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Document 2 of 100

CRISIS MANAGEMENT AT THE NATIONAL INSTITUTES OF HEALTH

Author: Campbell, Katherine; Helleloid, Duane

Abstract: None available.

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Headnote

CASE DESCRIPTION

Scientists at the National Institutes of Health (NIH), while government employees earning around $200, 000, were consulting and serving on private firms ' scientific advisory boards. Although such practices were rare before the 1980s, they became increasingly common during the 1990s and into the twenty-first century. These practices raised concerns over perceived, and real, conflicts of interest, when the same firms received grants from (and did research with) the NIH. Defenders of the practice, however, suggested that the development of scientific knowledge was enhanced when research scientists had regular contact with private industry. Federal ethics guidelines did not prohibit federal employees from "moonlighting" in their free time, but did place strict guidelines on such practices. The primary issue in the case is to understand the nature of conflicts of interest, conditions under which "knowledge sharing" can be appropriate, and when such actions can be inappropriate and potentially illegal.

A second issue explores "crisis management," when the allegations of impropriety and conflict of interest are leveled at the NIH in December 2003. The director of the NIH has called for a review of all consulting arrangements and the establishment of a Blue Ribbon Panel, but there are concerns that this does not go far enough and that the NIH is trying to avoid seriously dealing with the situation.

The primary authence for this case is a junior/senior course in Business Government and Society, or a Business Ethics course. The case would also be applicable in Public Administration classes, particularly where administrative ethics are discussed. The case might also prove of interest in a class on knowledge management issues in a graduate program. While both of the above identified issues should be addressed in any discussion, the instructor has discretion regarding which one should serve as the primary focus in a class.

INTRODUCTION

"Our mission is too important to the public health of the nation to have it undermined by any real or perceived conflicts of interest. . . . [our] ongoing review of outside activity files shows no evidence that patients were harmed or that decisions were influenced." (Dr. Elias A. Zerhouni, quoted in Willman, 2003b)

"This is not just a matter of a revolving door, where at NIH people go from the federal agency to the private sector. This is a matter of a swivel chair, where they sit at one desk ad do both jobs. ... I have great concern about institute directors having outside sources of income. It's like deputy secretaries of Defense working for Lockheed Martin." (Rep. James C. Greenwood, Chairman of the House Oversight and Investigations Subcommittee, quoted in Willman, 2003b)

December 2003 was a difficult month for Dr. Elias A. Zerhouni, Director of the National Institutes of Health (NIH). On December 7th, The Los Angeles Times published a series of articles reporting that a number of top NIH scientists, earning $180-$200,000 in government salaries, also had lucrative consulting and advisory relations with firms receiving grants from the NIH. The articles (Willman, 2003a) suggested that these relations created a conflicts of interest, and that, as a consequence, government funds might not be going to the most worthy projects, but to those that could financially benefit NIH officials. Perhaps even more troubling, was the suggestion that some patients' lives had been placed at risk by decisions that allowed unsafe drugs (from companies with financial ties to NIH officials) to be administered. The Los Angeles Times investigation concluded that this was not simply a matter of a few government employees trying to cash in on their knowledge and connections. Rather, the policies and practices at the NIH had created a climate where outside consultation was encouraged, and regular safeguards regarding disclosure of outside consultation had been systematically dismantled.

Initial reactions to the articles were predicable: the story was picked up by wire services, National Public Radio, and numerous other media outlets, Dr. Zerhouni defensively protected his Institutes' reputation, The Los Angeles Times' editors stood behind the story, and politicians called for investigations and looked for a scandal that would put their names in the press. But, behind these opening salvos, a strategy for dealing with the situation had to be developed by the leadership of the NIH. After the initial excitement, perhaps this story would just go away. If this happened, the best move would be simply to lie low and let the media attention and political fury pass on to the next big scandal. On the other hand, proactively dealing with the situation might diffuse the matter, and take some of the "wind out of the sails" of reporters and politicians that might try to make a bigger deal out of this than was warranted. The Congressional holiday recess had provided some breathing room, but the issue could quickly return to the headlines in January. While the NIH leadership could not entirely predict or manage how this issue would play out in the new year, actions taken now could influence whether the next NIH-related stories and Congressional hearings dealt with wonderful new drugs, important research results, and new treatments for serious diseases, or with the "scandalous" financial ties between top scientists and the private sector.

THE NATIONAL INSTITUTES OF HEALTH

The NIH is a part of the U.S. Department of Health and Human Services, and calls itself "The Nation's Medical Research Agency." The agency began in 1887 as a one room 'laboratory of hygiene' within the Marine Hospital Service. An early priority of the laboratory was to prevent the spread of infectious diseases from traveling seamen to the general population of the United States. Over the years, the entity's name and scope of mission changed many times. Currently, the NIH' s primary mission is to fund research on all aspects of public health. In 2004, the NIH's budget exceeded $28 billion. Most of the NIH's funds (80%) are spent on competitive grants given to researchers at universities, medical schools, hospitals, research institutes, and private firms located in all 50 states. The NIH has approximately 17,000 employees, including approximately 6,000 research scientists operating in its own laboratories. (Information in this section is summarized from the web site of the NIH (www.nih.gov). Specific facts and data are largely from www.nih.gov/about/NIHoverview.html, www.nih.gov/about/index.html, and history.nih.gov/exhibits/history/index.html.)

NIH directors and senior scientists are highly compensated. Typical salaries are $150200,000, higher than that of many members of Congress and Supreme Court justices. Many NIH scientists could, however, earn even more working in private industry or practicing medicine. By serving as consultants or members of firms' scientific advisory boards, NIH scientists can supplement their governmental salaries and make their total compensation more competitive with other opportunities. Decisions made by senior NIH scientists regularly involve allocating millions of dollars of governmental funds. The impact of these funding decisions on private firms, however, can be even larger. If NIH-funded work helps identify the root causes of a disease, a pharmaceutical firm can earn billions of dollars in long term sales by developing an effective treatment. In the end, the nation's public health may be well served by the NIH when diseases are prevented, eliminated, or cured, regardless of who might realize a direct financial profit.

THE U.S. OFFICE OF GOVERNMENT ETHICS

The U.S. Office of Government Ethics (USOGE) was established following the Ethics in Government Act of 1978. The primary role of the USOGE is to coordinate ethics programs for agencies within the executive branch, and interpret legislation and regulations. The USOGE publishes numerous pamphlets and handbooks outlining responsibilities of government employees, and steps that need to be taken to assure that employees comply with federal laws. The USOGE works directly with ethics administrators in government agencies (including the NIH) who monitor ethics programs and ethics compliance within their agencies. (Information in this section is largely taken from the web site of the USOGE - www.usoge.gov).

CONFLICT OF INTEREST GUIDELINES FOR GOVERNMENT EMPLOYEES

Conflicts of interest arise when a government employee's work might also personally benefit the employee, or benefit family, individuals, or organizations with which the employee has a relationship. When a conflict of interest exists, a government employee may be tempted to act out of self-interest, rather than in the best interest of the public. Conflict of interest guidelines are designed to address these circumstances. Employees are required to notify a superior whenever a conflict of interest exists, so that the work can be reviewed or assigned to another employee. Examples of obvious conflicts of interest include employees authorizing purchases from a firm owned by a family member or negotiating with an outside firm as a government official, while simultaneously personally negotiating an offer of employment from the firm. In cases such as these, the employee's objectivity could be questioned, even if decisions actually are made without bias. (Information on conflict of interest guidelines is largely drawn from USOGE, 2002a).

FINANCIAL DISCLOSURE REQUIREMENTS FOR GOVERNMENT EMPLOYEES

Government employees are not prohibited from also working outside the government, as long as the outside employment does not directly relate to, or interfere with, their governmental duties. An administrative assistant in the Department of Justice can work evenings or weekends at an ice cream shop, for instance, without raising any ethical concerns. Likewise, a scientist can teach a course a local college, a park ranger can work part time as an emergency medical technician, and a lawyer can earn royalties from writing novels. Generally, employees are free do what they want in their free time, including earning additional income, as long as this income is not directly related to their governmental duties (USOGE, 2002b).

ALLEGATIONS OF IMPROPRIETY

On December 7, 2003, in a series of articles written by David Willman, The Los Angeles Times ran a report raising significant concerns about the outside activities of several senior NIH scientists (Willman, 2003a). The following examples are all drawn from that report:

Dr. Stephen Katz was Director of the NIH's National Institute of Arthritis and Musculoskeletal and Skin Diseases. Dr. Katz was paid $200,000 in government salary, and earned approximately another $500-600,000 (total) in company fees in 1993-2002, according disclosures. One firm for which he consulted, Advanced Tissue Sciences, paid him between $142,500 and $212,500 during 1997-2002. During this same period, Advanced Tissue Sciences received $1.7million in grants from Katz's Institute. Katz had recused himself from all decisions involving Advanced Tissue Sciences, and made certain they were handled by a subordinate. However, NIH policies prevent a scientist not only from being involved in such decisions, but from supervising an individual making the decisions. Katz was also a consultant to Schering AG, for which the NIH was conducting an experimental kidney treatment. In both cases Katz's consulting relations with the private firms had been disclosed to the NIH, and approved by the agency.

Dr. John I. Gallin was Director of the NIH Clinical Center, and received $225,200 in government salary. He earned another $145,000-322,000 between 1997 and 2003 from consulting with private firms. One firm with which he consulted, Abgenix, was owned by Cell Genesys. Cell Genesys collaborated with Gallin's lab in developing gene transfer technology, and articles were published that described the contributions of Cell Genesys to the work of Gallin's lab. Gallin also owned stock in Cell Genesys. Gallin indicated that his consulting relationship with Abgenix did not affect his decisions regarding Cell Genesys, nor did his ownership of stock in Cell Genesys.

Dr. Ronald N. Germain was director of the Laboratory of Immunology, and received a government salary of $179,900. Between 1992 and 2003 he earned over $1.4million in consulting fees, and received stock options worth another $865,000. Between 1992-2002 he received $322,749 from the Genetics Institute. In 2001 the Genetics Institute entered into a contractual agreement with Germain's lab, yet he was advised that it was not necessary for him to discontinue his consulting relationship, even though NIH policy does not allow an employee to receive private fees from a firm that is in a collaborative arrangement with their lab. He also stated that he was initially unaware that his lab had entered into an agreement with the Genetics Institute.

Dr. Jeffrey Schlom was director was director of the National Cancer Institute's Laboratory of Tumor Immunology and Biology. His government salary was $180,400, and he received another $331,500 in consulting fees from 1994-2003. Cytoclonal Pharmaceuticals, a firm working on Taxol production, paid him $127,000. In his work at the NIH, Schlom worked on medications that, when used in conjunction with Taxol, can provide effective cancer treatment for some. Thus, the net result of his research would lead to increased demand for Taxol, and prove good for Cytoclonal Pharmaceuticals.

DEALING WITH THE REALITIES AND THE PERCEPTIONS

In "The Los Angeles Times" report there was no direct evidence that scientists had used their influence at the NIH to get preferential deals for their clients, personally profited from their government work, or had compromised the lives of patients as a result of consulting relationships. Yet, the report pointed out that the arrangements created the appearance of conflicts of interest, as well as incentives and opportunities for actions at odds with the scientists' duties to the public. In addition, scientists and their managers at the NIH had taken steps to circumvent some regulations intended to prevent the possibility of conflicts of interest. Was more being hidden from public view that might make these initial allegations seem trivial?

Dr. Elias Zerhouni and the NIH responded swiftly to the allegations. In a press release (NIH, 2003)on December 10th, 2003 (three days after the report), the agency indicated it was "committed to do everything possible to avoid even the perception of a conflict of interest. ... To the best of our knowledge, NIH and its employees have followed all the current government ethics rules. It is clear, however, that we will need to consider changes after a thoughtful analysis of the issue." Dr. Zerhouni called for a review of every consulting relationship entered into by employees in the past five years, and called for the establishment of a Blue Ribbon Panel to "review consulting practices" and "identify systemic solutions for improvement."

The press release indicated that "it is important that our scientists stay involved in the science and health community beyond NIH to share their broad knowledge in their respective fields." The general tone of many who defended the NIH was that these were professionals of the highest integrity, prominent scientists in their fields, and it would be beneath them to ever let their scientific judgment be affected by private monetary gain. Yet, even if they intended to act without bias, is it reasonable to assume that they could completely disassociate their governmental and private consulting roles? Did private firms feel they needed to have close relations with NIH scientists in order to get a fair shot at NIH grants or contracts?

While NIH management initially defended the integrity of its scientists, they also acknowledged that they might need to do a better job of dealing with perceptions. But, perhaps there were real underlying conflicts of interest that needed to be addressed and avoided in the future. By requiring a review of consulting arrangements, and establishing a Blue Ribbon Panel, there was an acknowledgement that some action was needed. Was this all that was needed, or was more decisive action required to keep "the story" from becoming an even bigger issue that would distract NIH scientists from making further medical progress on important diseases?

References

REFERENCES

NIH (2003). NIH Statement About Outside Consulting Arrangements. NIH News - National Institutes of Health, www.nih.gov/news/pr/dec2003/od-10.htm

USOGE (2002a). Conflicts of Interest and Government Employment (www.usoge.gov/pages/forms_pubs_otherdocs/fpo_files/pamphlets/phconflict_02.txt)

USOGE (2002b). Standards of Ethical Conduct for Employees of the Executive Branch (http://www.usoge.gov/pages/forms_pubs_otherdocs/fpo_files/reference/rfsoc_02.pdf)

Willman, David (2003a). Stealth Merger: Drug Companies and Government Medical Research, The Los Angeles Times, December 7, Page 1.

Willman, David (2003b). U.S. Scientists' Deals with Drug Firms under Review, The Los Angeles Times, December 29, Page 1

AuthorAffiliation

Katherine Campbell, University of North Dakota

Duane Helleloid, University of North Dakota

duane.helleloid@mail.business.und.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 12

Issue: 1

Pages: 17-21

Number of pages: 5

Publication year: 2005

Publication date: 2005

Year: 2005

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412180

Document URL: http://search.proquest.com/docview/192412180?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2005

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 8 of 100

HENCO FURNITURE

Author: Lane, Wilburn; McCullough, Mike

ProQuest document link

Abstract: None available.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matters of this case are entrepreneurship and marketing. Secondary subjects include management and organizational theory. The case would work well in junior-level to MBA courses in entrepreneurship, marketing or management. The case could be taught in an hour-long class, although 75 minutes would be ideal. The student will need to read and reflect on the case for 30 minutes to an hour, before class.

CASE SYNOPSIS

Henco Furniture Inc. is a retail furniture store that does almost $10 million in annual sales in a southwest Tennessee town of 4,200. The store is located in a warehouse in an industrial park. This case tells the story of an entrepreneur who is remarkably successful despite breaking many of the rules of retailing. The case includes an in-depth look at the company's colorful owner-the driving force of the business. Readers are provided an analysis of the furniture industry and an explanation of the major competitors.

After retiringfrom making and selling products to people who used them as fund-raisers for schools and other civic organizations, Tom Hendrix founded Henco Furniture. He had warehouse space he used as part of his previous business and was trying to decide what to do with it. After looking at several options, he decided to open a furniture store. The store uses a warehouse located in an industrial park near Selmer, Tennessee, a town of 4,200 people, in rural southwest Tennessee. His first full year in business, 1997, Henco did about $1.2 million in sales. Sales for 2004 were close to $9 million-quite remarkable for a furniture store in an industrial park in a small rural community.

The story of Henco Furniture necessarily features the biography of its founder. After he graduated college he sold bibles door-to-door. He says anyone who can survive selling bibles for a couple of years, can do anything. Ultimately, he chose to go out on his own, founding and operating first the fundraising business and now Henco Furniture. About himself he says, "I'm a tough guy, reasonably intelligent, a stick to it kind of person." That is an understatement.

THE HENCO STORY

After retiring from making and selling products to people who used them as fund-raisers for schools and other civic organizations, Tom Hendrix founded Henco Furniture. He had unused warehouse space from his previous business and was trying to decide what to do with it. After looking at several options, he decided to open a furniture store, an interesting use of a warehouse in an industrial park near Selmer, Tennessee, a town of 4,200 people, in rural southwest Tennessee. His first full year in business, 1997, Henco did about $1.2 million in salesr. Sales for 2004 were close to $9 million-quite remarkable for a furniture store in such a location. He contributes his success to several things.

First, he identified critical parts of the business and hired capable people to run them. He lists the critical parts as: (1) someone to buy back what is selling, (2) someone to decide what to buy in the first place, (3) someone to hire and train sales staff, (4) someone to keep the details straight-keep orders straight, etc., and (5) someone to manage the warehouse. From his prior business experience, he knew a lot of people with these skills and was successful in convincing them to come to work for him.

The second thing he did was take lower mark-ups on his merchandise. He can take lower mark-ups because he has no debt. His building was paid for before he opened the furniture business. He marks everything up the same percentage, significantly less than the competition. He does not have "sales." His emphasis is on "everyday low prices." He points out that his price is lower than the sale prices of many of his competitors, and tel stories of satisfied customers who have told him how much they saved shopping at Henco.

A third factor in Henco's success is his aggressive promotional activities. He is considering using other media but his main emphasis has been on television advertising. He does about $30,000 a year in television advertising and sees his primary market as people 25-65 who live within a 150 mile radius of the store. He never mentions a specific price in his ads. He continually re-enforces the message that his prices are lower than competitors' sale prices. He uses slogans like "It's worth the drive" or "Eggs are cheaper in the country" to send the message that his prices are low. The main purpose of his TV ads is to get people to visit the store. About 50% of Henco's business is from the Memphis-Shelby County area, 1 1⁄2 hours away. Also, he gets a lot of customers from the Jackson, Tennessee area, an hours drive. He has had customers from as far away as Little Rock, Arkansas and has even snipped merchandise to Florida. He is currently expanding his promotional efforts into northern Mississippi and plans to do so in northern Alabama.

The fourth reason Henco is successful is that he works hard to make customers know their drive to the store is appreciated. The first thing customers hear when they enter the store is: Welcome, we're glad you came". The last thing customers hear when leaving the store is thanks for coming. While the customer is shopping, people walk around offering them free, fresh-baked cookies. Also, the store has a restaurant where shoppers may sit down and eat a meal. When you enter Henco you feel you have entered your mother's home rather than a retail furniture store. The salespeople are taught to find out what the customer needs and to "educate" the customer on the products. They are taught to be "need fillers." Mr. Hendrix seldom mentions profit because he believes if you serve the customer the profits will come.

The fifth element of Henco's success is store layout. After visiting the top-ten furniture retail stores in the nation and getting them to tell him the secrets of their success, Mr. Hendrix incorporated many of their ideas into his store. One such idea was to organize the furniture into shops on a street. Prior to the street concept, it was difficult to find what you are looking for in a 200,000 square foot warehouse. Now the shops are divided into bedroom furniture, living-room furniture, dining-room furniture, etc. The street is named "Main Street USA." As the customer walks through a shop, she automatically returns to the "street." All the activities of the business are on the street. The place where the financial transactions are performed is called the bank. The restaurant is called the "Whistle Stop Café." These renovations cost about $1.5 million, but sales are up about 40% since the store layout was changed. A diagram of the layout of the store is found in Exhibit One.

The sixth reason that Henco is successful is selection. The large shopping area permits them to carry a large selection of merchandise. They have furniture from the moderately priced to the most expensive. In addition, most of the merchandise displayed is available for immediate delivery or pick up. They have around 95% of their inventory on display at any given time. Because of this broad selection of merchandise only about 30% of their sales are from catalogs available in the shops. The customer can take their purchase with them.

While Henco is a growing business, it is still small in the total furniture industry. They expect to have sales of $10 million this year. (See Exhibit B for sales data since 1997, and a financial statement is found in Exhibit C.) When retailers buy enough of the same merchandise to fill large shipping containers, they can save as much as 30%. Currently, Henco buys some full containers but not as many as they hope to when they increase sales volume.

Mr. Hendrix is 73 year old, but does not appear to be slowing down. However, one of his daughters and her husband has entered the business, and he is slowly moving her to the head of the business. He writes his own ads. His daughter appears in some of the ads and will soon start working with him on creating ads.

The shopping concept is important as is pricing and every day low prices, but the best way to understand what makes Henco Furniture successful, is to get acquainted with the man behind the business..

TOM HENDRTX

Tom Hendrix's shoulders do not droop. It is a straight line from his chin to his toes. He has no trouble using damn and Jesus in the same sentence. Keeping up the pace can be a challenge when you walk with him. Unless you want a sermon on economics, you should not admit to any debt problems. To him, America is synonymous with making money. He often alludes to what a great country this is, but not how it is great because of a criminal justice system that offers protection against predatory behavior, or because of a constitution guaranteeing freedom from a tyrannical central government, or that the US practices separation of church and state, or extends the freedom to dissent. For him, America is great because you can create a life entirely around economics. The issue of whether the pursuit of individual or collective wealth is the best way to live never comes up. That matter has apparently been long settled in his mind.

He was on the front porch of his father's house, shortly after graduating from college with a degree in agriculture, when his father's friend Cooper Mullin asked him what he planned to do with his life. He said, "I can't decide whether I want to be a multi-millionaire or just get a job and make enough money to have two Cadillacs." He talks often of education, and this talk always comes back to learning more about making money.

Tom Hendrix repeatedly refers to life as a trip. It seems unlikely he would ever have heard the Grateful Dead's Truckin', for while the Dead were taking their long-strange musical trip, Hendrix was taking his own money trip. Jerry Garcia's life seemed to be about the trip. Tom Hendrix's life is about the destination. Tom uses two synonyms for trip - drive and walk. Mr. Hendrix repeats words and phrases that become themes and all the themes come back to the j oy of walking down economic main street. Sherry Lynn, his wife, has taken the walk with Tom for forty-five years. She is nearly as tall as he is, and Tom is about six feet. They are youthful in appearance, healthy looking people. One of his two daughters, Susan, who is in some of his TV commercials, has the same air of certainty. It's apparently a Hendrix thing. Of someone who has accumulated a lot of credit card debt he says, "They do not have enough sense to take a walk down economic main street." If you visit his furniture business you will be walking down a replica of a West Tennessee Main Street. Of a sofa built to last, Hendrix says, "It is designed to take the family trip." All of his television commercials end with the same heavily-gesticulated phrase, "It's worth the drive." He refers to his and everyone else's life as a trip.

About being single-minded and unique he says, "I always just paddled my own canoe." To explain the importance of faith to life's journey he says, "Your headlights don't shine the whole way." The entrepreneur, he says, "travels under a different tent." To be successful you have to have a gut belief, faith, hope, to be willing to "travel a road that is not sure".

When he recalls significant events in his life, they tend to involve the travel motif. When asked how he kept himself so physically fit, he recalled a time when in his mid thirties he had tried to ride a little boy's bicycle in Springfield, Tennessee. He had run short of breath from being out of shape and smoking two packs of cigarettes a day. Not long after this, he says, he put a pack of Winston's on the dash of his Thunderbird and drove from Texas to Tennessee and never touched them.

He quotes Sam Walton, who said, as the owner of a retail business you are "working for the people walking across the parking lot." If you only pursue profit, you may wind up without it. The key is to look for a service to craft the product. The biggest challenge to the entrepreneur is to find and figure out how to provide, a valuable service. But the reason for the service is to collect wealth for yourself and to help spread it around a little by being generous in your community. The best generosity, for him, is to give someone a job, not a handout.

Jim Tucker only lacked finishing his dissertation for a Ph.D. in aeronautical engineering, when Tom Hendrix gave him a j ob making more money than Jim could ever have earned in the field he was studying. Jim said he didn't know anything about the furniture business and Tom said, "That's perfect, we will figure it out together." Tom said he wanted Jim to help him because he is a "neck up" sort of person, which is Tom's way of saying he is intelligent. Tom sells his talking-his vocabulary, he draws you in, making you temporarily forget the rest of the world does not talk and think the way he does. Even "neck up" people have trouble resisting Tom's brand of salesmanship.

Jim, who for years flew Tom's private jet, now takes care of information for the business, inventory control, payroll, accounting, and logistics. Sherry Lynn does projects, offers design advice to customers and generally helps in the business, but he never wants her to feel like she has a job to report to.

Tom says he watched Teresa Paris, hired as a sales person, and noticed her eye for interior design, so he called her into the office one day and told her he wanted her to help him build the business. "I see good things in your future", he told her. "I want you to be my buyer." Tom liked her flair for knowing how to best display furniture in the showroom, as well as her taste in selecting what to buy.

He needed a warehouse person, so he chose Loretta, because she was someone who would "dog the details". She had been with him for twenty-five years when he ran the original Henco. She came to tend his furniture warehouse despite a cut in pay. Cathy Burnett, another employee is smart, dogmatic, but she needed a softer side. He said to her, "Cathy, I want you to be a master teacher."

Here is Tom on bad attitudes: "We don't want bosses here. We want master teachers. I have no patience for bad attitudes. Bad attitudes gum up the works, they destroy serenity."

Tom on the importance of faith to a business: "You have to build the organization ahead of the volume, hire people before you need them at wages higher than you can afford, based on faith that together you can get it done."

Tom says business is so much fun and then he tells a story to illustrate why he says that. One of his employees has a mouth full of bad teeth, so he is paying for her to get a dental makeover. The best way to do good is to render a good service. He believes rendering a good service is the reason for all business.

At one point Tom said, "Jesus taught faith, hope, stuff that gives you staying power...with that you can do anything. We are created in the image of God, now that's something pretty damn special. When we scale our life down [out of fear] we are selling ourselves short."

He describes himself as a tough guy, reasonably intelligent, a stick to it kind of person. Sherry Lynn and I wanted to build a national business. I believed we could do it. You start by framing it in. I remember pulling off on the side of the road and taking a yellow pad and sketching out cash flows. Sometimes I would pep myself up. I would say, "Not many people can do what you are doing. I had to pep myself up, nobody else would.

He continues, "There are people who pick up the garbage, that's a necessary role for someone to play. But somebody has to be the visionary. I could have taken that $3500 I borrowed to start my first business and handed it out like welfare, but then it would have been gone pretty soon. The best way to practice generosity in your neighborhood is to start a business, render a valuable service to people, give people a job, a purpose. It's a much more generous trip to build a business than to hand out money to people."

HENCO'S FUTURE

When you ask Mr. Hendrix about the future, his eyes sparkle; and he talks about expanding his business by opening more stores. He is thinking about opening a store south of Nashville. He feels he can find an abandon warehouse and replicate what he has done in Selmer. He says, "The recipe will work anywhere. You just have to find the right property." He thinks that a store in that area is capable of doing $40 million a year in sales. He talks about opening other stores as well. He says that the key is volume, and if he can increase his volume he can offer his customers even better prices. While most people his age are playing golf or touring the country in a RV traveling to the next city, Mr. Hendrix is looking for his next great economic trip.

AuthorAffiliation

Wilburn Lane, Lambuth University

lane@lambuth.edu

Mike McCullough, University of Tennessee at Martin

mccullou@utm.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 12

Issue: 1

Pages: 49-53

Number of pages: 5

Publication year: 2005

Publication date: 2005

Year: 2005

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412255

Document URL: http://search.proquest.com/docview/192412255?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2005

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 12 of 100

BONA FIDE OCCUPATIONAL QUALIFICATIONS: WHAT ARE THEY?

Author: Thomson, Neal F

ProQuest document link

Abstract:

In 1964, the Civil Rights Act was passed. Title VII of this act, which was targeted specifically at employers, prohibits discrimination in employment based on race, color, religion, sex or national origin. However, also included in this act is an exemption, allowing that discrimination may be acceptable, if the type of discrimination is an actual requirement to successfully perform the job. The name given to this clause was Bona Fide Occupational Qualifications (BFOQ). BFOQ can be claimed in the case of sex, religion, national origin, but not race. Later, the Age Discrimination in Employment Act (ADEA) was passed, extending the protection against discrimination to include age discrimination, for employees over 40. At this point, the BQOF clause was also extended to the age category. In the following sections, Title VII, ADEA, and the BFOQ clause will be described in detail. Following this, you will be presented with several scenarios, in which a company claims BFOQ. Your task will be to apply the acts, and the BFOQ exemption, and determine which, if any of the claimed BFOQs are legitimate.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns human resource management, particularly the issues of discrimination, and the Bona Fide Occupational Qualification (BFOQ) exception to Title VII of the civil rights act and the Age Discrimination in employment act. This case has a difficulty level of three to four, and is appropriate for an upper division, undergraduate level. This case is designed to be taught in one class hour, and is expected to require two to three hours of outside preparation by students.

CASE SYNOPSIS

This case examines the Bona Fide Occupational Qualification (BFOQ) exception in discrimination cases. Title VII of the Civil Rights Act of 1964 prohibits discrimination based on race, color, religion, sex or national origin. The Age Discrimination in Employment Act expands this protection to cover age discrimination against people over 40. However, there is an exception, the BFOQ. Under certain circumstances, an employer can discriminate, if age, gender or national origin can be shown to be a legitimate requirement, in order to perform the job. In this case, the BFOQ is defined, the criteria for a BFOQ are listed, and the limits to BFOQ are discussed. Several real examples are given of cases in which a company has alleged a BFOQ exists. Students are asked to examine each example, and determine which, if any are legitimate BFOQs. The main focus of this case is to teach students to apply the criteria from Title VII of the civil rights act BFOQ exemption, to real situations.

INTRODUCTION

TITLE VII OF THE CIVIL RIGHTS ACT OF 1964

The section of Title VII which prohibits employment Discrimination says the following, according to the Equal Employment Opportunity Commission Website (www.eeoc.gov).

UNLAWFUL EMPLOYMENT PRACTICES SEC. 2000e-2. [Section 703]

(a) It shall be an unlawful employment practice for an employer - (1) to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin; or (2) to limit, segregate, or classify his employees or applicants for employment in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual's race, color, religion, sex, or national origin.

(b) It shall be an unlawful employment practice for an employment agency to fail or refuse to refer for employment, or otherwise to discriminate against, any individual because of his race, color, religion, sex, or national origin, or to classify or refer for employment any individual on the basis of his race, color, religion, sex, or national origin.

(c) It shall be an unlawful employment practice for a labor organization- (1) to exclude or to expel from its membership, or otherwise to discriminate against, any individual because of his race, color, religion, sex, or national origin; (2) to limit, segregate, or classify its membership or applicants for membership, or to classify or fail or refuse to refer for employment any individual, in any way which would deprive or tend to deprive any individual of employment opportunities, or would limit such employment opportunities or otherwise adversely affect his status as an employee or as an applicant for employment, because of such individual's race, color, religion, sex, or national origin; or (3) to cause or attempt to cause an employer to discriminate against an individual in violation of this section.

(d) It shall be an unlawful employment practice for any employer, labor organization, or joint labor-management committee controlling apprenticeship or other training or retraining, including on-the-job training programs to discriminate against any individual because of his race, color, religion, sex, or national origin in admission to, or employment in, any program established to provide apprenticeship or other training.

(e) Notwithstanding any other provision of this subchapter, (1) it shall not be an unlawful employment practice for an employer to hire and employ employees, for an employment agency to classify, or refer for employment any individual, for a labor organization to classify its membership or to classify or refer for employment any individual, or for an employer, labor organization, or joint labor-management committee controlling apprenticeship or other training or retraining programs to admit or employ any individual in any such program, on the basis of his religion, sex, or national origin in those certain instances where religion, sex, or national origin is a bona fide occupational qualification reasonably necessary to the normal operation of that particular business or enterprise, and (2) it shall not be an unlawful employment practice for a school, college, university, or other educational institution or institution of learning to hire and employ employees of a particular religion if such school, college, university, or other educational institution or institution of learning is, in whole or in substantial part, owned, supported, controlled, or managed by a particular religion or by a particular religious corporation, association, or society, or if the curriculum of such school, college, university, or other educational institution or institution of learning is directed toward the propagation of a particular religion, (www.eeoc.gov/policy/vii.html)

Section (e) of the above act is the BFOQ exemption. Some key items to note in section (e) include 1) there is no reference to a BFOQ for race, and 2) the requirement that the qualification be "reasonably necessary to the normal operation of that particular business or enterprise". What constitutes reasonably necessary? This question poses problems even for legal scholars. However, we must attempt to address this. Several reasons have been accepted as constituting "reasonably necessary. Among them are: authenticity, same sex privacy, and requirements to accomplish the work. Under authenticity, the state of Oregon, Civil Rights Division, gives the example of hiring an actor/actress or model based on sex, due to the characteristics of the role they portray. (www.boli.state.or.us). In other words, its reasonable to expect that King Arthur be played by a male, and Guenevere by a female. Same sex privacy applies almost exclusively to situations in which a person must disrobe, or be viewed in a state of undress. The ability to accomplish the work means that a person of the type excluded, CANNOT reasonably accomplish the work, or the criterion is central to the product or service being sold.

Below you will find several cases, in which an employer has claimed BFOQ. Examine each case, and determine whether the BFOQ is legitimate or not, and why.

CASE 1 - ROLE MODEL

A youth foundation runs a camp for the treatment of delinquent boys. This camp has a position open for a youth counselor. Among the stated duties of the youth counselor position, is the requirement that the individual serve as a "male role model" to the children. Therefore, the foundation has advertised the position as being open only to male applicants. A female, with past experience as a youth counselor, and a degree related to the treatment of childhood mental disorders applies for the job anyway, feeling that she is qualified. The foundation rejects her. She files suit, claiming sex discrimination. The foundation responds with a BFOQ defense. (Wisconsin, 2005)

CASE 2 - FAA REGULATIONS

The FAA (Federal Aviation Administration) had a regulation requiring that airline pilots be under the age of 60. Upon turning 60, all pilots are forced to retire. While this requirement does not extend to all members of the flight crew, one airline had the policy of extending this mandatory retirement to include their flight engineers, as the flight engineer is the backup pilot, in case of emergency. Three pilots working for this airline, upon their 60th birthdays, applied for transfers to flight engineer positions, rather than retiring. This is unusual, because the flight engineer position is essentially a demotion from pilot. However, the collective bargaining agreement, between the airline and the union, allows current employees to bid on any open position, based on seniority (The ADEA, 2005).

The airline rejected their applications. The pilots filed suit, and the airline defended with a BFOQ defense. The airline's arguments included 1) pilots and flight engineers are required to meet the same stringent requirements regarding health. 2) It is cost prohibitive to individually assess all employees at the age of 60, to see if they have age related problems that make them unable to function as flight engineers. 3) the flight engineer may be called upon to pilot the plane, if the pilot and first officer become incapacitated (The ADEA, 2005).

The workers responded by stating 1) the "age related problems," such as heart disease, cited by the airline, happen to young, as well as old employees. 2) it would be extremely rare for a pilot and first officer BOTH to become incapacitated, and even more unusual for the flight engineer to then suddenly develop incapacitating health problems. (The ADEA, 2005)

CASE 3 - SEX SELLS

A popular casual sports bar/restaurant has developed what they feel is a theme. This 'theme" involves scantily clad women, working as servers, hostess, and the other publicly viewed employees. Therefore, they require, as a condition of employment, that the waitstaff be female. They argue that this is a BFOQ, and that customers are buying this theme, rather than just food, and that this theme is an integral part of the business. (Wisconsin, 2005)

It should be noted here, that in the past, courts have determined that in the case of "strip clubs" sex as a BFOQ is legitimate, as the primary business is the stripping, and someone of the opposite sex would not appeal to the same customers. However, while this is true, courts have also ruled that "customer preference" was not sufficient reason to limit the sex of a salesperson, cashier, or other service provider. (Wisconsin, 2005)

Essentially, this issue in this case is: are scantily clad women what the customers are paying for, or are they coming to the restaurant to eat, drink, and watch sports.

CASE 4 - THE NURSE

An OB/GYN unit of a hospital advertised for a position opening for a Registered Nurse. The hospital had a 20 year policy of hiring ONLY female obstetric nurses. A male, who was a registered nurse, with past experience as an obstetrics nurse, applied for the position, and was turned down, as he was not female. The hospital argued that a female was necessary for this positon, due to the intimate nature of obstetrics. They said that having a male OB nurse violated the privacy rights of the patients. There are no OB nurse positions that do not involve patients with their private parts exposed. Furthermore, even in cases where a male doctor is allowed, patients demand a female nurse as a "chaperone". Finally, they showed evidence that at a teaching hospital, 80% of all patients refused to allow male students to be in the room during treatment, while few refused female students. (State EEO newsletter, 2004)

QUESTIONS-ANSWER THESE FOR EACH CASE

1) Is this practice discriminatory?

2) Is the BFOQ defense legitimate?

3) Why, or why not?

References

REFERENCES

The ADEA and Forced Retirement retrieved 2/01/2005 from http://www.135steward.org/472us400.htm

State EEO Newsletter retrieved 2/01/2005 from http://www.wvf.state.wv.us/eeo/April%202004%20Newsletter.htm

Title VI of the Civil Rights Act of 1964 retrieved 2/01/2005 from www.eeoc.gov/policy/vii.html

The Wisconsin Equal Rights Decsion Digest retrieved 2/01/2005 from http://www.dwd.state.wi.us/lirc/el27-.htm

AuthorAffiliation

Neal F. Thomson, Columbus State University

Thomson_Neal@Colstate.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 12

Issue: 1

Pages: 89-92

Number of pages: 4

Publication year: 2005

Publication date: 2005

Year: 2005

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412192

Document URL: http://search.proquest.com/docview/192412192?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2005

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 15 of 100

A Case of an IT-Enabled Organizational Change Intervention: The Missing Pieces

Author: Wang, Bing; Paper, David

ProQuest document link

Abstract:

This case study documents an organizational change intervention concerning the implementation of a novel information technology at a university-owned research foundation (URF). It evidences the disparate expectations and reactions by key actors toward the change event, marking a mismatch between a new paradigm required by the new technology and existing information technology practices. Drawing upon change management and management information systems (MIS) literature, we discuss the perceived change management issues hindering the change process at URE Our discussion is tempered by a theoretical lens that attempts to integrate the literature bases drawn upon in this research. In particular, resistance from in-house IT specialists was observed as the strongest force obstructing the novel IT implementation. This study offers a forum to stimulate both researchers and practitioners to rethink the necessary elements required to enact change, especially with respect to novel IT implementations. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Keywords: change management; process redesign; resistance to change; technology integration; technology management

ORGANIZATIONAL BACKGROUND The information technology (IT) enabled change process reported in this case is being implemented in a university-owned research organization (hereafter, the parent organization will be referred to as the university and the research organization will be referred to as URF). URF was formally incorporated in 1967 as a not-for-profit corporation with its origin as a space science and technology research laboratory that was created in 1959. URF was established primarily to provide an organizational structure for the management and physical support of applied research, the discovery of new ideas, and the advancement of new technologies. Since its establishment 40 years ago, URF has expanded from supporting a single-disciplinary research base to a multidisciplinary research base in space science and technology, small molecular systems, water science and technology, and associated information technologies; from owning one research laboratory to over 15 research facilities and laboratories; from having two university professors who started the first research laboratory to employing more than 400 scientists, engineers and administrative staff. Over the years, URF has evolved into a distinct research institute with international recognition as an associated reputation as a world-class research facility. URF not only provides research administration, management, and stewardship of funds for university-wide research projects, but also undertakes much of its renowned research activities in space, water and bio-molecular science and technologies via its various research units. URF currently has three research units and one technology commercialization office: the Space Unit (SU), the Molecular Unit (MU), the Water Unit (WU), and the Commercialization Office (CO). Each unit is characterized by its own identity in terms of management style, culture, finance, and research capacity. SU, as one of 10 university affiliated research centers (UARCs) in the nation, is the largest unit within URF and generates 94% of total URF research funding. The sources of funding by agency include: Ballistic Missile Defense Organization (BMDO) 39.7%, Air Force 20.6%, Navy 18.6%, NASA 15.5%, Private 2.0%, other Department of Defense (DoD) 1.5%, other Federal 1.4%, National Science Foundation (NSF) 0.4%, and state funding 0.4%. A board of trustees provides oversight and direction for the policies, procedures and development of the organization. There are currently 16 members on the board with backgrounds in academia, industry and government. The president of the university (the parent organization) appoints URF's directors with approval from the existing board. Until about five years ago, URF was managed and administrated under the auspices of a university model in all operational aspects such as finance, human resources, and research/business development. The vice president of research for the university had played a key role in the management and administration of URF. A major portion of URF research funding was contract and grant-based and its financial structure followed A21 - a university accounting scheme.

However, during the past five years, URF has experienced tremendous growth that demanded transformation from a university-oriented organization to a businessoriented corporation. Moreover, the increased scrutiny by federal government audits required URF to move to a more independent business environment. As a result, the accounting scheme has recently moved from A21 to Al 122, a not-for-profit protocol, to reflect the standard adopted by many other major federal and industrial scientific laboratory operations. Also, the role of the vice president for research changed from active to inactive in terms of URF management responsibility. Instead, URF appointed a CEO to lead the organization. An orchestration of changes has thereby been enacted - namely changes in leadership, financial structure, organizational structure, business process management, and IT. Due to the rapid expansion of the organization, the contracts and grants URF procures with federal and private entities demands an even higher level of research, ideas, and competence to compete with other major scientific and private laboratories. In fact, 94% to 96% of the research dollars generated by URF are contract dollars, unlike in the past where grant-based dollars were more significant. The difference between contracts and grants is important. Contract procurement must be competed with private industry and a good or service must be delivered. Grant procurement is only competitive on the front-end. That is, once a grant is procured there are no deliverables, and thus no competition exists on the back end.

SETTING THE STAGE The slowdown of the global economy, shrinkage of federal funding available for basic and applied research programs, and increasingly more stringent regulations in federal defense research contracts during the past several years have greatly impacted the ability of URF to compete. Such environmental change has seriously challenged the viability of the URF research and management practices that had been exercised successfully in the past. Taking on that challenge, URF top management launched a largescale organizational transformation designed to revitalize URF and enable it to continue to grow. It was hoped that URF would be able to reposition itself as a cutting-edge player in the increasingly competitive environment by transforming into a true businessoriented corporation. One overriding strategic goal of the transformation was to ensure better management of intellectual properties (discoveries/technologies) to further secure and expand its business base and continuously increase its capability to compete with other scientific and industrial laboratories. To facilitate this goal, a novel IT (BATON technology) was introduced into the organization with the purpose of streamlining/automating core management processes related to intellectual property and discovery protection. An outside consulting team was secured to lead the IT implementation.

Utilization of BATON literally enforces change in the manner in which managers use IT to create (and utilize) contract management processes, identify/secure new ideas and discoveries, and monitor contract/project progress. Consequently, effective utilization of BATON requires a significant change in current practices of the IT department. That is, the IT department must adapt to administer IT in the way that effectively supports newly created management processes.

Four key groups were involved in the initial planning and implementation of BATON - top management (essentially the CEO), external IT consultants, business managers, and in-house IT specialists. Each group (excluding the CEO) was assigned roles and responsibilities within each phase of the BATON implementation process. As the case unfolds, it will be made clear how each group reacted to the changes accompanying the novel IT implementation.

CASE DESCRIPTION Managing change is frequently cited in the organizational development (OD) literature. Traditionally, three phased elements - envisioning change, implementing change, and managing reactions to change - have been reported in the OD literature as enabling change (Jick, 1993). We use these phased elements as a theoretical lens to frame the IT intervention described in this case. As such, we explore the change management issues occurring in each of the three phases based on the perceptions of change actors. To provide a theoretical foundation that will help readers better understand our case (within an integrated context of OD and MIS), we first introduce the theoretical phases we followed. Vision Issues. The foundation of any successful change process rests on a clear vision of how change can be desirable to the future of the organization and how it can be directed and shaped to reach anticipated outcomes (Tichy & Devanna, 1986). However, as suggested by many researchers, not enough effort has been afforded to properly communicating said vision and educating people to share in this vision given that it is intended to stimulate and guide organizational change (Jick, 1993). Without a systematic structure to communicate and translate vision into reality (Graves & Rosenblum, 1987), visionaries will likely encounter skepticism and other negative reactions to change. Moreover, the seeming inconsistency between vision articulation and action by visionaries in leading the change effort merely increases confusion and cynicism among organization members (Richards & Engle, 1986). Implementing Change. Issues involved in implementing change often encompass three elements - supporting structure, change consistency, and the power to bridge the gap between the change strategist's vision and organization reality (Oden, 1999). To enable change, there must be a supporting structure in place that facilitates the creation of an environment in support of useful and innovative action leading toward realizing the vision (Richards & Engle, 1986). At the same time, consistency in change techniques employed during the process, as perception becomes reality, is crucial to enhance the enthusiasm and morale of the change actors. That is, if what is perceived as strength from one constituency is greeted with more ambiguity from another, the overall perceptions of the change intervention will be negatively influenced (Jick, 1993). Finally, change implementers often bemoan their frustration due to insufficient power to overcome the resistance they encounter to transform the organization into a new paradigm as called for by the change vision (Beckhard & Harries, 1987). Without considering such issues during the implementation process, there exists the potential to derail the course of change (as demonstrated by the consultants' experience described later). Managing Reactions. Managing reactions to change is probably the most challenging and unpredictable element in a change process. Receptivity, resistance, commitment, cynicism, stress, and related personal reactions must be considered within the framework of planning and implementing an organizational change, as researchers come to realize that organizations, as open systems, depend on human direction to succeed (Armenakis & Bedeian, 1999). Cases about unsuccessful change programs reported in many studies have exemplified that change without considering the psychological effect on others in the organization, particularly those who have not been part of the decision to make the change, is a major concern (Dick, 1993). OD researchers further point out that if the reactions to change are not anticipated and managed, the change process will be painful and perhaps unsuccessful (Beer et al., 1990). In the MIS literature, managing reactions to change is also cited as a challenging and unpredictable element. Traditionally, IT managers often take a technological imperative perspective (Markus & Benjamin, 1996). As such, "technology is seen as a primary and relatively autonomous driver of organizational change, so that the adoption of new technology creates predictable changes in organizations' structure, work routines, information flows, and performance" (Orlikowski, 1996, p. 64). Change strategists trapped within this perspective largely neglect the social issues involved in technologybased organizational change. The techno-centric lens offered by this perspective often limits their focus on technological issues and away from human issues such as affective impact of technology on change recipients, behavioral reactions to change, and attitudinal shifts that may occur during a change process (Berney, 2003). However, as the studies on IT-enabled change continue to reveal the importance of the human element in this process, MIS researchers have come to realize that the technological imperative model is not sufficient to effectuate change (Orlikowski, 1996). The most current paradigm of IT-based organizational change intervention, in which organizations employ technology as a mechanism to enact and institutionalize intended change, requires change strategists to heed human issues and respond effectively to the various reactions triggered by the intervention (Dick, 1990). Furthermore, IT specialists are frequently referred to as change agents because they identify psychologically with the technology they create or support (Markus & Benjamin, 1996). Ironically, IT specialists that are stereotyped as being in love with technical change and seem to benefit the most from an IT-enabled change resist such desirable change implementation (Orlikowski, 1994). This paradox has inspired a new stream of research that attempts to monitor/analyze behavioral reactions of IT specialists and explores forces/barriers precipitating resistance to change. Among this research are Markus and Benjamin's (1996) study classifying organizational beliefs and behaviors of stereotyped groups of IT specialists. Their interpretation suggests that many IT specialists fear that new technologies in the hands of users may threaten their professional credibility and self-esteem. As they explain, "new technology makes these IT specialists vulnerable: unless they know everything about it, they will look technically incompetent when users inevitably experience problems. Further, even when a new technology's problems are known and tractable, the shakedown period increases their workload and working hours" (Markus & Benjamin, 1996, p. 391).

Framed within the foregoing theories, the reminder of this case description articulates the research methodology and our story. The story includes the CEO's vision that initiated the IT-enabled change intervention, the external IT consultants' implementation issues, and the resistance from in-house IT specialists toward change. We organize our story chronologically to explain what happened during the intervention process and discuss the change management issues critical to the IT-enabled change intervention.

Research Methodology This case study explores an organizational phenomenon - namely a change intervention enabled by rr and the reactions by various constituencies towards the changes during the intervention process. As such, we adopt an in-depth qualitative case study approach to explore the context within which the phenomenon occurred. The procedures for the data collection and analysis process are interwoven within an iterative cycle consisting of interview-analyze-refine-interview. Data Collection. The data were collected mainly through unstructured and semistructured interviews. Interview participants spanned across different levels and different functionalities of the organization, including the CEO, deputy directors, external IT consultants, business managers, in-house IT specialists, and research engineers. A contact summary sheet was designed and used for every interview session to keep track of respondent information. Each interview lasted approximately 60 to 90 minutes and was recorded and carefully transcribed. Necessary clarifications with interview participants were made to ensure the reliability and validity of the data collected. Also, we supplemented interview data with on-site observations as well as various written documents (i.e., annual reports, mission statements, and meeting notes). Our data collection goal was to capture actors' perceptions of the intervention and the associated consequences of their actions as the change unfolds. This process of data collection proved to be efficient as it emphasized problems and issues that emerged during different phases of the change process. Data Analysis. To ensure rigorous data analysis, the case study approach as advocated by Creswell (1998) and Yin (1994) was utilized. Data analysis was integrated with data collection throughout the entire research process. Analysis centered on classifying data into coherent constructs (by identifying both surface and latent change issues), relating findings to existing OD and MIS literature, and generating/refining interview questions based upon the data obtained through prior interviews. Such an iterative cycle of data collection and analysis allowed us to organize new insights, accommodate emergent constructs, refine interview questions, and adjust the research focus accordingly. We began data collection and analysis for this case study in the summer of 2003. The process during which we iteratively interviewed, transcribed, resolved data discrepancies, and synthesized such information had a duration of over seven months. Such a longitudinal approach is critical to investigating change intervention as it helps researchers capture multiple perceptions/perspectives of change as it unfolds and enables them to develop a cogent lens for better understanding organizations and people (Garvin, 1998).

CEO's Vision Five years ago, the former executive director of URF retired and a new CEO (the current CEO) was appointed to lead the organization into the future. His mission was to develop and implement a strategy of growth to better compete in a changing business environment. The current CEO can be characterized as an entrepreneurial-type of leader because his history is one of founding and launching new organizations. His leadership by vision style is new to many people at URF An excerpt from the CEO's vision states: "URF has reached a fundamental turning point in the way it does business and performs research, paving the way for future cooperative success." It later continues with, "URF will further its efforts to a successful future via the management and commercialization of intellectual properties." To facilitate this fundamentally new way (process) of doing business, the CEO announced at the project introduction meeting with his business managers that "a new information technology has been evaluated and chosen to assist managing the transfer of intellectual properties into the commercial arena. This technology, known as BATON technology, will be implemented to the benefit of URF, the University, and the community."

Consistent with his vision and our interviews, the CEO believes that the successful implementation of the BATON technology will not only streamline, automate, and document the intellectual properties management process, but more importantly, it will change the culture of people by promoting a new way to manage the process of discovery. In an interview, the CEO explained: In the grant area, it's very much the case that your white paper constitutes your discovery. While you're delivering goods ([which is the case within URF]), not a white paper you're not revealing your discoveries. [As such] we have developed a very poor habit across the University and in URF, simply to ignore discovery. Now for every contract we have, we are to identify the intellectual property [the discoveries] in order to report those discoveries and inform the federal government what they have earned through their investment, not only in the goods or services received, but also in the discoveries identified. By doing so, it is to change the culture of our people, to realize that they are having discoveries that have value internally, and identifying our critical areas of contribution is important. The discovery is our future. I contend that in the future, if we don't do an effective job of that, we will lose the ability to compete with the big guys who can just redo our ideas and cut us out of opportunity. However, such vision had not been widely advertised and championed to other members of the organization because the CEO believes that change takes time and therefore should be communicated in a subtle manner. As a result, the vision was not universally shared among organization members, as evidenced in interviews with business managers at URF. "I know [that] many other managers do not see that vision," said a deputy director of a unit at URF, "I know where he [the CEO] wants us to go, but without a roadmap of how to get there is a question [shared] by many people."

It is also important to note that the vision's promise to value people's ideas and discoveries and bring new opportunities to the organization did not seem to stimulate them (with the exception of the external consultants). Rather, it was seen as another wave of new leadership manifesting as, "I guess this is a different management style," "we just do what we are supposed to do," "as long as we get things done, it is all right, I think." Such are the perceptions of senior engineers that we interviewed. Even the consultants who worked closely with the CEO on the intervention project and understood the vision well enough to implement it had frustration. "I thought this was a petproject of his, but it didn't really turn out to be the case because I didn't see [the CEO] put it as his top priority." Without consistent support from top management, the consultants felt powerless and concerned: "in spite of the fact that we are leading this project, there is no structure, and we have no power to push what we know needs to change." Intervention Begins with BATON Technology The existing IT system, as explained by the CEO, did not include standard procedures to assist principle investigators (PIs) in documenting and reporting research activities, new ideas, and by-product discoveries. In fact, each PI used their own spreadsheet and other non-centrally-controlled software to manage research projects and/or contracts. Even data pertaining to a single project/contract were scattered across the enterprise without a central repository to consolidate financial, human resource, and project progress for said project/contract. The management and reporting of such scattered information for all projects/contracts at the organizational level was recalcitrant. The same was true with intellectual protection of discoveries.

Moreover, the legacy system was not built to accommodate ever-changing regulations imposed by government agencies for regulating research and development of sensitive defense technologies. Without a mandated contract management process and a centralized system that supports said process, absolute compliance with regulations and procedures for each contract was difficult and challenging to say the least, especially as URF strives to grow and compete with other major industry laboratories. Building a centralized process and the associated IT system that optimally rectifies such problems, however, is not an easy endeavor. Given the weaknesses of the traditional IT paradigm in dealing with rapid system development and expansion (i.e., tremendous time and resources required), BATON was considered because it was designed to support dynamic modeling and deployment of management processes in accordance with IT. One of its important merits is that it allows non-technical people such as business managers to map and manage business process logic, and build their own management processes for each contract or research project directly into the IT architecture. Such mapped processes are automatically translated into the system with database interactions and programming tasks that are completed by system designers (see appendix A for an example). BATON-facilitated designs thereby drastically shorten system development cycle times and reduce interference from IT specialists in the process mapping arena. That is, it limits the time (and workload) required of managers and system designers as they attempt to understand each other's domain knowledge. It allows them to more easily transform such knowledge into effective IT support for each individual contract. With BATON, management processes pertaining to project/contract operations can be centrally streamlined and thereby effectively reflect specific contract regulations because the responsible manager, who understands said regulations and processes, actually maps such processes into the system through a graphical user interface (GUI). Once a process is established, all those involved in a particular contract or research project have no choice but to follow the basic structure of the mapped process. For example, a business manager can create a set of memos of a process as he/she sees it, and these memos, in turn, are negotiated until a consensus is reached by all responsible parties. The memos are then recorded into BATON with help from IT specialists. Each memo contains process steps that describe workflow. Each step is associated with a process-key and each process-key has a unique operational definition (see Appendix B for an example). All process keys are stored in BATON as libraries of process logic trees that allow valid users to navigate said trees. Process keys are really just sophisticated indexes that point to different locations in an overall process that is stored in the BATON system. The logic of a process is defined with a hierarchical tree structure. This tree (as conceptually realized by a manager) is finally translated by system designers into BATON. An integrated system is thus created because the tree represents a process that, once recorded into the system, must be followed by all users of the system.

In mid 2002, the CEO decided to hire two IT consultants to facilitate the realization of his vision. He charged the consultants with leading implementation of the BATON technology at URR BATON was chosen because of its innovative nature and process capability. Such features convinced the CEO that BATON was a good choice because it offered potential to alleviate many of the difficulties inherent in existing process management at URF, and in particular, the intellectual protection process.

Charged with the responsibility of BATON, the consultants began the implementation process as well as other required changes. Their initial plan was to present the project to business managers to get them excited about how BATON can help their business. The hope was that the managers would become enthused so that they would rally further support within the organization. The managers quickly came on board because BATON obviously offered them a way to better manage their processes and obtain data when and where needed. The next target group was the in-house IT specialist, because the consultants needed access to systems and data controlled by these people. In addition, the IT specialists would have to be the long-term custodians of BATON after the consultants leave. With assistance from the in-house IT specialists, the consultants expected to complete the implementation within months.

Consultants' Expectations During August and September of 2002, the consultants carried out their plan with business managers as expected. They frequently met with business managers to familiarize them with the technology and convince them of the advantages offered by BATON, such as the ability to quickly and easily build their own processes. For this constituency, the consultants knew that managers do not want to be presented technical complexities, only how an IT can help them. They therefore attempted to sell managers on the ease of use and usefulness of BATON. To get managers to buy-into the BATON system and assure successful implementation of said system, the consultants carefully prepared their presentation and material in such a way as to demonstrate the business impact and how BATON works. Following are some of the most salient presentation points: "BATON is a tree-based system development tool, and it is the most feasibly efficient solution for URF in its current situation. " "Using trees, it enables managers and research scientists to conceptually design logical structures that automatically generate the necessary Java code, coordinate with relational databases, and work with directory services with the goal of building a complete application. " "No IT background is needed for managers and research scientists. With only limited assistance from IT specialists, managers and research scientists will be able to layout basic structure of an application within afew days, and by a week, they can incorporate a complete set of complex logical elements. " "Such elements will then constitute the architecture of a new application in BATON, within weeks; a resulting application can be built and tested." During the presentation, there was some skepticism, but once BATON was demonstrated the business managers were generally encouraged by the notion of what the technology can do and how it can do it. The consultants also had a few managers actually design a simple process structure after the presentation. This exercise helped to greatly reduce any remaining skepticism. Within a few days of preliminary training, managers were prepared to readily accept the technology and facilitate their part in implementing it.

The consultants felt very positive at this point in time and believed they had an important first victory toward disseminating a positive attitude toward the intervention. As a result, the consultants anticipated a smooth transition to the next step of the process - gaining cooperation with the in-house IT specialists to set up a pilot infrastructure for the new system. This anticipation seemed reasonable because, after all, the inhouse IT specialist would be managing the new technology and should readily appreciate its advantages.

Current Infrastructure & Practices in the IT Department By October, after examining the existing IT infrastructure, the consultants noted that the legacy system built and maintained by the IT department for the past 15 years had many inherent problems such as lack of integration, redundant processes, redundant code, redundant data, and no apparent coordination. In retrospect, one of the consultants noted: Data is not stored in one place, that is, there is no centralized repository. This means that it is difficult to retrieve information on a project or contract on an ad hoc basis (via SQL). Data on a project or contract may be stored in several locations owned by more than one IT person (the DBA may have user information, the network person the same and so on). Data is not stored logically and/or consistently. There was no database structure or strategy (eg., overall ERD) that could be found. We were never shown an ERD for human resources, IT or any other part of the business. As for system security which is a big thing for IT, the IT department does a lot of firefighting, that is, they fix a problem without thought of an overall schema to help identify the root cause rather than a symptom. For example, if security needs to be heightened, IT builds a new firewall (or firewalls) to deny malicious access. The problem again is that there is no overall security strategy, just band-aids. At least we never noticed anything that explicitly verbalized or documented. Servers are everywhere with no seeming strategy for coordinating IT resources. "There is a method to the madness, I suppose," said one of the consultants in an interview with us, "but it was not possible for us to determine their IT security, network, database or other management strategy because they are either not documented as such or they do not exist at all."

Moreover, the culture of the IT department was such that "you do what you have to do to make it work." There was no standard in terms of system development and data access. Each IT specialist developed and controlled a piece of a stand-alone application as his or her own property. Decisions about which additional applications needed to be built and how they should be built were usually made separately by individual owners. One of the consultants told us that "[the CEO's] goal with BATON is to reduce these ad hoc applications. Some of these applications may do the same thing, but are never shared because nothing is integrated." Also, the ability of business managers to obtain access to project data depended mostly on their relationship with individual owners. That is, personal connections with system administrators and developers determined who got what data, rather than access to data being determined by a general data access policy. Since the organizational culture from the past few decades was family-oriented, administration of the IT department from top management was relaxed. As a result, IT specialists had great power over how they operated their supporting functionalities. Furthermore, IT specialists, guarded by techno-babble (technical jargon), were able to easily shield themselves from any attempts to question their practices or motives in order to defend their turf. According to one consultant, "since most managers do not know IT in any detail, it is not difficult to SCARE people away from potentially poor practices!" The consultants' perception was that technology intimidation was used as a defense mechanism because business managers are not normally IT literate and are thereby easily intimidated.

One of the consultants reflected that "when the company was small, this [lack of macro management] was probably not a problem, but the tremendous growth of URF in the past five years has made it almost impossible to operate IT support in this way."

In spite of the discovered poor IT practices, however, the consultants were still confident that implementation was possible: "By implementing this new IT-project, we hope to change the existing IT infrastructure and make it into an integrated one. Also we anticipate that there will be a good chance for us to bring in a new paradigm of integrated and coordinated business practices."

Consultants' Frustration With some effort, in November, the consultants moved the BATON project into the IT department and got it started. They talked with each IT specialist in the department in an effort to understand their corresponding responsibilities and the overall structure of the existing system architecture. At first the project seemed to be going well, but as events unfolded the consultants began to feel frustrated. It seemed to the consultants that the in-house IT people simply did not care about the project. It also seemed that the IT people were not willing to carry out their given responsibilities to make the project a success. In fact, the assistance that the consultants expected from the IT department turned out to be resistance: IT controlled all the databases and systems. As a result, we had to go through the DBA to get access to the database and subsequent access to the data inside the database. However, access was not easily forthcoming. It literally took a month for us just to get an account on the real system. Actually, we were never really sure that the account that we were given was really on the real system. We suspected that it was a dummy account with non-production data. Of course, this set us back months because we had to figure out what was going on. It seemed that at almost every step the consultants took to move the project forward, the IT department induced obstructions of some kind. "We had the same problem with network security. To connect to a database server, we asked the network administrator to open a port for us. Again it took weeks for us to really get one." When the consultants needed to prototype the new system somewhere, they again became frustrated: "we needed a machine to host our system, but we were turned away because our project was not included in their routine operation." In spite of enormous efforts expended by the consultants, the project was not making progress with IT.

Unable to push IT forward, the consultants turned to the CEO for support and hoped that he would help the effort. According to one of the consultants, however, the CEO was ambiguous in answering their request. "I think, although we were delegated by the CEO to lead the project, we didn't really have the power to push IT in any real direction. Hence we could not make change which was crucial to implement the project." One of the consultants also noted: "The CEO shared the vision but didn't actively help us." Although business managers had sponsored the project, they did not feel that it was their responsibility to push IT to change. Without a supporting structure to facilitate the change, the consultants felt alone and powerless to overcome resistance from IT. "We really wished that people from all levels had joined us and to create an environment that would pressure IT [for change]. To date, this hasn't happened."

By early 2003, what really concerned the consultants was that they were losing sponsorship from business managers. It was obvious that the new system could not be built and tested for production without costing another year in implementation time. The consultants revealed to us that what they promised in terms of project timelines was not being met. Having perceived the problems in implementation in IT, business managers began pulling back, doubting that the technology would really work.

As obstacles to the IT implementation continued to mount, the consultants started to realize that the project was facing serious challenges and that they were trapped between the vision and the reality. Powerless and helpless, the consultants noticed that their enthusiasm was fading. IT Reactions to Change Finally, in March of 2003, one of the consultants resigned and the database administrator (DBA) from the IT department was appointed to lead the BATON project. By the time we finished our first round of interviews at URF, one and half years had passed since the project began and the system still had not been moved into production. Business managers had gone back to using their original IS applications to manage their processes the way they had prior to BATON.

What had really gone wrong? Wondering about this question, we interviewed (for the second time) the consultants. "Basically, IT had strongly resisted the implementation because they feared that they would lose power over controlling the data and systems." "This is the power that IT doesn't want to lose," according to one of the consultants. As further pondered by the consultants: IT traditionally controls everything that is technology related. With that power, IT is able to operate as they see fit. Since most of the IT specialists have worked at URF for many years (and were responsible for creating the culture over time), they are content with the loose culture that exists at both IT and URF At the same time, non-IT people have become accustomed to the IT practices. That is, no one has ever challenged how IT should provide expertise to support the organization. The consultants also pointed out that "... being unfamiliar with BATON may cause rr to resist the implementation of this technology." One of the consultants confided that the level of resistance from IT was somewhat of a surprise. "I thought that Fr people would love this technology since it is novel and eventually it should free them from tedious application development. But this turned out to be just a misconception on our part." From the consultants' story, it may seem that IT is resisting good change with no regard for progress or the business. However, there is another side to the story. The major BATON programmer (who has been on the project from the beginning) did not really resist implementation and actually has become a champion of the project. We now relate some of his perceptions: I don't really think people [within the IT department] really envisioned a purpose as much as [the consultants] did. I think they [other IT specialists] were there just because they had to be there. As far as purpose goes, I don't even know what it did at the beginning [how BATON worked when he first began the project]. Nobody really knew what the technology was for [at the beginning]. I think they [other IT specialists] were just busy with other projects. I guess they just figured it wasn't their problem either. I think it's hard for them [other IT specialists] to take [consultants] seriously, because [one of the consultants] often said the tool [will] basically replace all [other] IT tools. And their experience was that they had never seen anything [that] would do this in the first place. So it's hard to take [the consultant] seriusly. I think they [other IT specialist] just figure more like it's impossible.

Also, the programmer revealed that the CEO was just so busy that he could not become actively involved in the implementation. Although the DBA was assigned to lead the project, she was also busy with her routine work, and did not really care about the project anyway. The programmer concluded, "... basically there is no lead on this project now."

Admittedly, the consultants, reflecting upon their experience with the IT department, commented that they had not been consistent in educating across all groups concerning the new technology and the potential benefits to the organization in the long term. Neither had they made as much effort as they should have to rally sponsorship from IT people and prepare them for the intervention. "I guess we did not spend as much time and energy with the IT department as we did preparing business managers for the new technology. We could have spent more time with IT prior to pushing for implementation." The consultant went on to say that "... without laying the groundwork for a change at the IT level, we underestimated the difficulties in implementing the project, [and] were unable to make the intended change to a new paradigm within IT." The reason given by the consultants was that the tool is really for business managers, not IT. However, "IT is central to the plan. We should have anticipated this. We didn't mean to underestimate IT. We just thought that they would do as directed by the CEO."

CURRENT CHALLENGES/PROBLEMS FACING THE ORGANIZATION

The major challenge facing successful implementation of BATON is the mismatch between the legacy IT culture within URF and the paradigm shift inherent in the novel technology. Adding to this challenge is the imperative of effectively managing the change process, particularly resistance to change. Unfortunately, URF management never recognized the urgency to systematically re-examine the change intervention. The next subsection provides additional analysis of the case to help readers understand the critical problems facing the organization so as to develop a more informed plan of rectification.

Mismatch

Historically, the culture at URF was rooted in that of a small, family-owned business. With fewer contracts and grant projects, the level of managing IT support in business process management was relatively low. Such low levels of control on the IT department and a lack of an overall IT strategy from top management made the IT department a self-indulgent (and relatively independent) entity that possessed undue power in controlling processes. This translated into an inability to share data across independent systems, and created practices based upon personal connections rather than standard IT procedures and policies. As the organization expanded in size and number of contracts over the past decade, the existing IT culture did not fit. Instead, the expansion of the organization as well as the changing business environment demanded increased strategic planning of overall process management, efficient utilization of IT resources, and standardized IT operations. That is, top management believed that a high level of strategic control on IT would be necessary to match the continued expansion of URF.

To illustrate, the new technology (BATON) allows business managers to implement their own processes without direct interference from IT. Implementation of BATON induces a radical departure from the existing culture within IT. That is, IT was used to dictate how information is to be supplied to processes rather than managers dictating how and when they need information to support their businesses. With BATON, IT actually has to do less work because they only have to translate the management-established process into the system infrastructure. However, this also implies that IT will no longer be able to control the processes to the extent that they had in the past. Furthermore, a process management system built with BATON technology is, by default, centralized and shared so that it can be used across all levels of the organization to meet disparate needs. The artifactual boundaries set by individual IT owners are thereby broken. "Do me a favor" requests are replaced by standard IT procedures and policies if BATON is successful. This new paradigm contrasts significantly with the existing non-standardized culture and practices within IT and thereby demands drastic changes in policies, procedures, and attitudes.

The mismatch (between nonstandard IT practices and BATON requirements), however, had not been fully recognized by top management during planning of the change intervention. Moreover, top management (and the consultants) underestimated the challenges (change management issues) of implementing the new technology in a provincial IT culture. Hence, top management faces a dilemma. They must reconcile the mismatch to save the project from failure by creating a better estimate of crucial change management issues as they relate to the IT culture. Therefore, the reader should begin thinking about ways that URF can reconcile this mismatch. In addition, the reconciliation should take into account the following change management issues that are still hindering progress.

Communicating/sharing the vision of change. As the case revealed, there was insufficient energy from top management to communicate and promote the vision to lower levels of the organization (i.e., programmers and other IT specialists). Further, the CEO's vision was well established, but it did not include specific objectives and plans to guide realization of the vision. Only informed by an abstract vision, organization members had limited understanding of how the change initiative would really affect them. This was clearly demonstrated by the fact that IT specialists were unaware of the purpose of BATON when it was first implemented in their department. As a result, they did not buy into the project (from the beginning), and as change unfolded, their resistance to the change escalated. The absence of a concrete and consistent articulation of the change vision, that should be communicated and shared by organizational members, created an early obstacle to a successful change intervention.

Managing the change process. In spite of the fact that the external consultants were hired to lead the implementation of BATON, they were seen by organization members as outsiders with no influence or power. Further, responsibilities for enacting change were not clearly assigned to those involved in the change (i.e., business managers, PIs, in-house IT specialists). Without such clear responsibilities, the normal management structure was not sufficient to support the change effort given that managers are already busy. As indicated from analysis of the case, consultants lost political sponsorship from other actors (i.e., managers and PIs) to a great extent in that they were unable to overcome the resistance they encountered when attempting to bring IT into the change effort. This insufficient management of the change process has contributed greatly to the problems encountered with BATON implementation within the IT department. Indeed, researchers have purported that "it is not the results management is managing, but the processes that achieve results" (Jick, 1993, p. 171).

Resistance to change. It seems apparent that the CEO took a technological imperative perspective in attempting to realize his vision with respect to intellectual property protection and process management. That is, he and other top management implicitly assumed that implementing BATON would automatically enable expected changes in work routines, information flows, and performance. While such assumptions appear to be reasonable for business managers because the benefits are apparent, they fail when dealing with IT department resistance because it is more difficult for IT people to understand how such change benefits them. The IT department was used to controlling business processes, data, systems, and was seldom challenged by management to change such practices. As a result, it was difficult to convince them that BATON offered any real benefits because management neglected the existing IT culture developed over the years. As the change process unfolded, IT was pressed to rethink almost every aspect of their culture, and a sense of being questioned about their current practices emerged among IT specialists. As such, IT was immediately defensive about BATON and resisted because they wanted to maintain their comfortable way of life. In contrast, business managers were not as deeply affected (in a perceived negative sense) as their IT counterparts. Thus business managers were less resistant to changes brought about by BATON. The challenge facing top management concerns what can be done to be more proactive in diffusing IT resistance.'

Footnote

ENDNOTES

Footnote

1 Names of the organization, its parent organization, units, and members have all been disguised.

References

REFERENCES

References

Armenakis, A.A., & Bedeian, A.G. (1999). Organizational change: A review of theory and research in the 1990s. Journal of Management, 25(3), 293-315.

Beckhard, R., & Harries, H.R. (1987). Organizational transactions (2nd ed.). MA: Addison-Wesley.

Beer, M., Eisenstat, R.A., & Spector, B. (1990). Why change programs don't produce change. Harvard Business Review, 68(6).

References

Berney, M. (2003). Transition Guide: How to Manage the Human Side of Major Change. Washington, DC: Federal Judicial Center.

Creswell, J.W. (1998). Qualitative Inquiry and Research Design: Choosing Among Five Traditions. London: Sage Publications.

Garvin, D.A. (1998). The process of organization and management. Sloan Management Review, 39(4), 33-50.

Graves, P., & Rosenblum, J. (1987, December). Rolling out the vision. OD Practitioner. Jick, T.D. (1990). The recipients of change. Harvard Business School Case N9-491039.

References

Jick, T.D. (1993). Managing Change: Case and Concept. Columbus, OH: The McGraw-Hill Companies.

Markus, M.L., & Benjamin, R.I. (1996). Change agentry - The next IS frontier. MIS Quarterly, 20(4).

Oden, H.W. (1999). Transforming the Organization: A Social-Technical Approach. Westport, CT: Greenwood Publishing Group.

Orlikowski, W.J. (1994). The contradictory structure of systems development methodologies: Deconstructing the IS-user relationship in information engineering. Information Systems Research, 5(4).

References

Orlikowski, W.J. (1996). Improvising organizational transformation over time: A situated change perspective. Information Systems Research, 7(1).

Richards, D., & Engle, S. (1986). After the vision: Suggestions to corporate visionaries and vision champions. Transforming leadership: From vision to results. Alexandria, VA: Miles River Press.

Tichy, N.M., & Devanna, M.A. (1986). The Transformational Leader West Sussex, UK: John Wiley & Sons.

Yin, R.K. (1994). Case Study Research: Design and Methods. Thousand Oaks, CA: Sage Publications.

AuthorAffiliation

Bing Wang, Utah State University, USA David Paper, Utah State University, USA

AuthorAffiliation

Bing Wang is a doctoral candidate in the Management Information Systems (MIS) Department at Utah State University (USA). She worked as a senior executive in a multinational company in Singapore prior to her PhD study, and has offered IT consulting services to the Utah Department of Transportation. She now serves as the assistant program chair as well as a track chair for the 2004 Global Information Technology Management Conference. Her research interests include technology-based organization intervention and change management. She is currently working on a major research project at a university-owned research institute.

AuthorAffiliation

David Paper is an associate professor at Utah State University in the Management Information Systems (MIS) Department. He has several refereed publications appearing in journals such as Information & Management, Journal of Information Technology Cases and Applications,

AuthorAffiliation

Information Resource Management Journal, Communications of the AIS, Long Range Planning, Creativity and Innovation, Accounting Management and Information Technologies, Journal of Managerial Issues, Business Process Management Journal, Journal of Computer Information Systems, and Information Strategy: The Executive's Journal. He has worked for Texas Instruments, DLS, Inc., and the Phoenix Small Business Administration. He has performed IS consulting work for the Utah Department of Transportation (Salt Lake City, UT) and the Space Dynamics Laboratory (Logan, UT). His teaching and research interests include change management, process reengineering, database management, e-commerce, and enterprise integration.

Subject: Case studies; Studies; Research centers; Information technology; Changes

Classification: 9110: Company specific; 9130: Experimental/theoretical; 5220: Information technology management; 5400: Research & development

Publication title: Journal of Cases on Information Technology

Volume: 7

Issue: 1

Pages: 34-52

Number of pages: 19

Publication year: 2005

Publication date: Jan-Mar 2005

Year: 2005

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 15487717

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: references charts

ProQuest document ID: 198652432

Document URL: http://search.proquest.com/docview/198652432?accountid=38610

Copyright: Copyright Idea Group Inc. Jan-Mar 2005

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 16 of 100

Adoption & Implementation of IT in Developing Nations: Experiences from Two Public Sector Enterprises in India

Author: Tarafdar, Monideepa; Vaidya, Sanjiv D

ProQuest document link

Abstract:

This case describes challenges in the adoption and implementation of IT in two public sector enterprises in the postal and distribution businesses respectively, in India. In spite of similarities in the scale of operations and the general cultural contexts, the IT adoption processes and outcomes of the two organizations were significantly different. While one failed to implement IT in its crucial processes, the other responded effectively to changes in external conditions by developing and using IT applications for critical functions. The case illustrates how differences in organizational factors such as top management commitment, unions, middle management participation, capabilities of IS professionals and specific aspects of organization culture resulted in such differences. The case is interesting and significant because it is representative of experiences of many government-aided organizations in India, which have undertaken IT modernization as a response to external changes and government mandates. The findings can also be generalized across similar organizations in other developing countries. [PUBLICATION ABSTRACT]

Full text:

Headnote

EXECUTIVE SUMMARY

Headnote

Keywords: end users; information technology adoption; IS evolution; IS/IT planning; MIS implementation; senior management support

ORGANIZATIONAL BACKGROUND

Introduction

The adoption of IT in large public sector organizations poses some interesting challenges and issues. These are related to specific characteristics of these organizations with regard to their entrenched processes, culture, the role of bureaucracy, performance measurement criteria and decision-making processes (see for example, Caudle et al., 1991). This case describes challenges in the adoption and implementation of IT in two public sector enterprises in India. The enterprises were in the postal and distribution businesses respectively.

Public sector enterprises (PSEs), in the context of the Indian economy, are companies that are largely administered and supported by the government. They exist in different areas such as transportation, goods distribution, postal services, telecommunications, and other manufacturing and service sectors of the economy. There are different types of PSEs (Mathur et al., 1979). Some of them are statutory corporations established through legislative resolutions of the Parliament. The Parliament is the executive branch of the Government of India, similar to the House and the Senate in the United States. Many other PSEs are departmental agencies, functioning directly under a particular department of the government. Others are established as companies with limited liability under the Companies Act of India. A few PSEs, like those in the Railways sector, function exclusively under one ministry of the government.

The government plays an important role at the strategic level, in activities such as policy making and financial outlay. At the operational level, PSEs run directly by government departments are staffed through a cadre of bureaucrats and administrators. In PSEs that are established through legislative acts, professional managers and technical specialists manage the operations. These bureaucrats, administrators, professional managers and technical specialists are responsible for achieving annual objectives in terms of activities accomplished and budgetary goals. Policy implementation with respect to modernization and IT adoption is the responsibility of organizational employees, who have autonomy over operational details of the implementation process, within a broad framework specified by the government.

National Couriers Limited (NCL) was in the business of providing postal, courier and information transfer services to different parts of India. It functioned directly under a government department. The company also provided limited banking services such as money transfer, insurance and certificate of deposit services. It had about 90,000 employees working in offices in various states in the country. Eighty-five percent of the personnel of the company were unionized and were either unskilled or clerical level workers. The remaining were professionally trained administrators.

National Traders Limited (NTL) was a distributor of agricultural products, particularly food grains, to different parts of the country. It was created by a Parliament resolution. It provided services such as procurement of these products from producers, their storage and management in warehouses, and distribution to non-producing consumers through retail outlets. During the 1970s and 1980s, the organization had played a key role in encouraging farmers to increase their production, by providing them with an assured market and stable purchase prices. Subsequently, the major function of the company had been to collect part of the surplus agricultural produce, and suitably store and distribute it, so that it could be used during lean production seasons and in places where emergencies and natural calamities happened. The organization procured, distributed and transported about 22 million metric tons of produce, annually. Most of the purchasing centers were located in the northern part of the country. Consumers were located all across India and also in the islands off the southern part of the country. NTL had about 63,000 employees, 95% of whom were unionized.

Services & Processes: Brief Description

Both NCL and NTL were service organizations. The major processes of NCL were collection, sorting and delivery of articles. Articles were collected from more than half a million collection centers, sorted in 550 sorting offices and delivered through more than 100,000 delivery offices. Other processes included activities related to banking, money transfer and information transfer functions.

Some financial details about the operations of the company are provided in Table 1. All these functions involved managing and processing significant amounts of information. In this context, the head of the operations of the Eastern Region observed:

"The sheer volume of information and articles that is required to be handled is tremendous. "

The major activities of NTL related to the distribution of agricultural produce. Relevant figures in this context are provided in Tables 2 and 3.

There were four critical activities for NTL, as described next.

1. Purchase of agricultural produce from producers: This was done through a network of purchase centers all over the country.

2. Storage of the purchased produce in appropriate places and under appropriate environmental conditions: NTL had a network of storage depots for this purpose.

3.Interfacing and maintaining liaison with administrative authorities in different states: This was required in order to plan for state-wise requirements of produce.

4. Distribution planning and transportation of produce: This function involved the transfer of produce from purchase centers to storage warehouses and then to the numerous distribution centers. It required access to good transport infrastructure, and liaising with professional transport agencies.

The overall processes of both organizations were therefore similar, in that they involved the transfer of physical goods and the accompanying information to and from different parts of the country. They also involved interfacing with government authorities at the state and national levels.

Organization Structure & Characteristics

The bureaucracy in India is typically the administrative arm of the central government and is largely responsible for turning legislation into policies and policies into practice. Bureaucrats therefore have a wide range of functions in many sectors of the economy, including the government departments. Their responsibilities can be broadly visualized in terms of two types of functions.

One, they are responsible for assisting in policy formulation in the different ministries and departments. They are also charged with the direct running of the day-to-day government functions like general administration, law enforcement, resources disbursement and tax collection. Two, they are also required to head government controlled PSEs in different industries such as utilities, postal services, nationalized banks, railways and public distribution systems for food grains. Both NCL and NTL, being public sector enterprises, were headed by a senior member of the administrative arm of the bureaucracy. They also had bureaucrats in different top management functions.

The operations of NCL were divided into four regions. Each region was headed by a Regional Office, with the Regional Manager as the executive head of the region. The Regional Manager was a member of senior management who supervised a team of middle management. Each region was further divided into districts, with a District Office supervising the operations of each district. The head of each District Office was a member of middle management. Members of junior management worked in the Regional and District Offices. There were about 200 districts and each district supervised the operations of a given number of collection centers, sorting offices and delivery centers, which were staffed by unionized employees and clerks. At the apex, there was one head office, from where the top management and company policymakers operated.

In a similar manner, NTL also carried out its operations through a network of administrative offices across the country. There was one central administrative office from where the top management functioned. The operations were divided into five zones and 17 regions. Each zone had a Zonal Administrative Office and each region had a Regional Administrative Office, supervised by a Zonal Manager and Regional Manager respectively. The regions were divided into a number of districts and each district was administered through a District Office, which managed the functions of a number of purchase centers and storage warehouses. There were 123 districts. There were 12,000 purchase centers and 1,700 depots and storage warehouses. Zonal Managers belonged to senior management cadre. Regional Managers and District Managers were middle managers. Junior managers also worked in all these offices. All employees in the management cadre were professional administrators. The company also had a number of clerical employees to carry out low-skilled functions in the different offices, purchase centers and warehouses.

The scale and scope of the operations of the company were very large. One of the senior managers in the company observed:

"The scale of operations is among the largest for any organization in the country. The amount of information required to be processed is tremendous. "

Although the particulars of the organizational hierarchy such as specific office names and designations of managers were different, the broad organization structures of the two organizations were similar, as shown in Figure 1. There were five levels of hierarchy and the decision-making processes were largely centralized. The top management in the apex (central) office and senior management in the zonal and regional offices was responsible for overall policy setting and strategic planning. All new initiatives and programs were designed at the higher levels, and were subsequently communicated through orders and directives to the middle and lower levels. Implementation strategies were planned by the senior management in consultation with middle management and implemented by middle management. This kind of planning and implementation structure is often a feature of public sector enterprises. This is because public sector enterprises usually operate on a large scale and scope, and hence it is more efficient to decide on policy at the top and leave the implementation to the middle managers in the various regional offices. The role of middle managers in policy implementation is therefore crucial (Caudle et al., 1991). In India, the accountability of the public sector to the people of India only further enhances the justification for rigid bureaucratic procedures. Such procedures lead to this rather strict division of labor between the senior management and the middle management.

Traditionally, both organizations were similar in that they were large and centralized, and had historically functioned in stable economic and business environments. They had been largely supported by the government and had not seen any major changes in their business strategies or processes for the past 20 years. Between 1980 and 1987, the top management of both companies was indifferent towards the use of IT and there was no commitment on the part of the organizational leaders to deploy IT in any of the functions. Further, most employees did not have any knowledge or awareness about IT, and tended to associate technology with loss of jobs. This observation has also been recorded in other organizations in India during the 1970s and 1980s. During this time, the Indian economy was a closed one and most organizations did not have any exposure to the use of IT (Nidumolu et al., 1993; Tarafdar & Vaidya, 2002b; Wolcott & Goodman, 2003).

SETTING THE STAGE (1987-1991)

External Conditions

The government financially aided NCL and, to a large extent, decided the rates for its services. NCL catered to both urban and rural segments of the population. During this time, the rural and semi urban segments accounted for over 70% of the customer base, and the company was a monopoly in this segment. Entry barriers were high because a vast distribution network was required to handle the volumes and reach in order to operate on a national scale. In the urban retail and corporate segments, the first major changes in the environment came in the late '80s and early '90s when a number of private companies were set up which provided faster deliveries, although at much higher prices. Hence there was some competition in this category. However, these new competitors were too small to pose any threat to NCL on a nationwide basis. Even then, NCL did have an internal drive towards business innovation. It introduced special premium "Speed" services in 1987, which were faster and more expensive than their regular services. Corporate customers were interested in efficient and reliable service and accounted for a majority of the high value transactions through the premium services. According to a senior manager in the eastern region:

"The products and services prior to 1987 were standard. There were no innovations. However, after 1987, we could sense some of the then happening and some impending changes in the competitive environment. Hence, even though we were a monopoly in the rural retail segment, we introduced new services directed towards the urban corporate and retail segments. "

NTL was financially aided by the government and many of the policies regarding purchase price, selling price, and distribution requirements were decided in consultation with the government and representatives of the producers. The company was required to interact with a number of external agencies such as distribution and transport service providers in order to carry out its functions. All interactions with these external organizations were through established procedures. For example, producers were given a fixed price for their produce, and customers also paid a fixed price. Similarly, transporters were selected on the basis of tenders. There had been no significant change in most of these processes over the years. Therefore, the external environment had remained stable.

In case of calamities such as floods and drought however, the company faced tremendous pressures because produce had to be rushed to specific places at all costs. The regional manager of one of the regions observed that:

"Normally there are no pressures on us. We function in a regulated and financially supported environment. However in times of emergencies, we have to deliver at all costs. "

Such instances however, were few and had occurred once in two or three years on an average. Moreover, in such times, NTL and other similar companies were given financial support from the government and also used their own slack resources. On the whole, NTL did not have any innate drive for business innovation. For example, it did not initiate efforts for introducing changes in its processes in a proactive manner. Its managers functioned within the parameters laid down by the government. The performance of the company was measured by the amount of produce purchased, the manner of quality control of stored produce and effectiveness of distribution. There was scope for performance slack because the company was financially supported by the government. In this context, one senior manager who had been with the company for 30 years observed:

"Everyone follows standard procedures. There is no inherent drive to change and improve. "

Process Descriptions & Information Processing Requirements

The primary processes for NCL included the logistical activities of sorting and transferring articles. The company also carried out limited operations related to banking functions such as money transfers and money orders.

Information processing had to be carried out quickly because article delivery times depended largely on the speed with which articles could be sorted and transported. Organizational processes were standardized through the use of standard operating procedures. Procedures were laid down for collection, sorting, delivery, after-sales activity like enquiry handling, refund, lost articles or other specific customer complaints. Tasks were structured and routine and, the context in which information had to be processed was clear. The presence of bureaucratic procedures, along with inherently simple tasks, did not leave much room for decision support requirements in the day-to-day operations. Decision making followed predictable patterns. There were well-defined rules for communicating information. All official communication was in written format. Information required for decision making was mostly available.

A senior executive explained the situation in this manner:

"There are fixed procedures that we are trained to follow. All possible requirements can be anticipated because there is a limited set of options that customers can choose from. "

Organizational processes for NTL included functions like packing, storing and handling of the produce. These were routine, standardized and well documented. There were written instructions and well-defined procedures for different activities. For instance, there were norms for storing bags in the warehouses, for deciding how many bags would be placed in a stack, how they would be stacked, how they would be issued for distribution and so on. There were specifications for the way in which warehouses were to be constructed. There were standards for preserving the produce in the warehouses according to the desired purity and quality levels. Information regarding relevant parameters such as humidity, temperature and cleanliness were clearly specified. All official communication was in standardized formats, formal and always recorded on paper.

One of the middle managers in a regional office in the eastern region said:

"All tasks are standardized and we have to follow standard operating procedures. There is no ambiguity. "

As far as information processing was concerned, some aspects of the company's operations required information to be processed within a given period of time. For instance, all the purchasing activities had to be completed within two to four months from the time that the produce was plucked and harvested. Transport and logistics operations involved coordination of activities across many geographical regions, and the produce had to be distributed to specific areas within a very short time, in case of disasters. The manager of one of the districts in the eastern region said:

"There is a short span of two to three months within which we have to finish offall the purchase and storage activities. This is a time of great pressure for all of us. "

Both organizations functioned in a stable environment and were financially supported by the government. This led to the possibility of having extensive bureaucratic procedures and well-defined processes. Thus, there was not much room for ambiguity and decision support. This is a common feature in public sector organizations, and has been found to influence the adoption of decision support aids in these organizations (Mohan et al., 1990). All policy decisions regarding the adoption of new innovations were taken by the top management team in consultation with representatives of the government and communicated clearly within the organization. However, there were some differences. NCL was widely regarded as one of the best public sector organizations in India, and within the broad framework of government-mandated policies, there was considerable scope for small-scale, local-level initiatives and innovations by its middle and junior managers. NTL, on the other hand, was more prone to functioning within the confines of government mandates, and there were not many opportunities for local innovation.

IT Adoption During This Period

Basic computerization was first introduced in both these organizations in the midto late-1980s. This period was also marked by commencement of similar initiatives in other public sector enterprises in India (such as nationalized banks). These initiatives were largely driven by policies of the central government. To begin with, both NCL and NTL went in for applications like payroll and financial accounting at their respective central administration offices. These were later extended to their different regional offices. Overall, the IT infrastructure during this time was quite elementary and did not have any significant impact on their critical operations.

Soon after, NCL took steps to introduce some additional IT applications as well. In 1989, money transfer pairing machines were first introduced in each zone. Hitherto, all the money transfer order slips originating in a particular region and bound for all other regions were collated separately and sent to each region. This was done by all the regions, so that a number of slips changed hands everyday between all the regions. With the introduction of the computerized pairing machines, instead of counting off individual slips for each region, each region's outgoing sum was simply netted off against the incoming sum. This was a spreadsheet application in which the total amount of money ordered for each zone was collated on a spreadsheet and paired and matched for each zone. Also in 1989, counter operations for article booking were computerized in the largest office in the two largest cities. Stand-alone PCs were given to the counter clerks at these offices. This significantly reduced the waiting time for the customer and rationalized queues at the counters. Although these applications were introduced in a limited manner, it was an important step for NCL in that it had proactively implemented some IT beyond the overall parameters suggested by the government. Although the monetary investment in IT during this period was small, it nevertheless set the stage for the implementation of IT in more critical processes, in subsequent years. Further, it also served as a pilot project for demonstration and learning purposes.

Impending Changes in the External Environment

Government policies form an important aspect of the external environment for public sector organizations. Changes in these policies have often been the cause of IT deployment in organizations in developing nations in general (Albadvi, 2002; Li et al., 2002; Molla & Licker, 2002) and in India in particular (Tarafdar & Vaidya, 2002a).

In 1991, the Government of India took a policy decision to liberalize the Indian economy. This decision resulted in an increase in external pressures for public sector undertakings in many industries including telecommunications, steel, banking and transportation, among others. The resulting changes in the business and economic environment had implications for adoption of IT in both NCL and NTL. There were also overall pressures for process re-engineering, modernization and human resource development.

CASE DESCRIPTION (1992-2000)

Changes in the External Environment

Economic liberalization in the early 1990s resulted in changes in the external and competitive environment for both organizations. Liberalization provided enormous opportunities for firms from developed economies to set up manufacturing, service or distributing units in India. This resulted in the entry of many of these companies in a number of Indian industries including banking, financial institutions and the manufacturing sector (see for example, Cavusgil et al., 2002; Joshi & Joshi, 1998; Tarafdar & Vaidya, 2002, 2003). Many of these companies had advanced IT-enabled processes. This created pressures for improved performance of processes among Indian organizations. There were also pressures from different customer segments for more flexibility and better service.

As far as NCL was concerned, private companies - from both India and outside - that provided courier and fax services entered the urban markets, and targeted the retail and corporate segments. There was also an increase in the volume of business related mail. Some customer segments like businesses, government organizations and institutional bodies required faster delivery, even if it was at a higher cost. Thus, increasing competition gave rise to a need to segment customers on the basis of specific needs and provide customized service options. Therefore, a Business Development Cell was set up in 1996 to design and develop a market for value-added premium products for specific customer segments. New services were introduced for corporate customers, and the accent was on speed and reliability rather than on cost. Utility payment and email services were also introduced.

That the organization perceived the pressures to be somewhat high can be gauged by the following statement, which appeared in the Annual Report of 1997-1998:

"... will spend 65% of its plan budget on the induction of technology with a view to improving and upgrading the quality of service... developing and providing new value added services and products. NCL will continue to look at the technology options so that the postal products and services can be re-oriented to the needs of the customers. 11

The second change as a result of economic liberalization was related to the role of the government. As mentioned before, the government can, through its policies and regulations, influence the adoption of IT (Nidumolu & Goodman, 1996; Rainey et al., 1976). Toward the later part of the eighties, the government laid down certain policies and mandates for adoption of IT in all major public sector enterprises in India, across different industries. Public sector banks, manufacturing units and service organizations embarked upon IT modernization programs. These organizations typically generated and processed huge volumes of transaction data due to their large scope of operations. Consequently, the most pressing requirements were for transaction processing systems.

Initiating & Implementing rr Adoption: Two Contrasting Approaches

Both NCL and NTL initiated a program for organization-wide computerization in response to the government's mandates.

According to Caudle et al. (1991), there are four major concerns that are required to be addressed for adoption and implementation of IT in public sector organizations. The two organizations addressed these four factors in different ways.

1. Goals of IT Adoption & Identification of Information Requirements: Market signals and profits guide companies in the private sector. In contrast, the public sector faces different goals, many of which are not necessarily related to financial performance. These could be related to efficiency and quality of customer service, scale of operations, the different kinds of customers served, social objectives and addressing political influences (Caudle et al., 1991). Thus, it is not always possible to directly link the adoption of IT with financial parameters, particularly for public sector enterprises. Hence, one of the ways to approach IT planning is to identify improvements that are required in concerned critical processes, and implement IT in the individual activities entailed in those processes. Identification of information requirements thus forms an important part of the planning for IT adoption and implementation in public sector organizations.

National Couriers Limited

Interviews with the head of the Eastern Region illustrated the process of identification of important information processing activities and requirements at NCL:

"We had already implemented computerized transaction processing systems in the payroll and financial accounting functions, starting in 1988. After the government mandates in 1991, we identified three critical areas in order to focus our computerization efforts. The first was the handling of and sorting registered mail articles. This process was the key to speed, efficiency and customer satisfaction in our operations. The second was the transfer of information related to the status of mailed articles, money transfer and banking services. Information transfer processes formed our second largest area of operations after mail handling. The third focus for computerization was information exchange activities within our offices. These included sharing of files, data and other resources such as printers. Our computerization efforts during the period 1992-1999 were concentrated largely in these three areas. "

Between 1992 and 1999, a number of new information technologies were introduced at NCL. In 1992, computerized mail handling and sorting was introduced in the two busiest centers in the country. This reduced the time required for sorting and directing articles by half. Computerized systems for article booking, tracking and delivery systems for select cities were introduced in 1997-98 in select cities (refer to Figure 2). This sped up the booking and delivery procedure, and enabled customers to keep track of their articles. A VSAT network consisting of 75 terminals was installed for this purpose. The articles would be booked with the help of a computerized system at the booking office, and the information would be transferred via a modem connection to the Central City sorting center, where the tracking system was installed. This center was connected through the VSAT network to other sorting centers. Customers could call up at the sorting center and find out the status of the booked articles. Computerized money transfer services were introduced in 1998. This was also done through the VSAT network. Individual offices were connected to the network through a leased line modem connection. This reduced the transit time of money orders from nearly a week to a few seconds. In 1997-1998, office operations were computerized and put on a WNT-based local area network. This enabled the sharing of files, data and other resources, and significantly enhanced the efficiency of office operations.

The approach used by NCL has been referred to as the "functional approach" to IT planning (Nidumolu & Goodman, 1996). Organizations that follow this approach believe adoption of IT is desirable because it can improve the timeliness of information flow and reduce process cycle times. NCL was able to respond effectively to the external conditions and government mandates through deployment of IT applications and infrastructure in many critical functions. The financial expenditure on IT between 1990 and 1999 was INR 1000 million', which was 75% of the total expenditure on modernization during this period and about 2.75% of the organization's revenues. This was relatively much higher than that during the previous 10 years.

According to the head of operations of the eastern region:

"For the first time, substantial budgets were being allocated annually, for the computerization process. 11

A senior manager in the eastern region further described the possible financial implications in the following way:

"The areas that we targeted for IT adoption covered 65% to 70%Io of our operations. So we expected to see significant cost savings in around 70% of our functions. "

National Traders Limited

A member of the top management, who had been with the organization for more than 30 years, described the overall phenomenon of IT planning and adoption at NTL in the following manner:

"We tried to follow the general instructions from the government, in identifying potential areas ofiT adoption. The first step in this regard was the computerization of all high volume transaction processes. We decided to begin by computerizing the payroll and financial accounting processes. "

In the mid-1990s a UNIX mainframe system was installed at the central office. This was used in batch processing applications for calculation of accounts, reporting of produce inventory and stock positions, and payroll accounting. In the late 1990s, the mainframe system was converted to a PC-based LAN. An ORACLE-based client server system was installed and the mainframe data were transferred to this. The administrative offices in the different regions carried out the same functions at the regional level using PC-based dBase applications.

In 1998, NTL connected its central administrative office, five zonal offices and 17 regional offices through VSAT links. The district offices were connected to the respective regional offices through dial-up modem connections. At the time of the study, there were about 50 PCs at the central headquarters, four to five PCs in each zonal office, two in each regional office and one in each district office. The depots communicated with the district offices through postal mail and the districts communicated with the regional offices through modems. Forty percent of the data transferred between depots and district, regional and zonal offices related to the inventory and stock position. Forty percent related to financial information and 20% to payroll data. Stock and inventory data were sent in by the depots and district offices to the regional and zonal offices manually, or through leased line modem connections. The regional and zonal offices consolidated the data and then transferred them to the central administrative office through VSAT as well as on paper. Data from all the regional and zonal offices were again consolidated at the central office. Reports about stock positions and requirements were generated for senior managers at both the head office and the regions. The transfer of stock-related information took place on a weekly basis from the depots to the zones and subsequently to the headquarters. A central server housed the consolidated data from all the regions. All the communication links were backed up by traditional mail and fax systems. The IT infrastructure is shown in Figure 3.

The investment in IT acquisition, maintenance and training during the period between 1992 and 1999 was INR 35 million, which was less than 5% of the total capital expenditure during this period.

2. Management of Bureaucracy and Paperwork: The public sector produces a lot of paperwork that results in a proliferation of forms and paper (Caudle et al., 1991). All these records need to be computerized in an integrated manner during the process of computerization, in order to make electronic transfer of information possible between offices and minimize manual re-entry of data. Hence it has been suggested (Mohan et al., 1990) that a central governing structure be set up. This structure should oversee the integration of IT management with records management and other information resource management areas.

For NCL, the different systems were designed such that seamless integration and flow of information between different functions was possible, in a limited manner, as shown in Figure 2. For instance, in the computerized booking and tracking system, article information generated at the time of booking was transferred using electronic means through intermediate stages, all the way to the central sorting centers. Similarly, office information related to administrative activities was shared electronically within each office. These capabilities were also planned to be extended to cover electronic transfer among different offices.

For NTL, information transferred from the depots and district offices was manually reentered at the regional offices prior to consolidation and transferred to the Head Office, as shown in Figure 3. At the Head Office also, information was partly reentered manually before the generation of management reports.

3. Role of Top Management: The top management plays a key role in deciding the thrust and direction of IT adoption in public sector organizations (Nidumolu & Goodman, 1996). This is because the planning and decision structure with respect to implementation of changes is usually centralized.

National Couriers Limited At NCL, there was a change in the top management in 1991 as a new CEO joined the organization. The new top management team was favorably disposed towards IT adoption and took many proactive initiatives in this regard. NCL was a member of the Universal Postal Union, and hence information about the latest IT applications in similar organizations around the world was available to the top executives. It was the thinking, planning and drive of top management that led to the introduction of the early IT initiatives. A middle manager in the eastern region office described the new priorities of the top management in this manner:

"After 1991, a number of new thrusts towards IT adoption have been generated at the central office. Our new CEO is enthusiastic about the introduction of IT, and is aware of the possible areas of application. Seminars are often organized to educate and inform us about the use of IT in postal services worldwide, " All decisions regarding rT planning and deployment were centralized. However, the implementation of IT initiatives was decentralized. According to a member of the top management at the central office: "We tell the regions what the overall plans are, regarding the purchasing of hardware, installation of software and the applications required to be used Broad decisions regarding all IT applications, hardware and software are taken at the headquarters in consultation with the regions and communicated to the zones and regions. The zones and regions have the power to make their own implementation decisions and purchases within given financial limits. "

National Traders Limited

At NTL, the top management was not, in principle, unfavorably oriented towards IT. They did realize the benefits that could accrue from the use of IT, in view of the size of the company and its scale of operations. However, they were not proactive about identifying areas where the company could benefit from IT. The senior managers and policy makers were typically professional administrators and bureaucrats, and the average age was more than 50 years. They did not have any knowledge of emerging IT applications and their use by similar companies around the world. Nor were they comfortable with the use of computers. They were content to depend on the government for direction and instructions on IT adoption.

One of the middle managers who had worked in the organization for the last 15 years said:

"...If the government had not made certain suggestions, computerization might have come to NTL even later than the late 1980s. "

Interviews with some of the senior managers revealed attitudes that varied from measured tolerance for IT, "It seems to be useful, but it is not indispensable," to downright rejection, "Computers are just expensive typewriters."

4. Role of Middle Management in Driving IT Implementation: There is evidence that middle managers play a very critical role in driving IT implementation and use in public sector organizations (Caudle et al., 1991). This is because these organizations are usually large, with multiple levels of decision hierarchy (Figure 1), and it is not possible for top management to oversee the details of the implementation processes. Further, middle managers have considerable bureaucratic power in the individual departments and units. Hence, while the top management is responsible for policy setting and strategic planning with respect to IT adoption, it is the middle managers who play the most crucial role in driving the implementation processes within different organizational units.

National Couriers Limited

The middle management influenced IT adoption at NCL in two ways.

