of those appre-hended total between $44 and $50million per year, according to AnnualRetail Theft Surveys conducted byJack L. Hayes International.

And those are just the knownthefts. The tip of the iceberg, saysClara Chen, assistant professor of ac-countancy at the University of Illi-nois.

“Those numbers represent onlya small fraction of the actual numberof people who steal from their em-ployers,” she says. “There are a lot ofopportunities for employees in retail

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

Chen, the Raymond A. HoffmanFellow in Accountancy, co-wrote astudy with Tatiana Sandino, associ-ate professor of business administra-tion at Harvard University, delvinginto data sets from 2003 and 2004from the U.S. convenience store in-dustry. Previous research studies ofthis industry, which typically provideminimum-wage jobs, have examinedhow wages earned impact turnoverand effort, but few—until Chen andSandino—have measured the impactof higher wages on employee theft.They focused on cash shortage andinventory shrinkage to measure em-ployee theft. Chen acknowledgesthat the inventory shrinkage meas-ure can include some customershoplifting.

Among their findings:• Employees who receive relatively

higher wages—that is, higher in

relation to those in similar storesin areas where the cost of living iscomparable—are less likely tocommit theft, because they wantto retain their jobs or becausethey feel they are treated fairlyand want to respond in a likemanner—a “gesture of reciproc-ity,” as Chen puts it.

• Theft might also be reduced byemployers who offer relativelyhigher wages because that mightattract more ethical people.

• There is a “tipping point”—wherethe cost of paying higher wages isgreater than the cost of employeetheft. “Employers have to findtheir own tipping points,” Chensays.

• When multiple workers are pres-ent, cash shortage goes down, butinventory shrinkage goes up. AsChen explains: “Research showsthat people have different per-ceptions about stealing cash and

stealing inventory. So, with otherworkers around, people are lesslikely to steal cash, but with in-ventory, it’s less of a big deal, andpeople might even collude tosteal things.”

• Relatively higher wages offeredby employers contribute to amore ethical group norm, whichmakes workers less likely to col-lude to steal inventory whenmultiple workers are present.

A REASON TO STEALChen notes that there are several

reasons for employee theft. “First,many people have financial stress andeconomic needs, and it’s especiallybad in a recession.” Other reasons in-clude revenge, job dissatisfaction, thethrill of potentially being caught, ego,peer pressure, addictions, and familyproblems.

Whatever the reason, employeetheft is all too common. In fact, the

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[ EMPLOYMENT MATTERS ]

American outlaws Robert LeRoy Parker and

Harry Alonzo Longabaugh—better known as

Butch Cassidy and the Sundance Kid—went to

Bolivia in 1908 to get away from the law. Hired

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.

Inside Job

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

– Clara Chen

A

[ THE MAIN EVENT ]

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The writing was literally on the wall at the Third Annual Partners inBusiness Ethics Conference held in Chicago in September. The conference was hosted by the College of Business and the Centerfor Professional Responsibility in Business and Society and wassponsored 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 enhancethe teaching of professional responsibility. Corporate ethics professionals fromdiverse industries along with deans and professors from business schools acrossthe 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 PerformanceDecember 5: Roundtable: Health Care Reform: The HR PerspectiveDecember 13: Business Alumni Holiday PartyJanuary 17: Roundtable: Being Your Own Career AdvocateFebruary 20: Roundtable: Corporate ResponsibilityMarch 1:MBA Alumni BanquetMarch 13: Roundtable: Accountancy

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

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 directorof 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

The Writing’s on the Wall

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[ REALITY CHECK ]

The Reality

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

Companies have spent billions of dollars developing those innovationsby acquiring patents and millions of dollars protecting their intellectualproperty by suing companies that infringe on patents. In fact, Steve Jobsonce said that he would go “thermonuclear” in a patent war betweenApple 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 asspecific scrolling and zooming methods. Apple had been on the losingside of a different patent battle over smartphones just the year beforewhen the company agreed to pay an undisclosed amount to settle a lawsuit with Nokia. Today’s winner could be yesterday’s loser.

The Reality Check

Deepak 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 ontheir 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 orcomponent 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.

