With a Google search, there are two sets of results — paid and organic.

Yi He, Ph.D., assistant professor in the Department of Marketing & Entrepreneurship, College of Business and Economics, at California State University, East Bay, says her advertising management students were surprised to see how many people click on the paid ads.

Her students participate in the Google Online Marketing Challenge, where they are given $250 to run a three-week online advertising campaign for a business or non-profit, which is developed using Google AdWords and Google+.

This type of search engine marketing (SEM) truly benefits small companies.

“For smaller companies, in the past, there was no way to compete in the conventional media with big companies. Now, they can differentiate themselves using SEM, just by spending their advertising dollars in a relatively cautious manner,” she says.

Smart Business spoke with He about why small companies are turning to SEM.

Why is SEM so important today?

Most Internet users don’t want to remember a website URL. Eighty-five to 90 percent of people are guided to websites by search engines, such as Google. Also, people usually just look at the first five or 10 search results, and many of those are advertisements. So, once you start running ads, you generate more ways to reach Internet users.

How are SEM and conventional advertising different?

With conventional advertising, print and broadcast, it’s hard to measure whether your ad campaign was effective. However, everything is measurable with SEM — you can calculate how much ROI is generated from every advertising dollar spent.

Conventional advertising also requires a specific set of skills. But a business owner can run a SEM campaign by opening a Google AdWords account and be up within minutes. It may not be a great campaign, but it’s not like creating a TV commercial.

How does SEM differ from Facebook ads?

With SEM, the only way to target ads is geographically. So, a San Jose restaurant owner can specify that he or she only wants the ad to show up for a ‘Thai food’ search in a 15-mile radius from the downtown San Jose area. Google doesn’t charge for the number of times the ad shows up, or the impression, but by cost-per-click. With Facebook display ads, ads can be targeted by age, gender, marital status, interests, education level, etc., and are charged by both the click and impression.

On average, of the 10,000 times a Facebook ad shows up, only five people click on it, because in a social environment you don’t want to be interrupted to buy something. With a search engine, people are looking for a solution to a problem. A search result, whether organic or paid, is like you’re in a retail store and someone offers a helpful recommendation. With Google’s marketing challenge, my students can get a click through rate (CTR) that is 100 times higher than the Facebook average.

Why is SEM more useful for small business?

Smaller businesses typically aren’t as visible on the organic results or with the extremely popular keywords. But they can run a SEM campaign to generate Internet traffic and increase visibility. There’s no entry barrier, too, so they can get started right away.

SEM also can help figure out demand. For example, one student ran two ad campaigns for a local Chinese restaurant and discovered that ‘Chinese dining’ was not popular in either impressions or CTR. However, ‘Chinese takeout’ led to more people clicking the restaurant’s website and calling, which increased takeout orders dramatically.

What ethical concerns come up with SEM?

We don’t know exactly what data companies have on consumers, and what they do with it. All impressions, clicks through and transactions can be tracked. For example, you might go to a website to look at a few items but not purchase anything, and over the next few days you see similar items on your Internet pages. In addition, some argue that precisely targeted results deprive people of the total available information.

Public policymakers have been pushing to protect consumer information with something like the ‘do not call’ list. A ‘do not track’ list would enable people to sign up to keep their Internet Protocol addresses from being recorded.

Yi He, Ph.D., assistant professor, Department of Marketing & Entrepreneurship, College of Business and Economics, at the California State University, East Bay. Reach her at (510) 885-3534 or yi.he@csueastbay.edu.

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When all is said and done, companies are generally satisfied with their new software, but their experiences are hardly a ringing endorsement for enterprise resource planning (ERP) endeavors. Among the 246 firms that completed an ERP installation within the past year, implementation exceeded budget 56 percent of the time and only 46 percent were completed on schedule or earlier, according to data from Panorama Consulting Solutions.

“The scope and complexity of ERP implementations makes forecasting treacherous,” says Zinovy Radovilsky, Ph.D., interim chair and professor of management for the College of Business and Economics at California State University, East Bay. “While cost overruns can’t be eliminated, they can be managed with the right tools and tactics.”

Smart Business spoke with Radovilsky about avoiding delays and budget overruns when tackling ERP projects.

Why do ERP projects often exceed budget? 

An inexperienced project manager and a lack of historical data for enterprise-level software initiatives often result in inadequate cost estimates for items like these:

• Employee training — The most underestimated expense, since employees have to learn a brand new system.

• Integration and testing — Connecting ERP to other software programs is costly.

• Customization — Increases initial programming and configuration costs, as well as the price tag for future upgrades and fixes.

• Data conversion — Including the cost of migrating existing data to the new system.

• Data warehousing upgrades — Often needed to support daily operations post-ERP.

• Consulting fees — When something goes wrong, consulting costs run wild.