First, they were actively involved in framing the specifics of IT adoption policies and driving implementation initiatives within their units. They used their collective organizational power to frame implementation schedules and timelines. They also developed programs for end-user training and education. This was a crucial aspect of the implementation process, given the large number of unskilled and unionized employees in the organization, who viewed IT as a potential threat to their jobs. In this context, one of the middle managers observed:

"We encouraged the clerical and low skilled employees to get familiar with the PC, and start out by just playing games. We hoped that once they became comfortable with the use of PCs, they would be able to appreciate the benefits of computerization. We also conducted education programs regarding the use of IT in organizations. Further we took steps to assure them that their jobs were safe. Throughout the entire computerization process, there was not a single day in which there was a loss of working hours because of union problems. "

In this connection, studies in the domain of IT adoption suggest that IT acceptance and innovation at the grassroots levels in different end-user units are crucial to the adoption of IT by an organization (Agarwal & Prasad, 1998; Nambisan, 1999; Rockart, 1988; Vaidya, 1991). In many developing countries, IT is seen to be the cause of reduction in opportunities for employment, and there is a hostile attitude to IT adoption and acceptance, not only at the level of semi-skilled and unskilled employees, but also by middle management. This has been a crucial factor in the introduction and management of IT in developing countries (Jantavongso & Li, 2002; Tarafdar & Vaidya, 2003).

The middle management also played an effective role as IS professionals. While the overall head of the IS function was a member of the senior management, IS activities in each regional and district office were supervised by middle management. These managers were also responsible for IT implementation in the delivery and sorting centers. In other words, middle managers were the IS heads in their respective functional departments. They supervised teams of junior managers who were responsible for installing and maintaining the hardware and software. These junior and middle management members had received technical training and were hence capable of managing the technical aspects of project implementation and systems maintenance. This kind of an "indigenous" implementation strategy is often followed in public sectors. This is because in such organizations there are constraints on hiring and firing employees. Hence existing employees are retrained and reallocated to the newer functions (Nidumolu & Goodman, 1996). Thus there was no separate IS department in NCL. Members of middle and junior management were responsible for IT implementation.

The middle management IS professionals also played an important part as IT champions. The role of IT champions in driving IT adoption has been well documented (Beath, 1991). The middle managers in NCL were credible and commanded authority by virtue of their positions. They had a good working relationship with the top management as well as the unskilled and clerical workers in the company. They were powerful enough to influence decisions at the higher levels, and saw to it that the resources required were made available. Initially there was considerable resistance - especially from the unionized staff - but this was neutralized through the efforts of middle and junior managers. In fact, in many instances, some of the unionized staff subsequently became advocates of the IT-related changes, after having gone through the training processes. They became IT champions themselves and saw to it that strong resistance groups were convinced and neutralized.

Various studies have explored the role of IS professionals in influencing the adoption of IT. IS professionals have a positive impact on IT adoption in the organization when they are technically aware of the possibilities from IT, are competent at developing new IS and maintaining existing IS, and are capable of promptly solving end-user needs (Al-Khaldi et al., 1999; Dvorak et al., 1994; Swanson, 1994). At NCL, the IS professionals influenced IT implementation through their traditional organizational power as middle managers. They were able to effectively carry out project management and end-user training; they were also able to ensure that resources were available. This case therefore illustrates a new dimension of the role of IS professionals in driving IT adoption and considerably enhances similar preliminary findings by Caudle et al. (1991).

National Traders Limited

The Central IS department at NTL was headed by a senior manager who reported to the head of the finance function. He was somewhat aware of the possibilities of IT and had some limited ideas of its usefulness for the company. He supervised a team of 60 Central IS employees. Out of these 60 people, 10 had a diploma or some other professional training in different aspects of software development, and could develop applications on dBase, MS Access and ORACLE. About 30 people were data entry operators, whose tasks were to key in and consolidate the data from the zonal, regional and district offices. All these employees had received the requisite training and looked after various functions in the IS department. They worked in the central administrative headquarters, and were responsible for centralized consolidation and collation of data from the regions. They also designed and implemented training programs for data entry staff in the different regions. They looked after incremental modifications to the existing applications. Further, they managed third-party vendors who carried out maintenance of existing hardware and the development of new applications.

The IS departments in the zones and regions comprised junior-level employees who had been transferred from other departments after training. They had no formal education in computer hardware or software. They were responsible for entering and consolidating the data received from the districts and depots, and generating relevant reports for senior managers at the zonal offices. At the time of the study, about 200 such employees, mostly staff and junior managers, had been trained in various applications, and had later been shifted to dedicated IS functions. They themselves were reluctant to use computers. Third-party vendors carried out the maintenance work.

The IS manager was not powerful and senior enough to convince top management to make resources available for any IT initiative other than the most basic applications. He had no significant power to independently make important decisions relating to IT deployment. Moreover the IS professionals at the central office did not have any control over whether or not the regional heads would actually implement specific IT applications. The IS department had not met with much success in this regard and there had been stiff resistance in many cases. This greatly hindered the penetration of IT because regional heads had independent authority over IT implementation initiatives in their areas.

The chief of the central IS function said:

"The implementation and use of computers in the offices is completely decentralized We cannot force anyone to start using computers. Ultimately the extent of IT use depends on the policies of the respective regions and zones. "

There were more than 60,000 employees in the company, 85% of whom performed low skilled and clerical jobs. Similar to the situation at NCL initially, employees were not favorably biased towards IT, because they feared that they would lose their jobs. Hence they tried various ways to express their opinions in this regard. For example, very often, when reports were not made available on time to senior managers, subordinate junior employees would excuse themselves by saying that the computers were not working or the relevant officer in charge of taking the print-outs was not available. They would even suggest that such problems did not exist before computers were introduced. The reluctance of employees to use computers is exemplified by the fact that those who used them had to be given monetary incentives. Further, most of the middle mangers and even some of the senior managers in the regions were against the deployment of IT. There was limited penetration of IT into the user departments. Senior managers did not directly use computers. They would ask data entry operators to enter data and furnish printouts.

The similarities and differences between the two organizations have been described in Table 4.

CURRENT CHALLENGES & PROBLEMS (2000 & BEYOND)

In spite of similarities in their overall nature and scale of operations and historical and cultural contexts, the IT adoption processes and outcomes in the two companies were considerably different. While NTL failed to implement IT in its crucial processes, NCL was able to respond effectively to the external conditions and government mandates through organization-wide deployment of IT applications and infrastructure in many critical functions.

National Couriers Limited

The computerization process at NCL took place in two distinct phases. In the first phase, from 1987 to 1991, computerization was limited and driven by the requirements of high-volume transaction processing. During this period, the company used IT for very basic and rudimentary transaction processing operations. It was in the Support Mode (McFarlan et al., 1983) or Delayed Sector (Earl, 1989). These two modes are the first stages of IT adoption in organizations where IT is not fundamentally essential for the smooth running of operations of the company. It is used to accomplish nonessential and noncritical tasks, and the IS department functions as a back-room support department, with no participation in functions like strategic planning and implementation.

The second phase of computerization between 1992 and 2000 saw an acceleration of the computerization process. The acceleration was partly in response to government mandates and partly as a result of the enthusiasm of the new leadership about IT. During this period, NCL went through the Turnaround Stage (McFarlan et al., 1983). IT became increasingly crucial to the future development of the organization. There was a change in focus, as far as IT planning and implementation were concerned. New applications were developed and there was an increase in IT investment. At the time this study was conducted, different applications had been introduced in a limited number of offices, and covered about 40% of the operations of the company. The Annual Report of 1994-95 described the induction of computerization in this manner:

"... NCL has made a gradual and phased attempt to introduce information technology into the postal system, so as to provide better services to its customers... "

The most important impact of IT had been to increase operational efficiencies, and IT was accorded a high priority by the top management. Hence the organization was well positioned to move to the next level of IT use, that is, the Factory Mode (McFarlan et al., 1983) or the Dependent Sector (Earl, 1989). This would include the extension of current applications to more offices and the development of more sophisticated applications. The challenge before NCL was therefore to transform from a Turnaround organization into a Factory organization. One of the most important aspects of the Factory Mode is to ensure that IT is delivered efficiently and reliably. This implies that resource requirements and budgets be correctly estimated (Earl, 1989). In this context, Mohan et al. (1990) suggest that since public sector organizations operate under fixed and often tight budgets, an inability to logically derive and clearly communicate IS budget requirements is a primary reason for these organizations not allocating adequate resources for IT adoption. A similar problem existed at NCL also, in that there were no budget-driven planning processes that could broaden the scope of the existing IT applications.

National Traders Limited

NTL was an interesting organization to study because it was large and there was significant potential for the use of rr. However, the organization did not use rF for any but the most basic functions. This was because there was a strong overall negative inclination towards IT adoption and use among the middle and junior management. For instance, none of the departmental heads at the head office or in the regional and zonal offices used computers for the latest available inventory positions. They would ask their secretaries for the relevant paper files or would simply ask their immediate subordinates over the phone.

One senior manager observed:

"Anyway, I have to ask for most of the information over the phone or through fax. So what is the use of the computer in tracking the movement of the stock?"

Lack of enthusiasm among managers in public sector enterprises for using IS has been documented by Mohan et al. (1990). The primary reasons for this are a low comfort level with the use of computers and a lack of awareness of applications relevant to the organization. Nidumolu and Goodman (1996) suggest that perceptions towards IT can change from unfavorable to favorable, as more projects are undertaken and more functions are computerized.

At the time this study was conducted, IT was used for routine administrative tasks, and not for any critical activities like logistics and distribution planning. Hence IT was not crucial to the achievement of the strategic objectives of the firm. Moreover, all electronic information was also stored in paper format. Transfer of information was both electronic and paper based. The challenge for NTL therefore was to move from the Support Mode to the Turnaround Mode (McFarlan et al., 1983), and increase the scope of existing IT applications. At the time of writing, they were pilot testing the use of a software for managing distribution and storage of food grains.

Change Management Issues

Change management has been suggested as an especially important issue in government organizations because of their entrenched processes (Caudle et al., 1991). In fact, the adoption of IT in the nationalized banks in India, which commenced in the mid1980s, had been fraught with issues regarding acceptance of process changes and the fear of job losses due to automation. Employee unions, perceiving that their concerns had not been adequately addressed, had offered considerable resistance and had significantly slowed the process of IT adoption in the banks (Joshi & Joshi, 2002). Hence it is anticipated that change management issues would be crucial to the continued infusion and diffusion of IT at NTL and NCL.

The first aspect of change management had to do with overcoming resistance at different levels of the two organizations, especially at NTL. In a study of e-government initiatives in the Indian state of Kerala, Kumar (2003) reports that top management drive has been an important issue in driving IT adoption in various government departments and has facilitated the acceptance of IT at lower organizational levels. In this regard NCL had so far been able to manage differences between the various units and had been able to convince unions and clerical staff about the benefits of IT adoption, largely through the efforts of its middle and top management.

This process had been more difficult at NTL, given that the top and middle management themselves were not quite convinced about the usefulness of IT and that they had not proactively driven its adoption. As Joshi and Joshi (2002) have pointed out, it is relatively easier to work towards middle and lower management commitment after top management commitment has been secured.

It has been observed that supervisors may often be reluctant to adopt IT in their departments because of possible reductions in head count, which might lead to a decrease in their span of control. This may partially explain the reluctance of middle and junior management cadres to adopt IT, especially in NTL. The middle mangers were afraid of losing headcount in their departments as a result of the junior management receiving training and getting relocated to IT-based functions. Similarly, junior management was apprehensive about the reduction in the number of unionized employees, the resultant loss in their own power and possible backlash from the labor unions.

The second aspect of change management was that of managing the work environment during the change process. Studies by Amabile (1996) have suggested that the work environment often becomes negative in times of new technology implementation and significant business process changes. This is because the difficulties associated with adjusting to the changes often result in collective cynicism and confusion. Such conditions stifle creativity and motivation. This was observed in NTL, where the new IT was met with collective skepticism from all levels of the organization.

Public sector organizations are characterized by complex performance measurement criteria. The lack of a clearly defined bottomline in most cases leads to a focus on inputs and budgets, rather than on outputs and productivity measures. Economic liberalization in India has resulted in an emphasis on service quality, process efficiency and overall modernization in both the public and private sectors (Wolcott & Goodman, 2003). The challenges before NCL and NTL would be to use IT for enhancing their service quality, for increasing the efficiency of their operations and to appropriately manage their IT adoption processes. In absence of such an effort, both organizations would be burdened with high-cost operations and increasingly dissatisfied customers.

Footnote

ENDNOTES

Footnote

1 45 INR (Indian Rupee) = I U.S. Dollar

References

REFERENCES

References

Agarwal, R., & Prasad, J. (1998). The antecedents and consequents of user perceptions in information technology adoption. Decision Support Systems, 22(1), 1529.

References

Al-Khaldi, M.A., & Wallace, R.S.O. (1999). The influence of attitudes on personal computer utilisation among knowledge workers: The case of Saudi Arabia. Information and Management, 36(4), 185-204.

Amabile, T., Conti, R., Coon, H., Lazenby, J., & Herron, M. (1996). Assessing the work environment for creativity. Academy of Management Journal, 13(5), 1154-1184. Beath, C.M. (1991, Sept). Supporting the information technology champion. MIS Quarterly, 15(3), 155-371.

Caulde, S.R., Gorr, W.L., & Newcomer, K.E. (1991). Key information systems management issues for the public sector. MIS Quarterly, 15(2), 171-188.

References

Cavusgil, S.T., Ghauri, PN., & Agarwal, M.R. (2002). Doing Business in Emerging Markets: Entry and Negotiation Strategies. CA: Sage Publications.

Dvorak, R., Dean, D., & Singer, M. (1994). Accelerating IT innovation. The McKinsey Quarterly, 123-135.

Earl, M.J. (1989). Management Strategies for Information Technology. London: Prentice Hall.

Jantavongso, S., & Li, K.YR. (2002, May). E-business in Thailand: Social and cultural issues. In M. Khosrow-Pour (Ed.), Issues and Trends of IT Management in Contemporary Organizations. Proceedings of Information Resources Management Association Conference (pp. 443-446).

Joshi, V.C., & Joshi, V.C. (2002). Managing Indian Banks (2nd ed.). CA: Sage Publications.

References

Khera, S.S. (1979). Public sector management. In B.C. Mathur, K. Diesh & C.C. Sekharan (Eds.), Management in Government. Publications Division, Ministry of Information and Broadcasting, Government of India.

Kumar, A. (2003). E-government and efficiency, accountability and transparency: ASEAN Executive Seminar on e-Government. International Journal of Information Systems in Developing Countries, 12(2), 1-15.

Lachman, R. (1985, Sept). Public and private sector differences: CEOs' perceptions of their role environments. Academy of Management Journal, 28(3), 671-679.

Li, Q., Zhang, X., Sun, C., & Wang, S. (2002, May). Strategies of securities electronic commerce in China: Implications of comparative analyses between China and other countries. In M. Khosrow-Pour (Ed.), Issues and Trends of IT Management in Contemporary Organizations. Proceedings of the Information Resources Management Association Conference, (pp. 1080-1083).

References

McFarlan, RW., McKenney, J.L., & Pyburn, P. (1983). The information archipelago: Plotting a course. Harvard Business Review, 61(1), 145-156.

Mohan, L., Holstein, W.K., & Adams, R.B. (1990). EIS: It can work in the public sector. MIS Quarterly, 14(4), 435-448.

Molla, A., & Licker, P.S. (2002, May). PERM: A model of e-commerce adoption in developing countries. In M. Khosrow-Pour (Ed.), Issues and trends in IT Management in Contemporary Organizations. Proceedings of the Information Resources Management Association Conference, Seattle, WA (pp. 527-530).

References

Moynihan, T. (1990). What chief executives and senior managers want from their IT departments. MIS Quarterly, 14(1), 15-25.

Nambisan, S. (1999). Organisational mechanisms for enhancing user innovation in information technology. MIS Quarterly, 23(3), 365-395.

Nidumolu, S.R., & Goodman, S.E. (1993). Computing in India: An Asian elephant learning to dance. Communications of the ACM, 36(4).

Nidumolu., S.R., Goodman, S.E., Vogel, D.R., & Danowitz, A.K. (1996). Information technology for local administration support: The Governorates project in Egypt. MIS Quarterly, 20(2), 197-224.

Rainey, H.G., Backoff, R., & Levine, C. (1976). Comparing public and private organizations. Public Administration Review, 36(2), 233-244.

References

Rockart, J.F. (1988, Summer). The line takes the leadership: IS management in a wired society. Sloan Management Review, 29(4), 57-64.

Swanson, E.B. (1994). Information systems innovation in organizations. Management Science, 40(9), 1069-1091.

Tarafdar, M., & Vaidya, S.D. (2002). Evolution of the use of IT for e-business at century financial services: An analysis of internal and external facilitators and inhibitors. Journal of IT Cases and Applications, 4(4), 49-76.

References

Tarafdar, M., & Vaidya, S.D. (2003). Challenges in the adoption of information technology at Sunrise Industries: The case of an Indian firm. Annals of Cases in Information Technology, 6, 457-479.

Vaidya, S.D. (1991, Dec 26-29). End user computing: An Indian perspective. Proceedings of the Indian Computing Congress (pp. 533-541).

Wolcott, P., & Goodman, S. (2003). Global diffusion of the Internet in India: Is the elephant learning to dance? Communications of the Association for Information Systems, 11, 560-646.

AuthorAffiliation

Monideepa Tarafdar, University of Toledo, USA

Sanjiv D. Vaidya, Indian Institute of Management Calcutta, India

AuthorAffiliation

Monideepa Tarafdar is assistant professor at the University of Toledo in Ohio. She has an undergraduate degree in physics and a graduate degree in telecommunications & electronics engineering from the University of Calcutta, India. Her doctoral degree is from the Indian Institute of Management Calcutta. Her current research and teaching interests are in the areas of strategic information systems management, management of IT, enterprise systems and organizational aspects of IS. Her teaching has been in the areas of management information systems, data management, data communications and e-commerce. Her research has appeared in the Journal of Information Technology Cases and Applications, Journal of Global Information Technology Management and System Dynamics: An International Journal of Policy Modeling.

AuthorAffiliation

Sanjiv D. Vaidya is currently associate professor with the Management Information Systems Group at the Indian Institute of Management Calcutta, India. He holds a BTech in electrical engineering from the Indian Institute of Technology Bombay, and an MBA and doctorate from the Indian Institute of Management Calcutta. He has spent several years in Indian industry and has held positions in the operations and IT functions. He has also worked in the capacity of a principal advisor on strategy matters for a leading IT organization in India. His research interests are approaches and processes for information systems strategy formulation, impact of IT on organizations, end-user computing, DSS and knowledge management and e-Business. His research work has been primarily of the theory building type. He has publications in Indian and international conferences and a book of strategic use of IT. His teaching interests are IS/IT strategy and management, and e-Business strategies. He also participates extensively in training corporate executives.

Subject: Public sector; Case studies; Information technology; Comparative analysis; Developing countries; LDCs

Location: India

Classification: 9550: Public sector; 9110: Company specific; 5220: Information technology management

Publication title: Journal of Cases on Information Technology

Volume: 7

Issue: 1

Pages: 111-135

Number of pages: 25

Publication year: 2005

Publication date: Jan-Mar 2005

Year: 2005

Publisher: IGI Global

Place of publication: Hershey

Country of publication: United States

Publication subject: Business And Economics--Computer Applications

ISSN: 15487717

Source type: Reports

Language of publication: English

Document type: Business Case

Document feature: tables charts references

ProQuest document ID: 198652601

Document URL: http://search.proquest.com/docview/198652601?accountid=38610

Copyright: Copyright Idea Group Inc. Jan-Mar 2005

Last updated: 2011-07-21

Database: ABI/INFORM Complete

Document 17 of 100

THE THRILL OF VICTORY, THE AGONY OF TITLE IX: THE CHALLENGE OF COMPLIANCE

Author: Whisenant, Warren A; Stretcher, Robert

ProQuest document link

Abstract:

The university's athletic program is not in compliance with Title IX. The critical decision to be made by the athletic director is how to best allocate funding to support sports programming that meet the needs and interests of the university, the students, and surrounding community. No incremental funding support is available from the university. In the past, such decisions were based on the emotional case for maintaining football and other men's sports. Funding and full compliance with Title IX can be accomplished, basing all decisions on the financial strength of individual sports. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The purpose of this case is to present the dilemma many universities face as they attempt to ensure gender equity within their athletic programs. The case allows students the opportunity to examine the operating budget for a Division I-AA institution and make recommendations regarding how to best fund additional sport programs to achieve Title IX compliance. The 2001-2002 Operating Budget for an athletic department as well as NCAA Division I-AA institutional data are provided. Selected demographic data for the university is also available. The case has a difficulty level appropriate for senior or first year graduate sports management or related courses. The case is designed to be taught in two class hours and is expected to require three hours of outside preparation by students.

CASE SYNOPSIS

INTRODUCTION

Athletic Director Gary Vega was prepared for a low impact summer until the senior women' s administrator entered his office to inform him that the new University President was concerned with the athletic program's level of compliance with Title G?. He was familiar with the struggles of other Division I-AA athletic directors were facing in meeting compliance. Knowing there would be no incremental funding from the university, he would have to achieve compliance with minimal impact on the other sports.

BACKGROUND

Pine Gulf State University is a mid-sized regional state university. For over five years, enrollment at the university has varied between 11,000 and 13,000 students. The university is comprised of a student body dominated by full-time (74%) students who tend to commute to the university. In fact, most of the students, 57%, live outside of the county. Its demographics reflect the rural community in which it operates: White (75%), Black (14%), Hispanic (9%), and all others (2%). Most of the students are women, 58%. The annual cost of attendance has been estimated to be $9,1 14 (tuition & fees $3,592; books $708; room & board $4,814). The university is a member of the NCAA, and competes with eleven other regional universities from two states in the Gulf Coast Conference. The conference competes at the Division I-AA level.

Issues associated with a federal law, the Education Amendments Act of 1972, had not been a concern to members of the athletic department until a new University President arrived on campus. The new president was a woman. Her concern was with a portion of the law known as Title IX. Title IX stated, "No person in the United States shall, on the basis of sex, be excluded from participation in, be denied the benefits of, or subjected to discrimination under any education program or activity receiving Federal financial assistance." She asked her new Vice-President of Student Affairs to report back to her on the university' s level of compliance with Title IX. The VP went to the NCAA' s web site, to learn more about the specifics of Title IX. He found that there were three basic parts of Title IX that applied to athletics - participation, scholarships, and other benefits. While Title IX required that men and women be extended equitable opportunities to participate in sports, it did not require an institution to offer identical sports. Regarding scholarships, the law required that student-athletes receive scholarship dollars proportional to their participation. Within the context of "other benefits," the law required equal treatment on issues of: equipment and supplies; scheduling of games and practice times; travel and daily allowances or per diem; access to tutoring; coaching; locker rooms, practice and competitive facilities; medical and training facilities and services; housing and dining facilities and services; publicity and promotions; support services; and recruitment of student-athletes. After learning more about the issue of Title IX, he contacted the senior administrator for women's athletics, Linda Wise.

Gary Vega, the university's athletic director, was looking forward to a relaxing summer after the end of another year of college athletics. With the exception of the men's basketball team, which had a 23-7 record and received its first ever NCAA tournament invitation, every team sport had a losing record. The women's basketball team performed so miserably (7 wins & 20 losses), Gary made a head coaching change before the summer break. Although the individual sports, comprised of men's and women' s golf, women's tennis, and track and field each had marginally successful seasons, their relatively obscure coverage by the media and community provided safe cover for their coaches. Unless someone showed some level of interest in developing those programs, Gary was content to allow those programs to roll along with little effort or involvement on his behalf.

As Gary ' s last major task for the academic school year, he prepared the 200 1 -2002 athletic budgets and distributed it to the coaching staff and to the senior administrator for women's athletics, Linda Wise, for their review. He had anticipated a calm and relaxing summer, until Linda entered his office. Linda had been at the university for over 19 years and served as the women's volleyball coach as well.

Gary: Hi Linda. How does the budget look?

Linda: Actually Gary, not too good.

Gary: I know it is tight, but the university is not going to give us any additional funding for next year. We are going to have to do the best that we can.

Linda: I can understand that Gary, but what I'm having problems with is your demand that volleyball, softball, and women's basketball have to conduct these summer camps to supplement our budget. The only camp you're requiring the men to run is baseball.

Gary: We've gone through this before Linda. The women's programs don't make any money. We have to generate funding from somewhere. Keep in mind, before I got here, the softball team used to clean the football stadium after the home games to get additional funds for their program. I really don't want to go back to that.

Linda: I agree. But football and men's basketball could make a lot more money on their camps than we can.

Gary: But they already generate money on their own.

Linda: But not nearly enough to cover their own expenses.

Gary: Agreed, but without them, our portion of the funds the NCAA allocates to the Conference, who in turn distributes to member schools based upon participation would be nearly nothing.

Gary: Is there anything else?

Linda: Yes. As you know, we haven't added participants or new teams to the womens' programs for the past five years. I got a call from the new VP of Student Affairs asking about Title IX compliance. He pointed out to me, that 58% of the university's students are women and only 34% of our student athletes are women. He suggested we offer soccer as an option to boost our numbers.

Gary: Are you kidding? How will we fund that? Where would we find the athletes?

Linda: He was very intense on this point. I fully expect him to go directly to the University President with this recommendation.

Gary: How much will this cost, and how close will this get us to compliance?

Linda: From what I can gather, we would add 21 girls, taking the percentage up to a 38% mix. Operating costs would be approximately $36,000, scholarships would run about $90,000, and coaches would cost approximately $65,000.

Gary: OK, here's what we need to do. You call the VP and let him know that I'll have the Athletics Business Manager look at the numbers. I'll have him provide us with a recommendation based on purely the financial condition of the department. You'll also need to educate the VP on a couple of things. Remind him that compliance doesn't just center on the dollars spent.

As Linda left his office, Gary picked up the phone to call the business manager. He got the business manger's voice mail. "Hey Joe, this is Gary. I need you to put together a financial recommendation to enable us to be in compliance with Title IX. Keep in mind that both groups have to receive scholarship dollars proportional to their participation. Also, we have to have equal treatment in the basic eleven provisions noted in Title IX. Then, we have to comply with the participation requirements. Get back to me as soon as you can."

To meet the participation requirements, Gary knew they would have to meet one of the three tests for compliance. First, they would have to show that the university provided participation opportunities for women and men that were substantially proportionate to their rates of enrollment of full-time undergraduate students. Second, they would need to be able to demonstrate a history and continuing practice of program expansion for the underrepresented sex. Or third, support the position that the university fully and effectively accommodated the interests and abilities of the underrepresented sex. Additional factors associated with Title IX would also need to be taken into consideration. Title IX did not require identical athletic programs for men and women. The programs needed to meet the interests and abilities of each gender. It also allowed for a discrepancy in the cost of equipment as long as the quality of equipment was the same. And finally, Gary knew that Title LX did not require reductions in or the elimination of any men's sports. He was anxious to see the Business Manager's recommendation.

View Image - Table 1: 2001-2002 Operating Budget

View Image - Table 4: NCAA Division I-AA Revenues and Expenses (Thousands)

View Image - Table 5: NCAA Sports By Season Table 6: NCAA Division I-AA Average Revenues and Expenses by Sport (Thousands)

View Image - Table 6: NCAA Division I-AA Average Revenues and Expenses by Sport (Thousands)

References

REFERENCES

Fulks, D.L. (2002). Revenues and expenses of divisions I and II intercollegiate athletics programs: financial trends and relationships-2001. Retrieved July 18, 2003, from http://www.ncaa.org

Gender Equity / Title IX. Retrieved July 18, 2003, from http://www.ncaa.org

Summary of estimated budget expenditures: current funds for the fiscal year beginning September 1, 2002. Retrieved July 18, 2003, from the anonymous university's web site.

AuthorAffiliation

Warren A. Whisenant, University of Houston

Robert Stretcher, Sam Houston State University

Subject: Colleges & universities; Gender equity; Sports; Gender differences; Federal funding; Case studies

Classification: 8306: Schools and educational services; 9130: Experimental/theoretical; 9550: Public sector

Publication title: Journal of the International Academy for Case Studies

Volume: 11

Issue: 3

Pages: 35-44

Number of pages: 10

Publication year: 2005

Publication date: 2005

Year: 2005

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References Tables

ProQuest document ID: 216297710

Document URL: http://search.proquest.com/docview/216297710?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2005

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 19 of 100

CIRR PRODUCE COMPANY - A CASE STUDY INTRODUCTION TO BUSINESS VALUATION

Author: Fern, Richard H

ProQuest document link

Abstract:

Jess Parker, a CPA, ABV, is hired by one his former college friends to place a value on a wholesale grocery business currently owned by him, his brother and sister. Family friction has led to the brother wanting to retire and have his interest bought by the other two siblings. Over a three week period, Jess works with his client and one of his staff members in doing the research and preliminary work. As he responds to questions from the client and his assistant, Jess explains some of the major challenges and issues involved in valuing a non-public business. Students research some common valuation methods and select the one most appropriate to the set of conditions in the grocery valuation. As students progress through the valuation and write the report they deal with limitations of traditional financial reports, the challenge of estimating proper discount and capitalization rates and the subjectivity of the valuation process. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

This case puts the student in the role of a CPA, ABV engaged in valuing a closely held family business for purposes of buying out a disenfranchised family member. Students are exposed to basic valuation research, confront the limitations of historical cost financial statements, choose an appropriate valuation method and exercise professional judgment in a variety of valuation decisions. The issues of objectivity, client conflicts of interest and business valuation accreditation are also introduced.

The case is appropriate for junior or senior level accounting or finance majors with a solid background in financial accounting. The case can be taught in one to two hours of class time and will require four to five hours of outside preparation by students.

CASE SYNOPSIS

Over a three week period, Jess works with his client and one of his staff members in doing the research and preliminary work. As he responds to questions from the client and his assistant, Jess explains some of the major challenges and issues involved in valuing a non-public business. Students research some common valuation methods and select the one most appropriate to the set of conditions in the grocery valuation. As students progress through the valuation and write the report they deal with limitations of traditional financial reports, the challenge of estimating proper discount and capitalization rates and the subjectivity of the valuation process.

[Data for the case is adapted from the AICP A's Course: "Developing Your Business Valuation Skills: An Engagement Approach". Copyright American Institute of Certified Public Accountants. Used with permission. All rights reserved.]

INSTRUCTORS' NOTES

DISCUSSION ITEM 1

Traditional GAAP -based financial statements should reflect full-accrual, primarily historical cost-based values. (Although not legally required to do so, many closely-held companies also prepare GAAP -based statements at the request of creditors.) While appropriate for the general investor and creditor trying to evaluate the firm's future earnings and cash flows, many GAAP-based amounts may not be relevant for valuation purposes. Among the reasons why GAAP standards are not always compatible with fair- value decisions are that 1) assets are reported at depreciated book value (using historical cost) and not at replacement cost or fair value; 2) revenue recognition rules may not be consistent with GAAP; 3) accounting estimates (e.g. bad debt reserves, depreciation lives, warranty provisions, pension accruals) may be overly optimistic or overly cautious;

DISCUSSION ITEM 2

The objective for this activity is for students to become familiar with some basic business valuation methods available to practitioners and discover some of the variables involved in the valuation process. Students will give a wide variety of responses depending on which particular sources are used. Students that limit their research to only those references in Appendix IV could adequately respond to Item 1 in an hour or so. Students using other resources might take an additional hour to complete this question. The following summaries are based on the sources in Appendix IV of the case that are typical of most discussions of valuation methods. It's important that students describe not only the calculation procedures but also that they have at least some appreciation of when each method is most appropriate.

Capitalized earnings approach: This is one of the most commonly used methods. It is appropriate when current earnings are presumed to be a good estimate of future earnings and will continue indefinitely. Historical earnings are first adjusted for unusual and abnormal items. Typical adjustments include removing excess owner and manager compensation and benefits and correcting for overly conservative or liberal accounting assumptions (e.g. depreciation, bad debts, and inventories). The normalized earnings are then projected into the indefinite future by dividing them by a capitalization rate. The capitalization rate is a risk- free rate of return that is adjusted for the risk inherent in the specific business situation.

Fair value of net assets method: This method is appropriate when the company's existing assets provide most of the firm's value. The appraised or estimated fair value of identifiable assets less liabilities gives the firm's equity value. This method is not appropriate when the firm's financial performance suggests that there may be a large amount of unrecorded intangible assets such as going-concern value or goodwill or the firm's value is largely dependent on earnings or cash flows.

Excess earnings method: This is one of the few methods that use both an asset and an income approach. The business is presumed to be worth the fair value of the existing net assets plus an amount for goodwill (going-concern value) based on the company's earnings in excess of a normal profit. Annual excess earnings are capitalized at an appropriate "cap" rate. The excess earnings method is appropriate when substantial going-concern value is suggested in the investigation phase of the valuation.

The excess earnings method, as presented in 1RS Rev. RuI. 68-609, is a common technique but it is sometimes hard to implement in practice. It is, however, appropriate in the set of circumstances surrounding the Cirr Grocery job. In this method, a business' value is estimated as the sum of the fair value of net tangible assets plus an approximated amount of goodwill based on excess earnings ability. It requires three calculations: 1) a reasonable rate of earnings on the tangible assets, 2) the company's normalized earnings in excess of the reasonable return (excess earnings) and 3) capitalization of the excess earnings at a rate appropriate for intangible assets.

Liquidation value method: This method approximates the minimum value that a business is worth and might be used if the owners were forced to sell the business quickly. Liquation value is the estimated amount that would be left if the owner were forced to quickly liquidate all of the assets and pay off the liabilities. The quick sale would preclude getting full, market value for the assets.

DISCUSSION ITEM 3

The objective of this activity is for students to relate the general valuation methods to the Cirr Grocery valuation job by focusing on some of the key issues. Students will have to critically evaluate the approaches in Item 2 and select one as most appropriate. This activity should help students see the type of professional judgments required in placing a value on a business. Choice of method(s) is one of the most important decisions that valuators make.

Most students will complete this activity in one hour or less since the background work was done in Item 1 . (In actuality, three different valuation methods were applied to the Cirr valuation. See details below.) Students should select either the capitalization of earnings or the excess earnings methods based on the following points: 1) the capitalization of earnings method seems appropriate since future operations are not likely to change in the near future after Darryl is bought out. Therefore, current normalized earnings are expected to continue; 2) the excess earnings method is appropriate since normalized earnings show substantial evidence of goodwill value (i.e. the firm is worth more than its recorded asset values); 3) the conditions are not conducive to using the other two methods. Future operations are unlikely to change substantially (due to the continuation of existing management), there is evidence of goodwill value based on successful operations and the company is not being liquidated.

DISCUSSION ITEM 4

The objective of this activity is to have students directly address some of the calculation and conceptual issues common in valuations and document their work. (Instructors may elect to have students do both of the suggested methods since this is often done in practice thereby adding realism and completeness to the case.) This section should take from two to three hours of student time.

Based on the discussion in Item 2, students have discovered that the liquidation method and the fair value of net assets method are inappropriate in these circumstances. Students will apply either (or both) the capitalized earnings or excess earnings methods. To apply these methods, normalized income statements for the five year period are required. To compute normalized earnings, students will likely propose earnings adjustments in two areas - specific adjustments based on items already presented in the case and general areas of GAAP.

The case only specifically identifies, and gives dollar amounts for adjustments related to salaries, profit sharing, personal travel costs and personal use of cars. Based on these items, the normalized income statements are presented below. For year 2001, the original amounts, adjustments and normalized amounts are shown (Table 1 and 2); for 1997 - 2000 only the final, normalized amounts are shown (Table 3).

Adjustments A and C: Adjust owner compensation to 2 percent of sales. In the case, Jess suggests that owner compensation should not exceed an industry average of 2 percent of sales. Therefore, officer salaries for each of the five years should be reduced to that amount (2% ? Net Sales). Also, since Profit Sharing is additional owner compensation, $60,000 ($20,000 @ owner) should also be eliminated to keep owner compensation to a total of two percent of sales. [Instructor note: The RMA size category for Cirr (Sales $10-$25 million) shows average compensation of 1.7 percent of sales. Some students may want to use that as the industry average. Jess' estimate at 2 percent seems reasonable.]

Adjustment B: Remove depreciation for personal use of cars by owners and spouses. Appendix II shows that one-half of the owners' car use is personal and that the company pays all of the expenses for the spouses' cars. Depreciation expense should be reduced by $10,000 ($20,000 ? 50%) for the owners' personal use and another $10,000 for the spouses' cars.

Adjustment D: Remove personal travel expenses paid by the company. Appendix II shows that Cirr pays $6,000 ($2,000 @ owner) of personal travel expenses for the shareholders. These should be eliminated since they are not typical business expenses.

Adjustment E: Adjust income taxes to 40% of normalized pre-tax income. The 40 percent rate must be determined from the tax expense data for years 1997 - 2001.

View Image - Table 1 Cirr Grocery Company Normalized Income Statement For Year Ended December 31, 2001

View Image - Table 2 Cirr Grocery Company Normalized Income Statement - Adjustments for Year Ended December 31, 2001

View Image - Table 3 Cirr Grocery Company Normalized Income Statement For Years Ended December 31, 1997 - 2000

Students may propose a variety of other potential adjustments, such as depreciation, write-down of obsolete plant and equipment, inventory costing methods and write downs, bad debt allowances, unrecorded sales, unrecorded liabilities (e.g. potential lawsuits), and inadequate operating accruals such as interest, taxes, wages or benefits. While the GAAP basis for their choices may be worthy of consideration and class discussion, there is no direct evidence that any of these items are substantially out of line at Cirr Grocery.

[Instructor note: There are a variety of GAAP issues that might be discussed here, although most of them really aren't vital to the adjustment process. Instructors may want to use this chance to review some basic GAAP concepts such as cash versus accrual basis (is Cirr full or only partial accrual?), periodicity and cut-offs (are all revenues booked and expenses accrued?), conservatism (what amounts did they use for depreciable lives?), reliability (have these statements been audited?) and materiality (does it really matter whether we use 2 or 1.7 percent of sales?).]

Capitalized Earnings Approach

The calculations for this method are: average expected future earnings / appropriate capitalization rate. In the case, Jess suggests a 40 percent cap rate when he predicts that there will be no major changes in operations for the next two and one-half years (100% 1 2 1⁄2 = 40%). Some students may use the three year estimate (Jess gave a 2 1A to 3 year range) and use a 33 1/3 percent cap rate. This is a good opportunity to discuss the use or conservatism in business valuation work. Of course, the lower the cap rate, the higher the value assigned to the assets. When in doubt, valuators like to err on the conservative side of their estimates which builds a bit more cushion for risk into the valuation numbers.

After the normalized earnings are computed for years 1 997 - 200 1 , the valuator must decide which, if any, of these years are representative of future trends. In three of these years, Cirr did not have the chain store customers that now account for a large percentage of their sales. And, the year 2000 earnings are unusually high and probably not typical of long-term trends. Therefore, a conservative estimate of Cirr' s value can probably best be found by capitalizing only the year 2001 earnings. This gives a value of approximately $1,168,890 ($467,556 / 40%). Students using the lower cap rate will get a value of $1,404,072 ($467,556 / 33.3 %).

In short, the business valuator is estimating that to get a 40 percent return on an investment in Cirr Grocery, one would need to pay $1,168,890.

Excess Earnings Method

The excess earning method has the following steps: 1) Determine the fair value of net assets (assets minus liabilities); 2) Compute normal earnings (fair value of assets times normal rate of return); 3) Compute excess earnings as actual average earnings minus normal earnings; 4) Capitalize the excess earnings using an appropriate capitalization rate; 5) Compute the company value as: fair value of net assets plus capitalized excess earnings.

The fair values of Cirr's net assets as of December 31, 2001, are shown in Table 4.

View Image - Table 4 Cirr Grocery Company Fair Value of Net Assets as of December 31, 2001

The calculations for the excess earnings method are: 1) The fair value of Cirr's net assets is $955,000 (Assets $2.297 M minus Liabilities $1.342 M); 2) Using Jess' imputed normal rate of return of 18 percent, normal earnings for net assets of $955,000 are $172,000 ($955,000 ? 18%); 3) Cirr's normalized earnings for year 2001 are $467,556. Excess earnings are $295,556 (actual $467,556 minus normal $172,000); 4) Using Jess' estimate of two and one-half years, the capitalization rate would be 40 percent (100% /21/2 years). Capitalized excess earnings are $738,890 (excess earnings $295,556 / 40% cap rate).

The company's value is approximately $1.64 M (fair value of assets $955,000 + capitalized excess earnings $738,890).

Since both methods seem appropriate, the final estimate could include both the capitalized earnings estimate of $ 1 . 1 7 million and the excess earnings estimate of $ 1 .64 million. One approach is to mathematically weigh each amount equally which is the simple average of the two amounts, or $ 1 .4 1 million [($ 1 . 1 7 + $ 1 .64)/ 2] . Or, the valuator may use the amounts only as guidelines and select some other value based on their professional judgment. In most cases, some mathematical approach is used. Under this approach, Darryl's one-third interest is worth about $470,000 (1/3 of $1.41 million).

Not all valuators weight the amounts equally. For example, some might use a 60% weighting for the capitalized earnings method and 40% weighting for the excess earnings method. This gives an approximate business value of $1.36 million [($1.17 ? 60%) + ($1.64 ? 40%)]. Weighting of final values is subjective. Individual valuators consider such variables as reliability and timeliness of the data, nature of the business, past experience with different methods and other considerations. For Cirr Grocery, only substantial differences in the weighting values (e.g. 90% vs. 10%) will make a material difference in the final valuation. In the final valuation report, the mathematical precision indicated by the weighting procedure should be downplayed.

At this point, students will want to know the "right" answer. In the AICPA case study, Cirr was valued at $1,298,000 using a combination of the capitalized earnings method (weighted 60%); excess earnings method (weighted 15%); and the discounted cash flow method (weighted 25%). (Note: Details of the cash flow method calculations were not given in the case; the authors' discounted cash flow value was inserted in the solution without explanation.) Be sure to stress that this is only one of many different amounts that could be computed depending on the evaluator, the assumptions made and a variety of other variables. Regardless of the subjectivity involved, it is fair to say that most valuations would fall in the range of $1.3 to $1.6 million.

OTHER ISSUES

Majority/ Minority Interests

While researching the various valuation methods, students may likely discover several of the many other issues that may be relevant in small business valuations. Among these are majority interest premiums, minority interest discounts and use of sanity checks on final valuation estimates. The instructor can raise these issues on their own if time, and student interest, permit.

In the appropriate circumstances, the business valuation may require an adjustment for a majority or a minority interest. If a majority interest in the business is being acquired (or sold) the value may be greater than its true proportional share. For example, the control inherent in a 60% ownership interest would indicate that a buyer would pay a premium above 60% of the estimated company value. On the other hand, a less than proportional share might be discounted for the opposite reason (lack of control or influence). For Cirr Grocery, family ownership shares are equal before the buy-out (each owns 1/3 of the company) and will be equal after the buy-out (each will own 1⁄2 of the company). So, majority and minority interest adjustments are not warranted.

One final step in arriving at the final estimate is applying "sanity checks" to the calculated amounts. For example, the valuator might ask: "Based on my knowledge of the industry and competitors, is this price reasonable?" "From an investment perspective, would an outside investor be willing to pay this amount?" With sufficient experience, most valuators can detect valuation results that are substantially different from reality.

General Business Valuation Guidelines

In retrospect, the instructor might want to share with students the following valuation axioms (Zipp, page 48). Each valuation is unique with its own peculiar circumstances, functions and purposes. There are only general guidelines to valuation. Individual judgment must be applied as part of and beyond the general methods. There is no single correct value. The appraiser only hopes to get a rational and supportable value in light of the circumstances. Experts usually disagree in their judgments of value. There are generally accepted methods of business valuation that have been tested in practice and in the courts. There is a difference between value and price. A value can be determined analytically; the price paid is the result of negotiation.

The Grocery Industry

Cirr's industry, the wholesale grocery industry, is SIC Code 5141 (Groceries, General Line) and NAICS Code 4224 (Grocery and Related Products Wholesale). Inquisitive students might explore for industry information as additional background. In the case, Jess concludes that a good industry average is owner compensation of about 2% of sales. This conclusion was reached from data found in: Risk Management Association's (RMA.) Annual Statement Studies, 2000, Wholesale Groceries, General Line. In 2000, Cirr's owners' compensation as a percentage of sales is 5.5% which is higher than any of the RMA categories. Since Cirr's owner compensation seems out of line, a normalization adjustment was made.

The Role of the Valuator

This is a good time to bring up the role of business valuators. Are they independent, objective appraisers (like external auditors) or advocates for their clients (like defense attorneys)? In most cases, valuators try to remain neutral and unbiased and this should be clearly understood by the client. On the Cirr engagement, Jess is actually working for all three owners, not just Dan, and will get paid by the company. Since these owners have competing agendas, Jess needs to remain objective. In other situations, however, valuators may take the advocate role. This often happens when the valuator is helping an individual client negotiate a purchase or sales price for a company.

AuthorAffiliation

Richard H. Fern, Eastern Kentucky University

Subject: Business valuation; CPAs; GAAP; Case studies

Location: United States--US

Classification: 8305: Professional services not elsewhere classified; 4120: Accounting policies & procedures; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 1-12

Number of pages: 12

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables

ProQuest document ID: 216302126

Document URL: http://search.proquest.com/docview/216302126?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 20 of 100

"WAITRESS! THERE'S A ROACH IN MY HASH BROWNS!" When Pleasing the Customer Becomes Lost in Other Issues

Author: Kahla, Marlene C; Bieber-Hamby, Barbara

ProQuest document link

Abstract:

The case is presented from the perspective of the waitress. The readers are taken into her life, her work experience, and her current situation as life happens to her and builds stress for her throughout the evening and early morning hours. Although the students can get the idea that the person has made a career of being a waitress, they can discover that little actual training is made available for employees in her position with the franchise or corporate office. She never mentions a training program with Denny's or even with her manager. Since she came to Denny's with actual work experience, any training was over looked. As the scenario progresses, she is quickly over taken with new responsibilities when the manager abruptly quits. Enabling students to distinguish service quality as a result of training is a challenge. The case emphasizes a "walk in my shoes" type of perspective and will enable the students to better understand the lives of the people they will one day manage. Also, the case enables students to incorporate the five characteristics of service quality into marketing strategies and plans. The case is designed to enhance each student's ability to differentiate each component of service quality and to better understand the significant role of first line employees in presenting the corporation to consumers and other employees. The overall goals of the case are to increase awareness that the actual physical product and service are two components of an overall service encounter; and, to enable students to understand that service delivery is a crucial element of service that revolves around training, evaluations, and effective communications within a company. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of the case presented here focuses on how customers and employees can get overlooked when corporate officers must attend to legal issues which have been mandated in courts and published in national papers and journals. Secondary issues can be determined as students are encouraged to discuss training of employees and its impact on the five characteristics of service quality: reliability, responsiveness, tangibility, empathy, and assurance. As students discuss the characteristics of service quality, they can be encouraged to develop a perceptual map placing Denny's amongst its competitors based on the axes of quality service and training provided employees.

If the instructor chooses to address all seven questions and tasks, then the case will take two class periods to cover, approximately two hours. However, if the instructor chooses to focus on a particular question, such as Question One that focuses on the five characteristics of service quality, then the case would require no more than one class meeting, approximately forty-five minutes to an hour.

The case can be useful in the following courses: (1) Service Marketing: re-enforcing characteristics of service quality and the importance of training programs in marketing of services; (2) Principles of Marketing: influences of situational determinants and group members on consumer behavior; (3) Principles of Management: the impact of effective training programs on the service profit chain; or, (4) Principles of Finance: the impact of ROI on profit.

CASE SYNOPSIS

She never mentions a training program with Denny's or even with her manager. Since she came to Denny's with actual work experience, any training was over looked. As the scenario progresses, she is quickly over taken with new responsibilities when the manager abruptly quits.

Enabling students to distinguish service quality as a result of training is a challenge. The case emphasizes a "walk in my shoes" type of perspective and will enable the students to better understand the lives of the people they will one day manage. Also, the case enables students to incorporate the five characteristics of service quality into marketing strategies and plans.

The case is designed to enhance each student's ability to differentiate each component of service quality and to better understand the significant role of first line employees in presenting the corporation to consumers and other employees. The overall goals of the case are to increase awareness that the actual physical product and service are two components of an overall service encounter; and, to enable students to understand that service delivery is a crucial element of service that revolves around training, evaluations, and effective communications within a company.

INSTRUCTORS' NOTES

Pre-class Readings and Student Preparation

Instructors may want to have students read specific sections of a service marketing text, i.e., Zeithaml and Bitner (2002) where the students focus on the characteristics of service quality and relate them to employees' roles in service delivery. Upper level students may also read service related articles in journals such as Journal of the Academy of Marketing Science. A good basic article to suggest would be:

Berry, L. L. (2000) Cultivating service brand equity, Academy of Marketing Science. 28(1), 128 - 137.

However, the case could be presented from the perspective of general marketing knowledge combined with knowledge gained by students as they participate as consumers of service. The students, therefore, would need little pre-class preparation-just their experiences as consumers of restaurant services.

GENERAL BACKGROUND

The "Roach in My Hash Browns" case enables introduction of terms such as characteristics of service quality, "moment of truth," and "service profit chain." As the students pursue the answers to the questions they should be encouraged to define these terms as they relate to service marketing. From the perspective of the employees, the waitress, the cook, and the manager, the students can be guided into discussions which require them to address training and lack of it and the impact training has on profit in service establishments.

RESPONSES /ISSUES SURROUNDING QUESTIONS TO ANSWER

1. Based on the characteristics of service quality, what is your perception of Benny's as it is presented in the case?

(a) Review the American Customer Satisfaction Index-Ratings by Industry in which restaurants are listed as fourth from the bottom-just above local police in central cities, broadcasting the national news, and the Internal Revenue Service.

(b) Discuss the potential for training programs in the restaurant industry and how such training can improve restaurant ratings in a satisfaction index.

A. reliability-the order is right the first time and each subsequent time. The waitress continued to forget the coffee orders, and she perceived little importance in coffee since she personally preferred soft drinks with caffeine. She was focused more on her own problems than she was attending to customers;

* responsiveness-Uiere is no long waiting periods for food or coffee. The waitress repeatedly took a long time in bringing coffee to the table, and, when the breakfast orders were delivered to the table, they were cold;

* assurance- well trained personnel, who really know what they are doing and should be doing. Neither the cook nor the waitress were sure about what they were doing. The roach infested kitchen and restaurant complicated things for the employees, but neither the waitress or the cook really had a plan that would effectively solve the roach problem, partial orders (the side of toast that was added later), and cold food. The manager quit to leave the waitress and the cook to take care of everything that evening. Neither employee was trained to address all that they encountered in the scenario. The cook was getting behind in completing orders, and the waitress was doing little to reassure customers that their food would be coming;

* empathy-acknowledges the customers and attends to them with care. While the waitress acknowledged the foursome of customers, she was not attending to them in a way that would reassure them that their food and beverages would be what they should be. She was slow at bringing the drinks and the food, and the food was cold when it was served, and she only responded quickly to the roach in the hash browns as she watched another roach scamper across the floor in front of her and the other customers; and,E. tangibles-the facility itself, the location of the smoking section, and the complete look of the location. The roaches crawling over the things in the kitchen and the dining areas were definite indicators that the tangibles could be improved. Also, the cook needed to present himself in a clean apron and be relatively neat in appearance.

2. Using a perceptual Map, define Benny's apparent positioning strategy.

I. Encourage map drawing on an easel, or an over head sheet.

II. Review the support material about Denny's and its training program and locate where they believe the restaurant should be placed on the perceptual map.

III. Organize students into teams.

IV. Have each team locate Denny's and competitors on the perceptual map and justify their decisions.

3. Visit a local restaurant, one similar to Denny's if Denny's is not available, and perform a customer service audit.

I. Out of the classroom participation can be carried out by the teams organized in the previous question.

II. Develop a checklist in class that each team should complete as part of the customer service audit

III. Evaluate each establishment visited by each team on the five characteristics of service quality.

4. List the "moments of truth" presented in the scenario.

I. "Moment of truth" is when customers interact with the service firm. Have the students count each "moment of truth" in the scenario;

II. "Moments of truth" can also occur from an employee perspective. Although moments of truth are typically presented from a customer perspective, they should be addressed from both sides-customer and employee. Have the students list at least four "moments of truth": greeting the customers, seating the customers, taking their order, and encountering the roach in the hash browns.

III. Additional "moments of truth" may exist, and the students should be encouraged to list a few more. For example, when one employee interacts with another employee that, too, is a "moment of truth." So, when Thelma interacted with the cook, Roy, the two were in a "moment of truth." Lead the students into a discussion of how the employees could have improved the interaction amongst themselves.

5. Perform a Gap Analysis. Which Gap in service evaluation is the focus of the case?

I. List provider gaps presented in the scenario:

A. Gap 1 : not knowing what customers expect.

1 . Thelma really did not realize that the customers wanted coffee first:

2. Hot food: and,

3. Clean surroundings.

B. Gap 2: not selecting the right service designs and standards.

1 . No formal training for Thelma;

2. No formal training for Roy; and,

3. Neither employee was aware of the image that corporate had for Denny's, nor did they care.

C. Gap 3: not delivering to service standards.

1. Service was slow;

2. Employees were non caring; and,

3. Food was cold and contained insects; and,

D. Gap 4: not matching performance to promises.

1 . Marketing Denny's does on a national level is not reality on local level,

2. Customers' understanding of what Denny's says it will deliver, and,

3. Customers' perception of what Denny's actually delivers.

II. Students should be encouraged to discuss The Customer Gap: the chasm that happens when expected service does not meet with perceived service.

A. Discuss students' perceptions of The Customer Gap,

B. Discuss Denny's complete advertising campaign that depicts the quality food and surroundings that a customer should expect in a Denny's restaurant,

C. Discuss the impact of national advertisements on local establishments, and

D. Discuss the role of training in placing the front line employees in an ownership role in the firm (and getting them beyond thinking based solely on tips).

6. How do you believe the training program at Denny's affects its service profit chain?

I. Discuss the idea that companies that manage people right will out perform companies that do not by 30 - 40 percent (see Pfeffer 1998).

IL Access the various lists of the best companies to work for and allow the students to discuss what the companies have in common regarding employee training.

III. List the things Denny's can improve in managing people.

A. Skills,

B. Knowledge,

C. Enthusiasm, and,

D. "Ownership".

7. Would use of a service audit, perceptual mapping, and gap analysis enable Denny's to improve ROI in their underperforming locations? (See previous discussion.)

I. Students should be reminded that ROI is the yardstick current management is using to evaluate facilities.

II. The instructor can access the September 18 NPR interview with Extended Care facility operators on the profitability of empowered employees.

A. Costs decreased

B. Improved Service

C. No increase in pay or benefits

Joseph Shapiro

Under the Wellspring program, the independently operated homes have banded together, sharing resources, data and ideas. Care at the homes has improved, according to the Commonwealth Fund report, in part because the lowliest of workers - the nurse aides - were empowered to take charge and solve problems.

References

REFERENCES

Peffer, J. (1998). The human equation Boston: Harvard Business School Press

Webber, A. M. (1998). Danger: Toxic Company, Fast Company, November, 152-62.

Zeithaml, V. A. & Bitner, M. J. (2002). Services Marketing, Integrating Customer Focus Across the Firm, (3rd ed.) Boston: McGraw Hill, Irwin.

(www.dennysrestaurants.com/who/history)

(www.usdoj .gov/crt/housing/documents/dennysettle2 .htm)

(Http://www.advantica-dine.com/advantica)

(http://www.advantica-dine.com/advantica/Devweb.nsf).

(www.dennysrestaurants.com/aboutus/) Retrieved from world wide web, September 15, 2002, Denny's Corporation Investor Relations, June 2, 20002, Advantica Reports May Same store Sales, Author unknown.

(NPR, August 16, 2002) Interview broadcast on National Public Radio, Red River affiliate, Motley Fool, 6:00 pm, central time.

(www.advantica-dine .com/advantica)

(www.virtualval.com/_enuf/_dennys.html)

(www.progressive .org/mpmilian 1 098 .htm)

(www.nylj.com-stories-00-07-071800ab.htm)

(www.kettle .com/history .html)

AuthorAffiliation

Marlene C.. Kahla, Stephen F. Austin State University

Barbara Bieber-Hamby, Stephen F. Austin State University

Subject: Restaurants; Waiters; Case studies; Quality of service; Customer satisfaction

Location: United States--US

Company / organization: Name: Dennys Corp; NAICS: 533110, 722110

Classification: 6200: Training & development; 9130: Experimental/theoretical; 8380: Hotels & restaurants; 9190: United States; 2400: Public relations

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 13-19

Number of pages: 7

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216274860

Document URL: http://search.proquest.com/docview/216274860?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 21 of 100

CONDUCT UNBECOMING: ALLEGATIONS OF SEXUAL MISCONDUCT AT THE UNITED STATES AIR FORCE ACADEMY

Author: Emery, Charles R; Benton, James E

ProQuest document link

Abstract:

Imagine the outrage if one out of five female American P.O.Ws said they had been sexually assaulted by Iraqi. Well, that's how many female Air Force cadets say they have been assaulted - not by the enemy, but by men supposed to be their comrades in arms. This case study chronicles the June-September, 2003, investigation of a decade of alleged sexual misconduct at the United States Air Force Academy. A panel of investigators, appointed by the Secretary of Defense and headed by the Honorable Tillie K. Fowler, examined the awareness of misconduct and the Academy's organizational culture, climate, structure, curriculum, reporting and response procedures and leadership (internal and external) in an attempt to identify root causes and to provide lasting recommendations for the prevention and intervention of any future abuses. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case involves the detection of cause factors and proposal of corrective actions to eliminate chronic sexual misconduct in an organization that rewards machismo. Despite the Academy's emphasis on officer integrity and honor, previous attempts over the last decade, to correct these problems have failed. Secondary issues examined include leadership, ethics, whistle blowing, sexual harassment, and the confidentiality of reporting along with how to develop character and plant seeds for organizational change. The objective is to make the students develop an investigative process that examines interrelated and often subtle cause factors to develop well justified corrective actions. This case is appropriate for junior or senior undergraduate students as well as graduate students studying business policy or strategy, human resource management, organizational behavior and ethics. This case can be easily varied in its scope through the array of focused discussion questions. The case is designed to be taught in one class hour and is expected to require three to four hours of outside preparation depending upon the level of sophistication; it is ideal for either individual or team assignments/presentations.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case on the investigation and correction of alleged sexual misconduct will generate a lot of discussion (and often heated debate) and as such, requires the instructor to focus on issues related to the course. While students will easily identify with the circumstances surrounding this case, they may often overlook the subtlety and interrelationship of cause factors and the delicate balance of corrective actions. This is an excellent vehicle to familiarize your class with an investigative process, particularly one under the microscope of the press. As such, it works well to have teams develop and implement their investigative process to determine the cause factors and corrective actions. The teams should pay particular attention to why the previous attempts to eliminate the problems failed and the array of ingredients necessary to produce organizational change. A fitting assignment scenario is to have a team present their case to a simulated Congressional Committee. Further, the instructor may want to order a video tape of the ABC 20/20 story "Under Fire at the Academy" aired February 13, 2004. This case chronicles the first Air Force Academy cadet scheduled to be court-martialed for allegedly raping a female cadet. The case illustrates the fine line between consensual sex and date rape when alcohol is involved. Additionally, the ABC 20/20 website (www.abcnews.go.com/sections/2020/US/Court_Martial_ 0402 13-1 .html) has links to other sexual misconduct cases at the U. S. Air Force Academy they have aired. For example, "Slap on the Wrist" discusses an Air Force cadet that gets 60 days for sexually assaulting a 13-year old girl. "Rape without Repercussion?" reviews the stories of seven female cadets who say their charges of sexual assault were ignored and "Conduct Unbecoming" examines the case of a cadet who allegedly runs a porn ring and arranges group sex at the Academy.

Individual assignments might center on the issues of character development, whistle blowing and organizational change in addition to identifying cause factors and suggesting corrective actions. Also, you may find it interesting to have the class debate: (1) whether there really is a sexual abuse problem at the Air Force Academy that is any different than any other college or university, (2) whether the toleration of misconduct by fellow cadets can be eradicated, and (3) whether a victim's confidentiality should be maintained or should the Academy's chain of command be notified. The following section contains a number of discussion/assignment questions that can be tailored to your class subject area. Note: Each question often contains several subquestions and suggestions that might further satisfy your teaching needs.

ASSIGNMENT OR DISCUSSION QUESTIONS

1. Determine the root causes of the abnormally high incidence of sexual misconduct at the USAF Academy and offer short and long term recommendations to resolve this problem.

Students should ask: Is the sexual misconduct abnormally high at the Academy versus civilian work environments and state or private university settings? Those assaults that are committed against female students attending other universities may not be counted as an assault on that particular college campus if the assault took place off campus. Often times the university only reports sexual assaults that occur against students on campus. Those that occur off campus are the communities' problem versus the reporting of all sexual assaults on female cadets regardless of where they took place. Furthermore, the academies are able to more easily account for the reported assaults because of the closed community the cadets live in. Notwithstanding, however, is the point that cadets may be less likely to report sexual misconduct than co-eds at other colleges and universities. What about a comparison of sexual misconduct at the Academy vs. society as a whole? Do a different set of social norms come into play?

Students should discuss the panel's recommendation that the academy should place a renewed emphasis on education and encouragement of responsible consumption of alcohol for all cadets. The panel found that drinking was highly correlated to sexual misconduct. Additionally, a novel of cadet life at the U.S. Air Force Academy by Mark Pizzimenti (1998) suggests that alcohol abuse is out-of-control.

Students should discuss the panel's recommendation that the academy implement a policy permitting unrestricted (i.e., no explanation required at any time) private access to telephones for the use by any cadet, including Fourth-Class cadets, in an emergency (Panel of House Armed Services; 2003).

Students should discuss the panel's recommendation that the Center for Character Development education instruction be mandatory for all cadets. The Panel further recommended that the cadet curriculum require completion of at least one course per year that emphasizes character values, for which cadets shall receive a grade and academic credit (Panel of House Armed Services; 2003).

Students should ask if the 4th class system should be to blame. Is it too much to ask of those so young to have so much power over other young people? Also discuss how power of upper classmen over underclassmen could possibly contribute to such abuses.

Students should examine several issues surrounding the selection of cadets. For example, are there personality characteristics of male students who attend the service academies predisposed to showing overly aggressive behavior towards women? Are the female students who attend the service academies more promiscuous and prone to getting into sexual situations that could get out of control? What percentage of male and female applicants have previously been involved in sexual misconduct incidents?

Is there a way for separating out the males and females, where females are in charge of females and males are in charge of males? Is this feasible? Are there drawbacks or disadvantages to this and what are they? Some disadvantages are the perception that the females do not have to do as much or work as hard as the males and also a lack of working together for a common goal together but segregated.

Is it feasible that males and females can never be alone (one-on-one) together? Chaperone type of meetings to include room inspections.

Students should suggest that a cadet's history of interaction with the opposite gender be a consideration for promotion to cadet ranks or supervisory positions at the Academy. In other words, limit promotions to males who prove/show an understanding of the leadership responsibilities over others to include interactions with females. The same type of provision would apply to promotion for female cadets.

Students should discuss sexual assault in the workplace and how this can be handled both from a preventative point of view and from a reporting perspective.

Note: The panel's recommendations have been scattered throughout this section on assignment questions. If you need a complete and orderly listing of recommendations, refer to www.usafa.af.mil/d20030922usafareportl.pdfor the actual report document (Panel of House Armed Services; 2003).

2. The Panel recommends a through review of the accountability of Academy and Air Force Headquarters leadership in attempts to fix the sexual assault problems at the Academy over the last decade. The review should consider the adequacy of personnel actions taken, the accuracy of individual performance evaluations, the validity of decorations awarded and the appropriateness of follow-on assignments. Further, if the leaders are found remiss in the execution of their duties, punitive measures should be considered (e.g., removal of decorations associated with the applicable tour of duty, adjustment to the individual's performance appraisal, written reprimands, dismissal, immediate retirement, reduction in active duty or retirement grade, etc.). Do you think leadership should be held accountable for failures to fix an organization's culture? If so, to what extent should they be held accountable? To what extent should the leaders of corporations be held accountable for failures to change organizational culture? Would this type of accountability improve future performance or have a negative impact on perceptions of procedural and distributive justice?

Students should discuss the difference between authority and responsibility. Which one can be delegated and which one cannot? Who is ultimately accountable for an organization? Students should clearly understand that the senior leadership team which includes the board of directors and all senior executives of the organization is accountable.

Students may want to discuss how a leader or leadership team can change an organization's culture and what it would take to do such a thing. There is a common belief that the organization takes on the culture or model the behavior of the leadership team. In other words, junior officers in the military (as well as junior managers in civilian organizations) will act in a manner that is consistent with the explicit and implicit actions and beliefs of the senior leadership team. As such, does this suggest that top leadership is clearly at fault when a dysfunctional culture is slow to change?

Students should discuss the various measures available for failure to accomplish a change in the organization's culture such as grade reduction and loss of awards for the military to paying back of bonuses or options in the corporate world. This discussion should also include how difficult this would be to implement, where the lines are between criminal and civil penalties as well as whether these measures are too severe or not severe enough. Under the Uniform Code of Military Justice (UCMJ) officers and cadets can be prosecuted for conduct that many civilians may consider as minor personal offenses. However, leaders in the military feel that there is a higher standard for officers because of the authority and responsibility they have for others lives.

Students should discuss whether the culture of an organization really has an impact on an organization's ability over the long run especially in the business world. Examples such as Microsoft, Intel, IBM, Southwest Airlines, Enron, Pepsi-Cola and GE may be discussed to look at the culture and how that culture was developed and what impact the culture has had on the success of the businesses.

Students should discuss the panel's following recommendations that: (1) The Secretary of the Air Force adopt a management plan that includes the creation of an Executive Steering Group, as the permanent organizational structure by which the senior Air Force leadership will exercise effective oversight of the Academy's deterrence of and response to incidents of sexual assault and sexual harassment; (2) The Air Force extend the tour length of the Superintendent to four years and the tour length of the Commandant of Cadets to three years in order to provide for greater continuity and stability in Academy leadership; and (3) The Air Force prepare a legislative proposal to revise 10 U.S.C. § 9335(a) to expand the available pool of potential candidates for the position of Dean of Faculty beyond the current limitation to permanent professors (Panel of House Armed Services; 2003).

3. The Panel believed that the USAF Academy Board of Visitors failed to perform their oversight duties. Do you agree? What is the basis of your agreement or disagreement? Is it the responsibility of a Board of Directors to have ethical oversight of a company? Can members of the Board of Directors be held accountable for failure to uphold this responsibility?

Students should discuss the amount of effort put forth by the Academy Board of Visitors and the time spent on their duties. They may want to explore what their duties were and were these duties delineated by law or agreement or ... and also were these duties communicated to the individual board members when they were asked to serve as a board member.

Students should discuss the oversight responsibilities of Corporate Board of Directors. What is their function and responsibilities and where are these responsibilities spelled out (e.g., Articles of Incorporation and Bylaws)?

Students should discuss the consequences to the individual board members on corporate boards when corporations seriously stumble or worse, fail, and how individual board members can protect themselves in today's legal and business environment.

Students should discuss the various duties that board members have in organizations, especially in business, such as:

Fiduciary Duty: To put the best interests of the organization first above the interests of the individual members.

Duty of Care: To act in a good faith manner and to exercise the care that an ordinary prudent person would exercise in a similar circumstance.

Duty of Informed and Reasonable Decisions: Meet the expectations of being informed on organizational matters and carefully study a situation and its alternatives prior to making decisions that impact the organization.

Duty of Reasonable Supervision: To supervise the senior leadership team who has the responsibilities for day-to-day operations.

Duty of Loyalty and Conflicts of Interest: See Fiduciary Duty.

Students may want to discuss the Business Judgment Rule here. How board members can avoid personal liability for missteps of the organization as long as they adhere to all of their duties listed above and yet still make a bad business decision (e.g., various acquisitions, joint ventures, product launches).

Students should discuss the panel's recommendations that the Board of Visitors operate more like a corporate board of directors with regularly organized committees charged with distinctive responsibilities. The board should meet not less than four times per year, with at least two of those meetings at the Academy. Board members must have unfettered access to Academy grounds and cadets, to include attending classes and meeting with cadets informally and privately. The board members must also receive candid and complete disclosure by the Secretary of the Air Force and the Academy Superintendent of all institutional problems, including but not limited to, all gender related matters, cadet surveys and information related to culture and climate and incidents of sexual harassment and sexual assaults (Panel of House Armed Services; 2003).

The panel further recommended that the Air Force prepare a legislative proposal to revise 10 U.S.C. § 9355 with changes as follows: (1) Changing the composition of the Board to include fewer Congressional members, more women and minority individuals and at least two Academy graduates; (2) Requiring that any individual who accepts an appointment as a Board member does, thereby, pledge full commitment to attend each meeting of the Board, and to carry out all of the duties and responsibilities of a Board member, to the fullest extent practical; (3) Terminating any Board member's appointment who fails to attend or fully participate in two successive Board meetings, unless granted prior excusai for good cause by the Board Chairman; (4) Providing clear oversight authority of the Board over the Academy, and direct that, in addition to the reports of its annual meetings required to be furnished to the President, it shall submit those reports and such other reports it prepares, to the Chairmen of the Senate and House Armed Services Committees, the Secretary of Defense and the Secretary of the Air Force, in order to identify all matters of the Board's concerns with or about the Air Force Academy and to recommend appropriate action thereon; and (5) Eliminating the current requirement for Secretarial approval for the Board to visit the Academy for other than annual visits (Panel of House Armed Services; 2003).

4. One might assume that the Academy's image has been damaged in the eyes of prospective recruits. If you were in charge of recruitment at the Academy, how would you develop a program to repair the Academy's image? Can the Academy's image be repaired?

Students may discuss a number of alternatives some of which may be: (1) Appealing to the individual recruits sense of change and how they can be the ones who change it for the better in the future by doing today what should have been done previously; (2) Publicly announcing the changes that are taking place at the Academy as well as the hoped for outcomes from the changes; (3) Playing on the positive of the academy schooling such as the leadership development and service to country; (4) Demonstrate that all cases will be publicly prosecuted no matter how sufficient the evidence; and (5) Students should discuss how the cultural changes must also start with current graduates such as those who attend academy events with the t-shirts and other paraphernalia with the letters "LCWB", last class without bitches (or broads). Should the academy restrict these graduates from attending events and if still currently serving in uniform, could there be some sort of punishment for continuing such open disregard for the women at the academy.

5. The Panel noted that there have been numerous incidents and indicators, investigations, working group discussions, and high-level meetings on sexual assault and harassment issues over the last ten years. Why has this problem been so hard to fix? Is there a common theme or root cause that occurs in all "hard to fix" problems?

Students should discuss the proposed solutions that various leaders have proposed in the past and their follow-up after implementation. They should discuss whether these proposed solutions were adequate (e.g., drinking policies, confidential reporting schemes, character education, self-defense courses, clustering of rooms) or merely band-aides for more serious problems. Additionally, students should discuss whether they perceive that the cadets were taking this problem seriously.

Students should discuss whether they think the honor code is a deterrent to sexual misconduct or just wishful thinking. It appears that some cadets believe the "not tolerating those who do" portion of the code is in conflict with loyalty to their fellow cadets. This suggests that their primary loyalty is not with the leadership and the Academy. What can the leadership do to change cadet loyalties without jeopardizing cadet camaraderie and teamwork? Currently, the Academy's leadership continues to believe that punishing "those who tolerate" is the only answer.

Students may want to discuss the legal outcomes and punishments for those who were accused of committing the sexual assaults and whether legal prosecution and punishment would or should have been an effective deterrent if done early.

Students may want to discuss how all hard to fix problems deal with people and the interactions of people.

Students should discuss the panel's recommendations regarding this area. The panel recommended that the Air Force extend the tour length of the Superintendent to four years and the tour length of the Commandant of Cadets to three years in order to provide for greater continuity and stability in Academy leadership (Panel of House Armed Services; 2003). If this is a concern of the panel regarding the leadership team at the Air Force Academy could there also be concern in the business world were it is not uncommon to send executives to various assignments for short durations to get experience in every area of the company? Does this type of mind set, although good in thought breed a short term mentality among executives to include short term profits versus long term company viability?

Students should also discuss the other panel recommendations as noted in question 3 above.

6. On June 3, 1996, a psychiatric consultant assigned to the Air Force Surgeon General briefed the Air Force Chief of Staff that "the problem of sexual assault and victimization continues at the Academy in large measure due to cultural or institutional value system. What was he suggesting? How are these issues corrected?

Students should talk about how this climate promotes silence and discourages victims from obtaining help while increasing the victim's fear of reprisal. Further, the climate promotes an atmosphere of fraternity-like machismo, sexual grossness and, in general, "boy behaving badly." How does a college or university modify this type of behavior? As the students should recall, research indicates that sexual harassment is the gateway to sexual misconduct.

Students should discuss the panel recommendations such as: (1) The Academy place a renewed emphasis on education and encouragement of responsible consumption of alcohol for all cadets; and (2) The Academy focus on providing better training to the trainers of prevention and awareness classes including enlisting the aid of faculty members who are sell-skilled in group presentation techniques that are effective and energize the cadets, developing small group training sessions which will be more effective than large audience presentations, developing training sessions that educate the students on the reporting process and Air Force Office of Special Investigations investigatory practices and procedures, and establishing a review process for training session materials that includes the use of the Academy Response Team and cadet cadre or some other multi-disciplinary group of experts (Panel of House Armed Services; 2003).

7. In 1997, the Academy requested and was granted a waiver from requiring Academy medical personnel to report all information surrounding sexual assault incidents to the Commandant of Cadets and the Security Police Office of Investigations (SPOI). Why would such a waiver be requested? What are the tradeoffs?

Students should discuss the reasoning behind the waiver request, i.e., to encourage the victims to come forward without feeling that they must report the incident to the law enforcement and legal authorities. They should also discuss other reasons why victims of sexual assaults fail to report the incidents such as low self-esteem stemming from the incident, that somehow the assault was for some reason their fault or the embarrassment from the incident. Additionally, the victims may feel shock that a fellow cadet would sexually assault them and the feeling that reporting the incident may show that they cannot handle adversity which is required of the cadets and future military officers.

Students may want to discuss whether this action helped to encourage victims to report incidents of sexual assault to medical personnel or not.

Students should discuss the dangers of not reporting incidents of sexual assault to authorities other than medical personnel such as lack of evidence collection and those who committed the acts of sexual assault escaping prosecution and punishment which in turn fails to deter others in the future.

Students should discuss the panel's recommendation that the Air Force Office of Special Investigations Academy detachment participate fully in the recently established Academy Response Team and use it for informing and educating Academy leadership, victim advocates and CASIE representatives of their responsibilities and limitations. Educational efforts by the AFOSI should include programs that provide a basic understanding of how and why it takes certain investigative actions, and the benefits of timely reporting and investigation of all sexual assault incidents.

Students should discuss the panel's recommendation that the Air Force establish a policy that achieves a better balance of interests and properly employs psychotherapist-patient counseling, and its associated privilege, for the benefit of cadet victims. The Panel also recommended that the Academy's policy for sexual assault reporting clearly recognize the applicability of the psychotherapist-patient privilege and that the Academy staff the Cadet Counseling Center with at least one Victim Advocate provider who meets the legal definition of "psychotherapist." Further, the Panel recommends that the individual assigned to serve as the initial point of reporting, whether by "hotline" or in person, be a qualified psychotherapist who has completed a recognized rape crisis certification program. Optimally, the Victim Advocate psychotherapist should be in charge of the sexual assault program within the Cadet Counseling Center and will provide direction and supervision to those assistants supporting the assigned psychotherapists.

8. The Academy failed to provide the Panel with information on climate surveys prior to 1998. Further, they indicated that they did not perform a climate survey in 1999 and that the surveys performed in 1998, 2000, 2001 and 2002 were statistically invalid. Is this a significant shortcoming? Why? Develop several survey questions that might serve as indicators of a culture that tolerates sexual harassment and abuse.

Students should discuss the purposes behind climate surveys in the armed services as well as in the business world. Why do we do them, what do we do with the information from them and how can they be used to affect change?

Students may want to discuss the possible connection between the cultural attitude towards sexual assaults and women at the USAF Academy and the care used in doing the climate surveys and the general makeup of the survey itself. Was the leadership just going through the motions of doing the survey so they can say that they did it or were they serious in gaining important information from the respective survey to change the climate at the academy?

The survey should identify new areas of concern and assess the corrective progress against cause factors. As such, the administration may want to focus on whether the cadets understand the factual definitions of sexual assault, sexual harassment and sexual abuse. In other words, ensure that the cadets understand what is and what is not allowed or tolerated. Further, it is important to continue asking questions regarding the acceptance of females at the academy as well as supervisors or superior officers. As the students should recall, it was not uncommon for male upperclassmen to direct "Fourth Class" males to disregard any orders given by a female cadet. Additionally, questions are needed to ascertain the cadets' perceptions of drinking and alcohol abuse, toleration of sexual misconduct (cadet and active duty), respect for leadership (cadet and active duty) and various reporting issues (e.g., willingness, availability, confidentiality, retribution). Another interesting question might be to ask the cadets whether they would recommend the Academy to their younger sister or daughter.

Students should discuss the panel's recommendation that the Academy draw upon climate survey resources at the Air Force Personnel Center Survey Branch for assistance in creating and administering the social climate surveys. Additionally the panel recommended that the Academy keep centralized records of all surveys, responses and reports and keep typed records of all written comments to be provided as an appendix to any report. All such reports must be provided to Academy leadership.

9. Are character development programs an effective deterrent of sexual misconduct and harassment? Why? Develop six elements of a character development program. Would this type of program be worthwhile in industry?

The character development program at the U.S. Air Force Academy has five key components: (1) Ethics and moral reasoning courses (e.g. study of the great philosophers); (2) Moral dilemma tests are administered and moral dilemma case studies are discussed along with Kohlberg's levels of moral development; (3) Honor Code workshops and discussions; (4) Leadership character courses (e.g., discussions of moral excellence and moral traits); and (5) Self-adjustment training (i.e., a probation program for minor Honor Code violations). This character development effort emphasizes the theme "leaders of character" . For further information regarding the Academy's revised character development program, contact Dr. Hurlie Hendrix at William.Hendrix@USAFA.af.mil.

Research on character development clearly indicates that character education is significantly effective at increasing scores on those factors generally regard to make up one's character (e.g., integrity, competency, selflessness, spiritual appreciation) (Hendrix & Barlow, 2004). Further, their research indicates the effectiveness of education over and above the simple progression of age within the teenage years. Additional reviews and investigations of character research have been conducted by Astin (1993), Barlow (2002), Barlow, et el. (2003), Bebeau (2002), Berkowitz (2002), Likona (1 99 1 ), Myyry and Helkama (2002), Paxcarella and Terenzini (1991), Walker and Pitts (1998). Currently, the U.S. Air Force Academy is considering plans to compare the character of entering and graduating cadets against those of several benchmark colleges and universities.

Students should discuss the panel's recommendation that the Center for Character Development develop education instruction that is mandatory for all cadets. The Panel further recommended that the cadet curriculum require completion of at least one course per year that emphasizes character values, for which cadets shall receive a grade and academic credit.

10. The previous reviews of sexual misconduct at the USAF Academy did not attempt to classify rapes in terms of type (e.g., date rape or criminal assault) or cause factors. Is this an important oversight? As a review panel member, would you classify the sexual abuse of female cadets any differently than the abuse by male cadets of local females?

Students should discuss different categories of sexual assault to reveal the potentially different cause factors and solutions. For example, are the circumstances different that lead to date rape or hazing generated sexual assault from those in which a cadet breaks into a female cadet's room? Additionally, students should be asked to comment on the comments of a past Commandant of Cadets and the officer in charge of cadet conduct suggesting that (1) the victims brought the misconduct upon themselves and (2) the misconduct wasn't truly criminal assault. (See the case subsection titled Command Supervision of the Academy.)

Furthermore, students may be asked if a female cadet is any different from a local female and whether the sexual assault of a local female would be different from the sexual assault of a female cadet. Does the fact that a female cadet is under the total control of upperclassmen make it more criminal or morally distasteful.

Additionally, students should be asked if the male cadets should be treated any differently as to prosecution and punishment based on whether they sexually assaulted a female cadet or a local civilian female.

Students may want to discuss the percentage of sexual assault cases that had alcohol involved.

11. The Honor Code (no lying, cheating, stealing and tolerating those who do) at the USAF Academy is meant to represent the "minimum standard" of conduct for cadets. A majority of cadets, however, believe that disenrollment as the typical sanction for an Honor Code violation should be abandoned, especially in cases of toleration. Do you think the Honor Code covers sexual misconduct? What is your feeling about punishing those cadets that fail to report incidents (i.e., toleration)?

Students may be asked if they believe the honor code is a floor, a minimum standard or a ceiling, a maximum standard and where crimes such as sexual assault would fall with these thresholds in mind.

Students should discuss their beliefs about telling on others. Why is this important and what ramifications are there in the corporate world by not telling on others when they do something wrong, especially something illegal as well as ramifications from telling on others such as co-workers.

Students should discuss the conflict that is created by such an honor code at the Air Force Academy. The cadets are taught teamwork and loyalty to your teammates is of the utmost importance. However, the honor code instills a loyalty to the institution over fellow cadets in requiring that cadets turn in fellow cadets when they are aware of a violation. If they fail to report a fellow cadet who violates the honor code that they themselves are violating the honor code.

12. The USAF Academy attempts to instill group loyalty as a critical value. Does this value have an adverse impact on the reporting of sexual misconduct? If so, how does one overcome this hurdle?

Students should discuss the importance of the critical value of group loyalty to group effectiveness, especially in the armed services. They should also discuss dysfunctional groupthink and how group dynamics are affected when members of the group break the law and at what point does the group breakdown when one or more members of the group fail to uphold core values adhered to by the group as a whole.

Students may want to discuss situations where loyalty to those within the group is detrimental to the whole group and individuals within the group.

Students should discuss the idea that one bad apple can spoil the whole basket if not taken care of and how they would propose taking care of bad apples within the group.

Students may want to discuss society's views on group loyalty and whistle blowing. When does society consider the behavior of tattletales, informants, and snitches to be appropriate and when is it inappropriate? Should informing on a fellow cadet be rewarded as a demonstration of honor and courage? Practically speaking, will incidents of informing have both positive and negative effects on the Air Force and the informant's career?

Students may be asked when does loyalty have to end and what situations should cause the loyalty to end towards individuals within the group as well as towards the group itself.

Students should discuss the panel's recommendations that the Academy establish a program that combines the existing CASIE program with a Victim Advocate psychotherapist managing the program, and which offers cadets a choice in reporting either to the psychotherapist or to a cadet peer. If reports to CASIE representatives continue to be considered non-confidential, then the Panel recommends that cadets be clearly advised of this fact and further advised that a confidential reporting option is available through the Victim Advocate psychotherapist. As an alternative, it is possible for CASIE cadet representatives to come within the protective umbrella of the psychotherapist-patient privilege if they meet the definition of being an "assistant to a psychotherapist." Furthermore, the Air Force should review the West Point and Navel Academy policies to encourage reporting of sexual assault and adopt its own clear policy to encourage reporting (Panel of House Armed Services; 2003).

13. Does hazing encourage sexual misconduct? Is there any positive impact to hazing freshman? If so, would you recommend transferring this tradition to corporate America?

Students should discuss their views on why new members in certain organizations are subjected to hazing, what is the purpose behind hazing and is it effective in accomplishing its intended purpose? Also, are there more effective ways of accomplishing the same purpose?

Students should discuss the various beliefs behind the continuation of hazing of freshman and whether these are valid factually supported or myths.

Students should discuss whether they would like to see hazing brought into the corporate world. Would they like to be hazed for a certain period of time at a new job and what would be the advantages versus disadvantages of this happening in a corporate environment. Further discussions could address any legal issues between employer/employees if hazing were allowed in corporations.

References

REFERENCES

Astin, A.W. (1993). What matters in college? San Francisco, CA: Jossey-Bass.

Barlow, C.B. (2002). Character assessment across Air Force professional military education: A descriptive investigation. (Res. Rep. No. AU/ACSC/015/2002-4). Air University, Maxwell AFB, Alabama.

Barlow, C.B., M. Jordan & W.H. Hendrix (2003). Character assessment: An examination of leadership levels. Journal of Business and Psychology, 17(4), 563-584.

Bebeau, M.J. (2002). The defining issues test and the four component model: Contributions to professional education, Journal of Moral Education, 37(3), 271-295.

Berkowitz, M.W. (2002). The science of character. In W. Damon (Ed.), Bringing in a new era in character education (pp. 43-63). Stanford, CA: Hoover Institute Press.

Hendrix, W.H. & C.B. Barlow (2003). Multimethod approach for measureing changes in character-related dimension. Unpublished manuscript, U.S. Air Force Academy.

Likona, T. (1991). Educating for character. New York: Bantam.

Myyry, L. & K. Helkama (2002). The role of value priorities and professional ethics training in moral sensitivity. Journal of Moral Education, 37(1), 35-50.

Panel of House Armed Services Committee on Total Force, 108th Congress, Report of the Panel to Review Sexual Misconduct Allegations at the U.S. Air Force Academy (Comm. Print, 2003).

Pascarella, E.T. & P. T. Terenzini (1991). How college affects students. San Francisco, CA: Jossey-Bass.

Pizzimenti, M. (1998). Victor Padrini. Colorado Springs, CO: Acedia Press.

Uniform Code of Military Justice, Article 133 (2002).

Walker, L.J. & R.C. Pitts (1998). Naturalistic conceptions of moral maturity. Developmental Psychology, 34, 403-419.

AuthorAffiliation

Charles R. Emery, Lander University

James E. Benton, Lander University

Subject: Armed forces; Sex crimes; Case studies; Colleges & universities; Investigations; Professional misconduct

Location: United States--US

Company / organization: Name: US Air Force Academy; NAICS: 611310

Classification: 8306: Schools and educational services; 9130: Experimental/theoretical; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 21-35

Number of pages: 15

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216270941

Document URL: http://search.proquest.com/docview/216270941?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 24 of 100

CROSS-CULTURAL BUGS IN A U.S. - MALAYSIA HIGH-TECH PROJECT

Author: Condron, Robert C; Thompson, Karen J; Dove, Sarah L

ProQuest document link

Abstract:

This case is based on the actual experiences of an American engineer based in a high tech manufacturing firm in northern California, USA. It focuses on the problems that arise when his U.S.-based team forms a joint project with a Malaysian team based in Penang. The Americans, assuming that the English-speaking Malaysians behave and do business just like Americans do, do not properly prepare themselves to work with the Malaysian culture. They simply believe that the strong organizational culture of their company will provide a framework for a successful joint project. The Americans select a project manager who is successful in the California setting but who turns out to be ineffective at dealing with the natives in Malaysia. His counterpart, a Malaysian engineer, struggles with the American management style which conflicts directly with many characteristics of the Malaysian management style. Culturally-based issues regarding the use of time and communication styles arise on a daily basis when the Americans arrive in Malaysia to do business. The same issues continue to plague both partners as they attempt to communicate long distance after the Americans return home. Even the structuring of work processes is done differently in Malaysia than in California, an issue that frustrates both partners. The two teams struggle to find common ground where they can operate efficiently and effectively. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns cross-cultural relations between the American and Malaysiern partners of a high-tech joint project based in Penang, Malaysia. Topics such as cross-cultural communication styles, cultural self-awareness, and preparation/training for cross-cultural joint projects are all explored in the case. Secondary issues include corporate culture and expatriate selection. The case has a difficulty level of 3-5, and is appropriate for junior, senior, and first-year graduate levels. It is designed to be taught in 1-2 class hours and is expected to require 1-2 hours of outside preparation by students.

CASE SYNOPSIS

The Americans select a project manager who is successful in the California setting but who turns out to be ineffective at dealing with the natives in Malaysia. His counterpart, a Malaysian engineer, struggles with the American management style which conflicts directly with many characteristics of the Malaysian management style. Culturally-based issues regarding the use of time and communication styles arise on a daily basis when the Americans arrive in Malaysia to do business. The same issues continue to plague both partners as they attempt to communicate long distance after the Americans return home. Even the structuring of work processes is done differently in Malaysia than in California, an issue that frustrates both partners. The two teams struggle to find common ground where they can operate efficiently and effectively.

[This case was written as a vehicle for discussion rather than to illustrate either the effective or ineffective handling of business situations. The information in this case is factual and based on actual situations; however, the real names of the company and individuals have been changed. In this case, the word 'Malaysian' is used to mean the inhabitants of Malaysia (which include Chinese, Malays, and Indians).]

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case is designed to stimulate discussion about cross-cultural issues in the management of a joint project of Malaysian and American partners. Although this case is specifically about the high-tech industry and the unique characteristics of the stakeholders, it is general enough to fit most situations involving partners of Malaysian and American origin attempting to manufacture products in Malaysia for export to America.

Students are encouraged to research characteristics of both the Malaysian and the American cultures that influence business before reading the case. The instructor may use the following questions, generate another list, or ask students to formulate questions about the case for class discussion.

DISCUSSION QUESTIONS WITH ANSWERS

1. What mistakes did the Americans make in dealing with the Malaysiane? How could they have prepared for the joint project more effectively?

Mistakes included but were not limited to the following issues:

a. The Americans assumed business would be conducted in Malaysia in the same way as business is conducted in America (i.e., they projected similarity onto the Malay sians).

b. The Americans knew very little about the Malaysian culture or style of doing business,

c. The Americans selected Dale, an ineffective team leader, to work with the Malaysians.

d. The Americans assumed there would be no problem communicating in English with the Malaysians.

e. The Americans were unprepared for the differences in orientation to time between themselves and the Malaysians.

f. The Americans misinterpreted the silence of the Malaysians during conversations,

g. The Americans misunderstood why the Malaysians didn't ask for clarification on project issues.

h. The Americans did not get the kind of access to the suppliers' machine operators that they needed (or were accustomed to getting in the U.S.).

i. The Americans failed to address the impact of the different team structures.

j. The Americans restructured the process for outsourcing parts, revoking Kong's autonomy.

Kurt's team could have been better prepared for their international project by researching the Malaysian culture and its ways of doing business. Had they understood the Malaysian culture from the beginning they could have avoided many of the mistakes above. Also, greater awareness of their own American culture would have helped them recognize their own approach to doing business, and thereby would have helped them be more prepared for the differences between the cultures.

Cross-cultural training would have been another effective way to prepare for the international joint project. Kurt and his team had little to no cultural training prior to embarking on the joint project with Malaysia. Communication styles, cultural behaviors, societal values, culture-specific attitudes, and how these components of culture impact workplace behavior all need to be addressed before beginning the cross-cultural project. In addition, employees need to go one step further by comparing and contrasting the American business culture to the other country's business culture. Furthermore, anticipating areas of miscommunication and thinking about how to modify behavior will ensure more effective cross-cultural communication.

2. Give examples of projected similarity. Why did Kurt's team succumb to projected similarity?

Projected similarity is the assumption that people in other cultures are similar to people in one's own culture. Even though differences actually exist, people are blind to them, assuming that everyone is the same (or more or less the same) regardless of cultural origins. In this case, the Americans, for example, assume that business is done in Malaysia in the same way that it is done in America. When individuals act based on this perceived similarity, they often find they have acted inappropriately and thus ineffectively.

The Americans also projected similarity on the Malaysiane when they assumed that the Malaysiane spoke American English. While the Malaysiane speak English, their dialect is not American, and different vocabulary and meanings abound. In addition, the Malaysiane have strong accents or may not speak English fluently, thus slowing down communication between the native English speaker and the Malaysian.

Other examples of projected similarity include: 1) the Americans assumed time would be viewed in the same way in Malaysia as in America and were surprised, if not irritated, when it was not (monochrome vs. polychrome time); and 2) the Americans assumed that communication would proceed as it does in America when in fact the Malaysiane communicate differently (low ve. high context).

One reaeon that Kurt'e team might have entered into the project with projected eimilarity is that the two teame worked for the eame multinational corporation (MNC). Many managere believe that organizational culture moderatee or eraeee the influence of national culture. They aeeume that employeee working for the eame organization, even if they come from different countriee, will behave more eimilarly than differently. MNC managere have "a natural tendency to do thinge abroad the way they are done at home. Thie is referred to as the globalization ve. national reeponeiveneee conflict" (Hodgette & Luthane, 2003). Managere implicitly believe that national cultural differencee only become important in working with foreign cliente, not in working with international colleaguee within their own organization. Hofetede (1980, 1991) found etrong cultural differencee within a eingle multinational corporation. In hie etudy, national culture explained 50% of the differencee in employeee' attitudee and behaviore. National culture explained more of the differencee than did profeeeional role, age, gender, or race (Adler, 2002).

3. Discuss the importance of relationship-building in Malaysian business culture.

In many Aeian culturee, relationehip-building ie crucial to eucceee in bueineee. Taek-oriented Americane, by contraet, tend to focue on the ieeuee at hand, enjoying a relationehip only if it develope through thie diecueeion of taeke. Malayeiane get down to bueineee only after a pereonal relationehip hae developed between the two partiee.

Eetabliehing thie pereonal relationehip takee time, but it ie vital for eucceee in Malayeia. Americane are advieed not to pueh the diecueeion of taek but to build more time into their tripe for relationehip-building. They need to take the time to get acquainted. Americane muet realize that the Malayeian ie building the relationehip in order to gain truet with the American before talking about bueineee ieeuee.

In the caee, it ie evident that the croee-cultural relationehipe improved over time ae the two teame epent time with each other in Malayeia. Aleo, it ehould be noted that the informal, non-work-related discussions that occurred during lunches and mum-mum were important trust-building tools for the Malaysians.

4. How did high and low context communication play a role in this case?

Cultural anthropologist Edward T. Hall (1977) differentiated between high and low context in communication. Context is everything that surrounds the verbal message and is the bank of information that a person uses to help interpret the message sent from the speaker. This includes facial expression, tone of voice, body language, eye contact, knowledge gained from previous contact and conversations, etc. The context level is typically high in relationship-oriented cultures where people spend a great deal of time together and thus build up context. Context is typically low in task-oriented cultures where the importance of accomplishing the task takes precedence over relationship-building.

High context communication focuses on everything that surrounds the verbal message (Hall, 1977). It is indirect, subtle, and ambiguous from the point of view of low context communicators. Inference, silence, and covert clues are used. Low context communicators rely most heavily on the spoken word. Therefore, the message needs to be precise, plain, and frank. The communication is explicit, there is not much silence, and overt clues are used. It is not subtle, there is little inference, and it is extremely direct.

Communication context was an important factor in this case. The Americans, as low context communicators, expected to conduct teleconferences just as they did with others in the U.S. They wanted verbal communication that was direct and frank. The Malaysians, however, employed high context communication, a style that challenged the Americans by being more subtle and ambiguous. Long pauses or periods of silence have many meanings that include "yes", "maybe", "no", or "I am thinking about this". The silent pause is a polite way for Malaysians to digest information being given to them. It does not signal misunderstanding, rejection, or acceptance. It simply gives them time to think and respond with their thoughts clear in their own heads. The American team thought they were helping the situation by quickly rephrasing questions or providing more detailed information. The answer "yes" can mean many things including, "I hear you", "Let's consider this", or a firm "Yes". The context of the situation must be considered in order to interpret the word with accuracy. Lacking context, the Americans could not interpret precisely what the Malaysians were communicating.

The high context Malaysian is very polite, increasing the chances for miscommunication with a low context communicator.

. . ..politeness demands a Malaysian not to disagree openly, the word "no" is rarely heard. A polite but insincere "yes" is simply a technique to avoid giving offense. In Malaysia, "yes" can mean anything from "I agree" to "maybe" to "I hope you can tell from my lack of enthusiasm that I really mean 'no'." "Yes" really means "no" when there are any qualifications attached. "Yes, but. ..." Probably means "no. " "It might be difficult" is a clear "no." A clear way to indicate "no" is to suck in air through the teeth. This sound always indicates a problem. When it comes to making a decision, a "yes" often comes more quickly than a "no." This is because a way must be found to deliver the "no" politely, without loss of face. It is important for foreign businesspeople to understand the environment in which most Malaysiane are brought up and the impact that this social conditioning has on individual values. One's opinions, for example, are usually withheld, or at least tempered, in order to serve the good of the whole. To a foreign manager, it may appear that his/her Malaysian employees and colleagues have no opinions, but this may or may not be true and cannot be judged as good or bad (Morrison, Borden, and Conaway, 1994).

For the Americans, there are proven ways of gaining more information from high context communicators. One key to obtaining more input is to create a condition or environment of consensus-seeking and cooperation. Some specific ways to create this type of environment are to ask open-ended questions that provide opportunities for voluntary answers, and to direct specific questions to an individual's area of expertise. It is important here specifically to invite the employee to respond with his/her ideas and perspectives so that the harmony and humility of a collectivistic culture is preserved (Milliman, Taylor, and Czaplewski, 2002).

5. Explain why the Malaysiane did not admit that they did not understand how to overcome the "trapped air bubble problem" in the plating process. Why did they respond affirmatively or with silence when asked by the Americans if they understood the problem?

In Malaysia, questioning or arguing a point is impolite. Disagreement or any negative replies are almost forbidden due to a strong focus on creating and maintaining harmony within the group. When the American engineers asked repeatedly if the Malaysians understood what was being said, they replied "yes." However, they may not have understood or they may have disagreed with the answer or suggestion. In the latter case, they would not dare to question whether that solution could work for them or state that they knew the supplier would never agree because it would cost too much. It was much easier and more polite to just agree with what was said and continue the teleconference. The harmony was maintained.

Malaysians are quite comfortable with silence. Their silence during the conference call may simply have been an indication that they were trying to assimilate the information given by the Americans. By not allowing the silent break, the U.S. team never gave the Malaysians this chance to catch up and comprehend. Malaysians do not interrupt or overlap each other in conversation as is done often in the U.S. Politeness demands that they leave a respectful pause, as long as ten to fifteen seconds, before responding.

6. Explain the differences between the American and Malaysian orientations to time. This difference has been termed as monochrome versus polychrome time (Bennet, 1998). Monochrome time means paying attention to and doing only one thing at a time. Time is linear and tangible. Monochrome time cultures (for example, America's) speak of time as a precious resource in such ways as: "Time is money. We're running out of time. Quit wasting time. How do you spend your time?" In the monochrome orientation, the schedule takes priority over all else and is treated as sacred and unalterable. A polychrome system is the complete opposite. Here, many things can be done at once. Time is not linear but abstract. It is less tangible and less predictable. This difference in the value of time is also applied in reference to temporal focus (Adler, 2002). This term is used to define the degree to which time is important within a society. "Deadlines are often viewed as flexible in Malaysia. If a timeline is particularly important, it is critical to convey to the Malaysian the reasons for the timeline as it has been established. Malaysiane are high context communicators and generally appreciate understanding the background rationale for decisions and directions," (GlobeSmart, 2002).

How late is late? If an appointment is set for 9:00 a.m., at what time would you expect a person to show up? The answer depends upon the culture ofthat person. Those with higher degrees of temporal precision, such as Americans, would be prompt. Those with lower degrees of temporal precision, such as Malaysiane, might not show up until 9:15 a.m. or 9:30 a.m. Temporal focus also has to do with variances in meeting duration. If the meeting is scheduled for one hour, then the person with high temporal focus would expect it to end promptly after that hour is up. An individual with a low temporal focus might carry on the meeting until the objectives are met.

7. What mistakes were made in the selection of the U.S. project manager? What selection criteria might be important for such a position?

Dale was selected for the position based on his domestic success and not on his adaptability or fit with the Malaysian culture. Domestic track records of success for an individual are not enough. Had the Malaysian culture been studied and used in the selection criteria for the manager position, Dale would not have been chosen. Two crucial criteria to consider in selecting a cross-cultural proj ect manager are strong technical skills and excellent cross-cultural communication skills. While Dale may have been highly trained in the technical aspects of the job, he was lacking in the skills needed to communicate effectively with people of different cultures.

A better approach for a cross-cultural management position involves careful research and analysis. First, research should be done to determine what style of management works best in each national culture involved. The relevant cultures should be analyzed with respect to their similarities and differences also. The information gathered can reveal the criteria that should be used for the selection of the manager.

Second, the management style of each managerial candidate should be analyzed. Some candidates may have a past of applying one style consistently while others may be more flexible in the management style they employ. Managers who can adapt their leadership styles for given situations will be more effective at managing global projects.

When global companies look for leadership, they have found that emotional intelligence, not cognitive abilities, explains 90% of the difference between average and star performers (Adler, 2002). According to psychologist Daniel Goleman (1995), emotional intelligence is a set of five individual and social competencies, including self-awareness, self-regulation, motivation, empathy, and social skills. Each of these skills is critical to leadership effectiveness on a global scale.

8. Communication technology, improved travel, and other evolutionary global factors have enabled businesses to venture into the worldwide marketplace. With this increase in cross-cultural interaction, do you believe that national and organizational cultures will become more similar or more distinct?

John Child (1981), a leading British management scholar, found that convergence happened at the macro-level (e.g., organizational structure and technology issues) while divergence happened at the micro-level (e.g., the behavior of people within an organization) (Adler, 2002). Child concluded that organizations worldwide are growing more similar, while the behavior of people within organizations remains culturally diverse.

As people from different cultures learn to work with each other, they may adapt their values, beliefs, and behaviors to better match those with whom they do business. A hybrid culture may form that results from a convergence of the represented cultures. Over time, this hybrid may take on other cultural values as businesses expand and foreign investment increases. National cultures could lose their roots and evolve into a global culture where one size fits all. On the other hand, as different cultures interact with each other they may hold on tighter to national cultures for fear of losing that which is sacred to them. They may revert back to their own more comfortable national culture when faced with the pressures of cross-cultural interaction.

Laurent's research (1983) found more pronounced cultural differences among employees from around the world working within the same MNC than among those working for organizations in their native lands. In his studies, managers employed by MNC's maintained and even strengthened their cultural differences. The cultural differences were significantly greater among managers working within the same MNC than they were among managers working for companies in their own native country.

In this case, Malaysiane working for APC became more Malaysian while Americans working for APC became more American. The Malaysian engineers became much more polite when speaking with the Americans than when communicating with their native colleagues. This resulted in even more apparent agreement from them on issues and less questioning of ideas when communicating with the Americans. They used silences and pauses more in their communication with Americans than with fellow Malaysians. With each exaggerated form of communication, there was more misunderstanding of the Malaysians' behavior by the Americans. Likewise, the Americans used stronger forms of their communication style, keeping things extremely direct and to the point, which would be perceived as rude by the Malaysians.