DEEPAK SOMAYA is an associate professor of business administrationand the Stephen V. and Christy C.King Faculty Fellow. His work oninnovation in multi-invention contexts, in collaboration with DavidTeece of the University of California,Berkeley, and Simon Wakeman of theEuropean School of Management &Technology, recently received the2012 Best Article Award from the California Management Review.The reality is he does not own asmartphone.

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RHIANNON CLIFTON

MADHU VISWANATHAN

CARLA

SANTOS

DEA

NA MCDONAGH

BRUCE ELLIOTT-LITCHFIELD

STEV

E MICHAEL

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

“Entrepreneurs execute well. They movefrom the big picture of strategy, purpose, andperformance down to operational details likewho’s on the night shift. Good execution canbring even modest ideas to life, but bad exe-cution will strangle even the best ideas.”Steve Michael, professor of business administration, teaches courses in technologymanagement and entrepreneurship.

For the past ten years, he has served as academic co-director of the Hoeft Technologyand Management Program, where he workswith the Colleges of Engineering and Businessas well as global corporations to train the next generation of leaders for the innovationeconomy.

“Creativity is key. As a mechanical engineer-ing student here, I kept a ‘creativity notebook’as a requirement for my ‘Creativity in Engi-neering Design’ course. We were to collectand connect ideas, and I continued to use theskills from that experience during my profes-sional career, first in industry and now in ac-ademia. Leaders create, so leaders needcreative skills. They must be able to imagineand implement new ideas with impact. Wewant education to enhance creativity and en-trepreneurship in ways that help students be-come international leaders who envisioninnovations addressing the grand challengesof our time.”Bruce Elliott-Litchfield, professor of agricultural and biological engineering

Developed the course, “Creativity, Innovationand Vision,” and leads a team researching creativity enhancement in undergraduate engineering education as part of a NationalScience Foundation grant

“Entrepreneurs need to be willing to fail. Inmy experience, entrepreneurs with a failureor two under their belts have learned wellfrom those and are able to take what they’velearned and subsequently create a successfulventure. We all love the story of the entre-preneur who has the right innovation at theright time to create a great success story. Butthose who learn from failure and create suc-cess with that knowledge are the truly inspir-ing stories to me.”Rhiannon Clifton, program director, Department of Advertising

Designed a course in entrepreneurial media,which will launch next spring

“A mindset of setting goals and finding waysto get there, rather than waiting for resources,is key, as is the ability to be nimble in the faceof changing circumstances. You must be per-sistent when obstacles arise and, like amarathon steeplechase contestant, be able tocombine power, speed, and flexibility toachieve your goal. You learn through action,so you must be willing to experiment withdifferent solutions. And you must focus onnot just the intellectual pursuit of what needsto be done but on the emotional task of howto get it done. The path to successful entre-preneurship is never straight; it sometimesmeanders like a river before it reaches itsgoal.”Madhu Viswanathan, professor of business administration and Diane and Steven N.Miller Endowed Professor

Developed a course on subsistence market-places, which was named one of the top entrepreneurship courses in the country in 2011by Inc. magazine; runs a social enterprise thatprovides entrepreneurial literacy education insubsistence marketplaces

“A mix of flexibility and creativity are essen-tial in anything you do, but particularly whenyou are viewing an opportunity through anentrepreneurial lens. By embracing creativityyou’re able to create something bigger out ofsmaller, disparate ideas. And by employingflexibility of thought you detach yourselffrom the notion that you must be right. En-trepreneurship is less about whether youhave the right answer and more about trust-ing that the answer you do come up with willmake a contribution to the effort. You haveto be able to see a ‘problem’ as an embeddedopportunity.”Carla Santos, associate professor and directorof graduate studies, Department of Recreation,Sport, and Tourism

Developed an entrepreneurial course on heritage tourism in the European Union andalso uses that curriculum in her course entitled: “Social Cultural Aspects of TourismDevelopment”