Don’t underestimate the impact of large-scale implementations on productivity. Activate one module or function at a time instead of taking a big bang approach, and offer short doses of virtual training and online tools to keep productivity high while employees get up to speed. When people can’t do their jobs the old way and haven’t yet mastered the new way, they panic, and the business goes into spasms.

What are some simple steps to keep ERP projects on budget?

First, select a qualified project manager who has extensive experience with ERP implementation and updates. Next, incorporate risk management into the budgeting process by considering every possible problem and starting with a rough order of magnitude (ROM) budget followed by a more accurate, and typically higher cost, budget estimate and finally, a definitive estimate.

Involve key managers and stakeholders in the budgeting process to ensure the estimates aren’t biased. Then, update the budget as the project progresses, using an earned value (EV) analysis approach that compares cost data to a baseline, to track your performance. Prevent misfires and crashes by conducting comprehensive load testing — using testing software and real users — before the system goes live. Finally, resist the urge to customize every little feature. Instead, choose an ERP system that supports your current business processes or use the standard functionality.

How can executives ensure the financial performance of ERP projects?

Keep employees energized by communicating a clear vision for where the system will be after the initial phase and at various intervals down the road by sharing project updates. Be realistic in setting goals and estimating how much change your organization can absorb, because a major software initiative requires stamina and commitment.

Use a software tool to collect actual data, and then periodically review project milestones, budgets, resource allocation and time/materials bookings to spot opportunities to boost ROI or reduce costs. A software tool is the only way to know exactly where you are in the project, how much time and money you’ve spent, and to forecast the cost and timeline for the entire project.

Remember, you can’t eliminate cost overruns, but they can be managed with the right tools and leadership.

Zinovy Radovilsky, Ph.D., is interim chair and a professor of management in the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3307 or zinovy.radovilsky@csueastbay.edu.

Website: Learn more about the College of Business and Economics at California State University, East Bay.

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Business leaders often rely on intuition when making critical decisions, but according to The Economist Intelligence Unit, executives dramatically increase their chances of success when they bring facts and data into the decision-making process.

“Although beliefs and instincts help executives make expedient decisions, they aren’t always good decisions,” says Dr. Chongqi Wu, assistant professor of management for the College of Business & Economics at California State University, East Bay. “Business leaders become better decision makers when they take advantage of the facts derived from data analysis.”

Smart Business spoke with Wu about the benefits of incorporating big data and analytics into the decision-making process.

Why is fact-based decision making superior?

Although intuitive decision making is simplistic and quick, a lack of underlying data makes it hard for executives to diagnose and correct problems when something goes wrong. Instead of compounding the problem by making another bad decision, executives can drill down into the data to determine the cause of misfires and use factual analysis to set a new course. Actually, studies show that cumulative improvement is hard to obtain when executives react to problems instead of using facts to make prudent business decisions. And since most of your competitors are probably using data, companies that base decisions on gut feel or instinct are at a competitive disadvantage.

What types of decisions or problems are best solved by big data?

In general, data-driven decision making works better at an operational or tactical level since there are relatively fewer risks involved. In fact, when aided by technology, data makes it easy to automate rudimentary tasks and decisions.

Conversely, strategic decisions still require intuition and judgment, but injecting data analysis and modeling into the process can significantly improve the odds of success. Don’t think of gut-based and fact-based decision making as competing concepts because they actually complement each other. For instance, cross-functional teams often use data to project outcomes and validate the return on proposed programs or new products. It also helps diverse teams build consensus by using facts instead of politics and personal preferences to reach conclusions. Strategic decision making still requires risk taking, and success may hinge on market timing, execution and luck. Data just makes executives better gamblers.

What’s the best way to incorporate data into the decision-making process?

First, executives need to lead the way in supporting cultural change by acknowledging the importance of data in the decision-making process. Next, use data modeling to project probable outcomes and evaluate ideas, since facts and knowledge generated from analyzing big data provide a common ground on which ideas can be debated. Finally, force your team to analyze data by asking questions during the evaluation process so they learn how to marry facts and instincts.

Do executives need copious amounts of data to conduct modeling and analysis?

It’s hard to estimate, but simply put, gather as much relevant data as possible. However, there’s no reason to wait; start small and start immediately because there’s no need to invest in expensive systems or software. Purchase information from third parties, tap free sources to validate ideas, use economical cloud services and software as a service programs to analyze information, and begin collecting in-house data. Finally, run an experiment or test to see how much data you actually need to project the return on a small marketing project or idea.

How can executives gain the confidence to make data-backed decisions?

Even though great decisions don’t always produce great outcomes, you’ll gain confidence by realizing that great decision gives you the best chance to succeed. For example, it’s a great decision to have Kobe Bryant take the final shot when the Lakers are behind because, with a career field goal percentage of 45.4 percent, he gives the team the best chance to win. But data also shows he’ll miss about 55 percent of the time. Luck and timing still play a key role in determining success.