References

REFERENCES

Adler, N. J. (2002). International Dimensions of Organizational Behavior (Fourth Edition). Cincinnati, Ohio: South- Western Publishing.

Angeli, D. & B. Heslop. (1994). The Elements of E-mail Style. Reading, MA: Addison-Wesley Publishing.

Bennet, M. J. (1998). Basic Concepts of Intercultural Communication. Yarmouth, Maine: Intercultural Press.

Child, J. (1981). Culture, Contingency and Capitalism in the Cross-National Study of Organizations. Research in Organizational Behavior, 3, 303-356.

GlobeSmart (1999-2002). Retrieved January 29, 2003 from http://www.meridianglobal.com/files/globesmart

Goleman, D. (1995). Emotional Intelligence. New York, NY: Bantam Books.

Hall, E. T. (1977). Beyond Culture (First Edition). New York, NY: Anchor Books.

Hodgetts, R. M. & F. Luthans. (2003). International Management. New York, NY: McGraw-Hill Book Company.

Hofstede, G. (1980). Culture's Consequences: International Differences in Work-Related Values. Beverly Hills, CA: Sage Publishing.

Hofstede, G. (1991). Cultures and Organizations: Software of the Mind. Oxford, England: Blackwell Publishing.

Kluckhohn, F. & F. L. Strodbeck. (1961). Variations in Value Orientations. Evanston, IL: Row, Peterson, and Co.

Laurent, A. (1983). The Cultural Diversity of Western Conceptions of Management. International Studies of Management and Organization, 73(1-2), 75-96.

Milliman, J., S. Taylor & A. J. Czaplewski. (2002). Cross-cultural performance feedback in multinational enterprises: Opportunity for organizational learning. Human Resource Planning, 29-43.

Morrison, T., G. A. Borden & W. A. Conaway. (1994). Kiss, Bow, or Shake Hands. Avon, MA: Adams Media Corporation.

Trompenaars, F. & C. Hampden- Turner (1998). Riding the Waves of Culture. New York, NY: McGraw-Hill Book Company.

AuthorAffiliation

Robert C. Condron, Sonoma State University

Karen J. Thompson, Sonoma State University

Sarah L. Dove, Sonoma State University

Subject: Cultural differences; Joint ventures; Business communications; Conflicts; Case studies; Corporate culture

Location: United States--US, Malaysia

Classification: 1220: Social trends & culture; 9190: United States; 9179: Asia & the Pacific; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 47-56

Number of pages: 10

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216296661

Document URL: http://search.proquest.com/docview/216296661?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 25 of 100

QUICKTROPHY.COM

Author: Brunswick, Gary J; Dehring, Terry

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Abstract:

The case centers around a group of entrepreneurs who recognized, develop and implement a unique web-based business model applied to the sports trophy business. QuickTrophy.com offers customers levels of customer service unparalleled in the trophy business, including an easy-to-use website, next day shipping, and a money-back guarantee. The company faces some unique challenges in developing and maintaining a consistent customer base, and is looking for additional ways of expanding their business through complimentary products and services. QuickTrophy.com is a small company, which has an interesting value proposition and the potential for significant growth. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns the growth and development of a web-based trophy and awards retail business, with primary focus on marketing strategy issues. Secondary issues examined include the identification and measurement of relevant performance metrics for an upstart firm such as QuickTrophy.com, and the relationship between strategic goal setting and the implementation of relevant strategies designed to achieve those goals. This case has a difficulty level of 3-4, and would be appropriate for junior-to-senior level students. The case is designed to be taught in 3 class hours, and is expected to require 4-6 hours of outside preparation by students. It might be helpful for students to examine other successful and failed web-based business models for comparison purposes.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case is designed for use in a variety of different courses, including Marketing Strategy, Strategic Management, Business Policy, and ?-commerce, although the case is probably most relevant to courses such as Marketing Strategy and ?-commerce. Students will probably be motivated to investigate the company purely based upon the name of the case (QuickTrophy.com), and may have some experience with the product, either having been on a sports team, or having served as a coach of a sports team. The case is also designed to get students to think about what it would take to start a small web-based business such as QuickTrophy.com, and to think about the links between plans and action, or strategy and implementation.

The case can be assigned as an individual assignment, or as a group or team assignment, and could be coupled with another web-based case (either a successful or unsuccessful firm), allowing students to compare and contrast. For example, how does QuickTrophy.com compare to successful web-based ventures such as Amazon.com or Travelocity.com, or how does QuickTrophy.com compare to failed ventures such as Webvan.com ? A number of web-related references (most competitors) are also mentioned in the case. In using this case, students will also be expected to use some (limited) quantitative skills, focusing on revenues, costs, margins, and break-even; in some courses, this case could be used as an initial exposure to these types of issues. Additionally, it might be both helpful and interesting to invite a local entrepreneur to either discuss the case, or to comment on student case presentations. Students would probably find the perspective of the entrepreneur both interesting and challenging.

TEACHING OBJECTIVES

There are a number of teaching objectives linked to this case, including the following:

1 . To expose students to the challenges and opportunities of starting and growing a new business.

2. To challenge students to make the connection between developing strategic marketing plans and successfully implementing those plans.

3 . To provide students with the opportunity to better understand a web-based business model, and to draw similarities with "traditional" business models.

4. To give students a limited opportunity to explore the financial issues associated with an upstart business.

CASE TEACHING QUESTIONS AND ANSWERS

1. How can QuickTrophy.com achieve brand recognition in a rapidly congested internet marketplace ? How can a national brand be built on a local marketing budget. When a volunteer coach needs to get trophies, what can be done to make sure he or she thinks of QuickTrophy.com ? What methods of brand-building can be employed that are effective and yet inexpensive ?

Although the focus of this question is on branding, there are implications for many aspects of QuickTrophy.com's operations. Building a national brand on a small (local) budget can be problematic. One strategy might be to have QuickTrophy.com target one, or a small number of specific geographic markets (i.e., major metropolitan areas, Chicago for example) to initially target their brand-building activities. For example, spending money on advertising (print, radio, billboards, transit signage) for a period of 1 year might yield considerable results in a major metropolitan area. Partnering with various youth sports leagues is another strategy which might be employed; can QuickTrophy.com's name be featured on league information or websites, or be designated as a "preferred" trophy provider for the league ? Sales promotional items, such as refrigerator magnets, pens, notepads might also be used. Another simple approach might be for QuickTrophy.com to invest in a simple "yellow-pages" advertisement and listing in a major metropolitan area, and then measure the increase in orders coming from that area (for a period of a year following the placement of the "yellow-pages" listing). Given QuickTrophy.com's limited resource base, a targeted approach to brand-building would seem to be the most cost-effective.

2. Search engine placement is rapidly increasing in price to ridiculous levels. How can more traffic be driven to the web site on a cost-effective basis ? What will it take to double the number of web site visitors ? Quadruple ? Increase the visitors by an order of magnitude ? What methods are available and what will each method cost - in total an on a per customer basis ? In other words, what are the customer acquisition costs per method ?

A good analogy here is to use the example of a normal shopping mall (and the parking lot surrounding the shopping mall). The internet is like a huge shopping mall that is tailored for each customer. It is easy to get a space in the shopping mall. But the most desirable locations appear to be right by the front door. There is only so much retail space by the front door, so search engines have been auctioning off the real estate and the prices have been bid to absurd, almost irrational levels. Strategies to try would be to search out less utilized CPC (cost per click) vendors where key words have not been bid as high (bidding for a location at a secondary mall entrance - the back or side door). The volume is less so traffic, although more reasonably priced, will be less as well. Another strategy is to bid on less frequently used key words (alternative mall entry points). Prado's Principle (80/20 rule) is certainly applicable to keyword bidding. Approximately 80% of the customers use the obvious keywords and these are the words bid beyond sensible levels. Thus, it takes a lot of auxiliary keywords and CPC vendors to compensate for the 80% of customers going to the "other guys".

Another strategy is to "get to the customer in the mall parking lot", via e-mails. A good strategy would be to send e-mails to existing customers on a regular basis, encouraging repeat purchases. E-mails can also be sent to potential customers who have been to the web site and opted-in to a mailing list. E-mail lists can also be purchased or rented from leagues, portal sites, other web opt-in vendors, or harvested from pertinent web sites.

Yet another strategy to "attract the customer in the parking lot" would be to form alliances with sports leagues in return for "commissions". This would involve setting up a link on the league website funneling customers directly to the web site, by-passing the search engines altogether.

Search engine optimization will help secure space near the front door of the mall (on the first page of the search results), but it is difficult, time consuming, and constantly changing. It requires either a dedicated person, or a contract with an outside agency with costs competitive to CPC. The results can often be a higher closing ratio and more credibility with customers.

Students should estimate costs for the strategies as well as the expected number of additional customers. The results should be quantitative. Emphasis should be placed on

Return on Investment (ROI) for each strategy. Estimates should be reasonable and students should offer supporting material.

3. People only coach for a few years, and only purchase trophies once or twice a year. How can QuickTrophy.com get to the decision-maker at the right time? How many new customers need to be added each month to replace "lost" coaches and still achieve a significant level of growth ? How can "new" customers be identified and cultivated by QuickTrophy.com ?

Initially, this would seem to be a daunting challenge for QuickTrophy.com, particularly when the brand name is still relatively unknown. One possible strategy would be to develop ongoing contacts / relationships with various types of youth sports leagues, regularly obtaining current mailing lists of coaches, or to become the "preferred" trophy vendor for that league. Having high levels of customer service will also lead to positive word-of-mouth, and in turn "retiring1 coaches who have used QuickTrophy.com will have positive things to say to their replacements.

The turnover issue among "lost" coaches is an interesting one to continue. What is the average tenure of a youth sports team coach; 1 year ? 2 years ? Student should be encouraged to develop a series of "what if analyses to factor in a range of possible turnover assumptions (i.e., for example, assume QuickTrophy loses 50% of their customer base every 2 years). Estimates on turno ver rate can be obtained from personal experience, conversations with coaches, or surveys.

4. Are there other market channels that should be exploited ? Other product lines that should be added ? How can QuickTrophy.com build sales to $1 to $2 million in 2 years? How can sales be increased to $10 million in 5 years ?

Adding additional channels of distribution is mentioned in the case, and might take a variety of different forms; the "easiest" approach would be to have partnering agreements with other complimentary websites, such as sports leagues, sporting goods firms, etc. Other possible method of channel expansion would include franchising, having QuickTrophy.com open a limited number of store-based retail sites, and partnering with existing store-based trophy retailers (who would serve as "order getters" for QuickTrophy.com - a "bricks and clicks" strategy). Some logical additions to the QuickTrophy.com product line would include plaques, engraved gifts, and perhaps a line of corporate motivational (engraved) gifts.

With regard to building QuickTrophy.com's sales over time, one argument might be that the firm is already showing signs of health and steady growth, and assuming they continue with the same strategy, the firm will eventually grow to a $2 million a year firm (and beyond). Alternatively, in answering questions 1-4 found in the case, students will develop a virtual cornucopia of ideas with regard to brand-building, increasing traffic to the website, developing and maintaining a strong customer base, and possibly expanding the firm's channel and product strategy. As an epilogue to the case, the professor could contact Terry Dehring at QuickTrophy.com for an update on successful (and unsuccessful) strategies, and an estimate of current levels of sales, customers, etc.

AuthorAffiliation

Gary J. Brunswick, Northern Michigan University

Terry Dehring, QuickTrophy.com

Subject: Electronic commerce; Retailing; Market strategy; Business models; Strategic management; Case studies

Location: United States--US

Classification: 2310: Planning; 7000: Marketing; 8390: Retailing industry; 5250: Telecommunications systems & Internet communications; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 57-61

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

ProQuest document ID: 216274069

Document URL: http://search.proquest.com/docview/216274069?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 26 of 100

BOVINE PREGNANCY TESTING, INC.

Author: Geiger, Joseph J; Metlen, Scott; Haines, Douglas

ProQuest document link

Abstract:

Bovine Pregnancy Testing Inc (BPT), is a bio-tech start up firm whose main product, ELISA, is designed to provide dairy farmers with early and accurate pregnancy testing capabilities not requiring manual examinations which can injure and/or abort the fetus. Because the productivity of dairy cows is related to frequency and timing of pregnancies, incremental improvements in pregnancy testing can significantly improve profits. The firm's product cannot be patented but is protected by trade secrets and technical know-how. BPT has many challenges: 1. overcoming the resistance of veterinarians who earn fees from the traditional manual testing, 2. creating a compelling argument for angel/venture venture capital financing, 3. determining the core customer group, and 4. managing and operating a start-up business. The case is based upon field research involving BPT leadership, operators of dairy herds, and owner-operators of veterinary clinics and laboratories.

Full text:

Headnote

CASE DESCRIPTION

BPT is a business start up case, based upon field research, requiring students to examine initial financing, marketing issues involving changing customer attitudes, and determining appropriate core customer groups. Additional issues include developing an appropriate organizational structure and developing business process arrangements with domestic and foreign customers. The difficulty level is five, with sufficient information provided in the instructor notes to use the case in both senior and graduate level strategy, policy, and entrepreneurship courses. The case is designed to be taught in two class sessions following reading of the case and instructor handouts provided in the case notes (two hours). A formal case write-up and presentation by a student or case team should take approximately 10 hours.

CASE SYNOPSIS

Bovine Pregnancy Testing, Inc., (BPT), is a bio-tech start up firm whose main product, ELISA, is designed to provide dairy farmers with early and accurate pregnancy testing capabilities not requiring manual examinations which can injure and/or abort the fetus. Because the productivity of dairy cows is related to frequency and timing of pregnancies, incremental improvements in pregnancy testing can significantly improve profits. The firm's product cannot be patented but is protected by trade secrets and technical know-how.

BPT is two years old with a small customer base. Growth has been hampered by a lack of capital, resistance to change by dairy farmers, and poor marketing. The current product, which requires blood samples to be sent to regional veterinary laboratories for over night testing, is competitive with traditional manual examinations performed by veterinarians. An upgraded test that can be administered by the dairy operator (i.e., "cow-side") is in the development stage. With 9 million dairy cows in the United States, the product has a multi-million dollar per year sales potential. Interest in the product has also been achieved in at least two foreign countries.

BPT has many challenges: (1) overcoming the resistance of veterinarians who earn fees from the traditional manual testing, (2) creating a compelling argument for angel/venture venture capital financing, (3) determining the core customer group (large or small herds and/or domestic or foreign markets), and (4) managing and operating a start-up business. The case is based upon field research involving BPT leadership, operators of dairy herds, and owner-operators of veterinary clinics and laboratories. Information provided in the case and the instructors' notes provides students with opportunities to explore angel/venture capital financing, marketing high technology products, product positioning, developing financial and marketing elements of a business plan, and exploring many practical aspects of launching a new business.

INSTRUCTORS' NOTES

As a high tech start up firm case, the instructor should decide whether to use all information provided (i.e., a comprehensive case) or focus on one or two of the main issues present in the narrative: financial forecasting, angel and venture capitalism, marketing, organization, and product process and delivery. Overview essays covering the dairy industry, venture capital and a sample financial forecast support comprehensive or focused analysis. It is also suggested that the case be handled differently for senior undergraduates versus graduate students:

To support market potential discussion as well as marketing plan recommendations, ask students to carefully consider and make sure they understand key product positioning issues such as:

* is the need/benefit manifest and obvious,

* what is the relative advantage versus manual (rectal) palpation

* how well does the BPT test fit with existing dairy/veterinary practices

Ask students from all class levels to recommend marketing plans and sales support programs for both domestic and foreign markets. Combine the plans and support programs into a 'compelling argument' to present to potential investors.

INDUSTRY ANALYSIS

The domestic dairy industry has over 9 million cows spread across 83,930 small herds (200 head or less) and 8,060 large herds (see Table 2 of case narrative). Large herds typically have one or more contract veterinarians who perform manual pregnancy tests and provide for the general health of the herd. Small herds call upon local vets for their pregnancy testing and cow health needs, as appropriate. Foreign dairy herds have similar arrangements. Cows are distributed across the USA as shown in Tables 2, 3 in case narrative, and Asia and Europe as shown in Table 4. Accurate and timely pregnancy testing is important in all countries as herd management and cost control measures replace government controls in many nations. Veterinarians performing manual examinations accomplish virtually all pregnancy testing. Each exam is completed in a minute or so and is relatively inexpensive. However, many veterinarians complained to the case researchers that the repetitive testing was boring, not all that lucrative, and promoted minor ailments in the hands and arms of the veterinarian. A manual test can also lead to an aborted fetus. The data suggest students target certain market areas, develop modest market penetration goals, and modify the financial forecast sales figures and develop marketing models for class discussion. Decisions on the scope and numbers of market segments can also frame the discussion on size and nature of the work force.

It would be appropriate to inform the students that in the United States, total herd numbers are flat or in mild decline. The numbers are influenced by demographics, reduced population growth, and continued incremental but important productivity gains. Like many industries, reduced cost of production can translate into higher profitability. The economic justification for using the slightly more expensive BPT test is summarized in Table 1 in the case narrative. The students may wish to use this analysis in any marketing plan required by the instructor.

SWOT ANALYSIS

All classes should be asked to perform a SWOT analysis. The case narrative contains sufficient information to make educated judgments on many aspects of the firm and the industry. A SWOT should display, but not be limited to, the following:

Strengths - Solid research and development [current product is competitive and the 'cow side' test will be an industry breakthrough]; solid reputation of owner, good results from initial customers, high quality production, product protected by trade secrets, production know-how, and the difficulty to successfully reverse engineer the current product.

Weaknesses - No formal marketing plan or professional marketing staff, insufficient capitalization for any major initiatives.

Opportunities - Large national and international potential, ability to segment markets and focus on most receptive customers, market potential of 'cow-side' test, potential (long term) of adapting technology for other animals and house pets; use of field representatives to grow firm without large infusions of capital.

Threats - Resistance to change by veterinarians, attractiveness of competitive products, threat of reverse engineering of current product, and loss of or inability to exploit markets due to lack of capital.

FINANCIAL MODELING

Seniors in business should be given the sample financial forecast and venture capital essay for use in developing a marketing strategy that would build to large annual sales. The forecast also provides a reasonable approximation of external funds needed over the next three years. Depending on what the instructor wishes to emphasize, a decision can be made whether to give the financiáis and/or Venture Capital Essay to graduate students. The Financial Forecast or Pro Forma is based upon a set of assumptions noted in the far right columns of TN - 2 shown at the end of the notes and provided in the case text as Table 7. The assumptions are for three years of 50% increases in sales followed by an example set of financiáis assuming $1,000,000 in sales (the stated goal of the Johnsons). An estimate of staff increases is found in the payroll lines (no provision for expanded sales force or salaries for owners). Student analysis of the national and international markets shown in the case tables can be used to modify the financial forecasts and the resulting angel or venture capital financing needed. The 'plug to balance' line in the balance sheet represents additional financing or borrowing needs for each year). The sample forecast results suggest $191,000 in start up (2003-2005), additional 'phase 2' financing to increase sales to 1,000,000 (occurring sometime in 2008), and $200,000 in 'cow side research and development is needed. Advanced students can set up the spread sheet forecast for several years and determine the additional funds needed to grow toi million units in sales. These figures would normally suggest that at least $400,000 is needed to seed the program (plus 'cow side R and D' during years 2003 - 2005 with additional 'phase 2 and 3' financing needed for several additional years. AlO year financial forecast, for example, with the Table 7 assumptions and a continued 50% per year growth would demonstrate that sales have to reach the $300,000 range before becoming profitable and $650,000 before additional borrowing is no longer needed.

SHORT ESSAY ON VENTURE CAPITAL

(Copy and Hand Out to Class)

Traditional sources of commercial loans for small businesses with two or more years of history include:

1 . Federal SBA loans administered through local banks

2. Other Federal loan programs such as Small Business Innovative Research Program Loans (SBIR's) which can help transfer new technology into a new business

3. Local banks requiring significant collateral for loan.

Initial start up financing is much more difficult to obtain. Family and friends often provide "angel financing" not requiring collateral, but when the need is too great, a variety of angel and venture capitalists and firms can be approached. This form of financing is typically found in:

1 . Publicly traded venture capital firms

2. Private Limited Partnerships whose investment mission is to provide venture capital

3. Venture Capital Divisions of larger, established corporations and banks

4. Individual and organized collections of Wealthy Investors

Angel and venture funding can be obtained in up to four phases:

First Round - For initial funding; investors take great risk and often expect returns on the order often times the initial investment; financing is obtained only after business owners develop and sell 'compelling arguments' for their product idea or business. At the beginning of this stage, the firm has barely been established, but the firm has what it believes is a compelling argument for selling the new idea, product, or service

Second Round - The money is used to complete product or service prototypes along with detailed business plans sufficient to attract larger amounts of money (even SBIR qualified loans -see above). The venture capitalists continue to require high returns on second round investments.

Third Round - The money is used for initial production (or equivalent service) and expansion to the breakeven point for the firm. The market for the product or service must be clearly demonstrated at this point and significant growth potential must also exist for continued financing.

Fourth Round - Financing is needed to bring the firm into full scale operation with sufficient success to tender Initial Public Offerings, obtaining large scale commercial loans, or issuing formal corporate debt.

Venture capitalists, by requiring very high returns on investments, tend towards high technology products and processes that are easily scaled up to large markets and sales. The owners of such firms must be careful, as the terms of the early round financing will require the firm to issue anticipation warrants convertible to either cash or stock in the firm. If the firm performs well, the venture capitalist can be paid off in cash. If ownership has to be transferred, the dollar value of the required return on investment might constitute a large percentage of the firm. For example, if the required return for a venture capitalist was $500,000 [to meet return on investment goals] and the firm was valued in year five at $1,000,000, the firm's owners would have to give up to 50% of the firm to cover the 'payment' depending on how much cash is available to pay off the venture capitalists.

A key financial exercise in the BPT case is to perform a financial forecast given reasonable sales growth and determining (a) the external funds needed, and (b) the estimated value of the firm. Section 2, Table TN-2, of the Instructor's Note provides a worked example of the financial forecast. Depending on the nature and level of the class the forecast can be either given to the students for interpretation or the case teams can be asked to generate their own forecasts. It is noted from the case text that at least $200,000 is needed to develop and produce the 'cow side test'. If the new product development is recommended in the student solution, the development costs should be added to the overall funds needed from the lending sources (i.e., $191,000 + $20000 = $391,000 in phase one or 'angel financing').

A potentially interesting set of discussions can be experienced if the students are required to develop and present a compelling argument that will induce potential investors to provide the first several hundred thousand in venture capital. The financial forecast noted previously - and its sales forecast modified by the marketing plan, can be employed to complete the compelling argument.

WEB SITES AND OTHER SOURCES ON VENTURE CAPITALISM

(Hand out to students and encourage them to look for additional sources of information)

Galante's Venture Capital and Private Equity Directory, Asset Alternatives, www.assetnews.com

Gladstone, D. & L. Gladstone. (2002). Venture Capital Handbook, Prentice Hall, Inc.

Lefteroff, T. (2003). Top 100 Venture Capital Firms, Enterpreneur magazine, 56-60 July, www.entrepreneur.com

Scott, J. et al. (2003). Credit, banks and Small Business - The New Century, National Federation of Independent Business Research Foundation, 1201 "F" St. NW, Suite 200, Washington, DC. January 2003, www.nfib.com

The National Venture Capital Association, Arlington, Va., www.nvca.org

Pratt's Guide to Venture Capital, www.sdonline.com

General information on governmental funding, www.sba.gov/financing/

MARKETING AND THE COMPELLING ARGUMENT

Students should be able to develop a variety of marketing plans based upon the data in the case and the handouts found in the instructor notes. All marketing plans and the compelling argument, however, should include the following elements:

Adoption: The fundamental marketing challenge for BPT is to: (1) Make dairy operators and veterinarians aware of their product, (2) Persuade customers that BPT offers features that meet customer needs, and (3) get users to adopt BPT.

Target Market/Segmentation: A start up firm with limited resources will need to carefully target their efforts to build awareness and encourage adoption. Target/ segmentation decision possibilities for BPT include:

Domestic and/or foreign : Should they resist the distraction of developing their international business until they make more confident progress domestically? They may have to give up control of the marketing effort because of the complications of distance, cultural differences, country knowledge, etc. They could overcome these challenges by licensing the product internationally. If they are willing to consider licensing internationally, they might also consider domestic licensing to a pharmaceutical firm with more resources that could finish the development and market introduction of the pregnancy test- domestically and internationally.

Dairy operators versus veterinarians: should awareness and persuasion efforts be directed to the operators, the veterinarians or some balance to both? Veterinarians perform manual pregnancy tests because they are trained and licensed and are considered experts. Dairy operators pay for the benefits of the veterinarians test and could be regarded as users. It is usually not a good idea to market around the experts, especially when they have so much power and respect in the eyes of the users. It is less likely that dairy operators will adopt BPT unless their veterinarians support it. BPT must convince veterinarians of the benefits of the BPT pregnancy test- including how it will help them provide better service to their customers, the dairy operators. They only have to persuade the dairy operators that there are benefits to using the BPT pregnancy test.

Domestic introduction and expansion : Should they focus their early efforts on regional dairies closer to their headquarters, target the largest dairies first or use some other segmentation criteria? Students should consider the degree of risk that operators and veterinarians face in adopting BPT. The higher the risk, the more selling effort may be required by BPT. Perceived high risk by BPT customers may argue for staying close to home at first so BPT marketers can give sufficient selling attention to the early adopting dairies. On the other hand, operators of larger dairies may see the greater financial impact and be willing to invest more of their own resources and be more risk tolerant.

Field Representatives: Students should explore compensation models which provide the field personnel a portion of the profits flowing to BPT for a period of 2-3 years. For example, a 20% commission in year one, 15% commission on sales for year two, 1 0% for year three, etc. This would enable a work force to be compensated without significant overhead. Discussion on the strategy has proven to be quite energetic !

Finally, the marketing and financial plans need to be combined to produce a compelling argument leading to successfully raising sufficient capital to survive until profitability is ensured. Marketing oriented classes can structure the case to focus on developing and presenting a compelling argument. The handouts from the Instructors Notes (Essay on Venture Capital plus sharing TN-2) plus answering the non- financial questions in the Notes should provide a framework for a spirited debate between the firm's owners (represented by one team) vs. potential investors (represented by the class or another team).

PROCESS MANAGEMENT

What can be done to improve the business processes in BPT?

Ask students in all class levels to critique the way BPT conducts business and make suggestions on how to improve the processes between BPT and the regional clinics and between the regional clinics and the dairy herd customers.

Students should be encouraged to examine the business processes associated with BPT and outlined in case. Many aspects of the business could be improved. The following provides a perspective developed by the case writers and can serve as a basis for the instructor to ask questions designed to move the students into suggesting improvements in the manner in which BPT conducts its daily business that would promote the use of the product by decreasing feedback time and ensuring accuracy of feedback.

The current process used to produce the final output of cow pregnancy information contains many opportunities for error, as is the process of information flow to ensure that there is the correct number of ELISA plates at the appropriate lab. Currently, dairy operations inform the veterinarian lab of when and how many cows they will test. The veterinarian lab then combines the information from all participating herds and orders enough ELISA plates from the ELISA production facility to service their expected needs. There is no forecasting or room for error, thus if more cows are tested or the production facility receives an unexpected order, there is a chance that the proper number of ELISA plates will not be delivered. The information flow of demand and availability of ELISA plates needs to be automated to insure uninterrupted supply to the labs, and thus the dairy operations. Common forecasting techniques and automated ordering procedures would help keep the correct number of ELISA plates available for use. Even more of a hindrance to success than unavailability of ELISA plates is the room for error in information transfer of which cow is pregnant.

The current process to determine pregnancy consists of several sub-processes. The first process is performed at a dairy. An employee of a dairy takes a blood sample from each cow and places each sample into a test tube, the identity of each cow is recorded on the respective test tube, and then all test tubes are sent to the vet lab. The second sub-process occurs at the lab where the blood from each test tube is placed on a given location on a ELISA plate, the plate is treated and then each cow specific local on the plate is observed for a given reaction to determine pregnancy, the result is recorded and then sent back to the dairy. Mistakes on cow identity can be made in any of four steps: (1) cow identity, (2) transfer of cow identity to the proper test tube, (3) recording which cow is linked to which specific local on the plate, and (4) recording which cow is pregnant. Automatic readers such as a bar code reader would foolproof step one. Devising a reader that places identities of cows onto test tubes would foolproof step two. Having the fist two numbers on the test tube refer to the column and row number of the possible locals on the plates would help to foolproof step 3 by limiting that blood sample to one local on the plate. Finally an automated reader of the plate would foolproof the transfer of data from the plate to the dairy operation.

Communication between the veterinarian and the dairy staff can be enhanced by creating a vet lab web site and with password access provided to each customer to look up test results, obtain hard copy, and/or down load the information to the owner's data base. An internet-based process could reduce turnaround time by several hours - perhaps as much as a day. Students with a background in information systems can provide several possible technical capabilities that human resource, marketing and production management majors can develop and incorporate in the planning and recommendations for process improvement.

ORGANIZATIONAL CONSIDERATIONS

BPT is basically a 'mom and pop' operation that utilizes part time skilled help to manufacture and distribute the test (well) plates and the associated material and equipment to conduct the pregnancy tests. To date, marketing has been limited to ad hoc ventures out to a few large dairy herds. No sales force is in place and an information system is needed to quickly record and notify the dairy owners of test results. Students may suggest a variety of organizational solutions, but any solution has to respond to all operating aspects of the firm:

Purchasing - Who is/should be in charge of purchasing the supplies used for producing the test (well) plates and related materials - and filling orders? A potential answer is Amy who is currently performing most of the office administrative functions. Other options require a new hire which increases the breakeven sales number.

Accounting - The function can be performed in two ways: (a) An in-house bookkeeper with appropriate small business accounting software, or (b) outsourcing the function to a professional accounting services firm. Option (a) may be less expensive, but exposure to potentially costly accounting and reporting mistakes is higher with option (a).

Production - Several hundreds of thousands of tests/per year can be produced with the current staff and the staff increases imputed in the financial forecasts. As the production volume goes up, additional staff and equipment may be needed. Increased equipment needs are noted in the fixed asset line of the balance sheet.

Management, Research, and Development - Garrett is the owner-scientist, but development of the cow side test will be outsourced at an approximate cost of $200,000. Ongoing refinement of the existing ELISA test is something Garrett can do without additional staff. The students can be directed to spread the $200,000 over the first two forecast years as a representative R&D expense (including staff).

Marketing - The estimation should be based upon student plans developed from the above marketing comments. A discussion on compensation strategies for the marketing staff during the case overview (first class session) should help identify and clarify ideas: sales commission strategies, etc.

Information Systems. - Students should 'brain storm' on how to produce a web based solution for veterinaries and dairy herd owners communication. The current 3 6-hour cycle of drawing blood, testing, notification and record keeping can be reduced by creative systems development. The instructor may wish to use the Process Design comments in the instructor notes to lead the discussion.

QUESTIONS TO ASK STUDENTS

Answers to the following questions can be enhanced by using the optional instructor note handouts and by encouraging the students to research the dairy industry and examine the website of the US Department of Agriculture.

1. What is the need/benefit for BPT? What are the compelling arguments that will induce investors to support BPT?

The need and benefits are difficult to define and promote. Dairy owners and veterinarians using current manual techniques are comfortable with the process. Tolerance levels for lost fetuses are apparently high. A compelling argument must include significant cost savings due to the non-invasive process, more timely and accurate testing, and how well the BPT test fits with existing dairy and veterinary practices?

The test can fit well if the dairy owner becomes comfortable with the new process and continues (as is the national trend) to strive for productivity increases. Productivity will increase given the benefits noted in question one. As owners continue to automate their databases and manage each cow as a specific 'production unit', both increased revenue and reduced expenses may result.

2. Should BPT resist the distraction of developing foreign markets until the domestic market is established?

The foreign market has advantages that include a higher selling price, less 'high tech' competition, and the ability to use the revenue to reduce the external funds needed to grow the firm. In some countries, government controlled agriculture may seize upon the test as one more way to make their agriculture industry competitive as they privatize the sector. The down side to the foreign market includes (a) greater risk of having the product reverse engineered and duplicated without compensation, and (b) stretching the existing firm beyond its capabilities to both service domestic and foreign operations while maintaining high quality control standards.

3. Should awareness and persuasion efforts be directed to the dairy operators, the veterinarians, or both?

This question should produce considerable discussion - especially among the marketing and promotion majors in the class. The conclusions are crucial to the overall marketing plan and development of the 'compelling argument'. It does appear to the case researchers that both the vet and the dairy herd owners require considerable education and persuasion before they adopt a fundamentally different approach to pregnancy management. However, it can be argued that the vet is the prime customer in the business model as presented and the vet needs to become a strong advocate. The sales force should focus upon winning over the vets who can spend considerably more time with each customer than can BPT's sales force. Having both the vet and the BPT representative visit potential customers should also be effective.

4. Should BPT focus on veterinary clinics serving large herds or focus on services to smaller herds?

The ultimate answer to this question will depend upon the degree in which the veterinaries adopt and promote the product. As implied in the case text and industry analysis in the instructors' notes, the large herd owners have been somewhat reluctant while the vets are eager to find a substitute to the physically demanding manual testing procedure. Veterinarians who rely on the manual test for a prime source of income will be most resistant. Small herds may be a fruitful market niche for BPT because veterinarians can manually test more cows per day by focusing on large herds and will charge more per cow at small dairies. Foreign operations will most likely choose the herds they service and may face different obstacles in their home countries. As a result, large or small herd choice is probably not a major issue.

5. How would you re-organize BPT?

Students must consider creating a professional advertising and marketing capability while recognizing the need for good accounting and financial support. Garrett and Amy can continue to be owner-operators to the extent Garrett can oversee production, quality control, and research and development. Amy can handle purchasing, shipments, and serve as the link between BPT and outsourced accounting and financial resources. Students can explore the implications of the international market on staffing and organizational structure. It is important to note that the nature of the production enables BPT to produce approximately 1,000,000 tests per year with modest increases in staffing, material, and facilities costs (see financial forecasts). Additional insights may be found in the ORGANIZATIONAL CONSIDERATIONS SECTION of the Instructor's Notes.

6. What are the financing needs of BPT as it moves towards $1,000,000 in net sales? Should the financing come from angel financiers, venture capitalists, or commercial lending institutions?

If the students are given TN-2 from the instructor's notes (normally senior classes), this question can be reduced to a discussion based upon the "Venture Capital Essay" included in the case notes. Ask students to interpret the results of TN-2 and a decide on what type of financing should be pursued. The students would also need to decide whether to stay with the existing product or finance the development of the improved "cow side" test while simultaneously building up the existing market. If the product improvement investment is decided upon, an additional $200,000 in financing is needed.

If the students are asked to create their own financial forecast and additional funds assessment (normally graduate students), they will have to proceed from the information supplied in Tables 5 and 6. The instructor can use TN-2 (not handed out to these students) as a reference check to see if the students have the mechanics of financial forecasting under control. The instructor is encouraged to allow flexibility in modifying the assumptions of Table 6 as long as the student analysts can provide good supporting logic. The students will find great variance in results as the assumptions are changed which can be used to demonstrate the power of scenario analysis. (A complete five year forecast is available by email from the authors.)

EPILOGUE

Garrett and Amy are developing the international market and overall sales, because of foreign contracts, are increasing significantly. They have hired a marketing person with a strong agriculture and dairy background who is working for a modest wage plus commissions to develop the domestic market. Accounting has been outsourced to a local firm who takes data from a standardized accounting package and provides management reports each month. The owners are reluctant to link up with venture capitalists for fear of losing majority ownership of their business and are hoping the cash flow from the foreign contracts will be sufficient to either finance penetration of the domestic market or reduce the amount of needed venture capital investment.

View Image - TABLE TN-2 BPT Example Financial Forecast (Pro Forma)

View Image - TABLE TN-2 BPT Example Financial Forecast (Balance Sheet)

AuthorAffiliation

Joseph J. Geiger, University of Idaho

Scott Metlen, University of Idaho

Douglas Haines, University of Idaho

Subject: Startups; Angel investors; Biotechnology; Dairy farms; Strategic management; Case studies

Location: United States--US

Classification: 2310: Planning; 8400: Agriculture industry; 3400: Investment analysis & personal finance; 9520: Small business; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 63-77

Number of pages: 15

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables

ProQuest document ID: 216274224

Document URL: http://search.proquest.com/docview/216274224?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 27 of 100

TELECOMMUTING TROUBLES

Author: Kellyann Berube Kowalski; Swanson, Jennifer A

ProQuest document link

Abstract:

The world is undergoing a transformation from the industrial age to the information age and we are seeing many changes to the world of work and management. One of the ways that information technology is changing work is telecommuting. Telecommuting is becoming more prevalent as an alternative working arrangement. The International Telework Association and Council (ITAC) estimates that nearly 25 million Americans regularly work from home one or two days a week. Furthermore, ITAC forecasts that the number of telecommuters will reach 30 million by 2004. As the number of telecommuters continues to increase, it is important for business students to have an understanding of the issues involved in managing telecommuters. Telecommuting Troubles is a case detailing a telecommuting work arrangement of one member of a product development team. Difficulties arise as the telecommuter no longer feels an integral part of the team. Analysis of the case allows students to see from the perspective of the telecommuter, the manager, and the coworkers how telecommuting is changing how, where and when we work. The case is designed to allow students to apply and evaluate organizational behavior concepts such as decision-making, motivation, leadership style, and empowerment to an alternative work arrangement. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns telecommuting. Secondary issues examined include decision-making, motivation, leadership style, and empowerment. The case has a difficulty level appropriate for the junior level and above. The case is designed to be taught in one class hour and is expected to require one hour of outside preparation by students.

CASE SYNOPSIS

Telecommuting Troubles is a case detailing a telecommuting work arrangement of one member of a product development team. Difficulties arise as the telecommuter no longer feels an integral part of the team. Analysis of the case allows students to see from the perspective of the telecommuter, the manager, and the coworkers how telecommuting is changing how, where and when we work. The case is designed to allow students to apply and evaluate organizational behavior concepts such as decision-making, motivation, leadership style, and empowerment to an alternative work arrangement.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

Assign students to read Part A of the case. The questions at the end of Part A can be assigned and students should come to class prepared to discuss the questions at the end of Part A. After Part A has been discussed, students will be asked to read Part B of the case during the class period. The students can be put into small groups and asked to answer the questions at the end of Part B. Alternatively, the students could be asked to do the questions individually and then open the class up for a discussion.

The instructor can also ask students to role-play the parts of Christine and Scott for either Part A or Part B or both.

Alternately the instructor may assign students to read both Part A and Part B together and then assign general questions instead of the case questions associated with specific organizational behavior concepts. This allows the instructor to see which concepts students apply to the case without prompting. Questions such as "What are the main issues in the case?" and "What steps do you recommend to deal with these issues?" work well.

The instructor could also start the case off with a short discussion on telecommuting. The teacher could assign one of the following articles on telecommuting as well:

Davenport, T.H. & Pearlson, K. (1998). Two cheers for the virtual office. Shan Management Review, 39(4), 51.

Grensing-Pophal, L. (1999). Training supervisors to manage teleworkers. HRMagazine, 44(1), 67.

Hartley, D.E. (2001). Observations of a telecommuter. Training & Development, 55(7), 28.

Khaifa, M. & Davidson, R. (2000). Exploring the telecommuting paradoxes. Communications of the ACM, 43(3), 29.

Lococo, A., D. Yen, & D. Chou. (2001). Telecommuting: its structure, options and business implications. International Journal of Technology Management, 27(5-6), 475.

Pearlson, K.E. & Saunders, C.S. (2001). There's noplace like home: Managing telecommuting paradoxes. The Academy of Management Executive, 15(2), 111.

Raines, J. P. & Leathers, C.G. (2001). Telecommuting: the new wave of workplace technology will create a flood of change in social institutions. Journal of Economic Issues, 35(2), 307.

Segal, JA. (1998). Home sweet office? HRMagazine, 43(5), 119.

PART A: QUESTIONS AND ANSWERS

1. What would you do if you were Christine? Apply the rational decision-making framework in determining your decision.

Students can be asked to use the rational decision-making model (Huber, 1980; Harrison, 1999) to decide what Christine should do next. There are six steps in the model; students can be asked to follow all six steps in coming up with their recommendation. The six steps are:

1. Recognizing and defining the problem.

2. Identifying the decision criteria

3. Allocate weights to the criteria

4. Generating alternative solutions

5. Evaluating and selecting an alternative

6. Implementing and following up on the solution

By applying the decision-making framework to this section, students should first define the problem. Students should be cautioned to avoid defining the problem in terms of a solution (e.g., Christine needs to find a new job or Christine needs to get out of the telecommuting arrangement) or in terms of a symptom (e.g., Christine is feeling left out of the loop). If students persist in these types of responses when trying to define the problem, the instructor can ask them questions such as "Why does she need a new job?" or "Why does she feel this way?"

Once students have defined the problem, they should identify the decision criteria by determining what is relevant in making this decision and then allocating weights to these criteria. Students will proceed to generate various alternative courses of action. Some of the alternatives they may come up with are the following:

1. Christine could decide to ignore the current problem.

2. Christine could decide to confront the product development team.

3. Christine could decide to discuss the problem with Scott.

4. Christine could decide to limit her telecommuting assignment to fewer days out of the office.

5. Christine could decide to quit her telecommuting assignment and go back to working full-time from the office.

6. Christine could quit the company and find one closer to home.

Students should evaluate each of the alternatives they come up with and select the one they feel would have the best outcome for Christine at this time. Students should be able to discuss the implications of the alternative they chose. Implications of the various alternatives are discussed in question two below.

2. What are the implications of your decision?

If Christine chooses to ignore the problem it would most likely escalate and she would become increasingly frustrated with her job. Her motivation may become affected and her morale could drop as a result. This would negatively impact her work performance and her job satisfaction level, thus lowering her commitment to the organization.

Christine could confront her co workers. This may further alienate them if they think she is making a big deal for nothing. This is especially true since her coworkers seem to feel she has a 'sweet' deal and they may get upset if they think she is complaining about the way it is going. However, if supportive communication (i.e., showing concern for the well being and needs of others and by being friendly and approachable) is used when Christine approaches the group, this could open the lines of communication and surface issues that need to be addressed.

Christine could talk to Scott about the problem. Since Scott is her boss, the head of the product development team, and the one who approved the telecommuting arrangement, it may be useful for Christine to go to Scott first. Of course, she needs to be careful about what she says because she does not want her coworkers to think she is going behind their backs.

Telecommuting fewer days might be a viable option for Christine. Christine may feel she is more a part of the team if she comes into the office a couple more days. Although this may work in the long run, it seems at this point she needs to first address the current situation.

Christine could quit her telecommuting assignment. Although Christine is upset with some aspects of the telecommuting experience, ending the arrangement at this point may be premature. Without trying to work out the problems that have surfaced, Christine may feel disappointed and blame the failure of the experience on Scott and her coworkers. This residual blame may lead to interpersonal problems even when Christine in back in the office full-time. Also, if Christine goes back to the office full-time, the original dissatisfaction she felt from having to commute two hours a day would return.

Christine could quit the company and find a similar position in a company closer to her home. Although this is a viable option, Christine seems to have vested much time and effort in her current position. She seems to like her job responsibilities, although she is currently experiencing problems with her boss and coworkers. She could start looking for another position, but should keep in mind that she may face worse problems at a new company.

PART B: QUESTIONS AND ANSWERS

1. Analyze Christine's motivation and her coworkers' motivation using a needs-based model and a process-based model of motivation.

Students may choose to answer question one using one of needs-based models of motivation such as Maslow's hierarchy of needs theory, ERG theory, Herzberg's two-factor theory, or McClelland's needs theory of motivation. Students may also choose to answer question one using one of the process-based models of motivation such as equity theory or expectancy theory. Alternatively, the instructor can assign a specific theory to be applied to the case.

Maslow's Hierarchy of Needs Theory (Maslow, 1970). According to Maslow's hierarchy of needs theory, individuals are motivated by five needs, which are arranged in a hierarchy. The lower-order needs include physiological (basic needs needed for survival), safety (security and protection), and social (love, acceptance, and friendship) needs. Higher-order needs include esteem (self-esteem and esteem from others) and self actualization (achieving one's potential) needs. According to this theory, when a need category becomes satisfied, the next higher need category becomes the motivating force. An individual can only be motivated by one category of needs at one time.

Applying Maslow's hierarchy of needs theory, students may believe that Christine is motivated most by the need for self-actualization as she strives to reach her full potential at work. Some students may feel that Christine is motivated more by esteem needs, self-esteem and esteem from others. Alternatively, some students may think that Christine is motivated by social needs because she may desire closer interpersonal relationships with people from work. Most students will agree that Christine's physiological needs and safety needs have been met. Many students may argue that Christine is motivated by more than one category of needs at the same time. However, remind students that Maslow's theory states that individuals are only motivated by one level of needs at any one time. In addition, individuals progress from lower level needs (physiological, safety, and social needs) to higher level needs (esteem and self-actualization needs). The instructor may wish to start a discussion on the applicability of Maslow's theory to the real world.

ERG Theory (Alderfer, 1972). Adlerfer argues that there are three groups of core needs: existence, relatedness, and growth. Existence needs are basic needs for survival and correspond to Maslow's physiological and safety needs. Relatedness needs focus on the desire for interpersonal relationships and align with Maslow's social needs and the external component of esteem needs (esteem from others). Growth needs center on personal development and correspond to the internal component of Maslow's esteem needs (self-esteem) and Maslow's self-actualization needs. In contrast to Maslow's theory, ERG theory states that individuals can be motivated by more than one category of needs at any time.

Applying ERG theory, most students will agree that Christine's existence needs have been met. Christine is currently most likely motivated by relatedness needs as evidenced by her need to maintain interpersonal relationships with Scott and her coworkers. She wants to be present at all product development team meetings, wants to be a real part of the team, and to be respected by Scott and her coworkers. Christine also seems motivated by growth needs, as she wants to make productive contributions at work and feel like she is working to her full capacity. This is evidenced by the fact that she is currently upset because the team has vetoed her no-spill toddler cup product line suggestion. In addition, she no longer feels they trust her judgement. Remind students that individuals can be motivated by more than one category of needs at the same time under this theory.

Herzberg's Two-Factor Theory (Herzberg, 1959). According to Herzberg, certain factors lead to job satisfaction and these factors are separate and distinct from those that lead to job dissatisfaction. Motivation factors include such things as growth, advancement, responsibility, the actual work, recognition, and achievement. When these factors are in place, an individual will have high job satisfaction. Hygiene factors include such things as company policies, interpersonal relationships, work conditions, security, quality of supervision, and salaries. When these factors are adequate, an individual will not be dissatisfied.

Based on Herzberg's two-factor theory, Christine is motivated by motivator factors such as the work itself, achievement, recognition, and responsibility. However, Christine may not be completely satisfied at work because some of these needs are not being met. It also seems as if some of the hygiene factors are not being met such as interpersonal relationships with Scott and coworkers and the need for good supervision. These needs are important in order to prevent dissatisfaction.

McClelland' s Needs Theory of Motivation (1971). McClelland's theory focuses on three needs that help explain motivation - need for achievement, need for power, and the need for affiliation. The need for achievement is the drive to excel and succeed and to realize personal achievement. The need for power is the desire to have impact, to be influential, and to control others. Finally, the need for affiliation is the desire for friendly and close interpersonal relationships.

Based on McClelland's needs theory of motivation, many students will feel that Christine is motivated by a high need for achievement. Alternatively, many students may feel that Christine has a higher need for affiliation.

Equity Theory (Adams, 1963). Equity plays an important role in motivation. The basic premise of equity theory is that individuals compare their job inputs (i.e., effort, experience, education) and outcomes (i.e., salary, raises, promotions, recognition) with those of others. An individual will compare their outcome-input ratio with the outcome-input ratio of relevant others. If the person perceives that the ratio is equal, a state of equity exists. If the ratio is not equal, a state of inequity is present. This inequity leads to tension and the individual is motivated to reduce the inequity.

Applying equity theory from Christine's viewpoint, she may feel that the situation is inequitable. Christine may feel that her inputs (i.e., hours worked) are greater than her coworkers. She is upset that, because she works from home, she is perceived as not working, yet coworkers who play computer games and surf the web are seen as being productive just because they are in the office. Christine's coworkers may perceive the situation differently and feel that they are the ones being 'cheated' and therefore the situation is inequitable for them. Susan, Andrea, and John seem to feel that Christine's inputs are less than their own inputs because she works from home. In this case, the inputs being compared would be the effort exerted on the job. Students can be asked to discuss how this inequity can be resolved. Using the coworkers as an example, there are six ways to reduce this inequity:

1. The coworkers could change their work inputs. They could choose to reduce their performance efforts.

2. The coworkers could change the outcomes they receive. For example, they could ask for a raise. Another option is to ask to telecommute, but this may be hard due to the nature of their jobs.

3. The coworkers could decide to leave the situation and quit.

4. The coworkers could change the comparison points and compare themselves to a different coworker.

5. The coworkers could psychologically distort the comparisons. For example, they could rationalize that the inequity is only temporary and will be resolved in the future.

6. The coworkers could take actions to change the inputs or outcomes of Christine. They could ask Christine to take on more work or come back to the office full-time.

Christine could also choose from the six options in order to reduce the inequity. Students should be encouraged to discuss the difference in perceptions on the part of Christine and her coworkers.

Expectancy Theory (Vroom, 1964). According to expectancy theory, individuals are motivated by a combination of three expectations. Individuals must believe that putting forth effort will lead to successfully performing a certain task or job (effort-performance expectancy); that they will receive an outcome/reward for performing the task or job (performance-outcome expectancy); and that the outcome/reward is attractive (value of the outcome).

Expectancy theory can be used to explain Christine's motivation. Christine knows that her work effort will lead to the accomplishment of work tasks. She is uncertain whether or not she will receive a reward for her performance. If there is a reward, Christine most likely will value praise and recognition from her boss and coworkers the most.

2. Analyze the relationship between Scott and Christine using the Hersey and Blanchard's Situational Leadership Model.

Hersey and Blanchard's Situational Leadership Model (1993) can be applied to this case. This is a contingency theory that focuses on the readiness of the followers. According to this theory, different leadership styles should be used based on the ability and motivation of the followers. If followers are unable and unwilling to do a task (Rl follower readiness level), then the leader needs to give clear and specific directions (telling leadership style). If followers are unable and willing to do a task (R2 follower readiness level), then the leader needs to be highly task-oriented and highly relationship-oriented (selling leadership style). If followers are able but unwilling to do a task (R3 follower readiness level), then the leader needs to use a supportive and participative leadership approach (participation leadership style). If followers are able and willing to do a task (R4 follower readiness level), then the leader does not need to do much and can use a laissez-faire style of management (delegating leadership style).

Students should be asked to specify Christine's level of readiness or her ability and motivation. Students should respond that she is highly mature and at the R4 level of readiness. At the R4 level of readiness, workers are able, willing, and confident that they can achieve a task. Therefore, R4 workers need a leader who exhibits delegating behavior, which is low relationship and low task. However, Scott is not currently behaving in a delegating manner towards Christine, as he should. He is being more directive and this would fall under the telling leadership behavior category. The telling leadership behavior only works well with followers who are at the Rl level of readiness, unable and unwilling to perform the tasks at work. Scott's leadership behavior does not match with Christine's level of readiness.

3. How could Scott have better empowered Christine so that the telecommuting experience was more successful?

According to Quinn and Spreitzer (1997) empowered employees have the following characteristics.

1. A sense of self-determination. Empowered employees feel they are free to choose how they do their work.

2. A sense of meaning. Empowered employees feel that their work is important to them and to the firm; they care about what they are doing.

3. A sense of competence. Empowered employees feel that can perform their work well; they are confident about their ability.

4. A sense of impact. Empowered employees feel they have influence on their work unit; that others listen to their ideas.

Based on this above conceptualization of employee empowerment, Christine seems to have lost her sense of self-determination and sense of impact since she started telecommuting. Her sense of self-determination has decreased, as she no longer feels that she has complete freedom in how and when she carries out her duties. Although Scott was a hands-off type manager when Susan worked in the office, he has become much more of a micro-manager. He now asks for progress reports, which Christine has to email him every day (or once a week?). Also, he calls to check up on her when she is working at home.

Her sense of impact has also decreased, as she feels left out of the loop. She feels she does not have as much input as she used to with the new product development team and that they do not take her ideas as seriously as they used to.

For the telecommuting experience to have been more successful, Scott should have handled the situation differently. By changing his management style with Christine he seems to have decreased her sense of empowerment and ultimately her sense of job satisfaction and motivation. One of the main reasons Scott agreed to the telecommuting setup for Christine was because he felt she was such a valuable worker he could not risk losing her to a job that was closer to her home. Now he finds himself in a situation where this could ultimately happen. There are several things that Scott could have done (and could do in the future) to better empower Christine and improve the success of the telecommuting experience. For example, Scott should have done the following:

1. Held Christine accountable for results instead of the process.

2. Provided Christine with relevant information.

Scott should focus more on Christine's work outcomes. Calling to check up on Christine is unnecessary and it is making Christine feel as though Scott no longer trusts her judgment and ability. Scott should have established clear goals to guide Christine's behavior as she worked on her tasks. Such goals would have specified outcomes as well as accountability for Christine. To be most effective Christine should have been involved in the goal setting process and her performance should have been evaluated on whether or not she has reached her outcomes, not on her progress.

Scott and the rest of the team should have communicated better with Christine. She feels left out of the loop and no longer a part of the team or the department. Christine should have been given task-relevant information necessary to successfully complete her job as well as more informal communication to make her feel as though she was still an integral part of the team. Christine should have been kept abreast of things that other members of the project team were doing that that might have affected her work. A project team web page or e-mail messages might have been useful for the team to communicate between meetings.

4. If you were Scott, what would you do next?

Students may make several suggestions as to what Scott should do now. They may suggest that: (1) Scott go back to his original management style; (2) that he let others in the management department begin to telecommute; (3) that he reconfigure the telecommuting arrangement and have Christine work from home fewer days; (4) that he cancel the telecommuting arrangement and have Christine work from the office full-time again; or even (5) that he fire Christine. Although these may be possibilities, they are not going to do much to resolve the conflict the team is currently experiencing. In addition, it is unlikely that Scott would consider firing Christine at this point. He knows she is an excellent worker who has been with the company for five years. He does not want to lose a valued employee and have to train someone else for her position. He also probably does not want to cancel the telecommuting arrangement at this time and risk losing her to a company closer to her home.

Before Scott makes any major decisions he needs to resolve the conflict within the team. At this time Scott should probably first discuss the issues individually with Christine and then, based on that conversation, follow it up with a team meeting. Since Scott was so shocked by Christine's revelations the last time they talked he really needs to discuss the issue in more depth with her first. Once they have done so he should call a team meeting as the problem seems to involve not only Christine, but also the entire product development team. At such a meeting Scott may want to open the lines of communication between the team members and utilize a conflict resolution technique to deal with the problem. Specifically, he may want to utilize a collaborative approach in which the team members (including himself) solve the problem together and address fully the concerns of both parties. In this approach, the intent is to find solutions to the cause of the conflict that are satisfactory to both parties rather than to find fault or assign blame. Students may actually suggest that the option of Christine telecommuting fewer days and/or Scott changing his management style may be solutions that come out of the conflict resolution meeting.

References

REFERENCES

Adams, J.S. (1963). Toward an understanding of inequity. Journal of Abnormal and Social Psychology, 67, 422-436.

Alderfer, C. P. (1972). Existence, Relatedness and Growth: Human Needs in Organizational Settings. New York: Free Press.

Harrison, E.F. (1999). The Managerial Decision-Making Process. Fifth Edition. Boston, MA: Houghton Mifflin.

Hersey, P. & Blanchard, K.H. (1993). Management of Organizational Behavior: Utilizing Human Resources. Englewood Cliffs, N.J.: Prentice-Hall.

Herzberg, F.I., B. Mausner, & B.B. Snyderman. (1959). The Motivation to Work. New York: John Wiley & Sons.

Huber, G.P. (1980). Managerial Decision-Making. Glenview, 111: Scott, Foresman.

Maslow, A.H. (1970). Motivation and Personality. New York: Harper & Row.

McClelland, D. C. (1971). Motivational Trends in Society. Morristown, N.J.: General Learning Press.

Quinn, R.E. & Spreitzer, G.M. (1997). The road to empowerment: seven questions every leader should consider. Organizational Dynamics, Autumn.

Vroom, V.H. (1964). Work and Motivation. New York: John Wiley & Sons.

AuthorAffiliation

Kellyann Berube Kowalski, University of Massachusetts - Dartmouth

Jennifer A. Swanson, Stonehill College

Subject: Telecommuting; Organizational behavior; Technological change; Case studies

Location: United States--US

Classification: 6100: Human resource planning; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 79-89

Number of pages: 11

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216274984

Document URL: http://search.proquest.com/docview/216274984?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 28 of 100

SUPERIOR FOODS: A CASE STUDY IN COSO RISK ASSESSMENT

Author: Kraut, Marla; Pforsich, Hugh D

ProQuest document link

Abstract:

This case describes the development, implementation, and results of a Fortune 500 company's risk assessment process. Some information about the company has been altered due to the company's request for anonymity. However, the detailed descriptions of the risk assessment process and the risks identified by management are factual. The newly hired Director of Internal Audit Services in this case already had seven years of experience managing external audits for a major international public accounting firm. The company had been one of his audit clients, so he was very familiar with their internal controls and financial reporting procedures. He was hired to develop a comprehensive internal control program to comply with the COSO Report (1992). His first step was to develop a process of risk assessment. This case describes the design and implementation of that risk assessment process. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

This case addresses the risk assessment process in the internal audit function. The level of difficulty is four. The case should require about three hours of classroom time for coverage and students should expect to spend another three to four hours in preparation time outside class.

This case is designed to be used in an accounting information systems or auditing course, graduate or undergraduate. In order for students to learn how to audit a client's risk assessment process, they must first gain a detailed understanding of that process. This case has been developed to provide exposure to an actual company's risk assessment process and thereby provide guidance for this understanding.

CASE SYNOPSIS

The newly hired Director of Internal Audit Services in this case already had seven years of experience managing external audits for a major international public accounting firm. The company had been one of his audit clients, so he was very familiar with their internal controls and financial reporting procedures. He was hired to develop a comprehensive internal control program to comply with the COSO Report (1992). His first step was to develop a process of risk assessment. This case describes the design and implementation of that risk assessment process.

"I've done over fifty audits...evaluation of internal control systems, tests of controls, substantive tests, etc... now COSO requires management to have a risk assessment process. How do we design, implement, and then audit this new 'process?'"

- Greg Johnson, CPA

Director of Internal Audit

Superior Foods, Inc.

INSTRUCTORS' NOTES

1. List additional "general" risks that would pertain to a company that owns and operates grocery stores.

GENERAL RISKS: Business acquisitions

Changes in competition

Changes in sales policies

Civil unrest - riots

Concentration of senior mgmt

Discontinuity of increase in earnings

Discontinuity of increase in sales

Discontinuity of store expansion

Disruption of supply of product

Embezzlement of cash

Fraudulent financial reporting

Employee turnover

General business liabilities

Hostile takeover

Human errors

Inability to meet daily cash needs

Inflation

Labor strikes

Market decline in stock price

Misuse of information

Negative media exposure

Noncompliance with benefit plan regulations

Noncompliance with business license laws

Noncompliance with debt covenants

Noncompliance with EPA regulations

Noncompliance with pharmaceutical regs

Noncompliance with union contracts

Noncompliance with GAAP

Noncompliance with SEC regulations

Noncompliance with tax regulations

Poor quality products

Poor quality service

Product liability (customer harm, lawsuits)

Theft of cash

Theft of inventory

Unavailability of capital

Unreliable financial reporting

Untrained work force

Vandalism

Workplace violence

2. List additional "technical" risks that would pertain to a company that owns and operates grocery stores. The locations of such risks would include corporate office, division offices, distribution centers, and retail operations.

Telecommunications

Computer equipment failure

Software failure

Technology changes

Loss of data integrity & security

Equipment failure

Power loss

3. List additional "natural" risks that would pertain to a company that owns and operates grocery stores. The locations of such risks would include corporate office, division offices, distribution centers, and retail operations.

Earthquakes

Winds/hurricanes

Dam failure

Fire Gas leak

Water leak

Hazardous material incident

4. List additional control objectives, risks, and controls in the "purchasing activity" at the retail operations level that would pertain to a company that owns and operates grocery stores.

5. How is the "monitoring" component related to the "risk assessment" component?

In addition to the identification of risks, the risk assessment process provides a means of organizing and integrating professional judgments for the "monitoring" of internal controls through the development of the annual internal audit work schedule. Based on prior risk assessments, highest audit priorities can be assigned to activities with the highest risk.

The risk assessment process should be conducted annually as a basis for the annual internal audit plan that is part of the "monitoring" process. Conditions may change that would affect the risk assessment. Changes in the risk assessment may necessitate revisions to the annual audit plan.

6. List "monitoring" activities that could be implemented by Superior Foods.

Management review of operating and financial reports.

Internal auditors' periodic evaluation of internal controls by reviewing the controls, evaluating their effectiveness, reporting their results, and providing recommendations for improvement

Annual performance evaluations.

Physical inventory reconciled with recorded inventory periodically.

Review of complaints by customers or suppliers about billings or payments.

Supervisory reviews that identify deficiencies.

Reviews by various governmental agencies.

External auditors' evaluation of internal controls as part of the annual audit.

7. List "information & communication" activities that could be implemented by Superior Foods.

Accounting and financial reporting manuals

Organization chart with defined responsibilities

Written personnel procedures

Training programs (i.e., explanation of controls)

Code of conduct

Ethics program (i.e., encourage employees to report irregularities, rewards for information)

Open communication channels

8. SAS 78 (AICPA 1995) requires external auditors to understand all the components of the internal controls of the auditee. What audit procedures should be performed to understand and evaluate a company's "risk assessment" process?

Discussions with management

Questionnaires

The following questions should be addressed in the discussions and questionnaires:

Have company objectives been established?

Have the objectives been prioritized?

Were all employee levels represented in establishing the objectives?

Have risks to each of the objectives been identified?

Were risks from internal sources adequately considered?

Were risks from external sources adequately considered?

Have risks been prioritized?

Was there an evaluation of the likelihood of occurrence for each risk?

Has the potential monetary impact been estimated for each risk?

Have the risks been evaluated, i.e., are there adequate controls or insurance to mitigate or transfer each risk?

Were appropriate levels of management involved in analyzing the risks?

9. What audit procedures should be performed to understand and evaluate a company's "monitoring" component of internal control?

Discussions with management

Discussions with the internal auditor

Questionnaires

The following questions should be addressed in the discussions and questionnaires:

Does management routinely evaluate the overall effectiveness of the internal control system?

How does management monitor the control environment?

Does management periodically evaluate the risk assessment process?

Does management monitor the effectiveness of key control activities?

Are the information & communication systems periodically evaluated for accuracy, timeliness, and relevance?

10. What audit procedures should be performed to understand and evaluate a company's "information & communication" component of internal control?

To understand and document the design of the accounting information system (the information component), the auditor would describe the system either by a narrative description or a flowchart.

The auditor would perform a transaction walk-through by tracing several transactions through the system.

Discussions with management

Questionnaires

The following questions should be addressed in the discussions and questionnaires:

Does the company receive relevant information regarding legislation, regulatory changes, economic changes, and other external factors?

Is key information about your organization's operations identified and regularly reported?

Are plans for the effective use of information technology developed and linked with strategic objectives?

Are training, seminars, and on-the-job supervision sufficient to communicate to employees their duties and responsibilities?

Are employees encouraged to provide recommendations for improvement?

Is there a procedure to communicate suspected improprieties?

Is the complainant protected from retaliation?

Are client complaints taken seriously, investigated, and acted upon?

AuthorAffiliation

Marla Kraut, University of Idaho

Hugh D. Pforsich, California State University, Sacramento

Subject: Risk assessment; Internal controls; Auditing standards; Compliance; Food processing industry; Case studies

Location: United States--US

Classification: 8610: Food processing industry; 4130: Auditing; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 91-96

Number of pages: 6

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

ProQuest document ID: 216273100

Document URL: http://search.proquest.com/docview/216273100?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 29 of 100

KSB ARGENTINA

Author: D K "Skip"Smith; Aimar, Carlos; Kessen, Andres

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Abstract:

Andres Kessen is General Manager of the Argentine subsidiary of the German pump manufacturing company KSB AG. Historically, KSB Argentina has manufactured a very limited range of pumps for the local market, and has imported a wide range of pumps produced elsewhere for applications not covered by its local manufacturing efforts. To date, KSB Argentina has not been involved in manufacturing pumps in Argentina for export. However, given the current economic situation in Argentina plus the fact that, over the last two years, the peso has depreciated 70% against the US dollar, Kessen believes that substantially increasing his production would make it possible for him to produce (at very reasonable prices) enough pumps not only to cover local needs but also to provide a substantial number of pumps for export to developing world markets such as Egypt, Uzbekistan, and Venezuela. However, before producing pumps for export, he needs to receive permission to do so from world headquarters in Germany.

Full text:

Headnote

CASE OVERVIEW

Andres Kessen, General Manager of the Argentine subsidiary of the German pump manufacturer KSB AG, is requesting permission from KSB AG headquarters in Germany to allow him to begin manufacturing pumps in Argentina for export to markets elsewhere in the world, primarily Less Developed Countries (LDCs) such as Egypt, Uzbekistan, Venezuela, etc. The pumps produced in Argentina would compete with pumps already produced by KSB manufacturing plants elsewhere in the world. Advantages of the KSB Argentina-produced products would include shorter delivery times (60 days vs. 120/150 days). In addition, use of KSB Argentina's obsolete technologies (not available elsewhere in KSB's system) offer lower manufacturing costs and higher margins. Kessen must decide what arguments he will offer to KSB AG's Board of Directors, in support of his proposal that KSB Argentina be allowed to expand its operations in this way. Kessen believes deeply in the merits of this proposal. However, he knows already that KSB AG's Director in charge of operations in the Americas (that is, the Director to whom he reports) is against the idea, because it would challenge and disrupt KSB AG's existing Global Manufacturing Network, which KSB Argentina (a small subsidiary using obsolete technologies) has not been invited to join.

The case is based on discussions conducted by the authors in Argentina. The case is appropriate for senior-level undergraduates as well as students in MBA and Executive Development programs. It is designed to be taught in a class session of 1.5 hours, and is likely to require a couple of hours of preparation by students.

CASE SYNOPSIS

Andres Kessen is General Manager of the Argentine subsidiary of the German pump manufacturing company KSB AG. The business involves designing, manufacturing, marketing, selling, and servicing pumps and related equipment. The markets served include water, sewage, industrial applications, energy, movement of water and/or waste water in buildings, oil and mining. Historically, KSB Argentina has manufactured a very limited range of pumps for the local market, and has imported a wide range of pumps produced elsewhere for applications not covered by its local manufacturing efforts. To date, KSB Argentina has not been involved in manufacturing pumps in Argentina for export. However, given the current economic situation in Argentina (unemployment is high, pressures for increases in wages are low, etc.) plus the fact that, over the last two years, the peso has depreciated 70% against the U.S. dollar, Kessen believes that substantially increasing his production would make it possible for him to produce (at very reasonable prices) enough pumps not only to cover local needs but also to provide a substantial number of pumps for export to developing world markets such as Egypt, Uzbekistan, and Venezuela. However, before producing pumps for export, he needs to receive permission to do so from world headquarters in Germany.

Data in the case include:

1. Description of the challenge faced by the company

2. For Argentina: Historical overview, plus a sample of recent statistics from the World Bank and (for benchmarking purposes) comparable statistics for the United States.

3. On KSB AG: Historical overview and current performance.

4. On KSB in Argentina: Historical overview and current performance.

5. On the opportunity Kessen sees for KSB Argentina: Information on the strategy currently being used (markets targeted, products offered, prices of those products, the route to market used, (that is, characteristics of the channels of distribution), promotional initiatives, and so on. Also, characteristics of the competitive situation in the pump industry in Argentina.

INSTRUCTORS' NOTE

Our hero, Andres Kessen, General Manager of KSB Argentina, faces the following situation:

1. He believes that manufacturing pumps using low-technology manufacturing techniques viewed as obsolete by corporate headquarters not only for consumption in Argentina (already doing this) but also for export to Less Developed Countries (LDCs) such as Egypt, Uzbekistan, and Venezuela (not yet doing this) could be a very profitable opportunity for KSB Argentina.

2. The Board of Directors at KSB's worldwide headquarters in Frankenthal, Germany has invited Kessen to Germany to make the case that KSB Argentina should be allowed to substantially increase its production of pumps, so as to be able not only to continue satisfying the market in Argentina but also to be able to export pumps to developing world markets as well. However, Kessen already knows that the Director in charge of the Americas (i.e., the individual to whom he reports) is against his idea because of the low-technology nature of the operations in Argentina. Another consideration in the Director's negative reaction to Kessen' s idea is that historically, KSB (like many German companies) has preferred to keep manufacturing operations for globally-exported products close to its home base in Germany.

As regards lessons and/or information which students should learn from this case, at least four points can be made:

1. At the beginning of the case, students will need to consider the extent to which developed-world models and conceptual frameworks can be applied to challenges and opportunities in the developing world. By the end of the case discussion, they will have discovered that some developed-world conceptual frameworks and/or decision tools can be very relevant and useful to managers in the developing world as well.

2. Students will be able to compare their solutions to the one developed by the hero of the case, that is, Andres Kessen.

3. Students will discover that managerial initiatives to win approval for proposals may require corporate champions to address not only business performance-related issues but also issues relating to corporate and/or national culture.

4. As they work through the case, students are exposed not only to a bit of information on an important South American market (Argentina) but also to a bit of history on the involvement in Argentina of KSB, a large multinational company headquartered in Germany.

DISCUSSION QUESTIONS

I often select one student to lead the discussion. Another approach would be to solicit input from various students at various stages of the analysis. Either way, my usual approach to this case is threefold:

1. Solicit from many students the details of the case, including information about the macroeconomic environment at the time of the case; information on the company; information on the competitive environment; information on customers, information on strategies the company has used over the years, and information on how those strategies have been implemented. Usually, I write much of this information on the board, so that if questions on "facts of the case" arise, we will have much of that information in front of us.

2. Ask an individual student or the class as a whole to address a very specific series of questions. Those questions, and comments relating to two possible solutions to the case, are as listed below:

1. What is the main problem?

Students usually conclude that General Manager Andres Kessen must develop an analysis and/or presentation to persuade KSB 's Board of Directors in Frankenthal Germany that it does make sense for KSB Argentina to be allowed to substantially increase its production of pumps, so as to be able to begin to export pumps into developing world markets.

2. What kind of problem is this?

Instructors should not be surprised if there are as many answers to this question as there are students in the class. Clearly, there is no one "right" answer. However, two alternative approaches, each of which seems quite relevant to the situation, are as indicated below:

1. Raising the attractiveness of the globalization option

2. Business performance.

3. For this kind of problem, what are the key variables which decisionmakers must consider, and who is the expert who says so?

For students concluding that the main problem is a "Raising the attractiveness of the globalization option" issue, Lane (2000) indicates that the key variables include: (1) Increasing openness by corporate elites to the globalization option (by highlighting, for example, the fact that raising the globalization option may make it possible to pressure home-country workers and/or unions to increase productivity and/or ease work rules); (2) Increased attention to the degree of competitive challenge (that is, the extent to which levels of competition are increasing, the extent to which there are pressures to lower production costs, etc.); and (3) Highlighting the increased power of key stakeholders (that is, the extent to which there is pressure from shareholders and/or the stock market to increase profits, the extent to which there is pressure from regulatory authorities to increase local content, etc.).

For students concluding that the main problem is "business performance," Smith (1985) indicates that the key variables include: (1) Macro-economic considerations; (2) Industry considerations; (3) "Environmental" considerations, where in this context "environmental" includes characteristics of the company itself, its customers, and its competitors; (4) Marketing strategy considerations (as indicated above, these include target market, product, price, promotion, and channel of distribution-related variables), and (5)The organization's ability to implement the marketing strategy.

4. What data from the case relate to the key variables?

As implied above (and this is one of the key learning points of the case), the data students present will depend on the main problem they identify. Students believing the main problem is "increase the attractiveness of the globalization option" will focus on the three key variables identified earlier, that is: (1) Increasing the openness of corporate elites; (2) Increasing headquarters sensitivity to the degree of competitive challenge; and (3) Motivating a reexamination of the power of key stakeholders. Appendix 1 identifies data from the case which relate to each of these key variables. Students believing the main problem relates to "business performance" will focus on the five variables identified by Smith (1985); Appendix 2 identifies data from the case which relate to each of those variables.

5. What alternative solutions can be identified?

Because research suggests we make better decisions if we identify alternatives and then chose one, I require students to identify at least two alternatives. Of course, students having difficulties coming up with a second alternative can be reminded that one possible solution is to "change nothing."

6. Which one alternative does the class/student recommend, and why?

"Doing nothing" is not an option for Andres Kessen, if he wishes to achieve his objective, that is, to persuade KSB 's Board of Directors that that KSB Argentina should be allowed to dramatically increase its level of pump production and that KSB Argentina should be allowed to export these pumps into developing world markets. It appears that students believing the main problem is the need to increase the attractiveness of the globalization option will do an analysis and then recommendation which touches on each of the key variables suggested by Lane (2000), that is, (1) Openness of corporate elites; (2) Degree of the competitive challenge; and (3) Power of central actors. Students believing the main problem involves "business performance" will need to present an analysis which touches on all of the performance-related variables.

Because KSB's Directors in Germany were already well-aware of the performance-related considerations, Andres Kessen chose in his presentation to focus intensively on increasing the attractiveness of the globalization option. For additional information on what happened, please see the epilogue.

7. What negatives are associated with the alternative selected by the class leader and/or other members of the class?

Very few solutions are risk and/or problem-free. Negatives associated with the solution proposed by the class leader and/or other members of the class could include the following: (1) The chosen alternative, if it requires KSB Argentina to develop specialized equipment and/or skills which the organization doesn't currently possess, could be expensive both in terms of time and money. Also, because the case probably doesn't provide all the data a decisionmaker would need (in other words, it is likely that some important data is missing), it is possible that assumptions made by the class leader regarding the actual situation faced by KSB Argentina are incorrect. If so, the proposed solution might be inappropriate.

EPILOGUE

In his presentation to the Board of Directors at KSB 's worldwide headquarters in Frankenthal, Andres Kessen presented arguments which focused on raising the attractiveness of the global option he was proposing. Specific comments Kessen made in his presentation included the following:

1. In attempting to increase the extent to which members of the Board of Directors would be receptive to his ideas, Kessen reminded them that having the ability to produce a range of pumps in a low-cost market like Argentina could be a way of focusing the attention of unions and workers in Germany on the fact that KSB could, if necessary, transfer the production of various pumps from Germany to Argentina. In short, having the option to make that change might lead to increased flexibility by German workers and their unions on a variety of issues including wages, benefits, work rules, etc.

2. Degree of competitive challenge/opportunity. Kessen reminded the Board of Directors that since Argentina's default on its debt in December 2001, KSB's ability to compete against major competitors in Argentina and elsewhere in the world has improved dramatically. The improved ability to compete is verified by the fact that KSB was not then but is now the market share leader in three pump segments : (1) the industry/energy segment; (2) the water segment; and (3) the sewage segment. The improvement in KSB's ability to compete is largely due to the fact that the 67% decrease in value of the peso means that costs of major competitors who import pumps and/or major pump parts are far higher than the costs of companies like KSB who are able to manufacture pumps locally. Kessen also reminded Board Members that KSB now is faced with the opportunity to be extremely competitive in export markets as well. In addition to the factors mentioned above, reasons include the following: (1) Instead of delivery times of 120/150 days, KSB Argentina can offer delivery times of 60 days; (2) The obsolete low-technology manufacturing technology used by KSB Argentina will result in lower manufacturing costs and higher margins for KSB.

3. Power of central actors/stakeholders. Kessen also reminded members of the Board of Directors that several sets of key stakeholders should react very favorably to his suggestion to increase KSB 's production capabilities in Argentina. For example, the power of shareholders and the stock market is increasing; both groups should be pleased with the lower manufacturing costs and increased margins which should be generated if his proposal is adopted by the company. As for the government of Argentina, they should be pleased not only by the fact that KSB itself will be increasing its local production and content, but also by the fact that companies in various sectors (industry/energy sector, water, sewage, etc.) exporting equipment incorporating KSB pumps will also (as they substitute KSB pumps for pumps made outside of Argentina) increase local content.

The Board of Directors was impressed by the arguments and data which Kessen presented. Ultimately, they approved a major capital injection for KSB Argentina, so as to be able to increase production in Argentina of pumps not only for various segments of the local market but also to permit export of pumps produced by KSB Argentina to developing world customers.

AuthorAffiliation

D. K. "Skip" Smith, Southeast Missouri State University

Carlos Aimar, University of Palermo and University of San Isidro

Andres Kessen, KSB Argentina

Appendix

APPENDIX 1

CASE DATA RELATING TO THE "RAISE ATTRACTIVENESS OF GLOBALIZATION" MODEL

1. INCREASING OPENNESS TO THE GLOBALIZATION OPTION. The case indicates that having the ability to produce a range of pumps in a low-cost market like Argentina could be a way of focusing the attention of unions and workers in Germany on the fact that KSB could, if necessary, transfer the production of various pumps from Germany to Argentina. In short, having the option to make that change might lead to increased flexibility by German workers and their unions on a variety of issues including wages, benefits, work rules, etc.

2. INCREASING ATTENTION TO THE DEGREE OF COMPETITIVE CHALLENGE. The value of the Euro has increased from a bit more the U. S. $0.80 two years ago to approximately U. S. $1.20 today. Because the costs of products produced in Germany (and other locations in Europe as well) are incurred in Euros, KSB AG needs to dramatically increase its prices to buyers elsewhere in the world who purchase KSB AG products in U.S. dollars and/or currencies linked with the dollar. For the same reason, competitors based in the United States and/or other countries whose currencies are linked with to the U.S. dollar can offer prices which are very attractive compared to those which KSB AG must charge.

Degree of competitive challenge/opportunity. Since Argentina' s default on its debt in December 2001, KSB's ability to compete against major competitors in Argentina and elsewhere in the world has improved dramatically. The improved ability to compete is verified by the fact that KSB was not then but is now the market share leader in three pump segments: (1) the industry/energy segment; (2) the water segment; and (3) the sewage segment. The improvement in KSB's ability to compete is largely due to the fact that the 67% decrease in value of the peso means that costs of major competitors who import pumps and/or major pump parts are far higher than the costs of companies like KSB who are able to manufacture pumps locally.

KSB now is faced with the opportunity to be extremely competitive in export markets as well. In addition to the factors mentioned above, reasons include the following: (1) Instead of delivery times of 120/150 days, KSB Argentina can offer delivery times of 60 days; (2) The obsolete low-technology manufacturing technology used by KSB Argentina will result in lower manufacturing costs and higher margins for KSB.

3. HIGHLIGHTING THE IMPORTANCE OF KEY STAKEHOLDERS. Since the end of the Second World War, the system of industrial relations operating in Germany has been characterized by high levels of social stability and industrial harmony. On the one hand, management is expected to provide workers with high levels of training, pay, benefits, and employment security; on the other, workers are expected to provide high levels of productivity and very low levels of strikes and/or other industrial problems. Recently, however, due to multiple forces (for example, exchange rate-related issues, the growing importance of the stock market and/or changes in share prices, pressures to localize products and/or increase local content, etc.), large companies including KSB AG find themselves wondering whether maintaining this system in which they must embrace relative high costs and relatively low levels of profits is still sustainable or even desirable.

Historically, the role of stock markets and the importance of movements in the price of a company's stock has been lower in Germany than in many other developed countries. One reason for this is that in Germany, extensive cross-shareholding between large companies have in the past been very common and have insulated companies from performance pressures from individual shareholders. A second reason for the less importance role of stock markets and changes in share price in Germany is that historically, banks in Germany (rather than individual investors) have provided a very large portion of the funds used to operate and/or grow companies. Third and finally, banks in Germany have historically voted (by proxy) the shares of many small stockholders; the impact, once again, has been to insulate firms from stock market pressures. However, all three of the factors mentioned above are now beginning to change, and the importance to large companies (including KSB AG) of the stock market and of changes in share prices (and thus, changes in performance) is increasing.

APPENDIX 2

CASE DATA RELATING TO THE BUSINESS PERFORMANCE MODEL

MACRO-ECONOMIC CHARACTERISTICS: The case indicates that Argentina was unable to pay its debts, and that the country is bankrupt. Levels of unemployment are high, approximately 20%. The case also indicates that many people in Argentina lost large amounts of money, when the government decided that depositors who had U.S.$ on deposit in banks in Argentina would be paid in pesos, not in dollars. Thus, if a depositor had U.S. $15,000 on deposit, and the value of the peso used to be one dollar to one peso but is now three pesos to one dollar, the 15,000 pesos which the depositor receives back from his bank are worth only U.S. $5000. Because of this development and because the government is meddling with the banks and banking policies, people no longer trust banks and no longer deposit their money there. This means that the banks are unable to make loans, and that money is very hard to come by. Very few investors are willing to risk investing money in such an uncertain and problematic environment.

While the economic crisis in Argentina has created severe hardships for many people and many industry sectors in Argentina, the case also indicates that not all sectors have been impacted equally. Sectors producing products for local use have indeed been hard-hit by Argentina's economic problems, because many individual and institutional buyers in Argentina no longer have enough money to buy equipment. However, sectors producing for export may face a very different situation. If they are selling their products for dollars and/or other hard currencies, and if their key inputs are produced locally and can be paid for in local currency (that is, pesos),companies in these sectors (especially, those operating on a large scale) may be making a lot of money. Such companies should be able to compete very vigorously with producers located anywhere else in the world.

INDUSTRY CHARACTERISTICS: There are several characteristics of the pump industry not only in Argentina but also elsewhere in the world which can be mentioned:

1. Price has always been important but is becoming even more so. Assuming the Directors of KSB AG allow KSB Argentina to begin producing pumps for export, the obsolete technologies KSB Argentina uses will reduce manufacturing costs and increase margins.

2. Shorter delivery times have become more important to customers. At the moment, delivery times for customers ordering KSB pumps worldwide average 120 to 150 days. Assuming the Directors allow KSB Argentina to begin manufacturing certain pumps for export, delivery times for those pumps should fall to approximately 60 days.

3. As indicated above, there are a number of companies still competing in the pumps business in Argentina. However, the number of competitors is smaller now than it used to be.

4. Government has many projects it would like to undertake, but very limited financial resources. The public works projects most likely to go ahead are those funded by international bodies such as the World Bank.

5. Service is becoming more important, and repairing imported pumps is becoming a good business.

6. Managing and collecting accounts receivables is becoming a much more serious challenge.

7. Opportunities to export locally-produced pumps look particularly attractive.

8. Some buyers are becoming less concerned about technical specifications and more concerned about costs. This is especially true of buyers in Less Developed Countries (LDCs) such as Egypt, Uzbekistan, and Venezuela.

"ENVIRONMENTAL" CHARACTERISTICS: As indicated earlier, in this context, "environment" refers to characteristics of the company, the customers, and the competitors. As regards company, the case contains background on the history of KSB and major milestones in that history. In terms of this case, however, it appears that one key piece of information regarding the company is the fact that while Kessen believes that increasing production of pumps in Argentina so as to be able to fully service not only the local market but so as to be able to export as well represents a fantastic opportunity for KSB Argentina, other powerful players within KSB 's global organization may view the situation differently. Historically, the culture of German companies is to maintain production of globally-exported products close to the company' s home base in Germany, rather than to farm it out to overseas subsidiaries. As indicated below, the case also provides measures of KSB Argentina's recent performance on several criteria:

Appendix

As regards customer characteristics, the case tells us that customers purchasing KSB pumps tend to be in process, industry/energy, water, in-building applications, sewage, valves, and mining industries. The case indicates that exports to customers outside Argentina (paid in U. S. dollar and/or other hard currencies) can be very profitable for KSB Argentina. Regarding customers outside of Argentina, the case indicates that some buyers are becoming less concerned about technical specifications and more concerned about costs. This is especially true of buyers in Less Developed Countries (LDCs) such as Egypt, Uzbekistan, and Venezuela. As for customers within Argentina, the case provides very little information about specific KSB customers. The case does provide a bit of information about customers and opportunities in various segments; this information includes the following:

1. Process customers: some of these export equipment. Such companies could take advantage of the huge decline in the value of their peso costs and do very well in the future, as they sell for U.S. dollars or other hard currencies.

2. Industry/energy customers: some of these could export equipment. As in the case of process customers, and for the same reasons, such exports could be very profitable for them.

3. Water customers: If public projects financed by external agencies (for example, the World Bank) become available, customers buying water-related pumping equipment will be open to buy. Private companies involved in providing water to individual consumers and/or industry are unlikely to be open to buy until rates have been adjusted upwards. Since such moves will be very unpopular politically, they are unlikely to occur anytime soon.

4. In-building applications-related customers: New construction has fallen dramatically, as neither public nor private sector entities have money for new projects. Also, because the level of technical expertise required to produce these sorts of pumps is not high, small local manufacturers can be tough competitors.

5. Sewage: as in the case of water, and for the same reasons, external financing is likely to impact powerfully on what sort of opportunities become available.

6. Valves: because the customers are private companies providing water services to individual and organizational customers, and because rate increases have not been approved, the companies providing these services are (in the short run) unlikely to be open to buy.

As regards competitors, the case indicates that they can be classified into three categories: (1) Companies with a broad line of products and activities (includes local manufacturing plus exporting and importing products); (2) Broad line of products, all of which are imported; and (3) Limited line of products manufactured locally. For reasons mentioned in the notes, KSB Argentina' s most powerful competitors are, like KSB Argentina itself, Category #1 companies. Companies in each of the categories are as indicated below:

View Image - Category 1 Companies, their market shares, and additional comments

Appendix

The case indicates that while KSB is (overall) #2 (after Flowserve) in the marketplace, other companies are very strong in certain markets. The following table from the case summarizes the data available from the case on this point:

View Image - EXHIBIT 1 PUMP APPLICATION SEGMENTS COMPANY

Appendix

The case also provides several performance measures for five of KSB Argentina's competitors. That information is reproduced below:

Appendix

STRATEGY-RELATED CHARACTERISTICS

TARGET MARKET

The case indicates that the primary target markets for KSB include several segments in Argentina (process, industrial/energy, water, sewage, in-building applications, plus valves) as well as export markets in less-developed countries including Egypt, Uzbekistan, and Venezuela. The size of the export market is not given. The current size of the various pump segments in Argentina are as indicated below:

Appendix

Of the above, clearly "process" is the largest segment. KSB has been badly hurt in this segment (and in the in-building applications as well) by the lack of Fire Fighting (FF) pumps. Increasing the number of FF pumps should lead to major increases in KSB revenues and profits in both the process and the in-building applications segments. As for the other segments, KSB is already the market share leader in all except valves.

MARKETING MIX

PLACE. The case contains very little information about how KSB markets its pumps in Argentina. As for the export business, the case indicates that some exports could be generated when pumps manufactured by KSB become components of large machines and/or industrial systems exported by other firms in Argentina.

PRICE: The case contains no information about prices of specific KSB products in Argentina. The case does indicate that prices of pumps manufactured by KSB Argentina are low compared to prices of pumps imported into Argentina from elsewhere in the world. The case also indicates that the prices of pumps manufactured by KSB Argentina should provide very high value for money for purchasers elsewhere in the world.

PRODUCT. The case indicates that KSB utilizes various technologies (including submersible pumps, submersible mixer pumps, wet-pit pumps, single-stage overhung pumps, multi-stage ring-section technology, vertical single- and/or multi-stage technology, and vertical semi-axial and/or axial hydraulics technologies) to serve the needs of its customers in the water, waste water, industrial applications, energy, in-building, mining, and systems engineering segments. The case also indicates that the products manufacturer by KSB, while they are produced using obsolete lowcost technologies, do (like those of its Category #1 competitors) measure up to world-class standards.

PROMOTION: The case includes very little information about how KSB promotes its products and services in Argentina.

IMPLEMENTATION-RELATED CHARACTERISTICS: Data in the case imply that KSB Argentina has been able to effectively implement its marketing strategy. As indicated earlier, the company is now the market leader in three segments. KSB 's position as market share leader implies that the company has developed and effectively implemented a solid marketing strategy, that is, that the range of products and services is appropriate for the market, that KSB has well-functioning channels of distribution, that KSB 's prices are indeed competitive, that KSB 's selling and promotions-related tactics are effective, etc.

Subject: Pumps; Subsidiaries; Competition; Exports; Developing countries--LDCs; Case studies

Location: Argentina

Classification: 1300: International trade & foreign investment; 2320: Organizational structure; 8670: Machinery industry; 9173: Latin America; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 6

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 97-111

Number of pages: 15

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables

ProQuest document ID: 216296838

Document URL: http://search.proquest.com/docview/216296838?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 37 of 100

GREEN ENTERPRISES, INC.

Author: Kargar, Javad; Ponder, Joi; Phillips, Marcus

ProQuest document link

Abstract:

The primary subject matter of this case concerns strategic planning. Secondary issues include financing, working capital analysis, cashflow estimation, and break-even analysis. In this field-researched case, Toppy Green, the CEO of Green Enterprises is faced with resolving some key questions about the direction of his company's strategy and turning around the company's operation. The company distributes good quality food products and makes profits, but is faced with negative working capital and cashflow difficulties. As the case closes, his advisors have asked him to address several key strategic questions. The case has a difficulty level appropriate for the firsyear graduate level. The case is designed to be taught in 1.5 class hours and is expected to require 4 hours of outside preparation by students.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

The case centers on an entrepreneur by the name of Toppy Green, whose business has grown from a single truck food distribution operation into a $6 million food distribution business in the State of North Carolina. After 23 years, the company faces significant growth hurdles in order to achieve nominal profitability with few cashflow difficulties. The company focused on distributing food products such as sandwiches to convenient stores mainly in North Carolina. Toppy's primary goals, in the context of this case, are to achieve better profitability, build a strong balance sheet, and to build the brand name on a limited budget. This case communicates the challenges experienced by an entrepreneur, and provides students with the opportunity to simulate the creation of strategy and implementation in the context of this case.

INTRODUCTION

On a warm and humid day in May of 2004, Toppy Green, the founder, CEO, and principal owner of Green Enterprises, had been reviewing recent company data to help him determine the direction that Green Enterprises should pursue. The financial statements reported that although the company enjoyed a better profit in the first quarter, the quarterly revenue had decreased by about 13.2% in 2004. "Right now our most serious problem is cash flow," said Toppy. "We could have sold more products if we had had more capital. We're often cash-poor because some of our customers pay too slowly. One of our biggest chain customers had recent organizational changes and is paying us slowly. We don't want to push them too much, because we might loose them to our competitors."

Green Enterprises, with revenues of more than $6 million in 2003, was a privately held corporation offering a full line of sandwiches, meats, and desserts. The company relied on food manufacturers for his products. A direct store delivery system (DSDS) composed of 12 route people and one branch office delivered food to over 800 customers serving consumers in its primary trade area of North Carolina.

Competing against old established companies in the sandwich category was a challenge. Toppy knew that to be successful he had to be better than the competition, which had advantages of economies of scale, advertising campaigns, and brand name. The company's abilities to satisfy the regional taste preferences of consumers and to move quickly were strengths of the firm.

COMPANY BACKGROUND

Toppy prided himself on the fact that he worked about ten years for Jubilee Salads, a food distribution firm, and performed well. In 1981, Jubilee Salads was about to go out of business as a result of losing core accounts to its competitors. Jubilee Salads offered each of its 30 salespeople the opportunity to take complete control of their individual routes and trucks. Toppy decided to accept this offer, and without a business plan, he opened his own venture of Green Enterprises. As a result of his work ethic, Toppy was the only salesperson who was successful in maintaining and growing his venture. Within six months, he took over routes for Jubilee Salads to comprise one complete route. "My strengths include salesmanship, professionalism, and excellent communication skills," said Toppy, "And my passion is to sell, and stay afloat. My main weakness is my inability to read and completely understand financial statements and know where every dollar is going."

In 1992, he expanded his business operations by adding one additional route to make a total of two routes. In 1993, he acquired contracts with NC State University and UNC-Chapel-Hill and added one additional truck to the company. As he acquired more business accounts, he added more trucks and routes to the operation. Since 1994, the company had grown rapidly. Riding the tidal wave of growth in the wholesale food distribution industry, Green Enterprises had expanded its operations in four States, from the entire state of North Carolina, to the top third of South Carolina, the bottom third of Virginia, and the Bluefield, West Virginia, corridor. Between 1994 and 1999, the business had grown dramatically fielding a fleet of 26 trucks and routes. Driven primarily by passion for profit, however, the company suffered from a lack of consistency, poor control, and low gross profit margin. By the end of 2000, the company had reached an annualized sales rate in excess of $7,900,000 but was losing nearly $1 million in sales. As a result of the cash flow problem in 2001, Toppy decided to reduce the number of trucks and routes from 26 to 14. Since 2003, the company remained operating with 12 trucks.

THE MARKET AND COMPETITION

The market area that Green Enterprises covered still included the entire State of North Carolina, the top third of South Carolina, the bottom third of Virginia, and the Bluefield, West Virginia, corridor. "Any convenience store in the market area is a potential customer," said Toppy. "In our market area, there are more than 5,000 convenience stores, out of which we serve fewer than 800." In addition to convenience stores, Toppy had diversified into the market for the small grocery stores and family owned grills and restaurants.

The market for the company's products was highly competitive. It faced a variety of local and regional competitors. Two of the company's competitors were larger than Green Enterprises and had substantially greater financial resources. Green Enterprises was the third largest local food distributor in its market area. The largest competitor was Sunburst Foods, which had a strong financial resource, was well known with over 65 years in business with its own brand name, and an older management team. Sunburst's market area included the entire State of North Carolina with distribution facilities located in Goldsboro, Salisbury, Vanceboro, and Wilmington. The company's second largest competitor, Fisher-Rex, had a younger management team and implemented many new innovative ideas. "Competition in the industry is intense and is mainly based on price," said Toppy. "To survive in this industry, you have to know your competition-their strengths and weaknesses."

The company competed on the basis of quality products and services offerings, price, and ongoing customer service and support. Toppy responded to competitive pressures by exploiting his company's agility. "What differentiates me from other competitors in the food distribution industry is my customer service. I don't just deliver the products to my customers. I place them on their shelves and in their refrigerators," he said. "Superior service is our niche in the marketplace; we respond quicker and faster than our competitors when customers need us."

Toppy thought that quality was the equivalent of brand name, and his products had better quality than that of his major competitors, Fisher-Rex and Sunburst Foods. "My company was created by my competitors because they were failing to service customers with high quality products. I think the difference in product is the difference between Green Enterprises and my competitors," he said.

Even so, Toppy was especially worried about the price-cutting war. "I've always priced to value," said Toppy. "My customers have always been willing to pay a premium for the excellent service I give. They want fast, reliable, dependable service, and they know I have staked my reputation on giving such service. Our service is exceptional and distinctive compared to our competitors.

MARKETING

Over the years, Green Enterprises relied almost exclusively on sandwiches, desserts, meats, and salad sales. Toppy felt that the company was offering a more diversified product line than its competitors to meet and exceed customer expectations.

Green Enterprises was not dependent on any one supplier and maintained back-up suppliers for major products. Further, it utilized competitive pricing among its suppliers to obtain the best value for the customer ' s dollar. The company carried products from approximately twenty different suppliers with their own brand names. Green Enterprises sales literature listed over 90 varieties of sandwiches.

Toppy was planning to add its own name brand products, "Granny Green," into the market beginning in July of 2004. The new items would include seven new sandwiches with 20% more meat and higher quality ingredients than its competitors' products. The company's gross profit margin on its own private-label was expected to be around 35 percent. The route system was divided into 12 geographical areas, all supported by the main office and warehouses in Hillsborough. The building is owned by Toppy Green and rented to Green Enterprises. This organization was partly dictated by existing store chain needs. Salespeople with low route sales felt that the system did not favor them as commission was based on sales. Although the gas price was going up, some salespeople also felt that their routes were long and time consuming, and several accounts required multiple visits a week. Each route salesperson was provided with a hand-held inventory tracking device to keep track of inventory on a daily basis. Toppy did not discount. He priced products on a par with two direct competitors, Sunburst Foods, and Fisher-Rex, because he thought that his quality was better and he could beat them with services.

Green Enterprises continued to acquire new accounts through existing customer referrals. According to Toppy, the best way to acquire new customers was strictly by word of mouth. Toppy also picked a specific geographic area twice a week and made a cold call visit to some convenience stores in order to earn new accounts.

ORGANIZATION AND CULTURE

As of March, 2004, Green Enterprises had 19 employees. The company considered its current employee relations to be satisfactory. The company had no organizational chart. As chairman and president, Toppy managed all route designs, sales, marketing, purchasing, controlling inventory, and day-to-day operations as well as all financial and accounting work. His area manager, Craig Hales, had about 11 years of on and off service with Green Enterprises.

There was no daily or weekly meeting with salespeople to focus on their performance or exchange ideas. Indeed, Toppy did not believe that setting short-term measurable goals for each salesperson was a good idea. "There are no sales quotas set for the sales force. That strategy does not apply to this kind of business," Toppy said.

Toppy believed that recruiting a salesperson was not a difficult task. Having a clear driving record was a must, while education and sales experience were added advantages. The job called for a person who was physically strong, hard-working, a self-starter, honest, and eager to make some money. There was an on-the-job induction upon a salesperson joining the company. Usually Toppy or Craig would accompany such a new hire on the route for about three weeks before letting him run the route on his own. The company had a high turnover rate for salespeople. Within 2003, the company had over thirty new salespeople on its payroll in different periods. Only two salespeople had been with the company over a year.

RECENT COMPANY PERFORMANCE

In 2003, the company had experienced a tough year. Although the business was contributing positively to overhead and profit, sales revenue had declined and resulted in a negative cash flow. Key vendors and the employees were being paid on time, but some suppliers were being asked to accept payments beyond their terms. During the year of 2003, Toppy was barely able to keep afloat. After meeting his bank obligations, he was able to pay some of his accounts payable. Out of the $377,913 accounts payable balance at the end of March, 2004, about $220,000 was payable to only three suppliers and was more than one year old. The company was purchasing about $3,000,000 a year from those three suppliers. Toppy was paying about $5,000 a month on his old accounts payable. As the bank officer had said in early 2004, "Toppy, I'm concerned about your cash position. You have reached your credit limit, and we know cash doesn't grow on trees. You need to restructure your accounts payable."

During the first three months of 2004, Toppy had made some progress on the cash position of the company. When the company was short and needed cash to make payroll or buy supplies, the bank loaned the money to the company. The company had, in the past, been able to raise additional cash when cash was needed. Toppy knew that was not possible anymore in light of the poor performance of the company's operation, and because most of the company's assets were already encumbered by bank debt. While the company still had some cash on its balance sheet, unless performance improved, that cash would soon run out.

POTENTIAL DIRECTIONS FOR THE COMPANY

Toppy's main ambition for Green Enterprises was to turn it around to a positive equity. He was fully convinced that his organization had to change in terms of moving toward a continuous improvement paradigm. To realize his ambition, he planned to rely heavily on his team of professional advisors. "I have never doubted my ability and courage to turn the company around," said Toppy. "We must now grow in an orderly way. That's why I need sound, expert advice."

Toppy's first approach in trying to address marketing and sales concerns was to have a company meeting involving his salespeople and hammer out a consensus as to the major issues facing the company and how to address them. Some of the more pertinent problems identified were: (1) high salespeople turnover; (2) insufficient familiarity with customers; (3) lack of training systems; (4) no "process" for improvement; (5) lack of communication; and (6) lack of motivation. Toppy pondered a strategy to solve these problems with his advisors. Together they brainstormed the following questions:

* Should we reevaluate the market, the company's strengths and resources, and the competitive industry and develop a new vision?

* What competencies and resources can we depend on to survive and grow in our increasingly competitive environment?

* What should be the company's geographic focus? Should we continue to aggressively expand our geographic coverage, or should we be more selective about where our products are sold and our routes are built?

* Finally, what are the possible ways to improve our gross profit margin and cash flow?

"These are tough decisions," Toppy thought to himself. "It is a good thing we have strong advisors to help us make the decisions."

AuthorAffiliation

Javad Kargar, North Carolina Central University

Joi Ponder, North Carolina Central University

Marcus Phillips, North Carolina Central University

jkargar@earthlink.net

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 2

Pages: 15-20

Number of pages: 6

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412191

Document URL: http://search.proquest.com/docview/192412191?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 40 of 100

SANDS CREEK WINERY

Author: Lapoint, Patricia A

ProQuest document link

Abstract:

The primary focus of this case concerns the strategic direction of a small, family-owned winery. Secondary issues relate to the conflict amongst family members in a family-owned business and succession planning. This case has a difficulty level of three, appropriate for a junior-level course in entrepreneurship or organizational behavior. The case is designed to be taught in one class period and is expected to require three hours of outside preparation. Sands Creek Winery is a family-owned business located in the hill country of central Texas. As is the case with many small wineries, Sands Creek faces an uncertain future given the intense domestic and foreign competition in the wine markets. The firm has faced several challenges: the aging and ill-health of the owner/founder and his wife, disease of the vineyard, rising costs, and over capacity in its storage facility. Several family members are directly or indirectly involved in the business' operations which has lead to interpersonal conflict amongst family members over the future direction of the business. The owner's son, a practicing physician, is not fully invested in the family business, but has a distinct interest in the winery's survival; other family members are engaged in the business in a variety of ways and depend upon the firm's future success.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

Sands Creek Winery is a family-owned business located in the hill country of central Texas. As is the case with many small wineries, Sands Creek faces an uncertain future given the intense domestic and foreign competition in the wine markets. The firm has faced several challenges: the aging and ill-health of the owner/founder and his wife, disease of the vineyard, rising costs, and over capacity in its storage facility. Several family members are directly or indirectly involved in the business' operations which has lead to interpersonal conflict amongst family members over the future direction of the business. The owner's son, a practicing physician, is not fully invested in the family business, but has a distinct interest in the winery's survival; other family members are engaged in the business in a variety of ways and depend upon the firm's future success.