“The most important characteristic for en-trepreneurs is the ability to imagine whatdoes not yet exist if they want to develop rad-ical not just incremental changes. Imagininga future where everything is possible, whilenot developing ‘design fixations’ to all theirideas is key. In addition, they need to be ableto communicate their initial ideas and con-cepts before a language and terminology hasbeen developed. Being observers of authen-tic human behavior provides them with keyinsight into entrepreneurial opportunities.”Deana McDonagh, chair of the industrial design program, School of Art + Design in theCollege of Fine and Applied Arts

Has brought her expertise in industrial designto collaborative efforts that have establishedentrepreneurial courses in Disability & Designand Designing for Gender

100 WORDS OR LESS

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WHY IT WORKS“Even though we’re a very young

organization, we’ve been able tomake a sizeable impact. In just under3 years, our 150 nonprofit partnershave received more than 120,000pounds of in-kind donations worthmore than $1.25 million,” says Singh.

And there is no cost to the char-ities, as corporate partners help fundboth the costs of collection and dis-tribution. That frees up other moniesfor the organizations to carry outtheir social mission so more peopleare served.

It works for businesses, too, be-cause they have one partner that or-ganizes all the pieces of the collectionand distribution, which makes it aneasy, efficient, and effective way forthe business and its employees togive back to the community.

And then there’s the environ-mental benefit. Thousands of poundsof essential goods are diverted fromlandfills and get reused by peoplewho need them. That’s a triple-bot-tom-line winner.

WHAT IT MEANSFor the past two decades, Singh's

career has included work in interna-tional corporate finance, global merg-ers and acquisitions, strategic businessdevelopment for startups, and evenrunning a casino hotel. So why makethis move to the nonprofit field?

“This is an opportunity to utilizemy extensive corporate and profes-sional skills and help put form andstructure around an unstructuredmarketplace,” she says. “I could seethat with Bin Donated it was possibleto move the needle in a very quickand meaningful way that was alsoextremely innovative. Nobody else inthe country is addressing the needthat Bin Donated fills in the mannerwe do. Our model is to create a sys-tematic, scalable solution that haswide-ranging benefits for business,for charitable organizations, and forthe at-risk communities.” •

Cathy Lockman

There are more than 6,600nonprofits in the Chicago-land area doing great work tocombat a variety of social

problems, from homelessness topoverty to literacy. Most run theirown collection drives and then dis-tribute goods to their beneficiaries.While that model has its benefits, itcan also create significant duplica-tion of effort for philanthropic or-ganizations and an inundation ofdonation requests for the businesscommunity.

Geeta Singh, a 1989 ILLINOIS fi-nance graduate, believes there’s an-other business model that has meritin the nonprofit environment, andas executive director of Bin Donated,she’s working to put that aggregatormodel to work.

“For nonprofits, the process ofconducting drives and collecting fortheir wish lists is resource-exhaus-tive,” explains Singh. “Our collabora-tive model streamlines the entirecollect and distribute process, whichmaximizes efficiency. It also helps re-duce costs for nonprofits, and for ourpartners it adds another dimensionof corporate social responsibility.”

HOW IT’S DONEBin Donated partners with

Chicago hotels, businesses, residen-tial and commercial buildings, andfoundations to collect and distributein-kind donations for local nonprof-its. For hotels, the donations areremnant toiletries; for dentists, itcould be new toothbrushes andtoothpaste samples; for corporatepartners, it could be books, schoolsupplies, toys, winter coats, or otherneeded items.

Here’s how it works. Big, blueBin Donated bins are placed in thebusiness where items can be easilycollected. That could be anywherefrom the housekeeping area of ahotel to a corporate break room tothe lobby of a bank. When the binsare full, the Bin Donated truck—yes,there’s only one—and its part-timedriver pick up the donations and de-liver them to other nonprofits acrossthe city that then distribute them as needed. It may sound simple, butlogistics is one of the biggest chal-lenges for the nonprofit and the cor-porate partners. The Bin Donatedmodel makes it easy.

BIN THERE, DONE THAT.

[ THE REASON WHY ]WHO

Geeta Singh, executive director of Bin DonatedWHAT

A new business model for nonprofitsWHERE

Bin Donated of ChicagoWHEN

Founded 2009WHY

To reduce costs for charitable organizations and help sustain the environment

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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 currentstudents, 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.

[ PARTING SHOT ]