Dr. Chongqi Wu is assistant professor of management, College of Business & Economics, at California State University, East Bay. Reach him at (510) 885-3568 or chongqi.wu@csueastbay.edu.

Event: See a calendar of upcoming seminars hosted by the Department of Economics.

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[caption id="attachment_30767" align="aligncenter" width="200"] Dr. Glen Taylor, Director of MBA Programs for Global Innovation, California State University, East Bay

Yi Jiang, Assistant Professor and Associate Director for MBA for Global Innovators, College of Business and Economics, California State University, East Bay[/caption]

Whether it is for technology or consumer products, the global market is now the best place to grow sales and profits. To fully realize the potential of these opportunities, executives must undergo a paradigm shift, strategically analyze data and build alliances before the first dollar changes hands.

“To sustain growth and allow the next generation of Americans to have a better life, we have to rethink globalization, identify opportunities and be contributors to the global economy rather than consumers,” says Dr. Yi Jiang, associate director of MBA Programs for Global Innovation at California State University, East Bay.

Smart Business spoke with Jiang and Dr. Glen Taylor, director of MBA Programs for Global Innovation at California State University, East Bay, about the process of identifying and making the most of ripe opportunities in the global marketplace.

What prevents U.S. executives from capitalizing on the best global opportunities?

Taylor: U.S. executives need a different approach to analyze and select global opportunities because our country is no longer the dominant market in the world. Our loss of supremacy means that we need to learn how to do business in other countries that don’t always comply with our culture and business practices. We must put ourselves in their shoes and see things from their perspective.

Jiang: We’ve had a tendency to view globalization in simplified terms and think of other countries as a resource for outsourced services and cheap labor. But when executives apply a different perspective to the analysis process and develop innovative products and solutions, they stand the best chance of succeeding outside the U.S.

What’s the first step in the identification process?

Taylor: The first step is demographic analysis, but unless executives take a deep dive into the data, they may overlook emerging trends and target the wrong customers. For example, a superficial analysis of Chinese demographics reveals no net population growth, but an in-depth study shows that social change is under way and people are urbanizing at the fastest rate in the world, adding tens of millions of new global consumers each year. This creates unprecedented demand growth.

Jiang: Each country has regional and generational differences that create unique opportunities on the consumer side. U.S. executives must consider dynamic industry cycles and a county’s openness and resources before attempting to position each country in the holistic picture of global strategy.

What’s the next step?

Jiang: Travel to the country to experience the culture, validate your hypothesis, and establish strategic business partnerships and networks. You’ll need seamless collaboration to understand the cultural nuances and build a supply chain. Infusing yourself in the culture will help you identify additional opportunities, since the best ideas often come from prospective partners, suppliers and customers.

Taylor: Business relationships are like a marriage, so prospective partners must get to know each other before making a commitment. And your travels may yield additional opportunities, especially if you view things with an eye for the innovations being developed in other markets.

What else must executives do to succeed in the global marketplace?

Jiang: Remember that global opportunities and situations are fluid, so what seems like a great idea today may not work tomorrow. Conduct extensive scenario analyses so you are prepared to perform under a variety of circumstances, and keep your finger on the pulse of prospective customers by garnering feedback through open source social networking.

Taylor: The key is to search out opportunities in global markets to develop innovative products and services that build on our strengths while embracing new ideas from other countries.

Dr. Glen Taylor is director of the MBA Programs for Global Innovation at California State University, East Bay. Reach him at glen.taylor@csueastbay.edu.

Dr. Yi Jiang is associate director of the MBA Programs for Global Innovation at California State University, East Bay. Reach her at yi.jiang@csueastbay.edu.

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Business leaders often rely on intuition when making critical decisions, but according to The Economist Intelligence Unit, executives dramatically increase their chances of success when they incorporate facts and data into the decision-making process.

Global companies experienced a 26 percent improvement in performance over the last three years when big data analytics were applied to the decision-making process. And now, those data-savvy executives are forecasting a 41 percent improvement over the next three years.

“Although beliefs and instincts help executives make expedient decisions, they aren’t always good decisions,” says Dr. Chongqi Wu, assistant professor of management for the College of Business & Economics at California State University, East Bay. “Business leaders become better decision makers when they take advantage of data and the facts derived from data analysis.”

Smart Business spoke with Wu about the benefits of incorporating big data and analytics into the decision-making process.

Why is fact-based decision making superior?

Although intuitive decision making is simplistic and quick, a lack of underlying data makes it hard for executives to diagnose and correct problems when something goes wrong. Instead of compounding the problem by making another bad decision, executives can drill down into the data to determine the cause of misfires and use factual analysis to set a new course. Actually, studies show that cumulative improvement is hard to obtain when executives react to problems instead of using facts to make prudent business decisions. And since most of your competitors are probably using data, companies that base decisions on gut feel or instinct are at a competitive disadvantage.

What types of decisions or problems are best solved by big data?