CASE BACKGROUND

Ted and Diane Flynn established Sands Creek Winery in 1983. Ted's previous venture, Diamond View Company, was a multi-million dollar offshore oil drilling company with accounts globally. During his many years of travel, he had acquired a taste for good wines. As a result, he became very interested in the many facets of the wine making process. While in Chile, members of the Chilean wine industry suggested Mr. Flynn enter into the industry in Chile, but he chose to retire in Texas; with him came the desire to produce good wines. After researching vineyard growth in the Texas Hill Country, the Flynns purchased a site near the Stonewall community near Sands Creek.

Initial criteria for a vineyard were good acidic soil conditions, accessible ground water, cool nights and warm days along with high visibility from a major U.S. highway. Over the next several years, Ted cultivated 17 of the 100 acres he had acquired with vines and produced his first wine in 1987. Over the next 10 years, Sands Creek Winery developed award-winning wines. In the beginning, Ted retained the expertise of a horticulturist to maintain the vineyard and a wine maker to aid in the art of wine development. Although he no longer has the horticulturist, he still consults with the winemaker, Dr. Enrique Salemo, Ph.D. Dr. Salerno is a third generation Italian wine maker, holding a doctorate in Viticulture and Enology. He arrives from California once a month to work with the development of the wines. His expertise has contributed to the great success of the vineyard.

In 1994, sections of the vineyard began to suffer and ultimately died. Two devastating diseases to vineyard growth are Cotton Root Rot and Pierce's disease. Constant attention to the soil helps monitor conditions (i.e., high alkaline and mold). Initially, samples were sent off to Texas A&M Agricultural Department in seeking answers to the problem. Mr. Flynn received notice that he had possibly high alkaline content in the soil. After prolonged treatment without success, he employed a private laboratory in Ohio, which confirmed the vineyard had Pierce's Disease. This bacterium is transmitted by insects as they feed on the vine. The insects usually inhabit low-lying areas such as creeks. By this time, a good part of the vineyard was lost with little hope for the remainder. They began the uprooting ofthe seventeen acres, section by section. The 1993 Cabernet Sauvignon is the last of the "estate bottle" wine, (grown and produced on the estate).

Mr. Flynn recently reorganized his operation and began to search out new avenues for his grape resources. On the average, newly planted vines take five years to mature before harvesting. Economically, he has found that buying the grapes versus estate grown grapes is basically an even trade. The upkeep of a vineyard is year-around maintenance that encompasses winter cultivation and pruning, constant soil conditioning, insect control and harvesting. The disadvantage to buying grapes is nailing down a good reliable source. Most vineyards in the State of Texas are only thirty plus acres and can not always follow through on demand forecasts; therefore, Mr. Flynn has gone through many vendors in order to meet his production goals for the year. He also has made many modifications in his production plans due to the quality and quantity of the grapes received.

Sands Creek Winery is considered a boutique winery producing five thousand cases a year on the average. Ted's philosophy is to maintain a debt free organization, with centralized control. Over the course of the business cycle, Ted and Diane have virtually hands-on control, with Ted in production and Diane in marketing and sales. Due to Diane's failing health, she has recently stepped down from participation in direct management activities. Their son, Leyton, entered into the corporation in 1989, where he consults with Ted weekly on laboratory wine production and testing while maintaining a medical practice in the Hill Country area. Leyton's wife, Anne, has been involved in the business off and on. She produces wine and herb vinegar to retain in the testing room. She grows the herbs on the estate where she creates her blends. Sands Creek Winery contracted with a Fredericksburg Company to make jelly from their estate-grown peaches and berries. Currently, they distribute the jelly to various markets under the Sands Creek Winery label without the utilization of their own fruit. Both of Leyton's daughters and Mr. Flynn's granddaughters work in the wine tasting room periodically.

Like any family business, there has been disagreement in the operation of the winery. The elder Flynn has definite ideas about how he perceives the business for the future and how he wants the business to operate. For example, Ted is very comfortable with serving only the Texas market. Leyton, on the other hand, would like to expand the business through e-commerce which would enable the company to reach markets outside the Texas region. While attending a medical conference in Copenhagen, he spent part of his free time visiting small, boutique wine shops and learning that the shop owners were having some difficulty with their current suppliers. The source of their concerns seemed to center around delivery reliability, and the fact that the European grape growers were no longer interested in serving the smaller customers. Also, because the boutique wine shops carry a variety of other wine-related products, the European suppliers did not want to bother with these items as well. Since production of specialized jellies and other fruit-related condiments are a distinctive competence of Sands Creek Winery, a competence for which the company's reputation is well-known in the Texas region, Leyton believes that a differentiated focused marketing strategy will enable the company to gain a foothold into global markets. In consultation with a family friend (who also happens to be a small business consultant), Leyton was encouraged to evaluate the business' strategic options according to the following framework.

However, with such differences between Leyton and his father, negotiating any changes seems to be difficult at this time.

Sands Creek Winery only employs eight people because of its size and type of business. Employees consist of a tasting room manager, several part-time retailers, an assistant wine maker and a few groundskeepers that care for the estate. They receive above average pay for the year and are guaranteed consistent hours, contrary to the industry average, which usually hires seasonally. During the slow cycle in mid-winter, many are laid off, but Mr. Flynn keeps his employees on the payroll year-round. With Mrs. Flynn's illness, total management is done by Mr. Flynn, which he does with great efficiency. He stays on top of every aspect of the business and for a man his age, his physical capability as well as his mental agility are amazing.

From the introduction of Sands Creek wines through today, concentration of sales has primarily been on premises constituting 65 percent of sales. The remainder is sold directly to specialty food and wine outlets in the Texas region. In some cases, Ted and Diane personally deliver to their long time customers in the surrounding area. The use of wholesale distributors is not an option with Ted as it is with most boutique wineries. The cost of production on a small scale does not allow for a distributor's price increase in order to remain competitive in the market. The economy of scale lies within larger scale production. Another deterrent in this industry is the compliance to legal requirements of alcohol production and sales. There are narrow parameters for wine sales and stringent accounting procedures. Tracking systems are set up from the time the grapes enter the facilities, whether they have been purchased from suppliers or grown on the premises. Every gallon must be accounted for by federal and state law, semi-monthly. The report entails a combination of gallons on hand, less total wine sales and usage (tasters) to determine the amount of taxes to be assessed for the period. The retail manager does assist in the information of quantity sold, but Mr. Flynn writes the actual reports.

The only costs directly assigned to the different wines' production are those costs that can actually be traced to that wine, (i.e., grapes, additives, bottles, corks, labels and boxes). Labor, volume less rework costs along with manufacturing overhead, selling and marketing and plant assets are carried over to the end of the production year. These allocated costs are equally divided among all products and direct costs are added to determine individual product cost.

In the areas of marketing, Mr. Flynn has not used media advertisement, but instead uses a method of marketing much like that of Robert Mondavi. The principle is to educate the public about wines by conducting tours and wine tasting. They also hold cultural events and participate in key wine and food societies. The goal is to build faithful wine clientele who communicate to friends and retailers about the quality of wine (i.e., word of mouth). This practice was quite successful in the early stages of development with the entire family involved, but has become quite difficult for Mr. Flynn to maintain while managing day-to-day operations.

As of 2002, while taking inventory of his assets, capabilities and limitations, Mr. Flynn reevaluated his business plan. His storage capacity is maximized. The production and storage area is approximately 1000 sq. ft. He utilizes this area with the greatest efficiency. There are five stainless steel fermentation tanks ranging from 550 gallons to 2500 gallons. The recent purchase of new equipment include an Italian bottling and corking machine that can easily process eight cases per hour and a new grape de-stemmer and crusher. Mr. Flynn also purchased thirty new American oak barrels for the aging of wines, which are stored in the wine cellar beneath the wine tasting room. The remainder of the warehouse is fully stocked with finished product. The investment of new equipment has shown an increase in production but also caused storage deficiency. In 2001 a reported lag in sales also contributed to excess inventory.

Facts from the Texas Wine Marketing Research Institute at Texas Tech University about retail outlets show a decline in on-premises sales froml996 to 2002; they project that this trend is likely to continue for the next ten years. Both on-premise sales and tasting room sales are currently down 4 percent, while supermarkets and liquor stores had each gained 4 percent statewide (Texas Wine Marketing Research Institute, 2002). Mr. Flynn realizes he has lost market share with his onpremise sales, but he thinks it is because of the loss of his vineyard. He believes that the aesthetic view from the highway was a mechanism to attract customers. This may very well be true, but these facts from the Texas Tech survey show a statewide decline of on-premise sales industry-wide.

An analysis of the business reveals that Sands Creek Winery has many attributes to remain competitive. They have a solid financial backing, no debt, state-of-the-art equipment and hands-on management. They are well established in a growing industry with an excellent location. Weaker areas that need attention are: 1 )top-down communication is in need of improvement. Although there is disagreement within the top-level management on strategic direction, a strategic business plan is in place and followed by the executive level; but the lack of communicating the strategy to the functional and operation level seems to be inadequate. It is not clear as to what responsibilities were given to the operational and functional employees, however. The effect of key employees' unawareness as to strategy and their knowledge of Ted's and Leyton's strategic differences foster an air of confusion, discontent and lack of commitment; 2) production is unclear. Sands Creek is on the threshold of leaving the boutique market. They show the potential of increasing market share with the 1998 equipment purchases. They now have the capability to increase production and cut per unit costs, but the plant and storage capacity can not handle the increase. The warehouse facility either needs to be enlarged for storage or more distribution centers need to be contracted; 3) stagnate market philosophy: the philosophy is more reactive and less proactive. With competition moving in daily, contemporary marketing techniques are advantageous to remain competitive. There is a need to penetrate existing markets or look at opening new areas of distribution; 4) loss of vineyard acreage has made it more difficult to maintain consistency within the product line. As each year passes, Mr. Flynn increases the number of reliable sources, but does not believe in contractual commitments. This leaves the winery with an element of risk.

With threats of more competition entering the market arena and gradual market growth, opportunities to enter new geographical market areas and serve additional customer groups could be an alternative. In order to maintain sales without the use of additional retail outlets, it may be necessary to reinstate some of the original marketing tactics. Some of these tactics include: keep in contact with the loyal customer base by a newsletter or mail out; create excitement about new additional wines that have been made and when they will be available; include more cultural events at the winery when planning for the new year; and take advantage of festive times by creating wine to accompany the event. Would the formation of a global joint venture be a viable part of Sands Creek future business and a way for the company to continue to innovate and develop its acclaimed wines?

As the family business faces a new century in a highly competitive market, the family members are concerned about the winery's survivability, and how they should move forward.

References

REFERENCES

Adams Business Media (2002). Adams Wine Handbook. New York.

Arnold, David J., and John A. Quelch. New Strategies in Emerging Markets (1997). Sloan Management Review, 40(1), 7-20.

Dawar, Niraj, and Tony Frost (1999). Competing with Giants: Survival Strategies for Local Companies in Emerging Markets. Harvard Business Review, 77(1), 122-133.

Ger, Guliz (1999). Localizing in the Global Village: Local Firms Competing in Global Markets. California Management Review, 41(4), 64-84.

Hearing Company (2002, July). And Now the Numbers. Wines and Vines, 23-25.

Texas Tech University (1996, 1999, 2002). Texas Wine Marketing Research Institute Study. Lubbock, Tx.: Texas Tech University Press.

AuthorAffiliation

Patricia A. Lapoint, McMurry University

lapointp@mcmurryadm.mcm.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 2

Pages: 25-29

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412106

Document URL: http://search.proquest.com/docview/192412106?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 41 of 100

HOSPITAL MANAGEMENT AND BOARD GOVERNANCE

Author: Loughman, Thomas P; Fleck, Robert A; Snipes, Robin L

ProQuest document link

Abstract:

The primary subject matter of this case involves issues relating to the management of a community hospital and the proper relationship of the hospital's Board of Trustees with the hospital's administration and the physicians who perform services for the hospital. It covers concepts of operations, management, and interpersonal and organizational communication. It fits well in junior-level management, organizational behavior, and communications courses. It can be covered in approximately 1.5-2 hours. Little outside preparation is necessary.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

The Hospital Board of Trustees had for some time been receiving complaints from physicians about the hospital administration's unwillingness to listen and their apparent lack of appreciation for the physicians' contributions. Physicians were also concerned about several operational issues within the hospital, including operating room turnover time and nursing competence in some sections of the hospital.

Hospital administration explained to the board that only a few physicians complain, but they complain loudly and often enough to make the board feel there is more dissatisfaction than really exists. The administration claimed that physicians were very demanding, did not like to be told no, and showed little awareness of the costs involved in the procedures they performed at the hospital. The administration also maintained that they did try to communicate with physicians, but physicians were difficult to reach because of gatekeepers and would often not return messages left by administrators.

The board, facing increased pressures to insure management accountability ofthe hospital, asked a consulting group to assess physician satisfaction with a broad range of issues concerning hospital operations as well as working relationships and communication among the board members, physicians, and administration.

THE HOSPITAL ASSESSMENT PROJECT

The assessment was accomplished in several phases and through three main data-gathering methods. The first phase involved discussions with hospital stakeholders concerning organizational, leadership, and communication issues to be explored through a research study and the goals the study would accomplish. With the major goals of the project agreed upon, the research team proposed using a three-pronged approach of interviews, focus groups, and a survey. Participants in the interviews and focus groups were to include hospital administrators, board members, and physicians. The survey was to be completed by physicians only.

Names of prospective interviewees and focus group participants were elicited from a physician relations committee of the Board. The committee membership included physicians, administrators, and trustees. As input was being gathered in the interviews, the consulting team began creating the survey instrument. Focus groups were subsequently used to pilot test the survey and to modify it when necessary.

The resulting survey contained 60 questions, grouped into four major sections, plus a few demographic items concerning physician specialty, age, and length of service in the local area. The majority of the questions were Likert Scale questions with responses ranging from 1-5. In the first section of the survey (hospital administration), the instructions to physicians were as follows: "Compare your image of the quality of service provided by [hospital] on each of the following items against the level you believe a hospital should deliver, as follows:

1 = Much worse than I would expect from a hospital

2 = Slightly worse than I would expect from a hospital

3 = Just as I would expect from a hospital

4 = Slightly better than I would expect from a hospital

5 = Much Better than I would expect from a hospital"

The first section of the survey covered satisfaction with the hospital administration, the Board of Trustees, the nursing staff, and the ancillary (non-nursing) staff. The second section of the survey covered satisfaction with different operational areas (such as operating room turnover time). The third section covered physician empowerment, and the last section included demographic questions and questions regarding communication preferences. Open-ended questions involving relationships, operations, and preferred communication channels were also included.

In an attempt to generate a response rate sufficient to engender confidence in the survey results, before the survey packet was mailed, a letter was sent out by the chair of the physician relations committee alerting physicians that the survey was about to arrive at their offices. The letter reminded the physicians about the project, emphasized the board's desire to hear from physicians, and encouraged them to participate. Another method designed to highlight the importance of the project and of physician participation in the survey was a signed cover letter in the survey packet from the Chief of Medical Staff at the hospital. His letter mentioned the project and stressed the importance of physician participation.

To minimize concerns physicians might have about the confidentiality of their responses, the research team rented a personal mailbox in town for the express purpose of receiving the survey responses. The packets sent to physicians by members of the hospital's staff contained a copy of the survey, a stamped return envelope addressed to the team's personal mailbox, and the letter from the Chief of Medical Staff.

A post card reminder subsequently sent out by the research team to physicians who did not respond to the initial mailout perhaps generated 10-15 additional responses. The total number of responses was 94, for a response rate of around 30%. (Normally, mail-in surveys generate a response rate of between 2 and 10%). Given the diversity of the respondents and the relatively high response rate of the survey, the consultants felt confident in the representativeness of the sample. Therefore, the sample was deemed representative and large enough to allow the researchers to make inferences about the entire hospital physician group.

SURVEY FINDINGS

Survey results suggested a more widespread dissatisfaction among the physicians than the administration had assumed. In what could be categorized as the "interpersonal dimension," physicians reported that the administration showed little concern for physicians' contributions to the hospital, did not give adequate individual attention to physicians, and did not listen to nor respond promptly to physicians' needs or concerns. To one open-ended question asking physicians to recommend a change at the hospital, nearly 10 percent of the respondents stated there should be a change in administrative personnel. In addition, physicians reported some dissatisfaction with specific areas of the hospital such as operating room turnover times and nursing competency on some floors of the hospital.

Positive findings involved several areas of hospital operations, including the nursing and ancillary staff, record keeping, records availability, and records ease of use. Physicians also generally believed that the hospital enjoyed a favorable reputation in the community and that relationships with the administration and the Board were important to foster.

CONSULTANT RECOMMENDATIONS

A. Strengthen the Physician Relations Committee and use it to develop a method of better communication among physicians, administration, and Board members. While survey data indicate that direct mail and newsletter are the top two preferred methods of communication, more personalized (face-to-face and staff meetings) methods would also be appreciated: many respondents indicated a desire for more personalized contacts.

B. Assess the operating room scheduling system. The current system is viewed as potentially discriminatory and a source of discomfort. Perhaps a more automated (on-line) approach would help alleviate some of the perceived inefficiencies and help clarify scheduling priorities.

C. Focus on enhancing interpersonal relations through team building, listening, and conflict resolution methodologies.

D. Capitalize on the physicians' desire to foster a good working relationship with the administration and Board.

E. Assess the factors responsible for some physician specialties reporting significantly different satisfaction levels with some areas of the hospital.

The consultants also made some observations about the manner in which some of the key personnel responded during the course of the study. For instance, after the Chief of Medical Staff had taken two weeks to draft a letter that was to accompany the survey packet, the consultants inquired about the delay. Because the physician's assistant stated that the physician had not had enough time to draft the letter, the consultants volunteered to draft it. The draft was composed and faxed to the physician's office. After several days elapsed, the consultants contacted the physician's office to get a status report. The fax had been misplaced, or something, so a new one was needed. (The physician does not use e-mail.) The consultants faxed another copy of the letter. Several days later, a copy of the letter, typed on the physician's letterhead, arrived in the mail. It was two pages long, but the consultants had sent a one-page draft and requested that the letter fit on one page.

In another example, the Chair of the Physicians' Relations Committee of the Board of Trustees received from the consultants a draft of a letter that was to precede the survey packet. It was intended to alert the physicians who were about to receive the survey that the packet would reach their offices within a few days. Since the letter from the Chief of Staff had not yet arrived, and consequently the packets had yet to be sent, the consultants requested the Chair to wait before sending his letter. The consultants also requested the Chair to inform them when the letter was about to be sent. While the consultants were assembling the packets to be mailed, they discovered by chance that the Chair's letter had been mailed about three weeks previously.

CASE QUESTIONS

1. What are the proper roles of a hospital's Board of Trustees, physicians, and administration in operating a community hospital?

2. In what ways can the "interpersonal dimension" affect the operations of an organization such as a hospital?

3. What changes could improve the interpersonal dimension? hospital operations?

4. Comment on the methodology used to assess physician satisfaction with the hospital. What could have been done differently?

INSTRUCTOR NOTES

Question 1: Many organizations today are facing pressures from stakeholders to become more accountable. More than most other organizations, hospitals must attempt to satisfy diverse constituencies with sometimes competing interests, in what is often a very high-stakes business. Physicians more than ever are concerned with the business aspects of their professions. Medical costs are rising. Vast numbers of Americans lack health insurance. Health maintenance organizations are attempting to control costs. Physicians and hospital administrators often disagree on how patients are to be served, and at what cost. Increasingly, boards of trustees are being asked to play a more active role in the governance of hospitals.

In this case, however, the administration has made it clear that it intends to run the hospital and that the board should stay out of the way. It has also stated that only a few physicians are disgruntled, so the Board should stop worrying. What the Board members are concerned about is the "fiduciary" responsibility of the hospital to the community it serves, an area over which they believe their authority rightfully extends. The Board members would probably not be involved to the extent they are in the day-to-day operations of the hospital, except that physicians keep coming to them seeking their assistance. In some scenarios, the Board members have considered removing the CEO of the hospital because much of the controversy seems to involve him, primarily because of the interpersonal dimension discussed below.

Question 2: The interpersonal dimension involves a host of issues including management style, listening competence, response to conflict, and numerous other personality characteristics. One of the most interesting parts of the interpersonal dimension of the case involves the role of perceptions. The hospital administration maintains, for example, that its communication channels are open and that it constantly seeks to connect with physicians. The physicians, on the other hand, for the most part believe that the administration does not listen, does not respond, and does not appreciate the work the physicians do. In that context, and after hearing complaints from physicians for a long time, the Board of Trustees decided to get an outside group to assess the current state. An outside viewpoint is essential in situations where perceptions differ so markedly about what is or is not happening. The outside group presumably has "clean hands" and is more apt to be believed than insiders.

In conflict-resolution terms, the issues have devolved into more affective than cognitive domains, meaning that emotions and personalities are playing prominent roles in framing issues and making decisions. The issues themselves are often complex enough, but emotions make them much more difficult to resolve. In addition, several of the physicians and the top administrators are known for their penchant for wanting what they want and when they want it, so personality clashes occur.

Question 3 : Communications researchers can offer numerous methods to help improve the interpersonal issues apparent from the survey as well as from the interviews and focus groups. Some of these involve developing effective listening skills and the ability to give feedback. Others involve team-building and conflict-resolution methods. See Fisher's, Communication in Organizations, for helpful information about these skills. DuFrene and Lehman's Building High-Performance Teams has several good activities to help build teams and develop group productivity. The International Listening Association (www.listen.org) has useful information and numerous worthwhile links involving listening skills.

As for hospital operations, the major complaint the physicians have involves the operating room scheduling and turnover times. Apparently, some favoritism has been shown to certain "insider" physicians, and others have decided on their own that the operating room is theirs to schedule for their own convenience. These perceptions have made the "outsider" physicians uncomfortable. Also, turnover times become problematic when surgeons must wait sometimes hours between the surgeries they perform. For these surgeons, downtime can cost them enormous sums, so they are not happy. The consultants recommended a more automated, perhaps online, system that could help alleviate the downtime and overcome the perception that some physicians were being treated inequitably in the OR scheduling.

Question 4: Going into the project, the consultants had been made aware that the administration would probably resist any critical findings, especially since the administrators believed only a few physicians were complaining. It was also apparent that the physicians were probably going to be suspicious of insiders conducting the study. In an effort to portray a balanced approach, the consultants spent a considerable amount of time and effort interviewing and conducting focus groups with physicians, Board members, and administrators. These steps also allowed the consultants to be certain that the major stakeholder groups had a chance to give input to the process. The focus groups also functioned well to pilot test the physician survey.

The main disadvantage of the methodology was that it took so much time to arrange and conduct the interviews and focus groups. The time factor began to wear somewhat on the physicians, administrators, and Board members since they were anxious to see survey results. Some began to wonder whether too much time was being spent on developing the survey. After all, the hospital had been using a canned survey for several years. As the hospital's CEO said, "I can get you a survey." The problem with the canned surveys, however, was that they told the stakeholders very little about the major issues discovered in the "custom-built" survey developed by the consultants.

AuthorAffiliation

Thomas P. Loughman, Columbus State University

loughman_tom@colstate.edu

Robert A. Fleck, Jr., Columbus State University

fleck_bob@colstate. edu

Robin L. Snipes, Columbus State University

snipes_robin@colstate.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 2

Pages: 31-36

Number of pages: 6

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412210

Document URL: http://search.proquest.com/docview/192412210?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 49 of 100

A DAY AT THE MOVIES

Author: Docan, Carol; Rymsza, Leonard; Baum, Paul

ProQuest document link

Abstract:

This case study was developed after the authors became aware of a consumer fraud lawsuit that was filed against a national movie theatre chain on behalf of all moviegoers who sat through unannounced advertisements. The authors recognized a series of additional legal issues that were not presented in the original litigation, which lead to a discussion of the ethical issues presented in the scenario, and to a discussion of how the national chain might solve the threatened litigation through statistical analysis of a consumer survey.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns business law and statistical analysis. Secondary issues examine contract formation, terms of an agreement, breach of contract, misrepresentation and legal remedies, as well as ethical issues related to business conduct affecting consumers and statistical analysis involving hypothesis testing which may lead to alternate business decisions.

The case has a difficulty of level three, appropriate for junior level courses. The case is designed to be taught in three class hours, including a class presentation by student teams. The case is expected to require a minimum of three hours of outside preparation by student teams that present a report.

CASE SYNOPSIS

Draw your students into a scenario that they will identify with quickly. A busy college student rushes to get to the movie theater, on time, to see the latest big movie hit. The student unwittingly becomes part of a captive audience that must sit through twenty minutes of commercial advertisements before the movie actually begins. Instead of complaining about the cost of a movie ticket, the student is fuming because he had to sit through the commercials and wants his money back. When the manager refuses to return the price of the movie ticket, the student considers whether he has a good lawsuit against the theater on behalf of all moviegoers.

The theater receives a letter from the student expressing his dissatisfaction with the showing of the commercials and threatens a class action lawsuit. The theater learns that competitors have received similar complaints. The theater owners prepare to defend a potential lawsuit by forming a consortium.

Your students will embark on a search for answers to a variety of questions. In Case A, students are required to determine whether a contract exists, identify the terms of the agreement, determine whether a breach of contract occurred, and what remedies, if any, are available, and analyze whether the theater made an innocent misrepresentation or acted fraudulently. In addition, students explore the ethical issues that arise from the theater owner's conduct of showing commercials to a captive audience.

In Case B, the consortium decides to conduct a survey to consider potential legal losses. The results of the survey are used to test the hypotheses regarding the percentage of all moviegoers who are unhappy with the commercials. The student must recognize the statistical issue as one of testing hypotheses about a population proportion, must be able to formulate the null and alternative hypothesis, compute the appropriate test statistic, and draw conclusions about whether the consortium should settle or defend the lawsuit.

The case study was developed after the authors became aware of a consumer fraud lawsuit that was filed against a national movie theatre chain on behalf of all moviegoers who sat through unannounced advertisements. The authors recognized a series of additional legal issues that were not presented in the original litigation, which lead to a discussion of the ethical issues presented in the scenario, and to a discussion of how the national chain might solve the threaten litigation through statistical analysis of a consumer survey.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case is designed to be used in an upper division business course. The purpose of the course is to enable students to utilize knowledge they have gained in their lower division core business courses. In addition, the course also aims to improve a student's communication, written and oral, and teamwork skills. Student teams prepare the answers to questions presented in the case with coaching from faculty. The faculty coaching is intended to provide answers to team questions. One team of students formally presents their case solution to the class. A second team of students acts as a "challenge team" by asking the presenting team for further explanation or clarification of its case solution. Following the challenge, the entire class is welcome to participate in an active question and answer session.

CASE A QUESTIONS - LEGAL AND ETHICAL

1. Does a contract exist between Tommy and Royal Theater? If a contract is present, what are the terms of the agreement and did Royal breach the agreement? If the contract was breached, what damages, if any, may Tommy recover?

Contract Formation

The breach of contract claim appears to be straightforward. A simple contract was entered into between Tommy and Royal Theater, Tommy requesting a ticket and paying for it in cash. Who is the offeror and who is the offeree is really not critical to the case. Whether Tommy offers to purchase the ticket by tendering the cash and Royal Theater accepts the tender, or Royal Theater offers to sell the ticket and Tommy accepts the offer by requesting a ticket and tendering the cash, makes little difference to the conclusion that a contract was entered into by the parties. The contract that results would have only a few very basic terms. Once Tommy's money is accepted, all that remains is Royal Theater's performance. Performance being Royal Theater's promise to begin showing the movie at 1 pm, the time indicated on the ticket. The ticket did not contain any express written statement authorizing the Royal Theater to show advertisements and promotions. Neither did the ticket contain any express written statement indicating that the movie would begin later than 1 pm on account of the showing of advertisements and promotions.

Contract Breach

The contract was breached, Tommy argues, by Royal Theater's failure to show the movie at the stated time. In addition, Tommy may also contend that the contract was breached by Royal Theater's unilateral decision to show unwanted advertisements and promotions despite the lack of an agreement regarding such showings. On the other side of this question of breach of contract, Royal Theater may simply state that time was not of the "essence." Specifically, that there was no agreement regarding showing the movie at precisely 1 pm. Consequently, Royal Theater would indicate that it would only be obligated to perform (show the movie) at 1 pm or within a reasonable amount of time after 1 pm. Royal Theater would indicate that the screening of the movie began at 1:20 pm, twenty minutes being a reasonable delay.

Contract Damages

If the contract is breached, there remains the issue of damages that Tommy has suffered. Tommy can argue that he suffered damages for wasted time, confusion and delay. How will Tommy translate these damages into a monetary amount. The complaint to the manager and a request for a refund would seem to be the easiest solution. Royal Theater would not only agree but might argue that refund of the cost of the ticket is the only solution for Tommy.

Although Tommy may recover very little in the form of monetary damages on the breach of contract claim, this does not mean that a class action suit is not worthwhile or that punitive damages or injunctive relief is unavailable in a fraud action against Royal Theater.

2. What liabilities, if any, does Royal Theater have for innocent misrepresentation or fraud? In answering the question, consider reviewing the case of Lee P. Cao et al v. Huan Nguyen et al., 607 N.W. 2d 528 (2000) and incorporating in your report the analysis of the court.

Misrepresentation vs. Fraud

The preliminary discussion by the students should distinguish between misrepresentation and fraud. A definition of each concept would be a good start. A misrepresentation is an assertion that is not in accord with the truth. Misrepresentations can be either, (1) "innocent" - where the representation is false but not intentionally deceptive, or (2) "fraudulent" - where the representation is made with knowledge of its falsity and with intent to deceive. In either instance, "innocent" or "fraudulent," the representation that is made is false. The distinction is that in a case of "innocent" misrepresentation the person making the representation is not aware that the representation is false (not in accord with the truth). Whereas, in the case of a "fraudulent" misrepresentation the person making the representation knows the representation is false and is making the representation with the specific intent to deceive another.

Students should recognize that the misrepresentation in this case was not innocent, but instead fraudulent. They should note that the statement, the movie would begin at 1 p.m., was false, that Royal was aware the statement was false, and that it was intended to deceive moviegoers. Students would point out that Royal made the statement to create a captive audience that would sit through twenty minutes of commercials before the movie began. This analysis eliminates any argument that Royal's statement was an innocent misrepresentation. Students then proceed to develop arguments to determine whether the elements of fraud exist.

Prima Facie Case for Fraud

The case Lee P. Cao et al v. Huan Nguyen et al., 607 N.W. 2d 528 (2000), provides the elements of fraud that must be established to prevail in a case. Students should recognize that Cao decision gives the prima facie case for fraud. The case states: In order to maintain an action for fraudulent misrepresentation, a plaintiff must allege and prove the following elements: (1) that a representation was made; (2) that the representation was false; (3) that when made, the representation was known to be false or made recklessly without knowledge of its truth and as a positive assertion; (4) that it was made with the intention that the plaintiff should rely upon it; (5) that the plaintiff reasonably did so rely; and (6) that the plaintiff suffered damage as a result.

Students should understand that in order for Tommy to prevail in a fraud claim against Royal Theater, he must allege and prove all six points stated in the Cao case. Students are expected to go through each point of the prima facie case and determine if the point is met or not met. Most importantly, the students should be able to explain the decision that they reach on each of the six points. Some of the points, as will be seen below, will require very little discussion. However, other points will be more complex, present contrary arguments, and require additional discussion.

Students should apply the elements of fraud in chronological order, as found in the Cao case. If Tommy and Royal Theater have conflicting arguments, each should be discussed. The following cites each element of fraud and applies the facts of the case to discuss the arguments and counter arguments that Tommy and Royal Theater might make.

(1) That a representation was made: Tommy would assert that Royal Theater made representations in newspaper advertisements, on the theater marquee and by the cashier at the ticket window that the movie would begin at 1 p.m.

Royal Theater has no counter argument.

(2) That the representation was false: Tommy would assert that the representations were false because the movie did not begin at 1 p.m. The movie began after twenty minutes of commercial advertisements were shown. To the contrary, Royal Theater may assert that the representation was not false because the posted time of 1 p.m. was the time when the theater lights would dim, thus advising customers to arrive on time while the theater was lighted.

Royal has the weaker argument.

(3) That when made, the representation was known to be false or made recklessly without knowledge of its truth and as a positive assertion: Tommy would assert that Royal Theater made a positive assertion, "The movie begins at 1 p.m.," and knew it was false because twenty minutes of commercial advertisements would be shown before the movie began.

Royal has no counter argument.

(4) That it was made with the intention that the plaintiff should rely upon it: Tommy may make the simple assertion that moviegoers rely on newspaper advertisements and theater marquees to determine which movies will be shown and at what specific times. Tommy would assert that Royal Theater intended to create a captive audience that would be seated at 1 p.m. only to be forced to sit through twenty-minutes of commercials He will also point out that Royal Theater receives revenues from it's advertisers at the expense of the captive audience that it deceives.

Royal Theater has no counter argument.

(5) That the plaintiff reasonably did so rely: The Cao case provides that a party is justified in relying upon a representation made to the party as a positive statement of fact when an investigation would be required to ascertain its falsity. The idea here is that a party's reliance on a positive statement of fact, under most circumstances, is reasonable in the absence of an attempt to verify the truth or falsity of the statement. If one were required to investigate to determine if every positive statement made to them was in fact true, the tort of fraud would be meaningless. What the students should indicate under this point is that the courts generally do not require a party to make an independent investigation as to the accuracy of the statement on which he relies. However, a person does not act justifiably if he relies on an assertion that is obviously false or not to be taken seriously.

Tommy will assert that he reasonably relied on the newspaper ad, the marquee, and the cashier's statement that the movie would begin at 1 p.m. Tommy would indicate that his reliance on the newspaper ad, the marquee, and the cashier's statement, was justified especially since the statements were not obviously false and were to be taken seriously. It was important that Tommy arrive before the lights in the theater dimmed because he could barely see what was happening when it was dark. He left his house and he arrived with fifteen minutes to spare, enough time to buy a drink and snacks. He entered the viewing room two minutes before the movie was to begin.

Royal Theater may assert that Tommy's reliance was not reasonable. To support this argument, Royal would point out that Tommy had not been to the movie for many years. Additionally, if Tommy had asked others moviegoers he could have easily learned that several minutes of commercial announcements are shown before the movie begins. If Tommy had made this simple inquiry, he would have understood that it was only important for him, personally, to arrive by 1 p.m. because the lights would dim and he would have had difficulty finding a seat in the dark. Once he was comfortably in his seat, the movie would begin after the showing of some commercials.

The decision on element (5) could conceivably be in favor of Tommy or Royal.

(6) That the plaintiff suffered damage as a result: Tommy may assert that he lost twenty minutes of his time and lost $9.00 by paying for a movie that was a bust. Some students might also include the cost of the snacks, in his losses. Tommy will have difficulty determining the value of his time since we do not know what he would have done if he had known the movie started twenty minutes later.

Royal Theater may assert that since the value of Tommy's time cannot be calculated, he is not entitled to recover damages for that loss. Regarding the cost of the movie ticket, Royal Theater might assert that Theaters do not guarantee that consumers will enjoy the movies they pay to view. Moviegoers assume the risk that they will not enjoy the movie, yet they have the opportunity to make that judgment when they pay to see the movie. Royal may also assert that Tommy enjoyed the benefits of consuming the snacks, thereby not suffering a loss.

Royal Theater has the better argument on element (6).

Students who find in favor of Tommy on this point may also raise the issue of whether punitive damages should also be awarded. The issue could be raised because the class of plaintiffs is quite large. Students should be able to point out that the awarding of punitive damages generally requires a showing of conduct that is reprehensible or egregious. On this point, it is left up to the students to determine whether Royal Theater's conduct is to be identified as reprehensible or egregious.

In conclusion, students should conclude that while Tommy will probably be able to establish fraud elements 1-4, he might have some difficulty in establishing elements 5 and 6. If Tommy cannot establish all six elements, he will not prevail in a fraud case against Royal.

3. What ethical issues might be involved in showing the commercials to a captive audience of moviegoers who have paid to see a movie? In answering this question, please read an article entitled, "Only the Ethical Survive." For a copy of the article see: http://www.scu.edu/ethics/publications/iie/vl0n2/ethical-surv.html. Also, search the Internet for other sources that will help you develop your answer.

Students are referred to an article entitled, "Only the Ethical Survive" found at http://www.scu.edu/ethics/publications/iie/vl0n2/ethical-surv.html. The basic premise of the article is that, in the long run, it is "good business" to act ethically. Students are encouraged to do some independent research on the question of ethics in business. A search of the Internet, using Google for example and searching "ethics in business" or "business ethics," will produce a considerable volume of material. It is up to each instructor to decide what they would like their class to do in answering this question.

Cost - Benefit Analysis

Here are some possible topics that students can raise. One theory discussed in the literature is a Cost-Benefit analysis. With this ethical theory, a company weighs the costs and benefits of a business decision. If the costs to the company would outweigh the benefits that the company would receive from the decision, one might conclude that the decision is unethical.

Students should identify the "benefits" to Royal Theater from showing advertisements. The obvious benefit to Royal Theater would be revenues received from advertisers for showing the commercials.

On the other hand, what are the "costs" to Royal Theater? Here students might want to look at Royal Theater stakeholders. Stakeholders are entities that are affected by Royal Theater or that have an affect on Royal Theater. Who are the stakeholders in this case - shareholders (in a corporation), employees, suppliers, customers, media, and the local community? The students should be able to identify the stakeholders and explain how the stakeholders might be affected by Royal Theater's decision to show the advertisements in the theater and what affect the stakeholders might have on Royal Theater because of the showing of advertisements.

Justice or Fairness

Another ethical theory is one of "fairness" or "justice." The idea here would be that a decision is ethical if everyone, who is affected by the decision, is treated fairly. In this circumstance the question that students might address would revolve around the question of is it fair to moviegoers to become a "captive audience" with Royal Theater reaping the benefits of commercial revenues.

CASE B QUESTIONS - STATISTICAL

4. In light of this result, should the consortium consider settling or contesting Tommy's lawsuit if it is filed?

The answer to this question involves testing a hypothesis regarding a population proportion. This is a standard statistical test that is covered in an elementary statistics course. The consortium suspects that the proportion of moviegoers who resent the showing of the ads is small, less than 10%. This is the belief or opinion to be tested. This belief or opinion is stated as the alternative hypothesis. The null hypothesis represents all other possibilities regarding the (unknown) population proportion (or percentage), 10% or more in our case.

To conduct the test, let

P = (unknown) proportion of all movie patrons who resent ads.

We then formulate the null (H^sub 0^) and the alternative (H^sub 1^) hypotheses, as shown below.

Hypotheses

H^sub O^: P > 0.10 (Null hypothesis - Avoid lawsuit and negotiate settlement.)

H^sub 1^: P < 0.10 (Alternative hypothesis- Go to trial and fight the lawsuit.)

Students generally find formulating the hypotheses to be one of the most difficult parts of the problem. They tend to forget that the belief, opinion, suspicion or claim to be tested is stated as the alternative hypothesis while the null hypothesis represents all other possibilities. Additionally, students may also incorrectly formulate the hypotheses as a two-tailed test. In our problem, the correct test is a one-tail test, using the left tail as the rejection region because we would be inclined to reject the null hypothesis only for relatively small values of the sample proportion (much smaller than 10%).

The following examples might be presented in class and discussed prior to assigning this case. They would help clarify these issues and guide the student to the correct formulation of the hypotheses for this case. A test is either a one-tail or two-tail test, depending on the values of the sample result (usually, the sample proportion or sample mean) for which we reject the null hypothesis. If we reject the null hypothesis for both very large and very small values of the sample result, the test is a two-tailed test. For example, in testing the effectiveness of a new insulin pump, we would reject the null hypothesis (the pump is effective in that it produces the desired amount of insulin on average) for both very large or very small values of the average amount of insulin released-that is, if the average amount of insulin released is too high or too small. The correct hypotheses would be:

H^sub 0^: Average level of insulin= Desired level of insulin

H^sub 1^: Average level of insulin f Desired level of insulin

On the other hand, if we reject the null hypothesis for only very large values or only very small values of the sample result, the test is a one-tail test. The rejection region (region where the null hypothesis is rejected) of a one-tail test can either be in the right tail or in the left tail. For example, if we are testing the breaking strength of a paper bag, the appropriate test is a one-tail test, using the lower or left tail as the rejection region because we would reject the null hypothesis (that the breaking strength of the bag is equal to or greater than the desired level) for very small values of the test statistic. These values would provide evidence that the breaking strength of the bag is far below the desired level.

H^sub 0^: Average breaking strength of the bag = Desired breaking strength of the bag

H^sub 1^: Average breaking strength of the bag < Desired breaking strength of the bag

Lastly, the rejection region of a one-tail test could be in the right or upper tail. This would be the case if we rejected the null hypothesis for very large values of the test statistic. To illustrate, suppose we are testing the noise level of a new lawn mower. We don't care if the noise level is very low; our concern is that it is not too high. Therefore, the appropriate test is a one-tail test, using the right or upper tail as the rejection region. In this case,

H^sub 0^: Average noise level = Desired noise level

H^sub 1^: Average noise level > Desired noise level

If the test statistic does not fall in the rejection region, students will often incorrectly conclude that the null hypothesis is true and therefore should be accepted. Instructors should remind their students that no statistical test will prove that the null hypothesis is true. The test can only provide evidence that it is false and hence should be rejected. To get this point across, the best analogy to present to students is from our criminal system. In a criminal trail, the null hypothesis is that "the defendant is innocent." (In our legal system this is the presumption - "innocent until proven guilty.") The alternative hypothesis is that the defendant is "guilty." (The alternative is what the prosecution [the state] believes; otherwise the state would not be prosecuting the defendant.) The jury, after reviewing the evidence, may render a verdict of "not guilty." We therefore would state that the null hypothesis should not be rejected. Not rejecting the null hypothesis means that there was not sufficient evidence to reach a guilty verdict. A "not guilty" verdict does not imply that we accept the null hypothesis and conclude that the defendant is innocent. Thus, we can never prove that a defendant is innocent, but we can, with enough evidence, prove that the defendant is guilty.

Critical z value

What is the critical z value? The answer depends on whether a one-tail or a two-tail test is being conducted. If the test is a one-tail test using the lower or left tail, the critical z value is the 5th percentile of the standard normal distribution, 1.645. (This value is obtained from the [cumulative] standard normal distribution table.) If the computed z value is less than this value, we reject the null hypothesis. That is, we reject the null hypothesis if the computed ? value is more than 1.645 standard deviations below the hypothesized value of the proportion. Conversely, if the computed z value is greater than 1.645, we do not reject the null hypothesis. If the test is a one-tail test using the left or lower tail, the critical z value is the same, expect that we drop the minus sign and use 1.645. (Lastly, if the test is a two-tailed test, we split the risk of a Type I error among the lower and upper tails, with 2.5% in each tail as opposed to 5% in one tail. From the standard normal table, we get two critical z values, namely, -1.96 and 1.96.)

Students often find it difficult to interpret the meaning of the z value. The following explanation should help. The z value is simply the number of standard deviations (or, more precisely, standard errors) the sample proportion is away from the hypothesized value of the proportion. The numerator of the z value is the difference between the sample proportion and the hypothesized value of the proportion. The denominator is the standard error of the sample proportion, or more simply, the sampling error. The sampling error depends on the sample size, n, and the hypothesized value of p. The larger the sample size, the smaller the sampling error and the bigger the z value. The larger the z value, the more likely it is that the null hypothesis will be rejected. Conversely, the smaller the sample size, the larger the sampling error and the smaller the value of z. Small z values tend to support the null hypothesis; consequently, the less likely it is that the null hypothesis will be rejected.

Decision Rule (at 5% level of significance)

Z^sub 0.05^ = critical z value at the 5% level of significance (5th percentile of standard normal distribution )

= -1.645

Students often find it difficult to interpret the meaning of this result. It simply states that the sample proportion (0.06) is 1.33 standard deviations below the hypothesized value of the proportion (0.10). Since the computed z value (-1.33) is greater than the critical z value (-1.645) we cannot reject the null hypothesis. Thus, the difference between sample proportion and the hypothesized value of the proportion is due to sampling error.

Students tend to also have difficulty interpreting the magnitude of negative numbers. They should be reminded that -3, for example, is bigger than -5, but -3 is smaller than -2.

Since z = -1.33 > -1.645, we do not reject the null hypothesis. Thus, there is not sufficient evidence, at the 5% level of significance, to conclude that the proportion of patrons who resent the showing of the ads is less than 0.10 (10%). Thus, there is insufficient evidence to justify going to trail. The consortium should, therefore, negotiate a settlement.

These results are illustrated below in the form of a graph.

The graph is the standard normal distribution. This is a graph of all possible z values. Recall that the z values are the number of standard deviations the sample proportion is away from the hypothesized value of the (unknown) population proportion, p^sub 0^ = 0.10. The mean of the z distribution is 0 because the hypothesized value of the population proportion is zero standard deviations away from itself. The computed z value for the sample proportion, z = 0.06, is -1.33, meaning that the sample proportion is 1.33 standard deviations below the hypothesized value of the population proportion.

The critical value of z corresponding to the 5% level of significance is -1.645. The critical value of z is the value of z that cuts off 5% of the area in the lower tail of the distribution. (More precisely, it is the 5th percentile of the standard normal distribution.) We reject the null hypothesis HO if the computed z value is less than the critical z value. (A computed value of z that is less than the critical value of z, - 1 .645, represents the "rejection" region of the test.) On the other hand, we do not reject the null hypothesis if the computed z value is greater than the critical z value. (A computed value of z that is greater than the critical value of z represents the "do not reject" region of the test.)

Students will also have difficulty in interpreting the results of the test. They should first state whether the null hypothesis is rejected or not rejected. If it is rejected, they should conclude that there is sufficient evidence to support the alternative hypothesis. If it is not rejected, the correct conclusion is that there is insufficient evidence to support the alternative hypothesis.

Students may also wonder why we have to perform a statistical test in the first place. After all, they might reason that since the sample revealed that 6 out of 100 moviegoers, or 6%, resent the ads and that 6% is less than 10%, they can conclude, without going through all the effort of conducting a statistical test, that the consortium should fight the case. What is the underlying flaw in this argumentz It ignores the sampling error and looks only at how far away the sample proportion is from the hypothesized value. While each of these results is important, neither is sufficient by itself. The formula for the z value allows us to account for both results. The numerator of z is the difference between the sample proportion and the hypothesized value. The denominator is the sampling error. The larger the sample size, the smaller the sampling error. If, for example, the difference between the sample proportion and the hypothesized value is very large, it would be tempting to argue that the null hypothesis should be rejected. However, if the sampling size is very small, the sampling error (the denominator) will be quite large. If it is very large relative to the difference between the sample proportion and the hypothesized value of the proportion (the numerator), the z value will be very small and, consequently, the null hypothesis would not be rejected. (Small z values tend to support the null hypothesis while large z values provide evidence that the null hypothesis should be rejected.) At the other extreme, if the difference between the sample proportion and the hypothesized value of the proportion is very small, students might be inclined to not reject the null hypothesis. But if the sampling error, due, for example, to a large sample size, is very small, a large z value could be obtained, thereby rejecting the null hypothesis.

The point is that any result that is based on sample data is subject to sampling error. The sampling error must be accounted for when judging the difference between the sample result and the result expected if the null hypothesis were true. For example, if a coin is claimed to be fair is tossed a very large number of times, it would be expected that heads would come up 50% of the time. If, however, the coin is tossed 100 times, but heads come up 48 times, could it be argued that the coin is biased in favor of getting more tails? Probably not, since the difference between the sample result (48 heads) and the expected result (50 heads) would be attributed to random variation or sampling error. The larger the sample size, the smaller the sampling error and the more statistically reliable is the sample outcome. The computed ? value allows us to account for both the difference between the sample result and the expected result (if the null hypothesis were true) as well as the sampling error.

5. When would the consortium make a Type I error? A Type II error?

Solution

A Type I error is made if we reject the null hypothesis if it is true. This would mean going to trial when the consortium should try to settle the case.

A Type II error is made if we do not reject the null hypothesis if it is false. This would mean avoiding going to trail by trying to negotiating a settlement when the consortium should actually fight the case in court.

6. Would your answer to Question 4 change if 300 patrons were randomly surveyed and 18 out of the 300 patrons agreed with Tommy and resented the ads? Explain.

Solution

Let

? = sample size = 300,

X = number of patrons in the sample who resent the ads =18,

-p. _ X/n = proportion of patrons in the sample who resent the ads = 18/100 = 0.06,

Po = hypothesized proportion of patrons who resent the ads = 0. 10.

Since ? =-2.31 < -1.645, we reject the null hypothesis. Thus, there is sufficient evidence, at the 5% level of significance, to conclude that the proportion of patron who resent the ads is less than 0.10. Hence, there the consortium would be justified in going to trial.

Students might wonder why the null hypothesis is rejected with a sample size of 300, but is not rejected with a sample size of 100, particularly in view of the fact that the sample proportion (0.06) is the same in both cases? The answer is straightforward: with the sample size is this question (300) being three times as large as the sample size in the previous question (100), the sampling error is smaller, resulting in a larger ? value. As we stated earlier, larger ? values provide weaker evidence in support of the null hypothesis and, consequently, lead us to reject the null hypothesis.

It is also helpful to point out that if, for example, the sample size is quadrupled, the resulting sampling error would not be one-forth as large as is was before; rather it would be one-half as large. This is just another way of saying that, as the sample size continues to increase, the reduction in the sampling error gets smaller and smaller-that is, the sampling error decreases as the sample size increases, but at a decreasing rate. In the extreme case, if you sampled the entire population, the sampling error would, of course, be zero, the ? value would be infinitely large and any difference that exists, whether large or small, would be significant and, hence, lead to the rejection of the null hypothesis.

AuthorAffiliation

Carol Docan, California State University, Northridge

Leonard Rymsza, California State University, Northridge

Paul Baum, California State University, Northridge

Subject: Theaters & cinemas; Statistical analysis; Litigation; Business ethics; Cinema advertising; Case studies

Classification: 8307: Arts, entertainment & recreation; 4330: Litigation; 2410: Social responsibility; 9130: Experiment/theoretical treatment

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 1-16

Number of pages: 16

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Equations Graphs

ProQuest document ID: 216275324

Document URL: http://search.proquest.com/docview/216275324?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 51 of 100

FUTURETECH AND LOGOISTICS: AN AFFAIR TO REMEMBER

Author: Kapuvari, David; Armandi, Barry

ProQuest document link

Abstract:

Logoistics, a high tech manufacturer in the Northeast, is a global leader in wireless security and surveillance equipment. In the Test Engineering Department of the Printed Circuits Board Division, three engineers and one technician started a secret company, called FutureTech. FutureTech member's were using Logoistics 'resources and were even performing services for some of Logoistics' competitors. At the same time, an affair was occurring between one member of FutureTech (Harry) and another associate in the Test Engineering Department of Logoistics (Donna). This latter non-member of FutureTech was secretly conducting a second affair with another member of FutureTech (Matt). A violent outburst occurs between Harry and Donna resulting in Harry's arrest. Logoistics' management discovers both the affairs and the covert Company and is considering what to do. The reader is left with the decisions that upper management must make regarding the individuals in the affairs and those within FutureTech. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns office romance and covert employee companies. Secondary issues examined include group cohesiveness, management controls, fraud, and conflict of interest. The case has a difficulty level of three, appropriate for the junior level. The case is designed to be taught in one and a half class hours and is expected to require 3 hours of outside preparation by students.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Intended Instructional Audience and Placement in Course Instruction

This case was based on original field research and written for several different audiences and uses. The case was developed at a company in which one author was employed and the other was a consultant. It was primarily developed for undergraduates enrolled in an Organizational Behavior course, although it could also be used in a Principles of Management course. For the Organizational Behavior course, the case should be introduced after the students have read the chapters on values and group dynamics (in Robbins, 1998; Chapters 4, 7, 8,1 1, and 12). An extension of the case also could be used at a macro level covering human resources policies and organization culture (Robbins; Chapters 15 and 16). In the Principles course, the case should be used after a discussion on leadership and for controlling.

Second, the case also has value for students taking a course in Business Ethics or Management and Society. Specifically, the case could be employed in conjunction with a discussion on moral judgment and personal ethics (Carroll and Buchholtz; Chapters 4 and 5).

Lastly, the case can be useful in management training and development programs. In such programs, two topics can benefit from using the case. First, the subject of office romance and how to handle such matters while maintaining team performance can be examined. Second, deviant behavior by stealing company resources for personal gain would likewise be an appropriate use.

Learning Objectives

The overall purpose of this case was to introduce students to the concepts of group dynamics and ethics in a high tech company. Students can obtain a realistic perspective for the temptations imposed upon employees from both internal and external forces. The concepts of character and integrity also should receive ample importance in the students' learning. Students should also realize the importance of management controls through the use of policies, procedures, and training in warding off such an unethical practice of using company resources for personal gain.

Specific learning objectives are as follows:

1. To understand the problems office romances and hidden companies can cause for employers.

2. To develop a formal system of management controls, such as policies, procedures, and a viable code of ethics, for preventing such problems from arising in the future.

3. To understand the concepts of group cohesiveness, conflict of interest (ethics), and fraud in the workplace.

TEACHING STRATEGIES

Preparing the Student Prior to Case Analysis

The instructor may decide to use various approaches when employing this case. It is recommended, however, that regardless of the method used, students prepare by reading material on ethics, especially on conflict of interest, and/or material on values and group behavior. Likewise, the student should become familiar with the information on management control, especially the creation and application of policies and procedures for dealing with deviant behavior in organizations. The instructor may also wish to have the students read other references on the subj ect, such as in conflict management The instructor may then decide to use one or a combination of the following method prior to the case being assigned:

Students should also be prepared to discuss the case by having read before class the article "Managing Attraction and Intimacy at Work" by Marcy Crary (1987). In this article Crary distinguishes between "Attraction", which may be beneficial and functional to managers and organizations, and "Intimacy" which can, and usually does, have the opposite impact. Yet attraction may have a down side as well. Crary, through her interviews, reports that some people, who were attracted to others at work, had at times feelings of uncertainty, confusion, frustration, fear, resentment, and anger.

Elsewhere, she relates how "some people seek the aid of a close but neutral party to help them sort out their feelings and gain some perspective on their attraction - particularly when the costs of directly expressing that attraction to the person seem too high." (p. 3 1) This may be what Harry did with his friend, Jerry, when he returned from Massachusetts.

Students should be aware of Crary's recommendations for organizations and managers in dealing with employee attraction and intimacy (p. 40). First, organizations should develop "constructive standards" about these relationships. Second, managers should not create rules that prohibit these relationships, since "such formal rules and sanctions only drive emotions underground, thus preventing people from dealing more constructively with the issue involved." Third, the establishment of training programs would raise the consciousness of employees regarding these relationships and the tensions that would ensue. Fourth, skill building can help employees to manage these issues by developing effective strategies. Lastly, "role models of close, effective male-female relationships in management can have an obvious impact on people's hopes and fears concerning attraction and intimacy at work." These recommendations should be kept in mind when discussing the solutions.

Role Playing

Role-playing is a device that permits the student to empathize with the participants in the case. The student plays the part of a character in this drama (or sometimes comedy). In this case, the following roles should be assigned to students:

The instructor also may include Pat Guarino, Manager Test Engineering Department but remember he was a silent participant. The remainder of the class can be observers or consultants. A number of scenarios can be played:

First, the startup of Future Tech (5 minutes);

Second, the Massachusetts trip (10 minutes);

Third, the meeting with Fred Black (15 minutes);

Fourth, an imagined outcome indicating what the students think will happen (10 minutes);

The remaining time can be spent for debriefing or presenting the consultants' or observers' perspective. Allot sufficient time at the end to tie the case to theory. Invariably, students will want to know what really happened. The epilogue at the beginning of this teaching note can accomplish that for the instructor.

Before the role playing, students should be aware of the characters they will be playing including the characters' motivation and viewpoint, prepare for their parts, create any dialogue, and practice with each other. This role-playing should be assigned at least one week in advance to give students ample time to prepare. The instructor may wish to meet with the "cast" to discuss their roles and what will enfold. They also should be told the amount of time they have, which should not be the entire class since the instructor would want a debriefing and discussion to ensue.

POSSIBLE ASSIGNMENT QUESTIONS AND ANSWERS

1. What are the problems and causes in this case?

There are two immediate problems confronting management. First, is the affair between Harry and Donna. Although it was a personal matter, it still has implications for the Company. Work time was used for carrying on the affair, which means that the employees were not fulfilling their obligations to the employer. This behavior may result in poor performance or sabotage if and when the affair is discontinued. For example, the erasing of computer files. It also establishes questionable organizational values that may be misinterpreted by other employees as acceptable behavior. Lying and cheating, or overall dishonesty, are not values that organizations wish to condone.

Possible causes of such behavior are the temptations that people will have as they work together for long periods. Likewise, personal problems, such as a dysfunctional family life, poor morals, or personal history are other causes. Office romance continues to be an increasing problem for organizations.

The second problem, the existence of FutureTech represents a "conflict of interest", a "misuse of power" and theft. The members of FutureTech were utilizing company resources for personal profit and made decisions that may not have been in the best interests of Logoistics. The use of Logoistics leased software, seeking authorization for unnecessary business trips, dealing with Logoistics competitors and conducting FutureTech work during Logoistics company time are some of the behaviors one would frown upon. FutureTech members also used Logoistics business as leverage to get a deferred payment deal with the test fixture vendor, CyberText.

This second problem can have several different causes. The most obvious is personal greed for more money, however this is not usually the initial cause since there first must be opportunity. Dynamo provided this opportunity by approaching the engineers. Secondly, the extra income was easy and lucrative. Thirdly, there had to exist a lack of supervision on the part of Logoistics. This allowed them to convince their managers to authorize many of their requests. This also raises a question as to the organization's culture. The company's desire to have a high entrepreneurial spirit, as seen in the company's founder, may have been misinterpreted and misapplied by employees. Finally, the lack of a sufficient workload enabled them to have spare time to perform FutureTech activities during company time.

2. What alternatives should be considered?

For the affair, the Company can dismiss both Harry and Donna for the theft of time and work. The Company, however, should consider counseling both of them and Matt for his behavior with Donna, although it is not clear if any use of Company time and facilities was involved in the affair with Matt and Donna. If the affairs were to continue or violence, sabotage, or lower morale persists, then the Company would need to dismiss the parties.

For the second problem, the existence of FutureTech, two possible courses of action are as follows:

Option 1: hey could have been given written warnings, requested to dissolve FutureTech, and put on probation, which Logoistics management did.

Option 2: They could have been fired the three associates for misconduct and temporarily outsource the workload to test fixture contractors, until new employees could replace them. The remaining associates would be requested to absorb some of the increased workload as well.

3. What solutions should be recommended?

Counseling is a viable option and within the Company's human resource benefits. The Company should not want to lose productive and valuable employees (prior to the affairs) without giving them a chance to regain their performance and composure. Management should try to salvage these workers by offering them counseling and training. However, all participants should be placed on probation for a six-month period with regular reporting of their activities and time to both their manager, director, and the Human Resource department.

Having a freelance business on the side is not necessary illegal as long as Company resources, customers, and time are not used. (See also Question #7) The means in which FutureTech conducted business therefore was questionable. Thus, written warnings seem appropriate. More practically, given the climate of scarce supply of test engineers and technicians, the Company should seek to retain these individuals, placing them on the aforementioned six-month probation. Apparently, the timing of the consequences could work in favor of the FutureTech members. Two engineers had just transferred to another department with in Logoistics before Harry's venture. Logoistics should be concerned that firing 75% of their PCB engineers would have dire consequences on production.

4. How should Logistics' management go about implementing these solutions?

Concerning the affair, both Harry and Donna would be referred to a counselor within the existing network of the Employee Assistance program. Their progress and performance would need to be carefully monitored by their manager. Donna should be transferred to another department and if at all possible Harry too. This would separate him from Matt and help to defuse the situation.

Next, management should consider starting Company-wide training programs to indoctrinate employees of the potential work and personal hazards of workplace romances and intimacy.

For the FutureTech situation, first, Logoistics management would have had to delay the transfers of the two engineers to the other department. Secondly, they would need to begin a search for two engineers and a technician. The technician position could have been filled immediately from within the company. The engineering positions would have taken longer. Thirdly, management could have requested that the remaining engineer absorb as much work as possible and outsource the rest to contract programmers.

5. If Fred Black, HRM Vice President called you in as a consultant, what advice would you give him to prevent such incidents from occurring in the future?

Overall, what are noticeably absent are ethical guidelines and a process to confront quickly unethical conduct. A published code of ethics should, therefore, be created and given high priority. Although the Company does have a "Code of Conduct", it merely describes core values and contains more generalities about relationships with customers and vendors. A strong clear and explicit document needs to be produced. Likewise, explicit policies need to be developed and disseminated to all employees on engaging in outside activities for remuneration using unapproved company resources. Also, procedures need to be created for managers to deal with these issues.

The manner in which this code of ethics can be accomplished should take the following form: First, gain approval from upper management. Second, construct a committee from all levels of management and from employee ranks to draft the code. Upper management and especially the legal officer should examine and approve the document. Fourth, the code should be communicated to all employees and made part of an orientation program for new employees. The Company newsletter may publish portions of the code with explanations or examples. Fifth, Human Resources should establish mandatory education programs explaining the code and presenting examples of dilemmas and their resolution. Lastly, top management must realize that they serve as role models and must therefore be models of ethical conduct.

Another suggestion is to appoint a person to serve as a liaison or ombudsmen to mediate and hopefully resolve ethical conflicts. This person needs to be well respected and can serve part time. (See Hughes, Ginnett, and Curphy, 1996; Chapter 8; and Leap and Crino, 1993; Chapter 17)

6. Explain how Group Cohesiveness and Conflict of Interest are demonstrated in the case.

Group Cohesiveness is the degree to which group members are attracted to each other and willing to work together. The size of the group and its importance are two factors that contribute to cohesiveness. In the Test Engineering Department we see a relatively small group (seven associates and one manager). The group seemed to be cohesive until two situations emerged. First, the start of FutureTech caused an imbalance in the department with two subgroups forming- FutureTech members and nonmembers. The split caused one group to constantly be on guard that the others would not report FutureTech's activities. Likewise, possible pangs of jealously by nonmembers not being included could have caused someone to anonymously report the covert actions to management or at least communicate the actions to the grapevine. The group's importance seemed to give them an attitude of invincibility. The test engineers were important to the operation and especially to the final quality of the product. Thus, we see the reluctance to fire all of them. However, Matt underestimates FutureTech's cohesiveness and is surprised when Harry blows the whistle on the entire operation. (See Robbins, Chapter 7)

Conflict of Interest is a conflict that exists when the self-interest of a person interferes with his obligation to act in another person's or group's interests. Accordingly, FutureTech's members had an actual, personal, and individual conflict of interest. In their operations, their interests were first with FutureTech rather than Logoistics. They repeatedly used Company resources for their own personal gain. Use of the telephone, copiers, computers, fax, customers, and test stations were blatant and in only FutureTech's interests. In essence, the members used biased judgment, misused their positions, violated confidentiality, and were in some instances in direct competition with their employer. (See Boatright, Chapter 6) Likewise, it is important to note that employees have fiduciary responsibility to the shareholders (owners) of the Company. Actions, while in the employ of the Company and on Company time and premises, for personal gain constitute a conflict of interest. A distinction needs to be drawn, however, between a conflict of interest and conflicting interests. In the former, one of the interests is not legitimate and thus, morally condemnable. In conflicting interests, all interests are legal. In the latter, these may be considered as unfortunate, but not condemned. Thus, in the FutureTech situation, we see that the deviant behavior was illegal because of the unauthorized use of Company resources, and constituted a conflict of interest. (See Beauchamp and Bowie, Chapter 5)

7. Discuss the fraudulent aspects of this case.1

This is an employer-employee relationship. Pursuant to an agreement, whether expressed or implied, the employee undertakes to perform services or to do work under the direction and control of another (i.e. the employer or the manager acting for the employer) for compensation. The employer-employee relationship is created with the consent of both parties, which is generally a contract and thus subject to the principles of contract law. In many instances the duration of the contract is not stated. It is thus considered employment-at-will and may be terminated at anytime by either party for any reason at all as long as it is not for discriminatory reasons.

The duties of an employee are determined either expressly or implied by the contract with the employer. The law also implies certain obligations on the part of the employee. Employees are under a duty to perform such services as may be required by the contract of employment. For example, an employee may be given confidential trade secrets and has been instructed not to disclose them to others. Failure on the part of the employee to live up to the stipulation of the directive and thus his or her contract, may force the employer to enjoin the use of the information by the employee and by any person to whom it has been disclosed by the employee. An employee who works for a company owes his or her allegiance to that company. Conduct that comprises that loyalty is a conflict of interest. There is generally no fiduciary duty (special relationship of trust) between an employee and employer. Such fiduciary responsibilities exist solely for officers of corporations and members of the Board of Directors. Thus, an employee does not have to put the interests of his or her employer ahead of themselves. Since there is no fiduciary duty, an employee is probably not responsible for any damages as a result of a breach of his or her

a) duty of loyalty

b) duty of diligence

c) usurp of a business opportunity

d) duty not to compete

e) duty of care

But as previously mentioned their actions would be considered a breach of their employment contract and may result in an injunction and termination of employment as this behavior by an employee is clearly unethical. It is also arguable as to whether they should forfeit compensation that they would have received, since they are in breach of their employment contract and have been doing "other business" on company time.

Of course all of these problems would be better addressed had there been an expressed written contract between the employer and the employee stipulating these issues (duties, responsibilities, trade secrets, customer lists, non-compete during and/or after employment). Yet the absence of such a written contract does invalidate their obligations to their employer.

Concerning fraud, which is defined as "...the misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured" (Whittington and Pany, p. 53) there is no question that the participants did misrepresent fact, especially the reason for their trip to Massachusetts. However, it is not clear whether the Company was injured in that regard. Thus on the surface it appears that their deception was fraud but only if the Company can show that the loss of employee productivity and reduction in profits were directly related to the deception.

In essence therefore, there is a breach of an employment contact, theft of services and company resources, possibly fraud, but no violation of fiduciary responsibility.

EPILOGUE

Harry and Donna were both fired.

Mike, Matt and Sam were separately called into Human Resources and met several times with Logoistics management. They all received a harsh slap on the wrists and written warnings for alleged misconduct. No one else was fired. They also were requested to immediately dissolve FutureTech and warned that any continued activity of this manner would result in instant termination.

All are still employed at Logoistics in the PCB Department. The latest developments indicate that they did indeed dissolve FutureTech. According to an outside vendor they are now operating under a new name. . .MSM Enterprises.

References

REFERENCES

Beauchamp, T. L. & N. E. Bowie. (Eds.). (1979). Ethical Theory and Business, Upper Saddle River, New Jersey: Prentice Hall.

Boatright, J. R. (2000). Ethics and the Conduct of Business, (3rd Edition). Upper Saddle River, New Jersey: Prentice Hall.

Carroll, A.B. & A.K. Buchholtz. (2000). Business & Society: Ethics and Stakeholder Management, (4th Edition). Cincinnati, Ohio: South- Western College Publishing.

Crary, M. (1987). Managing attraction and intimacy at work, Organizational Dynamics, 15(4), 27-41.

Gordon, L. V. (1975). Measurement of Interpersonal Values, Chicago: Science Research Associates.

Hughes, R. L., R. C. Ginnett & G. J. Curphy. (1996). Leadership: Enhancing the Lessons of Experience, New York: Irwin/McGraw-Hill.

Leap, T. L. & M. D. Crino. (1993), Personnel/Human Resource Management, (2nd Edition). New York: Macmillian.

Pearce, J. A. II & R. B. Robinson, Jr. (2000). Formulation, Implementation, and Control of Competitive Strategy, (7th Edition). New York: Irwin/McGraw-Hill.

Robbins, S. P. (1998), Organizational Behavior: Concepts, Controversies, and Applications, (8th Edition). Upper Saddle River, New Jersey: Prentice Hall.

Rokeach, M. (1973). The Nature of Human Values, New York: The Free Press.

Whittington, O. R. & K. Pany. (2001). Principles of Auditing and Other Assurance Services, New York: Irwin/McGraw Hill.

AuthorAffiliation

David Kapuvari, Long Island University

Barry Armandi, SUNY-OId Westbury

Subject: Covert operations; Personal relationships; Work environment; Organizational behavior; High tech industries; Case studies

Location: United States--US

Classification: 9190: United States; 2410: Social responsibility; 2500: Organizational behavior; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 25-34

Number of pages: 10

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables References

ProQuest document ID: 216274577

Document URL: http://search.proquest.com/docview/216274577?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 52 of 100

EAST WEST COMPANY

Author: Elrod, Henry

ProQuest document link

Abstract:

This case is based on events and financial statements reported by SanDisk, audited by Ernst & Young, LLP. The case involves the application of the rules of GAAP, regarding the treatment of realized and unrealized gains and losses on securities held for resale and held to maturity securities, the application of GAAP regarding subsequent events, and impairment of the fair value of assets. Students are asked to choose among conflicting principles, and to decide when the strict application of GAAP may produce misleading results. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The names in this case have been changed and some facts simplified to facilitate classroom analysis and discussion. There may be no correct answers to the issues presented in the case. The case is intended to stimulate classroom discussion, and is not intended to criticize or question the accounting treatment selected by the company or its auditors. The issues involved should help students develop professional judgment in the selection of accounting principles, and emphasize the purposes of financial reporting.

CASE SYNOPSIS

INSTRUCTORS' NOTE

This case takes the student through the accounting rules for realized and unrealized gains and losses on investments and securities. The case is intended for students in any of Intermediate Accounting, Auditing, or Accounting Ethics. In the requirements, Alternative A is intended to give practical experience in recognizing the need for entries, adjustments, and disclosures, in the preparation of entries and preparation of simple financial statements. The inclusion of a simple capital structure (with only one class of stock and no change in shares outstanding) earnings per share calculation is intended to emphasize the material impact of the transactions. Alternative A is best used in Intermediate Accounting. Alternative B calls for a rhetorical rather than computational solution. Under Alternative B requirements, students must recognize the transactions generating accounting activity, and be able to identify and discuss the appropriate GAAP. Alternatives A and B ask students to assume the role of either Controller or Chief Financial Officer. Alternative C asks students to evaluate the events, estimates, and accounting treatments and presentation selected by management, from the point of view of the auditor. Alternatives B and C are intended for use in Auditing and Ethics classes. Under any of the alternatives, students should be troubled by the conflicting treatments of realized and unrealized gains and losses on securities and investments, depending on the expressed intent of management, and should be troubled by the specific results obtained by the strict application of GAAP to the facts presented. Deferred tax issues arising from recording unrealized gains and losses are ignored. Teachers of Intermediate Accounting may find the case useful for taking students through the current GAAP for investments, but may find the Intermediate students so intent on learning the FASB's rules that they do not readily see the larger issues of overall presentation and transparency that will be the focus of the discussions in Auditing and Ethics.

The initial investment is not a marketable security investment, and should be simply recorded at cost. Unrealized temporary changes in market value should be ignored. Likewise, the restricted stock received in the merger should be classified as a held to maturity investment, and since neither the stock given up nor the stock received are productive assets, and since there is no intent to sell either asset, the gain on the exchange should be recognized, as a component of ordinary income.

Students may believe the realized gain is extraordinary. However, mergers by exchange of stock are neither unusual, nor infrequent, so the gain is not extraordinary.

Students are asked to recognize the accounting effect of the change in intent by management, regarding the stock dividend shares (never restricted) and as to the shares for which the restrictive covenant expires. When management expresses its intent to sell, and sale is no longer restricted, FASB 115 asks that the value of shares be reclassified to securities held for resale. This presents opportunities to discuss how to calculate the amounts to reclassify. Both the stock dividend shares, and the shares for which the restrictions expire, must be assigned values. The approach used in the sample solution is similar to the standard methods used to determine the relative values to record, say, a stock with detachable warrants offering, when the amount received from the offering, and the market value of both the warrants and the stock without warrants, immediately after the offering, are known.

With the dramatic decline in fair value reached by year end, students are asked to account for a temporary impairment in an asset accounted for at cost, not held for resale, and not held as marketable securities. FASB 115 indicates this decline in value is to be ignored unless realized, or unless the impairment is other than temporary. Additionally, the student is asked to account for the unrealized decline in fair value of the securities held for resale, which FASB 115 would recognize, but record and disclose in other accumulated comprehensive income, rather than as a component of ordinary income or loss. As a matter of presentation, students must decide whether the display of other accumulated comprehensive income should be on the income statement, the balance sheet, or elsewhere.

Finally, students must deal with the subsequent event rules, and a change in management's determination that the decline in value of the stock is other than temporary. The case clearly asserts that management believes the decline is temporary in nature at year-end. Because the change to other than temporary, from temporary, occurs after year-end, all of the facts and conditions creating subsequent event treatment are not in place at year-end. Accordingly, the student will need to decide how to disclose the amount of the loss to be recognized, as well as how to calculate the loss amount, related to the other than temporary impairment, in 2002.

Most accounting students encounter the concepts of extra-ordinary items, subsequent events, realized and unrealized gains and losses in investments, etc., for the first time, in Intermediate Accounting. This case can be used to discuss these matters.

Some students may notice the timing of the change to other than temporary in 2002 will allow subsequent event treatment, or other disclosure, but is after the date of the audit opinion. This allows discussion of the possibility of an unaudited footnote in an audited financial statement, the practical reasons management may not want to pay for the extra audit work to re-date the opinion, whether a dually dated opinion is possible, etc. Other than as a window for possible subsequent event treatment, these dating problems can be ignored for students without any background in audit.

The sample solution for Alternative A records the transactions, in accordance with the intent of management, in a perfunctory manner, following the guidance of FASB 115. The case provides a beginning trial balance for each of the two years, reflecting usual transactions for the year, but without any transactions related to the Taekwon/Hapkido investment, for either year. The initial purchase has been recorded. Journal entries are provided to record the investment transactions, and changes in fair value, described in the case. These are posted to the trial balances, and summary balance sheets and income statements are produced for each of the two years. This is the solution to the problem obtained in the real world version of this case. East west's rationale was simply to follow the steps in FASB 1 15 for accounting for investments held to maturity and investments held for sale, in the apparently firm belief that following the letter of the rules would lead to an appropriate result in every case.

The real world solution included an unaudited additional footnote to describe the change in value of the investment after year-end and the accounting treatment accorded the transactions. These have been omitted to simplify the case. Instructors may present the case without the sample solutions, depending on the level of the class, and the intent of the instructor. This can be accomplished by using the Alternative B requirements.

The solution from the real world occurrence produces an unsatisfactory result. Within a single set of financial statements and disclosures (for 2001), related to a single investment of $150 million in a parts factory, the case presents the following conflicted results:

1 . An after tax gain of $3 1 5 million, reported on the income statement.

2. An after tax loss of $89.6 million, in other accumulated comprehensive income.

3. A note to financial statements disclosure indicating the remaining investment, with a book value of $472 million, is worth only $200 million at year-end 2001.

4. An unaudited note that the same investment, with an initial cost of $150, million has a fair value of only $50 million at the end of the first quarter of the next year.

5. In a year when gross margins drop and total sales decline sharply, and the fair value of the $150 million investment drops below cost, year 2000 earnings per share increase to $3.49, from $1.29 reported for 1999.

These results assail transparency. While everything described can be found in the financial statements and notes, the story is convoluted and difficult to follow. Worse, this result is disingenuous. It flies in the face of economic reality. The company has invested $150 million in an asset that is worth only $50 million by the time the financial statement is printed. The presentation of the $3.49 earnings per share, an increase of 171 percent, is based on a huge gain that has disappeared. Income from continuing operations, excluding transactions related to the investment, actually decreased by 94 percent.

What happened? Students may duplicate these results, wending their way by rote, through some fairly complex accounting principles. What have been lost sight of are the objectives of financial reporting, of transparency, and the idea that the financial statements should not be misleading.

There is no proposed solution to alternative C. In auditing class, discussions of the ethics involved are appropriate. Investigation of the debate over principles versus rules based auditing may be in order. Is it possible the mandate of Rule 501, Rules of Professional Conduct, with regard to the exercise of professional judgment, have been obscured by the desire of the FASB to give us clear direction? Have the pressures of daily life, inflicted by management on an accounting staff wishing to please, eroded professional judgment in the preparation of meaningful financial statements? Do auditors now believe that the exact application of generally accepted accounting principles automatically results in financial statements that are fairly stated and not misleading?

Finally, teachers of accounting and auditing may wish to consider whether this case, with its three alternative uses, presents a clear and appropriate point of departure or recognizable decision point to the students. While the requirements of each of the three alternatives are clear and specific, they intentionally do not ask the students leading questions to guide them to the intended observation or solutions. The chemistry of every class is different. The level of knowledge and experience in the rules and principles of accounting varies from class to class and course to course, with the maturity and experience of the students. In the audit and accounting workplaces, the points at which critical decisions should be made are not often obvious. The development of the critical judgment that is required of the professional accountant must come from that hard experience as from the kind, mentoring hand of the classroom teacher.

DISCLAIMER

This critical incident and teaching note was prepared by the author and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of the situation. The names of the organizations, and their financial information, have been changed, and the transactions simplified, to facilitate classroom use. Copyright © 2002 by Henry Elrod.

SUGGESTED SOLUTION FOR ALTERNATIVE A

AuthorAffiliation

Henry Elrod, University of the Incarnate Word

Subject: Financial statements; Computer peripherals; GAAP; Case studies

Location: United States--US

Classification: 4120: Accounting policies & procedures; 8651: Computer industry; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 35-43

Number of pages: 9

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables

ProQuest document ID: 216302309

Document URL: http://search.proquest.com/docview/216302309?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 53 of 100

THE BRIEF CAREER OF CARLY HENNESSEY: A LOOK AT THE ECONOMICS OF POP MUSIC

Author: Fern, Richard H

ProQuest document link

Abstract:

In this case, students examine financial and managerial accounting concepts in an identifiable setting, the pop music industry. As background to the accounting issues, students get an introduction to the pop music industry through a brief look at two years in the recording life of a sixteen-year old newcomer artist. The primary financial accounting issue is how recording studios account for production and promotion costs for albums of new and untested recording artists. The managerial accounting issues revolve around cost behavior patterns and break-even analysis. The issues of fixed, variable, mixed, and discretionary fixed costs are introduced. Using the industry's average break-even level of sales, students are asked to approximate the variable costs for CDs and project what happens to variable costs and record company revenues as sales exceed the break-even level.

Full text:

Headnote

CASE DESCRIPTION

The two primary topics in this case study are the matching concept which underlies accrual accounting and types of cost behavior patterns for management decision making. The case is appropriate for upper-level accounting majors. With two sets of discussion questions, it could be used in either the first intermediate accounting course or the upper-level managerial course. Either the financial or managerial approaches to the case can be taught in two class hours. Both approaches will require about three to four hours of outside preparation by students.

CASE SYNOPSIS

The primary financial accounting issue is how recording studios account for production and promotion costs for albums of new and untested recording artists. Students decide whether such costs should be treated as revenue expenditures and expensed as incurred or capital expenditures to be deferred to futur e periods. Students will discover that most new releases never approach even a break-even volume of sales which makes the likelihood of future revenues extremely unlikely. Ultimately, a recommendation is required as to when advances to the artist and the sizeable recording and promotional costs for her album should be recognized. Student activities include accessing the corporate Web site, locating corporate accounting policies regarding music promotion and production costs, researching some GAAP rules for the music industry and discovering a practical application of some basic financial accounting theory.

The managerial accounting issues revolve around cost behavior patterns and break-even analysis. The issues of fixed, variable, mixed, and discretionary fixed costs are introduced. Using the industry's average break-even level of sales, students are asked to approximate the variable costs for CDs and project what happens to variable costs and record company revenues as sales exceed the break-even level.

INSTRUCTORS' NOTES

FINANCIAL ACCOUNTING ISSUES

Financial Accounting Question 1

Question: In light of trends in popular music industry over the past few years, briefly discuss the likelihood of any new artist generating at least a break even level of sales for a debut album.

Students should conclude from the background material in the case that it is extremely unlikely that any one new artist will be a "success". In fact, based on the sales figures for new titles in 2001, it is considerably unlikely that new releases would even make a profit. Less than 2 percent (112 / 6455) even reached break-even.

The focus here is to get students to think about the concept of materiality (as a prelude to Question 4) as it relates to expected future recoverability of deferred costs. It really isn't necessary that students assign an exact probability to this question as long as they realize that in this industry, profitability only comes to a very few big-name artists. Most albums never even recover the upfront promotion and production costs or cash advances to the artists.

Financial Accounting Question 2

Question: In your opinion, at what point during the three-year period of her contract (1999-2002) could MCA executives reliably predict the success or failure of Ms. Hennessy's recording career? Justify your answer.

This question is intended to get students to concentrate on the timing of events and when, perhaps, the future viability of a project becomes doubtful. This is a warm-up exercise to Question 4 where students will be asked to make the same judgment in applying GAAP.

To properly discuss this issue, students will need to sort out the chronology of events. Perhaps the class as a group can draw a timeline to put all important events in context. Here is a brief summary: Mid 1999 - Carly signs six-album contract; December 1 999 - First album completed; results aren't very encouraging; Early 2000 - New producer and writers hired to rerecord the entire album; December 2000 - Rerecorded album not completed; Early 2001 - The single "I'm Gonna Blow Your Mind" (from the upcoming album) released in U. S.; New production manager hired for the album; Mid 2001 - The single "Beautiful You" (from the album) released in U. S.; November 2001 - The album "Ultimate High" released in U.S; Early 2002 - The single "I'm Gonna Blow Your Mind" released in Europe.

Based on the case discussion, it seems clear that both the artist and the label still considered Carly Hennessy a potential success at end of 1999. Even though everyone was disappointed in the first album, at that point it was still considered a production and positioning problem, not an artist problem.

By the end of 2000, the seeds of doubt should have been emerging. Although Carly had still not been tested in the market, the long recording and production problems suggested that perhaps she didn't really fit into any of the potential markets. However, absent any market results, the studio optimists at MCA still considered her a viable artist and worth the continued investment of MCA's resources.

In mid 2001, it was becoming obvious that Carly Hennessy was perhaps not going to be a success in U. S. pop music. Extremely slow sales of the first single in the spring were followed by equally slow sales of the second single in the fall. Even though the rerecorded album was finally completed in November, it was all but ignored by both retailers and radio stations. All doubts about future success were put to rest by the end of 2001.

Financial Accounting Question 3

Question: MCA Records is a subsidiary of Vivendi Universal SA. At their website, locate the most recent set of financial statements. Scan Footnote No. 1 to locate their accounting policies for revenue and expense recognition related to their music holdings.

Instructors might give the Vivendi Universal URL to students or let them locate it through a Web search. http://www.vivendiuniversal.com/vu2/en/_home/home.cfm

To find their most recent annual report at the site: Click on: Shareholders; Click on: 2001 Annual Report Form 20-F; On page 127 of the 2001.

Form 20-F - Notes to Consolidated Financial Statements is Note 1 which describes their accounting policies.

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenues and Costs - Music:

Revenues from the sale of recorded music, net of a provision for estimated returns and allowances, are recognized upon shipment to third parties. Advances to established recording artists and direct costs associated with the creation of record masters are capitalized and are charged to expense as the related royalties are earned, or when the amounts are determined to be unrecoverable. The advances are expensed when past performance or current popularity does not provide a sound basis for estimating that the advance will be recovered from future royalties.

In connection with Vivendi's accounting policies, instructors may want to spend a few minutes deciding the appropriate GAAP standards in this area. SFAS No. 50 - Financial Reporting in the Record and Music Industry gives the authoritative guidance. (Relevant portions of the standard are in the Appendix to the Teaching Notes.) At this point it might be obvious that the wording of Vivendi's policies is taken directly from SFAS No. 50.

Financial Accounting Question 4

Question: Put yourself in the role of the controller for MCA. Prepare a report recommending the proper accounting for the revenues and expenses related to the Carly Hennessy project over the years 1999-2002. In your report, cite corporate accounting policies and be specific as to when the album revenue and related costs should be recognized. Make any reasonable allocation assumptions necessary to complete your recommendations.

Although many students will understand the capital expenditure versus the revenue expenditure concept, the instructor will have to steer many students toward the specifics of how it relates to this situation. Briefly, Vivendi's accounting policies are real-life applications of the basic revenue and expense recognition concepts.

Revenue should be recognized when it's realized (realizable) and earned. For most merchandisers, this occurs when the product is shipped. This is Vivendi's revenue recognition policy.

Expenses should be recognized when incurred which is in the period that the cost contributes to revenue generation. This is the matching principle underlying accrual accounting. Practically, the conceptual framework gives three guidelines for when to recognize expenses: direct matching with revenue, proportional allocation and immediate recognition in the current period (see SFAC No. 6 in the Appendices). Vivendi's policy for recording costs and artist advances approaches the expense/revenue matching dilemma by deferring such costs until either a) the related royalty revenue is earned or b) the costs are determined to be unrecoverable.

At some point in the discussion, the exact amounts and timing of MCA's costs will arise. Here is a summary:

View Image - Table 1: Summary of MCA's Costs for the Carly Hennessey Project

These costs total $2.42 million which includes the $120,000 of living costs ($5,000 @ month for two years) and the $100,000 advance. Recording and promotional costs alone are $2.2 million.

Having identified the key events in 1999 -2001 in Question 2, studied Vivendi's accounting policies and reviewed the relevant financial accounting theory, students should be ready to make some concrete recommendations to MCA.

Since Vivendi's policy is to capitalize production costs and advances, most students will likely recommend that all costs for 1999 be capitalized and some students will recommend similar treatment for the costs incurred in 2000. As discussed earlier, there is still some possibility at the end of 2000 that Ms. Hennessy will still have a successful release in the future. Note that at the end of 2000, there were still no revenues attributable to Ms. Hennessy's recordings.

By the end of 2001, most students should be recommending that all costs be expensed. Two justifications might be made here. First, since MCA had virtually given up on her in the U. S. market, only in 2001 would there ever be any revenue to match the expenses against. Secondly, since future recoverability of any deferred costs was highly unlikely at this point, their policy is to write off deferred costs ". . .when past performance or current popularity does not provide a sound basis for estimating that the advance will be recovered from future royalties". (Reference to SFAS No. 50 would be appropriate here since Vivendi is following, to the letter, GAAP principles in the recording industry.)

ADDITIONAL FINANCIAL ACCOUNTING ISSUES

Amortizing Acquired Musical Assets:

In a subsequent section of Vivendi's Footnote No. 1 is the following description of their accounting for acquired music assets. This might be introduced to the class as a contrast in accounting for acquired versus internally-developed music assets.

Other intangible assets:

Vivendi universal has significant acquired other intangible assets, including music catalogs, artists contracts, music and audiovisual publishing assets, film and television libraries, international television networks, editorial resources and plates, distribution networks, customer relationships, copyrights and trademarks, among others. Acquired music catalogs, artists' contracts and music publishing assets are amortized over periods ranging from 14 to 20 years. Most other intangibles are amortized over a four-year period, on a straight line basis.

Comparison with R & D Accounting:

If the basics of R & D accounting are included in the course, instructors might introduce it again as comparison of GAAP options available for different types of potential revenue expenditures. A brief review of the key accounting issues and GAAP mandates (see SFAS no. 2 in the Appendices) for R & D expenditures show both strong consistency and inconsistency with the GAAP guidelines for music assets. While GAAP requires full expensing of R & D costs, recording companies have the option of expensing or not the production and promotional costs for developing new recordings.

A further look at the rationale of SFAS No. 2 (See Par. 39: high failure rate of most R & D spending) indicates that those conditions also exist in the recording business. Yet, GAAP allows more choices in the music industry. Why? In R & D, GAAP mandates immediate expensing which prevents any deferrals. In the recording industry, while deferral is certainly an option, the low likelihood of future recording success for artists in general would also suggest immediate expensing of promotion and production costs.

Conservatism and Materiality:

Instructors might bring up the accounting concept of conservatism which would suggest immediate expensing of most production and promotion costs in all situations. Also, the concept of materiality might arise. MCA is facing a maximum write-off of approximately $2.2 million in year 2000 or 2001. Since Vivendi had total music revenue of approximately 6.5 billion Euros (music operating income of 719 million Euros) in 2001, it's not likely that a 2.2 million dollar write-off will materially affect anyone's analysis of their financial results.

Foreign Currency Translation:

Vivendi is a French company whose stock is sold on the Paris Bourse. When students access the Web site, they will likely encounter financial statements presented in both euros and U. S. dollars. Since MCA's U. S. operations will be originally reported to Vivendi in dollars, Vivendi corporate will have to translate those amounts into euros before consolidation.

Since many students enjoy discussing this topic, instructors might want to briefly discuss the concept of currency translation and foreign currency gains and losses. In June 2003, the euro equaled approximately $1.18 U. S. (1 U. S. dollar equaled 84.5 euros). However, in mid-2002, the euro only equaled approximately $.88 U. S. (1 U. S. dollar equaled 1.14 euros).

Throwing good money after bad? In discussions with students, the question will come up as to why MCA persisted with this project long after future did not look promising for her. MCA's president, Jay Boberg, originally heard and signed Carly Hennessy to her recording contract with MCA. Partly to save face and keep some new artists in the MCA "pipeline", Mr. Boberg undoubtedly felt pressure to make her a success (see: Ordoñez, Jennifer: "Behind the Music..."). In addition, the business strategies for Vivendi's music units specifically targets investing in new releases and new talents.

Business strategies for Vivendi Universal's Music Units:

* Local / Global: optimize the balance and diversity between local music and global hit production, to keep growing market share both on a worldwide and local basis

* New releases / Catalogs: optimize the balance between new releases and back catalogs to meet consumers' needs and tastes

* Artists & Repertoire and New labels: keep investing in A & R to detect and develop new talents, as well as support emerging and promising labels

* Fight piracy by developing technology, by legal/legislative efforts and by developing commercial alternatives

* Online Music: capitalize on UMG's extensive music library and VU's expertise in online technology (MP3.com) to derive new revenue streams from online music subscription service pressplay(TM), the JV with Sony Music Entertainment, Inc., as well as other internet sites (MusicNet, FarmClub, GetMusic,etc).

(Source: http://finance.vivendiuniversal.eom/finance/strategy/businessunits.cfm#04)

MANAGERIAL ACCOUNTING ISSUES Managerial Accounting Question 1

Question: What does the term "break even" mean? How does a company compute its break-even sales level? On average, about how many copies of a new release have to be sold before the record company breaks even?

This question should help students begin to see the relevance of some common managerial accounting concepts. The break-even point is where total sales revenue equals total costs (in other words, $0 of profit or loss). Most managerial accounting texts present the break-even formula as: BE level of sales = Fixed Costs / (Selling price - Variable Cost @ Unit).

The case says that, on average, CDs must reach sales of 500,000 to 700,000 to break even. The actual number is not the key focus in this question, but rather the idea that a lot of CDs must be sold to break even and how few CDs ever come close to that level. For the calculations in question 4 below, it would be appropriate for the class to agree on which sales volume to use.

Managerial Accounting Questions 2 and 3

Questions: In general, what determines whether a business' costs follow either fixed or variable cost patterns? Identify the main costs in the Case (see Appendices A and B) as primarily either fixed or variable costs for the recording industry. Give reasons for your choices. What are some other possible cost behaviors other than pure fixed and pure variable costs? Give examples of each related to the recording industry.

The objectives of Questions 2 and 3 are to give students an opportunity to discuss the basics of cost behavior in a setting with which they have some interest and familiarity (at least on the consumer side). Fixed costs stay constant over the relevant range of sales volume. Variable costs change proportionately with sales volume.

Other types of cost behavior include step-variable, mixed, discretionary and committed. Step- variable costs vary as sales volume changes but only over wide ranges (not proportionately). Mixed costs have both fixed and variable elements (also called semi-variable costs). Discretionary fixed costs represent a short-term commitment to a project and vary based on annual spending decisions. Committed fixed costs relate to costs necessary for the basic organizational structure and represent long-term capacity commitments.

After reading the case and Appendices A and B, students will likely list the following cost categories: production and recording costs for the record master, general promotional costs, promotional video costs, artist advances and living expenses, packaging and manufacturing costs, primary artist royalties and mechanical royalties for other artists.

The only true variable costs related to CD sales are the actual manufacturing and packaging costs and the mechanical royalties for other artists. The other costs identified in the case are primarily fixed or semi-fixed costs. Artist advances are fixed costs and living expenses do vary but in proportion to time, not sales volume. Promotional costs for new releases are mostly fixed costs since they are incurred primarily before most sales occur in an effort to get name and product recognition. The costs of producing the record master from which copies are made are also fixed costs with no variability related to sales volume (includes studio and musician costs, producer, engineer, etc.).

Discretionary fixed costs would include artists' living expenses and car and the promotional and video costs. Committed fixed costs would include artist advances and most of the costs of producing the record master

Managerial Accounting Question 4

Question: Based on your response to question 1 and 2, compute the approximate variable cost for MCA records related to the CD "Ultimate High". Assume that all costs are either pure fixed or pure variable costs. Does this variable cost per CD seem reasonable? Why or why not? What costs do you think would be included in the variable cost amount? (In this analysis, consider all costs incurred by MCA up to the album's release date as costs related to the CD.)

Students must commit to their previous cost behavior decisions since a quantitative answer is asked for. In the following calculations, these amounts were used:

* The higher break-even volume of 700,000 was used since MCA spent more than normal in producing and promoting the CD and it would likely take more sales to break even.

* A CD retail price of $12.50 was used (the case says that CD sales were only $5,000 for 400 copies).

* Record company sales revenue is based on wholesale, not retail. Therefore, revenue of $6.25 @ CD was used (retail of $12.50 ? 50% distributor rate - see Appendix A).

* Fixed costs for production and promotion for the CD "Ultimate High" are $2.4 million. No other corporate costs are included in the case and are ignored in this analysis.

Although Ms. Hennesy's contract provides that her royalties are only applied to 50% of promotional video costs, the entire video cost of $250,000 was included in the $2.4 million to simplify the calculations.

Using these values in the formula for break-even volume of sales yields the following:

* Break-even volume = FC / (Price - VC)

* 700,000 = $ 2.4 million / ($6.25 - VC)

* 700,000 * ($6.25 - VC) = $2.4 million

* $4.375 million - 700,000 VC = $2.4 million

* $1.975 million = 700,000 VC

* $2.82= VC per CD

* Contribution margin = Price - VC

* CM = $6.25 - $2.82

* CM = $3.43

At a variable cost of $2.82 @ unit, the record company achieves a contribution margin (amount of sales that can contribute to fixed costs) of $3.43 @ CD. This may seem low to most consumers but the analysis below might put this in a new perspective. The variable cost of $2.42 @ consists of packaging, manufacturing and mechanical royalty costs.

Why are Ms. Hennessey's royalties (15% of retail price) not included here as a variable cost? Most artist contracts provide that artist royalties are first applied to recovering the recording and promotional costs incurred by the record company. Therefore, the royalty is not a variable cost to the record company until the break-even sales level is reached. Therefore, the record company's contribution margin will be greater up to the break-even level than it is above that level (see Question 5).

Managerial Accounting Question 5

Question: After a CD reaches the break-even level of sales, what happens to the record company's costs? Is this a change in fixed costs or variable costs? Explain. Using the data for the album "Ultimate High", discuss MCA's potential profit on the next 100,000 copies sold above the BE level of sales. How might various provisions in the artist's contract affect this profit? Explain.

With sales of 700,000 copies, MCA would presumably break even on the CD "Ultimate High". (Of course, we're ignoring all other corporate costs in this analysis). But, what happens to their cost structure above the BE level of sales?

Above the BE level of sales, the record company's costs change. The artist's royalty, which the artist supposedly "earned" on the first 700,000 copies, was actually treated by the record company as contribution to their fixed costs (in other words, company revenue). Above the BE level, however, the artist is entitled to actually receive her royalties and this amount must now be included as an additional variable cost to the record company. At this point, they no longer have any fixed costs related to promotion and production.

With an artist royalty of 15% of retail, Ms. Hennessy would now be owed $1,875 @ copy sold ($12.50 x 15%). With this additional VC, MCA's profit on the next 100,000 copies sold above the BE level would be:

If the royalty was computed as a straight 15% of retail, MCA enjoys a $1.555 @ unit contribution to other corporate costs and profits. Any future production and promotional costs will also be charged against the artist's royalty.

After reviewing the economics of artist contracts in Appendix A, it isn't likely that her royalty would be computed as a straight 15% on retail price. For example, if MCA deducts the 25% packaging fee and reduces the sales volume level to cover possible returns and breakages, her royalty amount would be computed as:

Using this variation, MCA's profit on the next 100,000 of sales above the BE level gives:

In this scenario, MCA now has a $2.15 @ unit contribution towards other costs and profits.

Students will like come up with several variations on these calculations depending on how they interpret and apply the various provisions in artists' contracts. However, the key point is for them to understand the concepts of cost behaviors

AuthorAffiliation

Richard H. Fern, Eastern Kentucky University

Appendix

APPENDICES - TEACHING NOTES

Statement of Financial Accounting Concepts No. 6 - Elements of Financial Statements

Paragraphs 145 - 149: Accrual accounting uses accrual, deferral and allocation procedures whose goal is to relate revenues, expenses, gains, and losses to periods to reflect an entity's performance instead of merely listing its cash receipts than outlays. Thus, recognition of revenues, expenses, gains and losses and related increments or decrements in assets and liabilities-including matching of cost and revenues, allocation and amortization-is the essence of using accrual accounting to measure performance of entities. The goal of accrual accounting is to account in the periods in which they occur for the effects of an entity of transactions and other events and circumstances, to the extent that those financial effects are recognizable and measurable.

Some expenses can be directly matched with related revenues as part of the same transaction. Other types of expenses cannot be directly related to particular revenues but are incurred to obtain benefits that are exhausted. Other types of assets yield their benefits to entities over several periods. In these cases expenses resulting from their use are normally allocated to the periods over their estimated useful lives in a systematic and rational allocation procedure.

Statement of Financial Accounting Standards No. 50 - Financial Reporting in the Record and Music Industry

(This statement extracts the specialized accounting principles and practices for AICPA Statement of Position 76-1, Accounting Practices in the Record and Music Industry and establishes standard of financial accounting and reporting for licensors and licensees in the record and music industry. .... It also establishes accounting standards for artist compensation cost and cost of record masters.)

Artist compensation cost

Paragraph 10. The amount of royalties earned by artists, as adjusted for anticipated returns, shall be charged to expense of the period in which the sale of the record takes place. An advance royalty paid to an artist shall be reported as an asset if the past performance and current popularity of the artist to whom the advance is made provide a sound basis for estimating that the amount of the advance will be recoverable from future royalties to be earned by the artist. Advances shall be charged to expense as subsequent royalties are earned by the artist. Any portion of advances that subsequently appear not to be fully recoverable from future royalties to be earned by the artist shall be charged to expense during the period in which the loss becomes evident. Advance royalties shall be classified as current and noncurrent assets, as appropriate.

Cost of record masters

Paragraph 11. The portion of the cost of a record master borne by the record Company shall be reported as an asset if the past performance and current popularity the artist provides a sound basis for estimating that the cost will be recovered from future sales. Otherwise, that cost shall be charged to expense. The amount recognized as an asset shall be amortized over the estimated life of the recorded performance using a method that reasonably relates the amount to the net revenue expected to be realized.

Paragraph 12. The portion of the cost of a record master recoverable from the artist's royalties shall be accounted for as advance loyalty, as discussed in paragraph 10.

Glossary

Advance Royalty - An amount paid to music publishers, record producers, songwriters, or other artists in advance of their earning royalties from record or music sales. Such an amount is based on contractual terms and is generally nonrefundable.

Record Master - The master tape resulting from the performance of the artist. It is used to produce molds for commercial record production and other tapes for use of making cartridges, cassettes, and reel tapes. The costs of producing a record master include a) the cost of musical talent (musicians, vocal background, and arrangements); b) the cost of the technical talent for engineering, directing, and mixing; c) costs for the use of the equipment to record and produce the master; and d) studio facility charges. Under the standard type of artist contract, the record company bears a portion of the costs and recovers a portion of the cost from the artist out of designated royalties. However, either party may bear all or most of the cost.

Royalties - Amounts paid to record producers, songwriters, or other artist for their participation in making records and to music publishers for their copyright interest in music. Amounts for artists are determined by the terms of personal service contracts negotiated between artist and record companies and usually are determined based upon a percentage of sales activity and license fee income, adjusted for estimated sales returns.

Statement of Financial Accounting Standards No. 2 - Research and Development Costs

Accounting for Research and Development Cost

Paragraph 12. All research and development costs encompassed by the statement shall be charged to expense when incurred.

Appendix B - Basis for Conclusions - Uncertainty of future benefits

Paragraph 39. There is normally a high degree of uncertainty about the future benefits of individual research and development projects, although the element of uncertainty may diminish as a project progresses. Estimates of the rate of success of research and development projects vary markedly-depending in part on how narrowly one defines a project and how one defines success-but all such estimates indicate a high failure rate. For example, one study of a number of industries found an average of less than 2 percent of new product ideas and less than 15 percent of product development projects were commercially successful.

Subject: Accrual basis accounting; Management accounting; Popular music; Singers; Breakeven analysis; Case studies

Location: United States--US

Classification: 9190: United States; 3100: Capital & debt management; 8307: Arts, entertainment & recreation; 4120: Accounting policies & procedures; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 45-58

Number of pages: 14

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables Equations

ProQuest document ID: 216291051

Document URL: http://search.proquest.com/docview/216291051?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 54 of 100

VIRTUALLY THERE TECHNOLOGIES: A CASE STUDY OF EARNINGS MANAGEMENT AND FRAUD

Author: DiGregorio, Dean W; Stallworth, H Lynn; Braun, Robert L

ProQuest document link

Abstract:

Earnings management has received a great deal of publicity by the press and increased scrutiny by the SEC. However, many students do not understand how earnings management and frauds are perpetrated, the extent to which "gray" areas exist in accounting practice, and the role that professional judgment plays in determining the correct course of action. This instructional case is designed to help students learn to recognize earnings management and fraud, to develop professional judgment, and to become aware of typical reporting problems experienced by growing companies. Students are required to identify problem situations and differentiate between unintentional errors and omissions, aggressive accounting practices and fraud. They must also propose adjusting journal entries and determine the effect on income. The case is based on a fictional fast-growing high tech company, Virtually There Technologies, which manufactures and markets virtual reality game systems. In the wake of the abrupt departures of the CFO and controller, students assume the role of the new controller. Their job is to get the financial records in order before the annual audit of the company financial statements begins. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns recognizing and correcting earnings management and fraud. Secondary issues include helping students to develop professional judgment and to become aware of typical reporting problems experienced by growing companies. The case has a difficulty level of three and is appropriate for junior-level students in intermediate financial accounting courses. It could also be used at level four in a senior-level auditing class. The case is designed to be taught in 2.5 class hours and is expected to require 4 hours of outside preparation by students. Alternatively, the case can be assigned as a project that requires minimal classroom time.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case can be discussed in class or assigned as a project to be completed outside of class. The requirement to prepare a memorandum of their findings was designed to improve written communication skills and professional judgement. The requirements to prepare adjusting journal entries and determine the effect on income were designed to improve the students critical thinking skills and to reinforce the necessity of being aware of how proposed journal entries effect income per the books.

