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Volume 16, Number 9: Faculty Focus
September 2010

Listen to a 6-minute interview with Mark Vandenbosch on why opportunism occurs and what can be done about it   Listen (5.6MB)   Subscribe

In their quest to improve efficiency, more and more businesses are taking short cuts to reduce costs, thereby risking disastrous results. Recent examples include the Menu Foods pet food crisis and Mattel toy recall. Dawn Milne recently sat down with Mark Vandenbosch, the Kraft Professor in Marketing at the Richard Ivey School of Business, to discuss what has caused a culture of opportunism in business, why it is on the rise and what can be done to fight it. Dawn started by asking him to explain opportunism.

A. Opportunism is really acting in your own self-interest without regard for the consequences on others. There’s lots of ways in which we do this all the time. If you’re driving down the road and you decide that you want to speed, the law says that you’re supposed to go the speed limit, but, if you go faster, you’re doing it because you want to get there sooner and you’re not really regarding what’s happening to others. Now the consequences are pretty, minimal in most cases.

However, in business, this opportunism, we believe, is really on the rise because we’ve been on this efficiency treadmill for about 20 years now where all we care about is becoming more and more efficient. Every book you read, every article you read, sort of says you should be outsourcing, you should be building up a supply chain, and so on. Well, the problem from that is, as the supply chains get really, really complex, they also get really, really long and that makes it very difficult for people to monitor them. It also really disassociates people who are in that supply chain with the end consumer. And so they really don’t care about the end consumer when things are happening. This leads to a situation where they are often faced with decisions where, perhaps the upside of being a bit opportunistic is higher than the downside, or the chances of me getting caught are pretty low. And because the monitors or the systems can’t be everywhere at once, it tends to happen more often than not.

Q. Why do you believe this is of concern to managers?

A. We think it’s a real concern because, in our research, where we studied several huge supply chain failures, we found that really small acts of opportunism gone undetected can create huge problems. I’ll give you a couple of examples. A small feed manufacturer in Ireland changed the type of oil that he used in his feed dryer and this oil contained a dioxin. The dioxin somehow got its way into the feed, the feed was fed to pigs, the pigs were slaughtered and someone tested some pork and found that there were high levels of dioxin. And that led to, in December of 2008, all pork products in 25 countries that Ireland had sent its products to, to be recalled – a cost of something like $200 million.

Another example is the Mattel lead paint situation. Mattel obviously outsources its toy production to somewhere in China and it has rules and regulations that people are supposed to follow. But it turns out that a supplier to a supplier to a supplier to a supplier ended up selling pigments that had some lead in it and it really wasn’t detected until the toys were manufactured into millions of places around the United States. So these very small things can grow into huge problems and the scary part is that when we look at the supply chains that we studied that were these disasters, they look exactly the same as ones we see all around us.

Q. What can businesses do to fight opportunism?

A. We’ve come up with four different suggestions. The first one is to constantly monitor the potential risks in the market. No matter what you do, you can not eliminate opportunism, but you certainly should be able to recognize the ways in which opportunists are acting. In 2007, when we had the big pet food crisis in North America, they found one supplier to Menu Foods and others in the industry added melamine to their ingredients so that it could fool a test for the protein content in the food and melamine elevated the protein content so they were able to produce something that was cheap and sell it for more. Now it turned out that the melamine was bad for the pets and made them die and get sick. Well, a year later in China, they had a milk food crisis and they used the exact same process of adding melamine to milk powder to raise the protein levels. No one in China should have been surprised.

The second one is to make suppliers and intermediaries responsible and accountable. If they don’t share in the risks of the people that are down chain from them, they’re not really going to pay a lot of attention. If you have intermediaries that are based solely on volume, it gives them little incentive to sort of look for opportunism. A great example of this is mortgage brokers and people putting out mortgages, not really caring about whether or not or not responsible for whether or not people have to actually pay those mortgages off in the long run. This led to a whole bunch of mortgages that are now basically in default when, if they were more responsible for those payments, they would have taken more care in lending those in the first place.

The third way is to change the ways you test and measure. One of the problems is that, over time, people continue to test – that opportunists continue to try and figure out how it is you’re monitoring – they will find ways to get around that. And sometimes you need to sort of go and have audits to try and break this situation. Alternatively, sometimes the people – you as a company – are also changing the way you are monitoring over time. Small, little by little, allowing more variants or deviation into the system and you need to really stop that in its tracks.

And the last one is to understand and accept the role of regulation. People in industry really – our managers – don’t like regulation, but they’re looking at it mostly from an efficiency perspective. If you really are looking for efficiency, you don’t want anything like regulation to increase costs. But, they’re looking at it really the wrong way because, if those increased costs are actually reducing risk in the system, the net present value could actually be pretty high. So I think you really need to revisit and understand and accept the role of regulation.

That was Mark Vandenbosch, Kraft Professor in Marketing, Richard Ivey School of Business.