In general, data-driven decision making works better at an operational or tactical level since there are relatively fewer risks involved. In fact, when aided by technology, data makes it easy to automate rudimentary tasks and decisions. For example, it’s hard to imagine how Amazon or Wal-Mart would fare if they relied on managers’ instincts to replenish stock levels, when a computer can synthesize inventory changes and sales trends and place orders automatically. On the other hand, strategic decisions still require intuition and judgment, but injecting data analysis and modeling into the process can significantly improve the odds of success. Don’t think of gut-based and fact-based decision making as competing concepts because they actually complement each other. For instance, cross-functional teams often use data to project outcomes and validate the return on proposed programs or new products. It also helps diverse teams build consensus by using facts instead of politics and personal preferences to reach conclusions. Remember, strategic decision making still requires risk taking and gambling, and success may hinge on market timing, execution and luck, but data not only makes executives better decision makers, it makes them better gamblers.

What’s the best way to incorporate data into the decision-making process and corporate culture?

First, executives need to lead the way in supporting cultural change by acknowledging the importance of data in the decision-making process. Next, use data modeling to project probable outcomes and evaluate ideas, since facts and knowledge generated from analyzing big data provide a common ground on which we can better debate our ideas. Start with something simple like a marketing program or packaging change, since you usually have ample data to identify untapped opportunities and customer behaviors. In fact, the process of collecting and analyzing data and generating knowledge gives you a better feel about customers, markets and risks.

Finally, force your team to analyze data by asking questions during the evaluation process so they learn how to marry facts and instincts.

Do executives need copious amounts of data to conduct modeling and analysis?

It’s hard to estimate how much data executives need, but simply put, we need as much relevant data as possible. However, there’s no reason to wait; my advice is to start small and start immediately because there’s no need to invest in expensive systems or software. Purchase information from third parties or tap free sources to validate ideas and use economical cloud services and SaaS programs to analyze the information and begin collecting in-house data. Finally, run an experiment or test to see how much data you actually need to project the return on a small marketing project or idea.

How can executives gain the confidence to make data-backed decisions?

You’ll gain the confidence you need to make data-backed decisions by realizing that great decisions don’t always produce great outcomes. For example, it’s a great decision to have Kobe Bryant take the final shot when the Lakers are behind, because his field goal percentage is 45.4 percent. But, even though Kobe gives the Lakers the best chance to win, data shows that he’ll miss about 55 percent of the time. No matter how much data we have collected and how capable of analyzing the data we have become, we will never fully understand all the risks or be able to predict the future because luck and timing still play a role in determining the success of an idea. Don’t forsake your instincts or completely change course; just recognize that incorporating data and facts whenever possible will absolutely make you a better decision maker.

Dr. Chongqi Wu is an assistant professor of management for the College of Business & Economics at California State University, East Bay. Reach him at (510) 885-3568 or chongqi.wu@csueastbay.edu.

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Busy executives probably haven’t read Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, so they may be surprised by the broad impact of the regulatory changes to over-the-counter (OTC) derivatives trading. In addition to fundamentally changing the way the market operates, the new laws could impact your bank’s appetite for risk, your ability to borrow funds and even your company’s hedging strategy.

OTC derivatives are traded and negotiated  without going through an exchange or other intermediaries to hedge or speculate on risk. They were largely unregulated until this act.

“Any time there’s a fundamental change in the way a market operates executives need to understand the big picture,” says Scott Fung, DBA, associate professor of finance for the College of Business and Economics at California State University, East Bay. “At a minimum, the changes require increased knowledge of the interdependent relationships between the various parties, better decision making and a review of your risk management strategies.”

Smart Business spoke with Fung about the potential impact of the new derivative regulations and how executives should prepare.

Why should executives pay attention to the new derivative regulations and their market impact?

Following the financial crisis, policymakers decided that a lack of transparency and regulations in the OTC derivative market caused system-wide instability, so they created a regulated environment and increased the oversights and reporting requirements.With any legislation, there are reverberations throughout the business community and the possibility of unintended consequences, especially when the derivatives market provides the following key economic functions:

  • Price discovery. Derivatives trading provides key information on the value of the underlying assets and serves as a predictor of future prices.
  • Operational advantages. The derivatives market offers lower transaction costs and additional market liquidity.
  • Informational and allocation efficiency. Derivatives trading enhances available market information and resource allocation.
  • Business advantages. Derivatives allow companies to engage in risk management by facilitating hedging strategies and by reconfiguring risk and return trade-offs. The market allows unwilling risk holders to transfer risks for a fixed price, which frees up cash for other investments and business expansion.

What are the legislation’s key provisions and who will be impacted?

The new legislation establishes the regulatory framework for the governance of the OTC derivatives markets and vests oversight authority in the Commodity Futures Trading Commission and the Securities and Exchange Commission. The intent is to provide greater oversight and transparency for derivative transactions such as credit default swaps, commodities and equity swaps. Although the regulations primarily apply to swap dealers and major swap participants, they also impact commercial end-users, financial institutions and corporations. Key provisions include:

  • Changes in execution processes and price discovery of OTC derivatives.
  • Changes in central counterparty clearing and clearing requirements, trading activities, capital requirements and margining of OTC derivatives.
  • Changes in the reporting of transactions and record-keeping requirements.