The case may also be used to improve analytical and verbal communication skills by requiring students to present or discuss in class, the problems encountered, their proposed corrections, and the effect on income. For example, students can be required to make a presentation to the company's Board of Directors to discuss their investigation and explain their findings.

Versions of this case have been used for the last two years in one of the author's Intermediate Financial Accounting II classes. The vast majority of the students felt that the case helped them integrate and apply the materials covered in the course. The case was distributed approximately three-quarters of the way through the course and collected on the last day of class. It was weighted at approximately 7% of the final grade for the course.

The basic methods of manipulating income were discussed in class. Students were expected to complete the requirements of the case outside of class. However, they were also strongly urged to have their journal entries reviewed before handing in the case. This gave the instructor the opportunity to meet with the students, evaluate their reasoning processes, and reinforce critical concepts. In cases where several students had difficulties with the same journal entry, the issue was discussed in class. This required students to logically express their reasoning process and to develop their verbal communication skills. An additional benefit was that the students were exposed to audit procedures that would be covered later in their course work.

Requirements

Before beginning the assignment, you may want to review the Supplemental Instruction Materials included at the end of the case. These materials discuss specific accounting practices that can be used to manipulate earnings and perpetrate fraud.

(a) For each item presented after this section, identify the problem and discuss how it should be handled. The descriptions should be written in the form of a memo to the president and numbered. Address only the adjustments for the year-ended December 31, 2001. For each item, state whether it appears to be the result of an unintentional error or omission, a potentially intentional misstatement, a fraudulent action (intentional), or an aggressive interpretation of generally accepted accounting principles.

(b) Prepare any necessary adjusting journal entries and determine the effect of each entry on net income (record in a format similar to the following example). The company uses the perpetual inventory system. However, in cases where an adjusting journal entry would normally be made to the "inventory short/over" account, the "cost of goods sold" account should be used instead. After all required entries have been prepared, the effect on income column should be totaled and net income before taxes should be calculated. The net income before taxes for the year, before any required adjusting journal entries is $1,864,000.

AJE Description DR CR Effect on net income

Income per trial balance $1,864,000

SOLUTIONS: REQUIREMENT A

1 . It appears that the sales journal for December was kept open into January. The $800,000 of sales should not have been recorded in December because the goods had not been shipped by year-end. The sales and related accounts receivable should be removed from the books. The inventory of $640,000 was still owned and was correctly included on the books. The adjusting journal entry will reduce income by $800,000. This could be an intentional misstatement.

2. Sales were recorded before the income was earned. The sales should be reversed and unearned revenue should be recorded. The adjusting journal entry will reduce income by $250,000. This is probably an unintentional error.

3. The original transaction of $600,000 was not a real sale and should be removed from the books along with the related accounts receivable. The inventory was owned by the company but was not counted at year-end (it wasn't there) or included in ending inventory. The $480,000 of inventory should be added to the inventory per the books. The adjusting journal entry will reduce income by $120,000. This is a fraudulent misstatement.

4. The sales return and reduction of accounts receivable in the amount of $3 1 0,000 should have been recorded before year-end. The inventory was correct and no adjustment is needed for inventory or cost of goods sold. The adjusting journal entry will reduce income by $3 1 0,000. This is a fraudulent misstatement.

5. The sales and related receivables appear to be fictitious and should be removed from the books. The adjusting journal entry will reduce income by $350,000. This is a fraudulent misstatement.

6. The sales return should have been recorded, but was not. The sales return and related reduction of accounts receivable of $400,000 should be recorded on the books. In addition, inventory should be reduced and cost of goods sold increased by $320,000. The adjusting journal entry will reduce income by $720,000. This could have been an intentional misstatement.

7. The allowance for doubtful accounts and the related bad debt expense are understated by $220,000. The allowance for doubtful accounts should be adjusted to its estimated balance. The adjusting journal entry will reduce income by $220,000. This was probably an aggressive interpretation of generally accepted accounting principles.

8. Rebate expenses should be reported as incurred. The expense and related liability should be recorded on the books in December. The adjusting journal entry will reduce income by $300,000. This was an infrequent transaction and was probably an unintentional error. In addition, an adjusting entry would be required in January (not required for this project).

9. The ending inventory contains obsolete inventory that should be written off. Inventory should be reduced and the related cost of goods sold should be increased by $210,000. The adjusting journal entry will reduce income by $210,000. This was probably an unintentional error.

10. The components of the partially completed units included in work-in-process inventory (WIP) that are not yet operable and which are not compatible with any other game systems produced by the company, should be expensed as research and development expenses. The adjusting journal entry will reduce income by $400,000. The fmished goods inventory costs associated with the software to be used exclusively by this game system of $280,000 should also be expensed as research and development expenses because a working model has still not been developed. These are probably unintentional errors.

11. These transactions were in effect sales on consignment. Accounts receivable related to consignment sales should not be recorded until the consignee sells the goods. The accounts receivable and related sales of $750,000 should be reversed. Also, the inventory of $600,000 should be put back on the books and cost of goods sold should be reduced. The adjusting journal entry will reduce income by $150,000. This could be an intentional misstatement.

12. Depreciation expense and the related accumulated depreciation account are understated and should be increased by $900,000 (i.e. $2,100,000 - (12 x $100,000) = $900,000). The adjusting journal entry will reduce income by $900,000. This appears to be an overly aggressive interpretation of generally accepted accounting principles.

13. The "customer acquisition costs" should be classified as advertising costs and should be expensed in the period incurred. The adjusting journal entry will reduce income by $250,000. This appears to be an overly aggressive interpretation of generally accepted accounting principles.

14. The cost of the patent should be expensed as research and development expense. The adjusting journal entry will reduce income by $200,000. This appears to be an unintentional error.

15. The $500,000 incurred before working versions were created should be expensed and not capitalized. Computer software should be reduced and research and development expense increased by $500,000. The adjusting journal entry will reduce income by $500,000. This could be an intentional misstatement.

16. Liabilities should be recorded in the period they are incurred. The related inventory was already received and counted. Cost of goods sold and accounts payable should be increased by $250,000. The adjusting journal entry will reduce income by $250,000. This appears to be an unintentional error.

17. Liabilities should be recorded in the period they are incurred. The related inventory was already received and included in the year-end inventory counts. Cost of goods sold and accounts payable should be increased by $350,000. The adjusting journal entry will reduce income by $350,000. This appears to be a fraudulent misstatement.

18. Commission expense and the related liability should be reported in the period in which the services were rendered. The timing of the expense should be matched to the period in which the sales were recorded. Accrued commissions should be recorded in the amount of $310,000 [$150,000 + $160,000 (i.e. $3,200,000 x .05 = $160,000)]. The adjusting journal entry will reduce income by $310,000. An adjusting entry would also be required in January (not required for this project). This appears to be an unintentional error.

19. Payroll expense and the related liability should be reported in the period in which the services were rendered. The liability should be adjusted to its estimated balance and the related expense should be recorded on the books in December. The adjusting journal entry will reduce income by $60,000. An adjusting entry would also be required in January (not required for this project). This appears to be an unintentional error.

Note: If all of the errors go in the same direction (i.e. to increase income), then they may actually be intentional misstatements.

AuthorAffiliation

Dean W. DiGregorio, Southeastern Louisiana University

H. Lynn Stallworth, Southeastern Louisiana University

Robert L. Braun, Southeastern Louisiana University

Subject: Earnings management; High tech industries; Financial reporting; White collar crime; Fraud; Case studies

Location: United States--US

Classification: 4120: Accounting policies & procedures; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 59-65

Number of pages: 7

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables

ProQuest document ID: 216274425

Document URL: http://search.proquest.com/docview/216274425?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 55 of 100

WORLDCOM INC.: SURVIVAL AT STAKE

Author: Gollakota, Kamala; Gupta, Vipin

ProQuest document link

Abstract:

Accounting fraud issues have taken the center stage whenever there is a discussion about the bankruptcy of WorldCom. However, the fraud issues were just an outcome of a deep-rooted deterioration in the performance fundamentals of WorldCom. In this case, we discuss some of the strategic, organizational and environmental issues that led to the survival challenges, and hence precipitated ethical irregularities and downfall of the company. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns management of mergers and acquisitions in a turbulent environment. Secondary issues examined include strategic, organizational, and competitive issues that push the companies to the brink of destruction, and that may induce them to breach the boundaries of ethics and accountability for remaining afloat. The case has a difficulty level appropriate for first year graduate level. The case is designed to be taught in 1.5 class hours and is expected to require 2 hours of outside preparation by students.

CASE SYNOPSIS

INSTRUCTORS' NOTES

OVERVIEW

This case focuses on the growth and decline of WorldCom. The case traces the growth of WorldCom, till it filed for bankruptcy in 2002. Although accounting fraud issues have taken center stage when discussing the bankruptcy of WorldCom, the roots of WorldCom's decline lie in its turbulent industry, and strategic and management errors made. WorldCom shows meteoric rise and an equally meteoric fall. The case traces the developments in the telecommunications industry from the breakup of AT&T till 2002. Deregulation and technology have had major roles in shaping the industry. While deregulation increased competition in the long distance business, the local exchange business was not so transformed. Long distance business became increasingly commoditized and competition was price based. Technological advances allowed for massive increases in the transmission capability of networks, resulting in the expectation that there will be a convergence in data, voice and video. Many firms wanted to be the provider who would provide all these services to the consumer and greatly increased their network capacity by laying new lines. Unfortunately the demand boom expected did not happen and all that resulted was a gross mismatch between supply and demand.

WorldCom started as a small long distance reseller and by a series of acquisitions managed to become a national player, with a strong presence in the rapidly growing data business. WorldCom was the leader in the internet backbone business and was strong in the business segment of long distance telephony. WorldCom went on to buy MCI, a company much larger than itself. Various problems may be seen with the merger. The price paid was too high and the company took on a lot of debt. MCI was in a slow growing highly competitive segment - the long distance segment. By buying MCI, WorldCom was increasing its exposure to this segment. Whatever synergies and cost savings that this merger might have obtained were quashed with the poor implementation of the integration. Culture clashes and unreasonable cost cutting resulted in MCI executives leaving the company. Another problem with WorldCom was its lack of presence in the wireless business. WorldCom's attempt to correct that - by its bid to acquire Sprint - was defeated when the Justice department turned down the merger. This left WorldCom with strategic weaknesses, financial burdens, and with a large exposure to the slow growing long distance business. The situation came to a head with disclosures of accounting fraud that involved top management - right from the CEO. Failure to make payments resulted in WorldCom filing for bankruptcy protection.

DISCUSSION QUESTIONS

1. What are the major driving forces in the telecommunications industry? How have they affected the long distance business?

The major driving forces are: regulation/deregulation and technology.

Impact of Regulation/deregulation: Initially, the telecom industry was a monopoly and consisted of one firm: AT&T. AT&T controlled all aspects of telephony - it owned all the local and long distance networks in the US. Thus a call would travel from the home or business of a subscriber on AT&T lines.

Deregulation began when AT&T was ordered to break up. A distinction was made between the local and long distance businesses. Figure 1, shows the process of transmission. While local exchanges continued to be monopolies, the long distance business was opened up to competition. Local exchange was controlled by the creation of 22 separate holding companies (Regional Bell Operating Companies or RBOC's also called Baby Bells). The original company, AT&T, stayed in the long distance segment. Subscribers could now choose their long distance company (AT&T, MCI etc), but did not have a choice in who provided them local services - local service was provided by the RBOC controlling their geographical area. These RBOC's controlled a crucial component of the communication network - the "last mile" or the final connection to the consumer's home. A long distance carrier had to use these local networks to reach their subscribers and was charged an access fee by the RBOCs. The result was an entry of new competitors into the long distance business, which was becoming increasingly competitive. Prices for long distance calls dropped amongst allegations of high access fees pushing up costs.

Increased deregulation took place with the passage of the Telecomm Act of 1996. Under this Act, long distance companies were allowed to provide local services by setting up their own facilities if they did not want to pay access charges. Local exchange carriers were required to open their networks and provide access at wholesale prices. This opened up the door for long distance companies to set up their own facilities to reach their customers and avoid the access fee. Two dominant business models emerged - facilities based operators (companies that invested in laying down lines and networks) and resellers (companies that bought access to networks from facilities based competitors at wholesale prices and sold it to customers for a markup).

Impact of Technology

While deregulation opened the door for competition, technological changes amplified trends and created turbulence in the industry. Digital technology allowed for longer transmissions without signal losses, with better quality at no big cost increase. Developments in the carrying capacity of fiber and increasing substitution of fiber for traditional cable resulted in big increases in bandwidth (volume of data that can be transferred through a network). Towards the end of the 90's there was considerable euphoria as to the potential market size in telecom. This euphoria was fuelled by increased bandwidth that was available that would potentially allow the same provider to provide a subscriber access to the internet (data), entertainment (video) and telephone (voice). The opportunity to provide data, video and voice with the same network is referred to as convergence. The potential of staking a leadership position in a converged telecom industry, the rapid growth of the internet, and the easy availability of capital during the stockmarket boom resulted in huge capital investments in networks. Industry transmission capacity increased 500-fold between 1998 and 2001 (when we account for the technological evolution of carrying capacity of the fiber optic cable). Thus there was a massive increase in supply of telecommunication services, both in number of firms offering the services and total volume of transmission capability. Unfortunately, the exponential demand growth expected from converged networks did not happen. Further, technological progress in wireless networks resulted in a switch from wired to wireless networks further dampening the demand for all the additional capacity. Demand growth during the period when supply increased 500-fold was only 4-fold. Thus we see a huge mismatch between demand and supply and an industry moving rapidly from one of great promise and opportunity to one with tremendous overcapacity.

These changes may be summarized as given below:

Demand

Wireless (-)

Price decrease (+)

Convergence (?)

Supply

New entrants (+)

Capital availability (+)

Fiber capacity (+)

2. What is WorldCom's corporate strategy till 1997? Did it add value?

WorldCom's corporate strategy can be classified as one of related diversification. WorldCom started out as a reseller, but by acquiring companies with facilities it increased its geographic coverage, became a facilities based provider and increased its market power. Later on, with the belief that networks would converge, Worldcom opted to diversify into related products. Many of the early acquisitions were small, entrepreneurial companies - similar to WorldCom.

A strategic shift occurred when WorldCom started to acquire companies not in the telephone business, but firms in related businesses. The goal of these acquisitions seems to be to establish a leadership position in the converged networks. To this end, WorldCom acquired MFS, the parent of UUNet to give it a major presence in the internet/ data business. IDB Communications, gave WorldCom fax and data connections, television and radio transmission services, and mobile satellite communications potential. A gap in WorldCom's portfolio was the absence of a strong wireless presence.

Overall, WorldCom's corporate strategy can be seen mostly as growth by acquisition, versus building up what it had. In the early years, WorldCom's strategy of acquiring other long distance companies to increase its geographical coverage and market power added value. Integration of these firms was also easier since most were small entrepreneurial startups like WorldCom. During this period, WorldCom's shareholders saw their stock price go up.

3. Discuss WorldCom's acquisition of MCI. This deal was hailed by the media as "the deal of the century". Why did it fail to live up to expectations?

In 1997, WorldCom made its largest purchase - MCI. MCI was the second largest long distance company and WorldCom was the 4th largest. By purchasing MCI, WorldCom would be a major player in the long distance business. WorldCom beat the next best offer of $28 billion, by offering $37 billion. This is in contrast to British telecom which after having worked with MCI for many years, dropped its offer from $23 billion to $ 1 7.9 billion. WorldCom justified its premium by the expected synergies from sharing networks and reducing costs. Further, they expected to use MCI's strong marketing skills to enhance their other businesses. In concept there was potential in these arguments, but numerous problems emerged in implementation (discussed below).

The effectiveness of corporate strategy could be evaluated in light of the value added to shareholders.

Porter (1987) suggests using three criteria:

* Attractiveness test: The attractiveness of the industry being entered into

* Cost of entry test: Cost should not overshoot future profits

* Better off test: Either the new unit or the corporation must be better off

In the MCI-WorldCom merger, none of these three criteria were met. By 1997, the long distance business was not attractive - it had excess capacity, severe price competition, and was viewed by customers mostly as a commodity - giving firms little opportunity to differentiate. Regarding the cost of entry, it might be inferred that WorldCom paid a premium for MCI. British Telecom had worked closely with MCI for the previous few years actually dropped its offer from $23 billion to $ 1 7.9 billion based on MCI's performance and the potential of future revenues. This deal also required WorldCom to take on a lot of debt to pay British Telecom its 20% share in MCI.

Regarding the better off test, Bernie Ebbers, the CEO, referred to a large number of potential cost savings and synergies. It was hoped that WorldCom could cut down the costs of MCI in the price sensitive, increasingly commodity type long distance business, while MCI could strengthen the marketing of WorldCom's high growth data businesses. However, not much was actually realized. There were major problems of culture clash between WorldCom and MCI. WorldCom was a smaller, newer, lean company, while MCI was a more established, larger company. While WorldCom's growth was by acquisitions and cost cutting, MCI grew internally through innovation. The sort of culture and skills needed for a strategy based on cost leadership is quite different from that needed for innovation. What resulted was a major clash in cultures making integration of operations essential for cost savings elusive. Moreover, the austerity measures taken by Ebbers to cut costs went overboard (eg., removing water coolers) and some 70% of MCI executives left the firm. One can presume that with their exit, some of the marketing skills that WorldCom wanted also left MCI.

Adding to these strategic and implementation problems, the long distance business continued to deteriorate, with increased price competition. By 2000, just 3 years after acquisition of MCI, WorldCom decided to partition the two companies and created a tracking stock for MCI to allow focus on its faster growing data business.

4. How do you explain the poor performance leading to the bankruptcy of WorldCom?

Although the media has focused on the ethics issues as the cause of failure of WorldCom, there are many other equally important issues.

Problems in the Long Distance Business: Deregulation increased competition in the long distance segment of the telephone business, not the local exchange. Local exchanges were still monopolies and long distance companies had to pay large access fees to reach their subscribers. Since 1996 when local exchanges were opened for competition, it was possible for long distance companies to lay down lines to reach their customers, but this was very capital intensive and took place mostly in the densely populated areas.

Unforeseen Industry Shifts: In the mid 90's the telecommunication business was seen as an extremely high potential industry. Rapid technological advances in carrying capacity of optical fiber and internet, led to the expectation that entertainment, access to the internet and telephone service could be offered by one firm. Unfortunately, while the capacity of optical fiber to transmit information lived up to its potential, the boom in entertainment delivery and convergence did not occur. Other than densely populated urban areas, many areas did not have high speed access from their homes as the local exchange companies continued to keep the copper lines rather than update them. This acted as a bottleneck in data and video transfers through the network (even if the long distance companies had optical fiber lines, the local exchange did not, therefore slowing delivery). This resulted slower than anticipated demand contrasted with massive overcapacity since many firms had laid down networks in the hope of being the firm of choice in a converged environment.

While the above industry pressures acted on all firms in the telecommunications industry, WorldCom was hit very hard. MCIWorldCom had invested a lot of money in laying down long distance networks, and owned the largest chunk of internet backbone. By owning MCI, WorldCom increased its exposure to the hard hit long distance business.

Lack of Presence in the Wireless Business: WorldCom lacked a strong presence in the fast growing wireless business. Although WorldCom tried to address this problem by making a bid for Sprint, the failure of the Justice department to allow the merger, resulted in a conspicuous gap in its product offering. Most other long distance companies had a stronger presence in the growing wireless segment. This not gave them a strategic advantage in allowing them to offer a complete line of communication offering to customers, it kept them out of benefiting from the growth of the wireless segment.

High Acquisition Price for MCI: The high price paid for the acquisition of MCI seems more a result of managerial hubris than based on careful research into costs and benefits. Prior successes with acquisitions, and the easy availability of capital during the stockmarket boom are likely to have reinforced feels of bravado. As suggested in the research on reasons for high premiums paid for acquisitions (Hayward & Hambrick, 1997), the past success with acquisitions, the media blitz surrounding the CEO might have lead to the high price paid for acquisition. The resulting debt weakened WorldCom's balance sheet in comparison to other telecom firms.

Managerial Errors: There seem major problems in both choice of MCI as the firm to acquire as well as in attempts to integrate the firm. The obvious differences in culture should have warned WorldCom about the potential problems in realizing synergies from MCI. Further, it seems that cost cutting went too far. The report that 70% of MCI executives left following austerity measures indicates serious managerial problems. It is quite likely that the most promising executives left as it was probably easiest for them to find jobs. This drain on talent from MCI further decreased the benefits WorldCom was counting on - that MCI's marketing executives would help WorldCom with their marketing.

Failure of Ethics: Worldcom has been charged with overstating accounting irregularities of $9 billion. Studies on failure of ethics point to some underlying features - pressure to deliver results that are probably unachievable, leadership and culture of the company. Initial investigations suggest that fraud in WorldCom started from the top. The CFO of WorldCom has been accused of being directly involved in misrepresenting accounts. The CEo, Ebbers, involvement in this fraud is also being investigated. In any case, it is not likely that Ebbers will emerge as a role model for ethical behavior in the company. Ebbers, it is alleged has personally benefited from various transactions with the firm . For example, he received low interest loans from the company to cover personal margin calls made on company's stock. In addition to the failure of leadership, we should note the tremendous pressures faced by the company. The turbulence in the telecommunications industry, unforeseen negative events especially in the long distance sector, in which WorldCom had high exposure, coupled with high debt and shrinking capital availability obviously put tremendous pressures on WorldCom to improve performance.

EPILOGUE

In the last quarter of 2002, WorldCom's MCI unit sharply raised many of its domestic and international rates, in some instances by as much as 80 percent, marking a departure from its previous role as an industry leader in cost cutting. MCI sought to shed its least-profitable customers and focus on its most-profitable plans, such as the Neighborhood with flat-rate pricing. "In the past, they had focused on every customer," "Now they are focused on customers that are the highest value." (Wallack, 2002)

In April 2003, WorldCom filed a reorganization plan that changed its name to MCI, and shifting its headquarters to Virginia from Clinton, Mississippi, the town associated with disgraced co-founder Bernie Ebbers. According to the new Chairman and chief executive Michael Capellas, the company x "wanted a new name that would make us proud". "With established brand equity and a name that stands for integrity, innovation and value, we're ready to regain our leadership position in the marketplace." (Dalton, 2003)

In July 2003, new allegations were uncovered against MCI: schemes apparently designed to defraud its competitors that stretched back into the 1990s and that were still in place. Secret schemes to reduce the charges that the company paid to rival télécoms groups to complete long-distance calls. Mr Krutchen told investigators about schemes to reroute long-distance traffic via small independent télécoms operators in an attempt to disguise the origins of the calls and thereby avoid paying network access fees to local operators such as Verizon and SBC. MCI responded that just 8 per cent of its traffic is directed to least-cost routing companies.

As a result, in late July 2003, WorldCom was banned from bidding for US government contracts, worth about $1 billion a year. The General Services Administration, the body that hands out government deals, said: "It is important that all companies and individuals doing business with the federal government be ethical and responsible." (English, 2003) In response, MCI decided to hire a chief ethics officer to improve its image. Michael Capellas observed, "We are in the process of rebuilding our ethics program and understand that there is still more work to do. " (English, 2003)

In August 2003, WorldCom proposed changes in how the board would govern the company, as part of its reorganization plan. It accepted 78 recommendations by the court-appointed monitor reflecting specific weaknesses exposed by WorldCom's collapse. The changes aim to give the new MCI overwhelmingly independent and extremely active directors. The company will have 8 to 12 directors, with the chief executive as the only insider. The changes required the board to meet at least eight times a year, visit company sites and undergo annual training. The role of chairman will be turned over to an outsider who would run the board. It barred directors and auditor from serving more than 10 years, and mandated departure of at least one director each year. Strict standards for defining independence of the directors eliminated virtually any dealings with MCI. Most significantly, to give shareholders a bigger voice, an Internet site was to be created where MCI investors could bring concerns to the attention of the board and other shareholders. The site would allow investors to have resolutions voted on without having to gain approval to do so at the annual meeting. No employee will be paid more than $ 1 5 million a year without shareholder approval and severance packages will be limited (Feber, 2003).

In October 2003, WorldCom's reorganization plan was approved, and it looked forward to doing business as MCI starting 2004. MCI repaid most creditors just 36 cents on the dollar and wiped out all its former shareholders. MCI now had $2.3 billion in cash and $5.8 billion of debt, down from $41 billion when it filed for bankruptcy in July 2002. The work force was reduced by more than a third to 55,000, down from 85,000 before the bankruptcy. WorldCom had fired the executives responsible for the fraud and replaced the CEO, CFO and entire board of directors. The new policies and procedures - including state-of-the-art board of directors' guidelines, and an extensive corporate ethics program - make MCI a model of corporate governance. The federal judge overseeing the litigation against WorldCom recently opined that never has a company "so rapidly and so completely divorced itself from the misdeeds of the immediate past and undertaken such extraordinary steps to prevent such misdeeds in the future." (Garn, 2003)

In Jan 2004, the government ban on MCI bidding for government contracts was lifted. The representative of the government agency, General Services Administration, stated that "Now you have a company that has corrected the way it does business, and it's safe for the government to do business with it." (Young, 2004)

References

REFERENCES

Dalton, R. (2003, April 16). WorldCom is dead, long live its clone. The Australian, 26.

English, S. (2003, February 8). WorldCom barred from government contracts. Daily Telegraph. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2003/08/02/cnworld02.xml

Feder, BJ. (2003, August 27). WorldCom plans sweeping changes. Barnaby J. Feder. International Herald Tribune, August 27. 1 1

Garn, J. (2003, September 22). Destroying MCI; How to manipulate the bankruptcy code. The Washington Times. A23

Hayward, M. L & Hambrick, D.C. (1997). Explaining the premiums paid for large acquisitions: Evidence of CEO hubris. Administrative Science Quarterly. 42(10), 103-127.

Porter, M. E. (1987). From Competitive Advantage to Corporate Strategy. Harvard Business Review. 65(3), 43-59.

Wallack, T. (2002, December 4). MCI plans additional rate hikes; MCI plans to raise its rates. San Francisco Chronicle. .B1.

Young, S. (2004, January 8). Ban is Lifted on MCI's Bidding for US Government Contracts. The Wall Street Journal. A20.

AuthorAffiliation

Ramala Gollakota, University of South Dakota

Vipin Gupta, Grand Valley State University

Subject: Fraud; Business ethics; Acquisitions & mergers; Telecommunications industry; Bankruptcy; Case studies

Location: United States--US

Company / organization: Name: WorldCom Inc; NAICS: 517110, 517212, 518111

Classification: 3100: Capital & debt management; 8330: Broadcasting & telecommunications industry; 2330: Acquisitions & mergers; 2410: Social responsibility; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 67-76

Number of pages: 10

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References Diagrams

ProQuest document ID: 216302633

Document URL: http://search.proquest.com/docview/216302633?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 56 of 100

NIGERIAN PACKAGED GOODS, LTD.

Author: Smith, D K

ProQuest document link

Abstract:

Brian Keith is the newly-appointed Managing Director of Nigerian Packaged Goods Ltd, a large subsidiary of Global Packaged Goods Ltd and a major manufacturer and marketer of consumer packaged goods in Nigeria. The company has just reported a massive loss, and the former managing director together with most of the senior management team have retired. To ensure continued support for the company from worldwide headquarters in Belgium, Keith believes that he will need to dramatically improve profitability and to double sales volumes within the next four years. Data and information in the case include: 1. description of the challenge the company faces, 2. for Nigeria: historical overview, a sample of recent statistics from the World Bank, and (for benchmarking purposes), some comparable statistics on the US, 3. on the company: historical overview, current performance, and numerous factors impacting that performance. 4. characteristics of the marketing strategy, and 5. characteristics of the competitive situation.

Full text:

Headnote

CASE DESCRIPTION

Ever wished you had a full-length case (lots of issues, lots of data) about a large under-performing company in the developing world? This case challenges students to use the information provided to develop a plan to dramatically increase profitability and to double the number of tons of products sold by Nigerian Packaged Goods Ltd. within a four-year period. The case is based on field research conducted by the author in Nigeria. At first glance, students may believe the central issue in the case is "marketing strategy." As they will discover in the epilogue, however, the solution developed by the company's Managing Director involves initiatives on a very wide range of factors with the potential to impact corporate performance. Those factors include not only marketing strategy-related issues (that is, target market and the four marketing mix variables) but also company, competitor, and customer characteristics; industry considerations; and the macro-economic environment in Nigeria. The case is appropriate for senior-level undergraduates as well as students in MBA and Executive Development programs. It is designed to be taught in a "one hour and a half class session, and is likely to require at least a couple hours of preparation by students.

CASE SYNOPSIS

Brian Keith is the newly-appointed Managing Director of Nigerian Packaged Goods Ltd., a large subsidiary of Global Packaged Goods Ltd. and a major manufacturer and marketer of consumer packaged goods (foods, cosmetics, soaps, detergents, toothpastes, etc.) in Nigeria. The company has just reported a massive loss, and the former managing director together with most of the senior management team have retired. To ensure continued support for the company from worldwide headquarters in Belgium, Keith believes that he will need to dramatically improve profitability and to double sales volumes within the next four years. Data and information in the case include:

1. Description of the challenge the company faces.

2. For Nigeria: Historical overview, a sample of recent statistics from the World Bank, and (for benchmarking purposes), some comparable statistics on the United States.

3. On the company: Historical overview, current performance, and numerous factors impacting that performance.

(d) Characteristics of the marketing strategy, including descriptive information on the product line, characteristics of the distribution system, and information on the promotion and pricing strategies the company is currently using.

5. Characteristics of the competitive situation.

INSTRUCTORS' NOTE

Our hero, Brian Keith, newly-appointed Managing Director of the Nigerian Packaged Goods Ltd. (hence, NIPAG) subsidiary of Global Packaged Goods Ltd. (hence, GLOPAG), faces the following situation:

1. NIPAG has just recorded a huge loss.

2. The former Managing Director and most of his team have retired.

3. It is by no means certain that NIPAG will continue to enjoy continued support for ongoing operations from the worldwide headquarters of its parent company (GLOPAG) in Belgium.

As regards lessons and/or information which students should learn from this case, at least four points can be made:

1 . At the beginning of the case, students will need to consider the extent to which developed-world models and conceptual frameworks can be applied to challenges and opportunities in the developing world. By the end of the case discussion, they will have discovered that many conceptual frameworks (for example, models of corporate performance, models of marketing strategy, etc.) can be useful guides to managerial action not only in the developed world but in the developing world as well.

2. Students will be able to compare their plan to double the company's business in four years to the successful plan developed by the hero of the case, that is, the managing director of the company.

3. Students will discover that managerial initiatives (in this case, a plan for doubling corporate revenues within four years) are powerfully impacted by the nature of the model and/or process used to develop the initiative. Specifically, a plan based on a "corporate performance" framework is likely to differ considerably from a plan based on a "marketing strategy" or a "grow the business" framework.

4. As they work through the case, students are exposed not only to a bit of information on the most populous market in Africa (Nigeria) but also to a bit of history on the involvement in Nigeria of one of the world's great consumer packaged goods companies.

DISCUSSION QUESTIONS

2. Ask an individual student or the class as a whole to address a very specific series of questions. Those questions, and comments relating to three possible solutions to the case, are as listed below:

1. What is the main problem?

Students usually conclude that Brian Keith must develop a plan for achieving the objective which he and his boss (Johnson Ojo) have agreed on, that is, to double the turnover of Nigerian Packaged Goods, Ltd. within the next four years. I reinforce the idea that if we were Keith, this is a reasonable statement of the challenge he faces.

2. What kind of problem is this?

Instructors should not be surprised if there are as many answers to this question as there are students in the class. Clearly, there is no one "right" answer. However, three alternative approaches, each of which seem quite relevant to the situation, are as indicated below:

1 . Corporate Performance.

2. Marketing Strategy.

3. "Grow the business."

3. For the kind of problem selected, what are the key variables and which expert says so?

For students concluding that the main problem is a "corporate performance" problem, Smith (1985) suggests that the following five categories of variables impact powerfully on corporate performance: (1) Macroeconomic factors; (2) Industry characteristics; (3) "Environmental" characteristics (that is, company, competitor, and customer characteristics); (4) Own-company strategy; and (5) Own-company implementation and/or tactics. For students concluding that the main problem is a "marketing strategy" problem, Perreault and McCarthy (2002) suggest that the key marketing strategy variables are target market and the marketing mix (that is, product, place, price, and promotion). For students concluding that the main problem is a "grow the business" problem, Ansoff (1965) suggests that the available options include:

1. Market penetration.

2. Product development.

3. Market development.

4. Diversification.

4. What data from the case relate to the key variables?

As implied above (and this is one of the key learning points of the case), the data students present will depend on the main problem they identify. Those believing the main problem is "corporate performance" should focus on and reference data relating to the five key performance variables identified earlier, that is, macro-factors, industry factors, "environmental" factors, marketing strategy factors, and tactics/implementation-related factors. Appendix 1 identifies data from the case which relate to each of these five variables.

Students believing the main problem is "marketing strategy" will focus on the two key variables identified earlier, that is, target market and marketing mix. The "marketing strategy" section of Appendix 1 identifies data from the case which relate to each of the key variables.

Students believing that the main problem is "grow the business" will focus on the four options listed earlier, that is: (1) Market penetration; (2) Product development; (3) Market development; and (4) Diversification. Appendix 2 identifies data from the case which relate to each of those alternatives.

5. What alternative solutions can be identified?

6. Which one alternative does the class/student recommend, and why?

"Changing nothing" is unlikely to help Brian Keith achieve his objective, that is, to double his turnover within the next four years. Thus, it appears that students believing the main problem is the need for a "grow the business" strategy will recommend use ofthat sort of strategy, while students believing the main problem is the need for a new marketing strategy will recommend that approach. Similarly, students believing that "corporate performance" is the main problem will recommend a different approach to performance.

The approach used successfully by the Managing Director was "corporate performance-based;" for additional information on exactly what he did, please see the epilogue.

7. What negatives are associated with the alternative selected by the class leader and/or other members of the class?

Very few solutions are risk and/or problem-free. Negatives associated with the solution proposed by the class leader and/or other members of the class could include the following: (1) The chosen alternative, if it requires Nigerian Packaged Goods, Ltd. to acquire specialized skills which the organization doesn't currently possess, could be expensive both in terms of time and money. Also, since the case probably doesn't provide all the data a decision maker would need (in other words, it is likely that important data is missing), it is possible that assumptions made by the class leader regarding the actual situation Nigerian Packaged Goods, Ltd. faces are incorrect, and that in reality, the proposed solution might be inappropriate.

EPILOGUE

Brian Keith not only prepared and implemented a plan but also achieved his objective (that is, doubling Nigerian Packaged Goods, Ltd.'s turnover within four years. As indicated earlier, of the three conceptual frameworks suggested, Keith's actual approach was most consistent with the "corporate performance" model. Keith's comments regarding his plan to resuscitate Nigerian Packaged Goods, Ltd. (hence, NIPAG) are as indicated below.

On the financial side, and a indicated earlier, over 1.2 billion naira of non-existent and/or uncollectible accounts receivable were written off. It was important to take the hit and get this behind us.

Regarding staff, and as indicated in the case, Johnson Ojo replaced Erasmus Adepo and I became Vice-chairman and CEO. Most NIPAG directors were also replaced, together with many senior managers just below the director level. At the same time, an intense scrutiny of staffing was conducted. When the new team was finalized, the number of managers had been reduced 40%.

Regarding employee benefits and compensation programs, we substantially upgraded these. Pay levels at NIPAG were raised 20-30%, so as to be competitive with compensation at other leading companies in Nigeria. In addition, benefits provided to managers by NIPAG were increased to include features (for example, financial assistance in purchasing housing or cars) provided to managers by other leading companies in Nigeria. At the junior staff (that is, production workers) level, we have begun organizing the cross-functional teams which have been used in factories elsewhere in the world to substantially improve performance and productivity.

Regarding physical assets, we closed our two Lagos factories, and began a program to upgrade to worldclass levels the production facilities in our remaining three factories. Dedicated communications with major customers have been established, and we have dramatically increased our internet capabilities as well.

We sold our head office complex for more than one billion naira, and moved our head office to a suburb outside of Lagos. The new head office building provides worldclass workspaces and includes internet connections and computers at every workstation. Capabilities for non-internet communications with customers have also been dramatically upgraded. In the new headquarters building, directors are located alongside the managers who report to them, not in a directors' wing.

Regarding processes, NIPAG now outsources (both at headquarters and at its factories) a number of functions (canteen, medical care, security services, etc.) to third-party specialists. The services provided by these external third parties are higher quality and lower priced than the services we had provided ourselves.

We have established programs to motivate and reward employees to come forward with suggestions for improving our operations. We reassure our people constantly that there is a future at NIPAG for employees who come to work each day with the idea that they need to be making positive contributions to the company's current and future success.

We have also established programs to focus employee attention and efforts on safety, health, and productivity. Furthermore, NIPAG has introduced programs to reward employees who do care, do try, and do perform on these key issues. Under the new programs, and similar to worldclass factories elsewhere in the world, junior staff who meet specified health, productivity, quality, and safety goals can double their earnings. Specific changes in the behaviors of junior (that is, production) staff include the fact that now, when shifts change, there is intense coordination between staff coming off the line and those going on. Incoming workers assemble 15 minutes before shift change, so as to be able to coordinate the change-over and avoid situations where the production team's productivity is hurt because production lines must be halted.

We have resumed the practice of sending NIPAG staff on overseas postings to gain experience and insights. The inflow of overseas staff to ensure that we here at NIPAG are aware of worldclass ideas and practices has also resumed.

MARKETING STRATEGY-RELATED REVISIONS

Our target market continues to be Nigerian consumers at all socio-economic levels but especially those at the middle and higher levels. However, we are now making special efforts to ensure that our products are ongoingly available in rural markets all across Nigeria.

NIPAG has dramatically reorganized our interactions with customers. We now deal directly with only 150 of the 850 wholesalers and large retailers (that is, direct customers) we used to deal with directly. Also, we have dramatically increased the profile and importance of our customer service function. The person who now leads this area is on NIPAGs Board of Directors.

We have eliminated many of the low- volume products which were costly to produce and disruptive to our production operations. Our product line is now ten major brands and 50 items (down from 350). We have re-launched each of these major brands and, in the process, have increased and/or improved active ingredients to ensure that the brands we manufacture here in Nigeria meet and/or exceed the levels of performance and value for money set by worldclass products flowing into Nigeria from elsewhere.

As for promotion, we have over the last several months tripled our advertising expenditures. NIPAGs total promotional expenditures and share of voice this year will be dramatically greater than at any other time in recent memory.

Regarding distribution, we have closed the 28 depots NIPAG owned and operated all around the country. We have outsourced the distribution of our products to specialists. The quality of market presence provided by these specialists is better than what we had been able to do ourselves. Furthermore, the cost of purchasing these services from these independent third party specialists has been far lower than the cost of providing these services ourselves.

As indicated earlier, we are investing substantially to ensure that our products are available not only in urban markets but also in rural markets as well. Furthermore, in many major urban markets we now have only one direct wholesale customer and we run nearly all our business in that urban market through that one wholesaler. As we rework our approach to distribution, we are assuring our distributor partners that we will work with them to maximize the probability that they will earn a designated target return on whatever investments they make (financial, human capital) in support of their NIPAG business. Furthermore, we now insist that banks lending to our key distributors make this money available at the same rate at which they lend money to NIPAG itself.

Regarding pricing-related issues, and as a result of the product reformulations and relaunches mentioned earlier, the value for money for NIPAG products is now comparable to worldclass products entering Nigeria from anywhere else in the world.

As illustrated above, the initiative which Keith developed to turnaround the situation at NIPAG involves not just marketing strategy-related variables (that is, target market and marketing mix). Keith's approach clearly involves a full-range of "performance" variables (that is, macro and industry and company and customer and competitor and tactical issues). As to concluding observations, Keith notes the final two additional points:

1. In my opinion, the key success factors for this kind of initiative (together with brief descriptions and/or examples of each of those factors) are:

A. ORGANIZATION: This is all about clarity and simplification. We simplified structures and made sure that people were very clear about their responsibilities. We introduced the concept of multi-functional team work to ensure there was a greater awareness of interdependence within the entire organization. Having taken care of the 'hard' issues in terms of job reductions etc. we were able to take an inclusive approach to those that remained.

B. LEADERSHIP: In Africa, leadership is essential. Part of Nigeria's national problems are related to poor leadership and appalling examples of bad behavior. In NIPAG we set out a very clear objective of what we wanted to achieve (double the business in 4 years) and how we were going to do it. We were then seen to take action accordingly. We also clearly demonstrated that "the Nigerian factor" was not acceptable. We would operate to GLOPAGs international standards. We demonstrated this in every aspect of the business.

C. SELF-DEVELOPMENT: One of the problems in NIPAG was summed up as "management should do something about this," referring to the unacceptable things that were happening. However it was actually management that was saying this. A symptom of a culture where all decisions were taken at the top. We insisted that management must manage, and instituted a programme of coaching and counseling workshops aimed at ensuring accountability at all levels. Team-based structures and open dialogue with the Board also assisted, as did celebrating with those managers that showed the right approach. We got rid of the 'blame' culture.

D. TEAMWORK: Not an easy concept in Africa, as generally social structure is built around hierarchy. It has not been easy to introduce. However, we have worked hard at it and introduced team work training to assist. When moving to our new offices and factories we built open offices and work stations where multi-functional teams actually sat together. Rewards were focused on individual and team results. Team successes were celebrated.

E. COMMUNICATION: Absolutely critical. We just kept repeating the same message: you know you are succeeding when you start to get it fed back to you from the most junior employees in the company. So I and my colleagues did regular briefings, we had a total company "Change Fair," we issue monthly newsletters, we issue "elevator speeches" on credit cards, and rewards mirror the key message. In summary everything in the Genesis Programme (that is, the corporate change programme) was aligned through communication. We also had some real big events that demonstrated real change, i.e. new factories, new offices, a change in everything we did and an open approach to challenging everything that we formerly took as "the way we do things."

F. PROJECT MANAGER/CHANGE COORDINATOR: The Project Manager/Change Coordinator (it is one and the same person) worked with a multi-functional team to ensure that our milestones were achieved and kept us honest to the organizational philosophy we had created for the company. This was a critical role and vital to maintain momentum.

2. The degree of success one can achieve with this sort of initiative is also powerfully impacted by the extent to which the macro-environment of the country is improving. Here in Nigeria the macro-environment is improving, and we are succeeding. In Zimbabwe, on the other hand, the political and economic environment is deteriorating, and the very similar initiative launched by GLOPAG's people there has failed.

References

REFERENCES

Ansoff, H.I. (1965). Corporate Strategy. New York: McGraw-Hill.

Perreault, W.D. & E.J. McCarthy (2002). Basic Marketing: A Global-Managerial Approach. New York: McGraw-Hill Irwin.

Smith, D. K., Jr. (1985). Timing of entry/performance relationships: An exploratory investigation. Unpublished doctoral dissertation, University of Minnesota.

AuthorAffiliation

D.K. Smith, Southeast Missouri State University

Appendix

APPENDIX 1

CASE DATA RELATING TO PERFORMANCE MODEL

1. Macroeconomic considerations from the case:

For years, government had placed many restrictions (duties, tariffs, quotas, and so on) on the ability of companies outside of Nigeria to sell into the Nigerian market. NIPAG benefitted greatly from these policies. Over the last couple of years, however, government has greatly liberalized its policies and eliminated most restrictions on commercial activities in Nigeria of companies outside the country. Now, worldclass products (in terms of price and quality) are flowing into Nigeria from all over the world.

2. Industry characteristics:

As stated above, the case indicates that worldclass consumer products are flowing into Nigeria from all over the world. In other words, the approach NIPAG has used in the past (reduce costs by reducing active ingredients and debase brands manufactured in Nigeria by providing lower levels of performance) is not likely to succeed in the future.

3. "Environmental characteristics":

A. Company characteristics (that is, financial, human, and physical assets and operations).

Over the period 1991-1997, NIPAG pushed products out to buyers who were unable to pay. The result is that over 1.2 billion naira of non-existent and/or uncollectible accounts receivable was written off. When the three month long suspension on trading NIPAG shares on the Nigerian Stock Exchange was lifted, the value of an NIPAG share fell from 13 naira to 5 naira.

When Erasmus Adepo retired, nearly all of NIPAGs directors also stepped down. Many other senior managers just below the director level also left the company at this time.

NIPAGs employee benefits and compensation programs have not been updated in many years. Pay levels at NIPAG are 20-30% lower than at other leading companies in Nigeria. In addition, benefits provided to managers by NIPAG do not include features (for example, financial assistance in purchasing housing or cars) which are provided to managers by other leading companies in Nigeria.

The 5 factories NIPAG operates are all old and full of old equipment. NIPAG has no dedicated communications with major customers, and has very little ability to assess the internet as well. NIPAGs head office is also full of old equipment and technologies, and has very limited ability to communicate with the companies depots and customers, very little access to internet, etc.

At the most senior management level, directors are all located in a directors' wing, far from the managers who report to them. At the junior staff (that is, production workers) level, NIPAG has made no effort to organize cross-functional teams, even though factories elsewhere in the world have substantially improved performance and productivity by adopting cross-functional approaches.

NIPAG provides its own canteen and medical care and security services. Such services could be outsourced. The quality of services available from external third parties is higher than what NIPAG now has plus the costs would be considerably lower.

The attitude of a typical NIPAG employee is not "how can I improve the performance of the company" but "how can I enrich myself and my relatives and/or friends." Employees fear there is no future for them at NIPAG, do not feel challenged or motivated, and tend not to perceive that "coming to work" is a good thing to do.

In its factories, NIPAG has no programs focusing on safety, health, productivity, etc. Furthermore, NIPAG has no programs which reward employees who do care, do try, and do perform on key issues such as safety, productivity, quality of products produced, etc. In worldclass factories elsewhere, safety, health, and productivity are worked on intensively, and junior staff who perform on these issues can double their earnings. An unfortunate consequence of NIPAGs lack of attention to these issues is that NIPAG junior staff do not take responsibility for quality and production but their colleagues elsewhere in the world do. There is no peer pressure at NIPAG for employees to be on time or even show up for work. Furthermore, when shifts change, there is no coordination between employees coming off the line and those going on. The result is that lines are likely to come to a total halt as shifts change, thus reducing production and increasing the cost of products produced.

In the past, a regular flow of NIPAG staff overseas to gain experience, and overseas staff into NIPAG to ensure awareness at NIPAG of worldclass ideas and practices. At the time of the case, however, neither of these exchange programs was still functioning.

B. Competitor characteristics:

As indicated earlier, there are competitors in Nigeria who manufacture the same sort of products as NIPAG However, the really dangerous competitors and the ones to whom NIPAG is losing business are traders who purchase worldclass products produced at worldclass factories elsewhere in the world and then smuggle those products into Nigeria.

C. Customers

NIPAG has 850 direct customers, that is, wholesalers and large retailers. They are located in urban areas all across Nigeria.

Since the end of the oil boom, levels of income and spending for Nigerian consumers (that is, NIPAGs indirect customers) have fallen sharply.

4. Marketing strategy:

A. Target Market:

As indicated earlier, NIPAG has 850 direct customers, that is, wholesalers and large retailers in urban areas all across Nigeria. However, the target market is Nigerian consumers at all socio-economic levels but especially those at the middle and higher levels.

B. Product:

NIPAG sells 350 products, many of which are low-volume items which are costly to produce. Furthermore, these low-volume items are very disruptive of factory operations. To produce these items, NIPAG has to stop its production lines, clean its equipment, change ingredients, run small batches, and then stop its lines again and go repeat the entire process before beginning to produce the next product.

In response to deteriorating economic conditions (see "macroeconomic considerations") and its need to lower costs, NIPAG had reduced the active ingredients in many of the branded products it manufacturers in Nigeria. Consequently, the performance of these products is not as good as the performance of the worldclass products flowing into Nigeria from elsewhere. In other words, NIPAG has debased the value of its brands. Relative to worldclass products, value for money of NIPAG products is very low.

C. Promotion:

Historically, NIPAGs promotional budgets have been set at 3% of turnover. Because current turnovers are now approximately half of previous levels, NIPAGs total promotional expenditures and share of voice are dramatically lower than in the past.

D. Distribution:

NIPAG owns and operates 28 depots all around the country. This approach to distribution is very costly. While it would not have been possible ten years ago, it would now be possible for NIPAG to outsource the physical distribution and logistics functions to specialists. The quality of services offered by these specialists is higher than the quality of the distribution and logistics functions which NIPAG produces itself.

Because most NIPAG direct customers (that is, wholesalers and large retailers) are located in urban areas, the company's products are not widely available in rural areas. In many urban areas, on the other hand, multiple distributors are competing ferociously with each other. For example, NIPAG has six distributions in Jos, 4 in Maidugari, etc. In such situations, competition is intense, no one is making any money, and no one is very happy.

In Nigeria, distributors and large retailers arrange their own lines of credit, paying 4 or 5 points more than high-profile companies like NIPAG for similar credit facilities. NIPAG pumps products to them, works intensively on getting them to increase purchases, but does not assist in any way on arranging credit facilities.

E. Price:

As a result of the product debasing programs described earlier, value for money for NIPAG products is low compared with worldclass products entering Nigeria from elsewhere in the world.

5. Own-company tactics/implementation:

A number of issues relating to implementation and/or tactics have been raised earlier.

APPENDEX 2

CASE DATA RELATING TO THE "GROW THE BUSINESS" MODEL

1. Market penetration:

As indicated in Appendix 7, NIPAG has major distributors and/or large retail customers in major urban areas all across Nigeria. Thus, increasing market penetration in urban areas should be possible, given products which offer consumers high levels of performance and high "value for money." Unfortunately, the case also indicates that many NIPAG brands have been debased to the point where they do not offer high performance or "value for money." Thus, before mounting any effort to increase market penetration in urban areas, NIPAG may need to consider improving the "value for money" profiles of its products.

The case indicates that NIPAG products do not have a strong presence in rural areas. It seems likely that increasing market penetration in rural areas may require NIPAG to increase distribution and market coverage efforts in rural areas.

2. Product development:

The case indicates that NIPAG is manufacturing 350 products, some of which are low volume, high cost items. The case also indicates that the low-volume items can be very disruptive of factory operations. To produce these items, NIPAG has to stop its production lines, clean its equipment, change ingredients, run small batches, and then stop its lines again and go repeat the entire process before beginning to produce the next product.

3. Market development:

As indicated earlier, NIPAG has strong presence in many urban areas. However, NIPAGs presence in rural markets is weak. It appears that rural areas could represent an opportunity, if NIPAG can increase market coverage in rural areas. Another possible area of market opportunity for NIPAG could be exports to markets outside of Nigeria. However, because NIPAG has reduced the active ingredients in many of the branded products it manufacturers in Nigeria, the performance of these products is not as good as the performance of the worldclass products manufactured elsewhere. In other words, before pursuing export opportunities, NIPAG would need to ensure that the performance and "value for money" offered by NIPAG products is least as good as what is offered by worldclass products from elsewhere.

4. Diversification:

Because NIPAGs product line is already large (350 products), and because this large number of products already impacts negatively on the efficiency of NIPAGs factory operations and the cost of its products, it seems unlikely that moving into new products for new markets is a high-priority initiative for NIPAG at this time. Furthermore, since diversification is the riskiest of the business growth options (because firms pursuing diversification lack deep knowledge not only of the new products but also of the new markets), and given the huge problems NIPAG already faces, it seems unlikely that taking on additional high-risk opportunities is a high priority item on NIPAGs current agenda.

Subject: Profitability; Market strategy; Consumer goods; Packaged goods; Case studies

Location: Nigeria

Classification: 8600: Manufacturing industries not elsewhere classified; 9177: Africa; 7000: Marketing; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 77-91

Number of pages: 15

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216307639

Document URL: http://search.proquest.com/docview/216307639?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 57 of 100

THE OVERPAID STUDENT

Author: Schwab, Robert C

ProQuest document link

Abstract:

This case chronicles the experience of Cindy, a student employee in a mid-western university. She is an excellent worker and receives a generous wage increase which seems to violate the school's student wage scale. Her supervisor followed the appropriate exception procedures, but several supervisors and students suspect favoritism or political muscle has been at work. They are upset because their requests for wage increases for excellent student workers have been denied. Friction develops between best friends when one receives a large wage increase while the other does not. Is the organization equitably compensating its students, or is the system inherently flawed and unfair? Student interest in this case should be high because the wage scale under scrutiny (which focuses more on class standing than work performance) is commonly used in many schools. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

This short case focuses on the motivational and equity problems created by a student wage scale which is based on class standing rather than job demands or work performance. Fairness issues related to motivation, compensation, performance recognition and exception procedures are highlighted. The case has a difficulty level of three, and is best-suited for use in junior or senior-level courses in human resource management, organizational behavior or compensation. The case can be presented and discussed in about one class hour, and is expected to require about two hours of outside preparation by students.

CASE SYNOPSIS

INSTRUCTORS' NOTES

The Overpaid Student case illustrates many of the problems created when wage systems are developed which focus on seniority rather than work performance or job demands. Ask your students to read the case and prepare answers to the discussion questions or assign them into small groups and have them analyze the case and make recommendations to Peoria University. As you discuss the case, try to keep the class focused on the motivational and managerial issues that must be resolved at Peoria University. Since issues of pay equity and fairness permeate the case, expect lively class debates and differences of opinion.

DISCUSSION QUESTIONS

1. Evaluate the wage scale in use at Peoria University. What does a pay system like this encourage?

The wage scale seems to primarily reward students for their academic progress. Peoria University hasn't developed job descriptions for students, and there isn't any evidence that the pay categories are related to needed skills or task difficulty. Students can theoretically be assigned to any job. Pay category is determined strictly by who you are, not what you can do. As the case illustrates, the starting pay level for an inexperienced senior is equal to or higher than the best performing freshman or sophomore. This implies that the designers of the pay system thought that academic maturity and experience were worth paying for, but should we assume that all freshmen and sophomores deserve less pay, regardless of their experience, job demands or work accomplishments? Most students at the university work in jobs which have little to do with their academic or educational pursuits. Why then should class standing be used to determine a student's wage category?

The architects of this plan were not sensitive to the motivational implications of their pay system. They probably wanted a simple, uncomplicated pay scale which could be used by supervisors all across the campus. While this wage system is intuitive and easy to administer when students are first hired, it becomes problematic when students work hard and expect more recognition for their accomplishments.

The pay range within each wage category does offer some incentive to work because students who perform well may get a raise if their supervisor recommends it. However, students are likely to receive some pay increases anyway, because over time they will automatically advance into a higher "class," and thus qualify for a higher wage category. Theoretically, over three or four years, a mediocre worker should receive raises almost as large as those received by an outstanding worker. Unfortunately, mediocre students can receive pay increases whether they stay in their current jobs or switch to other positions within the university, because pay isn't tied to seniority in a position, but rather to class standing. Thus this particular wage system doesn't appear to encourage job stability or longevity.

While there is a wage progression within each pay category, the criteria for advancement are not clear. The whole process seems somewhat arbitrary. Supervisors can decide if and when they want to recommend pay increases. The timing and rationale for the raises are left up to them because there are no formal performance appraisal procedures or timetables for students. One would assume that pay increases would be justified on the basis of work performance or mastery of the job, but this isn't clear in the case. As long as a recommended wage adjustment remains within the appropriate class range, no official will question it. Wage adjustments that fall outside of the guidelines are possible, but they are extremely rare and require a strong rationale and top management approval.

In summary, the student pay system at Peoria University does not equitably recognize or reward students for their skills, their performance, or their job loyalty and commitment. It appears to be a wage scale of convenience for university supervisors, and is biased toward the most academically advanced students.

2. Did Cindy receive an appropriate wage increase? Why are some supervisors and students upset?

There is no question that Cindy was an excellent student worker and was entitled to be recognized as such. The problem occurred when her supervisor, Mrs. Wong, felt that her existing pay category (sophomore) was too restrictive, and sought to give Cindy an exceptional wage (outside of her pay category). Mrs. Wong felt it was inequitable to pay Cindy a sophomore rate while requiring her to perform difficult tasks that graduate students normally performed, but the exception was a clear violation of the wage system. When Mrs. Wong received permission to grant Cindy an exceptional raise, other supervisors also sought exceptions because they didn't want their excellent students to be disadvantaged. If it was ok for Mrs. Wong's workers to get exceptions, why not mine?

Theoretically, when wage exceptions are granted, those who have faithfully followed the pay scale will feel disadvantaged or cheated, and they will begin to ask for exceptions, too. If very many wage exceptions are granted, the integrity of the scale becomes compromised and the wage scale becomes meaningless. Thus, to maintain order, wage exceptions must be kept to an absolute minimum and must only be granted in highly extraordinary or unusual situations.

When Cindy received her exceptional raise while others were denied, a few supervisors suspected that favoritism was at work, and they aired their frustrations in places where their students could overhear. This fed the rumor mill and reinforced feelings of unfairness in the minds of some of the better student workers like Wendy, who were not as fortunate as Cindy.

One wonders which criteria were considered when Cindy's pay exception was granted while Wendy's was denied. Was there any consistency in how the exception requests were decided? Both students were reported to be truly excellent workers and both had made commitments to stay at their jobs through the summer. Was Mrs. Wong's story about Cindy taking over the graduate student's difficult job the deciding factor, or was it the fact that the departmental budget could afford the increase? We really don't know which criteria were considered "legitimate reasons" to compromise the wage scale, and we can only hope that the university business manager made these decisions in a thoughtful, consistent manner.

What we do know is that Wendy feels terribly wronged. She cannot understand why she is worth so much less than her friend Cindy. If Cindy had not received the exceptional wage adjustment, she would be earning $7.00 per hour, identical to what Wendy and most other high-performing sophomores are paid. No jealousy or animosity would have developed and the two would still be best friends. Similarly, if Wendy had received her exceptional wage adjustment she would not feel unfairly treated, she and Cindy would still be friends, and she never would have quit her job in the accounting department.

Thus, the exceptions and the unknown criteria used in making these decisions were probably what triggered dissatisfaction with the wage adjustments. If deviations from the pay scale are permitted, the criteria used for these exceptions must be well understood and the determination process must be transparent and consistently applied. In this way the university will be able to maintain a sense of wage equity, fairness and trust. Otherwise, exceptions and wage deviations should not be permitted under any circumstances.

3. Is there anything Cindy can do to defuse this situation? Help Cindy evaluate her options.

Cindy feels very bad about being at the center of this controversy. She doesn't think she has done anything wrong and feels she earned the wage adjustment that she received. It wasn't her fault that some wage exceptions were granted while others were denied. Yet, she's disturbed by the things that some supervisors and students have been saying about her and her supervisor, and now she's lost her best friend because of jealousy and unhappiness.

The class should discuss whether Cindy can do anything which might reduce her felt stress and improve the situation. She could simply tolerate the rumors and hope that things quiet down and her friends stop blaming her for their misfortunes. Cindy could go public and tell her friends about all the other students who are receiving exceptional wages. This would divert attention away from her, but it would probably make the supervisors and disappointed students even more angry and upset. It would also require divulging confidential job information which is ethically questionable, and could result in her being fired. She could quit her job and go to work somewhere else like Wal-Mart. Quitting would demonstrate to both her supervisor and her friends that she feels the wage system at the school is unfair. However, it would also cost her a job she really likes, and reduce her summer earnings by several hundred dollars. Furthermore, there is no guarantee that Wendy would see this as an act of solidarity and restore their friendship. Cindy could ask Mrs. Wong to reassign her to a different position and reduce her pay back to $7.00 per hour. This action would also send a strong signal to her friends and to her supervisor that she was uncomfortable being "overpaid" according to the wage scale. It would also result in the loss of several hundred dollars of summer income and most of her friends would probably think she was foolish to do this. Cindy is not in a position to change the wage scale, but she could suggest to Mrs. Wong that she has been under a great deal of stress as a result of the well-intentioned raise. Perhaps Mrs. Wong could be persuaded to press the university to redesign the wage system, or figure out some other way of recognizing and rewarding excellent work.

Students will generate many ideas and suggestions for Cindy, but they should realize that the problem is much bigger than Cindy. The actions she takes may deflect some of her felt stress and pressure, but unless the university redesigns either the wage scale or the exception process, other students will be subjected to similar pressures in the future.

4. Identify the issues that must be addressed by the university if these problems are to be avoided in the future.

What does the university really want to pay its students for? It doesn't seem logical to pay students based on their academic class standing when the nature of their work has little to do with the degree they are pursuing. The school needs to develop a wage system that is equitable and relevant to the work being performed. Should progression from lower to higher wage categories be based on job difficulty or seniority? If the most demanding and difficult jobs deserve to be paid the most, then job descriptions and job specifications need to be developed for all student positions. Each job could then be analyzed for difficulty and assigned to the appropriate wage category, and it would make no difference whether the position was filled by a freshman or a graduate student, the range of pay would be the same for anyone holding that job. On the other hand, if the school wishes to tie pay categories to seniority and long-term occupancy of a job, then the pay categories should correspond to increasing tenure or occupancy of a job ( less than one year, one to two years, two to three years, etc). Either of these progression systems would be more logical than what is currently in use at Peoria University. The seniority or job tenure system would be easier to create and implement, but the wage system based on job difficulty would be better at rewarding effort and job performance.

Next, the university should consider how to recognize outstanding job performance. The pay ranges within each pay category (beginning, midpoint, top rate) could be widened or elongated ($6.00 to $8.00) so that more increments were possible than just beginning, midpoint and top rate. This would give the supervisor greater flexibility in recognizing work excellence. If the existing pay ranges each went one dollar higher, Mrs. Wong may not have felt that an exception to the scale was necessary for Cindy. Similarly, Wendy would have received her raise to $8.00 per hour without question. If you believe in rewarding performance, there must be a significant number of possible steps or increments available in each pay category.

The case mentioned that exceptions were often granted for students who made a commitment to work through the summer months. If this is a major reason for the exception system, is it fair to tinker with wages to reward students for this? When student wages are raised by the exception policy, the rates don't drop back down when the summer is over. Thus, a pay exception based on a summer work commitment will be continued indefinitely, as long as the student continues in the job. Perhaps the school should offer these students a special "summer worker" scholarship instead. It would give students a significant reward for their summer commitment, but would not compromise the integrity of a wage system built to recognize job effort and performance. This would also eliminate most of the need for exceptions to the wage scale.

If these changes are implemented, a more equitable and consistent wage system should result. The exception process should no longer be needed. Supervisors will have greater flexibility and discretion in rewarding their outstanding workers, and students will have more incentive to perform their jobs well.

EPILOGUE

Cindy continued to work in the payroll office for the remainder of the summer. Wendy never was a close friend again and left Peoria University to pursue her studies elsewhere. Concerns about the unfairness of the exception system were partially addressed when the school began to offer all summer workers either a free class or reduced room and board in exchange for working through the summer. Exceptions were just about eliminated because most of the wage exceptions at the university had been granted in exchange for a commitment to summer work, not for outstanding work performance. To this day, Peoria University still uses a student wage scale based on academic class.

NOTE

The names of individuals and the organization have been disguised.

AuthorAffiliation

Robert C. Schwab, Andrews University

Subject: Raises; College students; Pay structure; Wage differential; Case studies

Location: United States--US

Classification: 6400: Employee benefits & compensation; 8306: Schools and educational services; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 93-98

Number of pages: 6

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

ProQuest document ID: 216307748

Document URL: http://search.proquest.com/docview/216307748?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 58 of 100

COLLEGE RECRUITING AT ORGSERVICES CORPORATION

Author: Richardson, Woody D; Smith, Brien N

ProQuest document link

Abstract:

The case follows, Jason and Patrick, two service area managers for OrgServices Corporation as they return to their alma mater to recruit for the company's Management Training Program. A senior-level Business Policy class constitutes their audience for the presentation. OrgServices is the largest uniform provider in the United States with sales of over $2 billion in 2001. Jason and Patrick briefly present a description of OrgServices and its outstanding achievements (e.g. over 20 consecutive years of growth in revenues and profits, making Fortune's list of Most Admired Companies, etc.). They project that the company will expand its workforce from its current level of 20,000 to 39,000 in 10 years. They also describe the 2-year Management Training Program open to all business majors where trainees rotate through all aspects of the business. At the close of the presentation only 3 students pick up information on the company leaving Jason and Patrick to wonder what went wrong. Patrick and another alumnus of the University were scheduled to visit a junior-level class in one month. As the case closes the two are in a quandary over what if anything should be done differently for their next visit to campus. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The case presents a good springboard for discussing the recruitment process in general and to illustrate the level of students' interest in less well-known organizations. The case also demonstrates the common practice of sending employees to their alma maters to recruit. The case presents a good opportunity to explore student's expectations regarding the job market in general and their specific desires regarding a suitable employer by evaluating the presentation of OrgServices. You may ask students to visit your own career center or one of the many websites providing salary information to obtain salary ranges for jobs of interest to each of the majors represented in your class. This may serve as a "reality check" for many of the students who have not been collecting this information. This case is intended for use in an Employee Selection class in a discussion of recruitment practices; therefore its difficulty level is a three (junior-level). The case is short enough to be easily covered in one class period or as apart of class period if using a recruitment lecture. Alternatively, the case can be used early in the Business Policy or General Management course to stimulate discussion of job-related topics. In either case the case should require less than 1 hour of outside preparation by students.

CASE SYNOPSIS

At the close of the presentation only 3 students pick up information on the company leaving Jason and Patrick to wonder what went wrong. Patrick and another alumnus of the University were scheduled to visit a junior-level class in one month. As the case closes the two are in a quandary over what if anything should be done differently for their next visit to campus.

INSTRUCTORS' NOTES

Case Development and Teaching Approaches

This case was developed through one of the author's personal experience. The case material tracks very closely the actual presentation made by Jason and Patrick in the class. The name of the organization and individuals were disguised at the company's request.

This case is intended for use in an Employee Selection class in a discussion of recruitment practices. Alternatively, the case can be used early in the Business Policy course as "reality check" for those students nearing graduation. The case is short enough to be easily covered in one class period or as a part of class period if using a recruitment lecture. The case is not designed to encompass a review of the corporation's entire recruitment strategy, but to illustrate the students' level of interest in less well-known organizations.

The case can be used for a general discussion of the recruitment process and the role of campus visits in particular. Employee Recruitment is an area of study that has come into its own in the previous two decades. Until recently researchers have not attempted to measure a number of important process, intervening, and outcome variables. It has become clearer that recruitment is a pivotal step in the overall success of any employee selection initiative. For a current review of the recruitment literature see Breaugh and Starke (2000). You may then walk the students through the process as it explicitly or implicitly applies to OrgServices Corporation. Additionally, based on their own perceptions of what it would be like to work for OrgServices, students could describe what kind of information they would need before considering a job offer there or anywhere. Students could then describe the demographics and qualifications of the recruiter needed to convey this information. Finally, the students could describe the key components of the recruitment presentation that OrgServices should consider using.

The case also offers students the chance to role-play the parts of Jason and Patrick with the class. Alternatively, you may ask students to assume the roles of Patrick and Ann in order to design the presentation for their next visit. After hearing a brief presentation by the participants, you may have the class express whether they would pick up information on the company. Have each of the groups (interested vs. not interested) break into discussion groups to outline their rationale. Then have both groups place their rationale on the board to facilitate discussion with the entire class.

The case also presents a good opportunity to explore student's expectations regarding the job market in general and their specific desires regarding a suitable employer. You may ask students to visit your own career center or one of the many websites providing salary information to obtain salary ranges for jobs of interest to each of the majors represented in your class. This may serve as "reality check" for many of the students who have not been collecting this information. It may also be instructive to have the students visit the U.S. Bureau of Labor Statistics website (listed below) to view industries and occupations with the largest job growth. Additionally a review of Fortune's list of the "Fasting Growing Companies" may also be enlightening regarding job prospects.

QUESTIONS FOR CLASS DISCUSSION

1. Why were the students so uninterested in this opportunity? What are you looking for in a fir st job?

These open-ended questions elicit a number of responses from students and are a good way to kickoff the class discussion for this case. Our students offered the following comments in the next class meeting following the presentation. Many of the students expressed surprise that the presentation centered so much on the company, its products, and its future potential. Most students would have preferred more specific comments concerning pay, benefits, promotion, and location. The students specifically commented on how they related to the presenters being graduates of their institution. The typical comments were, "It made me feel that if they can do it, so can I", or "It made me feel confident that I could get a job with my degree".

Students specifically remarked on how the job opportunities at OrgServices did not meet their stereotype of an ideal job right out of college. One student remarked, "I really hadn't thought much about the kind of company I want to work for". Moreover, the students agreed that they were in their senior year and more than half of the class had not done any advanced preparation for a job. In this regard, the educational institution had failed the students by not specifically confronting their attitudes and perspectives concerning the job search.

Students didn't appear to be sure what they were looking for. Although they were not willing to admit it, it seemed as if they were willing to go to the "highest bidder" salary-wise. Absent more specific salary information, then "folding towels" right out of college didn't sound attractive. Students seemed unprepared to demonstrate how they would add value to a prospective employer. Rather, they felt that the value should be evident in the college degree.

2. What specific information do you look for when evaluating the attractiveness of a job opening? Did Patrick and Jason's presentation provide this information?

These questions serve as a follow-up to the discussion generated by the questions above. It gives the professor a chance to tailor the case to their own institution's students. In terms of the actual recruitment message, the breadth of knowledge conveyed, specificity of information provided, and timing of communications are all-important variables that should be mentioned by students. During the job search process, external applicants are seeking specific job-related information on such issues as starting salary, benefits, raise determination, career advancement, and the success rate of new hires. Recruitment sources that do not meet applicant's expectations in these areas are seen as "lacking professionalism" and cause disinterest in the applicant. Even in cases where the recruiter tries to convey specific information, they may fall short in unsuspecting ways. For example, applicants desire more specific information than "competitive salary range", and the need for uncertainty avoidance may stimulate applicant disinterest. Furthermore, when the job or company is less well known the specificity and timing of information becomes critical. More well known companies may benefit from earlier recruitment and job offers than companies who are lesser known.

When answering this question information provided by students will vary, but regardless of the responses students should be pressed to provide the rationale for their answers. What are they looking for, a job or a career? How important are salary, benefits, training, advancement, etc. Their responses may be divided into job-related and company-specific information. Examples of company-specific information include the history, products/services offered, and growth prospects. Students may also point out that company success is important. Jason and Patrick pointed out that sales and profit growth over the past 20 years had been exceptional as has the stock performance. The company had also been recognized by Fortune magazine as one of the Most Admired Companies. Better students should point out that just because you may not have heard of the company does little to lessen its accomplishments. OrgServices may be less well known than other companies, thereby requiring a little more information on company-specific items. In this regard, the recruitment message needs to be informative enough to address the students need to overcome information ambiguity. When it comes to job-related information desired by students they will readily point out that salary, benefits, raise determination, career advancement, and the success rate of new hires would be appropriate. Students may be directed to search http://salary.com for salary information by field and desired work location. This helps give students some perspective on the salary range for management trainees mentioned in the case. Some students feel Jason and Patrick's comment that "selection into the program is competitive with salaries starting in the mid-30's" may have been a little too vague, but students should be pressed to consider the applicant's qualifications and its affect on starting salary. The content may have been better served if it had addressed more areas of student concern including benefits, and how raises are determined, but given the relative unfamiliarity with the company this was not practical. Better students will point out that well-known companies have the luxury of dispensing with much of the company-specific information and concentrating on job-related items.

3. What recruitment objectives and strategies would be appropriate for a company like OrgServices?

The early stages of recruitment should speak to a number of key organizational variables that are critical to the success of human resource selection. These variables are specific to the organization's context and many should be considered consistent with overall corporate strategy. These variables include cost and speed of filling jobs, number of applicants, desired diversity of applicants, historical ratio of offers to acceptances, retention rate, and job performance variables. Specifically, the company would need to determine what variables are significantly related to successful employee performance, satisfaction, and overall retention. Recruitment objectives dictate the who, how, and when of recruitment procedures that follow, and are an indispensable first step. Once objectives have been identified, consistent recruitment strategies are developed. A typical organization views recruitment as a vehicle toward increasing the applicant pool at a minimal cost.

If you performed the lecture on recruitment, students will tend to answer this question by restating the variables including cost and speed of filling jobs, number of applicants, diversity of applicants, historical ratio of offers to acceptances, retention rate, and job performance variables. Given the growth prospects for OrgServices the sheer number of applicants possessing management potential is an important objective. Therefore, a source that promises to yield those applications would be highly desirable. College recruitment efforts would be part of a larger effort including newspapers, employee referrals, and direct applications. The objectives and strategies for the recruiting effort would be set by the corporate-level human resource department at OrgServices. Patrick and Jason were merely the instruments of the implementation of the company recruitment strategy. However, one can infer that given the growth projections, OrgServices would need a broad-based approach. Their willingness to consider all majors for the management training program is in keeping with this approach.

4. Were you surprised at the growth projections presented for OrgServices? What other industries do you think are projected to grow in employment?

Students are usually surprised by the growth of OrgServices? The U.S. Bureau of Labor Statistics tracks information related to job growth that you may want to share with students or have them retrieve on their own at http://www.bls.g0v/emp/h0me.htm#tables. The Computer and data processing services industry is projected to grow at an average rate of 6.4% between 2000-2010 followed by Residential care (5.0%), Health services (4.6%), Cable and pay television services (4.2%), Water and sanitation (3.8), and miscellaneous business services (3.7%). It is also sobering for college students to note the fastest growing occupations found at this website. Food preparation, customer service reps, registered nurses, retail salespersons, computer support specialists, cashiers, office clerks, security guards, software engineers, and waiter and waitresses are listed as the fastest growing occupations through 2010. Additionally, the website has a detailed list of employment changes by Standard Industrial Classification Code. This allows students to focus on specific industries of interest.

Fortune's list of "Fastest Growing Companies" provides an additional source of information that students may use to gauge their own aspirations with the opportunities in the marketplace http://www.fortune.com. This information combined with headlines of layoffs at America's largest companies may serve to educate students regarding the sources of new jobs. Additionally, a list of companies recruiting on your campus might be used during this discussion.

5. Were Patrick and Jason appropriate choices to be recruiters?

Research suggests that the recruiter has a strong influence on the outcome of the recruitment process. Unfortunately, research also indicates that companies devote little or no training to their recruiters (Rynes & Boudreau, 1986). Among those that do train, about thirty percent of the time is devoted to interpersonal skills training, whereas only about ten percent is given to developing actual recruitment content.

The role of the recruiter is especially important because candidates use the recruiter as signals of unknown organizational attributes. Information that is conveyed should come from a credible source, and be job positive. To be persuasive applicants need to perceive that the recruiter has considerable expertise and is trustworthy. Applicants who perceive recruiters as personable and informative also view the prospective employer as attractive. Typically recruiters are defined according to demographics and functional job held. With respect to demographics, applicants may develop more positive attitudes when the recruiter is similar to them demographically (gender, ethnicity, and age). However, as a caveat to demographics, research has concluded that experienced recruiters leave a more favorable impression among applicants. As for functional job held, recruiters who are job-incumbents appear more credible. Human resource specialists who recruit for all units are often seen as less trustworthy than actual job incumbents. Additionally, recruiters should convey realistic job information as first year retention rate among new hires may be related to a perception of employer honesty during the recruitment process.

When answering this question, the student's initial response to this question tends to focus on the recruiters' familiarity with the school and its student body and their ability to relate to the students. You may have to prompt the students to comment on Patrick and Jason's credibility, trustworthiness, and expertise. Research suggests that the functional job held, demographic match, and the realism of the presentation are important variable in stimulating applicant interest. Having successfully completed the management training program and currently working as service managers bolsters Patrick and Jason's credibility and trustworthiness. Their candor regarding "going to college to fold clothes" also enhanced the realism of the presentation. Although the demographics of the class were not included, students may reasonably fault OrgServices for sending two males to do the recruiting. Students should also point out that race and age would also influence the recruiter's credibility. Patrick and Jason's race and age were not explicitly identified in the case, although most students assume them to be young because they graduated four years earlier. Students who assume that Patrick and Jason were young may be reflecting a bias toward non-traditional students. Better students will point out that four years experience (two of which were in management training) may indicate limited experience in recruiting. It also may mean that students view the recruiters' short tenure as a lack of expertise thereby offsetting the credibility of the pair.

6. Why do companies send employees to their alma maters to recruit? Is this a sound practice?

Better students will also point out that this time-honored practice has some solid rationale behind it. Consistent with the comments presented in Question 1 earlier, recruiters from the students' alma mater get the attention of the students and provide a certain degree of credibility and trustworthiness to the recruitment presentation. Additionally, when setting recruitment strategies, many organizations have used source tracking techniques to help correlate recruitment sources with any number of "post-hire" outcomes. These include cost and speed of filling jobs, number of applicants, diversity of applicants, historical ratio of offers to acceptances, retention rate, and job performance variables. Based on the objectives set in these areas, it makes theoretical and economic sense for employers to return the source of its past successes in recruitment and selection.

7. What should Patrick do differently in his next visit?

Some students may argue that nothing needs to be changed until Patrick makes an additional visit to see if the next class has a similar response. Overall, Jason and Patrick appear to have done a good job of presenting OrgServices to the class. Their comments regarding their reaction to "folding clothes" as a college graduate constituted a realistic job preview. Furthermore, students may point out that the addition of Ann from HR improves the demographic diversity and the recruitment expertise level.

Students advocating changes for the next visit will base their recommendations on their earlier responses to what they are looking for in their own job search. Students may argue that the presentation should cover more specific information such as vacation time, health benefits, a narrower salary range, and other specific perquisites. These students should be challenged to provide ideas on how to overcome the relative obscurity of OrgServices in order to "free up" the time for the additional information the student desires. Additionally, some students may perceive the presentation to be more professional if the recruiter has used a software presentation package rather than overhead transparencies.

EPILOGUE

Patrick and Ann visited the Professor's class the following month and received much greater interest from the students. The same basic information was delivered with the assistance of PowerPoint slides. OrgServices continues to recruit on campus by providing class speakers and participating in Career Center activities.

Footnote

NOTE

While based on real events the company and individual names have been disguised at the company's request.

References

REFERENCES

Breaugh, J. A. & M. Starke. (2000). Research on employee recruitment: So many studies, so many remaining questions. Journal of Management, 26(3), 405-434.

Rhynes, S. L. & J.W. Boudreau (1986). College recruiting in large organizations: Practice, evaluation, and research implications. Personnel Psychology, 39, 729-757.

AuthorAffiliation

Woody D. Richardson, Ball State University

Brien N. Smith, Ball State University

Subject: Recruitment; Management training; Colleges & universities; Service industries; Case studies

Location: United States--US

Classification: 8300: Other services; 6100: Human resource planning; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 99-106

Number of pages: 8

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216302524

Document URL: http://search.proquest.com/docview/216302524?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 59 of 100

SCHOOL OF BUSINESS REVISES ITS MISSION STATEMENT

Author: Medlin, Bobby; Green, Ken, Jr; Stark, Carl

ProQuest document link

Abstract:

Students are provided with a management scenario in which the dean of a university school of business has determined that the school's mission statement must be revised and improved in terms of completeness and quality for purposes of meeting accreditation requirements and reestablishing a strong sense of unity of direction on the part of the school's faculty and staff. One of the faculty members has been assigned the task of facilitating the mission statement improvement process which incorporates 1) assessment of the completeness of the existing statement by faculty and students of the school of business, 2) participation in a brainstorming, multi-voting process designed to rectify noted deficiencies in the statement, 3) a revision of the statement and finally 4) a reassessment of the new statement. Students are asked to apply this mission statement improvement process to the current mission statement for their university. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns implementation of a process designed to improve an existing mission statement in terms of completeness and quality. Students use a mission statement evaluation scale to identify deficiencies in an existing mission statement and adopt a TQM based brain storming, multi-voting approach to rectifying the deficiencies. The case depicts a university business school in the process of reviewing and improving an existing mission statement for purposes of satisfying accreditation requirements and improving program and service delivery processes. The case is designed to be taught in approximately three class hours.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Recommendations for a General Teaching Approach

The process described in the case has been used in a Management/Organizational Behavior class to specifically illustrate a formal method of mission statement evaluation. The case is equally applicable to senior level courses in Strategic Management. The case is designed to be used in two, fifty-minute class sessions (though it could certainly be used in two ninety-minute classes as well). It requires students to evaluate both the process of mission statement evaluation and revision (as described in the case) and the subsequent results (as appear in the case). In addition, students are asked to apply this process to the mission statement of their own college or university.

Though there are numerous approaches to using the case, a general instruction approach would be as follows:

1 . Make sure students have read and prepared for the case prior to the class discussion. During the first half of first class period, have students discuss the five areas listed in question one as they apply to the activities in the case.

2. Approximately halfway through the first class period, provide students with a copy of the mission statement of the university. Have students use the Mission Statement Evaluation Scale (as provided as an Appendix in the case) to evaluate the mission of the university. Students should be familiar with how to apply the scale from their work analyzing the case. Scores for each individual area included in the scale as well as an overall score for the mission statement should be calculated. The instructor should tabulate the results, identify the two lowest-score areas and an overall mission statement score, prior to the next class period.

3 . Under the direction of a facilitator, attack each deficient area (average score below 5) using a brainstorming, multi-voting technique designed 1 ) to generate a maximum number of ideas related to improvement from all participants and 2) to build a consensus concerning which of the ideas should actually be incorporated in the improved mission statement. The work done during this portion of the process impacts the quality of the mission statement. The technique follows a specific process:

a. Carefully describe the area of concern and ask all class participants to focus solely on improvement in that area.

b. Ask class participants to list three ideas that they believe will correct the deficiency.

c. Poll participants and list each idea until all ideas are exhausted.

d. Divide the total number of ideas by three to determine the initial number of votes to be allocated to each class participant.

e. Ask participants to consider the list of ideas and vote for those they believe merit remaining on the list.

f. Tally the votes and remove ideas receiving none or only a few votes from the list.

g. Divide the number of remaining ideas by three to determine the number of votes to be allocated,

h. Again ask class participants to multi-vote.

i. Tally the votes and rank the remaining ideas ranked from high to low.

j. Ask class participants to consider the top three to five ideas,

k. Ask participants, "If these ideas are incorporated into the mission statement, are you satisfied that the mission statement will be improved in terms of completeness and quality?"

4. Have students discuss the suggested changes to the mission statement in terms of the items listed in question 1. at the end of the case.

ANSWERS TO CASE QUESTIONS

1. Discuss the value of the mission revision process described in the case in terms of:

a. The improvement in completeness of the mission statement.

Note that the completeness score improved from 61% to 92% after completion of the revision process. Note also that all individual item scores improved, not just the four specific deficient items subjected to the revision process. The revision process resulted in a significantly more complete mission statement.

b. The improvement in quality of the mission statement.

Quality improvement depends heavily upon the efforts of the facilitator and participants during the brainstorming, multi-voting portion of the revision process. This specific technique is designed to draw an exhaustive list of potential improvements from all participants and to develop a consensus among the participants concerning which specific ideas should be adopted.

c. Increased familiarity with the organization's purpose and vision on the part of the process participants.

Note that all faculty and staff members were included and necessarily participated in the revision process. All reviewed and evaluated the existing mission statement and all provided and voted on specific ideas for improvement. This type of participation served to remind long time faculty and staff members of the contents of the existing mission and of potential revisions. Additionally, newer faculty and staff members should have become thoroughly familiar with the contents of and potential revision to the mission statement.

d. Increased internalization of the organization's purpose and vision on the part of the process participants.

Faculty and staff members participating in the process should come away with a sense of ownership in the mission. It is one thing to read the mission statement and quite another to participate in its development. Such participation should result in an internalization of the mission statement by both faculty and staff members. Such internalization should increase the probability that all actions by those members will be aligned with the school's mission.

e. Implications of internalization on the organization's long-term performance.

Internalization of the school's mission should serve to focus all school members on the purpose and vision of the school. All resulting activities undertaken by the members should be directed toward fulfillment of the stated mission. It is, therefore, reasonable to conclude that improved organizational performance will result from such internalization.

2. For your university's mission statement, use the Mission Statement Evaluation Scale to:

a. Assess the completeness of your university's mission statement.

This assessment should emphasize the primary components of a mission statement (purpose and vision) and the nine specific areas that should be discussed in a complete mission statement.

b. Summarize the results of the evaluation and compute item averages and an overall completeness score.

Summarization should serve to provide overall and item scores that facilitate an overall evaluation of completeness and identification of areas of deficiency.

c. Rank the areas from low to high according to area means. Note the areas with scores of less than 5.00.

This step should assist in identifying the specific areas were improvement is most needed. Rather than attempting to generally improve the statement, this ranking focuses the improvement efforts.

3. Apply the brainstorming, multi-voting process to improve top two areas of deficiency. Revise the mission statement to reflect the results of the brainstorming, multi-voting process.

Once specific deficiencies have been identified, this process provides a structured approach that results in improvement. Through their participation, students both learn about and gain experience in the application of the brainstorming and multi- voting techniques.

4. Reevaluate the revised mission statement using the Mission Statement Evaluation Scale. Compare the results of the initial evaluation and the réévaluation noting any improvements.

This step affords students an opportunity to quantify the improvement in the mission statement that results from their efforts. Hopefully, at this stage students will conclude that the mission statement has been improved both in terms of completeness and quality as a result of their efforts in following the mission statement revision process.

AuthorAffiliation

Bobby Medlin, Henderson State University

Ken Green, Jr., Henderson State University

Carl Stark, Henderson State University

Subject: Business schools; Mission statements; Accreditation; Revisions; Case studies

Location: United States--US

Classification: 9190: United States; 8306: Schools and educational services; 2310: Planning; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 107-111

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

ProQuest document ID: 216292066

Document URL: http://search.proquest.com/docview/216292066?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 60 of 100

BIG FLICKS STUDIO: A CASE ANALYSIS OF EQUITY STRUCTURING POLICY AND EARNINGS MANAGEMENT

Author: Mason, Richard; Mills, John; Bible, Lynn

ProQuest document link

Abstract:

Corporate structuring has provided management with many opportunities to shape earnings. This case involves the evaluation of a joint venture for funding motion picture production and provides a means for students to see the impact of such a creation on earnings, while staying within the bounds of existing accounting rules. It also provides the instructor with the opportunity to discuss the market and ethical considerations involved in earnings management for a publicly traded firm. Actual situations and accepted practices used in the entertainment industry were used in the case design. Alternative financing choices are demonstrated that impact on the corporate bottom line. Specifically, at issue is whether to set up a joint venture as a basis for improving short-term earnings. Instructors may use this case to provide students with a basic understanding of the use of special purpose entities as a précis for a discussion of the Enron situation. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case is an evaluation of the impact on earnings that can result from forming a separate subsidiary joint venture and the use of the equity accounting method. The main objective is to help students realize that there are various ways that management can adjust earnings to provide different outcomes with the same underlying business performance. Secondary objectives include helping students understand the nature and complexity of the structured finance decision and the various conflicting managerial motivations involved in such a decision. Students are also given an understanding of the market effects that may drive earnings management. The case provides a good example of the effects of the equity method of accounting and is suitable for use when presenting the equity method. This case is appropriate for an upper-division undergraduate financial accounting course, an accounting MBA or MAcc course or even a finance course. Level of difficulty would be four or five on a ten scale. The case is designed to be discussed in one anda half hours and should take students no more than two hours of outside preparation.

CASE SYNOPSIS

INSTRUCTORS' NOTES

RELEVANT STATEMENTS ISSUED BY THE FASB AND SEC

Both the FASB and the SEC have had many meeting and discussions on defining what is appropriate for disclosure of consolidated financial statements. The FASB currently has two exposure drafts that address consolidation issues. (Consolidation of Certain Special-Purpose Entities-an interpretation of ARB No. 51; and, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others-an interpretation of FASB Statements No. 5, 57, and 107). . These interpretations attempt to clarify when an SPE should be consolidated. The FASB has also issued several standards regarding the disclosure of certain transactions. For example see SFAS No. 5, Accounting for Contingencies, SFAS No. 57 Related Party Disclosures, and SFAS No. 129, Disclosure of Information about Capital Structure. In addition, the FASB Emerging Issues Task Force (EITF) has issued 13 statements on off-balance sheet financing to help accountants determine the proper financial reporting of transactions.

The accounting literature regarding SPE consolidation is found in materials issued by the EITF: EITF No. 90-15, Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions; EITF No. 96-21, Implementation Issues in Accounting for Leasing Transactions involving Special-Purpose Entities; EITF Topic No. D-99, Questions and Answers Related to Servicing Activities in a Qualifying Special Purpose Entity under FASB Statement No. 140, and EITF Topic No. D- 14, Transactions involving Special-Purpose Entities.

The SEC is also seriously evaluating disclosure requirements. In a speech before the Committee on Banking, Housing and Urban Affairs, United States Senate, SEC Chairman Harvey L. Pitt stated that "investors need to know more about liquidity risk, market price risks, and effects of 'off-balance sheet' transaction structures. MD&A should mandate specific disclosures by companies concerning transactions, arrangements and other relationships with these unconsolidated entities, or other persons, when they are reasonably likely to have a material effect on a company's liquidity, its capital resources or its requirements for capital." The SEC responded by issuing Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations. This statement discusses three disclosure requirements within the MD&A that the SEC believes should be improved upon: (1) "liquidity and capital resources, including off-balance sheet arrangements;" (2) "certain trading activities involving non-exchange traded contracts accounted for at fair value; and" (3) "relationships and transactions with persons or entities that derive benefits from their non-independent relationship with the registrant or the registrant's related parties."

RELEVANT STATEMENTS FOR FINANCIAL REPORTING IN THE FILM INDUSTRY

The FASB initially issued SFAS No. 53, "Financial reporting by producers and distributors of motion picture films" in 1981. At that time, the majority of a film's revenue resulted from the distribution to movie theaters and free television. Since the issuance of SFAS No 53, numerous additional forms of exploitation such as home video, satellite and cable television, and pay-per-view television have either come into existence, or have become far more meaningful as revenue sources. As a result, the FASB rescinded SFAS 53 and now requires film producing companies to use the AICPA statement of position SOP 00-2, Accounting by Producers or Distributors of Films.

The application of SOP 00-2 requires the film company to recognize 100% of any expected ultimate loss on a film in the year of release, and to recognize the profits for a film expected to be profitable over the revenue producing life of the film (not to exceed 10 years). The application of this rule accelerates losses into earlier periods and defers profits until earned. Such an approach provides managers with an incentive to look for ways to smooth the uneven and uncertain earnings that can result. An additional aspect of the application of recognizing the losses up front is that the film library, i.e. films released in earlier years, throws off annual gross profits. In effect, once a film studio stops releasing new films, only the profits from prior releases remain to be recognized.

SUGGESTED SOLUTIONS TO THE BIG FLICKS CASE

Students can readily access some of the latest form 10-K public filings for public limited partnerships in film financing through the Securities and Exchange Commission's EDGAR database. Most structured financings are done by means of unregistered, i.e. non-public, securities, so the ability for students to see some "real-life" documents that relate to transactions of this nature is a plus in using this exercise. Having students either learn to access the EDGAR database, or reinforce these skills, is a nice corollary benefit of this case. The 1996 form 10-K for Delphi Film Associates V provides a good example of the Picture Partners structure. An example of a more complex structure can be found by searching for the public filings of ML Delphi Premier Partners.

The material used in this case has been greatly simplified from the actual structures of this type of transaction for pedagogical purposes. We have also used a flat 35% tax rate for the exercise, and have deliberately omitted what can be extremely complex tax motivations from the exercise so the exercise can be completed in a one and a half hour class session.

QUESTIONS AND SOLUTIONS

1 . How does SOP 00-2 require film producers and distributors to treat "loss" films? How does SOP 00-2 require film producers and distributors to treat "profitable" films? Prepare an income statement in accordance with SOP 00-2 for the five years of anticipated revenues (years 2002-2007) for Big Flicks. This should include earnings per share (EPS) data.

View Image - Big Flicks Earnings (in millions)

2. Prepare an income statement in accordance with SOP 00-2 for the five years of anticipated revenues (years 2002-2007) for Picture Partners. Keep in mind that the Picture Partners is not a taxed entity and that profits flow through to the parent companies. Then prepare an income statement for the five years of anticipated revenues (years 2002-2007) for Big Flicks. The equity method is used to record transactions from its participation in Picture Partners. This should include earnings per share (EPS) for each year.

3. The normal price earnings ratio for the film industry is 15 times annual EPS. Prepare a chart of the potential stock price and overall market capitalization of Big Flicks for the five-year period under both Alternative #1 and #2.

Note that year 1 EPS would be reported as $1.04 per share without Picture Partners. With Picture Partners, Big Flicks is able to report EPS of $1.50 for year 1. This occurs because half the loss on The Houston Story is passed onto Filmvest through the Picture Partners. Taking the five-year period as a whole, Big Flicks reports less earnings because half of the profit on The Tax Master is also passed to Filmvest through Picture Partners. This occurs if only one transaction of this type is entered into. By entering into a series of transactions Big Flicks can defer the negative impact well into the future. We have also ignored the present value effect of the negative impact. Depending upon the cost of capital to Big Flicks a Picture Partners transaction may result in a "real" gain despite the reduced earnings reported over the five-year period. Putting this point another way, does the value to Big Flicks in "real" terms of a higher current market capitalization, with its attendant ability to impact on other capital pricing matters, out weigh the cost of an earnings reduction spread out over the following four years? These points can be used to sensitize accounting students to the impact that reported earnings may have on firm capital pricing in the market, reinforcing the conceptual relationship between corporate finance and accounting matters, and illustrating the importance of accounting matters to firms.

It is important to realize that the market may or may not be viewed as efficient in the sense that the market is able to see through transactions such as Picture Partners. However, the prevalence of these structured financing arrangements leads to the conclusion that managers do not believe the market can readily see through these types of transactions. As accountants, it is critical for us to understand the motivations for and the implications that these arrangements can have on firms. To illustrate the potential effects of entering into Picture Partners for Big Flicks, the example now introduces some potential market effects of the arrangement. Again, for pedagogical purposes we have made the example very simple and again note that realism has been sacrificed to simplicity for illustrative purposes.

After year 1 , the Big Flicks stock price will be $15.60 per share ($ 1 .04 x 1 5) without Picture Partners and $22.50 per share with Picture Partners. This represents a potential net gain of $6.825 per share in market value, or a total market capitalization increase of $68.25 million.

Note, that without the production of additional films for year 2 Big Flicks will report less earnings, $21.45 million versus $23.4 million. This would result in a decrease in EPS for year 2 of $. 19 per share corresponding to a market capitalization decrease of $29.25 million. However, at the end of the second year Big Flicks is still $39.05 million ahead in market capitalization.

Again assuming no new film production in year 3, Big Flicks assuming P would again underreport by $. 19 per share and potentially lose another $29.25 million of market capitalization. However, Big Flicks is still net ahead after three years by $9.8 million in cumulative market capitalization.

It is not until year 4 that Big Flicks would actually feel the effects of having entered into Picture Partners. Note the cumulative decrease in market capitalization of $19.5 million. What can Big Flicks do to offset the ultimate negative effects of participating in Picture Partners? After all, Big Flicks has given up some $5 million of gross profit over time ($160-155) and $48.75 million in net market capitalization. The net decrease in market capitalization is equal to 15 times the after-tax lost profit of ($5 million times 65% = $3.25 million times 15= $48.75 million). They can enter into another Picture Partners and continue to defer the reversal into the future. Additionally, if there are real losses on the films the outside partner in Picture Partners and any subsequent entities may bear a real cost and Big Flicks would pick up a real gain. However, if managers hold a short-term orientation, arrangements such as Picture Partners can be very attractive.

4. As the CFO of Big Flicks, you know that film production and distribution can result in potentially volatile earnings. Provide arguments for maintaining the current corporate structuring versus creating Picture Partners. What are the financial concerns of each alternative?

Arguments for entertaining the structured financing are: First, earnings can be smoothed and increased in early periods and allow a measure of control to reported results. The market tends to reward firms with predictable and rising earnings with higher multiples than firms with volatile and unpredictable earnings. Accordingly, there may be a disproportionately large beneficial effect to Big Flicks from entering into Picture Partners type arrangements.

Second, in the event of a series of unsuccessful films Big Flicks may receive real economic gains from having an outside entity bear some of the risk associated with the film projects.

Third, the monies provided by the outside partner are not on the Big Flicks balance sheet and may provide Big Flicks with additional operating flexibility in running the business. It may also aid Big Flicks in maintaining its financial ratios under bank loan arrangements.

Fourth, the increase in the firm's market capitalization may aid the firm by providing additional financing sources in the capital markets.

Arguments for not entering into a Picture Partners type arrangement are: First, the firm owes a fiduciary responsibility to constituencies to provide financial reports that actually reflect the results of the firm's business and do not result from creative financing structures.

Are structured financings a breach of this duty and therefore unethical?

Second, structured transactions are time consuming and may distract managers from pursuing more lucrative "real" business opportunities.

Third, structured financings can be costly bearing high initial and frequently ongoing transaction costs. These transactions can cost upwards of 10% of the capital involved for attorneys, accountants, and various investment-banking fees.

Finally, let us now consider the decision to enter into Picture Partners from the perspective of a Big Flicks executive with 30,000 vested stock options to acquire Big Flicks at $20 expiring in year 1. Also assume this executive has personal gain as his primary motivation for action.

Entering into the Picture Partners can boost year 1 earnings by $.46 per share and the market price of the stock from $15.60 to $22.43 per share. At $15.60 per share the executive's options are worthless. At $22.43 per share the executive's options are worth $72,900. This potential effect when viewed across a group of senior managers can be a large incentive.

It is likely that personal impact on executives may be a driver of decisions to enter into transactions that provide short-term benefits. An executive group with personal stakes in reported firm performance may be easily tempted to participate in transactions that provide increased reported earnings over short-term horizons irrespective of whether the transactions are in the long-run best interest of the firm.

5. Would the provisions of the current FASB exposure drafts: Consolidation of Certain Special-Purpose Entities-an interpretation of ARB No. 51; and, Guarantor's Accounting and Disclosure Requirements for Guarantees and Including Guarantees of Indebtedness of Others-an interpretation of FASB Statements No. 5, 57, and 107, impact Big Flick's ability to derive the short-term earnings benefit of the Picture Partners transaction structure?

Regarding the first exposure draft, Consolidation of Certain Special-Purpose Entities - an interpretation of ARB No. 5 1 the FASB has explained the reason for the proposed change as follows:

Under current practice, [ARB No. 5 1 ] two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting ownership interests. This proposed Interpretation would explain how to identify an SPE that is not subject to control through voting ownership interests and would require each enterprise involved with such an SPE to determine whether it provides financial support to the SPE through a variable interest. Variable interests may arise from financial instruments, service contracts, nonvoting ownership interests, or other arrangements. If an enterprise holds (a) a majority of the variable interests in the SPE or (b) a significant variable interest that is significantly more than any other party's variable interest, that enterprise would be the primary beneficiary. The primary beneficiary would be required to include the assets, liabilities, and results of the activities of the SPE in its consolidated financial statements, pg i

Clearly, the exposure draft is designed to address partnership, rather than corporate, type SPEs. Picture Partners is just the type of SPE the exposure draft is pointed at. However, under the facts we assumed above, Big Flicks would neither have the required majority of variable interests, nor have a variable interest that is significantly more than any other parties variable interest. This is because each party is truly an equal partner in Picture Partners. This means that Big Flicks would not be the primary beneficiary and not required to consolidate Picture Partners.

If we changed the facts a bit and had Big Flicks charging a fee for its distribution services to Picture Partners, the matter is not so clear. In that instance, Big Flicks may indeed have a majority of the variable interest when you take the financial investment and the service contract together. This issue provides an opportunity to discuss with students the difficulties involved in setting standards regarding consolidation. One point for the discussion can be that all Filmvest really provides to Picture Partners is capital, no particular business expertise. Conceptually, should mere structured financing conduits be allowed to alter reported earnings? Should we adopt a substance over form rule that would require consolidation in all circumstances, unless the partnering entity was bringing some expertise or real assets beyond financial assets to the party?

The second exposure draft, Guarantor's Accounting and Disclosure Requirements for Guarantees and Including Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5,57, and 107, does not impact Big Flicks Studio. Guarantees usually require the parent company to cover various shortfalls by the SPC or subsidiary corporation if the SPC cannot meet its obligations. Big Flicks Studio does not provide a guarantee to Picture Partners; therefore there are no disclosure requirements under this exposure draft.

References

REFERENCES

Financial Accounting Standards Board. (June, 2002). Exposure Draft, Consolidation of Certain Special-Purpose Entities - an interpretation of ARB No. 51, Norwalk, Conn.

Healy, P.M. & J.M. Wahlen (1999). Commentary: A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13 (2), 365-383.

Levitt, A. (September, 1998). TheNumbers Game. Presented at New York University Center of Law and Business, New York City, New York.

National Association of Certified Fraud Examiners (1993). Cooking the books: What every accountant should know about fraud. No. 92-5401. Self-study workbook, 12.

Pitt, H.L. (March, 2002). Written Testimony Concerning Accounting and Investor Protection Issues Raised by Enron and Other Public Companies. Presented to the Committee on Banking, Housing and Urban Affairs United States Senate.

Schipper, K. (1989). Commentary: Earnings management. Accounting Horizons, 3 (4), 91-102.

Securities and Exchange Commission, Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations. Retrieved June 13, 2002, from http://www.sec.gov/rules/other/33-8056.htm

AuthorAffiliation

Richard Mason, University of Nevada, Reno

John Mills, University of Nevada, Reno

Lynn Bible, University of Nevada, Reno

Subject: Motion pictures; Earnings management; Joint ventures; Special purpose entities; Case studies; Capital structure

Location: United States--US

Classification: 8307: Arts, entertainment & recreation; 4120: Accounting policies & procedures; 2310: Planning; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 113-121

Number of pages: 9

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables References

ProQuest document ID: 216302785

Document URL: http://search.proquest.com/docview/216302785?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 61 of 100

MISSOURI SOLVENTS: THE CAPITAL INVESTMENT DECISION

Author: Kunz, David A; Heischmidt, Kenneth

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Abstract:

Missouri Solvents is a regional distributor of liquid and dry chemicals. Allen David, a recent college graduate and financial analyst for Missouri Solvents, has completed the net present value (NPV) calculation for new drum filling equipment. The project is championed by Stewart Scott, vice president of sales for Missouri Solvents, who provided most of the supporting assumptions for new drum filling equipment. The initial analysis indicated the project did not meet company investment criteria. Scott was not satisfied with the analysis and increased the sales assumptions. David thought the revised sales numbers were aggressive. When David expressed his concern, Scott assured him that he was the sales expert and knew the packaged goods market. David felt that one way or another Scott was going to insure that the project would achieve a positive NPV and meet company investment criteria. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns the fine line between ethical and unethical behavior and the capital budgeting process. Case examines the challenges of identifying unethical behavior and resolving ethical conflicts. Students are expected to apply a predetermined process to the ethical analysis of a realistic business situation. The situation is one that young business professionals may encounter early in their careers. The case requires students to have an introductory knowledge of general business issues thus the case has a difficulty level of three (junior level) or higher. The case is designed to be taught in one class session of approximately 1.25 hours and is expected to require 1-2 hours of preparation time from the students.

CASE SYNOPSIS

INSTRUCTORS' NOTES

CASE OVERVIEW

Allen David, a recent college graduate and financial analyst for Missouri Solvents, has completed the net present value (NPV) calculation for new drum filling equipment. Missouri Solvents is a regional distributor of liquid and dry chemicals. The project is championed by Stewart Scott, vice president of sales for Missouri Solvents, who provided most of the supporting assumptions for new drum filling equipment. The initial analysis indicated the project did not meet company investment criteria. Scott was not satisfied with the analysis and increased the sales assumptions. David thought the revised sales numbers were aggressive. When David expressed his concern, Scott assured him that he was the sales expert and knew the packaged goods market. David felt that one way or another Scott was going to insure that the project would achieve a positive NPV and meet company investment criteria.

After the meeting with Scott, David met with his boss, Ann Nye, Controller, and described the meeting with Scott. In particular, he expressed his reservations about the revised assumptions provided by Scott. Ann told him that it was his job to verify the reasonableness of the assumptions and "run the analysis." She asked if he was certain the assumptions were not reasonable. He replied that he was not certain, but indicated that based on historic information they seemed very aggressive. She said that Scott had over 20 years in the chemical distribution business and knew the market. She told him to use Scott's new assumptions and run the analysis again.

CASE USE

This case may be used in a number of business courses and may be particularly appropriate for accounting, finance, or business ethics courses where ethics is integrated into the curriculum. It represents a common professional issue: What should a subordinate do when directed by a superior to act in a manner the subordinate considers questionable or inappropriate. In this case the subordinate, David, was directed by a senior manager, Scott, to use more favorable operating assumptions to ensure a project meets company investment criteria. Additionally, the controller, Ann Nye, asked that he use Scott's assumptions and run the analysis. How far should an employee go when they have a general professional opinion that something is inappropriate or incorrect?

The instructor needs to keep in mind that the primary objective for this case is the critical analysis of the ethical issues related to this business situation. The students are provided a predetermined process for the ethical analysis of a realistic business situation. There is no one correct answer to the case. Students are expected to apply critical thinking skills in a forum that foster comprehensive student involvement. Students should be encouraged to move from a dualistic view of this ethical problem solving to that which considers multiple viewpoints.

STUDENT TASK

Use the Seven Step Model, developed by Velasquez, to recommend a course of action for Allen David.

Students would have no trouble recommending a course of action without the Seven Step Model, but the objective of the case is to provide the students with a systematic process to justify their recommendation, rather than a solution based solely on feelings.

QUESTIONS AND ANSWERS

1) What are the relevant facts? Identify the primary factors that impact the business event and provide an ethical issue.

a) Allen David is the financial analyst completing an analysis of the proposed purchase of drum filling equipment.

b) Stewart Scott is the Vice President wanting the new equipment. He is also the person providing the projections upon which the analysis is completed.

c) Initial analysis was not favorable for the purchase of the equipment.

d) Scott suggests a further analysis based on more favorable sales assumptions and increased assumed selling price.

e) David's supervisor appears to support the revised analysis of proposed purchase.

2) What are the ethical issues?

There may be many business related issues that are separate from identified ethical issues. The value of this step is to stimulate student discussion, not to find one best issue for the case. Remember, there are no definitively correct answers to this case. The fostering of the critical analysis of the case situation is extremely important in any ethical analysis. It is suggested that the instructor not provide any suggestion of the "correct" answer because it would be an expression of a personal opinion and it would be inappropriate to the purpose of the ethical analysis. The following questions can be used to stimulate discussion.

a) What is David's responsibility to Missouri Solvents?

i) Should he be conservative and do all he can to protect the assets of Missouri Solvents?

ii) Should he be willing to assume additional risks for possible greater gain for the company?

b) What is David's responsibility to himself?

i) Should he complete analysis that he feels is overly aggressive and possibly place his career and his family's future in jeopardy?

ii) Should he only complete the original analysis and protect his career with the company?

c) What is David's responsibility to his supervisors' instructions?

i) Should he blindly follow the strong requests of his supervisors?

ii) What are the likely outcomes for David if the higher assumptions prove to be incorrect?

d) Should David take his concerns to the company president?

i) How will the company president react to his concerns?

ii) How will his supervisor, Nye, react if he bypasses the chain of command?

e) What are Scott's and Nye's responsibilities to Missouri Solvents?

f) Are Scott and Nye willing to take a risk in hopes of furthering their own careers at the expense of company performance?

3) Who are the primary stakeholders?

a) David

b) Scott

c) Nye

d) Company Management

e) Company Stockholders

f) Company Customers

g) Company Financial Lenders

h) David's family

4) What are the possible alternatives?

Remember, there is no one best solution - only a number of solutions that are supported by different sets of values and goals. All of these alternatives need to be considered in light of the ramifications of decisions each has on David's job security, personal/family situation, and career advancement. Broadly speaking, after the above areas are discussed and considered, the alternatives may fall along one of the following possibilities.

a) Refuse to complete the analysis based on the revised estimates in sales and price.

b) Complete the analysis based on the revised sales and sales price estimates while not saying anything to any supervisor.

c) Complete the analysis based on the revised sales and sales price estimates while telling supervisor about skeptical sales and sale price estimates.

d) Complete the analysis using a number of different assumptions (best, most likely and worse case scenario).

5) Discuss the ethics of the alternatives from the perspective of Teleology (both egoism and utilitarianism), Deontology, and Relativist. Again, keep in mind, there is no one best answer! There are multiple answers and each needs to be supported by a set of logical arguments.

a) Teleology suggests actions may be judged correct or acceptable if they provide desired results (maximizes benefits and minimizes costs). Possible discussions of benefits and costs considerations may include the following:

i) Which action would provide the greatest benefit and least costs to the greatest number of stakeholders?

ii) Do the benefits to David for continuing to questions the analysis (e.g. future promotion, supervisor and peer respect, financial award, etc) exceed the benefits for not questioning the revised assumptions?

iii) Which stakeholders have the greatest risks if a revised analysis provides a situation that turns out to be financially undesirable?

b) Deontology suggests actions should be guided by certain rights of individuals. The focus is on the intentions associated with a behavior, not the consequences. Potential behaviors may include the following:

i) Does David have the right to always speak his mind if he honestly believes the assumptions are overly aggressive?

ii) Does David have the freedom to consent or not to consent with the wishes of his supervisor/peer to revise the estimates based on aggressive assumptions?

iii) Are there any codes of professional conduct that address the appropriate behavior by David?

c) The Relativists look at what others do in this situation, and base their action accordingly. Possible considerations may include the following:

i) What does David feel or know of what other company accountants do in similar situation for suggestions to revise analysis of business decision situations? Does he just follow their example?

6) What are the practical constraints?

There are many possible constraints, among these may include the following:

a) David may hurt his promotion chances by continuing to question the underlying assumptions of the revised analysis.

b) The company could loose valuable future sales if the equipment is not purchased based on an analysis using overly conservative initial assumptions.

c) If the sales assumptions are not realistic the company will not generate the required return on a sizable investment.

7) What actions should be taken?

As you might understand by now, there is no one best decision for David. It depends upon the company, the situation, and the individuals involved. With that in mind, the following course of action is provided as one alternative that students may provide to the rest of the class.

We need to remember that David is a relatively new employee. He will likely want to stay on the good side of his manager/evaluator Nye. To go directly against what his supervisor suggests would be very risky, especially given that fact that Scott has more direct experience in the business. Given these considerations, David may eventually decide to develop a number of possible analysis scenarios that utilize a range of data related to projected sales and prices. These scenarios may include the original sales and price projections provided by Scott (remember, analysis from these projections did not justify the equipment purchase); projection levels that indicate a breakeven point on the equipment purchase; and projection levels, as suggested by Scott in his final request, that showed a favorable return on investment in new equipment.

The scenario, as suggested above, would likely be considered a teleology perspective because it would be looking at the different results of the alternative projections. More precisely, David would be using the egoism perspective because he would be looking out for his own best interest in the analysis. He would provide analysis without assuming responsibility for the final decision. David thus can take credit if the project goes ahead and is successful, avoid responsibility if it goes bad, and can say to his supervisor that he did his honest best if there is the decision not to pursue the project. David will be doing what he can to maximize personal gain (prestige) while minimizing his personal risk (any unfavorable perceived judgment or performance).

CONCLUSION

This case provides an opportunity for an instructor to examine an interesting ethical case in the classroom with a structured approach to its analysis. While there is no definitive correct solution to this case, there is enough guidance to allow a healthy discussion of an important business situation. One of the most difficult aspects of any classroom analysis of an ethical situation is the encouragement of students to critically evaluate the situation without the fear that their view will be incorrect. Remember, it is the systematic and logical analysis of the ethical situation that is important in the learning environment. Unlike accounting and finance analysis where there is usually a defined correct answer to many problems, the ethical analysis of the business situation requires the student to make an analysis that is logical, yet may yield a solution that may be quite different from solutions provided by other students in class.

AuthorAffiliation

David A. Kunz, Southeast Missouri State University

Kenneth Heischmidt, Southeast Missouri State University

Subject: Capital investments; Business ethics; Net present value; Case studies

Location: United States--US

Classification: 9190: United States; 2410: Social responsibility; 3100: Capital & debt management; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 123-129

Number of pages: 7

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

ProQuest document ID: 216297367

Document URL: http://search.proquest.com/docview/216297367?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 62 of 100

SILVER BREAD BAKERY: A SMALL BUSINESS CASE FROM THE SULTANATE OF OMAN

Author: Kuehn, Kermit W; Al-Busaidi, Yousef

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Abstract:

The primary subject matter of this case concerns the purchase of a troubled existing small business in an international context and the issues confronted and actions taken to turn the business around. Specific issues relate to general management in this non-Western context, with considerable attention given to the changing environment the business was operating in during the period. Secondary issues included in the case relate to human resources, organizational structure and financial analysis. The case has a difficulty level of 2 (sophomores or higher), depending on what you expect the student to be able to do. Depending on the depth of analysis pursued, the case would fit into a 50 minute or 75 minute class period. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

If you are looking for an international small business/entrepreneurship case that allows you to introduce multiple issues in entrepreneur ship, this case does so simply, yet in a relatively thorough manner. The case allows you to contrast typical Western entrepreneurial environments with a decidedly different economic, legal, and social context. There is enough information presented to permit discussion of a wide range of topics including generic advantages and disadvantages of buying an existing business over starting a new one, market analysis, cultural idiosyncracies that affect how the business operates, and simple financial analysis.

The events in the case take place between 1991 and 2001 in the Sultanate of Oman. The student follows Hamad, an Omani entrepreneur, as he considers the purchase of an existing, troubled bakery from his acquaintance, Sadeq. The case proceeds from the purchase to review the actions taken by Hamad to turn the business around as he responds to the changing marketplace. Extensive footnotes describe the social, legal and business factors that influence the way the business operates in this environment.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Key Issues in the Case

1 . Advantages and disadvantages of buying an existing business

2. Decision making under conditions of risk (ambiguity)

3. Human resources in small business

4. Cross-cultural small business

5. SWOT analysis and environmental scanning

6. Operational issues in small business

7. Entrepreneurship and small business management

Teaching Methods

This case is designed to involve the student in the context and information available leading up to a decision to buy or not buy an existing business and the challenges faced in turning it around. It would thus be best for discussion in a course in entrepreneurship or small business management at either the undergraduate or MBA level.

The case should normally be used during discussions of the trade offs between starting a new business versus buying an existing versus franchising. The case would illustrate well the the challenges of buying an existing business as well as the managerial challenges faced to turn it into a more successful small business. Discussions of the operations of the business from human resource decisions to production could be held, as well as those related to market trends, competition and their implications for the business.

DISCUSSION QUESTIONS

1. Research and write a brief summary of the history of Oman and its development. Describe the business practices in Oman.

The following links are a sample of several that could be used to review the history of the country and the region. Also Appendix B provides a brief summary of the history of Oman and the region.

http://www.legend.net/oman/menu.htm

http://www.omaninfo.com/

Business practices are detailed throughout the case itself and center around 51% ownership rules operating in the country. These rules have set the tone for the whole private sector and the behaviors revealed in the case.

2. Discuss the history of the business and the owners involved leading up to Hamad's purchase.

The Hussain and Abdulla Bakery was started in the mid-to-late 1980s by Abdulla, a director in one of the government ministries, and Dr. Hussain, an eye consultant in a local hospital in Muscat, Sultanate of Oman. Neither of the partners had any experience in running a business. They operated the business until around 1990.

Sadeq, an intermediate school graduate, was a governor (a wali) in one of the states in the Sultanate. He purchased the business in 1990 for $60,000. Sadeq had no prior business experience. He invested an additional $ 1 6,000 in equipment and facility upgrades in order to make the business more productive. He lived some 300km from Al Khodh where the business was located. He was clearly an absentee owner and was not able to be actively involved in the business, nor did he have the expertise to actually run the business. By 1 99 1 , Sadeq is looking for a way out of this situation and was looking to Hamad to as a solution.

3. Analyze the pros and cons of buying this business. Which issues seem to be unique to this setting?

Advantages:

* has existing operations, licenses, employees, customers, cash flow, etc.

* employees are already present and have residence visas*

* Hamad has a sense of what the real issues are in the business

* operations have plenty of room for improvement (nowhere to go but up?)

* desperate, novice seller suggests potential to buy at a good price

* market trends suggest likely growth in consumption

* limited competition and existing competitor is weak

Disadvantages:

* lack of financial information about the business

* poor financial performance of the business

* poor market reputation

* weak market presence

* human resource/performance problems

* poor quality equipment/poorly maintained

* employee visa restrictions mean owner must be easily accessible to solve problems requiring trips to neighboring UAE*

* lack of local suppliers or support of this technology*

* not always easy to get new employee visas*

* reflects those issues that would be rather unique to the Arab (Persian) Gulf

4. Summarize several key operational decisions made by the owner during the period covered in the case.

There seemed to be two main issues dealt with by the owner after taking over the business. First was the human resource problems that affected all other operational issues. By learning the details as to how bread was made, the owner removed a major source of performance problems. He made sure that more than one person knew how to do a particular job, reducing individual employee power. He sought to improve employee knowledge of the bread making process. Second, and related to the first, was the assurance of organizational reliability as a quality, reasonably-priced supplier of bread. This was discussed more thoroughly in Part A of this company case, but mentioned in this part as well. This involved not only better human resources, already mentioned earlier, but also better systems and technology.

5. Conduct a SWOT analysis for the business at the end of 2000.

Strengths:

* good, recognized location

* Hamad's experience as a business person in the area

* solid business reputation in marketplace

* good quality product and reliable service

* cross-trained workforce

* low-cost structure of business

Weaknesses:

* small size of the company in light of larger competitors

* limited production capacities

* poor to non-existent marketing skills/activities

* relatively weak financial management skills

Opportunities:

* high growth market

* social trends support more business

* university market largely untapped

* product in wide demand, good times or bad

Threats:

* increasing competition

* changing market demographics

* changing social trends and purchasing habits

Note: Porter's 5-forces model could be used to assess this case as well.

6. Conduct a financial analysis of Silver Bread Bakery during the 1995-2000 period.

Because there is moderate amount of financial information available, simple analysis could be made related to cost structure, rearranging the statement into variable vs fixed costs or cost of goods vs operating expenses and such. Comparisons for common size are also possible.

Appendix A attached to these notes compares Silver Bakery with U. S. industry ratios for both retail and wholesale bakery businesses, the two closest SIC categories researched. Recall that about half the business revenue came from both retail and commercial accounts, with the business conducting itself as both a retailer and manufacturer. As the data is derived from US businesses using full financial accounting procedures, caution needs to be made when comparing this company with those included in the RMA resources.

In looking at Appendices A and B, the significant difference in operating expenses may largely be due to the fact that no depreciation is included. Additionally, no interest costs for the loans are noted. Further, the cost of goods seem high relatively speaking. There are no corporate taxes in Oman at this time.

7. Recommend at least two significant things Hamad should consider doing to insure the future health of the business.

The standard recommendations might involve considering expansion to other smaller communities or neighborhoods, increasing marketing activities (and their costs) to solidify local reputation and business, and continuous quality improvements to enhance reputation relative to competitors.

AuthorAffiliation

Kermit W. Kuehn, American University of Sharjah

Yousef Al-Busaidi, Sultan Qaboos University

Appendix

NOTES TO PROFIT-LOSS STATEMENT

No balance sheet exists and how to construct one is unknown to the owner. Income/expense details are lacking for years 1997-99, but summary data was available. Table 2 contains average expense details for 3 years, all that was available for the period presented.

Sales are comprised of delivery drivers who act as sales people who run routes and try to generate more business. The drivers are charged a certain rate for the bread they take and they can sell it for the price they are able, paying for their product at the end of each week. The retail category is comprised of walk- in traffic at the single location.

Raw materials include the ingredients to make the various breads sold - flour, oil, yeast, etc.

Rent (employee housing) involves barracks-like facilities provided by the sponsor/owner and is a rented space used to house workers. This arrangement is typical of companies who bring expatriate labor in. Rent (business) is for the lease expense for the business.

Miscellaneous. A rather catch all account that is used rather inconsistently by the owner for various petty cash type purchases such as maintenance, various fees, etc.

Management fee. Hamad draws a fee for the active management of the business. He also shares in the dividends split up each year between the two partners.

Car payment. Two delivery vehicles were bought on credit during period.

Air tickets. Employees have round-trip airfares paid for by the sponsor. They are eligible for the benefit every two years to return home to visit family. In this particular business, the employees often waited three or more years before they actually took the benefit as they apparently needed to make the money. Most expatriates send the money home, and in these groups of labor, their whole purpose for being overseas is to be able to send money home in support of extended families. Many spend most of their working lives away from their families. The benefit was only available if you actually flew home; there was no encashment option.

Labor cards. As indicated earlier, labor cards are becoming increasingly more valuable as the government is attempting to restrict work visas

APPENDLX C: Cultural Context for This Case

The six Arab countries that make up the Gulf Cooperation Council (GCC) include Saudi Arabia, Oman, United Arab Emirates, Kuwait, Qatar and Bahrain. They are nations of an estimated 28.9 million residents of whom approximately 7.3 million (3 1 %) are expatriate. Furthermore, these expatriates make up nearly 70% of the workforce in these countries (The Europa World Year Book, 1999). Islam is the dominant religion in the region and the monarchical form of government is the only administrative system.

GCC countries have experienced much growth and change in their economic and social conditions over the past decades as a result of the vast revenues from oil. By the late 1970s, faced with the desire to gain national control over vital sections of their respective economies, many governments in the region adopted a policy of giving first priority to nationals in filling administrative/management positions. This was particularly emphasized in the government sector, where government mandates gave exclusive rights to nationals for these positions (Abdel-Halim & Ashour, 1995).

On the other hand, however, faced with the fact that the national workforce in the region was sorely under-skilled, governments had to utilize foreign workers to provide the skills necessary to support the established government goals for development. These non-national workers provided most of this diverse labor requirement, ranging from the least skilled laborers to managerial and technical skills. In the 1980s, oil prices plummeted and revenues from oil fell sharply from their peak levels. Along with the rapid population growth, governments in the region could not absorb the graduates coming out of their educational systems. Thus, the nativization policies began to focus on the private sector.

Despite efforts to encourage nationals to work in the private sector, it remains a sector dominated by expatriates, especially in unskilled and semi-skilled employment. In light of Oman's recent development experience and the diverse work context that has developed, the attitudes and performance-related behaviors of organizational members here are of particular interest in this study.

Subject: Small business; Foreign investment; Organizational behavior; Case studies

Location: Oman

Classification: 2500: Organizational behavior; 9130: Experiment/theoretical treatment; 1300: International trade & foreign investment; 9178: Middle East; 9520: Small business

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 4

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 131-138

Number of pages: 8

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables

ProQuest document ID: 216274742

Document URL: http://search.proquest.com/docview/216274742?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 63 of 100

AU REVOIR, MRS. WILLIAMSON

Author: Rarick, Charles A

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Abstract:

Margaret Williamson, a British expatriate had been assigned to Paris as a marketing manager for a British-French joint venture called EUROi. While Margaret had been a successful manager in London, she did not continue that success in Paris and experienced many difficulties in her new assignment. Margaret was unable to work effectively with her French counterpart, Georges DuPont which was the result of personality differences, and differences in country and corporate culture. The inability to adjust to these challenges resulted in Margaret failing in her expatriate assignment and returning to London with an uncertain future in her company. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns cross-cultural management problems. Secondary issues include expatriate selection and training. The case has a difficulty level of five. The case is designed to be taught in one class hour and is expected to require six hours of outside preparation by students.

CASE SYNOPSIS

INTRODUCTION

Margaret Williamson, age 50 has just returned to London from Paris, where she worked for the past six months as a marketing specialist for a British and French joint venture called EUROi. British computer manufacturer RoyalPC formed the joint venture with a French ISP called Internet du France (IDF). The two companies hope to capitalize on their particular strengths and grow a Pan-European Internet service. EUROi competes in Europe on the basis of price, and has positioned itself as an alternative ISP in an already crowded market. EUROi targets the 16 to 24 year-old market by offering programming that appeals to a more youthful market. The company also offers subscribers sizable discounts on Royal personal computers.

Margaret began her career at Royal fifteen years ago as a secretary. As a recently divorced mother of two, Margaret entered the work force for the first time and displayed a strong work ethic. Although she did not attend college, Margaret is a very intelligent individual and a quick learner. These traits did not go unnoticed at Royal, and she was promoted out of the secretary pool and placed into the Marketing Department. Margaret advanced in the department, gaining a reputation for handling difficult assignments. With a strong devotion to her children and her work, she chose not to remarry. With her children now grown she became interested in an international assignment.

Her colleagues viewed Margaret as an effective manager. She was seen as fair to all, conscientious, a good decision maker, and very loyal to the company. Because of her abilities, she was selected to act as marketing liaison between her company and the French partner in the newly formed joint venture.

Mrs. Williamson, as she prefers to be called, is a refined British lady. She possesses excellent manners and prides herself on her personal composure. Her ability to remain calm and level-headed in tense situations would be challenged when she moved to Paris for her new assignment.

Georges DuPont, age 35 is director of marketing for EUROi. DuPont, a graduate of the prestigious Ecole Nationale d' Administration, comes from an elite French family. Somewhat of a renegade, Georges refused to work in the family business after college. He instead, found employment in a number of computer-related businesses. DuPont became fascinated with the creative side of the computer and Internet business. He had been at IDF for four years, and was highly regarded as an effective manager and creative promoter. As marketing director of the joint venture, DuPont was given the responsibility of working with Williamson to find a way to increase revenue for EUROi. DuPont prides himself on his literary and artistic skills and enjoys engaging others in verbal debate.

From the start of their working relationship, problems surfaced between Margaret and Georges. At first, small personal habits of the two seemed to cause friction. Margaret often remarked that Georges never smiled at her, and Georges called Margaret's personality as "interesting as a bottle of cheap California wine." Over the early weeks of the relationship, the situation deteriorated further. Margaret was convinced that Georges was an incompetent and lazy manager. She felt that Georges was too autocratic and did not delegate enough responsibility to lower levels in the organization.

Margaret further complained to her superiors back in London that Georges frequently broke company policy, canceled meetings with little notice, took two-hour lunch breaks, and never admitted his mistakes. She felt that he did not respect her as an equal partner; in fact, she felt that he actually resented her help in promoting the joint venture.

To add more tension to the already strained relationship, Margaret learned that Georges (a married man) was having an affair with his secretary, Giselle. This fact came to light when Margaret found out that the two of them were going to a resort in the south of France for three weeks of vacation. Margaret was offended by Georges's lack of morality, which included his affair with Giselle as well as his advances to other women in the company.

Georges was equally unimpressed with Margaret. He felt that she was uneducated, insensitive, and too concerned with money and company regulations. Georges frequently joked to others about the way in which Margaret dressed. He felt that she had no taste in fashion, and that this alone made her abilities in the company suspect. Georges was unhappy that Margaret forced everyone to communicate with her in English. Although she spoke little French and Georges and most others spoke fluent English, he resented this, nevertheless. When Margaret requested that she be referred to as "Mrs. Williamson," Georges just rolled his eyes and muttered something in French that Margaret did not understand. He seldom used either her first or last name in conversations with her.

The workplace tensions continued for some time, with Georges and Margaret frequently disagreeing and complaining about each other. It was known throughout EUROi that the two did not get along, and their strained interactions were often the butt of jokes around the company. Georges tried to avoid Margaret as much as possible, which put her in the awkward position of having to go through Giselle to communicate with him. Margaret did not like to deal with Giselle because of her "illicit" behavior with her boss.

The situation finally came to a head when a creative team was to be assembled to design a large advertising campaign for EUROi. Margaret had already developed a plan to assemble the team and empower them with the responsibility of creating a more youth-oriented advertising theme. Margaret had identified five people whom she felt would be best suited for the project. Her plan was to allow these people to work independent of management in creating a new series of advertisements. Margaret felt that a more creative approach to promotion was needed, and she wanted this team to develop a breakthrough design for the promotional strategy.

When Margaret approached Georges with her idea, he refused to accept it. He told Margaret that he felt the current campaign was effective, but admitted that he could see a need for some improvement. Georges recommended that he solicit the advice of a few key people and that he create the new ad design. After all, he was the director of marketing for the new company. Margaret tried to explain to Georges why her plan was better, and that a similar approach had been successful with RoyalPC. Georges just stared at the ceiling, smoking his cigarette. Margaret wasn't even sure if he was listening to her.

After a few weeks of attempting to convince Georges that her plan was better, Margaret decided that she needed help from London. She arranged for a video conference call to be held between London and Paris, in which she and some senior managers at Royal would discuss the issue further with Georges. Margaret sent an e-mail message to Georges, informing him of the conference but received no response. After two days, she asked Giselle if her boss knew of the proposed meeting and if he could attend. Giselle just smiled and responded that he could attend the meeting, if he desired to do so. Margaret sent a memo to Georges indicating the date and time of the conference call and emphasizing the importance of his presence at the meeting.

On the day of the meeting, Margaret searched for Georges. Even though the meeting wasn't for a few hours, she wanted to make sure he would attend, and she thought that perhaps she could even get him to change his mind before the call took place. Giselle told Margaret that he would be in the office soon and that she would remind him of the meeting.

As the 1 :00 PM hour for the meeting approached, Margaret was frantic. She phoned Giselle and demanded to know where Georges was and when he would be in the conference room. Giselle responded that she didn't know where he was and that she really didn't care. When Giselle rudely hung up the phone, Margaret was convinced that Georges would not show up for the meeting. She decided, however, that she might be able to use this to her advantage.

The call from London came precisely at 1:00 PM, with just Margaret sitting in the Paris office. She explained to the people in London that Georges was not present and that she had no idea why he was not there. She went on to tell the London managers that she was not surprised by Georges's behavior; he continually expressed contempt for her, and he had an apparent disregard for the welfare of EUROi. Margaret went on for over 30 minutes detailing Georges's shortcomings, when suddenly he entered the room with three other EUROi employees. Georges apologized for his tardiness but explained that he and the others had been across town working with marketing personnel from a very popular magazine targeted toward the 16 to 24 age group in Europe. Georges was very excited about what this "team" had accomplished, and he wanted the London managers to know the details.

The video call went on for another hour with the three EUROi employees explaining with charts and figures how the association with the youth magazine would be beneficial to the company. They proposed new creative advertising designs and an association with the popular magazine. The team appeared to have been well prepared for the meeting. Georges, who spoke with great confidence and enthusiasm, directed the entire presentation. From the questions asked by the London managers, it was clear that they felt Georges's plan was superior to the one proposed by Margaret. When the presentation was completed they thanked Georges and his team and quickly approved the plan.

At that point Margaret rose from her chair, red-faced and very angry. She appeared at first barely able to speak, but when she began, she angrily accused Georges of undermining her authority. Margaret called Georges a "sneaky bastard," and for the next five minutes vented her frustration at Georges, who sat quietly staring at the ceiling, smoking his cigarette.

Finally the most senior London manager interrupted Margaret and politely asked if Georges and his team could leave the room for a moment. Georges got up and began to leave, but before he left he stopped, smiled at Margaret, and said, "au revoir, Mrs. Williamson."

References

REFERENCES

Joseph, N. (1997). Passport France. Novato, CA: World Trade Press.

Scarborough, J. (1998). The Origins of Cultural Differences and Their Impact on Management. Westport, CT: Quorum.

AuthorAffiliation

Charles A. Rarick, Barry University

Subject: Corporate culture; Executives; Internet service providers; Professional responsibilities; Case studies

Location: United Kingdom--UK

People: Williamson, Margaret

Company / organization: Name: euroi.net; NAICS: 518111

Classification: 8331: Internet services industry; 2130: Executives; 9175: Western Europe

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 3

Pages: 87-90

Number of pages: 4

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216275075

Document URL: http://search.proquest.com/docview/216275075?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-13

Database: ABI/INFORM Complete

Document 65 of 100

CONDUCT UNBECOMING: ALLEGATIONS OF SEXUAL MISCONDUCT AT THE UNITED STATES AIR FORCE ACADEMY

Author: Emery, Charles R; Benton, James E

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Abstract:

Imagine the outrage if one out of five female American P.O.Ws said they had been sexually assaulted by Iraqi. Well, that's how many female Air Force cadets say they have been assaulted not by the enemy, but by men supposed to be their comrades in arms. This case study documents the June-September, 2003, investigation of a decade of alleged sexual misconduct at the United States Air Force Academy. A panel of investigators, appointed by the Secretary of Defense and headed by the Honorable Tillie K. Fowler, examined the awareness of misconduct and the Academy's organizational culture, climate, structure, curriculum, reporting and response procedures and leadership (internal and external) in an attempt to identify root causes and to provide lasting recommendations for the prevention and intervention of any future abuses. This story goes beyond a record of "boys behaving badly" and a chronicle of an atmosphere that encourages machismo to raise issues of character development, sexual harassment, whistleblower retribution, toleration of misconduct and resistance to organizational change.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

Imagine the outrage if one out of five female American P.O. Ws said they had been sexually assaulted by Iraqi. Well, that's how many female Air Force cadets say they have been assaulted not by the enemy, but by men supposed to be their comrades in arms. This case study documents the June-September, 2003, investigation of a decade of alleged sexual misconduct at the United States Air Force Academy. A panel of investigators, appointed by the Secretary of Defense and headed by the Honorable Tillie K. Fowler, examined the awareness of misconduct and the Academy's organizational culture, climate, structure, curriculum, reporting and response procedures and leadership (internal and external) in an attempt to identify root causes and to provide lasting recommendations for the prevention and intervention of any future abuses. This story goes beyond a record of "boys behaving badly" and a chronicle of an atmosphere that encourages machismo to raise issues of character development, sexual harassment, whistleblower retribution, toleration of misconduct and resistance to organizational change.

BACKGROUND

It was September 17, 2003 and the Honorable Tillie K. Fowler sat in her temporary office in Washington D.C. contemplating what recommendations her Panel of six investigators might give Congress next week that would finally resolve a decade of sexual misconduct at the United States Air Force Academy. Tillie, a former Congressional representative from Florida (1993-2001), had been chosen by Secretary of Defense, Donald Rumsfeld, to execute Presidential Order H.R. 1559; the review of sexual misconduct allegations at the United States Air Force Academy (USAFA). This Panel was given ninety days to investigate and prepare a report of findings and conclusions to Congress. The Panel's prime directive was to (1) review actions taken and contemplated by Academy and other Air Force personnel in response to allegations of sexual assault, (2) review the effectiveness of the process, procedures and policies used at the Academy to respond to allegations of sexual misconduct, and (3) review the relationship between the command climate for women at the Academy, including factors that may have produced a fear of retribution of reporting sexual misconduct, and the circumstances that resulted in the sexual misconduct (Senate Armed Services Committee, 2003). Note: this was the fourth investigative team chartered during 2003 to exam sexual misconduct at the USAFA and the only one not formally affiliated with the Department of Defense.

Pressure for results (and in some cases, heads) was coming from all directions and the press was fanning the flames of outrage. Government statistics indicated that three percent of women in college report rape or attempted rape-it was over seven percent at the Air Force Academy. Further, there was reason to believe that there was a higher rate of unreported cases at the Academy than a typical university. Sixty female cadets had come forward within the last year to allege that they were raped or assaulted. Sadly it appeared that senior civilian and military leadership of the Air Force and the Air Force Academy were aware of serious and persistent problems of sexual assault and gender harassment at the Academy since 1993. While numerous cause factors had been identified by previous teams, their recommendations had failed to resolve the problem. Also, it's particularly surprising that the problems haven't been resolved given that a high percentage of female cadets come from military families. Certainly, this begged the questions of whether the root causes had been truly identified and whether corrective actions had been taken with resolve.

For example: in February, 2003, Senator Wayne Allard, member of the Senate Armed Services Committee, presented the Secretary of the Air Force with a two-page letter requesting investigation and/or clarification of several constituent complaints. The following are key excerpts from that letter (McAllister, 2003).

1. There is some confusion about the number of cadets that have been raped or sexually assaulted at the Academy. Provide the number of cadets that have reported rapes and sexual assault to each of the following: the CASIE Program, the counseling center, and the Academy hospital.

2. Several cadets who may have been raped or sexually assaulted were punished before the rape or assault investigation was completed.

3. Some former and current cadets have reported difficulties in securing the rape kits and investigative reports. The AFOSI stated that their rape kits and investigative reports were lost.

4. A number of victims have complained about not being permitted to bring someone with them to AFOSI questioning sessions or to meetings with senior Academy officials.

5. All of the former and current cadets have expressed concern about not knowing whether or not their alleged assailant was punished.

6. When a cadet is raped or sexually assaulted, in many cases, alcohol is involved. While it is well-known that cadets are not permitted to drink, it appears that the consumption of alcohol is common practice. What is the Academy doing to discourage underage drinking?

7. What, if anything, did the Academy do with the 1994 General Accounting Office (GAO) recommendations to reduce an environment conducive to sexual harassment?

In March 2003, findings of the Allard investigation and interim findings of the Air Force General Counsel's investigation prompted the Air Force to issue an immediate "Agenda for Change" - a series of preliminary efforts to improve the safety and security of every cadet and regain the trust and confidence of the American people in the Academy. It was developed by officers and leaders with experience at the Academy, other academies, and Air Force ROTC in an effort to swiftly start the process of implementing decisive changes. Shortly after the "Agenda for Change" was issued, the Secretary of the Air Force directed the Air Force Inspector General to undertake a parallel investigation (to the General Counsel's) into every case where a victim felt that justice had not been done so as to assess command accountability. While the Air Force must be commended on its sense of urgency, it should be noted that many of the strategies touted as reforms are actually measures that have been tried under past administrations. Of 25 items on the "Agenda for Change" that affect cadets directly, at least nine aren't new at all.

In June 2003, Air Force General Counsel Mary L. Walker released The Report of the Working Group Concerning Deterrence of and Response to Incidents of Sexual Assault at the U.S. Air Force Academy (hereafter referred to as the "Working Group Report"). The Working Group Report covered many aspects of cadet life, Academy policies and sexual assault reporting procedures in place at the Academy during the last ten years. While the investigation found factors contributing to an unhealthy climate for female cadets (e.g., perceived negative consequences for reporting assaults), it stated that there was "no systemic acceptance of sexual assault at the academy, institutional avoidance of responsibility, or systemic maltreatment of cadets who report sexual assault. In short, it avoided any reference to the responsibility of Air Force Headquarters for the failure of leadership which occurred at the Academy. Recommendations from the "Agenda for Change" and the General Counsel's final report were translated into 63 action items for implementation and tracking (Senate Armed Services Committee, 2003).

On July 11, 2003, James Roche, Air Force Secretary, announced that General Dallager, the commander of the Air Force Academy from 2000 to 2003, will be demoted as he retires. Roche said, "He failed to detect and stop the school's sexual-assault crisis." "He should have taken notice of the indicators of the problems and he should have aggressively pursued solutions to them." The rebuke represented a reversal for Roche, who originally said the general and other academy leaders shouldn't be blamed for long-standing problems (Soraghan, 2003). (Note: The three star to two star demotion is equivalent to a fine of $10,000 per year in retirement pay)

Over the past month, at least 22 other women-13 former cadets and nine currently enrolled-have made similar charges, accusing academy officials not only of failing to investigate sexual assaults but of actively discouraging women from reporting them, and retaliating when they did. In the past decade, only one academy cadet had been court-martialed on a rape charge and that cadet was acquitted. One cadet summed up the victims' feelings toward leadership by saying, "the guy who did this to me knew nothing would happen to him" (Thomas, 2003).

Last week, the DoD IG released its follow-on report on the United States Air Force Academy Sexual Assault Survey. The survey of 579 female cadets in the Academy classes 2003-2006 (87.9% of the total female population) found that: 43 cadets (7.4% of all respondents) - including 15 members of the Class of 2003 (11.7% of that class) - indicated they had been victims of at least one rape or attempted rape in their time at the Academy; 109 cadets (18.8% of all respondents) indicated they had been victims of at least one instance of sexual assault in their time at the Academy; Cadets indicated that only 33 (18.6%) of the 177 sexual assault incidents were reported to the authorities; 143 (80.8%) were indicated as not reported; 143 of the 177 sexual assault incidents were recorded by the victims as not being reported to any authority because of embarrassment (in 77 incidents), fear of ostracism by peers (in 66 incidents), fear of some form of reprisal (in 61 incidents) and the belief that nothing would be done (in 58 incidents). The top two reasons given for why cadets thought that victims were not reporting (after embarrassment) were fear of ostracism by peers and fear of being punished for other infractions. Especially disturbing was the finding that 88.4% of cadets who were rape or attempted rape victims disagreed or strongly disagreed with the statement that "most cadets are willing to report a sexual assault incident regardless of loyalty to the offender." Obviously, things didn't appear to be getting better at the Academy despite this year's intense press coverage and investigative attention. (Panel of House Armed Services; 2003, p.63).

The last 83 days of the investigation, under the harsh spotlight of public opinion, had been intense, illuminating and at some times frustrating. Early in the investigation, there were the typical cries of "witch hunt" and "whitewash" and one of our panelists was pushed to resign after telling AP Radio that, "Due to the fact that many of the women making the allegations were involved with drinking, partying, strip poker, what I call high-risk behaviors. . . the veracity of theses allegations may be suspect" ("United States", 2003). As the investigation progressed, however, the press and the general public became one of our most valuable sources of information. It truly appeared that the problems were long-standing and deeply imbedded in the fabric of the Academy. Further, they appeared to be specific to the Air Force Academy; interviews with officials at the other military academies and the U.S. Coast Guard Academy and the Merchant Marine Academy said they had relatively few cases of sexual assault, and that they had rigorous systems to ensure that complaints were thoroughly addressed. We realized there weren't going to be any quick fixes. Our investigation examined the awareness of misconduct over the last decade and the Academy's organizational culture, climate, structure, curriculum, reporting and response procedures and leadership (internal and external). We experienced the gravity of this crisis first-hand. We were stunned to hear stories from victims, many still too afraid to go public with their stories and, more disturbing, too afraid to make an official report of the crime. They shared with us how their lives have been torn apart by a violent assault and an aftermath that most of them suffered alone and in silence because of an atmosphere of fear and retribution by peers aided by either indifference, incompetence or a combination of both by an Academy leadership they believed failed them. Now was the time to pull all of our findings together, identify the root causes and provide lasting recommendations for the prevention and intervention of any future abuses.

References

REFERENCES

McAllister, B. (2003, February, 26). Official promises to investigate sex assault claims at Air Force Academy. Knight Ridder/Tribune Business.

Panel of House Armed Services Committee on Total Force, 108th Congress, Report of the Panel to Review Sexual Misconduct Allegations at the U.S. Air Force Academy (Comm. Print, 2003).

Senate Armed Services Committee Report. (2003, September 30). US Air Force Academy Sexual Assault Review. Opening statement of the Secretary of Air Force.

Soraghan, M. (2003, July 11). General blamed in scandal at Air Force. Knight Ridder/Tribune Business News.

Thomas, C. (2003, March 10). Conduct unbecoming: One female cadet's tale in the Air Force Academy's growing rape scandal. Time, 161(9), 46-47.

United States: sexual assault plagues military. (2003, September-October). Off Our Backs, 35(9-10), 6-8.

AuthorAffiliation

Charles R. Emery, Lander University

cemery@lander.edu

James E. Benton, Lander University

jbenton@lander. edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 13-17

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192411995

Document URL: http://search.proquest.com/docview/192411995?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 67 of 100

ST. LOUIS CHEMICAL: THE INVESTMENT DECISION

Author: Kunz, David A

ProQuest document link

Abstract:

The primary subject matter of this case concerns the issues surrounding evaluation of capital expenditures. Case provides a systematic approach to evaluating capital expenditures including a review of alternative capital budgeting methods and the relationship between cost of capital and capital budgeting. Secondary issues include cost of capital theory and the advantages and disadvantages of financial leverage. The case requires students to have an introductory knowledge of accounting, finance and general business issues thus the case has a difficulty level of three (junior level) or higher. The case is designed to be taught in one class session of approximately 1.25 hours and is expected to require 4-6 hours of preparation time from the students. St. Louis Chemical is a regional chemical distributor, headquartered in St. Louis. Don Williams, the President and primary owner, began St. Louis Chemical five years ago after a successful career in chemical sales and marketing. The company reported small losses during it first two years of operation but has since reported increasing sales and profits. The growth has required the acquisition of equipment, expansion of storage capacity and increasing the size of the workforce. The unexpected withdrawal of one of St. Louis Chemical's competitors from the region has provided the opportunity to increase its packaged goods sales, in particular, sales of material in fifty-five gallon drums. However, St. Louis Chemical's fifty-five gallon drum filling equipment is already operating at capacity. To take advantage of this opportunity additional equipment must be obtained, requiring a major capital investment. It is estimated that St. Louis Chemical must increase its drum filling capacity by at least 200,000 to 400,000 drums annually. The firm has no systematic capital expenditure evaluation process or an estimate of its cost of capital.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

St. Louis Chemical is a regional chemical distributor, headquartered in St. Louis. Don Williams, the President and primary owner, began St. Louis Chemical five years ago after a successful career in chemical sales and marketing. The company reported small losses during it first two years of operation but has since reported increasing sales and profits. The growth has required the acquisition of equipment, expansion of storage capacity and increasing the size of the workforce.

The unexpected withdrawal of one of St. Louis Chemical's competitors from the region has provided the opportunity to increase its packaged goods sales, in particular, sales of material in fifty-five gallon drums. However, St. Louis Chemical's fifty-five gallon drum filling equipment is already operating at capacity. To take advantage of this opportunity additional equipment must be obtained, requiring a major capital investment. It is estimated that St. Louis Chemical must increase its drum filling capacity by at least 200,000 to 400,000 drums annually. The firm has no systematic capital expenditure evaluation process or an estimate of its cost of capital.

COMPANY HISTORY

St. Louis Chemical is a regional chemical distributor, headquartered in St. Louis. Don Williams, the President and primary owner, began St. Louis Chemical five years ago after a successful career in chemical sales and marketing. In his previous employment he gained a solid understanding of the chemical industry and the distribution process. But his exposure to accounting and finance issues was limited. The company reported small losses during it first two years of operation but has since reported increasing sales and profits. The growth has required the acquisition of equipment, expansion of bulk liquid storage and warehousing for packaged goods and increasing the size of its work force.

Most initial business financing was provided by Williams, using the proceeds from liquidating his stock portfolio plus severance pay from his previous employer. Other capital was provided by an investment by his father, trade credit and a bank loan. The original bank loan was repaid last year. Williams has been reluctant to borrow funds because of the "fixed" nature of interest payments.

Despite its business success St. Louis Chemical is still a "large" small business with Williams making all important decisions. He recognized the need to develop a professional managerial staff, particularly in the area of finance. Recently, he hired Ann Bush as the company's first finance professional and placed her in charge of the company's accounting and finance activities.

St. Louis Chemical's board of directors is composed of Williams' family members and the company's attorney. The board's existence satisfies state regulatory requirements for corporations but provides no input to business operations.

CHEMICAL DISTRIBUTION

A chemical distributor is a wholesaler. Operations may vary but a typical distributor purchases chemicals in large quantities (bulk - barge, rail or truckloads) from a number of manufacturers. They store bulk chemicals in "tank farms", a number of tanks surrounded by dikes to prevent pollution in the event of a tank failure. Tanks can receive and ship materials from all modes of transportation. Packaged chemicals are stored in a warehouse. Other distributor activities include blending, repackaging, and shipping in smaller quantities (less than truckload, tote tanks, 55-gallon drums, and other smaller package sizes) to meet the needs of a variety of industrial users. In addition to the tank farm and warehouse, a distributor needs access to specialized delivery equipment (specialized truck transports, and tank rail cars) to meet the handling requirements of different chemicals. A distributor adds value by supplying its customers with the chemicals they need, in the quantities they desire, when they need them. This requires maintaining a sizable inventory and operating efficiently. Distributors usually operate on very thin profit margins. RMA Annual Statement Studies indicates "profit before taxes as a percentage of sales" for Wholesalers - Chemicals and Allied Products, (SIC number 5169) ranges from 2.1 to 4.5% with an average of 3.2%. In addition to operating efficiently, a successful distributor will possess 1) a solid customer base and 2) supplier contacts and contracts which will ensure a complete product line is available at competitive prices.

THE SITUATION

The unexpected withdrawal of one of St. Louis Chemical's competitors from the region has provided the opportunity to increase its packaged goods sales, in particular, sales of material in fifty-five gallon drums. That's the good news. The bad news is St. Louis Chemical's fifty-five gallon drum filling equipment is operating at capacity, thus to take advantage of this opportunity additional equipment must be obtained, requiring a major capital investment. It is estimated that, St. Louis Chemical must increase its drum filling capacity by at least 200,000 to 400,000 drums annually.

Williams is considering two alternatives proposed by the company's engineer. The first is the acquisition and installation of used equipment that will provide the capacity to fill an additional 200,000 fifty-five gallon drums annually. The used equipment will cost $860,000 to acquire and install. The equipment is projected to have an estimated life of three years. The second option is the acquisition and installation of new equipment with the capacity to fill 400,000 drums annually. The new equipment would have a substantially higher cost to acquire and install, $2,480,000, but have a higher capacity and an economic life of seven years. The new equipment is also more efficient thus the cost to fill a drum is less than the per drum filling cost of the used equipment. Williams asked Bush to lead the evaluation process.

Bush thinks the used equipment could be obtained without a new bank loan. The acquisition of the new equipment would require new bank borrowing. Bush feels that Williams may be willing to consider using debt if she can convince him of the advantages of using debt in the firm's capital structure.

The evaluation of each alternative will require an estimate of the financial benefits associated with each. Bush obtained projections of incremental sales of 55 gallon packaged material for the next seven years from the marketing and sales staff. Their estimates are provided in table one.

During the last year the average selling price for a fifty-five gallon drum of material has been near $35 and cost has been approximately $30.50. The marketing staff anticipates no significant change in either future selling prices or product cost.

PROJECT EVALUATION PROCESS

The company has no formal process for evaluating capital expenditure projects. In the past Williams had reviewed investment alternatives and made the decision based on his "informal" evaluation. Bush plans to develop a formal capital budgeting process using Cash Payback, Net Present Value (NPV) and the Internal Rate of Return (IRR) evaluation methods. She will need to educate Williams on the superiority of a formal evaluation process and these methods. Bush understands that the first step of the evaluation process is to estimate St. Louis Chemical's cost of capital. Knowledge of the firm's cost of capital is required to calculate a project's NPV.

Cost of Capital

Using input from an investment-banking firm, Bush has estimated the company's cost of equity to be 16%. A St. Louis bank has indicated a long-term bank loan can be arranged to finance the new equipment at an annual interest rate of 10%. The bank would require the loan to be secured with the new equipment. The loan agreement would also include a number of restrictive covenants, including a limitation of dividends while the loans are outstanding. While long-term debt is not included in the firm's capital structure, Bush believes a 30% debt, 70% equity capital mix would be appropriate for St. Louis Chemical. Last year the company's federal-plus-state income tax rate was 30%. Bush does not expect the income tax rate to change in the foreseeable future.

Used Equipment

The used equipment will cost $800,000 with another $60,000 to install the equipment. The equipment is projected to have an economic life of three years with a salvage value of $50,000. The equipment will provide the capacity to fill an additional 200,000 fifty-five gallon drums annually. The variable cost to fill a drum is estimated to be $ 1.75. The equipment would be depreciated under the Modified Accelerate Cost Recovery System (MACRS) 3-year class. Under the current tax law, the depreciation allowances are 0.33, 0.45, 0.15, and 0.07 in years 1 through 4, respectively. The increased sales volume will require an additional investment in working capital of 10% of sales.

New Equipment

The acquisition of new equipment with the capacity to fill 400,000 drums annually is the second alternative. The new equipment would cost $2,400,000 with installation cost of $80,000 and have an economic life of seven years and a salvage value of $120,000. The new equipment can be operated more efficiently than the used equipment. The cost to fill a drum is estimated to be $1.00. The equipment would be depreciated under the MACRS 7-year class. Under the current tax law, the depreciation allowances are 0.14, 0.25, 0.17, 0.13, 0.09, 0.09, 0.09 and 0.04 in years 1 through 8, respectively. The increased sales volume will require an additional investment in working capital of 10% of sales.

REQUIREMENTS

Assume the role of a consultant and assist Bush to answer the following questions.

1) Prepare a presentation for Williams regarding the concept of WACC.

2) Calculate St. Louis Chemical's WACC (round to the nearest whole number). What arguments should be made to convince Williams of the advantage of using long-term debt in the firm's capital structure?

3) Since the used equipment will be financed with internal capital and the new equipment with a bank loan should the same discount rate be used to evaluate each alternative? Explain.

4) Explain why an accurate WACC is important to a firm's long-term success.

5) Evaluate the strengths and weaknesses of the NPV, IRR and Cash Payback capital expenditure budgeting methods. Prepare a recommendation for Williams regarding the capital budgeting method or methods to use in evaluating the expansion alternatives. Support your answer.

6) Calculate the NPV, IRR and Cash Payback for each alternative. For these calculations assume a WACC of 13%. Based strictly on the results of these methods, should either option be selected? Why? How could the analysis be improved? Solution requires preparation of a spreadsheet.

7) The projected cash flow benefits of both projects did not include the effects of inflation. Future cash flows were determined using a constant selling price and operating costs (real cash flows). The cash flows were then discounted using a WACC that included the impact of inflation (nominal WACC). Discuss the problem with using real cash flows and a nominal WACC when calculating a project's NPV or IRR.

8) What other issues should be considered before a final decision regarding the expansion alternatives is made?

References

REFERENCES

Brigham, E. & J. Houston. (2004). Fundamentals of Financial Management, (10th Edition) South-Western, a Division of Thomson Learning.

Brigham, E. & M. Ehrhardt.(2002). Financial Management: Theory and Practice, (10th Edition), Harcourt Brace College Publishers

AuthorAffiliation

David A. Kunz, Southeast Missouri State University

dkunz@semo.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 33-37

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412002

Document URL: http://search.proquest.com/docview/192412002?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2004

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 68 of 100

KIRKLAND'S INC.

Author: Lane, Wilburn; McCullough, Mike

ProQuest document link

Abstract: None available.

Full text:

HOME DÉCOR/ACCESSORIES INDUSTRY

The home décor/accessories industry is a large and growing industry. In 2002, sales in this industry topped $78 billion-an increase of 7.9% over the previous year. The average net profit margin in the industry was 3.8%. Most of the major competitors in the industry are chains of 150 stores or more. Rather than franchising the stores out to owners in the different regions of the country, the stores are operated as part of corporate chains. This means that economies of scale are very important and give the chain owner a lot of leverage with suppliers. Companies in this industry rely upon word-of-mouth, catalogs, and more recently the Internet to deliver their messages. Historically, they have not spent a lot of money in traditional advertising vehicles. The average size store ranges from 3500 square feet for a small specialty retailer to 80,000 square feet for a big box store such as Bed, Bath, and Beyond.

This industry is highly fragmented. Competitors include the large mass merchandisers like Wal-Mart and Target; the specialty retailing chains like Kirkland's and Bombay; the big box (category killers) like Bed, Bath, and Beyond and Linens N' Things; the department stores like Macy's and Saks; the moderate to large size free standing specialty retailer who have chosen to use free standing stores like Pier 1; the catalog retailer; and the small specialty retailer with just one or a few stores. Ironically it seems that each of these segments of the industry have been able to carve out a niche for themselves, although department stores have been losing business to the other segments for the last 10 to 15 years.

Product innovation is one of the keys to success in this industry. Product must be cutting edge and up-to-date. Customers enter these stores looking for new and innovative ways to decorate their homes. Companies must constantly update and tweak the merchandise mix and the items carried within each product category. If a company misreads the market it can quickly lose its place in the industry to a competitor. If this happens very often the company may lose its identity-a fatal mistake in this industry.

With emphasis being placed on value focused retailing and product innovation, the management of the supply chain has become even more critical. Companies are investing literally millions of dollars in information systems that allow them to track their inventory, place orders, and shift merchandise at the push of a button or the click of a mouse. Many companies have established their own distribution systems and truck fleets. Some companies have even established buying offices overseas to cut out middle people. Companies have found that by better managing their supply chain they can lower their distribution and inventory costs, maintain their margins, and still offer the product to the customer at a lower price.

THE HISTORY OF KIRKLAND'S

Carl Kirkland, the co-founder of Kirkland's Inc., grew up in the retailing business. His father and grandfather ran a clothing store in Union City, Tennessee called Kirkland's Klothing. Carl fondly remembers that at age ten his father put him in charge of the Boy Scout department. After graduating from college with a degree in accounting, Carl went to work for a large home building firm in Memphis, Tennessee. During the mid-1960s, they develop a lot of the residential proper along the new I- 240 By-pass. Carl says that when he drives in that area today, he recognizes the houses they build and can picture what they looked like inside. As interest rate began to rise in the mid to late 1960s, the housing bubble burst and people quit buying new homes. Carl decided that he needed to look for another line of work.

In 1968, he returned to his retailing roots and opened a franchised gift shop in the recently built Old Hickory Mall in Jackson, Tennessee. Carl recalls that the store was reasonably successful from the beginning, and they did about $150,000 in sales the first year-a pretty good some of money for the times. About the same time, Carl's cousin, Robert Kirkland, opened a gift shop by the same franchiser in Nashville, Tennessee. Because of their success they began to look for other opportunities.

In the late 1970's Carl and his cousin began to travel to the orient looking for merchandise for Kirkland's. After doing this for a few years, they decided to go into the import wholesale business. At that point they started a company call CBK, which stood for Carl and Bob Kirkland. This business mainly catered to small retail gift shops, many of which were mom and pop stores that could not buy in large quantities. This business was run as a separate business, and they really never sold much merchandise to Kirkland's, Inc.

On July 11, 2002, Kirkland's Inc. went public, raising about $90 million. Robert Kirkland sold his remaining share in the business, and the company retired virtually all of its debt. It has remained debt free to this day, except for the line of credit it uses to fund inventory from time to time. Carl Kirkland is the Chairman of the Board, Robert Alderson is the President and CEO, Reynolds Faulkner is the CFO, and Chris LaFont is now Senior Vice President for Merchandising.

KIRKLAND'S TODAY

Kirkland's Inc. is a specialty retailer of home décor/accessory items. The stores have about 5,000 SKUs in a variety of merchandise categories including framed art, mirrors, candles, lamps, picture frames, accent rugs, garden accessories, and artificial floral products. The stores also offer an extensive assortment of holiday merchandise, as well as items carried throughout the year suitable for gift giving. In addition, the company uses innovative design and packaging to market home décor items as gifts.

Kirkland's purchases merchandise from approximately 200 vendors, and its buying team works closely with many of these vendors to differentiate the company's merchandise from that of its competitors. Kirkland's estimates that over 60% of its merchandise assortment is designed or packaged exclusively for the company. Generally, this is done based on the buyer's experience in modifying certain merchandise characteristics or interpreting market trends into a product and price point that will appeal to the company's customer. For products that are not manufactured specifically for it, the company may create custom packaging as a way to differentiate its merchandise offering and reinforce its brand names. The company markets a substantial portion of its exclusive or custom-package merchandise assortment under the Cedar Creek private label brand and other proprietary names. Its strategy is to continue to grow the company's exclusive and proprietary products and custom-packaged products within its merchandise mix.

STRATEGIC KEYS TO KIRKLAND'S SUCCESS

Kirkland's is very proud of its business strategy and feels it is the reason they have been so successful. There are five key elements of Kirkland's business strategy that differentiate them from their competitors and allow them to be successful where others have failed. These elements are discussed below.

Item-focus merchandising

While their stores contain a broad range of complementary product categories, they emphasize key items within their targeted categories rather than merchandising complete product classifications. They do not attempt to be a fashion leader, but their buyers work closely with their vendors to identify and develop stylish merchandise reflecting the latest trends. This allows them to respond quickly to changing trends. As mentioned earlier, approximately 60% of their merchandise is designed and packaged exclusively for Kirkland's, which distinguishes them in the marketplace and enhances their margins.

Ever-changing merchandise mix

While they maintain about 5,000 SKUs in their stores, they are constantly bringing in new "fresh" merchandise to create an exciting "treasure hunt" environment that encourages strong customer loyalty and frequent return visits to their stores. The merchandise is traditionally styled for broad market appeal, yet reflects an understanding of their customer's desire for newness and freshness. Their information system allows them to keep close track of individual item sales, enabling them to react quickly to both fast-selling and slow-moving items. They actively change their merchandise throughout the year in response to market trends, sales results and changes in season. Also, they strategically increase selling space devoted to gifts and seasonal merchandise in advance of holidays. They have a very experienced buying team-some have been with Kirkland's for more than twenty years. They work together to ensure that the products they buy will work in a Kirkland's store. Their experience and teamwork ensure that Kirkland's is constantly projecting the image of a store that offers traditional style that is current.

Stimulating visual presentation

The stores have a distinctive, "interior design" look that helps customers visualize the merchandise in their own homes and inspires decorating and gift-giving ideas. They use multiple merchandise arrangements to simulate home settings. This allows them to group complementary merchandise creatively throughout the store rather than display products strictly by category or product type. This cross-category merchandising strategy encourages customers to browse for longer periods of time, promoting add-on sales. While the average price of an item is $12.00, the average sales ticket is about $30.00.

Strong value proposition

Their customers regularly experience the satisfaction of paying noticeably less for items similar or identical to those sold by other retail stores, through catalogs, or via the Internet. The unique combination of style and value is an important element in making Kirkland's a destination store. While they carry items that sell for several hundred dollars, most of their items sell for under $50 and are perceived by the customers as "affordable luxuries." They are known in the industry as being tough negotiators on price. They are able to do this for three reasons. First, for the items they carry in their stores, they buy in large quantities. Second, they do not do a lot of charge backs to their suppliers. Third, unlike many other retailers in the industry, they pay when they say they will. Vendors have found that they can sell to Kirkland's at a lower price and do so profitably.

Flexible approach to real estate

They operate in a wide spectrum of different regions, market sizes, and real estate venues. Their lease arrangements are very advantageous. Their leases are for no more than ten years with a clause that allows them (or the landlord) to get out of the lease after five years. If the sales do not reach a certain amount by the fifth year, they can get out of the lease. Also, they have clauses in their leases that allow them to get out of a contract if other stores in the mall leave. This makes it easy for them to open stores in very desirable locations and to close stores that are not performing to expectations. Kirkland's reputation makes landlords want Kirkland's in their shopping centers. Because of their experience in opening stores and their wonderful reputation as a tenant, they can open a store and stock it for an initial investment of $300,000. They estimate their payback on a new store to be two years.

TWEAKING THE STRATEGY

While the primary business strategy has remained the same for years, Kirkland's has done several things to tweak the strategy to make it better. First, they are no longer considered a gift shop. Granted they still carry seasonal/gift items, and the fourth quarter of the year is still very important to them-40% of their sales and 80% of their profits occur during the fourth quarter. However, over the years they have moved from being a gift shop to being a retailer of home décor/accessories items. They have phased out the tableware because they could not compete with department stores that offer greater width and depth of assortment in this category.

They no long carry collectibles (such as Precious Moments) because there are a lot of small gift shops that now carry these items. At one time they had an extensive collection of dolls, but much of that business is now at Wal-Mart or other mass merchandisers. They have replaced these product categories with lamps and wall décor such as framed art. According to Chris LaFont (Senior Vice President for Merchandise), 60-70% of their business is strictly home décor/accessories purchases.

Second, while according to Robert Alderson (President and CEO), "Kirkland's grew up in the malls," they are now considering other retail venues. Their desire to have more stores and the declining popularity and number of new malls has forced Kirkland's to consider other retail venues. As Mr. Alderson said, "today's customer want to drive up in front of the store, get out, go in, get what they want, and get out quickly." Kirkland's has recognized this change in shopping patterns and is repositioning itself to reach its target market. They now have stores in power strips, life-style centers, and large-scale outlet malls.

Third, they have upgraded their information system so they can keep better control over their inventory. Over a three-year period (beginning in 1999), Kirkland's invested $6.5 million in a new information technology that tracks each store's sales and inventory. This helps them determine what merchandise needs to be replenished and what needs to be shifted to other stores. This has allowed the store manager to concentrate more on visual presentation and selling rather than managing inventory.

Fourth, in addition to the new information technology, they have established a central distribution system in Jackson, Tennessee. Previously, the merchandise was shipped directly from the vendor to the individual stores. This meant each store manager had to manage the inventory and find suitable storage space for the merchandise. With the new central distribution system, the vendor ships the merchandise to one location; and the merchandise is distributed to the stores as needed. Currently, about 75% of their merchandise is distributed this way. This has saved a lot of money in freight costs and in local storage costs. The new information technology and the new distribution system have allowed Kirkland's to reduce the individual store's inventory and speed up its turnover rate.

Fifth, while Kirkland's is still a brick and mortar business, they have established a website where customers can learn more about Kirkland's, find store locations, down load coupons, purchase gift certificates, make purchases, and communicate with Kirkland's. They plan to offer some incentives that will give them more information about their customers and allow them to communicate with customers via e-mail.

References

REFERENCES

Personal Interviews

Alderson, Robert (President and CEO, Kirkland's, Inc.) Personal Interview 2-19-04.

Faulkner, Reynolds (Chief Financial Officer, Kirkland's, Inc. Personal Interview 2-23-04.

Kirkland, Carl (Chairman of the Board, Kirkland's, Inc.) Personal Interview 2-19-04.

LaFont, Christopher (Senior Vice President of General Merchandise, Kirkland's, Inc.) Personal Interview 2-20-04.

AuthorAffiliation

Wilburn Lane, Lambuth University

lane@lambuth.edu

Mike McCullough, University of Tennessee at Martin

mccullou@utm.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 39-43

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412053

Document URL: http://search.proquest.com/docview/192412053?accountid=38610

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 73 of 100

MILLER'S PROFESSIONAL IMAGING 1999 (A)

Author: O'Bryan, David; Weaver, David; Box, Thomas M

ProQuest document link

Abstract:

The primary subject matter of this case concerns the business strategy that needs to be employed at the largest film processing firm in the United States at the beginning of the year 2000. Secondary issues include HRM policies and operations strategy. The case has a difficulty level of four and is appropriate for seniors. The case is designed to be taught in one fifty minute class and is expected to require two-three hours of outside preparation by students. At the end of 1999 Miller's Professional Imaging was facing several business challenges. Despite an enviable track record of exponential growth and above industry profits for the proceeding twenty years, they had run out of capacity and were unable to accept new customer accounts. This $60 million business was a commercial film processor that focused on the professional photographer who specialized in "people pictures "-graduation, wedding and school photographs. They were (in 1999), the largest "player" in this niche market in the United States. The firm was located in Pittsburg, Kansas - a small rural community with a population of about 18,000. This community had experienced declining population for the preceding twenty years. An additional challenge facing the firm is what Andy Grove (Chairman and CEO of Intel) called an "inflection point" - a radical change in the industry and market for the firm that would probably require an entirely new business model. That change was the emergence of digital photography.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

At the end of 1999 Miller's Professional Imaging was facing several business challenges. Despite an enviable track record of exponential growth and above industry profits for the proceeding twenty years, they had run out of capacity and were unable to accept new customer accounts. This $60 million business was a commercial film processor that focused on the professional photographer who specialized in "people pictures "-graduation, wedding and school photographs. They were (in 1999), the largest "player" in this niche market in the United States. The firm was located in Pittsburg, Kansas - a small rural community with a population of about 18,000. This community had experienced declining population for the preceding twenty years.

An additional challenge facing the firm is what Andy Grove (Chairman and CEO of Intel) called an "inflection point" - a radical change in the industry and market for the firm that would probably require an entirely new business model. That change was the emergence of digital photography.

INTRODUCTION

Miller's Professional Imaging (Miller's) is a 450 person commercial film processor located in Pittsburg, Kansas. The firm serves professional photographers (SIC 7221) who are primarily "people photographers" - those who take wedding, prom and school pictures. Miller's prides itself on customer service, quality and very rapid delivery of prints utilizing an exclusive contract with Airborne Express.

The firm was founded by William S. (Bill) Miller in 1939. Bill was a professional photographer who developed film in a small lab adjacent to his studio. With black and white film, a modest investment in darkroom equipment was sufficient to produce high quality prints. Most professional photographers (at that time) developed their own prints.

The widespread adoption of color photography in the 1960s created a need for commercial film development services because developing color film is a more complex and costly process than developing black and white film. Bill Miller began to develop color film for other professional photographers in 1968 and this service gradually became the primary business of Miller's. By 1999, Miller's was the largest independent film processing lab in the United States with revenues in excess of $60 million.

ORGANIZATION

Miller's is a privately held Subchapter S corporation and all stock is held by members of the Miller family. Richard Miller is the President and CEO and he joined the company in 1971. Bill Miller's son-in-law, Dick Coleman is Vice President and Bill's grandson, Todd Coleman, is Chief Operating Officer. The company is organized into nine departments and the hierarchy is quite flat. It is a "fast, fluid, flexible" organizational structure that facilitates communications and very quick responses to customer needs and problems (Peters, 1994).

Miller's has a penchant to measure virtually every aspect of the operation on an individual and group basis. "Stretch" targets have been established for virtually every position in the organization and progress towards achieving those targets is measured daily. Miller's seems to exemplify some aspects of a Low Cost Leadership strategy - very tight control systems and a high degree of automation to minimize labor costs, but they also differentiate with a well-developed customer service orientation and very high quality standards (Porter, 1980).

The company and Richard Miller and Dick Coleman individually have been very active in the Pittsburg, Kansas community. They have made substantial contributions of time and money to a variety of charities and are major benefactors of Pittsburg State University. They are one of the major employers in the community and have a well-deserved reputation for community involvement.

MARKETING

Miller's (in Pittsburg) has two major business lines - film development and cut negative orders. After a photo "shoot", the photographer ships their undeveloped film to Miller's by Airborne Express. Film development yields a cut negative and a proof for each image which is returned to the photographer within two days - in all cases. The photographer then reviews the proofs (often with his or her customer) and returns an order which is also processed in two days or less. It is of interest to note that approximately 99% of all customer orders are actually processed in one day.

Pricing of services is "market pricing". Miller's has a large number of competitors around the country - offering a range of prices and services - and thus the industry is highly competitive. Miller's prices in the middle of the range (Miller, 2003) and is able to generate an exceptional profit at this level probably because of the high level of service provided and the sophistication of the operations side of the business.

Miller's employs no salesmen. Promotion is essentially "word of mouth" and the company's reputation for very high quality, very fast order "turnaround" and a 100% satisfaction guarantee have generated an exponential growth rate over the last 25 years. Miller's serves customers in all 50 states and, as yet, has not engaged in foreign sales.

OPERATIONS

The essence of Miller's operations can only be described as "high tech". Richard Miller states, "We believe in being leading edge with technology and we are always on the lookout for better ways to handle our business" (Miller's Professional Imaging, 1994). Automation is a key word at Miller's. They utilize advanced work stations to control every aspect of order processing, scheduling and delivery. Computerization also plays a major role in their electronic imaging services. The firm uses multi terabyte servers, hundreds of high powered Dell computers, Durst Theta and Lambda large format laser printers, Kodak RP30 laser printers, and Fuji's Digital Minilab systems. Eight staff members handle the hardware maintenance, and three staff members are responsible for the software maintenance. Richard Miller (a Mathematics graduate with a Master's degree from the University of Missouri) brought the first computer to Miller's in 1973 and wrote the entire initial programs himself. Today Miller's uses 775 custom-designed computer programs to run every aspect of the business including a highly sophisticated control system that monitors every aspect of the business each day.

Film development for new orders begins at 6 AM each morning. Film rolls are sorted into product groups that share a common development process. Each roll of film is assigned a unique bar code and then the film is racked and dipped into chemical baths for processing. Completed negatives are placed in protective sleeves and they are moved to a "proofing" station where quality is assessed and optimal print settings are developed on an analyzer. Printing begins at 9 AM and a "proof of each negative is created. The proofs are again reviewed and completed orders move to processing where each day's outbound shipments are prepared along with shipping documentation and invoices.

After a customer has reviewed the proofs and determined how many of each portrait they wish to order, the negatives are returned to Miller's (by Airborne Express) and each order is assigned a unique bar code. A 4" x 5" test print is generated first and compared to standards. Necessary adjustments are made and the negatives are loaded into one of six printing machines. An infrared scanner reads the barcode on the placard holding the negative to determine optimal print settings and quantities and the prints are made automatically. Because of the very high degree of automation, only two employees are required to run the six printing machines. All portraits are then sent to shipping where orders for that day are ready for pickup by Airborne at 5:30 PM. Prints completed after the shipping "cut off" are shipped the next day.

In 1999, the lab processed over 2 Million rolls of film with as many as 20,000 print orders per day during the fourth quarter of the year. Accuracy rates run from 95 to 99% and employee productivity is exceptional. Sales per employee were more than $100,000 annually and this is more than double the productivity of competing labs.

HUMAN RESOURCE MANAGEMENT

Miller's is an "enlightened employer" (Peters, 2003). Employees are held to very high standards in terms of both accuracy and speed, but they are also provided extensive "on the job" training. Employees are also cross trained as a matter of company policy so as to preclude any shut down as a result of absenteeism or inclement weather. Annual reviews of performance are conducted for each employee, but management prefers to give timely, frequent feedback on performance. There are, generally, no surprises at the annual performance review.

Benefits are extensive and well beyond what most firms in the area provide. A profit sharing system has been in place since 1976 and it returns 20% of profits to the employees as a percentage of annual earnings. Three fourths of the profit sharing funds are paid in monthly bonuses and the remainder is invested in a retirement plan. This profit sharing distribution typically equates to more than 50% of an employee's annual base pay. Miller's also conducts many social events for employees - such things as picnics, ball games in Kansas City and canoe outings. There is a real sense of "family" among the Miller's employees.

FUTURE CHALLENGES

In 1999 and early 2000 the company faced a severe capacity constraint. Due to the rapid growth in demand for their services, they were unable to accept new customer accounts. Although it seems obvious that capacity expansion was the answer to this dilemma, there are labor constraints in the Pittsburg community.

Secondly, the industry (Film Processing) was facing what Andy Grove (Chairman and CEO of Intel) describes as an "inflection point". A transition was beginning from film to digital photography. This new technology brought with it several challenges - no longer would film be processed from negative to print. The images would be stored in digital files and downloaded for printing on dedicated printers. Also, digital imaging requires access to employees with well developed expertise in this medium - a real challenge in the small Pittsburg community.

DISCUSSION QUESTIONS

1) Conduct a SWOT analysis of Miller's Professional Imaging in 1999.

2) Technology solves some management control problems but can create other control or strategic problems. Comment on this irony.

3) What Generic Strategy is Miller's following? Is this what they should be doing? How does their strategy correspond to Porter's ideas about Generic Strategy?

4) What are the Strategic Issues facing Miller's Professional Imaging in late 1999 and early 2000?

5) What specific strategy do you recommend for Millers' as they go forward to the 21st Century? What are the important implementation considerations?

References

REFERENCES

Miller, R.G. (September, 2003). Miller's Professional Imaging. Presented to MGMKT 921-01 class (Topics in Entrepreneurship), Kelce College of Business, Pittsburg, KS.

Miller's Professional Imaging (1994). Retrieved November 28, 2003, from http://www.math.missouri.edu~elias/miller.html.

Peters, T. (1994). The pursuit of WOW!. New York: Vantage Books.

Peters, T. (2003). Re-imagine!. London: Dorling- Kindersley.

Porter, M.E. (1980). Competitive Strategy. New York: The Free Press.

AuthorAffiliation

David O'Bryan, Pittsburg State University

obryan@pittstate.edu

David Weaver, Weaver Photography

Thomas M. Box, Pittsburg State University

tbox@pittstate.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 77-81

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192411935

Document URL: http://search.proquest.com/docview/192411935?accountid=38610

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 75 of 100

BETHLEHEM STEEL: DOWNFALL OF A GIANT

Author: Ragucci, Donna M; Gulbro, Robert D

ProQuest document link

Abstract:

The purpose of this case is to showcase the downfall of an industry that could not survive the demands of a changing economy and environment. The Bethlehem Iron Company was formed in 1861 in the town of Bethlehem, Pennsylvania. Early construction of the manufacturing mills was delayed due to the Civil War disturbance in 1863. However, the first iron rails were rolling from the mill on September 26, 1863. The Company prospered due to its prime location in the Lehigh Valley of Pennsylvania and its close proximity to the ore and fuel supplies. The Company drew attention and interest of steel men for its ingenuity, engineering skills, and its exceptional high quality output. Soon, the Bethlehem Iron Company became known as Bethlehem Steel Company.

During the next twenty years, the Company expanded to manufacture heavy materials, including forging for large caliber guns. It became known as a leader in the design and development of ordnance equipment used in the United States and other countries around the world.

Mr. Charles Schwab brought his large-scale business practices to the Company in 1900. He brought about a sharp distinction between management and labor. He also instituted the revolutionary "bonus system", which rewarded individuals for high production levels. Under Charles Schwab, andwith help from World Wars, Bethlehem Steel increased in production andsize. This brought about the mentality that Bethlehem was a prosperous "steel town," which caused the population and financial backing to skyrocket.

Full text:

CASE PURPOSE

The purpose of this case is to showcase the downfall of an industry that could not survive the demands of a changing economy and environment.

CASE SYNOPSIS

The Bethlehem Iron Company was formed in 1861 in the town of Bethlehem, Pennsylvania. Early construction of the manufacturing mills was delayed due to the Civil War disturbance in 1863. However, the first iron rails were rolling from the mill on September 26, 1863. The Company prospered due to its prime location in the Lehigh Valley of Pennsylvania and its close proximity to the ore and fuel supplies. The Company drew attention and interest of steel men for its ingenuity, engineering skills, and its exceptional high quality output. Soon, the Bethlehem Iron Company became known as Bethlehem Steel Company.

CASE SITUATION

Mr. Charles Schwab understood the precariousness of relying solely on government contracts for his steel. He aimed for expansion. He concentrated on owning all stages of supply and production of steel. By 1910, Bethlehem Steel's profits grew significantly from rising sales and increased efficiency that he brought.

Then in 1914, World War I broke out in Europe. Bethlehem Steel was the first American company to get a "war order." There was a great demand for steel, but there were not many men available in the workforce. This was not a problem for Mr. Schwab; he installed women to man the assembly lines, and since child labor laws were not in effect yet, he employed children to work along side their mothers. The war effort helped the Company triple its capacity from 1 million tons of steel per year in 1914 to 3 million tons per year in 1918. The workforce also expanded from 9,712 employees in January 1915 to 21,705 by January 1918. The first half of the twentieth century was known as the "Golden Age" for the steel industry. World War II and the American infrastructure continued to increase the demand for steel. Mr. Schwab was given all the credit for this.

Under the management of Eugene Grace, differences between management and labor was encouraged. He worked hand in hand with Mr. Schwab to help build Bethlehem Steel into the number two steel producing and number one shipping company in the world. He created, "the Loop" program - an elite group that trained new managers for the Company. This group also incorporated the role of judging the social and personal lives of its workers. At this time, labor became more united through the National Steel Worker's Union, and management began to lose control of the employees.

By the 1960s and 1970s, there was much change and confusion in Bethlehem Steel. The rapid and constant turnover of management and the labor workforce every few years caused a problem with continuity and the constant change slowed down processes. The Company was becoming outdated, and drastic changes had to be made to maintain profitability. Competition from smaller mills and foreign imports threatened the Company. Decades of executives with large salaries and expensive "perks" became harmful to the Company. Laborers were protected by the union and enjoyed high wages and job security. By 1980, Bethlehem Steel was tied to a single industry and began its downward spiral.

OUTCOME

Changing markets and outdated practices had taken its toll on Bethlehem Steel. The Company filed Chapter 11 Bankruptcy on October 15, 2001. They blamed their demise on not balancing strategic alternatives toward organization, a seasonal decline in steel shipments, and the increased cost of raw materials. The automotive business, which was a large steel purchaser, was a good customer but other markets were down.

The only alternative for Bethlehem Steel was to close or sell to the highest bidder. The Company was an oligopoly at one time and the American dream for its workers. It was still a good steel producer, but with no ability to increase its customer base, the Company chose to sell out to a competitor who might be able to re-create the steel business in the global economy.

International Steel Group (ISG) acquired all of Bethlehem Steel through its sale of the Company on May 7, 2003. ISG is the fourth largest steel company in the United States and the newest competitor in the global steel industry. Bethlehem Steel's vision and mission catered only to the United States, whereas, ISG was more focused on the global economy.

FUTURE EXPECTATIONS

Bethlehem Steel Company is no longer a viable company. However, its name is still a symbol of greatness in American society. Anyone associated with Bethlehem Steel will be looked upon favorably. ISG will do well to maintain a close relationship with Bethlehem Steel's name and trade on its reputation.

The Transition Management Team, set up by ISG, will maintain continuity of operations at the Bethlehem facility and meet the satisfaction of its customer base. Former employees of Bethlehem Steel will be given training opportunities to move into new positions in the company. ISG will complement Bethlehem Steel by using fully established facilities, which will represent the potential for great cost savings and possibly create cross-selling opportunities. ISG is focused on making the facilities the industry benchmark. They will strive to incorporate a committed and dedicated workforce and overcome the challenges of an on-going business.

ISG produces a wide-range of steel products. Its markets include automotive, construction, machinery and equipment, appliances, containers, service centers, and rails. ISG is actively engaged in integrating specific customer service quality system certification requirements into its business processes.

ISG re-started Bethlehem Steel, and with a new labor agreement, it can create a great new company. The twenty-first century will re-engineer the steel industry with robust partnerships, integration of research and education, and global reaching. By incorporating these advancements, ISG is and will continue to be a leader in the restructuring and consolidation of the North American Steel Industry.

DISCUSSION

The problems addressed through discussions between Bethlehem Steel and ISG, before the acquisition, showed a real need for radical change. A strategic advantage for managers in both companies should have had them envision change in the industry structure, their people and their culture, their products and services, new technology, and the thought of moving forward.

Bethlehem Steel concentrated in shipping using railroads, which limited its customer base. The Company was located in Lehigh Valley, Pennsylvania not far from the Philadelphia Naval Yard, but the thought of this useful resource as a customer and a shipper never was a priority for them. The potential for expansion and growth was never envisioned. Management and labor were too selfenclosed and formal in their business practices. They concentrated on how they did business without realizing what was happening around them. Because of this, like IBM, they were in love with their product and processes. They ignored new ideas and possibilities, while maintaining the status quo. They were too much a mechanistic structure in their approach to managing the organization.

ISG, on the other hand, realized the importance of the shipping industry and increased its annual shipping capabilities by more than 16 million tons last year by using the shipyards and railroads throughout the country. ISG's idea of boundary spanning brought in new and fresh ideas, new people, and new processes. From experience, ISG learned that managers and supervisors needed to allow employees some freedom to do their jobs. They allowed them to create business plans and make their own rules as they implemented new ideas. Their employees are empowered to create a changing environment in the company, which allows for a fast-paced and goal oriented workforce. Their hierarchy of authority and communication goes both horizontal and vertical, but mostly horizontal. There is more discussion by employees and management about what new systems, processes, and businesses to focus attention on at any time of the year. Their environment remains somewhat stable, but communication is open, and the flexibility to cross-train and do work in other departments helps maintain a more organic structural approach.

Bethlehem Steel had the philosophy of keeping management and labor separate, and the longer they were in business, the more the separation of the two functions increased. Although both areas were given good salaries, the disparity was beginning to take its toll, especially after the United Steel Worker's Union came about.

ISG's philosophy has been to divide activities into functions by specializing areas throughout the company. They have incorporated competitive salaries and wages for staff, simplified job classifications, created flexible work rules, and established new pay, and incentive and benefit programs. This was a revolutionary change in the industry.

Bethlehem Steel had lost track of their operative goals. Seemingly overnight, Bethlehem Steel had gone from industrial titan to struggling dinosaur. They never saw change coming. They were no longer cost efficient or cost effective. Their legitimacy for being in business had gone awry. They continued to try to be customer oriented and to establish good relations with its workers, but had no vision for the future. They chose to buffer themselves, and to insulate their workers, who then became slow to react to change. There were no long-term goals or strategy for the future in the steel industry. They didn't see how they could re-invent themselves or start something new. The business's processes were out of date, and no one envisioned a new way of doing business in the global economy. They had different leadership over the years, which should have revitalized the company and the culture. Normally, changes in top management provide for new ways of thinking and gives new direction. Unfortunately, this was not the case for Bethlehem Steel.

ISG's concept was to consolidate functions and then have smaller focused companies. This was a new and revolutionary idea in the steel industry. They agreed that they had to be flexible and adaptable to appeal to a variety of ever-changing regions of the world. They maintained a productive and efficient company, even in a worsening steel market, and still made money. They developed a good business plan, which concentrated on cost and debt structure and labor agreements. ISG did what Bethlehem Steel said they couldn't do, to increase contract business. This helped to tighten its grip as leader of the consolidating North American Steel Industry. They didn't want this designation, but they were thrust into this role because of the ability to keep costs down and establish a cooperative working relationship with the United Steel Workers Union.

Also, ISG saw the opportunity of new technology - the Internet. E-Commerce and new business-to-business transactions was seen as the wave of the future. ISG sees this as an opportunity to bring an adequate return on prices and to fill orders quickly. Inventories can be increased, which brings in more business and creates more jobs for American workers. Organizations like ISG will be a leader in their industry, if they can establish a differentiation strategy that will distinguish their products above others.

CONCLUSION

If Bethlehem Steel had half the vision of ISG, they would still be in business. If they had maintained their focus on contract business, the use of resources close to home (the Naval Yard), and new technologies (the Internet), their company would be the one buying other, smaller, inadequate steel companies. Also, it is too bad that Bethlehem Steel didn't use ISG to benefit them in some way, as they could have formed a strategic alliance or joint venture.

ISG needs to maintain their momentum and keep the lessons learned from the demise and downfall of Bethlehem Steel from happening to them. This will be possible if they continue to improve their business practices, set new goals, and assess the results of their goals. Adapting and surviving in a changing economy makes it critical to remain focused on the goal and remain creative in achieving that goal. Their creative use of strategy, structure and technology will meet the needs and demands of the global economy.

References

REFERENCES

Bethlehem Steel Corporation. "A Brief History of Bethlehem Steel Corporation." Bethlehem, PA: Bethlehem Steel Corporation, 1990.

Bethlehem Steel Web Page. Retrieved from http://www.bethlehempaonline.com

Arundel. The Story of Bethlehem Steel. New York: Moody, 1916.

International Steel Group Web Page. Available: http://www.steelnews.org

Strohmeyer, John. Crisis in Bethlehem: Big Steel's Struggle to Survive. Pittsburgh: University of Pittsburg Press, 1994.

TEACHING IDEAS:

Bethlehem Steel made textbook mistakes even during its successful period. These mistakes led to its final demise as a competitive organization and led to its sale. A wide variety of courses would be interested in using this sort of case. Types of classes that could use the case:

Organizational Development and Change: It kept an inward focus and failed to change.

Organizational Theory: It used buffering and did not use boundary spanning in a way that would bring in new ideas.

Strategic Management: A classic case that could be used in a one-hour class discussion of ways a firm can or should attempt to re-invent itself to survive in our market economy.

International Management: Bethlehem Steel has been bought out by a firm that is more successful in the global economy.

AuthorAffiliation

Donna M. Ragucci, Florida Tech

dragucci@fit.edu

Robert D. Gulbro, Athens State University

gulbror@athens.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 85-89

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412412

Document URL: http://search.proquest.com/docview/192412412?accountid=38610

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 76 of 100

THINKING ON YOUR FEET DURING A CRISIS: THE FAILURE OF THE LAST ANGLO-SAXON KING

Author: Scarpati, Louis; Betts, Stephen C

ProQuest document link

Abstract:

The process of Crisis Management can be broken out into three distinct phases: pre-crisis preparation, dealing with the crisis itself, and learning from the ordeal after the crisis is over. While the study of all phases is important, this case examines the most crucial phase, the actual crisis itself. The case describes the Battle of Hastings, placing emphasis on the decisions made by Harold Godwinson, the last Anglo-Saxon King of England. First the events leading up to the battle are presented to provide the context and show the preparations undertaken by Harold. Next the Battle itself is explored.

The most important skills that a leader can have in dealing with a crisis are the ability to reasonably and objectively evaluate real-time feedback, and the ability to adapt to your surroundings and change course, quickly and decisively, as the situation evolves. The Battle of Hastings demonstrates the failures that can occur when a leader does not have these skills. Crisis management and leadership are the primary topic areas covered. The case is designed for senior level undergraduates or entry MBA level students (difficulty 4/5). It is designed to take one hour of class time with one hour of outside preparation.

Full text:

CASE DESCRIPTION

CASE SYNOPSIS

In the spring of 1066AD, Harold Godwinson was celebrating his third month as the AngloSaxon King of England. This new king acquired two fairly powerful enemies almost immediately William, the Duke of Normandy, and Harald Hardrada, King of Norway, both of whom were preparing to invade. So the king called out to the entire kingdom for men to mobilize, had defensive positions built along the southern coast at strategic locations, and had many staging areas set up on good ground where he could rally troops and defend the land against invasion.

Hardrada was the first to make a major attack, finally landing near York in the central eastern part of the island. The well trained English reached them in a few days and used tactics that had proved successful in earlier uprisings. They were able to repel the Norwegian invaders in one day.

Meanwhile, William's army had landed and proceeded to the town of Hastings. Harold arrived in London ahead of his main for ce and moved toward Hastings with a new army of relatively untrained men. The forced-march which worked with his seasoned troops did not work with the new soldiers. It is estimated that no more than a third of the English army, was on the field when William, long since ready to attack, approached. Unlike previous adversaries, the Norman army had knights and archers who rendered Harold's previously successful tactics ineffective. Harold was unable to adjust during the battle. Despite careful planning and proven successful tactics, the shortlived career of the last Anglo-Saxon King was over.

THE CASE

In the spring of 1066AD, Harold Godwinson was celebrating his third month as the AngloSaxon King of England. He was not supposed to have been king, though there is ample historical evidence to show that he had coveted the crown for many years before he took it. But Harold Godwinson, the Earl of Wessex, was neither short on ambition or on means.

Harold Seizes the Throne

Harold seized the throne before anyone else could in mid-January 1066AD, old King Edward, having died on the fifth of that month, literally lowered into his grave as the crown was put upon Harold's head. There were a few minor rumblings among some of the other Earls and Thegns, the nobles of the realm. But, those rumblings were all put down immediately.

Still, for all his speed and early successes against these local lords, this new king acquired two fairly powerful enemies almost immediately. The first of these two enemies was the Duke of Normandy, William by name - a man King Harold had sworn to support, while fighting along side him not two years earlier in that man's bid to become England's King. The other was the King of Norway, Harald Hardrada, who had diplomatic and hereditary claim to the English throne and whose people had been raiding and invading the island kingdom for more than two centuries.

The Invaders From Norway

In the summer of 1066AD, Hardrada's ships appeared off the southern English coast. They harried the English coastline for weeks, moving steadily up the east coast of the island. But at the same time, King Harold was receiving intelligence from William's court that the Duke of Normandy was mustering troops and also preparing to invade. The king waited at London for one or the other to make landfall.

But, the king did not wait idly. He called out to the entire kingdom for men to mobilize. He had defensive positions built along the southern coast at strategic locations. And, he had many staging areas set up on good ground where he could rally troops and defend the land against invasion.

Hardrada was the first to make a major attack, finally landing near York in the central eastern part of the island. King Harold was alerted to the landing and told of his enemy's progress by series of signal pyres, fires atop huge towers set up along the road from York that could send a signal down to London in a matter of hours. When the siege began, King Harold left London for York with his army.

The siege at York lasted two or three days, but the city fell on Sunday the twenty fourth of September.

Harold Moves Towards York

The Norwegians held York, but Harold Godwinson was moving quickly. By Monday, the twenty fifth, he was in range to strike the Norwegian army. He had force-marched, traveling an average of 50 miles per day (Tetlow, 1974). This aggressive and bold move caught the Norwegian King by surprise, much as Harold's usurpation of the throne nine months earlier surprised his fellow lords.

The two armies met at Stamford Bridge, seven miles east of York. When King Harold crossed the bridge, he stopped his march. Accompanied by his hand picked guard of Housecarls, loyal and professional soldiers whom even the Norwegians said were worth any two of their own number, he approached the Norwegian King. He offered Tostig, an ally of Hardrada and Harold's long estranged brother, one third of his new kingdom, if he, Tostig, would make peace and defect to Harold's side. When Tostig asked what would be given to his ally for this peace, Harold offered a grave large enough to comfortably fit the large man's frame.

The offer was refused, of course, and the battle ensued.

The Norwegians Fall

The battle was a quick and bloody affair, lasting only one day. The English attacked the shield-wall of the Norwegians several times, and were repulsed each time. At some point, the English retreated, and the Norwegians ran after them. The well-trained English turned and faced the on-rushing force, and the Norwegians could do little but batter themselves against the English shield wall. They battered themselves throughout the rest of the morning.

Eventually, the Norwegian King, "a huge man of great fury" (Linklater, 1966), found himself standing at the forefront of his forces. As such, he was supremely vulnerable to English arrows and throwing spears. Predictably, he took one or the other in the throat before midday and died. Loyal Tostig fought on throughout the rest of the day, even after being offered a second chance at peace. He died soon after the offer, and the battle was over.

King Harold Godwinson stood victor over the field. He did not allow his men to take booty from the dead. He granted them only a brief celebration that evening, for he knew that he would have to mop up what remained of the Norwegian forces in the area the next morning, and then head south again, to London, in order to prepare for William.

But while he was still at York, the king received word that on the twenty eighth of September, William's army had landed at Pevensey Bay south of London. And, that landing was uncontested.

William Moves Towards Hastings

When no resistance materialized at Pevensey Bay, William of Normandy scouted the roads to London. He could not believe his good luck at the unopposed landing, but he was not satisfied with the roads or his position. So, he ordered his men and his fleet to move a bit north and east, to the town of Hastings, which . commanded many good roads into London. In this position, William could make a lot of trouble.

And, he did.

He spent several days ravaging the villages and countryside around Hastings, hoping to draw King Harold down from London, for he could not hold out too long in hostile territory about which he knew little.

And, it did.

Harold Moves Towards Hastings

While William was making noise at Hastings, the king was force-marching again back to London, this time at 35 to 40 miles per day. He had to leave most of his army behind though, as many were not able to keep pace. Luckily, when he arrived at London on the sixth of October, there was a sizable force of men waiting for him. These were the levies he had called up from the more remote regions of his kingdom to help fight at York. These men were not as seasoned as those who had fought at Stamford Bridge, and most were relatively untrained. But, they would have to do.

Harold spent only five days in London. Then, as he had done to reach Stamford Bridge, he force-marched his army to meet William. It took him only two days to get to one of his prepared sites, the one nearest to Hastings - a place called Battle. It was an excellent site for a defensive fight, a narrow approach up a steep ridge, flanked by nearly impassable bogs on either side. Unfortunately, that is not what the king wanted.

A forced-march of this kind is most effective when it gives the marchers the element of surprise for an attack. Often, a rout occurs before the enemy knows what hit him, and the battle is over quickly.

This is what Harold needed. It is not what he got.

William saw his hurried approach. And, as Michael Wood points out, unlike at Stamford Bridge, "Harold, not William, was taken by surprise." The king, in his rush to get to Hastings, did not put up a defensive screen of outlying soldiers to probe the surrounding area ahead of and around the main body of the army.

The Battle Begins

The battle began on the morning of the fifteenth of October. There are varying accounts, but it seems the English did not even arrive at the site until after dawn, with little or no sleep at all. Further, a good portion of the king's army still stretched for miles behind him, so hard had he pushed them. It is estimated that no more than a third of the English army, was on the field when William, long since ready to attack, approached.

Moreover, Harold's force was inferior to the Norman's army. William had 4000 knights. Harold did not have any. While William's army was small in comparison to Harold's total force, probably no more than 12,000 men total, he had many more archers than the English, and perhaps most importantly, the archers were formed in units. The English archers were not.

These Norman archers advanced first, firing into the English shield wall. Perhaps not surprisingly, the wall held, as the arrow and bow of the did not pack enough punch to go through a thick wooden shield of an English infantryman.

Next, William ordered a cavalry charge. But, the day of charging in huge formations had not yet dawned, so these troops attacked in loose groups and in small formations, one after the other. This piecemeal attack failed to break the wall, as well.

So, while exhausted, the English held the high ground, largely undamaged. And, more importantly, they actually were winning. The failed assaults were having a terrible effect on the Normans' morale, and soon many units were in retreat.

The Battle Turns

Upon seeing the retreat, many Englishmen broke from their positions and charged after the Normans in small groups. But, for infantry to charge in small clusters, horribly undisciplined, over mostly open ground is suicide if knights are on the field and ready to attack, no matter how primitive those knights are. The Norman knights were ready to attack. Those Englishmen who had foolishly charged were slaughtered.

William soon rallied the remainder of his troops and then feigned retreat twice more. The English shield wall crumbled a bit each time, as more and more of the English pursued the retreating Normans. And, each time the charging English were destroyed by cavalry that turned on them.

It was over after that. After the third feigned retreat, William attacked in force. And, the cavalry pressure slowly wore the wall away as the day dragged on into late afternoon. Finally, William moved his archers into a position where they could fire arrows high into the air, so that they would are down behind the shield wall.

Harold was either killed by an arrow to the eye or wounded by one and later hacked to pieces by William's knights. Sources differ. But it doesn't matter. The result is the same. The short-lived career of the last Anglo-Saxon King was over. More significantly, England and her people would be changed forever.

DISCUSSION QUESTIONS

Question 1 - What is a crisis? Is War a crisis?

Question 2 - Clearly Harold was in a crisis, and clearly he did not manage it well - as he lost. The first stage in crisis management is pre-crisis preparation. Was Harold's failure a lack of preparation?

Question 3 - Why did Harold fail to properly evaluate the feedback before moving on Hastings?

Question 4 - He was effectively blind in the days leading up to the Battle of Hastings. Why did he march to it anyway?

Question 5 - The battle did not go as planned. Why didn't the English make adjustments?

Question 6 - What should Harold have done?

REFERENCES (available on request)

AuthorAffiliation

Louis Scarpati, William Paterson University

LouisScarpati@aol.com

Stephen C. Betts, William Paterson University

BettsS@wpunj.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 91-96

Number of pages: 6

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192411929

Document URL: http://search.proquest.com/docview/192411929?accountid=38610

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 79 of 100

THE ENTREPRENEUR AND THE LADY

Author: Shonesy, Linda B; Gulbro, Robert D

ProQuest document link

Abstract: None available.

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case involves the first three years of the life of a small business and the decisional journey to ensure that the business will succeed. Secondary issues for discussion concern management concerns of growth, expansion, and personality styles of the owners. The case is designed to be taught in three to four hours of class time, and should require two to three hours of outside preparation. It is intended for use in an undergraduate business policy or strategic management course, as well as, an undergraduate marketing strategy course, management course, or small business course.

CASE SYNOPSIS

This case depicts the formation of a small business. It describes decisions facing a new company, as it sees a growing demand for its product. It demonstrates the uncertainty of expansion with a new business, and follows the various marketing decisions that must be made in competitive retail, gift and tourist markets. It also allows the reader to evaluate these various markets, identify problems, and define ways that a small business may continue to make itself successful.

GRITS, INC. opened its doors in July, 1996 in Birmingham, AL, selling t-shirts embroidered with southern sayings. All of the sayings were associated with the word "grits," which in this case is an acronym for "Girls Raised In The South." It all started as an idea for a volleyball team slogan and the business then began in the garage of the founders, Deborah and Jim Ford. It outgrew several warehouses and far exceeded the company's initial projections every year for the first three years.

The case covers the time frame of 1995 until 1999 and watches the growth explosion of GRITS, and the contributions of the founders, who are very different individuals. The Lady is very creative and the Entrepreneur is a risk taker and a very driven businessman. However, it ends on a note of uncertainty, which will allow the student to walk the journey to that point and then speculate about the outcome.

THE LADY

Deborah sat in her office at the local high school thinking about her volleyball team that was to play on the road for their next two games. Every year when she readied the team for their first road trip, she provided them with t-shirts and a slogan to use for the year. Deborah had always dabbled in arts and craft shows, as she was quite creative, but she was especially fond of sewing and sewed for herself and her daughters. The girls on her team were always excited to see their new shirts each year, as it was kept as a surprise until the last moment. It was that very thing that Deborah pondered as she sat in her office. What new saying would provide the needed spark for her team? She almost wished that she had not started this tradition.

Deborah suddenly decided that she wanted a slogan that reflected the South, which was where she had grown up. She began to think of southern traditions, such as pearls, magnolias, good manners, etc. and what would fit the girls on her team. Then a phrase that she had often heard as a child came to mind, "Girls Raised in the South." She jotted it down and began to look at it, when suddenly the first letters of each word leaped out spelling "GRITS." She immediately liked the combination of an acronym for a southern dish and a southern saying. She had a slogan for her southern team! It might not be politically correct, but then many things southern are not!

This happened in the fall of 1995 and Deborah had no idea where she would be within one year. She was dating a man, Jim Ford and they were to be married the following spring in 1996. All year before they married, Deborah kept having requests from students and parents for t-shirts like the ones she had made for her team. She would spend all of her time after school working on these requests, as time permitted. Finally, Jim said, "If all of these people want one of your shirts, there must be some money to be made. Let's give it a try!" So instead of giving away shirts, a new business was created (Tomberlin, 1996).

THE ENTREPRENEUR

Before launching this new ship, Jim Ford, who had previous experience as a marketer and in product licensing, decided to trademark the expression "Girls Raised in the South." Then he and Deborah designed a logo and began to produce t-shirts. Jim and Deborah got married and on their honeymoon took several of their samples to the beach to sell at the local craft market. They sold so quickly that their next stop was the Atlanta Apparel Mart, where they sold $65,000 worth in one weekend. It was then that they decided it was time for each to quit their respective jobs and go to work for GRITS on a full-time basis (Bystrom,1997).

The first major decision to be made was whether to keep operating from their garage, which would save money, or to go ahead and rent space. Jim decided to rent a small warehouse with approximately 1000 square-feet. They were handling start-up costs using personal financing. Initially funds were used to introduce and market their products, purchase equipment, and fund working capital. The second decision to be made was when Jim discovered that they needed some help. He hired two employees, one to help Deborah pack the orders, and an accounting assistant to assist him with billing and accounts. They tried to keep overhead as low as possible.

The third decision to be made was whether Deborah should continue to embroider the logos on the shirts, or whether this should be contracted out. Deborah voiced her concern about quality, and as she was quite sure that she could continue to handle the sewing, Jim decided to keep the embroidery in-house for the moment. He began to concentrate his efforts on the marketing aspects.

There were even more decisions to be made. Jim began to call on specialty stores and gift shops to try and place their shirts in as many stores as possible. He also called on college bookstores and gift stores near the campuses. He was quite successful and orders began to roll in, especially from their exposure at the Atlanta Apparel Mart. It was at this time that they decided to expand their product line and slogans, as well. They made a list of possible product lines, and decided to try sweatshirts, hats, mugs, beach bags, visors, aprons, nightshirts, sundresses, beachwear, sox, throw blankets, boxers, and pillows by adding a few of these along for the next few months.

They were so excited about the prospects of these new products that they continued to brainstorm at every opportunity to find new slogans and products. For the college campuses they designed a slogan using the school colors, for example, "Southern Girls Know Their Primary Colors...Orange and Blue." They decided that the initial focus would be on the Southeastern Conference and Atlantic Coast Conference schools (Bystrom,1997).

Other products and slogans that were developed over the course of their brainstorming sessions were products for men using slogans such as, "Guys Raised in the South," and for the golfers, "Golfers Raised in the South." Expansion of slogans included, "Girls Raised in the Snow," "Grandmothers Raised in the South," "Girls Raised in Texas," and "Girls Raised in Tennessee," as examples. Deborah's ideas for these slogans came easily, as they began as part of her southern heritage that reminded her that certain behaviors, like them or not, were part of the tradition of growing up in the South (Taylor, 1995).

Business was booming! It was apparent that they would no longer be able to produce all of their product lines in-house. They were already having difficulty with current orders processing out on time. Jim and Deborah began to contract their business to local companies, with Deborah overseeing the quality aspects and continuing her role as project creator. Additional funding was sought from various investors, as well.