How are these provisions likely to fundamentally alter the OTC derivatives market?

The structural changes are supposed to improve the efficiency, stability, innovation and sustainability of derivatives markets by reducing the possibility of default, system-wide risk and financial crisis. In turn, this will improve the stability and functionality of the markets and financial institutions, ultimately impacting U.S. and global businesses. But it is unclear how these regulations will impact transaction costs, margin and collateral requirements. It’s also unknown whether they will actually curtail risk or tighten the credit market by limiting financial institutions’ hedging options along with their ability to customize derivative contracts. It will be interesting to see if the regulations produce changed trading activities and characteristics, so stay tuned.

How will the regulations impact U.S. businesses?

Any regulation that impacts the market or financial institutions impacts businesses because there’s an interdependent relationship between the various parties. Ultimately, the performance of financial markets and financial institutions affect corporate decision-making, financing opportunities, risk management and so forth. Possible benefits include enhanced functionality and stability of financial institutions, better performance of derivatives contracts, and the opportunity for end-users and institutions to better manage risk. Plus, the increased transparency and availability of information along with additional oversight could increase market participation, thereby boosting market liquidity. Possible downsides of the legislation include cost increases resulting from system complexities including transaction costs, collateral and margin requirements, and diminished customization capabilities.

How should executives prepare for the new regulations and the subsequent market changes?

Executives need to understand the interdependent relationship between financial markets, financial institutions, their suppliers and clients to see how their capital supply and financial resources could be affected. They should consider how they’re managing risk, as they may benefit from the enhanced usefulness and performance of derivative contracts. They also should look out for emerging opportunities and new financing products that may spring up. Executives need to understand the regulations’s intricacies to uncover new opportunities for risk management, financial innovation and ultimately value creation.

Scott Fung, DBA, is an associate professor of finance for the Department of Accounting and Finance, which is part of the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-4863 or scott.fung@csueastbay.edu.

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Superior knowledge management (KM) is often credited with boosting shareholder value, jumpstarting innovation and improving customer service, but with little evidence to support vendors’ heady claims, executives have to rely on faith instead of facts when approving costly initiatives.

Finally, research confirms that acquiring, sharing and using knowledge in meaningful ways definitively improves a company’s return on assets, sales and operating income.

“We only had soft evidence to support the link between superior KM and the bottom line,” says Jiming Wu, Ph.D., assistant professor of management for the College of Business and Economics at California State University, East Bay. “Now after studying the results of 62 companies, we’ve confirmed the link between superior financial performance and superior knowledge management.”

Smart Business spoke with Wu about the tangible and intangible benefits of superior KM.

What is KM and what types of knowledge does it typically include?

 

KM generally refers to a tool or automated system where companies gather, archive, analyze, and share tangible and intangible information from a variety of sources. In most companies, knowledge is scattered across the enterprise; it resides in databases, documents, manuals and people’s heads. The disparate formats and locales make it virtually impossible to tap or review holistic data when tackling business problems, and efficiency is compromised because business units and managers operate independently.

Top-performing firms use accumulated data to solve business problems, create new products, educate employees or drive operating efficiencies. For example, KM helps managers proactively spot patterns and relationships among customer complaints, product returns and diminishing sales. In turn, they eliminate restocking costs by altering product designs or instruction manuals, which boosts goodwill, sales, market share and the bottom line.

What are the benefits of a knowledge management system?

 

The top benefits include:

  • Superior knowledge acquisition: Centralization allows executives to measure knowledge collection and make it a priority. Plus, a KM tool reduces the tendency for a manager to collect and hoard separate data.

  • Superior storage and retrieval: KM systems allow companies to collect, organize, codify, store, safeguard, and access institutional knowledge and data. Without a tool or program, information stored in a variety of formats and systems can’t be retrieved or analyzed, and staff turnover often results in the loss of critical institutional know-how.

  • Superior sharing and dissemination: It’s easy to share best practices and foster collaboration when everyone shares the same goals and has access to the same information. Plus, studies show that superior KM is capable of transforming run-of-the-mill companies into powerful learning organizations.

  • Superior decision-making: It’s hard to make good decisions when managers have to react to problems. KM lets them analyze suppliers, customer preferences and the competitive landscape so they can forecast the impact of a new product on revenue, accounting, manufacturing and distribution, customer service and the bottom line. Our research revealed that superior KM firms are more efficient and profitable because they use data instead of hunches to anticipate problems, establish priorities and align valuable resources.

 

How does superior KM create a competitive advantage?