JIM'S MARKET ANALYSIS

Almost two years later, Jim Ford was sitting in his office, which was lined with mementos and framed articles about his accomplishments as an entrepreneur. He was thinking about the past two years and the growth that GRITS had experienced. They had moved to a larger facility, as they had outgrown the small warehouse in only eight months, and had leased a warehouse with more than 8000 square-feet in March, 1996. Now he was realizing that, they had outgrown the second warehouse and needed to expand again. They now had about 1250 accounts and 10 employees. Their accounts included primarily specialty shops, but they were beginning to pick up major retail accounts, such as Mercantile, which owns Gayfers, Maison Blanche, J.B. White, Bacons, McAlpine, and Caster Knotts in the Southeast. He was also elated to have struck a deal with Hallmark stores and Cracker Barrel stores throughout the country (Tomberlin, 1997).

From July, 1996 until July, 1997, GRITS had doubled the first year's projections. These projections for 1996-97 were for sales to reach $360,000, while the projection for 1997-98 was for the volume of sales to be $5 million. However, at the end of the first year, sales were approximately $1.7 million, and sales for the second year were approaching projections with one quarter still remaining (Tomberlin, 1997).

It was a true fairy-tale, but Jim realized that while he had worked hard to start this new business, and had been quite successful, he still had to use all of his expertise to keep GRITS alive for the future. That would be the most difficult challenge he had ever faced. Jim knew that too often, small businesses would take off, only to fade after the new wore off. His thoughts as he sat at his desk were centered on the market for women's apparel and gift items in the United States. He really needed to rethink his marketing strategies.

Jim knew that the market for women's apparel in the United States is very diverse. There are low barriers to entry, but many competitors both large and small. With his entrepreneurial expertise, he also knew that both men and women want their products to be on the cutting edge. He had already decided that the market for their merchandise was a crossover for apparel and gift retailers. The fact that a synergy is created between these two, where stores that sell gift lines also will sell apparel, and vice versa was important.

It also occurred to Jim that the market that attracts those who want personalized gifts, have a pride in heritage, or simply want to take mementos home from an enjoyable trip was there to be tapped. The tourist industry has always supported the sale of items, such as t-shits, hats, sweatshirts, and pillows for people wanting to remember (Lee, 1998).

There is a distinctly southern market, as has been evidenced by the public's appetite for this area of the country in recent years. For example, the John Grisham books and movies, as well as others set in the South, magazines such as "Southern Living," restaurants serving "southern cooking," and others. Jim's intent was to attract a special clientele that wanted unique products, but would not want to see them at a "flea market" (Bystrom, 1997).

As Jim knew that the competition in the apparel industry is keen and that the important factors in the women's market are innovation and cost, he decided to target the leisure segment of the industry by choosing to market products through the gift medium, rather than only through the apparel markets. The main focus would be to tap the unique southern market, especially the middle and upper class.

FUTURE ISSUES

Once the marketing strategy was defined, Jim and Deborah began to think about future issues. Jim and Deborah discussed a very relevant issue. What could they do to further tap their potential markets? Then, suddenly Jim broached a subject that they had never even considered. He said, "Deborah, you know at some point, we may want to sell this business while we are growing." Deborah was silent for a minute, and then she replied, " I am not sure if I can do that. I have put so much of myself into it." After some discussion, it was clear that this was the first time that they could not agree. Jim decided not to push the issue at that point and Deborah hoped it would not come up again. Rather, they began to concentrate on growing their business and market potential. Jim, however, wondered whether they had really dealt with what they needed to do in the future.

QUESTIONS

1. Evaluate the market for women's apparel paying particular attention to the differences in retail, gift, and apparel segments. Are there problems that small businesses might encounter in each segment? Identify the target market for GRITS.

2. What future marketing strategies should this company consider? Why?

3. Define types of unique products that may be developed for market and product expansion, which would be compatible with the current strategy.

4. How could GRITS insure a strong customer base with loyal customers and repeat purchases?

5. What problems could be anticipated with GRITS that might cause it to fail?

References

REFERENCES

Bystrom, P. (November, 1997). "GRITS: A New Twist on a Southern Staple," Press Release: GRITS, Inc., Birmingham, AL.

Lee, Georgia (January, 1998). "GRITS: Regional Pride," Women's Wear Daily, 54.

Taylor, Rebecca (August 23,1995). "Coach's Clothing Spreads," Birmingham Post-Herald, D1,D4.

Tomberlin, Michael (September 30, 1996). "Business Woman Cooks Up Hot New Grits Clothing Line," Birmingham Business Journal, 1.

Tomberlin, Michael (May 12, 1997). "GRITS Lands Major Retail Contracts," Birmingham Business Journal, 10,15.

AuthorAffiliation

Linda B. Shonesy, Athens State University

lshonesy@athens.edu

Robert D. Gulbro, Athens State University

gulbror@athens.edu

Publication title: Allied Academies International Conference. International Academy for Case Studies. Proceedings

Volume: 11

Issue: 1

Pages: 103-107

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 1948-3198

Source type: Conference Papers & Proceedings

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 192412008

Document URL: http://search.proquest.com/docview/192412008?accountid=38610

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 86 of 100

DIGITONE APS: THE CASE OF THE DANISH ONLINE MUSIC INDUSTRY

Author: Mukherjee, Arindam; Dass, Rajanish

ProQuest document link

Abstract:

This case was developed as a part of the class discussions during a second year elective course of Digital Marketing at the IT University of Copenhagen, Denmark for its mMaster of Science in Electronic Business program.

Full text:

It was a chilly winter evening in 2002 and it was snowing heavily. As he looked outside his window, Christensen began to feel warm, positive and strong in the heated room. The future of his online Danish music portal, Digitone ApS, had looked as bleak and misty as the evening outside not too long ago, but the new-found warmth gave him a fresh resolve. It was true that even after two and a half years, he had failed to find any sustainable source of revenue for his business. But his problem was a common one among start-ups - the initial business plan was weak. Eventually, the survivors had found ways to increase their profitability, and Christensen felt sure that it was just a matter of time before he too turned around. He reflected on the direction in which the business was heading. It was clear that he needed some immediate cash to sustain and promote his company. But he could not follow most of the viable alternatives for want of funds. He thought that the time was ripe enough for some bold steps towards meeting the competition and framing a long-term strategy for Digitone ApS. The company had to devise entry and mobility barriers, to pre-empt the competition in Europe, which would create market power, provide him business and generate revenue.

Christensen took a deep breath. The famous quote of Erica Young came to his mind "And the trouble is, if you don't risk anything, you risk even more."

The problem, thought Christensen, was that the company was not yet breaking even. A subsequent source of start up capital from Technological Innovation A/S had dried up and Digitone was making very low profits. The main sources of revenue, sales of banner advertisements, compilation of customized CDs, and payments from customers through subscriptions didn't meet expectations. Digitone had been relying too much on a pure B2C strategy that never paid off.

Christensen was, in a way, correct. The Internet had become the nursery for the sale and promotion of products and services, and digital products were especially suited for online sales where the Internet technologies could provide a strong basis of distribution. Being highly suited for online promotion, the potential of the music industry had caused a buzz worldwide.

Internet technologies had forced traditional record companies to adapt to a whole new set of market conditions. The established music industry had slowly begun to move, but it remained uncertain about the timing of the first wave of legal online music distribution, and the effects on the interests and rights of artists. However, consumers were a step ahead of the traditional music industry, adapting to new technologies. The consumers had the power and it was the responsibility of the companies to fulfill their consumers' needs, instead of protecting their own traditional, turf which in any case was fast becoming obsolete with the emergence of the Internet.

Christensen, even in this situation, felt confident about implementing his innovative ideas. He had to adapt quickly to this new era of music promotion. However, the turbulence in the music industry as well as the changing habits of the online user had placed him in deeper trouble than what he had anticipated.

THE COMPANY

Jans Christensen, a twenty-two year old fresh graduate in Computer Science from the University of Copenhagen, alongwith a childhood friend who was an Accounting major, started Digitone on the 3rd of August 2000. They had a vision of becoming Denmark's first virtual record company for the distribution of legal music over the Internet and the mobile net. Teknologisk Innovation A/S2, a government-funded agency, whose mission was to support innovative new ventures of Danish youth in the dot-com field, provided the company with a seed capital of DKK 500,000 that was injected into the firm in several stages (see Exhibit 1 for basic corporate information, Exhibit 2A and 2B for bases and assumptions of Profit forecast and the projected Profit and Loss account, and Exhibit 3 for projected Balance Sheet).

Right from its inception, the underground music arena3 became the major source for Digitone's products and services. With the help of a well-established network and support from the leading figures of the Danish music world, it was successful in attracting and recruiting a large pool of musicians from the Danish underground. The company was also successful in attracting and recruiting about 70 of the leading bands from the Scandinavian and European underground music markets. So, the majority of the artists that had been recruited for its distribution network were from Denmark, while the remainder came from Sweden, Germany and Norway. These artists had been personally audited by Digitone to ensure a high quality of the music that was being uploaded on its web site (see Exhibit 4 to find how the Internet impacted the traditional music industry). This underground music formed the backbone of its products and services. The company also attracted a few reputed artists from the Danish music market.

By January 2001, Digitone had created a strong brand name within the Danish music industry and built a large database of users. It was offering about 50,000 music tracks from 70 of the best bands in the Scandinavian underground. The available music was divided into nine big categories. On the web site, surfers could search for a particular artist or piece of music, or they could browse through the albums of certain well-known artists. Digitone's search engine could also compile a list of artists and music for a particular genre. Christensen was personally responsible for the design and functioning of the web site.

In order to ensure that the music launched on its web site was of high quality, Digitone recruited an Artist and Repertoire (A&R) manager with valuable insight into the Danish underground music scene (see Exhibit 5 for the organization chart). The A&R manager was very competent, had wide contacts within the music industry and was perceived as an expert in Danish underground music. He started scouting for the best underground music and artists, and recruited them for Digitone.

By the summer of 2001, Digitone had to make several changes in its business strategies. Christensen's initial plan was to do away with physical CDs, and maintain a web site without membership fees. However, in order to generate revenues, Christensen now saw the need to offer physical CDs. Beside the revenue obtained from the sales of CDs, which was equally shared between Digitone and the artists, another potential source of revenue was the sales of banner ads. But this form of advertisement brought only minimal profits and turned out to be a virtual failure.

From free downloads, Digitone switched over in July 2001 to charging customers for their music. However, it immediately experienced a significant decline in downloads. Since other websites were offering free downloads, online consumers were simply unwilling to pay for their music. In order to retain the traffic on its web site, Christensen decided in October 2001 to revert to free downloads.

From the inception, Christensen also wanted to offer customers personal compilations of music in a single CD. Such customization of CDs turned out to be too complicated and expensive for Digitone. Christensen had once thought of outsourcing the process of compilation of CDs, but he didn't follow through.

Hence, sales of physical CDs appeared in Digitone's agenda despite its initial plan of making the distribution of music completely digital by means of the Internet. The change in strategy, to incorporate both on-line and off-line sales, did not bring much change in income.

The software program used for the web site enabled data mining. Through the placement of cookies, the program accumulated information on users who visited the site, collecting users' personal data of what kind of music they downloaded and the frequency of their return and downloading. However, Digitone had not made any effort in analyzing the data in order to understand their customers better.

So, although there was some initial success in capturing media attention, there was little commercial promotion of Digitone's services. Occasionally, Digitone held corporate presentations; but in general there was a lack of proper advertising and marketing campaigns. Most of the publicity was through word of mouth and media interviews. Christensen was convinced that the reason for inadequate marketing campaigns was a lack of funds. Trends showed that the digital music industry was evolving fast enough, with more and more people getting accustomed to downloading MP3-files, making room for more competitors (see Exhibit 6 to find how MP3 files changed the music industry).

The first and only album Digitone published, the "Gravity Life" album in August 2001, did not turn out to be as successful as expected. The promotion of the group and its album on the Danish portals SOL.dk and Jubii.dk did not create the expected mileage. Digitone managed to outsource the distribution of the CDs through Sony's distribution network, but not many sales were generated and no further experiments were done. After only two weeks of cooperation, the portal SOL.dk was taken over by a third party and Digitone lost all the personal contacts it had acquired. There had been no further pursuit of cooperation.

After a critical evaluation of his company's business, Christensen started to consider a variety of successful B2B strategies. Some of the alternatives were 1) to make Digitone an agent for the record companies to test market their new releases, 2) to sell user information, and 3) to lease and sell music rights. However, he was not fully sure which one of these strategies would work. After all, thought Christensen, Digitone neither had the resources to launch nor the capability to realize them.

In May 2002, Christensen entered into an agreement with the Dansk Biblioteks Center (DBC)4. DBC was implementing a system in subsidiary libraries that allowed users to download music owned by Digitone from the library web site. DBC had bought 10,000 downloads (200 tracks) from Digitone. If it got more agreements like this, Digitone could just see some light at the end of the tunnel.

In the same month, the company had outsourced daily web-site management to ROSA5. The A&R manager that Christensen had hired was now being employed directly by ROSA, but was still in charge of finding new artists for Digitone.

After careful consideration of the ways to broaden the business base, Christensen in July 2002 zeroed in on Norway and Sweden, which he felt had short "cultural" distances from Denmark. Furthermore, he found that the Internet penetration in Scandinavia was quite high. The experience from Scandinavian operations would provide a perfect launching pad for a foray into the German market. Germany and Denmark had close business relations, and Germany had one of the highest online consumption in Europe. Since the German underground music scene had been largely overlooked, Christensen seriously considered tapping it as well in the near future.

INTERNET USAGE TRENDS

From 1999 through 2001, the population of Internet users was growing in most European countries. Because of their smaller population, Denmark and Sweden had fewer Internet users compared to the UK and the rest of Europe. Markets in the Nordic countries were getting saturated due to the early and rapid adoption of information and communication technologies and highly developed Internet infrastructure. In general, Internet commerce was still small but the UK, in particular, had better prospects than the rest of Europe (OECD, 2002d) (Table 1).

View Image - Table 1: Annual Growth Rate in Internet Users from 1999 - 2001(eMarketer, 2002)

The total European Internet population was forecasted to increase from 144.4 million users in 1999 to 221.1 million users by 2004 (eMarketer, 2002). Within Europe, Germany had one of the highest number of Internet users and UK came a close second. Even Sweden had very high online consumption. In Denmark, the new online payment system called VALUS was expected to increase e-commerce manifold (Computerworld, 2002). The number of Internet users was growing, and it was estimated that Europe's Internet user growth rate in 2004 would be double that of the US. Table 2 shows historical and forecasted Internet users in Digitone's key markets.

View Image - Table 2: Internet users 1999-2004 (in millions) (eMarketer, 2002)

Improved international conditions added further momentum to the Danish economy, which was expected to accelerate in the middle of 2002. Overall, the Danish economy was in good shape (OECD, 2002a). An increase in private consumption and a favorable investment climate made businesses respond to the hope of better prospects. Sweden's economic performance had continued to be impressive. Due to the positive market trends worldwide, Sweden was experiencing an overall recovery in both domestic demand and exports. Private consumption started growing (OECD, 2002b) as well. UK experienced a recession in 2001, mostly caused by global factors and low overseas demand. The country was less affected than the rest of Europe and growth was expected to return to a solid pace. Also, during this period, private consumption was buoyant (OECD, 2002c).

CULTURAL LIFE IN DENMARK

Danes are friendly, sociable, easy-going people who attach a lot of importance to their personal lives. They prioritise their spare time selectively, and after work, many are active practising sports, participating in cultural activities and going to the theatre or taking part in associations and clubs.

The Danish cultural life is varied, and live music, ballet, theatre and opera are extremely popular among the Danes. Moreover, Denmark is a country of music festivals. Summer is a busy time for the Danes, and is strewn with numerous comprehensive and international festivals all over the country, especially in the genres of rock, folk and jazz. Most of the Danes take an active part in these festivals. Other than the festivals, Denmark is quite famous for its jazz, which has been acclaimed the world over. Even the small cities have one or more venues for live music in the weekend, and lesser known bands get an opportunity to showcase their talent. The repertoire is comprehensive and ranges from soft pop over hard rock to funk and hip hop. The events are advertised in local newspapers and on the Internet.

Danish pop music is also very popular, with the hugely successful band Aqua storming the international scene. International hits, however, are not the only yardsticks for judging the range and quality of the Danish music environment. What is most noteworthy is its active alternative scenario. Denmark produces a continuous supply of exciting new talents fresh from the rehearsal rooms. The local scene is very active and broad in terms of genres and idioms. Some of these newcomers perform live at the Roskilde Festival, which is a very popular venue that strives to promote innovative and young talent. Music, for the Danes, is a way of life.

The Danish music scene, over the years, has been dominated by a number of talented, "freelance" singers and lyricists who did not work for any permanent group. Rather, they work on their own to contribute to the image of Danish music and portray the values and ideologies of the contemporary culture. Overall, the music scenario is vibrant and pulsating, with a whole lot of young talents fighting to make it big.

THE DANISH MUSIC INDUSTRY

In 2000, foreign music releases accounted for almost 70% of total sales in Denmark and there had been a trend toward increasing internationalization of Danish music consumption. In general, it had been hard to release Danish music in popular genres. The reasons for this, other than the internationalization of music consumption, had been high marketing costs for Danish releases and a lack of export experience (Dahlager, 2002).

The Danish music industry had been hurt by promotions of only those artists who could make significant profits. In 2001, sales in the Danish recording industry experienced a decline of almost 23%. This decline in sales was the highest in all of Europe. Critics claimed that this was largely a consequence of bad investments in mainstream bands. They said that Danish releases had fallen since the industry stopped fulfilling the Danes' need for new, Danish music. The market also experienced a different consumer trend among the young. This traditional target group was spending their money on things other than music, and they tried to get them for free, if they could. However, the sales for two other big target groups, the over 40-year-olds and young children, were generally increasing.

The Danish case was in contrast with other European countries where CD sales were still high. In Sweden there had long been a trend toward better promotion of local, underground music. In this market, record companies had concentrated on developing and promoting new local artists, and had succeeded. The music industry in Sweden did not experience the same downturn in CD-sales as in Denmark; there was only a small decrease of about 2% in sales in 2001.

Whereas Denmark and Sweden had both experienced lower CD-sales in 2001, sales in the UK had actually been increasing. The music industry was one of UK's biggest and most culturally significant creative industries, and there was a general willingness of the big record companies to invest heavily in nurturing new talents so as to promote underground music. On the music front, the UK was very well represented both within and outside Europe (The Department for Culture Media and Sports UK, 2002).

With traditional Danish record companies concentrating on popular music and top 100 tracks, the underground scene was forced to find other avenues for distribution and sale. Promoting local music was a global trend, and Digitone could continue to leverage its early-mover position in the underground arena. Despite the trend toward global lifestyles, especially among youths, people still demanded music with a local touch. The challenge for the company is to re-establish Danish music in Danish people's minds, and to make it as important for Danish culture as Danish films were (Kulturministeriet of Denmark, 2002).

COMPETITION

The only companies with substantial revenue in the highly competitive music industry were the traditional record companies. These companies, some of which were Digitone's direct competitors, had been reluctant to go into the business of online distribution and promotion of music. However, the situation was changing, and there was always a threat that some of these companies would enter the online music industry. Digitone's major competitors were Vitaminic, Peoplesound and Kazaa. Exhibit 7 shows Digitone's representation of its competition. The first and innermost circle contains traditional record companies that publish music. These companies were considered industry giants. Five of these companies had organized themselves into two online representations, Musicnet and Pressplay. In December 2001, Bertelsmarm, EMI and Warner Music joined forces and launched the online service Musicnet. Shortly after this, in January 2002, Sony Music and Universal launched the online service Pressplay (King, 2002). None of these sites offered a full catalogue of music from all five record labels, and operated in the US with subscription available through their affiliates. They promoted and sold a portion of their repertoire that consisted of mainstream music in their sites. Their CDs were distributed to companies in the third circle of the Exhibit 7, as well as to online e-tailers and offline retailers.

Digitone resided in the second inner circle of the Exhibit 7, with a unique position in Europe. It was the only company which had an A&R manager who focused on emerging artists from the underground music scene. Digitone promoted and sold music, though it did little publishing. The third circle of the Exhibit 7 contained Digitone's closest competitors that also distributed and promoted, but did not publish, music. They did not have A&R managers to perform quality checks on their music. Artists uploaded their music directly on these websites.

The outermost circle contained companies that offered peer-to-peer file sharing services. These companies were neither producing nor promoting music. However, these companies were important since the well-developed technique of file sharing fostered users who were unwilling to pay for music downloads. This reluctance had serious effects on the companies in all other circles. Companies like Digitone struggled to get people to pay for download of music. In this situation, the implementation of strict copyright laws seems to the most important weapon in this battle. Digitone was a member of IFPI6, a trade organization that promoted and lobbied for the enforcement of copyright protection (see Exhibit 8).

Vitaminic7

Vitaminic was founded in Italy in April 1999 and became the world's leading independent company in online music distribution and promotion. It operated in the UK, Sweden, Denmark, Germany, France, Spain, The Netherlands, Ireland and the US. It was in possession of 385,000 digital tracks and 87,000 artists, and collaborated with 1,400 established record companies. During the last few years Vitaminic had been buying up major players in the European market to gain its market power, including Peoplesound, IUMA8, and FranceMp3 (Vitaminic, 2002). It differed distinctly from Digitone, as any artist could upload his or her music, directly without an A&R manager assessing the music. With this system architecture, it was more of a content manager and community than a virtual record company like Digitone. It offered music from its own artists as well as from other traditional record companies. It had collaborations with important players in the music industry like Sony, BMG, EMI, Universal and Warner.

Vitaminic offered its users free streaming and free downloads of selected music tracks. In addition, Vitaminic had options for payment on compilations ($7), traditional CDs (est. $ 8) and other downloads (est. $1). It had started a membership subscription service, which gave the customer unlimited access to certain musical tracks for six months for a fee of $39.99. Furthermore, information and news from the music world were available on the site.

Vitaminic offered marketing information and music licensing to other companies. Moreover, it owned the company Protein, which offered music marketing consultancy services, and the company ZipMind, which published music. In terms of selling marketing information, it offered services like tailored online consumer reach campaigns, research services, viral marketing and targeting services. In the music publishing business, it provided these services to authors, publishers and third parties through its subsidiaries Peoplesound and ZipMind.

Peoplesound9

The England-based Peoplesound was owned by Vitaminic, but it operated as an independent subsidiary. The website was accessible in English, German, French, Spanish, Italian and Dutch. Peoplesound was founded in June 1999, and was Digitone's closest competitor, considering the business strategies of the two. Peoplesound, like Digitone, had specialised in selecting quality underground music through an A&R manager. However, since the 26th of February 2002, artists who went to Peoplesound's web site to sign up were referred to Vitaminic's web site, and were no longer assessed by an A&R manager (Peoplesound, 2002). This left Digitone as the only European online company that selected its music through an A&R manager.

Peoplesound offered customers free streaming and free downloads of selected tracks by each artist. Other downloads, traditional CDs and custom- compiled CDs were also available for sale. These services were extensive and included a facility for the customer to set up and store his own personalized music collection, artist dedicated web sites, charts, competitions and music news. Peoplesound's target group consisted of those consumers who wished to discover music.

Peoplesound, along with major partners in the music industry including Universal, Sony Music, BMG and EMI, had a well-established business in market research and data mining. Furthermore, it offered market testing of new artists. It also launched a licensing division in June 2000 and operated as a one-stop solution, with mainly advertisers and film producers as business partners. However, it had little music publishing.

Kazaa

Kazaa was an online peer-to-peer file sharing service that operated worldwide. Users of this site could access other users' computers with the help of a software that could be downloaded free from Kazaa's web site. This meant that the user could choose from an enormous number of files shared by other users, and then download the music files for free. It is the continuous evolution of companies like Kazaa that had made the business of paid online distribution of music very difficult.

A lawsuit had been filed against Kazaa for illegal trafficking of music online. It had however been acquitted on the grounds that it could not be held responsible for illegal actions taking place on its web site (Thomsen, 2002). It is noteworthy to mention that a lawsuit filed by RIAA10 against Napster in October 2001 had caused Napster to close down its business temporarily, preventing it from being a major competitor in the industry (King, 2002). Incidentally, only legislation had the power to bar these companies from competing in the market.

The Competitive Scenario in Sweden and in the UK

Through the acquisition of IUMA11 and Peoplesound, Vitaminic had gained a competitive advantage in the distribution and promotion of underground music in both Sweden and UK. In the UK, Peoplesound was a well-established brand, and various bands promoted by it have been successful. Peoplesound thus had a strong grip on the underground music scene in UK. However, the competitive situation in the UK had changed in favor of Digitone due to the imposition of Vitaminic's strategy over Peoplesound's. This might as well have weakened Peoplesound's control of the UK underground music market. In Sweden, Vitaminic was well established with a large number of daily users, and had taken various initiatives including sponsoring the Swedish Alternative Music Awards.

Peoplesound performed efficient music licensing in the UK market and seemed to be getting good results in this business. It also dominated the UK market in terms of marketing information and test marketing offered by online music distributors.

In the B2C category, all of Digitone's major competitors had implemented membership subscription services to develop a bond with the customers. However, the services that Digitone's competitors offered to their members were not much different from those offered to their non-members. There were some other possibilities in membership subscription services which Vitaminic did not take advantage of. Digitone could explore some of these avenues.

Peoplesound granted its customers an extensive array of services. Digitone had an opportunity to be as popular as Peoplesound if Digitone implemented similar features. There was a contradiction between Peoplesound's original business strategy and Vitaminic's overall strategy. As a result, Digitone no longer had a competitor in online distribution of quality music selected by an A&R manager. This allowed Digitone easier entry to the UK market.

The business of marketing information was highly developed. Digitone's competitors, particularly Peoplesound, were all in this business. Peoplesound demonstrated great efficiency in its music licensing procedure which many of its competitors lacked. The music licensing business, in general, was very slow and inefficient. There were opportunities for Digitone to benefit in this area by following Peoplesound's strategy.

NEW BUSINESS AREAS

Digitone's external environment was constantly changing, and new opportunities and threats continued to surface. Since the underground music base in Denmark, from where it found customers as well as emerging artists, was quite small, Digitone was compelled to seek new opportunities by entering foreign markets. Digitone did not have the resources to explore all overseas markets, and Christensen chose to focus on foreign markets that were endowed with opportunities similar to the Danish market. He selected the Swedish and the British markets.

SYSTEM LOCK-IN WITHIN DENMARK

Christensen had been thinking of taking a position which locked out his competitors. The company needed to ensure that competitors did not pose any threat, particularly in the Danish market. This meant that Digitone had to stop its competitors from obtaining a critical mass in terms of customers or artists. One way to ensure this was to control the distribution channels. The other was to prevent a flow of Danish artists toward competitors. Therefore, it was very important that Digitone continued to lock in artists by signing contracts with them. The company needed to retain their artists' loyalty and fulfill their interests (see Exhibit 9).

Christensen was thinking of recruiting known artists, since this would enhance the company's reputation of offering quality music. It could be hard to convince known artists to join a small company like Digitone. Christensen felt the need to promote Digitone's brand and create a large clientele. The more customers the company reached, the more valuable the network would be. Similarly, the more bands Digitone could recruit, the better were its chances of attracting more users in its web site. This was the essence of positive feedback. The value of a network depended on the number of people that were already connected to it. In other words, for the artists and users, Digitone could offer network externalities.

Building a network also involved finding partners, building strategic alliances, and knowing how to get the bandwagon rolling. Digitone was already venturing into a B2B strategy for the attraction, development and innovation of business "complementers". It was developing relationships with Danish libraries, and was thinking about networking with the book clubs and TV and radio stations. Developing a network with these partners would definitely enable Digitone to attract even more customers and make music more accessible.

Christensen planned to use similar business strategies for Sweden and UK. However, achieving a System Lock-in would not be possible in these countries, as competitors already had a strong foothold in these markets. By searching for artists in these countries and entering these markets, Digitone could increase both its music database and customer mass substantially. Christensen hoped that this would foster valuable networks and enhance Digitone's position as a digital distribution channel.

CONCLUSION

During the past couple of years, Christensen had learned how hard the situation could be for dot-coms and the B2C business. He still believed that products that were sold offline would benefit the most from advertisement over the Internet. He expected that the consumer's desire for music online would stimulate sales offline as well. Christensen commented:

"We are very pessimistic about charging customers for music downloading, particularly at a time when the Internet hypes that everything is for free. It takes a whole lot of change in attitude to make people pay for services that originally were free. We expect the market for payment of MP3 downloads to mature slowly in around five years. In this period of transition, we at Digitone are aiming to create a strong brand and a loyal customer base. We will not focus on predicting the exact point in time when the B2C business will have its break-through. Rather, we would focus on being flexible, and adjust our company to best suit the present market situation."

Digitone was launched with a vision of becoming the most preferred online promotion, sales and distribution channel for underground music and promising artists within the European music industry. Although it ran into early financial problems due to a B2C strategy that was not generating substantial profit (see Exhibit 2B for the Profit and Loss statement), the company's vision stood clear.

Christensen realized that he needed a sustainable strategy for revenue generation pronto. He also understood that players like Napster and Kazaa were moulding the habits and expectations of the consumers. He decided that chasing wild geese would not help him much. Instead, he chose to focus on the right target groups and strive at satisfying their needs.

Christensen believed that Digitone had to capitalize on to its core competency of being a forerunner in promoting emerging artists from the underground music scene with the help of Internet technologies. The company had a deep knowledge of the underground music environment, and had established a brand reputation within the Danish music industry. It would leverage these assets to offer its customers the choicest of music and make them thirst for more.

ACKNOWLEDGEMENT

This case was developed as a part of the class discussions during a second year elective course of Digital Marketing at the IT University of Copenhagen, Denmark for its Master of Science in Electronic Business program. The authors acknowledge Anne Bech Christensen, Lise Skovgaard Petersen and Edward Kay Chuan Ng for their contribution in development of the case. We wish to sincerely thank Dr. Steven Gordon, Senior Associate Editor for his guidance and all the anonymous JITCA reviewers for their contribution in improving our manuscript. We also thank Sanjay Kumar Basu, a senior Doctoral candidate at the Indian Institute of Management Calcutta for his painstaking efforts in going through this proof and suggesting his valued comments. We are also grateful to Infosys Technologies Limited for their support in the first three years of our Fellowship at the Indian Institute of Management Calcutta.

EXHIBIT 1

BASIC CORPORATE INFORMATION

Name of business: Digitone ApS

Status : Partnership

Capital :

Registered office address:

Registration number:

Number of CEO: 1

Number of Board of Directors: 2

Professional Advisers:

Mission for 2002

The mission of Digitone for 2002 is to be Denmark's dominant virtual record company where the distribution of music is in the digital form via Internet and mobile net. The goal for the next three years is to maintain its dominant lock-in position as the digital distribution channel for Danish underground music and emerging artists. Digitone should expand its services and distribution channel into Sweden and Great Britain. The main objective is to acquire a net profit of 700,000.00 DKK. per year for the next three year.

Vision

Digitone is dedicated to be a promoter and doorway for promising emerging artists and Scandinavian underground music. It also aims to be a forerunner in the digital distribution channel within European's music industry.

Company values

Digitone will operate under strict legal and ethical guidelines. It would not distribute music with lyrics containing paedophilic or racial discrimination. Close and mutually beneficial relationships with artists under Digitone's umbrella would be nurtured and personal relationships with Digitone's customers and business partners would be developed more extensively.

View Image - EXHIBIT 2A BASES AND ASSUMPTIONS FOR PROFIT FORECAST As on August 2002

View Image - EXHIBIT 2B PROJECTED PROFIT AND LOSS ACCOUNT (IN 1000 DKK) As on August 2002

NOTES TO PROFIT & LOSS ACCOUNT

Note 1 Revenues on CD sales

Online sales

1. CD sale online (ordinary CDs)

The sale projection is based on:

(No. of units sold) × DKK 20 per CD

No. of units sold = (no. of streams) × 0,2% (rate of conversion)

Price of unit has been calculated to yield an average profit margin of DKK 20 per CD.

The conversion rate and the no. of streams are obtained from a statistical module software program installed in the web site. It analysed the number of streamers who has decided to buy the CD.

2. CD sale online (custom made)

The sale projection is based on:

(No. of units sold) × DKK70 per CD

3. Download sales

(No. of downloads) × DKK 5 per download

No. of downloads = (no. of streams) × 0.5% (rate of conversion)

The conversion rate and the no. of streams are obtained from the statistic module.

Note that by June 2004 (3rd quarter), the no. of projected downloads has been increased sharply both in June 2003 and June 2004. Reasons for the increase in June 2003 is due to planned promotion activities, and in June 2004, it is due to the planned promotion and entrance into the UK and Swedish markets.

4. CD sale offline

For the most popular CD's on the site, Digitone will start cooperation with the artist and produce CD's to be distributed on the site as well as through ordinary retail channels. The expected profit per sold CD is approx. DKK 20 (gross sales price to distributor is DKK 65 ex. VAT which is further deducted by production costs and NCB: DKK 15 and royalty to the artist(s) and the Internet portal SOL DKK 30). There has been made an agreement with the band Gravity Life regarding the first release. The CD has been produced and released in November 2001 in cooperation with the Internet portal Scandinavia Online (online promotion and sales through their vast userbase) and Sony Music (distribution to the offline retail market).

Digitone expects to publish 3-5 CDs per year with a normal sale of 2,000 - 10,000 units (a hit will reach 50,000 units). The budget provides for an annual sale of 30,000 units in 2002 and 45,000 units in 2003. In 2002, Digitone will also launch CDs in Norway and Sweden.

Note 2 Advertising revenue

Advertising revenue is obtained by sale of banner ads. The level of revenue has fallen considerably on the basis of a reduced interest from advertisers due to the general dot-com market crisis. If the number of streams run from the server is regarded to represent the traffic on the site, this year's revenue has been DKK 0.30 per stream. This has been the basis for the budget. The expected increase in web traffic is reached by higher awareness of Digitone via the company's distribution with Scandinavia Online, offline releases and the launch of sites in Norway and Sweden with the number of signed bands to grow accordingly.

Note 3 Membership subscription fees

In the near future it is expected that the market will accept subscription based downloads from Digitone's site. The number of subscribers is based upon a conversion rate of 10 % of the number of users.

No. of subscribers = (no. of users) * 0.1

A subscriber will be charged DKK 200 including VAT.

Membership subscription fees = No. of subscribers * 200 DKK

Note 4 Test marketing

Digitone expects to make an agreement with 10 % of 10 potential traditional record companies every quarter year. The agreement will be for the testing of three tracks for three months at the price of 1000 DKK per track. The budget provides for an increase in sales with the ratio mentioned in note 1 (1:2:3 for DK, SE, UK) with the entrance into the Swedish and the UK market.

Note 5 Market information

Digitone expects to make an agreement with 20 % of 10 potential companies for marketing information at the price of 5000 DKK. The budget provides for an increase in sales with the ratio mentioned in note 1 (1:2:3 for DK, SE, UK) with the entrance into the Swedish and the UK market.

Note 6 Booking

The income from the booking of bands is based upon a conversion rate of 1% of the number of bands.

At the entrance into the Swedish and the UK market the conversion rate is 5%

The budget provides for 1000 DKK per booking.

Note 7 Music licensing

The budget provides for 1 licensing agreement per quarter. The budget provides for an agreement on 1 track at the price of 15,000 DKK.

The budget provides for an increase in sales with the ratio mentioned in note 1 (1:2:3 for DK, SE, UK) with the entrance into the Swedish and the UK market.

The deal with DBC is expected to be a success bringing in 15,000 DKK every quarter.

Note 8 Salaries

The budget operates with no salaries in the 3rd quarter of 2002. From the 4th quarter of 2002 there is calculated with 2 persons to be employed with a salary of 10,000 DKK per person. From the 3rd quarter of 2003 the budget provides for a salary of 20,000 per month for 2 persons.

Note 9 Marketing costs

The marketing costs cover the promotion in terms of posters and flyers in the 3rd and 4th quarter of 2002. In the 3rd quarter of 2003 the budget provides for the promotion of new bands. In the 4th quarter of 2003 the marketing costs cover the promotion at Christmas time.

In the 3rd quarter of 2004 investment is sought to cover the marketing costs for entering the Swedish and the UK market.

Note 10 Financing Costs

This is calculated on an interest rate of 8% p.a. of the loan from Technological Innovation and for the average capital needed for the period (refer. balance sheet/cash flow forecast).

View Image - EXHIBIT 3 PROJECTED BALANCE SHEET/CASH FLOW STATEMENT As on August 2002

NOTES TO BALANCE SHEET/CASH FLOW FORECAST

Note 11 Debtors

The budget is based on an average credit of 60 days on advertising revenues, while there is cash on delivery terms for other income.

Note 12 Stock supply CD's

The budget is based on stock position accounted at a price of DKK 15.00 per CD.

The CD stock is calculated using the formula:

(number of offline CD sales in that year * 15)/(1000*4)

The CD stock of a year is actually the stock that is present at the end of the particular quarter and is being carried forward. Hence, the CD stock or inventory is not cumulative, across the quarters, but precisely what is actually in the inventory at the end of the 4th quarter. Hence the division by 4. The factor of 1000 denotes the conversion factor for representing in 1000 DKK.

Note 13 Share capital and reserves

A further DKK 250,000 has been injected by Teknologisk Innovation in Q1 2001, comprising DKK 83,000 as share capital and the rest as a long-term loan. In July 2001 the share capital has increased by a further DKK 22,000 and in November 2001 with DKK 60,000.

Note 14 Loan and interest on loan, Technological Innovation

Is increased by added interest. Interest and loan is not to be paid back before ultimo year with 5% of the company's turnover. Negative figures result due to outflow in the form of Repayment of Loans to Teknologisk Innovation. Positive figures indicate Interests payable.

Note 15 Value added tax (debt)

Negative figures show VAT receivables.

EXHIBIT 4

CHANGE IN THE RULES OF THE GAME

The music industry had long been aware of the impending threat of music piracy. The big companies tightly controlled the marketing and distribution channels, making it very difficult for a new player to enter the fray. The problem got compounded since there were only a handful of companies dominating the industry. Till music piracy started slicing off a significant portion of their profits, there was little incentive for these big companies to change the way they did business. They were afraid that embracing a digital system would displace some of their existing intermediaries in the business.

In the traditional business model, new artists had to pass through a series of middlemen before they could place their music in the local record shop. The following intermediaries, operating in sequence, claimed a major chunk of the value chain:

* Artists and Repertoire (A & R) Development, which comprised of investing in finding and developing bands and their music, helping the bands develop their musical repertoire and promoting the concerts

* Recording, which involves owning and operating the recording studios

* Manufacturing, where actual manufacturing of a CD takes place

* Marketing, which involves television and print advertising, promotion of the events and public relations for launch of some event

* Distribution, which is the most important activity, and involves packaging, transport of the CDs from the place of manufacture to the distributor or directly to the retailer.

* Retailing, where actual sales happen. This includes the Internet superstores as well as the physical departmental stores.

The Internet changed all that. It squeezed out the middlemen, and major labels were forced to concentrate on volume marketing and promotion of an artist. The most significant role played by the Internet was discovering the artist, and launching him into the global arena.

The Internet provided an alternative channel of distribution for the newer players. The companies could now reach out globally across the borders without being worried about the barriers to entry; effectively, the whole world became the market. Budding unknown artists could now reach out to a diverse range of potential consumers without seeking help of the established record labels. They no longer needed to depend on the existing labels, and could produce and market their own music. From the consumers' viewpoint, they could now listen to unknown artists whose music was not aired in the radio.

Distribution of music over the Internet could be done in two ways. Music could be ordered over the Internet, and delivered via e-mail. Alternately, consumers could directly download digitized music from the concerned websites.

View Image - EXHIBIT 5 ORGANIZATION CHART

The financial expertise of Director no. 1 is a crucial contribution to the company. He plays an important role in the monitoring and guiding of the company's financial accounting.

Directive Administrator no. 1 has obtained deep knowledge in communication from his studies and therefore has potential skills in regards of marketing. Being a musician himself, he has a deep inside understanding in the Danish music scene and a well-developed network to key persons.

Directive Administrator no. 2 has obtained IT skills from his studies where he specializes in Design, communication and media. All skills are useful assets for the company.

EXHIBIT 6

THE CHALLENGE OF MP3

The MP3 format

MP3 files can be created through a process called "ripping" where the digital audio contents of a CD is copied into a file in the MP3 format (which stands for Motion Picture Experts Group, Audio Layer 3) and stored on the computer's hard drive. The MP3 is a format similar to the .jpg format, and was developed by the Fraunhofer Institute in Germany in 1992. Its primary use was to transfer and store digital music over the Internet (Hellweg, 2000). The file, even after being compressed significantly, retained CD-quality sound (Hunter & Smith, 2000). There are other audio compression formats which achieve better compression, but MP3 remains the most popular format in the Internet.

Proliferation of MP3

New technologies made MP3s extremely popular among the huge base of Internet users. Fast connectivity, computer based and portable MP3 players and increasing number of web-sites offering MPSs for download enabled the music users to carry MP3s wherever they went. For consumers unable to purchase the expensive music CDs, MP3 became a viable alternative. These developments posed a serious challenge to the music industry's control over its copyrighted materials (Kiron, 2001).

The turn of events

In response, the music industry in the USA came up with two strategies. First, they developed a technological standard for encrypting digital audio. Second, they sued those companies which posed the maximum threats to copyrights held by RIAA's12 members.

To stop the mass popularity of MP3 players, the RIAA sued the manufacturer of the MP3 player, Diamond Multimedia Systems Inc., for violating the 1992 Audio Home Recording Act (Hunter & Smith, 2000). The suit was lost on the ground that the MP3 player was a "space-shifting" device, and it allowed the user to shift music files from one format to another for their own non-commercial purposes.

The music industry requested Leonardo Chiariglione, inventor of MP3, to come up with a system which would safeguard digital audio from piracy and counterfeiting (Kiron, 2001). Chiariglione, with the help of a consortium of around 100 firms, created the Security Digital Music Initiative (SDMI). SDMI was a set of guidelines for technologies and software and aimed at reducing the risks of copyright infringements13 in a digital audio-based format.

Similar to RIAA, the Canadian Recording Industry Association (CRIA) in Canada and the British Phonographic Industry (BPI) protected the rights of the artists in Canada and the United Kingdom respectively. Interestingly, CRIA and the BPI were not members of the SDMI. Rather, they were members of the International Federation of the Phonographic Industry (IFPI). The recording industry associations of a number of other countries, including Denmark14, were members of the IFPI. The IFPI, in turn, was a member of the SDMI.

However, the standards set by the SDMI group were too high to achieve. Internet users, aided by peer-to-peer technologies, could share music files with each other for free. Napster, an Internet service facilitator, allowed computer users to share their MP3 music files logging on to a common server, which was a distributed system that could store large number of files (Kiron, 2001). Although Napster's music swapping operation was halted by order of the US Courts, other peer-to-peer software applications, like Gnutella and Freenet, allowed users to find music files without having to go thorough a central listing service, such as Napster's. When Napster's servers, where the listing service was located, was shut down, it eliminated peer-to-peer sharing among the Napster users. In Gnutella and Freenet applications, however, there was no listing service to shut down. The only method in which the use of these services could be stopped was to turn off each and every user's computer. The companies couldn't be sued, since according to them, it was the users who were actually infringing the copyrights. Since the users were also the consumers, none of the music associations dared to bring them to the court of law. This was seriously undermining the copyright enforcement effort.

The next challenge for the major record labels was to counter the threat from the multitude of web sites which offered free download music MP3s. They first targetted the most successful of these websites, MP3.com, that had a huge collection of MP3s. The US District court ruled in May 2000 that MP3.com had directly infringed the music companies' copyrights. With its stock price dipping sharply, MP3.com hastily settled with the five major record labels, finally paying them around $100 million (Kiron, 2001). Another major threat was the web-based radio stations, which played streaming audio that, in principle, could have been illegally recorded and transferred.

View Image - EXHIBIT 7 INDUSTRY SCENARIO

EXHIBIT 8

MUSIC PIRACY AND COPYRIGHT PROTECTION

Piracy of commercial music is a continuous threat to the recording industry. Two out of every five physical recordings sold in the world are pirated copies.

Two new treaties were adopted internationally in 1996 to bring copyright into the digital age, the WIPO Copyright Treaty (WCT) (IFPI, 2003) and the Performers and Phonograms Treaty (WPPT). The WPPT marked a watershed in the protection of sound recordings for the recording industry. The WIPO treaties aim at providing incentives and protections to the creative individuals and companies to promote national culture and creativity and to pave the way for electronic commerce in copyrighted works and products. The WIPO Treaties are administered by the World Intellectual Property Organisation.

Most of the creative enterprises are dependent on copyright protection and are repositioning themselves for the Internet and e-commerce age. The WIPO Treaties aim to create a legal environment in which rights owners can protect against infringement in information networks. The WPPT provides protection against unauthorized reproduction, distribution, and rental of recorded music. The producer's consent is required to make sound recordings available and to communicate them interactively over the Internet. If these treaties are accepted all over the world, it would protect the local musicians from counterfeit copies of their work, prevent the development of some pockets into a piracy haven and provide economic rewards to the creative people for their original work.

IFPI has been actively encouraging governments to adopt these treaties at the earliest (IFPI, 2003). In Europe, IFPI has been working towards strong protections for the creative industries in the Copyright and Related Rights Directive, which implements the treaties. The recording industry is a talent-driven, creative industry, and as such it is totally dependent on copyright protection. Protecting copyright, fighting piracy and promoting the value of modern economies in a thriving legitimate music industry are core activities of IFPI.

View Image - EXHIBIT 9 SYSTEM LOCK-IN (DENMARK)

Footnote

2 Teknologisk Innovation - Technology Innovation

3 Underground music arena here refers to the pool of amateur and unknown artists who were yet to gain a strong foothold in the market

4 Danish Bibliographic Centre

5 Dansk Rock Samfund - Danish Rock Association

6 IFPI - The International Federation of the Phonographic Industry

7 All information on Vitaminic is retrieved from (Vitaminic, 2002) unless otherwise stated

8 Internet Underground Music Archive

9 All information on Peoplesound is retrieved from (Peoplesound, 2002) unless otherwise stated

10 Recording Industry Association of America

11 The Internet Underground Music Archive (IUMA) is a premier artist community on the web, and hosts over 25,000 artists and over 100,000 tracks. Their mission is to empower unsigned musicians a viable means to promote and distribute their music online. IUMA offers the fans audio sampling as well as purchase of downloadable tracks and physical product through a secure e-commerce system. IUMA shares its advertising revenues with its members (Brydon, 1999).

12 RIAA was the Recording Industry Association of America.

13 Based n the Copyright Act of 1976, the set of the rights could be infringed in three ways: Direct copyright infringement, Vicarious copyright infringement and Contributory copyright infringement.

14 The countries whose recording association were members of the IFPI were: Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Chile, Colombia, Czech republic, Denmark, Egypt, Finland, France, Germany, Ghana, Greece, Hong Kong, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Kenya, Lebanon, Malaysia, Mexico, the Netherlands, New Zealand, Nigeria, Norway, Poland, Portugal, Singapore, Slovak Republic, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United States of America and Venezuela.

References

REFERENCES

1. Brydon, A. (1999). About IUMA. Retrieved 7 January, 2004, from http://wvvw.iuma.com/About/pagePressRelease 5.html

2. Computerworld. (2002). Onlinemedier Klar Til at Krceve Delating. Retrieved 16 May, 2002, from www.computerworld.dk/default.asp?Mode=10&ArticleID D=14658

3. Dahlager, A. L. (2002). Bundrekord for Musiksalg. Retrieved 07 August, 2003, from www.politiken.dk/visartikel.asp?TemplateID=679&PageID=209830

4. eMarketer. (2002). Europe Online: Access, Demographics and Usage. Retrieved 25 May, 2002, from www.emarketer.com/ereports/europe online

5. Hellweg, E. (2000). New Wave Music. PC World, July, 127.

6. Hunter, T., & Smith, T. (2000). Napster and MP3: Redefining the Music industry (No. 9B01 M002). Ontario, Canada: Ivey Publishing, Richard Ivey School of Business, the University of Western Ontario.

7. JFPI. (2003). Commercial Piracy Report 2003. Retrieved 10 January, 2003, from http://www.ifpi.org/site-content/antipiracv/piracv2003.html

8. King, B. (2002). Pressplay Arrives in Music Fog. Retrieved 15 August, 2003, from www.wired.com/news/mp3/0,1285.49934,00.html

9. Kiron, D. (2001). Napster (No. 9-801-219). Boston, MA, ,USA: Harvard Business School Publishing.

10. Kulturministeriet of Denmark. (2002). Musik/Distributions- og Salgsledet. Retrieved 6 May, 2002, from www.kum.dk/netkunst/article.asp?Chapter=8&Article=103

11. OECD. (2002a). Economic Survey - Denmark. Retrieved 25 May, 2002, from www.oecd.org/EN/document/0,, EN-document-652-nodirectorate-no-3-25155-3.00.html

12. OECD. (2002b). Economic survey - Sweden. Retrieved 26 May, 2002, from www.oecd,org/EN/documents/0,,EN-documents-652-nodifectorate-no-3-no-3-no-no-2,00.html

13. OECD. (2002c). Economic Survey - UK. Retrieved 24 May, 2002, from www.oecd.org/EN/document/0,,EN-document-652-nodirectorate-n 0-3-25986-3,00.html

14. OECD. (2002d). Update of Official Statistics on Internet Consumer Transactions. Retrieved 27th. May, 2002, from www.occd.org/EN/home/0aEN-home-570-nodirectorate-no-no-no-13,00.html

15. Peoplesound. (2002). Retrieved 17 January, 2003, from www.peoplesound.com

16. The Department for Culture Media and Sports UK. (2002). Music. Retrieved 5 May, 2002. from www.culture.gov.uk/creative/music.html

17. Thomsen, C. (2002). Hollandsk domstol frikender Kazaa. Retrieved 16 March, 2003, from www.computerworld.dk/default.asp? Mode=2&ArticleID=14206

18. Vitaminic. (2002). Retrieved 22 December, 2002, from www.vitaminic.com

AuthorAffiliation

Arindam Mukherjee and Rajanish Dass

Indian Institute of Management Calcutta*

AuthorAffiliation

* This case was prepared by Arindam Mukherjee and Rajanish Dass, Doctoral candidates of the Indian Institute of Management Calcutta at the Copenhagen Business School, as the basis of classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The authors have disguised some names and other identifying information for anonymity and to maintain confidentiality.

Subject: Digital music; Business models; Startups; Music industry

Location: Denmark

Classification: 8331: Internet services industry; 9175: Western Europe

Publication title: Journal of Information Technology Cases and Applications

Volume: 6

Issue: 1

Pages: 28-53

Number of pages: 26

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Ivy League Publishing

Place of publication: Marietta

Country of publication: United States

Publication subject: Computers--Data Base Management, Computers

ISSN: 15228053

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References Charts

ProQuest document ID: 214896468

Document URL: http://search.proquest.com/docview/214896468?accountid=38610

Last updated: 2011-09-27

Database: ABI/INFORM Complete

Document 87 of 100

Watson Communications, Inc: Partnering with Information Services

Author: Hurt, Mimi E

ProQuest document link

Abstract:

This teaching case illustrates the issues and challenges in creating effective, productive relationships between senior management, business units, individual users and the Information Systems function. The case describes, in rich detail, the efforts of a CIO to develop a stronger, more centralized Information Systems department. As part of this transition, the CIO creates the position of Director of Business Account Managers. The newly hired Director, a sales account manager from one of the business units, is tasked with developing, hiring and ensuring the business account managers' success. Keywords: IS Management, IS-User relationships, relationship management, user satisfaction, stakeholder management, leadership, and communication. [PUBLICATION ABSTRACT]

Full text:

Headnote

ABSTRACT

INTRODUCTION

Charlie Foss, the CIO at Watson Communications, Inc., angrily hung up the phone after demanding Sue Meeyah, his Director of Business Account Managers, schedule a meeting with him as soon as possible. The head of the cell phone division, Mark Freeson, had just cornered Charlie in his office. Mark loudly complained about the level of support and service he was getting from Central Information Services (CIS). He also was none to happy about what he had heard about the plans to implement SAP and change his applications. "So much for your speech about CIS wanting to be real partners with the business units! I thought partners at least talked to each other before making decisions," Mark snorted as he slammed Charlie's door behind him.

Charlie wearily rubbed his face, "Trying to get all these user groups and strategic business units aligned and supporting his vision for CIS' was worse than herding cats." One of the reasons Charlie had created Sue's position four months ago was to specifically manage relationships with Mark and the other division heads; and avoid the sort of scenes that had just occurred.

COMPANY BACKGROUND

Watson Communications, Inc. (WCI) is a medium-sized organization in the mid-west, located in a metropolitan area of approximately 800,000 people. It had gotten its start as an Internet Service Provider at the beginning of the Internet boom in the early 1990s. The founder, Larry Watson - who had been a senior executive with a large telephone company, saw an opportunity to jump in at the beginning of what he foresaw to be the next wave of telecommunications. Moving quickly and aggressively, he and his partner, Frank Sears, soon established Watson as the premier ISP in the metropolitan area. Foreseeing the possibility of web-based TV, they brought in additional investors and bought a television station and two popular radio stations. In the late 1990's, WCI acquired a small, but well established cell phone company, Ringz 4U, with an active customer base of over 100,000 cell phone accounts.

The acquisition of Ringz created some interesting challenges for WCI. Although Ringz was smaller than WCI, and had been in business for less time, it had successfully grown at a very rapid pace by targeting both mid-size businesses and individuals for its cell phone products and services. Its reputation in the business community included such adjectives as "nimble," "innovative," and "fun." The executives who started up and managed Ringz were primarily in their 30's, and all had MBA degrees. They exuded high energy and confidence in their business acumen and decision-making. They prided themselves on their ability to sense where the market was going quickly, and take fast action in order to seize perceived opportunities. Watson Communications, on the other hand, saw itself as equally leading-edge and innovative, but more thorough and thoughtful in their decision making. They paid close attention to key details and performance indicators. They firmly believed that it was better to be a second, or even third mover, rather than risk being on the "bleeding" edge where innovations don't develop as anticipated. One of the motivations for buying the cell phone company was to eventually offer wireless Internet access via a joint effort between the ISP and cell phone divisions. While this opportunity had frequently been discussed and pushed for by the Ringz executives; Watson and Sears didn't think the market was ripe enough to enter in early 2002.

In June 2001, WCI successfully completed negotiations to acquire a cable-TV company. While the local business press reported the move as a "merger of equals," the reality was that the deal represented a takeover by the smaller WCI of the larger, but struggling cable-TV company. WCI senior management felt that with their superior management skill and experience, they could turn the company's performance measures around, and create the potential for significant synergies across their existing divisions.

Up until the acquisition of the cable-TV company, each previous acquisition acted as a semi-autonomous company under the WCI umbrella. Each division retained much of its original senior management, organizational structure, and culture, and more or less pursued business as the division's senior management deemed appropriate. At year-end, each division was measured by their revenues and profit margins. Those divisions that had the best returns received more favorable status when it came to resource allocation; those that under-performed squirmed and scrambled. The head of each division acted as part of the overall WCI management team, and carried dual titles: Vice-President in WCI, and President in their respective division. Other senior managers had also made the transition from the division level up to WCI Head Office to oversee various portfolios. (See Exhibit 1 - WC Organizational Chart.) For example, Dale Jones moved from President of the cell phone division to become Executive Vice-President - Operations. Mark Freeson, a long-time employee with Ringz, became the division's new President.

The role of WCI Head Office was to oversee the total operations of the company, set policy, provide central services, and most importantly, strategically plan for the continued growth of the company, as measured by increased revenues and bottom line performance. Frank Sears, the tough-talking, bottom-line focused CFO, had been with Larry Watson since the initial startup of the ISP company. Recognized throughout the company as one of the key powers within the organization, if Frank wanted something done, it got done, no matter how the divisions felt. Another key player was Isabelle Rogers, the head of the ISP division. She also oversaw Legal Services and Communications & PR. Olly Winston, a recent MBA grad from a top business school, was promoted from the cell phone division to be Director of the strategic planning group. There were limited shared services across divisions, with the shared services being primarily related to Legal Services, HR functions, Communications & PR, and Information Services.

The History of Information Services at WCI

For most of WCI's brief history, the Central Information Services (CIS) function, headed by a Director, reported up through Central Services, and provided shared services to all of WCI in the form of centralized telecommunication networks, e-mail and so forth. While everyone was provided with a corporate e-mail account, many also had a second e-mail account provided by their division's information systems departments. Typically, their division e-mail account served as their primary e-mail. Some divisions used Microsoft Outlook for their e-mail, some used Lotus Notes, and some (primarily the ISP division) used the IBM mail system provided on the mainframe.

CIS also maintained the corporate website which provided basic information about the company, and provided links to division websites. It was each division's responsibility to create and maintain their own website. CIS also provided the necessary systems, applications and support for the original ISP division, and provided a few ancillary information systems for the radio and television division (e.g. accounting), but not their broadcasting telecommunication networks. CIS provided mainframe-based services and computing "horsepower" on a chargeback-basis(i) to each of the divisions. As of March 2001, they also supervised the help desk support and computer-equipment purchasing. Although this looked good on paper, with the exception of the ISP division, the other two divisions rarely made use of these centrally provided services, preferring to work with their own information systems organizations that they had from before their acquisition by WCI.

These arrangements seemed to work fine, and everyone was more or less happy. There was a minor uproar, however, when it was discovered that the radio and TV division were using cell phone services provided by a competitor, at a cheaper rate, rather than services provided by Ringz. Further discontent occurred when Olly Winston and Dale Jones convinced the executive management team that significant savings could be attained if the company standardized their desktop platform, centralized the purchasing of computer-related equipment and outsourced help desk support services. With Larry Watson's and Frank Sear's support, this initiative was pushed through, and the rollout of a common desktop had been completed by September 2001 to almost all 950 employees in the company. (The marketing and advertising department in the TV & Radio division had made convincing arguments why they need to stay with their Mac-based environment, and the Legal Division made similarly strong arguments for why they needed to stay with WordPerfect.)

There were also rumblings of complaints from customers regarding separate bills, and confusing formatting, from different divisions. For example, a customer might have two personal cell phones from Ringz, and an ISP account with WC. They'd like to pay just one bill to the company, rather than three. It was expected these types of complaints might get worse when the company started providing cell phone-based Internet access. Also, customers were complaining about the inconsistency across company websites. The look and feel of each website, as well as the types of services and information provided were significantly different. Customers could log onto the TV and radio websites and get basic programming information, although it was hard to find details about a specific program without going through several screens. The troubleshooting FAQs(ii) provided by the ISP division's website had reduced the number of calls received by its Call Centre. They still received thousands of calls, however, since it acted as the primary call centre for all of Watson Communications. Many of the calls they received were complaints about the Ringz website from frustrated customers who couldn't access their cell phone accounts and services.

The merger with the cable-TV company, which had its own information systems organization - including its own billing systems, CRM system, interactive website and call centre, threatened to compound and further complicate all these issues. On top of all this, Frank Sears wanted better, integrated accounting and financial systems across the divisions in order to provide faster, more accurate roll up of financial performance indicators to Head Office. After an initial six month investigation that primarily involved talking with other companies in the industry and a few vendor consultations, Olly Winston recommended the company implement SAP - an enterprise resource planning system that appeared to meet the CFO's requirements. A more detailed investigation and pilot test of the system's potential had already been initiated in the ISP division, despite the cell phone division's objections that SAP would not meet their needs.

WCI's executive management recognized that effectively managing the change to a stronger, more powerful centralized information systems function (CIS), and addressing the related organizational challenges was beyond the authority and capability of the current IS Director. They created the position of CIO, still reporting up through EVP-Operations, and offered the position to Charlie Foss, the CIO of the cable-TV company as part of the merger negotiations. The previous IS Director, Ken Derron, became the Chief Technology Officer and reported to the CIO. These changes became official at the start of fiscal year, July 1, 2001.

THE CURRENT SITUATION IN CIS

Charlie Foss' initial task was to develop a compelling vision and business case for a strong, centralized IS department for WCI. It was felt that if he could convince vocal opponents like Mark Freeson, VP-Ringz, Gerry Stoneman - VP-TV & Radio, and Isabelle Rogers - VP-ISP Division of the benefits of the new model, then he would be able to get the changes implemented. After spending several weeks talking with the various divisions heads and different IS folks throughout the company, reviewing the current services, applications and technology infrastructure, Charlie felt he had a good understanding of the issues and challenges, and started putting together his plan. Over lunch with his boss, Dale Jones, Charlie commented, "This should be a pretty easy sell. There's so much duplication of services, applications and inefficient use of resources that I can demonstrate that each division's bottom line can be improved 10-20% simply by moving to a more centralized model. The ISP division is already supportive of the proposal." "Be careful," warned Jones, "we had similar observations when we decided to roll out the standardized desk top, but we still met with plenty of user resistance." "Yeah," responded Charlie, "but those were mainly end users who were affected. Most of these changes will primarily affect CIS folks. Most of the technical changes will revolve around centralizing data into one central set of files instead of having it scattered or duplicated across various divisions. The business units and users will quickly support the changes when they see the logic underlying it. Plus, the CIS employees will get better career paths, as well as opportunities to work on different kinds of projects under a centralized model. Those are the sorts of things that motivate IS types."

Charlie's plan for moving forward involved two major prongs - a) developing a new information infrastructure and technical architecture to support the organization's needs - both now and in the future, and b) creating better relationships with the divisions and users so that CIS was truly perceived to be valuable partners in the business units' success. His major challenges, as he saw them, were identifying what technologies and applications should be centralized, which ones should remain with the divisions, and implementing the SAP suite of applications across the organization. The cable-TV division had recently implemented SAP, and Charlie was a big supporter of the power that such integrated systems could give a company. Accordingly, he decided to work closely with the Chief Technology Officer (the previous IS Director) to develop a plan for the new information infrastructure. He also created a new position Director, Business Account Managers to oversee and implement the development of a plan to improve relationships with the business units. Input from these CIS Business Account Managers would help ensure the information and technical infrastructure met each division's needs, and help smooth the way for its implementation.

The CIS Business Account Managers

When Sue Meeyah, an end-user in the cell phone division, first saw the job posting for Director, Business Account Managers in an internal newsletter, she was intrigued by the opportunity it presented. As one of the top account managers for Ringz 4U, she had a proven track record for finding and developing new business accounts. She worked hard for the people she perceived as her "clients," making sure they had the appropriate bundle of cell phone services for their business needs. If they had a problem with their bill, she was on top of it immediately, always resolving the issue to the client's satisfaction. She would spend an hour helping an administrative assistant learn how to work through the cell phone's self-service website, looking for the best cell phone package for their personal use. Whatever her clients wanted or needed, she got for them. Her manager frequently got letters from her clients, praising her excellent work and willingness to go the extra mile. Sue was also an excellent team player. She organized and set up a semi-regular monthly meeting for all the sales account managers to get together and share their tactics, experiences, explore common issues and so forth. She worked with the Marketing folk in the division, and helped them devise successful marketing campaigns that clearly addressed the target market needs. When she discussed the job posting with her manager, he encouraged her to "go for it." When she pointed out that she didn't have a lot of IT-related experience, her boss countered with, "Look, Sue, they're not looking for technical expertise - they've got that. They need someone who's good at working with people, who can help them build better relationships with their "customers" - the users. That's us. And who knows how to build relationships with customers better than you! We'll be sorry to lose you, but it's a great move for you. Besides, if you get the job, that will give Ringz four people in top positions - for sure, we can get what we want then!" Sue laughed, and promised to apply. After going through the interview process, she was pleasantly surprised when told the position was hers. The start date for the new position was October 1.

Sue walked into her first meeting with Charlie Foss on October 2nd. He was on the phone, but his assistant told her to go on in and have a seat. Sue studied him as he wrapped up the rather heated conversation he was having with someone about telecommunication networks. It sounded rather technical to her, but she would have to get used to that. Foss looked tired and a little rumpled, she thought, as he hung up the phone. "Hi!" said Charlie, as he reached over to shake her hand. "Welcome on board! Sorry for being so rushed - just got back from a 3-day SAP users' conference. It was fantastic - you wouldn't believe the music and the food, not to mention all the great presentations. We'll have to get you to it next year. Of course, there's always hell to pay when you get back... I should know, that was the third trip this month. Now, I've got a week full of vendor presentations and meetings scheduled." He rolled his eyes. She smiled in sympathy, "Was that a vendor you were just talking with on the phone?" "No," he said, a bit ruefully. "That was the telecommunications director over in Radio/TV, trying to convince me why his needs are so unique, and why he needs non-standard technology. One of these days, these guys will learn. We had the same type of telecom issues at the cable company - I know how this stuff works. They can't try to pull the wool over my eyes. Forget about that for now. Let me tell you about your job. I'm really excited by it since it will be critical to our department's success and the changes we want to make in the organization!"

Sue listened intently as Foss described his vision, first for a centralized IS department, then how he saw a centralized infrastructure supporting the divisions and providing appropriate integration across them. "It will be great," he enthused. "The divisions will be able to tap into the natural synergies and complementary products the company offers. Why an account manager in the cell phone division will be able to sell cell phone services, ISP services, wireless internet access as well as broadband access from the cable-TV division. Just think, it's Friday afternoon and you're wondering what to do that evening - you can use your Ringz cell phone to check your cable-TV listings, then surf the Internet to check local movies, and even call ahead to order a pizza delivered. It is going to be so easy to cross sell products and services from different divisions to customers of any of them! And, better yet, the CFO will be able to drill down and get the latest figures and financials, for any division, whenever he wants them."

Sue, confessing her ignorance of an in-depth understanding of information systems, asked how this would be possible. Foss started to explain. "The basic idea is that you keep all relevant data in one place - stuff like customer information, accounting, billing, product details, and so forth - and then anyone, anywhere, can access it through their desktop or laptop. Because all the data is stored in only one place, it's accurate and up to date. You don't have to go down the hall, or to the next building, looking for the right person to give you the information; you don't have to wait for them to get around to sending it to you when they feel like it; you don't have to wonder if there is later numbers than last quarter's financials. It will be great!" Sue slowly nodded her head. She remembered the difficulty she had trying to get information from the ISP division about some of their services when one of her cell phone clients asked her about them. The response she kept getting was simply to pass on the client's contact information, and someone from the ISP division would contact them. Since it was her client, she was reluctant to do that, fearing that the ISP division representative might promise something that she couldn't deliver, or worse, might say something that would damage the relationship she had carefully built up with the client.

"Can we do that with our current systems?" asked Sue. "No," said Foss. "That's where SAP comes in. It's a set of integrated applications, with modules that support practically every aspect of a business. I've been working with Olly Winston in Strategic Planning on this. Do you know him? He came from Ringz." Sue shook her head. "Not really," she said. "I only met him once or twice at meetings. He had a reputation of being an 'out-of-the-box thinker,' and was frequently at odds with the other Ringz executives about where to take the company." "Well, I like him," said Foss. "He's got a good grasp of the big picture, sees how things ought to be done, and then works hard trying to make it so. He's a great one to have onside with where we want to move things."

Foss went on to further describe Sue's new role. "One of the key elements to our success is becoming partners with the divisions and user groups. We want to be partners, not order takers." When Sue asked him to explain the difference, he said "Partners can say 'no' if they don't think the other partner is right. They can discuss, negotiate, and develop compromises. Partners work together to develop the best solutions for everyone. Order takers, on the other hand, simply take orders. The customer/user group says, 'I want a system to do x, y and z; here's the money from my budget for it, when can you deliver?' If CIS says no - even if for very good reasons - the customer will either shop around until they find someone whose willing to take the order, i.e. deliver the system, or worse yet, the user group tries to develop the system themselves." Sue grinned wryly, "That sounds almost exactly like something my old boss did." "Exactly," jumped in Foss. "That's gone on throughout this company. That's how we've gotten this mishmash of systems, that can't talk to each other, each with their own datasets, and no one knowing which data are the right numbers or even where the numbers are stored - not to mention the resource costs of supporting all these different and redundant systems. We've got to win these groups over. We've got to get them to trust us. We need to show them that we know what we're doing, and that when we say 'no' or 'we'll do that later', it's because we're right - we understand the big picture, where we're going and what we need to do to get there."

"So, the CIS Business Account Managers that you will oversee, or bridge builders as I like to call them, will be key to winning the users over. The CIS Business Account Managers will be the users' link to CIS. The CIS Business Account Manager will live and breathe the users' world, become familiar with their processes, their strategies and so forth, and understand their information and technical requirements. He or she will sit in on their meetings, and help them understand what can and can't be done. He or she will help the users come up with solutions to address their needs. Then the CIS Business Account Manager becomes the users' conduit back into CIS. The CIS Business Account Manager presents the users' requirements, and makes sure they get the technical support they need. The CIS Business Account Manager also acts like one-stop shopping for the user. If a user needs something done, say a small change on a report, the user goes to his or her account manager, who in turn goes to the right person in CIS, and makes sure the change gets done. If a systems analyst needs to understand something for a user's system, the analyst goes to the appropriate CIS Business Account Manager, who knows the right user to for the analyst to talk to, or can even answer the analyst's question himself." Sue warmed to the idea immediately. She could see where this role could be very effective, and address many of the problems she had heard about and experienced herself. She was excited about being part of the team introducing these changes, and helping the company become even better and more effective. Nevertheless, she wanted to be clear on exactly what Foss wanted her to do. "Build the team," he said. "Find the right account managers for each of the divisions and strategic business units. Train them and coach them on how to be effective relationship or account managers. The reason I picked you for this job was because I felt your background and experience was perfect for what I want to accomplish. Keep in touch with me on a regular basis, and let me know how things are going."

CIS' Account Management is Initiated

Over the next few weeks, Sue got straight to work. One of the first things she did was persuade Foss to do a presentation on this new role and its purposes to all the senior managers in the other divisions. The senior managers seemed open to the idea, and indicated a willingness to talk to Sue when she booked appointments with them. She got Foss to do a similar presentation to CIS personnel. He encouraged anyone interested in becoming an account manager to talk to Sue. As a result, Sue received several interesting applications, which she diligently reviewed. She also posted the job description in the internal newsletter, thinking there might be others like herself, who would be interested in making a career change by moving into CIS. She received a few applications from this ad, and added them to the pile to review.

After the interviews with the presidents of the various divisions, the executive vice presidents and directors, she felt she had a good understanding of the issues, challenges and hot buttons for each of them. She found out how important these CIS Business Account Managers might be, when during one of the interviews with a president of one of the divisions, he said, "Where's Charlie? Given the way he talked at his presentation, this is a key part of his strategy. I'm surprised he's not here for this interview, too." "Oh," said Sue hurriedly, "he's at an important vendor's meeting to see if the vendor can address some technical issue. I'll be sure to pass on what I learn from our meeting to him, and let him know how interested you are." And she did, when she caught up with the CIO in the hall one time between meetings. "Great, thanks for letting me know," said Charlie. "Keep up the good work!"

In early November, she had another meeting with Charlie, where he told her that he was transferring responsibility for the Help Desk and Purchasing to her. He said it only made sense to keep all the customer-touching, front-line contacts under one area. The Help Desk was headed by a competent manager, Craig Sepia, who seemed to have things well in hand when Sue talked to him. He had already initiated a survey, to be conducted in December, of users' perceptions of its service quality. "Good," said Sue, "let me have a look at the survey before you send it out." She had similar good impressions of Jane Beason, the Purchasing Manager.

By the middle of December 2001, as a result of her careful matchmaking, she had selected and placed several key CIS Business Account Managers or BAMs, as they liked to call themselves. She was quite pleased with most of them, thinking they were naturals for the job. Some of the others could be brought up to speed with a little coaching and initial handholding.

Tom Vixon, the BAM for the ISP Division, for example, had been the project manager on one of their key systems. He had successfully led a team of 10 analysts, programmers and user representatives in the development and implementation of a large-scale system that was now at the heart of the ISP applications. The project had been a month late, but it was on budget and did what the users needed. Tom said that delivering something that was usable was more important than cutting corners to get the system delivered on time. "If we had delivered a system that didn't work well," he said, "it would have been a long time before we could build the users' trust back in us. I'd rather take the hit for being late, than being thought we didn't understand their needs." "In hindsight," he continued, "I would have planned the implementation in chunks, so that the users quickly had something in their hands which we would then build and add on to. That way, they might be more patient with us if were late delivering the next piece." Sue was impressed by this. She thought that it demonstrated that Tom understood the users' needs and priorities, knew how to lead and manage a team, and was reflective enough to learn and change his actions when he saw that his current practices didn't work as well as he had planned.

Another good BAM, or so she thought, was Stephanie Li, the BAM for the Ringz cell phone division. She was a systems analyst who had actually come from Ringz' own IS department. Although only in her late20's, she had proven herself to be an excellent systems analyst. She had graduated with an undergraduate degree in Management Information Systems and a minor in Computer Science from the local university five years ago with top marks. As a 2nd generation Chinese immigrant, with impeccable communication skills, her accomplishments were a great source of pride to her and her family. She kept up on the latest technology developments by taking courses through her professional development grants, and by attending relevant monthly user group and professional meetings held in the city. She had been a key systems analyst on several of the Ringz' applications, and was frequently called upon whenever users had problems with their systems. The only area where she might be weak, thought Sue, was in her lack of assertiveness, which Sue thought probably came from her upbringing and cultural background. With a little coaching, however, Sue thought this problem could easily be overcome.

The Crisis

It was February 3, 2002; three months after the BAMs had been assigned to each division. Sue Meeyah, stared out the window at the dreary weather, as she mentally reviewed the telephone conversation she just had with Charlie Foss after his confrontation with Mark Freeson. Charlie's angry tones still rang in Sue's ear. "I thought the reason why we created your job, and put your people in place was to prevent this kind of stuff! I thought the BAMs were supposed to look after the business unit's needs, and make sure the users are happy," he continued. "So, why is Mark in here pounding on my desk? Where did he get all these facts and ideas, which, by the way, are totally wrong!" He hung up abruptly after telling her to call his assistant and book an appointment with him in the next few days to review her group, its strategies and tactics. Sue sighed. Since taking on this newly created department and position four months ago, outside of the weekly director meetings, she had only met with Charlie for a few brief one-on-one meetings.

Before calling Charlie's assistant, Sue checked her calendar. She had a meeting that afternoon with the academic she hired to conduct a survey of the Help Desk, and she wanted to squeeze in a couple meetings with her account managers to find out how things were going. She especially wanted to talk to Stephanie Li, the BAM for the cell phone division. "Better start making phone calls," she thought.

Sue's phone calls proved fruitful. Tom Vixon was free immediately, and Stephanie Li could see her first thing tomorrow morning. Her meeting with Charlie Foss was scheduled for the morning after that, so she would have tomorrow afternoon to pull her thoughts together, and draft a memo outlining her findings and plans for the next few months.

When Tom walked into her office, Sue practically pounced on him. "Tell me how things are working out for you. How would you describe the quality of the relationship you've built up with the ISP division?" "They're great!" said Tom. "I've been really busy attending various meetings with them, digging into their problems and issues, and really learning their business." "How have you done that?" asked Sue. "Well, first of all, I attend the weekly directors and managers' meeting, I also attend several of the managers' area meetings, and Isabelle - the division president - has me report to her once a week and tell her what I've been hearing and doing." "Really?" said Sue, "I wouldn't think she'd have time for that." "She says she makes the time because it's important for her to know what's going on, to ensure that orders she gives are clearly understood, and it's a way for her to hear about issues in her division from another perspective." "And do you? Understand her issues, I mean?" Tom went on to explain how he sat in on the call centre for a couple days. He shadowed staff members while they answered the phone and used their information systems to answer customers' questions and deal with their complaints. He also dug through the Help Desk logs to identify what sorts of problems users from the ISP Division were calling about, and then organized some lunch-n-learn sessions and wrote a few "quick tips" cards to address some of the common, simple ones. "That seemed to really catch their attention," said Tom.

"A problem I did run into, though, was back here with the CIS folk. Two frequent problems the users had were with getting a report to print on a local printer and with the way information displays across multiple screens. If they could get the information on one screen, they could probably save a minute per call on over half their calls." "Why did you run into problems with the CIS people?" Sue asked. "Fixing the printer problem actually was pretty simple." Tom replied. "I finally dragged one of our technical people over, showed him the problem, and he quickly figured out that it was an IP error on the local area network. Five minutes later, the problem was fixed, and everyone was happy. No more frustrated calls to the Help Desk. The screen display problem is proving a little more difficult to resolve."

Tom went onto explain, "I went over the problem with the systems people here who maintain the system. While they quickly grasped the problem, they said it would take 2 days of manpower to fix it, and they didn't have anyone to spare. When I explained to them that the current display format added approximately a minute to every call, they just laughed - 'tell the call centre staff to take a Valium,' they said. I tried to point out that a minute per call, times roughly 200-300 calls per day quickly added up to quite a bit of time and costs, not to mention customer and staff frustration. That's when they accused me of having gone over to the 'dark side,' and become one of 'them' - the users." "Hmmm," said Sue, "we'll have to do something about that.... it hardly makes for an attitude of partnership. Do you mind if I bring this example up with Charlie?" "Sure, go ahead, anything that will help get this problem addressed will be great."

"Tell me more about these manager meetings you've been sitting in on," Sue asked curiously. "It's still early in their budget planning time," said Tom. "I've been listening to their plans for the next year, and suggesting specific ways technology might help them out. I've also pointed out where they can save money by running some of their computer processing at different times of the day or month. They're so impressed, they want me to attend one of their industry conferences next month so that I can help them evaluate some of the things the competition is doing."

"Well, that was interesting," thought Sue, after Tom left. There were a lot of good things he was doing that should be passed onto the other BAMs. "I should start having regular meetings with all of them, so that we can share these sorts of things, like we used to do when I was in Sales." Sue also recalled an earlier conversation she had with the academic who was conducting a Help Desk study for them.

Sue had asked the academic, "What do you know about IS-User relationships?" "Well," laughed the academic, "they're historically poor and even antagonistic at times. There is usually always room for improvement, especially from the users' perspective, although it's sometimes hard for the IS people to see that, because they think things are working fine." The academic went on to explain that things like consensus, quality of communications, frequency of problems, understanding each other's business and practices, formalization and quality of service were all important factors that went into effective relationships. Sue asked him what he meant by "formalization." "That refers to the extent that behavior and activities are clearly specified, mandated, and standardized,"iii he said. "It also refers to how the activities are coordinated between the parties." "Oh, so you're referring to service level agreements(iv) and things like that," responded Sue. "Yes, and also things like whether or not a steering committee exists, who is on it, and does the steering committee make decisions about priorities and resource allocations." He went on to add, "A lot of the stuff we've learned about what makes for effective outsourcing arrangements applies to internal IS-user relationships as well. What we've observed, however, is that many IS organizations don't recognize the need to manage their relationships with users, don't devote adequate time and resources to what they see as "schmoozing" with the user, or simply don't know how to do it. The IS folks see their job as ensuring the systems and technology are up-to-date; operating efficiently, fast and reliably; and supporting the organization's needs. So, that's where they devote their time, energy and resources." The academic continued, "The other interesting thing that we've noted is that there can be significantly different perceptions or interpretations between users and IS about the same set of details."

The next morning, Stephanie Liu showed up promptly for her appointment with Sue. "I can't stay long," she said, "I have a meeting over at Ringz in an hour." "Do you meet with them often?" asked Sue. "Oh, yes," replied Stephanie, "I attend their managers' meeting every week." "Is that it?" Sue queried. "No," said Stephanie, a bit taken back by the question. "I've met two or three times with a couple managers about the system we're developing for them, and we've discussed the central e-mail system. I've been investigating a way where any e-mails from the central system are automatically forwarded to their divisional e-mail system." "Do you ever meet with Mark Freeson, the head of the division?" "Well, I've met with him once when I first started, and I see him at the weekly managers' meeting. The President is very busy, you know." Sue nodded, but wondered about that. She had always found Freeson to be very approachable, and willing to give her five minutes whenever she asked, even when she was just beginning as a lowly sales rep and thought she had a good idea for improving things.

"What happens at these meetings?" Sue asked. "The managers, there's about 10 of them, discuss their issues and problems, and discuss on how to address them," said Stephanie. "What do you do in these meetings?" Stephanie described how she listened carefully to all that was said, took detailed notes, and afterwards wrote a report summarizing what she heard. At the end of the report, she would make suggestions for how CIS might help address them. She e-mailed this report to all the managers, and to Mark Freeson. "What else do you do for the division?" asked Sue, thinking about all the things that Tom Vixon had rattled off. "I don't have a lot of time to visit with them," said Stephanie, "Most of my time is spent back here working on the new systems that we are designing for them. We keep running into snags because they keep changing the requirements on us."

Later that day, Sue bumped into Gerry Stoneman, the president of the Radio/TV division, in the elevator. "How is your account manager working out?" she asked him. "Seems to be fine," was Gerry's reply. "My guys in telecommunications say that he really knows his stuff - they say he instantly understands all the technical problems they're wrestling with, and has helped fix many of the problems." "That's good news," said Sue. The elevator opened on Gerry's floor. As he left, however, he turned back to her. "He's been on the job for 3 months now, and a couple things have come up that I wouldn't mind talking with you about. For example, he seems a bit junior - after all, he's only a manager, and all the folks he's dealing with in my department are senior managers or higher. Could we get together sometime?" "Sure!" stammered Sue. "I'll call your assistant and set an appointment up."

Concerned by Gerry's last comment, Sue wondered if any of the other division heads were having problems with their BAM. She picked up the phone, and gave Mark Freeson a call. "Mark," she said, "its Sue Meeyah. Do you have time for lunch? There's a couple things I'd like to chat with you about." "You're in luck," he replied, "my appointment for lunch just cancelled. Where do you want to meet?"

"We don't see much of her, but she seems okay," said Mark, in response to Sue's query about Stephanie. "She's a bit of a mouse, though. Never opens her mouth during meetings, just sits there and takes notes. Then she sends these detailed memos summarizing the meeting. Thanks for sending us such a great secretary!" he kidded Sue. "Do you read her report?" asked Sue. "Nah, I don't have time for that. I just glance through it. She seems to understand the issues well enough." Mark commented that Stephanie's suggestions at the end of the report were typically things they were already doing. "It's good to see we are on the same wavelength, though!" he said. "But, are you getting the kind of support you need?" persisted Sue. "Sure," he replied, "if I don't, I just do what I always do - go pound on someone's desk until I get what I need. If CIS can't deliver, and it's something the division needs, we'll just shop around until we find someone who can. I might have to do something like that with your boss, if he doesn't deliver on some of our IS projects like he promised, or if he insists on ramming this SAP on us." "Well, that explains that," thought Sue, recalling the conversation with Charlie from the day before. "What do you hear about what's happening in CIS?" she continued. "Not much," he answered, "I still have lunch with Dale Jones once a week, and he fills me in on the major things. Given your boss's comments about the importance of partnering, I thought I'd be seeing more of him than I do... the only I time I really see him is at the monthly executive meetings." "Well... he's been busy developing the plans for the new information architecture, meeting with vendors, and visiting other companies to learn about SAP and other stuff," Sue replied, nervously defending her boss.

Back at her office, Sue called Charlie Foss to confirm the next day's appointment. "By the way, I had lunch with Mark Freeson today," she mentioned. "He indicated that in one of your conversations, CIS agreed to some specific projects and targets for his division." "Where did he get that from? All we agreed to was some process issues!" Charlie replied. "I will look forward to hearing more about this from you tomorrow." With that he hung up, leaving to Sue to contemplate the title on her otherwise blank computer screen, "CIS Business Account Managers: A Status Report." She wondered where she should start.

View Image - EXHIBIT 1. WCT ORGANIZATIONAL CHART

Watson Communications, Inc: Partnering with Information Services

RESEARCH NOTE

Mimi E. Hurt

Athabasca University

In a still unpublished piece of research, the author statistically examined relationships between I/S and user groups in eight state government agencies. A survey adapted from Van de Ven and Ferry'sv work on inter-organizational relationships formed the basis for collecting the data'. The survey examined 15 different variables associated with I/S-User relationships using multi-item constructs, and a 6-point response scale, which included a "don't know" response. The survey was given to both users and appropriate I/S personnel. Valid responses were collected from 382 users representing 70 different user groups and 62 responses from corresponding I/S representatives. The relevant user responses were averaged together to form one collective, representative response per user group. Thus, there were a total of 132 cases used in the various analyses. Regression analyses, ANOVAs and MANOVAs were used to examine which variables were significantly related to the perceived effectiveness of the relationship, and to determine if significant differences existed in the perceptions of I/S people and users. Table 1 provides definitions of the significant variables, and Table 2 summarizes the results and indicates those variables that were found to be significantly associated with perceived effectiveness.

The results of the regression analyses identified six variables that explained 68% of the variance in Perceived Effectiveness. These included consensus, quality of I/S' services, Formalization, ease and Frequency of Communication and Frequency of Problems. Subsequent regression analyses using user and I/S data sets independently and separately of each other revealed a split in the importance of these six variables.

Which set or subset of variables should be considered most important depends on the point of perspective taken, i.e. the unit of analysis. From an overall organizational point of view, all six variables are important in explaining / predicting Perceived Effectiveness of I/S-User relationships. From a user's perspective, only three, especially Quality of Service, are important. Similarly, from I/S' point of view, only five variables are important.

From a Rational view of organizations, the six significant variables are intuitively consistent with mutually dependent, collaborative type relationships. The split in importance can be further explained by understanding the roles that I/S and users play in their relationship.

I/S' role is to provide services; consequently, the most important variables to them are those associated with the provision of service. As a part of human nature, it is difficult perhaps for service providers to perceive / acknowledge the their service is of inadequate quality. A lack of variance in perception of Service Quality might therefore explain why this variable is not statistically significant from an I/S perspective. Users, on the other hand, are consumers of services. The variables that are important to them are consistent with consumers' concerns: quality of service, degree of consensus, and frequency of problems.

View Image - Table 1. Definition of Key Variables

From a Political view of organizational behavior, the significant variables are also intuitively explainable. In the Political view of organizations, different groups within an organization can have their own goals and priorities which can, in fact be different and at odds with other units' and with the organization's goals. The variables which are significantly associated with Perceived Effectiveness can be seen as ones through which power is manifested and exercised in order to achieve one's objectives. For I/S, the most significant variables are those that allow it to gain or maintain power in a resource dependent-relationship. The factors that are important for users appear intuitively consistent with one who is dependent on another for resources critical to the attainment of the dependent unit's objectives.

The significant differences in perception between I/S and users for four of the independent variables can also be viewed through the Rational and Political perspectives of organizational behavior. From a Rational perspective, the differences in perception could explain relatively low degrees of perceived effectiveness. The differences could also be rationally explained by differences in conceptual frameworks - e.g. I/S and users have different backgrounds, education, and training, and consequently perceive things differently. From a practical perspective, the identification of such differences in perceptions can lead to specific actions to improve communications and the perceived effectiveness of relationships.

View Image - Table 2. Statistical Results

Differences in perception from a Political perspective are more difficult to succinctly explain, and is perhaps beyond the scope necessary for this Research Note. Differences in perceptions are consistent with other research on stakeholders' agendas, and the importance of various criteria to different stakeholders. Another explanation might be that perhaps differences in perception are due to where one stands vis a vis the distribution of influence, and thus are a surrogate measure of power. For example, if a difference in perception exists regarding Formalization, perhaps the group who perceives less Formalization to exist perceives that because they would rather have other terms of formalization, yet were unable to get them. Consequently, the lower power group does its best to ignore or avoid the terms of formalization imposed by the high power group.

The research gives interesting insights into various variables' association with effective I/SUser relationships. It also highlights where differences in roles and perceptions can play a major role in perceptions of effectiveness. From a practical, managerial perspective, the research provides insight into specific areas that managers should pay attention to, and/or develop specific practices that address them.

Footnote

i Chargeback is a method of allocating costs back to the business unit that incurred them. For example, the total mainframe costs would be allocated across each business unit in proportion to the amount of mainframe resources the business unit utilized during the billing period. Each business unit's budget would be "charged" for the equivalent dollar amount. The amount would be reflected as "income" or "revenues" in the Information Systems department's budget. There are different methods for creating chargeback systems. They can be a frequent cause of friction with user departments who either don't understand them or agree with the underlying methodology and/or assumptions.

ii Frequently Asked Questions

iii Ven de Ven and Ferry (1980), Measuring and Assessing Organizations, Wiley and Sons, 1980, pg. 416.

iv Service Level Agreements are a commitment by the IS function to provide certain minimum levels of service. For example, they may stipulate that all help desk requests be acknowledged in 12 hrs and no more than 5% system downtime.

v Ven de Ven and Ferry (1980), Measuring and Assessing Organizations, Wiley and Sons, 1980.

i Yen de Yen and Ferry (1980), Measuring and Assessing Organizations, Wiley and Sons, 1980.

AuthorAffiliation

Mimi E. Hurt

Athabasca University

AuthorAffiliation

Dr. Mimi Hurt holds a PhD in Management from the University of Texas at Austin. Her academic experience includes developing and teaching a variety of information systems and e-business courses at the graduate, undergraduate, and executive education levels at Athabasca University, the University of Calgary and the University of Texas. She is currently the Director of the MBA in IT Management Program at Athabasca University. Her research interests include: IS-User relationships - both internal and externally based ones, IS management, delivery of information services, outsourcing, user satisfaction and IS service quality. Dr. Hurt has consulted in the areas of information systems management, organizational behaviour, and change management for large corporations in Canada, as well as for several state and municipal government agencies. Dr. Hurt has delivered upwards of 20 invited presentations and papers to a variety of venues including the premiere academic conferences in her field, as well as at practitioner-oriented conferences and privately to major corporations.

Subject: Information systems; Chief information officers; Telecommunications industry

Location: United States, US

Company / organization: Name: Watson Communication Systems Inc; NAICS: 518111, 517212, 515120, 515112

Classification: 2130: Executives; 9190: United States; 8330: Broadcasting & telecommunications industry

Publication title: Journal of Information Technology Cases and Applications

Volume: 6

Issue: 2

Pages: 48-62

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Ivy League Publishing

Place of publication: Marietta

Country of publication: United States

Publication subject: Computers--Data Base Management, Computers

ISSN: 15228053

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References Diagrams Tables

ProQuest document ID: 214910786

Document URL: http://search.proquest.com/docview/214910786?accountid=38610

Last updated: 2011-09-27

Database: ABI/INFORM Complete

Document 88 of 100

MERRIMACK VALLEY CHAMBER OF COMMERCE: "THE BIGGEST AND THE BEST"

Author: Vega, Gina

ProQuest document link

Abstract:

The Merrimack Valley Chamber of Commerce was the fifth largest Chamber of Commerce in New England in 2001. The Merrimack Valley region was being confronted with a series of challenges to the continued economic growth of the region, including sky-rocketing housing prices, a shortage of skilled labor, and the continued influx of high tech companies with complicated infrastructure demands. The cyclical nature of the regional economic development, highlighted from the Industrial Revolution to the high tech evolution, presents a context for understanding the "big picture" problems and macro issues that exist within the business community, as well as the immediate and pressing problems that the Chamber of Commerce had to face. The reader is introduced to the problems through the eyes of the President of the Chamber. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this case concerns regional economic development. Secondary issues examined include the role of the Chamber of Commerce and the integration of business and social concerns. The case has a difficulty level of two, appropriate for sophomore level courses. The case is designed to be taught in 2 - 4 class hours and is expected to require 2-4 hours of outside preparation by students, depending on the related projects selected.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Case Overview and Learning Objectives:

1. Understand the background of business development on a macro-level,

2. Recognize the cyclical nature of the economy and its impact on the growth of business communities,

3. Understand the integration of business and social community,

4. Understand the role of the Chamber of Commerce in commercial development,

5. Identify and prioritize a series of economic and demographic challenges.

Courses and Levels of Students:

This case is designed for undergraduate students who have had little or no previous exposure to business courses. One of the greatest challenges inherent in teaching undergraduate business students is the need to start at "ground zero" in the subject matter. Some of this challenge can be addressed through the use of business cases, as business problems can be focused on efficiently and accurately through them by providing ready examples of issues that students have not yet experienced. Yet, most business cases posit at least a minimal understanding of the way businesses function and their relationship to the larger community. With beginning undergraduate business students, especially those of "traditional" age, this understanding is often missing.

Courses such as "Introduction to Business" or "Introduction to Management" are geared to guiding students through the background issues of business. This case serves as a vehicle for contextualizing business knowledge, especially in integrated course formats. Introductory courses are often team taught by instructors from a variety of disciplinary approaches. The issues presented in this case can be tackled from several perspectives and are not limited to "management" issues. The case would also work with an introductory course on not-for-profit management.

A number of introductory texts have sections that correspond directly to the case: Business: An Integrative Approach (Fred L. Fry, Charles R. Stoner, Richard E. Hattwick. 2000. Irwin/McGraw-Hill), Business: A Changing World (O.C. Ferrell, Jeffrey Hirt. 2000. Irwin/McGraw-Hill), i+Business in Action (Courtland L. Bovee, John V. Thill. 2001. Prentice Hall) to name just three of the many introduction to business texts that are available. If used with an introduction to management text, Modern Management (Samuel C. Certo. 2000. Prentice Hall) works particularly well.

If you are using the Ferrell/Hirt volume, Chapter 1 is devoted to the context of business, and covers topics such as the nature of business, the economic foundations of business and their cycles, the role of entrepreneurship, a brief history of the growth of industrialization and current movements in technology. The introduction of this case in the very beginning of the term will provide a means of operationalizing the chapter contents for an existing community and concretizing the theories that are presented. Cycles of economic expansion and contraction and the way the American economy works are easily illustrated via the case.

The same suggestion would apply for the introduction of the case early in the term with the Fry/Stoner/Hattwick text. In that text, the first five chapters are devoted to a discussion of the integrative nature of business, including big picture indicators, scope of business, stakeholder theory, and decision-making. These topics are particularly appropriate for the use of this case, and questions can easily be developed that relate specifically to the sub-topic under consideration. In particular, the treatment of the environment of business, including visioning and developing a mission, along with the interactions that individual businesses have, provides opportunities to reflect on the way this concept works in the "real world."

If using the Certo text or other introduction to management text, the case can be integrated throughout the term, or used in one class if students are properly prepared. I have introduced it early in term, in conjunction with the history of management theory (Chapter 2), and provided the questions at strategic intervals. Certo's discussion of the Davis Model of Social Responsibility and social audits in Chapter 3 can be readily applied to local companies, as can elementary versions of stakeholder theory.

DISCUSSION QUESTIONS:

The following questions have been designed from the perspective of "introduction to management" and with an eye to providing opportunities to apply some basic theories that are covered in introductory courses. Similar questions can easily be designed from other disciplinary perspectives. It is often helpful for first and second year students to answer these questions as homework assignments before discussing them in class. In addition, the questions are useful as discussion starters and fishbowl reporting back processes for groups of four to six students working together.

1. Identify the main needs of the Merrimack Valley community and select the one you think is most important. Why have you selected this issue?

An appropriate time to introduce the case and assign the first question for discussion is when you are handling stakeholder theory, social responsibility, and/or the interactions among the participants in a business community. This means early in the term if you are using Ferrell and Hirt (Chapters 1-3) or Certo (Chapter 3), and a bit later if you are using Fry, et al (Chapters 5 and 7). The discussion of stakeholder theory in Fry is comprehensive and clear, providing students with a method for identifying primary and secondary stakeholders, and the later treatment of the impact of economic forces on local economies fits well with this case. Certo does a particularly good job with issues of social responsibility, and provides a socially responsible decision-making flowchart that will help to guide student responses.

The sudden influx of high tech companies created many jobs, but the local job force was not trained to fill them. Jobs for programmers, database administrators, and other high tech positions grew more quickly than did the training programs to fill these jobs. The fluctuating economic cycle kept the local employment population uncertain as to which type of job training to focus on. Many lower level positions were opening as well, in the health care service areas, but again, workers were insufficiently trained to fill them and, in a strong economy, were not interested in working for the lower wages traditionally connected with service employment. The heavy demand for housing created temporary shortages, coupled with a desire on the part of communities to maintain green space and avoid over-development. High income and low income communities existed side by side, with little to no interaction with one another, and the gap was widening.

Stakeholder theory takes into account the needs and interests of all institutional stakeholders, typically including stockholders, employees, customers, suppliers, the local business community, and political interests. The primary stakeholders may vary according to the focus one wishes to place on each major player and on whose interests are paramount at the time (Mitchell, AgIe, and Wood, 1997). Mitchell, AgIe, and Wood suggest that competing stakeholder interests can be prioritized through the careful analysis of "(1) the stakeholder's power to influence the firm, (2) the legitimacy of the stakeholder's relationship with the firm, and (3) the urgency of the stakeholder's claim on the firm." (p. 854). Power is defined as the ability to carry out one's wishes regardless of opposition. Legitimacy can be measured by the social acceptability of goals and desires. Urgency refers to time-sensitive needs. When combined, these three factors provide a compelling look at the priorities of various stakeholders in decision making processes. This unified perspective can be helpful when trying to provide a quantified stakeholder analysis.

Students may find it helpful to consider the following table (blank, of course) when answering Question #2 and prioritizing their own perspectives. The following table weights power, legitimacy, and urgency per stakeholder. Weights included below are arbitrary, that is, they represent my personal perspective, and are based on a maximum input often, for a potential total potency of 30.

There are multiple "correct" answers. The selection of a particular problem that a student makes will lead to rewarding class discussion about social and demographic issues, the rise and fall of communities, the social responsibility of business, and the interconnectedness of the needs of the elderly, immigrant populations, the need for education, poverty and business, and other broad topics of economic development. Refer to Exhibits A-C (maps), Exhibit J (demographic trends), Exhibit K (wages in the Valley), and Exhibit G (housing prices)

2. Why has the Merrimack Valley proven attractive to business? What factors create a climate that is conducive to commercial development?

Access to convenient transportation (whether it is the Merrimack River during the Industrial Revolution or the network of highways and airports) , a growing and appropriately educated population that can replace itself on a regular basis, sufficient high quality housing to serve the needs of the high wage community and affordable housing for the lower wage community, the aggregation of similar businesses that creates a visible presence and a reason to join the community, safe neighborhoods, and good access to education all make a community attractive for further development, both commercial and industrial.

Refer to Exhibits A-C, maps of the northeast United States and the local area. These maps identify clearly that the Merrimack Valley lies in the center of a network of highways and airports, making access to greater New England as well as the rest of the nation easy and direct. Twenty- five miles to the south is Logan International Airport, and the same distance to the north is Manchester Airport. Within the Valley itself, the Lawrence Airport provides access to corporate planes and other small aircraft. Interstates 495, 95, and 93 run through the Valley, providing ease of automobile transportation. In addition, housing is less costly than in the immediate Boston area, despite rapidly increasing housing prices. Boston is close enough to provide cultural activities, and there are several colleges and universities within the Merrimack Valley, including Merrimack College, Northern Essex Community College, and UMass Lowell.

This question connects well with the previous question and provides some basis for discussion of attracting commercial development to a region or an economic area. Encourage students to seek out this specific information from local websites, rather than feeding it to them in handouts, and encourage them to make the connections themselves.

3. What recommendation should Joe make to the Education and Workforce Development Committee at their next meeting?

The case provides seven different suggestions that were under consideration by the Education and Workforce Development Committee, each of which are briefly weighed below:

Instructors should note that the final decision made by the Committee was to support several suggestions. They collaborated on donating supplies to the schools, worked on mentoring and tutoring relationships, and were successful in obtaining assistance from the Commonwealth to help the community colleges tap into resources through municipal and quasi-public agencies. The community colleges were then able to develop training programs fitted to the needs of local industry.

TEACHING SUGGESTIONS:

The Merrimack Valley Planning Commission (978-374-05 1 9) makes available to the public a CD-ROM about the Merrimack Valley. For a minimal fee ($5.00), you can request this CD-ROM, which contains a brief video, information about industrial and commercial sites, a 1 0 year economic forecast, maps and a regional profile, labor market information, and more. The CD offers connections to Internet sites and most data are as of April 2000. You can also reach the Planning Commission by email at info@mvpc.org.

The CD-ROM is convenient for the instructor for classroom use, but students can be advised to look up the Merrimack Valley Planning Commission on the Internet at www.mvpc.org. Many links are available for students (and instructors) to investigate that will enrich learning and provide additional technological enhancements to the course. Maps of the local areas are included. The site is updated on a regular basis, so all data will be fresh and current.

For example, you may decide to compare several communities within the Merrimack Valley in terms of population, income, population density, unemployment or other factors. When you do so, I recommend comparing Andover (one of the wealthiest communities in Massachusetts) with its neighbor, Lawrence (the poorest community in Massachusetts). Students will be surprised by the differences, and this is likely to generate classroom conversation and exploration of the "why" of such disparities and other social issues. These data are available directly from the CD-ROM, or students can be instructed to find the data from www.census.gov, through the Planning Commission website. This site is easy to search and the research process is likely to generate interest in the students for similar issues in their own communities.

I have also had success with the following projects, all related to the Merrimack Valley. These four projects help to keep their attention focused on the interaction of various groups and businesses within one economic region.

Project 1: Social Responsibility

Review news stories about companies in the Merrimack Valley. Identify a company that gained positive publicity for the way it carried out its social responsibilities and identify a company that damaged its image among consumers and the general public as a result of its failure to carry out its social responsibilities. Show how the company's involvement could pay off in some practical way for its owners as a result of its commitment to socially responsible action.

Students often present the example of Maiden Mills as a socially responsible organization. Aaron Feuerstein gained his national reputation for loyalty to community and workers in 1995, when his factory in Lawrence, MA burned down shortly before Christmas. He paid his workforce for 90 days, even though the factory could not operate, while he rebuilt and remained in this community. Mr. Feuerstein has been recognized in all media over the intervening years, and it is a simple matter to obtain video, newspaper and journal articles discussing his behavior.

Project 2: Organizing and Reorganizing

Examine how AT&T has changed itself since the 1980s when it was a local and long distance telephone monopoly. What are Lucent's, Verizon's, and Bell Atlantic's plans for the future? What are they doing to implement those plans?

As a major employer in the Merrimack Valley, Lucent Technologies and all things relating to Lucent and its sister companies are interesting to the students in this geographical area. Of course, the break up of the telephone company in the early 1980s was a major event nationally, and its impacts have continued to reverberate throughout the telecommunications industry, affecting business and individuals throughout the U.S.

Project 3: Diversity

Research two local business leaders, one man and one woman, and the companies they lead. What leadership styles do they use? How do their styles differ? Are these differences the result of gender influence or purely of human individuality? What is the impact of their style on their respective companies? How has their leadership style added to or limited the success of their companies? Why would you like to work for these people (or why would you not like to work for them)?