 

Companies get a leg up on the competition when they use a unique resource like KM to streamline business processes, reduce production costs or accelerate R&D. They tend to originate, design, test and release new products faster than the competition, and be more efficient because products are better aligned with marketplace needs. For example, engineers can nip defects in the bud by reviewing focus group feedback and adapting the design or manufacturing process before production. Marketing can eliminate seasonal revenue dips by reviewing customer demographics and buying cycles and creating unique advertising campaigns or promotions. You’ll prevail anytime you can produce something better, cheaper or faster than others, and knowledge is the key to outhustling the competition.

What did the study reveal about the link between superior KM and superior bottom line performance?

 

We studied the financial performance of 62 firms in reaching our conclusions. Half the firms were deemed to have superior KM because they were better at mobilizing and applying their resources to problems and they resolved issues more quickly than other firms. On average, the superior KM firms were 5 percent better in four key categories: return on assets, return on sales, operating income to assets and operating income to sales. Not only were the superior KM firms more profitable, they garnered more income from each dollar of their assets.

How can executives tailor benchmarks and measure the return on KM initiatives?

 

Because KM initiatives tend to be costly, executives need to track a variety of tangible and intangible measures to gauge the return. Intangibles include the time and resolution rates for customer problems because those should improve when agents, engineers and production managers have access to centralized information. Next, look for decreased cycle times in R&D and whether you’re developing and releasing new products faster than the competition. Finally, track tangible measures, such as your company’s growth rate, revenue, market share and profitability. If you’re exceeding industry norms, it’s probably due to superior KM, because now we know that the link between superior KM and superior financial performance is no coincidence.

Jiming Wu, Ph.D., is assistant professor of management at the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3099 or jiming.wu@csueastbay.edu.

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Published in Northern California

It’s not surprising that the cost of labor was cited as the second-largest executive concern in CFO Magazine’s Global Business Outlook Survey, as the total cost of employee compensation often accounts for 40 percent to 70 percent of a company’s operating budget. The challenge is in finding a way to attract, motivate and retain top performers without breaking the bank.

“You can’t succeed by taking a one-size-fits-all approach,” says Jed DeVaro, Ph.D., chair of the Department of Economics, College of Business and Economics, at California State University, East Bay. “Companies need to analyze historical data, elicit employee preferences and strategically allocate expenditures to maximize their return on employee compensation.”

Smart Business spoke with DeVaro about the process of aligning employee compensation with critical business goals.

How can aligning compensation boost the success of major business initiatives?

While compensation alone won’t ensure the attainment of the business plan, customized, strategic alignment of total rewards increases the likelihood of success. The key is taking a data-driven approach so that pay and benefits are allocated toward the positions and workers that yield the greatest return, require in-depth training or who are difficult to source.

Most companies are sitting on a treasure trove of historical data, making it possible to ascertain the cost and output for each position at specific tenure levels and strategically apportion compensation to yield the best return. For example, you probably need to pay market rates for software engineers and project managers because unplanned turnover of these scarce professionals can increase development costs and the productivity of these professionals increases over time. However, you may be able to pay below market for customer service agents who reach maximum productivity levels within a few weeks.

In addition, a review of previous successes and failures helps companies tweak designs and allocate expenditures toward programs that have successfully attracted, retained and motivated top performers in the past.

How can early stage companies gather the necessary data to calibrate compensation?

While the basic tenets of the compensation alignment process remain constant, early stage companies need to adapt their approach due to a lack of historical data and their need to attract and retain nontraditional candidates. For example, startup firms often want energetic risk-takers who are willing to accept a smaller salary in exchange for stock options.

It’s important to gather current market intelligence instead of waiting until turnover occurs or relying on third-party wage surveys that are often out of date. Human resources can help ascertain competitive positions and employee preferences, and proactively design an effective plan by following up with lost candidates, conducting exit interviews and informally surveying referred candidates.

What kinds of compensation practices can boost employee retention and productivity without breaking the bank?

Employers often think they have to pay top dollar to attract, retain and motivate employees, when these innovative, budget-friendly techniques are equally effective.

  • Positive work environment. Being nice to your employees may not be the first thing that comes to mind when you consider compensation strategies, but workers are less likely to leave or become disenchanted if they feel appreciated and appropriately challenged. Salary usually comes in second or third in surveys of employee preferences, while a positive work environment is often their top priority.

  • Reasonable hours. Even if you can’t give large raises or bonuses, you can boost hourly pay for salaried employees by reducing their work hours and letting them go home instead of scheduling a two-hour meeting for 4 o’clock on Friday.

  • Customized benefits. Instead of offering the standard fare, optimize benefits expenditures by creating programs that resonate with your employees and your prospective talent pool. For example, young tech workers may prefer career development, training and certification stipends, while more mature workers with family obligations value flex time and a robust retirement program.

  • Team incentives. Group incentives boost overall performance by encouraging top performers to mentor and train neophyte or less-skilled workers. Team incentives aren’t a substitute for individual rewards, but they serve as a rising tide that raises all boats.

  • Deferred compensation. When strategically applied, deferred compensation can help employers retain scarce-knowledge workers or control the exodus of retirees to coincide with long-term business cycles or shifting labor market conditions. Examples include unvested stock options, which act as a cost lever by slowing or hastening the departure of employees.

What else can employers do to maximize their return on total compensation?

First and foremost, listen to your employees because they will tell you what they value and whether they’re motivated by raises, bonuses or other perks. Informal conversations are the best way to gather intelligence because employees can become disgruntled if employers conduct surveys and then disregard their opinions. Second, ensure that top performers receive the largest raises and bonuses relative to actual, observable differences in productivity. Awarding raises based on discretionary criteria or a manager’s desire for reciprocal favoritism in 360-degree surveys can result in pay inflation or compression and erode the efficacy of a pay-for-performance program.

Finally, treat employees well. It’s easy for executives to lose sight of the fact that compensation goes beyond salaries and benefits. A positive work environment and a windfall of free time may be more valuable than working 60 hours a week for a nominal raise.

Jed DeVaro, Ph.D., is chair of the Department of Economics for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3289 or jed.devaro@csueastbay.edu.

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It’s become so difficult to create mindshare for a product or service that companies are increasingly counting on celebrities to do the heavy lifting. Celebrities now appear in about 15 percent of U.S. advertisements, and AdAge estimates that companies invest $50 billion each year on corporate sponsorships and endorsements.

But do the rewards of celebrity endorsements justify the cost or the risk? There’s no doubt that some campaigns have been very successful, but the jury is still out on the overall effectiveness of celebrity advertisements. Some experts estimate that Tiger Woods’ debacle cost shareholders of the companies he endorsed up to $12 billion.

“We have a celebrity-driven culture so the ads make a lot of sense in a cluttered marketplace,” says Jagdish Agrawal, Ph.D., interim dean and professor of marketing for the College of Business and Economics at California State University, East Bay. “But executives need to proceed with caution because hitching your brand to a celebrity is expensive and can be fraught with danger.”

Smart Business spoke with Agrawal about the dos and don’ts of celebrity endorsements.

How do celebrity endorsements work and are they really effective?

While celebrities are capable of creating brand awareness or projecting a certain image, studies show that they have a limited impact on sales. Consequently, executives must set realistic goals and select the right endorser to ensure a campaign’s effectiveness. For example, hiring an attractive actress to promote a beauty and cosmetics line is a good idea since customers automatically assume that the endorser is credible. Or, using a rugged, professional athlete to tout a line of jeans is a viable strategy as long as his or her persona supports the product’s brand and desired image. In fact, studies show that a company’s stock price rises when a new endorsement deal is announced as shareholders anticipate a boost in sales. But the stock price typically retreats within a few weeks as the deal’s luster starts to fade.

However, a celebrity is capable of driving sales if he or she is a recognized expert in his or her field, and if the celebrity takes an active role in the product’s development and promotion. Tiger Woods successfully designed and marketed a line of golf clubs, and several celebrity chefs have used their expertise to design and promote gourmet cookware and accessories.

When should companies consider celebrity endorsements?

Celebrity endorsers are particularly effective when it is hard to distinguish one product from another or when a company needs instant credibility to penetrate a new market. Studies show that people pay attention when they see a celebrity and tend to remember a product or service that a celebrity pitches. For instance, using a glamorous actress to promote a luxury resort or expensive jewelry line is a good idea since customers use feelings or emotions to make those types of purchases. But when customers base buying decisions on research and facts companies are better off using a noted expert instead of a diva. A tennis aficionado may listen to Maria Sharapova’s recommendations about a racquet’s tension and flexibility but will scoff at that advice if it comes from Kim Kardashian.

What are the keys to selecting the right spokesperson?

The celebrity must resonate with your audience and be viewed as someone who would use your product or service. Therefore, consider a spokesperson’s age, image and strategic brand alignment when making your selection. For example, soft drink and snack companies often engage up-and-coming recording artists to attract youthful customers or they may try to evade the advertising doldrums by taking a tongue-in-cheek approach and hiring someone like Betty White. On the other hand, financial services companies need to garner prospective customers’ trust so they tend to hire veteran actors or former news anchors who exude wisdom and integrity. After all, you probably wouldn’t buy securities from Justin Bieber but you might listen to Sam Waterston or Tom Brokaw. Aside from the strategic match, do your homework because you don’t want to hire a celebrity who may be involved in a scandal down the road.

How can companies avoid the fallout from celebrity missteps or scandals?

Hiring multiple endorsers helps companies avoid the fallout from a scandal since customers won’t associate their brand with a single promoter. For instance, Nike wasn’t fazed by Tiger Woods’ marital problems because it was able to run other ads, but his unforeseen issues blindsided Accenture and decimated its entire campaign. Hiring a celebrity for his or her expertise rather than image or personality is another way to avoid the fallout from a scandal, since professional reputations built on experience and success can generally withstand the impact from a personal miscue.

What else should executives know before shelling out funds for a celebrity spokesperson?

Sometimes a CEO or CFO knows a celebrity and tries to sway the decision. Instead, let the ad agency do its job since it understands the complex nature of endorsements and knows which celebrity has the image and personality to resonate with your customers. Also, don’t overestimate the return or effectiveness of a celebrity advertising campaign. It’s not a magic cure-all for lagging sales or a bad product; it’s just another way for a good company with a quality product or service to stand out in a crowd.

Jagdish Agrawal, Ph.D., is the interim dean and professor of marketing for the College of Business and Economics at California State University, East Bay. Reach him at (510) 885-3291 or jagdish.agrawal@csueastbay.edu.

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What do golf tournament payouts and executive compensation have in common? More than you might think. For starters, both offer rewards based on relative — as opposed to absolute — performance, and research shows that the bigger the purse, the harder people play.

Moreover, a review of executive compensation reveals that the economic theory of tournaments may justify the blueprint and the level of executive pay, and this is just one of the ways that economists are using sports data to test business theories.

“We can learn a lot about human nature, motivation and beating the odds by studying copious data from the world of sports,” says Dr. Stephen Shmanske, professor emeritus of economics at California State University, East Bay.

Smart Business spoke with Shmanske about what business leaders can learn from economists who use sports data to test market efficiencies and business theories.

Why are economists studying sports?

An abundance of accessible, high-quality data has made it possible for economists to study the management, turnover, performance and compensation of professional athletes and correlate the results to a wide range of economic and business theories. For example, economists can review the results of golf or tennis tournaments to determine the optimal way to structure sales contests or other incentives.

An early study looked at the impact of pay discrimination, in which economists compared whether men and women perform differently based on prize structure. The researchers found no differences in performance when the participants were vying for the same purse.

What does an in-depth analysis of sports gambling reveal about market efficiencies?

Various analyses have revealed that stock and gambling markets are equally efficient because all relative information is captured and considered when the betting line or stock price is set. In other words, the company’s management team, competitive position and future earnings are considered when investors decide how much to pay for a share of its stock.

Likewise, odds makers consider each golfer’s strengths and weaknesses and the course layout when they set the tournament betting line. The odds and share price shift based on changes in demand or circumstances leading up to the event. Because both markets are efficient, you’ll need luck or inside information to consistently beat the odds.

What is the Tiger Woods effect, and what can economists learn from this phenomenon?

A study examined whether Tiger skewed the odds or the wagering volume when he played in a tournament, which is similar to a thin market versus thick market effect. Although more people bet on Tiger when he’s the favorite, and they bet on the field when he’s not, those scenarios were consistently factored into the odds. If greater amounts are wagered on a tournament, it might allow the casino to offer more favorable odds, much as transactions costs, measured by bid-ask spreads, are lowered in thick markets. The study concluded that gambling markets are efficient because odds makers consider Tiger’s participation.

What can we learn about profitability by studying golf wagering and bettor biases?

One of the themes in existing literature concerns whether there are identifiable biases in bettor behavior or in posted odds that can lead to positive profit strategies. Studies show that there’s no way to increase profitability by taking shortcuts, employing arbitrage betting techniques or contrarian betting algorithms because the markets are efficient. In fact, there’s no secret market intelligence or formula that increases profitably when taking risk, because the favorites generally return less on every dollar wagered but win more. You need luck to beat the house and anyone who says they have a surefire system is mistaken.

What can we learn about predicting winners and losers?

Certainly every fan has an opinion about who might win or lose a tournament but the odds makers have access to the same information. They factor in players’ injuries, outing tendencies and even the weather forecast when they set the line, and they’re right most of the time. It’s like trying to predict whether the price of a stock will rise or fall by monitoring the trading activities of insiders when the information is released to everyone after a transaction. It may be possible to consummate an advantageous stock purchase if you have exclusive information about a new contract or product release, but while you might make more money, you could wind up in jail.

How are economists using sports data to test other business theories?

The theory of tournaments is often applied to compensation since economists can see how various structures and payouts impact individual motivation and performance. For example, top golfers tend to focus and put forth their best effort because sinking a put or managing to birdie the next hole can earn them an additional $100,000. While lower performers may only earn $200 for shaving a shot or two off their score so they’re inspired to preserve and improve their technique, in hopes of earning a bigger payout next year. Similarly, vice presidents are inspired to go above and beyond because they want to ascend to the CEO’s chair. What we can conclude is that the size of the prize does not guarantee absolute performance in any one match, but it does raise the absolute standard over time.

Dr. Stephen Shmanske is professor emeritus of economics and director of the Smith Center for Private Enterprise Studies at California State University, East Bay and the author of Golfonomics. Reach him at stephen.shmanske@csueastbay.edu.

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