It is fairly easy to find local leaders of both genders and to interview them regarding their managerial styles. This particular topic often generates excited discussion in the class, as students try to determine the managerial style that most appeals to them. In terms of career planning and some "reality testing, " this topic is helpful and stimulating.

Project 4: Quality and Continuous Improvement

Investigate and report on a Merrimack Valley company that is a Baldrige Quality Award winner. What does this mean? How did the company attain this achievement? What were some of the problems they encountered and how did they deal with them? Is this award a feasible goal for all companies that are concerned with quality? How can you apply the principles of Total Quality Management to your academic life?

Lucent Technologies is a Baldrige Quality Award winner, as are divisions of several other large firms. Students are surprised to discover the extent of work and expense of application in relation the award, and it provides them with a fuller understanding of the goals of the quality movement.

References

REFERENCES

Mitchell, R. K., Breadley R. A. & DJ. Wood. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22 (4), 853-886.

AuthorAffiliation

Gina Vega, Merrimack College

Subject: Chambers of commerce; Regions; Economic development; Business community; Case studies

Location: United States--US, Merrimack Valley

Classification: 1120: Economic policy & planning; 9550: Public sector; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 2

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 1-9

Number of pages: 9

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables References

ProQuest document ID: 216303386

Document URL: http://search.proquest.com/docview/216303386?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 89 of 100

MANOS DEL URUGUAY

Author: Ash, Steven R; Weber, Paula S; Vora, Jay A; Faggiani, Alvaro

ProQuest document link

Abstract:

Manos Del Uruguay is a non-profit cooperative based in Montevideo, Uruguay. Manos produces high quality hand-made woolen goods. Its customers include major design houses in South America, Europe, the U.S. and Japan. However, despite a 30-year history of operations, Manos is currently struggling for survival. It is experiencing rapidly falling export sales and dramatic changes in the local and global economy. The cooperative was originally formed to provide job opportunities for women artisans' producing hand crafted goods. Can Manos hold to its original mission or must it change fundamentally in order to survive? The General Manager has developed four strategic alternatives for the Board of Directors to consider in addressing this difficult situation. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary objective of this case concerns the need to resolve a worsening financial situation by establishing new strategic initiatives. Secondary issues include the role of mission in establishing strategic plans and the importance of company and country culture in strategic decisions. The case is appropriate for level 3 (Junior) or 4 (Senior) courses in international management, small business or strategic management. The case is designed to be taught in a 75-minute class period and is expected to require three hours of outside preparation by students.

CASE SYNOPSIS

INSTRUCTORS' NOTES

Teaching Objectives

The objectives of this case are as follows:

Recommendations for Teaching Approaches

This case would fit nicely with a module on the role of the management team as chief strategists or a discussion of the role of mission statement in the early part of a course. The Board of Directors are pondering and rethinking the strategic course for Manos and, as a result, the future direction of the organization is in question. The key questions facing Manos are "What should be done to bolster sales?" and, "Where do we go from here?"

Although Manos is not required to meet profitability goals for shareholders, it must meet its expenses and provide a stream of income for its artisans. They also must create sufficient profit to reinvest in the company to support growth. Due to a changing economic and political environment, Manos has appeared to stray from its original mission and is experiencing reduced sales and profits. Students should be asked to read and complete the discussion questions prior to the in-class discussion. Additional background information on Uruguay and Manos Del Uruguay can also be gathered from the following web sites:

www.manos.com.uy ; www.odci.gov/cia/publications/factbook/geos/uy.html.

Students should be challenged to identify the importance of organizational mission as a foundation for making internal organization decisions as well as guiding the response of an organization to changes in its environment. Students should identify the strengths and weaknesses of each strategic alternative presented along with their proj ected impact on the organizations mission and organization structure. They should also be asked to generate other viable alternatives not under consideration by the Board of Directors.

We typically begin class discussions by focusing briefly (5-10 minutes) on the setting for the case: South America and especially Uruguay. We ask students to identify information from the case on the culture, language, religion, socio-economic issues, etc. of the area. We may discuss current events related to Uruguay and the other major countries in the region, Brazil and Argentina. We may show the location of Uruguay on a map.

Next, we discuss Manos del Uruguay. In particular, we discuss its products (examples available on the website) and the co-operative organization structure (Q2) (10 minutes). Then we review in very general terms the issues facing Manos (financial situation and strategic alternatives) (10 minutes). From this discussion, we break the students into four small groups to discuss and report back on different discussion questions (Ql, Q3, Q4, and Q5) (15 minutes). Next we assign each small group one of the four alternatives to analyze. Groups are given approximately 10 minutes to prepare a report for the class on the strengths and weaknesses of one assigned alternative. Finally, we ask student groups to select a recommended alternative which could be one identified in the case or one of their own ideas. Often students combine recommendations from their case write-ups and present some very creative and potentially successful ideas for Manos. We conclude by presenting the Epilogue to the case.

DISCUSSION QUESTIONS

1. What is the mission for Manos Del Uruguay? How does it reflect their culture? Is it appropriate? Why or why not? Has their mission served Manos well? Should the mission statement be reformulated? If so, why? What changes or improvements would you suggest?

According to the case, Manos Del Uruguay was originally formed to generate work for rural artisans. According to their web site, Manos' current mission is customer- focused. They want to achieve for their customers "excellent quality hand-knit or woven garments." Their web site also states that their key objective is "to provide job opportunities and training to women in distant rural areas of the country." The case notes that the current general manager, Rodolfo Gioscia, wanted to "give the artisan and her family a new place in the economic and social order."

If Manos' mission is viewed as creating job opportunities for artisans, they had been successful. However, the significant drop in number of involved artisans reflects a departure from their mission of providing job opportunities to many and instead provides better opportunities for some. Artisans now enjoy paid vacations, bonuses, medical insurance, and retirement pensions.

If the mission is viewed as providing hand-knit garments using natural yarns and a hand-dying process, it is unclear how closely that mission is being followed. Designs are not created by the rural artisan but are developed by the head office in Montevideo. Some of the handwork has been taken over by machines so that in many cases only the finishing work and trimming is done by hand. Manos sells their products under brand labels such as Polo, Ralph Lauren and Donna Karan.

Manos appears to have strayed from their mission. This is due in part to the need to respond to increased international competition in local markets when Uruguay opened its doors to foreign imports in 1 994. Deregulation and reduced tariffs let to a more competitive economy. They responded with a three-fold increase in productivity per artisan. While the Uruguayan economy is fairly stable, the country is feeling the effects of the poor economies in its large regional trading partners, Brazil and Argentina. Reduced exports to these countries have hurt Manos' financial position. In addition, Manos felt great pressure to modernize and create more efficient production processes.

The mission statement needs to continue to reflect the purpose for Manos' existence. If that purpose has evolved from an emphasis on retaining local weaving methods and providing job opportunities for a large number of rural women, to one of profitable exports and improved levels of efficiency, then the mission must be reformulated with the participation of all. Suggestions for improvements include incorporating statements identifying the organization's customers, geographic markets, and concern for survival or growth.

The current mission already incorporates the philosophy of the organization and a concern for employees by stating its focus on providing employment and training for rural women; it identifies competitive advantages in the areas of excellent quality, hand- woven products.

Clearly, the organization had some original economic goals that are still important. However, the mission statement has evolved. The need for a clear mission is reflected in the situation facing Manos today. Does the emphasis on economic security outweigh the importance of maintaining hand-made products? Do artisans wish to increase productivity by becoming more mechanized and, thus, increasing output, sales and, hopefully, profitability? Does Manos want to employ higher numbers of artisans at the risk of ongoing losses or streamline operations, reduce employment and remain a viable entity for the remaining employees?

The development of a mission statement by the board, management and rural artisans would provide the foundation for strategic decisions and work to ensure that everyone involved in Manos supports the future direction of the company.

2. What is Manos' organization structure? What cultural values might underlie the mission and organization structure of Manos?

Manos has a cooperative organization structure. The Uruguayan culture emphasizes familial relationships and the importance of personal relationships. The cooperative organization structure is very consistent with the country culture. The relatively low masculinity dimension of the country culture is also reflected in the organization's mission that emphasizes the importance of people and quality of life over purely financial success.

3. Complete a SWOT analysis for Manos. Then identify their core competencies and key vulnerabilities.

Manos core competencies are their hand-dyed wool and hand made products. Their key vulnerabilities are falling profits due to an increase in administrative expenses and a decrease in exports resulting from increased competition.

4. What is your diagnosis of Manos' financial situation? How bad is it?

From Year 1 to Year 5, revenues increased 27% with the biggest increase (12%) occurring between Year 1 and Year 2. However, net profits were only 1.8% of revenues in Year 1 and declined to a -.07% by Year 5. Net profits experienced a precipitous decline in Year 5. An analysis of this decline shows that administrative expenses rose 36% from Year 1 to Year 5 and financial expenses increased 53%. Clearly the long-term debt and administrative expense burdens taken on by Manos were far too heavy for the company. Gross profit margins dipped from to .3 1 in 1 998 from .43 in 1 994. Long-term debt rose from only 1 5,000 to 104,000 in the short five years of the case. These liabilities must be examined and ROI evaluated for each investment.

Current ratio declined from 2.7 in 1996 to 2.5 in 1998. Quick ratio also dropped from2.12to 1.94. Total asset turnover (sales divided by total assets) dropped from 3.21 in 1996 to 2.55 in 1998.

5. What are the strengths and weaknesses of each of the strategic alternatives noted in the case? What are the long-term ramifications of each alternative? How does each alternative relate to Manos' mission? What should the Board of Directors explore before deciding on an appropriate strategic direction?

Alternative 1: Incorporate High-Speed Technology

This alternative's key strength lays in the ability to increase productivity. Use of high-speed sewing machines would improve efficiencies, reduce labor costs, and provide the ability for much higher levels of production. This would provide increased profitability to Manos. Of course, this comes at a great cost, the loss of the "hand-made" quality of Manos' products. It would also require a large capital investment estimated at $300,000.

The short and long-term ramifications of selecting this option would be a dramatic change in the nature of Manos. In fact, even the company name would need to be changed as it would no longer accurately reflect the company's business. In addition, the country and corresponding organization culture, high uncertainty avoidance, would be resistant to an expensive investment with questionable return. The country culture also ranks low on Hofstede's dimension of Masculinity suggesting an emphasis on material achievement is not as highly valued as nurturing. This finding would also be unsupportive of a move to mechanize the company which could result in loss of jobs and/or relocation for artisans.

Pursuing this alternative is in direct conflict with their current mission of producing unique, excellent quality hand-knit or hand-woven garments using natural yarns and a hand-dyeing process. Manos Del Uruguay would need to revisit their basic business purpose - to provide job opportunities and training to women in distant rural areas through a non-profit cooperative organization. Students may argue that providing jobs is a key goal and therefore, handwork should be maintained, as it would employ more artisans than under an automated scenario. Others may counter argue that in the long-run, if Manos can efficiently provide a high quality product, they may be able to sell their goods to large retail organizations such as Kmart or Wal-mart and thus, employ many more workers.

The Board of Directors should explore with all co-op members the desire to survive and grow through automation and mass-production versus growth through producing higher-priced specialty items. Manos Del Uruguay is at a critical crossroad. The Board should carefully discuss and explore all alternatives with as many organization stakeholders as possible.

Alternative 2: International Expansion

This alternative suggests growth through market development by increasing exports. The strengths of this approach are that it maintains the existing product line while looking for new sales outlets. This alternative can be approached incrementally ranging from attendance at international fairs to development of a website to extensive research to identify lucrative markets and vendors. This alternative can also be pursued simultaneously with automation since capital expenditures can range from minimal to establish a web site to extensive R& D studies. This alternative would potentially provide additional positions for artisans as sales grew.

The weaknesses of this alternative include that Manos may expend monies that may yield no return due to significant international competition. Attending a specific fair may result in many new connections or absolutely no new business at all. Pursuit of this alternative would need to follow a careful balance between expenditures and likely outcomes. In addition, rapid increases in sales would result in production quotas that might be difficult to meet causing both employee and customer dissatisfaction.

The long-term ramifications of this alternative could be significant if Manos can establish international recognition. Significant growth in exports would require additional infrastructure to handle shipping and international payment issues as well as advertising and product information in different languages.

The present mission of Manos is consistent with this alternative. Manos would continue to emphasize high-quality, hand- wo ven products made by local Uruguayan artisans.

The Board of Directors would need to conduct preliminary research to identify the key international fairs to attend, to price web-site development, to get estimates on research costs to identify foreign markets with the most potential interest in Manos' products including costs of surveys or fees for market data reports. Staff time to identify existing market information as well as to outline potential infrastructure changes due to foreign sales could be significant.

Alternative 3: Franchise

Developing international and/or domestic franchise opportunities in markets where the demand for Manos' products is high would provide the company with some upfront capital in the form of franchise payments. It would also provide ongoing flow of funds from goods sold by the franchisee. However, Manos would only receive a percentage of profits from those sales. This would reduce Manos' current profits in those markets but it would also reduce their liabilities. The franchisee would take more of the market risk. Manos' could benefit from the local expertise and experience an overall increase in sales in those market segments.

Depending on how the franchise agreement is structured both in terms of quality control and payments, franchise operations could help improve Manos' financial situation. A key challenge would be finding and training the appropriate franchise owners. The long-term impact of this decision would be a loss of control for the local artisans who are now one more step further from the customer in the distribution chain. Franchising might also tend to cannibalize existing sales levels since franchise opportunities would, at least initially, be established in existing markets. In addition, large sales increases due to franchising might result in production demands that exceed Manos' capacity resulting in customer and employee dissatisfaction.

This alternative would support Manos' current mission by working to increase sales of local artisan products. It would allow Manos to expand without sacrificing their focus on hand-made items.

The Board of Directors should explore franchise agreements to determine the fees and operational structures most appropriate and advantageous for their organization. In addition, efforts would need to be made to identify profitable locations, qualified franchisees, and appropriate policies for product ordering, returned merchandise, pricing of products, etc. would need to be established.

Alternative 4: Managed Growth

The strengths of this alternative are that it involves a continuation of the existing mission and operational structure. It allows Manos to continue in a format and manner to which the organization members are accustomed. There would be limited change resulting in minimal conflict and hopefully, wide support for this alternative. A distinct weakness is that managed growth may not result in sufficient change in a timely manner to address Manos' negative financial situation. More drastic measures might be necessary to ensure the long-term financial viability of Manos.

The long-term impact of a successful managed growth effort would be an organization that gradually improves operational efficiencies. The process could be improved carefully and smoothly minimizing potential failures inherent with more aggressive changes.

This alternative would result in no change to the current mission statement.

The Board of Directors would need to prepare some projected pro forma financial statements for the next five years to determine if this alternative is a financially viable option for them.

6. What recommendations can you make to the Board? Should they implement any of the suggested strategic alternatives? What other alternatives should they consider?

Students should be able to identify the positives and negatives of each alternative as well as associated changes to the mission statement. Many will argue that Alt. 4 - Managed Growth, is the preferred alternative as long it is projected to be financially viable. If you tell the class to assume that this alternative is not financially viable, many may select Alternative 2, International Expansion. This alternative results in only minimal changes to Manos' overall mission and is consistent with their existing export approach. It however simply expands the number of potential export locations from the current primary markets of Brazil, Argentina, and the U.S.

Students should see the financial advantages to pursuing markets in different regions with different economies so as to spread the market risk of operating primarily with one country. While market research efforts would greatly increase the likelihood of success, this alternative can also be pursued relatively inexpensively with some initial steps like developing a web-site for on-line ordering or attending some international textile trade-shows to establish foreign interest in Manos products.

Students see the benefit of franchising as a cash inflow with no outlay. However, franchising can represent huge managerial demands in establishing quality standards, pricing, training, location selection, etc.

Other alternatives proposed by students include expanding Manos' website to include product sales and information on the cultural aspects of Manos' products; develop Manos brand name rather than continuing to sell products under other labels; expanding product line to include products for men and children; and display and sale of Manos' products at museums. One of the better alternatives not considered by Manos' in the case is to develop a new product line that would be made by machines thus salvaging the current handmade quality of Manos while promoting new products at a lower cost under another brand name perhaps through large international retail chains such as Wal-Mart.

RESEARCH BASIS

Alvaro Faggiani based data for the case upon personal interviews and participative observation of Manos executives and employees. Dr. Steve Ash extended this effort by email interviews with Mr. Gioscia. This was followed by personal interviews with Mr. Gioscia conducted by Dr. Jay Vora in Uruguay. Both Dr. Jay Vora and Dr. Paula Weber made personal visits to Manos del Uruguay in Montevideo. Steve Ash and Angela Cabrera translated original case material and supporting documentation from Spanish to English. Additional supporting data was gathered from research on cooperative ventures and on the Uruguayan country. Dr. Ash lived in Uruguay for more than one year. The authors are extremely grateful for the openness and participation of Manos del Uruguay staff and, in particular, Mr. Gioscia.

EPILOGUE

In a January, 2002 email, Mr. Gioscia told us that the traditional and historic culture of Manos del Uruguay placed "an enormous emphasis on the social aspects of the organization and the feeling of ownership of the organization. Today these values are maintained but are subordinate to satisfying the clients, for in this way, we are able to obtain satisfactory economic results that permit the fulfillment of the social mission. One of the greatest challenges was (and is) to achieve a cultural change that permits us to be focused on the customer, the market. The commitment of the Directorio (artisan representatives from the different cooperatives) was essential to achieving this change. Also, the cooperatives work well together. If one cooperative is behind on an order, another cooperative helps them."

Specific changes carried out at Manos included:

* centralization and strict control over product design and development and final product quality

* reorienting the corporate culture to emphasize the importance of the client as the only method for achieving the socio-political objectives of Manos

* aggressively pursuing exporting opportunities including commercial ventures with department stores

* dramatic changes in production management and logistics including staffing changes, and an emphasis on quality control and training to minimize product defects.

The result was a substantial increase in export sales and a marked improvement in Manos' gross margin. In particular, domestic margin was high because of top quality or "export quality" of goods. The export margin was not as high due to intense competitive pressures and the power of the buyers.

Key contributors to the improved financial situation included a new product development process that focused on high quality items designed to meet customer specifications and priced to provide adequate operating margins.

Future endeavors include hiring a Manos sales representative to focus on the Argentinean market. This process has been delayed due to the dramatic decline in the Argentinean market in 2002.

Therefore, Manos has expanded marketing efforts to Italy, Belgium, France, etc. But, the markets are so fragmented. There is no major supplier like "The Gap" in the U.S. So, Manos must contact many companies and develop many contacts in order to get a significant volume of sales. They have to sell smaller qualities to specialized stores or boutiques.

In a tape-recorded personal interview conducted in June 2002, Mr. Gioscia said, "I believe the future of our company is in growth outside Uruguay. Our primary market, Argentina, is not doing well at all. The garment industry is also very competitive and very weak, so we are in a difficult business."

As for the original founders, Mr. Gioscia told us, "two of the women founders still participate as consultants. Another one is deceased and one is very ill."

In 1997, Manos received a development grant from the American Development Bank. It was their second grant. They received their first grant twenty years earlier, in 1977. Mr. Gioscia noted "we were the only company still in existence that had received the first grant. Manos has a very important social role in Uruguay. It has a cultural identity which is very important for a young country like Uruguay."

"In Central Services we now have 45 people. Of those, 20 are managers. We have two designers who are assisted by an expert weaver and dyer so that we can produce a prototype for each product. The cooperatives are still primarily women. In fact, we only have one male at Manos - he dyes wool for the company."

AuthorAffiliation

Steven R. Ash, University of Akron

Paula S. Weber, St. Cloud State University

Jay A. Vora, St. Cloud State University

Alvaro Faggiani, Universidad ORT, Uruguay

Subject: Nonprofit organizations; Cooperatives; Financial performance; Exports; Handicrafts; Case studies

Location: Uruguay

Company / organization: Name: Manos del Uruguay; NAICS: 813910

Classification: 9130: Experimental/theoretical; 1300: International trade & foreign investment; 9540: Non-profit institutions; 9173: Latin America

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 2

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 11-21

Number of pages: 11

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: Tables

ProQuest document ID: 216284007

Document URL: http://search.proquest.com/docview/216284007?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 91 of 100

CHANGE MANAGEMENT-WALKER AND WALKER

Author: Barger, Bonita

ProQuest document link

Abstract:

This case provides a realistic scenario encountered by senior management in managing organizational change from the old to the new economy. Walker and Walker is a Southern family owned manufacturing firm struggling to expand into a global marketplace. The tensions involved in organizational change are played out in multiple arenas. The student is challenged to analyze these arenas. The instructor is provided with extensive supporting literature to facilitate this analysis. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

Change Management-Walker and Walker (W & W) is designed to be used in a Human Resource Management and/or Organizational Behavior class at the senior undergraduate level or entry MBA level, and has a difficulty level of 4/5. The purpose of the case is three-fold:

* to increase student awareness of the issues involved in managing organizational change;

* to raise issues relating to organizational design, culture, and interpersonal alliances in managing human capital;

* to provide comprehensive teaching notes and citations for educators to enhance discussion.

CASE SYNOPSIS

CASE STUD Y-WALKER AND WALKER

GROUNDING

Walker and Walker (W & W) is a North American leader in the manufacturing of rail ballbearings. W&W, founded in 1950, has grown from a small, family owned business in Macon, Georgia, to a billion dollar operation servicing external customers world-wide. They have grown and thrived on a central tent: Service to customers by building the best technically advanced product in the marketplace. This tradition has deep roots.

BACKGROUND

W & W believed in people. It was started by the "Walker Brothers," John and James Walker. It was built on the labor of family and community members from Macon, Georgia. Everyone knew each other, pitched in, and helped when needed. There was no need for a union, as the Walkers "took care of their own." There were commonalities that bound the employees together. They were related by blood, religion, and generations of growing up in the same neighborhoods. They shared similar values, beliefs, and ways of working. They were "family," with strong father figures providing direction, security, and a good place to work.

With a strong market demand for their products, a focused and dedicated labor force ready to follow the orders of their founders, John and James, grew W & W from 100 to 1,000 employees working in two manufacturing units located in southern Georgia. W & W had changed remarkably over what appeared to be a long history but was, in fact, quite a short period of time. W & W increased its workforce, doubled its manufacturing facilities, tripled its customer base and profits. Sales were $900,000 by 1980. W & W appeared to be well positioned to enter the year 2005.

The early 1980s were difficult for W & W. With the untimely death of James Walker, the recession, and new competitors entering the marketplace, John and the Board were faced with the possibility of laying off part of its workforce. In this small town where loyalty to employee and employer were the givens of life, this had never occurred. A difficult decision had to be made. John made it. W & W decided not to lay off employees, rather start a large-scale cost reduction effort and decrease corporate and executive salaries. This strategy worked. The recession ended, demand for products and services started to "turn around." Now John Walker and the Board realized that it could not be "business as usual."

The external environment had changed, while the internal work environment of W & W appeared to stay the same. Externally, new customers were demanding products quicker, global competitors were entering the marketplace, technology advances in the manufacturingof ballbearings were rapidly changing, and government guidelines on affirmative action and other policies were requiring new approaches to old practices. Internally, the workforce appeared to be the same. Business was the same as usual. The rules were known. The power bases were established. The resources and access to them were there. The pathway to promotion and success had been charted by seniority, loyalty, and protection. "Do your job. Keep your head down. Your time will come for the next step up the ladder," was the unspoken emotional contractual agreement between the predominately male labor force.

John Walker knew things had to change for this young company that was quickly "growing up" and maturing in the marketplace if it wanted to reach the year 2005. What had worked in the past would still work today, but not tomorrow. He was growing tired. Silently, he acknowledged that the company had outgrown him. If it was to survive, a transfusion of new blood, vision, and direction were needed.

John Walker consulted with the elders in the Walker family and a trusted business associate from the Bank of Georgia. He received their counsel and made the second toughest decision of his life to step down and pass on the management of W & W to the next generation of leadership. But he did not see that leadership among the current ranks. He and Jack Walker had focused on building the business. Succession planning was not part of that plan. In looking at the line of executives under his charge, they were very much "like him" - Southern white males from Macon, Georgia, who grew and grew up in the business. They were unable to take W & W where it needed to go.

W & W conducted an extensive search for a new CEO, using an executive search firm. It was costly, but worth the results. Roger Pulley, a young, energetic white male with international experience from New York, was hired. In spite of his youth, he had extensive education and experience in the industry. The board of directors, Walker family, and particularly John Walker were pleased with the selection. Even the vice presidents of W & W appeared to accept the new CEO. There seemed to be few reservations as to the choice made.

Roger's entry into the organization was thoughtful, observant, and filled with insights. It was immediately apparent to all that Roger was an individual of vision and knowledge. What he lacked in relationship building skills, he made up for with an understanding of the future needs of the business.

After twelve months on the job, results of incremental changes in marketing and sales strategies were beginning to be seen in the bottom line. Employees' initial "questioning observations" were beginning to form into "trust statements" as bonuses increased in their paychecks. Roger recognized that these incremental changes were not sufficient to move W & W to the next plateau. From his 12-month analysis of the organization, he realized that the company was dated in technology and manufacturing capability. The workforce was homogenous with similar work-related behaviors. There was a deep cultural aversion to change. The human resource staff performed administrative functions. They did not have the staff who could create, foster, and facilitate change. Overall, the information, financial, and logistic functions were composed of insufficient systems, processes, and procedures to take W & W to a two billion dollar company playing in a global arena. How could he bring about significant change within the cultural without rupturing the bottom line?

FOREGROUND

Roger chose a multilevel approach: (1) replacement of two positions on his staff created by retirement (VP of Human Resources and Marketing); and (2) a change management strategy involving the formation of a new vision for W & W.

A new VP of Human Resources, Richard Green, and Marketing, Sara Ferguson, were hired. They, in conjunction with Roger and his staff, created a change management strategy.

A change management strategy took on the following activities:

* Creation and communication of a vision and mission statement for the company;

* Acquisitions of new companies and the formation of international joint ventures;

* Creation of succession planning for mid-level management and above, hiring 25% of open positions from outside the company to staff the new ventures;

* Hiring of a Human Resource Development professional to staff the Human Resource function. (The person was to work with the CEO and his staff to create a succession planning process, in addition to work with the training staff to design and implement training models.);

* Creation of training programs for the entire workforce on multi-culturalism, globalization, diversity, and ethics;

* Extensive training programs on multiple topics and above average salary raises to position all employees at the 55%tile for the work they performed.

The strategy was put in place. Roger presented the mission statement to small groups throughout the company and welcomed dialogue. The acquisitions and joint venture agreements had been signed. Employees were being trained in the vision and mission of W & W. A cultural change module highlighting empowerment and diversity were presented to all levels within the company. New employees were hired and placed in various parts of the company. These people were hired from outside of the traditional business environment. They had experience with international private and public organizations. They brought fresh new ideas. By some, they were perceived as a threat to the "way things always have been done at W & W." By others, they were seen as the "new hope for the future."

CASE GROUNDING

The Human Resource Development Director, Jo Anna Sam was one of those new people excited about the opportunity to work in business as a "change agent." Not quite sure what the charter of "change agent" meant, she spent the first six months doing a Human Resource analysis. The findings were clear. Human Resource practices and policies were selectively being applied. Based on these findings, she created and presented a succession planning proposal to Roger and Richard. They accepted the concepts and implementation strategy. It was communicated to the management staff who were not as accepting.

Opportunities existed in the new joint ventures that required the technical expertise and knowledge of W & W Vice Presidents to "get the business off the ground." In addition, new perspectives were needed from outside the company at the management levels to foster the new direction. Senior and mid-level managers would not move and take on functional or cross-functional work outside of Macon, Georgia. An impasse had occurred. Critical positions were vacant, requiring company expertise. Management would not relocate. The succession plan was intended to create a process for movement and relocation. What was not considered was the fundamental belief that employment security was an entitlement and rooted in the culture.

A critical incident had occurred. Roger had asked several staff members to take on new roles. They silently or overtly resisted. The final straw came when Roger asked Jake Crandal, a senior management team member, to take on a new position in a newly formed joint venture in Norway Jake refused, stating that he would not "move to that freezer where they did not speak English, and, by the way, this whole stuff around succession planning was not the way to run a small family business like W & W." Roger was shocked and not willing to accept insubordination from his staff. Roger and Jake shared little in common. They did not like each other. A business, as well as a personality, conflict existed. Roger recognized this and called in Richard (the new VP of HR) to facilitate a series of meetings with the purpose of reaching agreement about Jake's next move. It was agreed that Jake would stay in his current role for two years but would then move to Norway once the new plant was built.

Although Jake agreed to move, he never intended to move. He had stated to one of the senior management team that "I'll not move my family to that forsaken place. They don't even speak English there." "I would rather fight than switch." Initially, the implications of this were unclear, but within several weeks, the impact of this statement began to unfold. About a month later, reports were coming back through senior management that the training programs were violating the religious beliefs of certain employees. Some of the concepts and principles were perceived as "New Age." It was reported that segments of the workforce believed that W & W was possessed by evil forces, and the devil was at work. Prayer sessions were being conducted for W & W in local community churches.

Jo Anna, the Human Resource Development Director, was an outsider. She had created the cultural change model and succession planning process. She was different. She did not know or understand what was occurring during these management sessions.

She continued to do her work - training the cultural change model. As she boarded a plane for England to present the model to their European operations, she phoned the office. My supervisor said that, "Jake is stating that you are training New Age ideas and trying to brainwash the company." She was silent. Her head was spinning. Her heart was beating and she could hear it throughout the phone. She was shocked, confused, and scared. She said, "What?? What is New Age? What is going on here?" He said, "You have become a target." She responded, "A target? What does that mean?" The only thing she could envision was a cartoon from Gary Larsen of a moose with a bulls eye. The caption read: "It's difficult to be born with this on your back."

She boarded the plane in shock and confusion. What she could not see at that moment was the impasse that had occurred between Roger and Jake and the management team, nor could she see that a culture that had been supportive, protective, and nurturing was transforming, not into the vision of a globally diverse customer-focused organization of the future, rather into splintered groups possessing either primitive fears of centuries ago or visions of futures yet to be lived.

AuthorAffiliation

Bonita Barger, Tennessee Technological University

Subject: Organizational change; Upper management; Human resource management; Leadership; Case studies

Classification: 6100: Human resource planning; 9130: Experiment/theoretical treatment; 2310: Planning

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 1

Pages: 27-31

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 216284231

Document URL: http://search.proquest.com/docview/216284231?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 92 of 100

JET BLUE: A NEW CHALLENGER

Author: Box, Thomas M; Saxton, Susan E

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Abstract:

JetBlue is a new, very successful low cost airline. In their first full year of operations (2001) they achieved a $32 million net profit on revenues of approximately $320 million. This is particularly notable in that the entire industry lost approximately $10 billion during the same year. JetBlue flies point to point routes - much like Southwest Airlines and offers distinctive service features - reserved seating, leather seats, seat back TVs (24 channels) and very customer oriented personnel. JetBlue, at least superficially, appears to be an example of a Low Cost Leader. In their initial foray into the New York to Florida market they offered ticket prices about half of the existing competitor's ticket prices and a serious focus on customer convenience - including such things as no mandatory Saturday night stay to get the lowest ticket price. All tickets are sold online or through a unique Salt Lake City reservation system. They were the first airline to introduce electronic ticketing and their use of Information Technology is extensive. Jet Blue's founder - David Neeleman - is a young (43 year old) career entrepreneur with dyslexia. He is a practicing Mormon with nine children and prior to founding JetBlue had experience with two other airline startups. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The primary subject matter of this business policy case concerns the competitive strategy and background of a new, very successful airline - JetBlue Airways (JetBlue). The time frame of the case is from the firm's inception to the end of fiscal year 2002. The case has a difficulty level of four - five, appropriate for senior level undergraduates or first year MBA students. The case is designed to be taught in one seventy minute class and will require approximately two to three hours of outside preparation by the students.

CASE SYNOPSIS

JetBlue, at least superficially, appears to be an example of a Low Cost Leader. In their initial foray into the New York to Florida market they offered ticket prices about half of the existing competitor's ticket prices and a serious focus on customer convenience - including such things as no mandatory Saturday night stay to get the lowest ticket price. All tickets are sold online or through a unique Salt Lake City reservation system. They were the first airline to introduce electronic ticketing and their use of Information Technology is extensive. Jet Blue's founder - David Neeleman - is a young (43 year old) career entrepreneur with dyslexia. He is a practicing Mormon with nine children and prior to founding JetBlue had experience with two other airline startups.

INSTRUCTORS' NOTES

Learning Objectives

This case is designed to reinforce learning of the following strategic management (business policy) analysis and decision tools:

Porter's Five Force Analysis of Industry Competition

Financial ratio analysis

SWOT analysis

Generic strategies (Porter)

It is assumed that all of the above topics will have been covered with textbook readings or classroom discussion prior to asking the students to analyze the case. If these topics have not been covered in detail, they provide a real opportunity for the "black board panel" approach recommended by Harvard University.

TEACHING THE CASE

The starting point for this case is the classroom discussion of Porter's Five Force Model, SWOT analysis and Generic Strategies. Any good business policy text should cover all three of those concepts in some detail because they are so common to the strategy literature. Financial ratio analysis, is of course, a topic from the prerequisite management accounting or, perhaps, first course in finance. Surprisingly, non accounting or finance majors frequently need to go back and review, so it probably makes sense to talk about the common ratios and their interpretation as a classroom review item.

When assigning this case, we have found it helpful to require students - particularly undergraduates - to jot down their answers to the case questions and to bring those responses to class. All too often, it seems, some undergraduates "breeze" through the case and are woefully unprepared for a rigorous class room discussion.

When discussing the case in class, we feel that the "black board panel" approach to case organization works well. The panels for this case would likely be:

A SWOT ANALYSIS

The Five Force Model of Industry Competition

Strengths and Weaknesses of a Low Cost Leadership strategy and examples of differentiation on the part of JetBlue.

DISCUSSION QESTIONS

1. Go to the JetBlue web site (http://www.jetblue.com/) and the American Airlines web site (http://aa.com/). Pick cities serviced by both JetBlue and American Airlines, select travel dates and number of passengers and determine the difference in fares. What is the percentage difference? What does this suggest?

Answers to this question will differ appreciably depending upon the starting and ending airports selected by the students. Some of the published fares (as of February, 2003) show differences in favor of JetBlue) of as much as 50%. On the other hand, it is clear the American Airlines has met the JetBlue challenge by offering (on selected flights) very competitive pricing on the JFK to Orlando route.

One might infer that American and other major carriers are being forced into a price war by JetBlue. One of the points that should come out in this discussion is the relative ability of other airlines to match JetBlue's fare schedule. One of the most important metrics to assess operating performance of airlines is cost per seat mile and JetBlue has a real advantage in this area. Their cost per seat mile (in 2002) is about 2/3 of the industry average!

2. Go to http://finance.yahoo.com and look up the information on JetBlue. Which of their financial ratios are significantly different than the industry? What are the implications?

JetBlue has significantly outperformed the industry in most important financial ratios. In term of valuation ratios, PE is 3 1 . 1 2 for the most recent (as of 1 8 Feb 03) month compared to an industry average of 38.43. Growth rates in earnings per share and sales are far above their competitors. The implication is that JetBlue is growing rapidly while many of its competitors are declining. The most significant ratio differences are in profitability and management effectiveness. In every category, JetBlue is outperforming the competition significantly.

One ratio that needs careful assessment is the Debt Equity (D/E) ratio. By comparison, JetBlue carries a fairly high D/E ratio. This can have an effect on future borrowing for new aircraft - see Question 6, following.

3. Do a SWOT analysis on JetBlue. What are the most important SO strategies suggested by the SWOT analysis? Are there any WT strategies?

Strengths: management, costs, utilization, profitability and focus

Weaknesses: The only significant weakness would be size - it is possible that larger competitors could overwhelm JetBlue in some markets.

Opportunities: expansion to additional markets - particularly underserved markets and regional markets.

Threats: Competition (particularly other low cost airlines), the price of fuel, and unions.

SO strategies are fairly numerous and obvious. WT strategies might include expansion or acquisition of another carrier to grow rapidly and enter additional markets.

4. Which of Porter's generic strategies does JetBlue seem to be following? In what ways might their generic strategy be somewhat different than what Porter suggests?

JetBlue is following a Low Cost Leadership strategy, but, interestingly they are intentionally differentiating themselves from Southwest in several ways - assigned seating, leather seats and seat back TV, in particular. This notion that a firm can both be a differentiator and a low cost leader flies in the face of (Porter's) conventional wisdom.

5. Conduct a Five Force Analysis of the airline industry. How do you assess the threat of New Entrants?

The threat of substitutes is low. The bargaining power of suppliers (particularly aircraft manufacturers and employee groups) is fairly high. JetBlue is able to offset the bargaining power of fuel suppliers (a very important cost area) with a successful fuel hedging program. The bargaining power of buyers is high as there are numerous opportunities to purchase tickets from competing airlines and, essentially, no switching costs. Existing industry competition is fierce.

Despite the dreadful economic situation of the airline industry in general, several of the major carriers have announced (recently) new subsidiaries to compete against the low cost leaders. Thus the threat of new entrants in the low cost sector of the airline industry is substantial.

6. On June 10, 2003, JetBlue announced an order for 100 new EMBRAER 190 aircraft. Does this new equipment order suggest a new business model? What are the risks?

The EMBAER 190 is a 100 seat regional jet. Thus, it seems, JetBlue is announcing its intent to enter the regional airline business. This would be a new business model in that they have previously standardized on Airbus A 320s to serve major airports. The rationale for standardizing on A 320s was to minimize parts inventories and personnel training. Anytime a business introduces a new business model they incur incremental risks.

References

REFERENCES

Blue skies (2001, July 30). Time Magazine, Retrieved July28, 2001, from http://www.bankboscap.com

Brown, E. (2001, May) A smokeless Herb. Fortune Magazine, Retrieved July 24, 2002, from http://www.business2.com/articles

CBSNEWS.COM. JetBlue: Flying higher (2002, October 16). Retrieved October 27, 2002, from http://www.cbsnews.com/stories/2002/10/lbll

DiCarlo, L. (2001, January 31). JetBlue skies. Forbes.com. Retrieved December 16, 2002, from http://www.forbes.com/2001/01/03/0131jetblue.html

JetBlue Airways News Release (2002, November 4). Retrieved November 4, 2002 from http://www.investor.jetblue.co

JetBlue Airways Timeline, (n.d.). Retrieved June 16, 2002, from http://www.jetblue.com/learnmore/timeline.html

JetBlue gets approval for 75 slots at JFK (1999, September 17). Retrieved from http://web.lexis-nexis.com

JetBlue to buy Airbus A320s (2002, January 14). Retrieved October 27, 2002, from http://money.cnn.com/2002/01/14/international/airbus/

Porter, M.E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.

Porter, M.E. (1996). What is strategy? Harvard Business Review, November-December, 1996.

Sweat, J. (2001, Januaryl). Generation dot-com gets its wings. Information Week.com. Retrieved July 24, 2002, from http://www.informationweek.eom/8 1 8/neeleman.html

USA Today.com (2002, April 30). Travel: JetBlue Airways CEO David Neeleman. Retrieved June 3, 2002, from http://www.cgil.usatoday.com/mchat/2002043001/tscript.htm

AuthorAffiliation

Thomas M. Box, Pittsburg State University

Susan E. Saxton, Capella University

Subject: Airlines; Case studies; Market strategy; Strategic management; SWOT analysis

Location: United States--US

Company / organization: Name: JetBlue Airways; NAICS: 481111

Classification: 2310: Planning; 7000: Marketing; 9130: Experimental/theoretical; 8350: Transportation & travel industry; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 2

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 45-50

Number of pages: 6

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216270162

Document URL: http://search.proquest.com/docview/216270162?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 93 of 100

HANDS OF URUGUAY

Author: Ash, Steven R; Weber, Paula S; Vora, Jay A; Faggiani, Alvaro

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Abstract:

Full text:

Headnote

CASE DESCRIPTION

CASE SYNOPSIS

MANOS DEL URUQUAY

"At this rate, in two years our exports will cease to exist! " Rodolfo Gioscia, General Manager of Manos del Uruguay moaned to himself after analyzing the year-end financial results compared with those of previous years (Appendix 1). The results showed a continuing decline in the company's export sales and a net loss for the year. In addition, the company had been experiencing cash flow problems.

It was Friday, the last week of January, and many questions whirled around in his head: "What can we do to break this pattern of losses? Do we need to make company wide changes or will a small focused effort turn things around? Is the problem with our export markets or does it extent to local markets too?"

Rodolfo Gioscia had been the General Manager of Manos del Uruguay since 1998. This position had represented a significant challenge for him because Manos was a nonprofit, co-op organization with a concept different from other companies that he had previously managed. Co-ops have significantly different risks and opportunities. One cannot manage a group of independent artisans in the same manner as regular, full-time employees.

Mr. Gioscia decided to call together his Board of Directors for a meeting at the beginning of next week. This would give him the weekend to think things over and try to generate some strategic alternatives for their consideration.

URUGUAY

Most first-time visitors from the United States are surprised that Uruguay is nothing like Mexico (apparently the prototypical Latin American image). Original colonists of Uruguay displaced nearly all native peoples resulting in a largely European-based population that is nearly 90% white. Unlike Mexico, there are no spicy foods (Uruguayans eat a lot of beef, noodles, and rice), there are no ancient ruins, and the people look different from Mexicans. Even though Spanish is the official language of Uruguay, it is somewhat different from the type most Americans learn in school. For example, a "taco" is not something you eat, but rather the heel of a shoe and a "pancho" is a hot dog, as opposed to a "poncho" which is something you wear.

Uruguay is a land of rolling hills and gauchos (cowboys). There is no jungle, and there are no mountains. The weather is quite temperate, with rare freezes, and no Amazonian heat. Cattle and sheep, and their by-products, have been the mainstay of the economy for decades. There are nice beaches and several large modern cities, the largest of which, Montevideo, is modern and vibrant. The entire country is about the size of the state of Washington with 3.3 million people, 1 .5 million of which reside in the capital. Uruguay lies on the Atlantic Ocean between the two superpowers of South America - Brazil and Argentina, but boasts more economic and political stability than either of those neighbors.

Despite a large rural setting and low wages, the population of Uruguay has one of the highest literacy rates in the world. Public schools had operated in rural areas for many decades, thanks to the general opinion of society that education was a useful investment. These schools prepared men and women with a variety of skills and basic knowledge that, in rural areas, had been difficult to put to use in the local job market.

According to Hofstede's (1984) national cultural dimensions, Uruguay is very high on uncertainty avoidance indicating people prefer to follow established rules and take fewer risks. It is also ranked relatively low on the masculine dimension indicating that quality of life is considered more important than financial success. Westerners often note a more relaxed approach to time and a higher priority on personal relationships and family. Uruguay is ranked medium on power distance and individualism dimensions indicating moderate acceptance of authority and individual achievements respectively.

HISTORY OF MANOS DEL URUGUAY

At the end of the 1960's, the lifestyle of the majority of the inhabitants in cities around the world, and in particular in Uruguay, had undergone substantial change. Industrial products substituted for handmade products, and the absence of interested buyers for the handcrafted items virtually condemned handmade products to extinction.

However, in isolated rural areas of Uruguay, one could still find people, especially women, who retained various handcrafted artisan traditions. These women had continued producing handmade items without being influenced by the changed lifestyles, technology, or latest fashions. Their products were made for their families and neighbors who had often provided them the raw material - wool, leather, or horns. The articles the artisans produced were sweaters, pullovers, saddles, and containers made from horns. It was these capable people, with skilled hands and a desire to work, together with the quality of the handicrafts they produced, that provided the initial elements on which Manos del Uruguay had been built.

The importance of supporting and maintaining native artisans in rural areas of Uruguay had captured the interest of some people in the private sector, including visionaries, rural teachers, and a variety of marketing and sales executives. Five women had taken the initiative to establish Manos del Uruguay in 1 968 : Olga Pardo Santayana, Manila Chaneton, Sara Beisso, Dora Muñoz and Maria del Carmen Bocking. They wanted to improve the opportunities for poor women in rural areas. Therefore, they worked together to form groups of women artisans divided by geographic area or town.

The five founders were wealthy and traveled extensively abroad. While abroad, they established contact with design houses in Europe whose designers created designs for the rural women of Manos to produce. The founders were confident that there was a market for the hand-crafted woolen items which would mean significant resources for poor country people in Uruguay. The mission of Manos del Uruguay became: "Offer the rural woman the opportunity to develop herself both economically and culturally, by means of artisan work organized as a cooperative."

The first step was to conduct a test market in the two largest Uruguayan cities: Montevideo and Punta del Este. Montevideo, as the capital, was on the itinerary of many foreign tourists. Punta del Este was a wealthy beach community that had long been a regular stop for the jet-set elite, and sailing enthusiasts. The initial results were very positive. The artisans tripled their traditional earnings! The news of these results quickly spread to other areas and many additional artisans joined Manos del Uruguay. The women were very, very proud of their accomplishments. They were working and able to significantly contribute to the family income.

Over time, Manos continued to grow and expand. The founders developed and coordinated artisan expertise in spinning and weaving, created administrative and marketing processes, and worked to create effective, stable employment opportunities. Manos del Uruguay had received the support of several international organizations: the BID, for technical assistance and working capital; the Inter- American Foundation for the training of the artisans; and funds for the development of the cooperatives. They were also successful in obtaining a loan from the Banco de la República Oriental del Uruguay (BROU) and the Centro Cooperativista Uruguayo (CCU) which helped set up the cooperative system, which was rather unknown in the country prior to Manos.

Although Manos began with only five groups of artisans, in a matter of only a few months Manos grew to more than 12 groups. By the end of 1969, they had more than 260 artisans in 18 groups. By the end of the second year of operations (1970), Manos had 31 cooperative groups consisting of more than 560 artisans!

Their spectacular and rapid growth was owed principally to the great reception of the products in their primary markets of Montevideo, Punta del Este, and neighboring Buenos Aires, Argentina. Nevertheless, rapid expansion also produced a series of organizational, administrative, and financial difficulties that for many years marked the history of Manos del Uruguay.

To solve these problems, a Central Services unit was created in Montevideo. This unit had the primary responsibility for coordinating the supplies of raw material and machinery, acquiring capital financing, marketing, and general administration. Originally, Central Services was made up of women volunteers from the Montevideo area, but later paid employees were added, with the responsibility of effectively managing distinct sectors of the company such as financing, marketing and supply management. The need for paid employees led to charging the customer an additional percentage on top of the artisan price to cover Central Services payroll expenses.

In addition to the establishment of Central Services administration, measures were taken to improve work techniques, with the goal of improving the quality of the products. In the human resource area, efforts were made to train artisans on the skills necessary to actively participate in the management of the company. During the 1970's, the company relied heavily upon the free counsel of people and institutions that volunteered their experience and this served them well.

By the end of the 1970's, fashion magazines like Vogue, Elle and others featured Manos del Uruguay products on their covers. Celebrities like John Lennon, Robert Redford and Brook Shields wore their garments. While the artisans were not earning a lot of money, they were very proud that their products were of a quality good enough to compete in the very demanding European fashion market.

On more than one occasion Manos won the Export Prize awarded by Banco de la República Oriental del Uruguay (BROU). Manos received these prizes for responding to a real need of the artisans for living wages which in turn made an important contribution to the economy of the country. Manos served national and international clients that had again become eager to obtain handcrafted products. The hands logo of Manos del Uruguay sent a special message about the viability of handmade items in a highly competitive economy. Likewise, on a personal level, the products carried the pride of the people who made them.

Manos del Uruguay puts special emphasis on the social aspect of women working together. In the view of many artisans it is this value system of putting the "group" first that sets Manos apart from other companies. This is a hallmark of cooperative organizations.

A COOPERATIVE ORGANIZATION

As an organization, Manos Del Uruguay follows a cooperative organization structure. A cooperative is an association of people voluntarily united to meet common goals. These goals are often economic, social and cultural. The cooperative business is jointly owned and democratically controlled by its members and operated for them on a non-profit basis. Cooperatives are generally based on the values of self-help, caring for others, democracy, equality, and solidarity. To understand co-ops one must understand their network nature and the strong underlying culture that supports this type of relationship. The cultural values of solidarity, caring for others, and joint participation were key aspects of Manos. The culture of Manos reflects the basic notion of a cooperative. The members of Manos del Uruguay think of themselves as a "system," because Manos unites different organizational units with common objectives. The members feel united by a close interdependence.

Central Services had the responsibilities for product design, quality control, and marketing. Product design was done exclusively by product development teams at Central Services. The cooperatives produced what Central Services ordered. The cooperatives received the design, a prototype with technical notes, and the production materials from Central Services. Every artisan received salary and benefits from their cooperative.

For the products made for sale under other labels, product development had typically been a very long procedure. The process began with Manos presenting colors, materials and models to designers from the clients, the designers then develop specifications, Manos made a prototype, the client approved it or made changes, then Central Services developed the final prototype and assigned it to the cooperatives for production. Central Services made payments to the cooperatives after receiving the completed products and verifying quality.

Governance of Manos was primarily conducted through the Board of Directors. The Board of Directors is constituted of honorary members - people who have a personal commitment directly related to the objectives of Manos. They receive no payment and they included lawyers, accountants, etc. There were also four elected representatives from the artisans voted in by members of the cooperatives. In some cases they helped give shape to the committee and helped to determine its function; in other cases, they collaborated to gather specific knowledge essential for leading the organization. The Board's role is to ensure that the overall goal of Manos continues to be helping give the artisans and their families a new place in the economic and social order.

Under the Board of Directors you find the General Manager, whose job is to guide the organization towards its objectives. Likewise the General Manager manages various day-to-day situations, and spends a large portion of time making business contacts, especially in the foreign market. Reporting to the general manager, are the manager of Administration and Finances, the Leader of Sales and Exports, and the Production Manager.

The production manager is in charge of the quality. Each cooperative group has a leader or guide who reviews the quality of the products before they are sent to Montevideo. Once received at Central Services, garments are again inspected. If a garment is not of sufficient quality, the artisan does not receive payment for their work. Or, they may be given a chance to rework the garment.

CHANGES IN GLOBAL COMPETITION

By 1994, Manos del Uruguay had more that 800 artisans located throughout the country. Approximately 80,000 units of wool blankets, tapestries, garments, baskets, and rugs, all made from natural fibers, were sold in local and international markets.

Manos had been successful at generating new job opportunities for women that lived in remote rural areas, such as Dragon, on the Brazilian border and Paso la Crus on the Argentinean border; as well as regions close to the capital city of Montevideo. With their labor, the artisans of Manos del Uruguay preserved and promoted the traditional Uruguayan handcrafts that dated back to the birth of the country. Manos continued to play a key role in the preservation of the history and traditions of rural life. Their marketing efforts helped ensure that other countries would know Uruguayan traditions for wool making and dying as well as their craftwork.

In 1994, the Uruguayan government declared a change in economic policies that included some progressive new priorities in the economic area. After 30 years of a relatively closed economy, Uruguay aimed for a deeper deregulation in trading policies and opened their markets to create a more competitive economy. Efficient production and well-run organizations became essential to remaining competitive. Manos found itself having to adapt to the changes thrust upon it by these new developments without the help of the government policies that had specifically protected the artisans in the past. The company worked hard to respond to new and greater client demands, penetrate new markets, and face new competition.

The invasion of all types of imported products created real competition for the local craftspeople. Manos attempted to rise to the challenge. In 1999 Manos produced almost three times as much per person as they had in the previous five years. Simultaneously however, the number of participating artisans dropped to about 350 grouped into 17 cooperatives from a variety of rural counties in Uruguay: Soriano, Tacuarembó, Florida, Cerro Largo, Flores, San Jose, Paysandu, Canelones, Rio Negro, Lavalleja and Durazno. This reduction in artisans was mainly a result of the emphasis placed on greater productivity.

Along with the greater emphasis on productivity, the Manos organization also had evolved to include benefits such as paid vacations, bonuses, medical insurance, and retirement pensions for artisans. In the words of the general manager, "These changes were more and more necessary. We needed new answers for new situations, continually adapting ourselves to the new circumstances."

Manos' primary products at this point were sweaters, capes, ponchos, blankets and bedspreads. All products were still made of 100% virgin wool, spun by hand and woven on a handloom. The designs were fashionable, original and creative - a trademark of the business, which identified the business not only on a national level but also internationally. Products were marketed in Uruguay through stores owned by Manos, four of which were located in Montevideo (Ciudad Vieja, Centro, Montevideo Shopping and Punta Carretas Shopping) and one in Punta del Este. Other stores included specialty boutiques in Mercado del Puerto in Montevideo, in the city of Colonia del Sacramento, in the city of Salto, in the spa Atlantida and in Piriapolis.

Manos had also continued to export to Paris, Tokyo, and New York. In their attempts to grow, Manos recognized three alternatives for penetrating the North American market: 1) specialized stores, 2) name brand labels (e.g., Polo, Ralph Lauren, Michale Koors, Jhane Barnesand Donna Karan in New York), and 3) department stores (e.g., Bloomingdale's andNordstrom's). When products were made for other labels, Manos competed directly with many other suppliers. The retail clothing industry was historically fickle with many rapid product cycles. Major brands changed suppliers frequently. Manos knew they were in a very fragile position when selling in the USA under other brand labels because the clients changed suppliers very easily.

Staying competitive with designs created a longer production process as Mr. Gioscia described, "The coordination of the production process is very difficult. For example, we travel to the U.S . and meet with Donna Karan's designers. Then the design people start sending and receiving specifications and sending wool samples. Once the sample of wool and the design is approved, we have to coordinate who will dye the wool and who will produce the garment. Quality control is done on an individual basis with each artisan. So, the process is very lengthy and hard to coordinate."

Consequently, Manos' exports had been declining. The drop in foreign sales was primarily due to intense competition and increased buyer demands. Cooperatives had difficulty responding to rapid production requests and planning mechanisms were inefficient. The organizational culture gave greater priority to the problems of the artisans than the needs of the customers. For example, when an artisan had to attend to a situation in the home, she would temporarily stop working. "We cover for each other. We organize ourselves so as not to jeopardize the organization, but the person comes first and then the work," one of the artisans stated. While this priority was inherent in the culture and cooperative system, it was tremendously challenging for Manos to be successful in the new highly competitive markets. In addition, the South American economy had been struggling with severe financial and economic problems including double-digit (or greater) inflation rates.

Since Manos saw its niche in labor intensive products that were not easily replicated by machines, the most intense competition came from other low labor-cost countries. China for example, owing to low salaries, had produced similar handmade articles at substantially lower prices. Mr. Gioscia noted, "We wonder how China can produce the goods at such low prices which sometimes seem to be lower than the cost of the wool alone." With the lowering of international trade barriers, the demands of buyers for top line labels that had historically purchased Manos' products had grown more and more intense. Even though Manos had been able to establish close relationships with its clients, they believed that this was not a sustainable advantage in an environment of increasing competition.

Vertical integrations seemed improbable also. For a few years, Manos ran its own store in New York, but the bottom line was unsatisfactory, and the store closed. The result was that Manos only sold internationally when a design was requested by a brand name label, which then used thenown name on the label (in particular Polo, Ralph Lauren,

ORGANIZATION STRUCTURE

"We, the members of Manos del Uruguay, think of ourselves as a "system", because Manos unites different organizational units (groups, cooperatives, and central services), with common objectives, united by a close interdependence." "We are interrelated parts that form a 'whole*, one entity where each part is distinct, yet connected to the other."

In recent years, the cooperatives produced what was ordered by Central Services. The cooperatives received the design, a prototype with technical notes, and the production material from Central Services. Every artisan received salary and benefits from their cooperative. The cooperatives elected four representatives that participated on the Board of Directors.

Central Services had responsibility for product design, quality control and marketing. Product design was done exclusively by product development teams at Central Services. For the products made for sale under other labels, product development had typically been a very long process. Mr. Gioscia explained, "the process begins with Manos presenting colors, materials and models to designers from the clients, the designers then develop specifications, Manos makes a prototype, the client approves it or makes changes, we develop the final prototype and then assign it to cooperatives for production. Central Services makes payments to the cooperatives after receiving the completed products and verifying production quality."

Referring to the organizational structure of Central Services, Mr. Rodolfo Gioscia had said, "At the head we have the Board of Directors, formed by honorary members - people who have a personal commitment directly related to the objectives of the business. They receive no pay and they include lawyers, accountants, etc. There are also four elected representatives (artisans) voted in by members of the cooperatives. In some cases they helped give shape to the committee and helped to determine its function; in other cases, they collaborated to gather specific knowledge essential for leading the organization. Mr. Gioscia is a non-voting member of the Board."

"Under the Board of Directors you find the General Manager, whose job is to guide the organization towards its objectives. Likewise the General Manager manages various day-to-day situations, and spends a large portion of time making business contacts, especially in the foreign market. Reporting to the general manager, are the manager of Administration and Finances, the Leader of Sales and Exports, and the Production Manager."

"The production manager is in charge of the quality. Each cooperative group has a leader or guide who reviews the quality of the products before they are sent to Montevideo. Once received at Central Services, garments are again inspected. If a garment is not of sufficient quality, the artisan does not receive payment for their work. Or, they may be given a chance to rework the garment. This is possible because Uruguay is a very small country. The farthest distance from a cooperative to Montevideo is only 200 miles."

CURRENT SITUATION

Manos del Uruguay had received the support of several international organizations: the BID, for technical assistance and working capital; the Inter- American Foundation for the training of thef artisans; and funds for the development of the cooperatives). There were also successful in obtaining a loan from the Banco de la Republica Oriental del Uruguay (BROU).

Manos had been successful at generating new job opportunities for women that lived in remote rural areas, such as Dragon, on the Brazilian border; to Paso la Crus on the Argentinean border; as well as regions close to the capital city of Montevideo. With their labor, the artisans of Manos del Uruguay preserved and promoted the traditional Uruguayan handcrafts that dated back to the birth of the country. Manos had continued to play a key role in the preservation of the history and traditions of rural life. Their marketing efforts helped ensure that other countries would know Uruguayan traditions for wool making and dying and their craftwork as well.

In 1994, the Uruguayan government declared a change in economic policies that included some progressive new priorities in the economic area. After 30 years of a relatively closed economy, Uruguay aimed for a deeper deregulation in trading policies and opened their markets for a more competitive economy. Efficient production and well-run organizations became essential to remaining competitive. Manos worked to penetrate new markets, faced new competition, and responded to new and greater client demands. Inexorably, Manos had to adapt itself to the changes thrust upon them by these new times without the help of a government policy that had specifically protected the artisans in the past.

"The invasion of all types of imported products, from the most sophisticated to the most simple, left less space for the relaxed paced independent artisans of Manos del Uruguay," was the comment heard most often during the mid-1990's. Manos rose to the challenge: artisans in 1999 produced almost three times as much per person as they had in the previous five years. Simultaneously, the number of participating artisans dropped. This was mainly a result of the emphasis placed on greater productivity as well as a moderate increase in the volume of sales.

The Manos organization also had evolved to include benefits such as paid vacations, bonuses, medical insurance, and retirement pensions for artisans. In the words of the general manager, "Our stores grew along with our sales organization. We now need to aggressively promote and market in all areas. These activities and goals are more and more necessary. We need new answers for new circumstances, continually adapting ourselves to the new situations."

By 1999, Manos del Uruguay consisted of only 350 artisans, grouped into 17 cooperatives from a variety of rural counties in Uruguay: Soriano, Tacuarembó, Florida, Cerro Largo, Flores, San Jose, Paysandu, Canelones, Rio Negro, Lavalleja and Durazno. Manos* products were many and varied including sweaters for men and women, capes, ponchos, blankets and bedspreads. According to their web site in 2002, Manos* mission emphasized a focus on the customer. They wanted to achieve for their customers "excellent quality hand-knit or woven garments." Their web site also stated that their key objective was "to provide job opportunities and training to women in distant rural areas of the country."

All products were still made of 100% virgin wool, spun by hand and woven on a handloom. The designs were fashionable, original and creative - a trademark of the business, which identified the business not only on a national level but also internationally. Products were marketed in Uruguay through stores owned by Manos, four of which were located in Montevideo (Ciudad Vieja, Centro, Montevideo Shopping and Punta Carretas Shopping) and one in Punta del Este. Other stores included specialty boutiques in Mercado del Puerto in Montevideo, in the city of Colonia del Sacramento, in the city of Salto, in the spa Atlantida and in Piriapolis.

Throughout the years Manos had also continued to export to Europe, Japan and the United States. Manos has more than 20 years of experience selling their products in foreign markets ranging from Paris to Tokyo to New York. Manos del Uruguay had three alternatives for penetrating the North American market: specialized stores, name brand labels (e.g., Polo, Ralph Lauren, Michale Koors, Jhane Barnesand Donna Karan in New York), and department stores including Bloomingdale's and Nordstrom's. When products were made for other labels, Manos was competing directly with many other suppliers. The retail clothing industry has been historically fickle with many rapid product cycles. Major brands changed suppliers frequently. Mr. Gioscia noted "Manos is in a very fragile position when we sell in the USA under other brands, the clients can (and do) change suppliers very easily."

Mr. Gioscia described the production process. "The coordination of the production process is very difficult. For example, we travel to the U.S. and meet with Donna Karan's designers. Then the design people start sending and receiving specifications and sending wool samples. Once the sample of wool and the design is approved, we have to coordinate who will dye the wool and who will produce the garment. The quality control is done on an individual basis with each artisan. So, the process is very lengthy and hard to coordinate. The good thing about export business though is that you have to constantly prove and improve your quality."

In recent years, Manos* exports had been declining. The drop in foreign sales was due to a variety of reasons including intense competition and increases in buyer demands. Cooperatives had difficulty responding to production requests and planning mechanisms were inefficient. Mr. Gioscia also noted, "the organization culture gave great priority to the cooperatives and the problems of the artisans before the needs of Manos* clients." In addition, the South American economy had been struggling with severe financial and economic problems including double-digit (or greater) inflation rates.

Intense competition came from other countries too, especially China, which, owing to low salaries, had produced similar, handmade or machine made articles at substantially lower prices. Mr. Gioscia noted, "we wonder how China can produce the goods at such low prices which sometimes seem to be lower than the cost of the wool alone." The demands of buyers for top line labels that had historically purchased Manos' products has grown more and more intense. The only market niche left was for products with unique characteristics or features that could not be done by machines. "We rely heavily on close relationship with our customers," said Mr. Gioscia.

For a few years Manos ran its own store in New York, but the bottom line was unsatisfactory, and the store was closed. Manos then produced and sold internationally only when a design was requested by a brand name label, which used their own name on the label (in particular Polo, Ralph Lauren, Donna Karan New York, and Neiman-Marcus, among others.)

STRATEGIC ALTERNATIVES

During his weekend of thought and worry, Mr. Gioscia developed four alternatives which he presented to his Board of Directors the following week:

1) Continue working under existing brand name labels, but incorporate other types of products made by high-speed machines that would be more price competitive worldwide. This alternative would augment the competitiveness of the company and hopefully improve the volume of exports. On the other hand, this alternative required a large investment for three high-speed machines (approximately $ 1 00,000 permachine). High-speed production would also need to be centered in one location preferably Montevideo.

2) Increase the exposure of Manos in foreign markets with the goal of attracting and developing new sales channels including international distributors. This would require international trips to participate in trade shows, the need for a web site, and extensive R& D to determine which foreign markets to pursue.

3) Franchise Manos in markets that would know and appreciate the quality of Manos products. A good example would be to establish a store in Buenos Aires. Argentineans frequently travel to Uruguay for vacations and business. Many are already familiar with the Manos products and could be important clients for the stores in Argentina. A recent analysis shows that 20% of Manos sales in Uruguay were made to visiting Argentineans. However, franchising could rapidly increase demand beyond existing production capacity. Owing to the co-op nature of the organization, when an artisan had to attend to situations in the home, she would temporarily stop working. "We cover for each other. We organize ourselves so as not to jeopardize the organization, but the person comes first and then the work," one of the artisans stated. Failures to meet production volume and quality requirements when entering a large, important market could potentially curtail future expansion options.

4) Pursue slow, managed growth by carefully selecting and penetrating the most lucrative markets. In that way, Manos could develop international marketing experience and at the same time analyze and improve their production processes. This would allow them time to train more artisans and improve efficiencies to meet future growth and expansion efforts.

What should Mr. Gioscia recommend to his Board? What strategies can they pursue to turn around their weakening financial position? Does Manos need a new mission? What other alternatives should Mr. Gioscia put before the board?

References

REFERENCES

CIA - The World Factbook -Uruguay

Hofstede, G. (1984). The cultural relativity of the quality of life concepts, Academy of Management Review, 9(3), 389-398.

AuthorAffiliation

Steven R. Ash, University of Akron

Paula S. Weber, St. Cloud State University

Jay A. Vora, St. Cloud State University

Alvaro Faggiani, Universidad ORT, Uruguay

Subject: Cooperatives; Business conditions; Wool; Exports; Case studies

Location: Uruguay

Classification: 9130: Experiment/theoretical treatment; 1300: International trade & foreign investment; 8620: Textile & apparel industries; 9173: Latin America

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 1

Pages: 53-67

Number of pages: 15

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: References Tables Maps

ProQuest document ID: 216276159

Document URL: http://search.proquest.com/docview/216276159?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 94 of 100

GROWTH FOR TIFFANY & CO.

Author: Bertsch, Thomas; Wiseman, Debra

ProQuest document link

Abstract:

Tiffany & Co. has stores in more than 20 countries. Its retail activities focus on upscale customers, high quality-products, extensive services, premium prices, fashionable locations, sophisticated promotions, and prestige image. Management wants the company to become the preeminent jewelry retailer in the world. Consequently, adjustments are needed in strategy. Students are asked which changes should be made in Tiffany's publics, products, places, prices, promotions, performances, processes, and providers. Students working with this case will gain increased knowledge, skills, and practical experience. Specific knowledge topics include: image positioning, market segmentation, product branding, service opportunities, pricing strategy, merchandising, store site selection, promotion media selection and message appeals, distribution channel integration, and performance measures. Skill building opportunities include: logical problem solving, oral communication, and written communication. Important experiential learning opportunities are: informative and persuasive speaking, business report writing, strategy integration, and teamwork. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

This case focuses on the strategy needs of an upscale retailer. The subject matter is appropriate for courses in retailing, marketing strategy, marketing management, and merchandising. The case is suitable for junior and senior undergraduate students and has a difficulty level of 4/5. It can be used for a 75-minute class discussion session, a take-home exam, or as the basis for team oral presentations.

CASE SYNOPSIS

Students working with this case will gain increased knowledge, skills, and practical experience. Specific knowledge topics include: image positioning, market segmentation, product branding, service opportunities, pricing strategy, merchandising, store site selection, promotion media selection and message appeals, distribution channel integration, and performance measures. Skill building opportunities include: logical problem solving, oral communication, and written communication. Important experiential learning opportunities are: informative and persuasive speaking, business report writing, strategy integration, and teamwork.

INSTRUCTORS' NOTES

Problems

Answers to issues at the end of the case are given below:

* Appeal more to target market segments.

Students may think that Tiffany should put more emphasis on the near-luxury "aspirants" market segment, since it is large and appreciative of the Tiffany reputation. However, the company should not endanger its appeal to the wealthy. A youth-oriented store atmosphere should be avoided - such as top-twenty music, wall posters, and jeans clothing for employees.

Some students may want to standardize Tiffany stores, to provide a consistent appearance. However, that is not practical. Downtown shopping district stores tend to be tall, because land is very expensive. Mall stores in suburban locations were built when land was low in price. Consequently, they are flatter, with one or two stories. Smaller market areas get smaller stores, so the extent of products on display is less. Mall stores open onto a walkway that is protected from the outside weather, so store doors can be open during shopping hours. Downtown shopping district stores open onto streets, so doors must be closed to keep out traffic, noise, and air-blown dirt.

Shopper desires, characteristics, and behavior can be measured with surveys. The customer database can be analyzed to find groupings worth distinctive strategy efforts, such as trend leaders and seasonal buyers. Tests can be used to compare responses to different strategy activities. Tiffany needs occasional market research projects to measure new issues. An ongoing information system is needed to measure recurring issues.

The Internet can be used to search for those illegally imitating Tiffany merchandise. Tiffany does take legal action against those who infringe on its design patents, brand names, proprietary color, trademarks, and trade names. Such assertive protection efforts help maintain the company's image and customer satisfaction with merchandise.

* Pick additional products and services to offer.

Students will probably want to expand the variety of Tiffany brand j ewelry, since that category is the largest revenue generator. However, product line additions require more retail space. That requires more display cases that, in turn, would require larger stores, smaller spaces between display cabinets, or more constricted displays. The "un-crowded" appearance of Tiffany stores and displays is important to its prestige image.

Many prestige product additions, such as Gucci handbags, could be a location problem for Tiffany. Gucci and Tiffany operate stores in many of the same shopping malls, so Gucci would not allow Tiffany to carry its products at those locations. Other luxury product retailers also want exclusive distribution rights in an area.

Students may recommend the addition of many luxury brand products from outside manufacturers. However, such brands are sold in other posh establishments. Tiffany could have better store loyalty if it carried items under its own, respected brand names.

Luxury and near-luxury retail chains should be monitored, to help identify service innovations that Tiffany may be able to adopt. Also, customer comments and surveys can be used to identify new service possibilities.

Young female customers want chic styles worn by celebrities. Therefore, fashion leaders, television, and style magazines are important sources for quickly identifying trends so that production and promotion can be adjusted.

* Select locations for new stores.

A few students may want to sell off non-retailing operations, to generate the capital needed for major expansion of the retail store network. However, Tiffany needs assurance of supply and extensive quality control. Balanced growth across its operations is less risky.

Tiffany's store expansion in the United States is set at three to five additions a year. The company could quickly narrow the choices by considering only locating where other luxury stores are located, such as Saks and Gucci. The Directory of Shopping Centers in the United States identifies regional, community, and neighborhood shopping centers and downtown shopping districts. The directory also indicates the tenants and shopping theme of each center, such as fashion or manufacturer's outlet. Of course, many students will want to evaluate shopping areas and site locations on their own merits. Such evaluations should include dozens of issues, such as: large population, high discretionary income, percent spending on luxury products, neighborhood quality, site availability, and lease terms.

Foreign expansion can also be simplified, by focusing on which luxury product retail chains are open to acquisition or to operation of Tiffany stores within their stores. If store locations were evaluated on an individual basis, then many more issues should be considered than was necessary for domestic choices. Some important foreign-market criteria are: openness to free enterprise business, political stability, acceptance of U.S. products, and religious acceptance of luxury buying.

* Choose which price levels to discontinue.

Product line additions should not take sales away from current products of equal or higher margin. Otherwise, a "hidden" financial opportunity loss would occur. Tiffany offers more than 2,000 products that range in price from under $75 to $1,000,000. Price lines that do not sell can be discontinued. Products that do not sell can be reported back to production and discontinued. Of course, some items sell few units but offer substantial sales revenue and profit, such as the $ 1 ,000,000 engagement ring. Therefore, Tiffany should track the cost, markup, and quantity sold of items.

* Evaluate which promotional media to use.

Expansion of promotional efforts in existing store areas may not be worthwhile. Too much promotion may even devalue the company's image. Of course, individually targeted promotion to "big spenders" is important for customer relationship marketing.

The promotional budget is always limited, so the purposes and payoffs of alternative investments should be estimated. Mass media reaches many people, but most are not going to buy at Tiffany. Therefore, targeted mass media should be used such as television programs, magazines, and newspapers aimed at luxury market buyers. Such information is available from several syndicated data services, such as Simmons' s Choices III. Direct mail is much more expensive per thousand, but it is very valuable in appealing to existing customers. Personal selling is extremely expensive per thousand reach. However, the margin on sales easily justifies the cost, and customized communications with shoppers are essential. The company is committed to public service projects, which include several themes and contact points for public relations and publicity.

Management may reject major changes in promotional budgeting from one year to the next. Also, many media relationships are likely to be treated as long-term commitments. Therefore, promotional budget reallocations are likely to be gradual, unless a strong justification can be presented for large changes. The rapid growth in Internet sales would be one justification for major reallocation of the media budget from one year to the next. However, the company's web site is already developed and operational, so budget needs for that media are less than before.

* Decide which outside suppliers to use.

Tiffany has more than 100 outside suppliers and its own supply operations. The number of relationships is so large that a quick, easy, consistent process for evaluating individual suppliers is needed. A workable system is to have preset evaluation criteria, rating levels, acceptance ranges, rating assignments, and reactions. Some of the evaluation criteria should be: products - quality level and quality consistency; services - return, exchange, and credit options; delivery - arrival promptness and expedited shipping. The company should also consider: reputation - does what promised and value of supplier's brands; prices - competitive prices and discounts offered; and promotion - new ideas and cooperative spending provided.

A five-point rating scale, ranging from excellent to poor can be used on each evaluation issue. Acceptance levels of at least satisfactory could be set for each criterion. The signature of an approved evaluator can indicate authorized ratings. High performers should receive extra rewards, low performers should be advised on what and how to improve, and consistently low performers should be replaced. Of course, the suppliers should know the evaluation and rewards system in advance, so they can adjust to it.

* Protect on-line information.

Hackers try to steal information, time, money, products, and identities through online tricks. Tiffany should use virus protection software, data encryption, locked server system switching rooms, an on-line network just for suppliers, frequently changed user passwords, restricted access to company computers, and a web site monitoring service. The company should also train employees how to update protection on their computers and how to identify, avoid, and report suspicious web sites and e-mails. Tiffany's web site server system should be programmed to block out unidentified sources and newly identified viruses

References

REFERENCES

Business & Company Resource Center (2004). Tiffany & Co. Retrieved February 12, 2004, from http://galenet.galegroup.com/servlet/BCRC71oc lD=viva.

Google Image Search (2004). Tiffany & Co. Retrieved February 12, 2004, from http://www.google.com/imgmp7hl-en

Hoover's Online Tiffany & Co. (2004). Retrieved February 12, 2004, from http://premium.hoovers.com/subscribe/co/history.xhtml?COID=1 148 1

Palmer, Kimberly (2003, July 23). Tiffany & Co. branches out under an alias, Wall Street Journal (Eastern Edition), B1 .

Staff (2003, September). Temple of Traffic, Retail Traffic, 16.

Tiffany & Co. (2004). Tiffany & Co. Retrieved February 12, 2004, from http://tiffany.com

Tiffany & Co. (2003). The Tiffany mark. New York: Tiffany and Company.

Yahoo! Finance (2004). Tiffany & Co. Retrieved February 12, 2004, from http://biz.yahoo.eom/e/030611/tifl0.html

AuthorAffiliation

Thomas Bertsch, James Madison University

Debra Wiseman, Rugged Wearhouse

Subject: Jewelry stores; Market strategy; Marketing management; Changes; Case studies

Location: United States--US

Company / organization: Name: Tiffany & Co; NAICS: 448310, 454111

Classification: 7000: Marketing; 9190: United States; 8390: Retailing industry; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 2

Source details: SPECIAL EDITION, INSTRUCTORS' NOTES

Pages: 61-65

Number of pages: 5

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Business Case, Feature

Document feature: References

ProQuest document ID: 216275209

Document URL: http://search.proquest.com/docview/216275209?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 96 of 100

HARDEE'S RESTAURANTS: STUCK IN THE MIDDLE OR CREATING COMPETITIVE ADVANTAGE?

Author: Droege, Scott; White, Harold; Tucci, Jack

ProQuest document link

Abstract:

On January 21, 2003, Andrew Puzder, CEO and president of Hardee's Food Systems, Inc. stated, "We are distinguishing ourselves from the competition as the premium burger specialist among quick-service restaurants." But how much value can you really add to a hamburger? Clearly companies like Outback Steakhouse, Cracker Barrel, and Shoney's offer menu selections similar to Hardees' "Thickburger," but these restaurants set themselves apart by offering a casual dining atmosphere, a wide selection of entrées beyond hamburgers, and table service rather than order counters. On the other end of the spectrum are fast food restaurants such as McDonalds, Burger King, and Wendy's, Hardee's traditional competitors offering low cost convenience meals. Hardee's Thickburger initiative goes beyond efforts at differentiating itself from its competition. Instead, the company is taking actions it hopes will move it into a new strategic group where competition is less intense. This case examines the difficulties in strategic reorientation when such reorientation requires a business-level strategy that moves a firm from one strategic group to another. Students must decide if Hardee's new initiatives will be successful or whether the fast food franchise will be "stuck in the middle" with neither a feasible low cost nor a feasible differentiation strategy. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

Business-level strategy is the primary focus of this case. Secondary issues examined include strategic groups and strategic reorientation. The case has a difficulty level of four, appropriate for senior level courses. The case is designed to be taught in one class hour and is expected to require one hour of outside preparation by students.

CASE SYNOPSIS

INTRODUCTION

After struggling with the intense competition in the fast food industry, Hardee's struck upon what seemed to be a cure for its mediocre performance of the last few years. Its Six Dollar Burger campaign in 2002 attracted consumer attention to this struggling franchise. The ability to quickly get a quality hamburger similar to what one might expect at a full service restaurant such as Appleby's or TGIFriday's seemed to appeal to customers with little time but discretionary tastes. The success of this initiative compelled Hardee's to think deeply about where it had been and where it hoped to be in the future. On January 21, 2003, Andrew Puzder, CEO and president of Hardee's Food Systems, Inc. stated, "We are distinguishing ourselves from the competition as the premium burger specialist among quick service restaurants."

BACKGROUND

CKE Restaurants, Inc. is the parent company of 1,000 Carl's Jr, restaurants, 97 La Salsa Fresh Mexican Grills restaurants, and 2,181 Hardee's restaurants. The combined revenue was nearly $3 billion for the fiscal year ending January 2003. While these are substantial revenues for a franchisor, the company has struggle recently and has not earned a profit since 1 999. The company had a net loss of $150 million for 2003. After extrapolating a value for a procedural change in accounting which had a significant negative financial impact, the St. Louis based Hardee's Food Systems, Inc. segment, a wholly owned subsidiary of CKE, lost $10.5 million in fiscal year 2003 after losing $76.9 million in fiscal year 2002.

The restaurant chains within the CKE parent are franchisers, with only limited company ownership of retail stores. As with all franchises, one of the corporate parent's primary objectives is the proliferation of the franchise brand that provides desired escalation of revenue through franchise fees. Because Hardee's accounts for the "lion's share" of both retail stores and revenues for CKE Restaurants, the strategy that Hardee's employs will have a substantial financial impact on CKE.

Historically, Hardee's has been a quick service (fast food) franchise, competing mainly on price against rivals McDonald's, Burger King, Wendy's, and other fast food chains. Although each chain attempts to differentiate its products, imitation by competitors is swift, prohibiting any single chain from gaining a competitive advantage based on product attributes. Intense competition within the fast food market has forced these restaurants to focus on operating efficiencies to drive down costs in an effort to maintain acceptable net margins. Brad Haley, Hardee's executive V.P. has felt the pricing pressure in the fast food segment: "We can't compete when everybody is selling sandwiches for 99 cents. Nobody can. Even the big guys are losing at that game."

Combined with recent diminishing profit margins for the entire quick service restaurant industry, Hardee's recent losses in the past two years have forced the chain to reconsider its strategy. Rather than competing on price against its traditional rivals, Hardee's has embarked on a strategy intended to vastly differentiate it products from the traditional fast food items. In October 2001, Hardee's contracted with Mendelsohn|Zien, a Los Angeles based advertising firm to help reposition its brand. Richard Zien, managing partner with Mendelsohn|Zien noted, "No one has been able to unlock the door of advertising success at Hardee's in many years. Inconsistent advertising strategies have resulted in a variety of messages which may have served to confuse Hardee's customer base."

Soon after contracting with Hardee's, Mendelsohn|Zien recommended that the restaurant chain introduce the "Six Dollar Burger". In November 2001, Hardee's introduced this 1/2 pound, 91 1 calorie, $3 .95 hamburger, which quickly became the fastest growing burger among all fast food chains. In 2002, the "Six Dollar Burger" won the Restaurant Business Award for Best New Burger. CKE Restaurant Corporate Affairs Director Larry Brayman noted that not only was the "Six Dollar Burger" recognized among industry critics, but also by customers. "We are very pleased to have introduced a product that has received not only critical acclaim with the Best Burger Award for 2002, but also the approval of our guests."

THE RESTAURANT INDUSTRY

According to the Bureau of Economic Analysis, restaurants have a significant impact on the overall health of the U.S. economy. Considering both direct and indirect employment, this industry supports a greater number of jobs than any other industry in the nation's economy. Other than the government, the restaurant industry is the nation's largest employer with over 11.7 million employees. However, restaurants are extremely labor intensive. In 2001, sales per full time equivalent employee were $55,35 1, which is notably lower than most other industries. Again for 2003 , the National Restaurant Association reported that employee recruitment and retention remains the number one challenge facing fast food (quick service) restaurant operators. Due to its low-skill, labor-intensive environment, the industry employs a workforce with a high turnover rate and demographically composed of a majority of young, single, female, part-time employees averaging 25.6 hours per week. Consequentially, approximately one-third of all adults in the United States have worked in the restaurant industry at some time in their lives.

However, with the majority of workers viewing their "tour of service" as only temporary, opportunities for advancement are superior to most other industries as evidenced by a rate of eight out often salaried employees starting their careers as hourly workers.

With over 300,000 restaurant companies, the industry is mature and extremely competitive. Although there are differences among specific companies, the industry can be divided into two basic groups-full service (casual dining) and quick service (fast-food). The full service sector tends to have more points of differentiation including family atmospheres such as Denny's and Shoneys, buffets such as Quincy's and Golden Corral, combination full service restaurants with bars such as Appleby's, ethnic cuisine such as China Palace and many more.

The fast food sector is geared towards quick, inexpensive meals and includes made-to order sandwiches such as Subway, Mexican food such as Taco Bell, chicken entrées such as Kentucky Fried Chicken and Popeye*, pizza such as Domino's and Pizza Hut, the hamburger chains such as Hardee's, McDonalds, and Wendy's, and a variety of others. Both the full service and fast-food segments include locally owned restaurants typically managed by a single individual. Currently, seven out of ten establishments are single-unit (independent) operations with less than twenty employees. Historically, these local restaurants always compete with the national chains by creating menus catering to local tastes and/or building strong personal relationships with local repeat customers.

Because the restaurant market is mature and annual industry sales growth is relatively small at about 4.5%, it is increasingly difficult to earn above average returns. Economic downturns tend to impact fast food as well as full service restaurants as indicated by the posted 2002 growth rate of 4. 1% compared to 4.8% for full service. In 2000, the average check per customer at fast food was $3.71 . Whereas, the average per person price for a meal at a full service restaurant is from $9.96 for casual dining to $24.59 for upscale. The total market for dining away from home in 2000 was over $241.7 billion. As projected for 2003 by the National Restaurant Association, the fullservice sales should reach $153.2 billion and the quickservice revenue should exceed $120.9 billion.

Although in 2002, the average U.S. household spent $2,137 at restaurants annually, consumers become more price sensitive during economic downturns. The way households divide their purchases between the full service and fast food segments may change, making fast food restaurants viable, less expensive substitutes. Or, the reduced discretionary income may cut into the customer counts - especially for fast food restaurants. Currently, both dynamics of consumer behavior are impacting the industry, but full service restaurants have a slight advantage in terms of gross sales and profitability. In 2002, full service restaurants average $650,000 per restaurant while fast food restaurants average a little less at $585,000. Also, full service restaurants posted an average pretax income of 6% versus 5% for the fast food segment.

Other market factors bearing on the fast food segment are: a) consumer tastes are slowly evolving toward a desire for more healthy meals. There is increasing pressure on fast food chains to offer low fat, nutritious alternatives, b) technology is changing the way Americans shop and the restaurant industry is beginning to feel the impact of this shift in consumer behavior. Over fifty six percent of all restaurants currently have web sites, c) the American population is aging which will impact the available low wage labor market and the customer behavior trends.

When it comes to restaurant spending, household income is one of the most influential characteristics. Households with an average income of more than $70,000 make up only 1 7 % of the American households yet account for more than twenty six percent of total spending on food away from home. In general, expenditures on food away from home rise dramatically for households that bring home more than $30,000 in pre-tax income.

Age of the head of household also is another of the most influential characteristics. Households with the head at an average age greater than 45 years but less than 65 years spend approximately twenty five percent more per-capita than age groups on either side.

STRATEGIC REORIENTATION

This success with its initial attempt to distinguish Hardee's from its competitors gave the company confidence to continue with a strategic reorientation of the entire business. The "Six Dollar Burger" was the precursor to a new direction intended to reposition the company within the industry. If it could successfully draw a line between its products and those of traditional fast food competitors, perhaps the company could stem the losses of recent years by adding value to what was, for the most part, a previously undifferentiated product-the common Hardee's hamburger. By setting itself apart, Hardee's hoped to reduce the price competition that had helped drive down its profitability. By competing on product attributes-fast food hamburgers that tasted more like an Applebee's or a TGIFriday's hamburger-Hardee's hoped to exploit a market niche that had been previously ignored by the industry.

To complement its new product line, Hardee's has begun remodeling the interiors and exteriors of many of its restaurants. This "Star Hardee's Program" includes new red signs with a star logo to replace the orange signs with which customers had previously associated with Hardee's. The company projects that all company-owned stores will be converted to Star Hardee's Program and franchisees will be converted by the end of 2004. The next step of this remodelling effort is a yet unannounced prototype design for the restaurant. The phenomenal success of the "Six Dollar Burger" encouraged Hardee's to forge ahead with its plan to reorient the company's strategy. By adding value to its products, the goal was to move away from the competitive rivalry inherent in the price sensitive traditional fast food market segment. To build on the success of the "Six Dollar Burger" and further set itself apart from its competitors, the new Thickburger line was introduced at the same time that 40 items were eliminated from the menu. This included 1/3 pound hamburgers, cheeseburgers, bacon burgers, and chili cheeseburger in addition to a 1/2 pound grilled sourdough burger. Hardee's top of the line Thickburger was a 2/3 pound, 1,088 calorie hamburger. A key feature of this line was that each hamburger was made from Angus beef, a premium source of ground beef. The added cost of Angus beef makes Thickburgers, ranging in price from $2.39 to $4.95, somewhat higher than competitors* hamburgers.

The new tag line in Hardee's advertising, "Hardee's: Making the last place you'd go for a burger, the first," made it clear that the company considered its new product line more than just a menu change, but instead an about face from its previous position in the industry. Hardee's CEO Puzder announced that "a premium product strategy is . . .being implemented at Hardee's. Over time, we hope this change-together with our continued focus on quality, service and cleanliness-will help reverse the public's perception of Hardee's as the discount variety brand to the place to go for best-in-class premium burgers. If we're successful, our strategy should build on the brand's already strong breakfast business by bringing in new customers for lunch and dinner." Executive V.P. Haley puts Hardee's new strategy succinctly: "It's not fast food and it's not sit-down restaurant food," Haley said. "It's something in between. That's what we're trying to target."

THE CURRENT CRISIS

Although it is too early to know how well Hardee's strategy will work long range, so far revenues are slumping. As of the 16 weeks leading up to May 19, 2003, gross revenues had decline 1% compared to the same period in 2002. Market share had not increased despite an aggressive advertising campaign and minor store remodeling. The company must consider its options. Is this a situation where patience will pay off once its aggressive advertising brings in more customers? If so, how long should the company wait? Has Hardee's been misguided in believing it set itself apart from its rivals with its new menu? Should Hardee's increase its differentiation beyond its menu and remodeling efforts by doing away with the order counter? If the new menu does not eventually increase revenue and net income, should Hardee's return to its original menu and keep competing on price with the other fast food chains? President and CEO Andrew Puzder is certainly struggling with these issues. What should be his next?

AuthorAffiliation

Scott Droege, Mississippi State University-Meridian

Harold White, Mississippi State University-Meridian

Jack Tucci, Mississippi State University-Meridian

Subject: Restaurants; Competitive advantage; Fast food industry; Market strategy; Case studies

Location: United States--US

Company / organization: Name: Hardees Food Systems Inc; NAICS: 722211

Classification: 7000: Marketing; 9190: United States; 8380: Hotels & restaurants; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 1

Pages: 75-81

Number of pages: 7

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 216274655

Document URL: http://search.proquest.com/docview/216274655?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 99 of 100

BIG SKY CARVERS: A RURAL SUCCESS STORY

Author: Karahan, R Sitki; Christiansen, Tim

ProQuest document link

Abstract:

Big Sky Carvers (BSC) is a small, but quite successful firm specializing in home décor and gifts based upon a wide range of wildlife, from trout to grizzlies. While BSC is small, it is still a fairly large player within the focused industry niche for this type of product. A significant success factor for the firm has been the high level of craftsmanship exhibited in its pieces, which leads to generally higher prices. The attention to detail and quality has lead to a strong customer base, among both its retailers and consumers, for its products. The firm now has the opportunity to embark on a co-branded line of products which could develop a new method of production for the firm, leading to lower prices, and a possible expansion of the market for its products. [PUBLICATION ABSTRACT]

Full text:

Headnote

CASE DESCRIPTION

The focus of this case is on product development for a small, but successful firm. The firm has an opportunity to expand its product line through a co-branding effort, but the new products represent a significant adjustment in how the products are made and who they are sold to. An important secondary issue deals with the opportunity to develop global sources of production as a means of lowering production costs. The case has a difficulty level of four to six. It should take about two class hours and the students will need to spend about two hours outside of class to prepare for it.

CASE SYNOPSIS

INTRODUCTION

"When I was a kid, Dad had some old decoys around the house. They weren't rare or valuable; they weren't even very well made. But I noticed, especially when I held one of them, I was transported to another place; the memory of the brisk fall morning with autumn smells of a marsh in the air, and our yellow lab. Nancy, running around disobethently while Dad put out the decoys. Those old decoys of my Dad fueled a deep passion in me."

- Marc Pierce, Co-Founder and CEO

PROLOGUE

Marc Pierce and his family are looking forward to their annual winter trip to Cabo San Lucas, Mexico next week. However, before Marc goes he knows that he has to make a decision on a new product line for his firm. This line would be different in many ways from the products that Big Sky Carvers has sold and Marc has been seeking advice and counsel from all his key employees and retailers. But the final decision on whether to pursue this new line is Marc's responsibility and he knows that he must decide before he goes on vacation.

BIG SKY CARVERS

Eric Pierce and his son Marc founded Big Sky Carvers in 1980. In the past twenty years it has grown from a small producer of decorative duck decoys into a global leader in the decorative design industry.

After learning how to make decoys on a multiple-spindle carving machine, the Pierces moved from the mid-west to Montana in hopes of being able to successfully market their product in and around Yellowstone Park. Success was not easy to come by at first. However, with hard work and the addition of many artists and craftsmen from the Yellowstone area the Pierces* dream of being a highly successful leader in their field has been realized.

BSC now has a number of product lines which include, decoys, fish, game birds, signs, furniture, sports collectables, dogs, big game, and much more. BSC has become much more than just a woodworking shop; its expanded facilities include a foundry as well as furniture assembly and sign making processes.

While the products offer a unique view of nature and its beauty, the true identity of BSC is embodied in the employees. BSC has been very fortunate in assembling a talented group of artists. In addition to being great artists, they truly love the outdoors, wildlife and all the things that BSC products have come to represent.

The mission statement for BSC reflects how the firm embodies both the family nature of the firm and the love of its organization members for the outdoors. Marc Pierce has articulated the mission statement as "Big Sky Carvers is a team of highly motivated individuals dedicated to designing, creating and delivering products reflecting outdoor lifestyles to niche markets. Our strength lies in our ability to create win/win relationships with our customers, vendors and staff, resulting in a 'world class' model of excellence."

Existing Products

BSC is a group of people that share the common goal of providing a top of the line product with as much character as those who produce and purchase the product. The hope of the many master artists, designers, craftsmen and members of the workshop at BSC is to bring a little piece of the outdoors into the customer's home.

The company currently has seven major product lines that it markets. While all of these are sold under the BSC name, each line has its own type of pricing structure and distribution intensity based upon its target market. Many of the lines have begun as a single item or small group of items created by artists in the area. BSC has helped these artists to develop profitable products and market them nationally.

Wildlife Woodcarvings

This collection started in the tradition of the American Folk Art of decoy making and was the beginning of the BSC, but has grown to provide a great deal of options for those who have grown up as avid sportsmen. The items are produced by a workshop of artisans, crafting decorative decoys in the tradition of those before them. However this collection has expanded over the years to include several waterfowl editions, game fish, upland birds, songbirds and mammals.

The Wildlife Woodcarvings collection represents the upper level in quality and price for smaller woodcarvings in the industry. With prices ranging from sixty-nine dollars for very small items to almost five hundred dollars for larger items, there is as much parity in price as in selection.

These products are designed for people with outdoor lifestyles. Representing the very best that the industry has to offer in the wood sculpture market, with unparalleled quality, diversity and design. With the offerings of "limited edition" designs BSC increases the worldwide following of collectables and increases the desirability and value of the purchase as the items sell out.

Placement of this line is very important at BSC, with a target of mid to upscale gift/gallery stores and catalogs with a commitment to stocking inventory and display and visual merchandising. With a low to medium distribution density and medium to high price points, these products are a rarity in most stores.

Big Sky Bears and Friends

These bears, carved by chainsaw and created by the imagination of Jeff Fleming are more animated than the rest of the collections, thus they tend to appeal to a wide range of consumers throughout the market.

Big Sky Bears, as with the Wildlife Woodcarvings collection, tends to lean toward the higher price ranges and low distribution density. This collection also is rare and desirable. The prices fluctuate according to the size of the carving, starting at around fifty dollars for the smallest items to twelve hundred dollars for the Ben Table Bear.

These products are marketed to people who decorate or collect for an outdoor or lodge look in their home. These upscale carved bears and other animals have frequently been described as "cool" and "endearing." Collecting or decorating with Big Sky Bears makes people smile.

The William Herrick Collection

This collection started twenty-five years ago when William Herrick began to carve basswood. Beginning with his world famous Trout Table, then adding more tables as well as many other items over time, this collection has grown into one of the more popular collections at BSC.

With this collection consisting of large items such as tables, mirrors and cabinets, it is the most expensive collection that BSC offers. With high price points and low distribution density this collection falls into the same category as the Wildlife Woodcarvings and Big Sky Bears. Prices range from one hundred dollars for a candleholder to almost five thousand for a Round Troutstream Basswood Table.

Marketed to those with a deep appreciation for the outdoors, these reproductions of William Herrick's original woodcarvings represent BSC premium collection of exclusive designs of furniture and accessories. The presence of these items is considered a great source of pride and conversation among owners.

Meissenburg Designs

These handcrafted signs are of unique quality and design that far exceeds that of the rest of the market. Lloyd Meissenburg, the personal designer of this collection, is the leader in this field, showing a dedication to the old days of wood crafting. The production of both inside and outdoor signs is designed specifically to reflect the buyer personality.

The line of outdoor signs are for people wanting a high quality welcome sign reflecting their lifestyle or personality. These signs are the best three-dimensional personalized signs available. With a relatively expensive price and high distribution density, these signs follow the BSC pricing trend but are easier to find. Price ranges are approximately seventy to one hundred dollars.

The inside signs are marketed to those wanting to decorate their home or office with reminders of their life's passions. This collection offers a fun and decorative sign at a very reasonable price. With a medium to low price point (rare at BSC) these items are a great deal. Prices range from thirty-five dollars for a wisdom board to one hundred sixty dollars for a larger sign.

With a larger number of channels of distribution this collection is much easier to find than most BSC products. With the target placement of these items including, home & garden and general variety/hardware stores included with the usual channels of distribution used by BSC, distribution is much higher with these products.

Montana Bronze

Created by Brad Williams, these sculptures consisting of bronze, resin and pewter, appear almost identical to the much more expensive solid bronze sculptures. These limited edition sculptures all come with a certificate of authenticity for added value and desirability. These extremely lifelike sculptures are a true credit to the ability of their artists.

With prices ranging from fifty to three hundred dollars, there is a wide selection of items to fit almost any consumer. With medium to high price ranges and low to medium distribution these products are true collectors items.

This product line is designed for art collectors with outdoor lifestyles who are not necessarily buyers of real bronze sculptures. Montana Bronzes are near bronze sculptures with outstanding quality and design at reasonable prices. Collectors of Montana Bronzes get a piece of art for their home or office, which not only reflects their lifestyle and is a great value, but as editions sell out can increase in value.

Ducks Unlimited

Ducks Unlimited is a national organization that was begun by a group of waterfowl hunters in 1937 and whose goal is to save or restore the nations wetlands. Ninety percent of its current members are hunters whose participation in waterfowl hunting fuels their drive to give something back to the resources that make their outdoor experiences so enjoyable. Through the support of this sportsman constituency, DU has been able to conserve more than 10 million acres of habitat across North America-in the areas that are most important to ducks and geese.

The partnership between BCS and Ducks Unlimited (DU) was formed to raise money for DU and its cause. Selected to develop some designs that reflect the lifestyle of the DU supporter, BSC jumped at the chance to help a cause directly associated with their own lifestyle as outdoorsmen. This co-branded venture has been extremely successful for both BSC and DU, and continues to raise money to support wildlife habitats.

With medium price points and high distribution the hope is to raise as much as possible for DU, while pushing the BSC name. Prices range from one hundred to three hundred twenty dollars, determined primarily by the size of the item.

Produced and marketed especially for DU members and other people with outdoor lifestyles, the DU collection is a group of accessories reflecting the DU lifestyle. Owning DU accessories provides the buyer with a connection to that DU lifestyle through their décor, and supports DU's important conservation efforts.

Big Sky Home Accents

This collection consists of items that the owners and employees of BSC feel would appeal to their customers, but are not made by BSC. These products could come from a tiny village in Mexico, a workshop in Asia, or a small community in the low country of South Carolina. Low to medium price points and high to medium distribution, make this collection the most affordable of the BSC collections. Prices range from twenty-five to one hundred twenty-five dollars with a few products that may go as high as four hundred fifty dollars.

This product line, consisting of many items from different backgrounds, is directed to anyone who enjoys BSC products and an outdoor lifestyle. These are things that BSC employees enjoy and feel that their customers will as well.

The Distribution Channels

BSC uses a variety of different channels to sell their products; this variety has proved to be very successful throughout the life of the firm. By using so many different channels of distribution BSC has given itself a great deal of freedom and ability to reach many different markets within its industry.

Retail Stores

BSC owns and operates two retail stores which carry items from all the product lines and can order any item for a customer. One store is at the Mall of America and the other at their headquarters in Manhattan, Montana. These stores account for a very small percent of the yearly sales and also perform the duties of a showroom for soliciting larger clients such as catalogs and other forms of distribution.

Licensed Gallery Dealers

The licensed gallery dealers are a larger part of the sales picture. Currently there are over three hundred of these dealers that are licensed to sell BSC products (see table below). These dealers operate independently from BSC, and perform as separate entities within the same markets as BSC. Operating in the same way as any other store they purchase the products from BSC and then resell them for their own profit.

Catalog Distribution

All the various catalogs in which BSC products are featured constitutes the largest channel of distribution for its products. The ability to reach as many people as a catalog can is a great asset. With low costs and high circulation, the catalog market has allowed BSC to grow into an industry leader. Although BSC does not put out its own catalog, its products are featured in over forty major and regional specialty books that reach over forty million people every circulation cycle. With that type of opportunity for sales it is easy to see why it can be so successful.

Internet

The Internet has become an important tool in helping to support the sales of BSC products, but BSC does not sell on-line direct to consumers. Instead, the web site (www.bigskycarvers.com) provides information about its products to prospective customers and then will help direct them to the nearest licensed gallery dealer. With detailed explanations and descriptions of products and dealer information the Internet is a good "end consumer" driven support of the licensed gallery dealers distributing BSC products. In addition, retailers that would like to carry BSC products can provide contact information so that BSC can contact them and in the future BSC would like to use their web site as way for its retailers to place their orders electronically.

Conservation Groups

Alliances with conservation groups has been another successful channel of distribution for BSC. This method of product distribution not only helps the cause of the group but it increases circulation of the BSC name and products. This channel allows BSC to contribute to the conservation of the environment that it represents so well within its product. Currently over twenty major conservation groups and their member chapters use BSC products for fundraising. An example of how successful this channel can be is the partnership of BSC and Ducks Unlimited to help raise money to save, restore and manage wildlife habitats.

Profitability

BSC has been a profitable firm since shortly after Marc and his father founded it in 1980. The firm grew slowly during its early years, but growth in the last ten years has been much faster, largely due to the expanding product lines the firm produces and markets. While the firm is privately held and closely guards its financial information, it is widely recognized as a leader within its niche area within the home décor/gift industry.

Retail prices for merchandise in this industry commonly provide a fifty percent margin for the retailer. For example, if the retail price on a product is one hundred dollars, the retailer paid fifty dollars to the supplier for it. Thus, if a BSC product retails for one hundred dollars, BSC received fifty dollars for it and from that price must pay for all production costs, promotion, and overhead costs. It is not uncommon for the production costs to consume over fifty percent of the price of the product, so that ofthat fifty dollars BSC generally has less than twenty-five dollars to cover all promotion and overhead costs, and leave some type of profit. For many publicly traded firms in the home décor/gift industry the net profit margin ranges from eight to fourteen percent. It is also common for the lower priced retail products in this industry to produce a lower net profit margin and firms that market these products hope to make higher net profits through volume sales. While BSC is distributed nationwide, it is not carried in any of the larger discount or volume retailers for these products, and the firm emphasizes margin over volume in the sales of its products.

Promotion

The promotional efforts of BSC have largely been directed to two areas: point-of-purchase (POP) displays and personal selling. BSC recognizes that its products appeal to a small target market that is spread widely over the U.S. In fact, many of its products sell better in smaller, more rural markets where there is a larger percentage of the population that still hunt and fish. This wide and shallow distribution of the target market has always made the purchase of any type of mass media rather costly on a per exposure basis. In addition, Marc Pierce believes that advertising does not have the ability to truly represent the quality of the products that BSC markets. As a result, BSC has put a great deal of time and money into developing effective POP display items for its products. For example, a handmade, hand-painted decoy from BSC would have a display easel given to the licensed gallery dealer to put next to the product to hold a card (or number of cards) that talk about the particular species of waterfowl the decoy represents, the areas of the country where the bird can often be found, any interesting facts about the bird (such as geese mating for life), what type of wood was used in producing the product, and so on. BSC also has a number of special display units that it sells to its dealers to display the products at less than the manufacturing cost of the unit.

The second method of promotion that BSC employs is really in developing and maintaining reseller relations rather than sales from the end consumer. To help build these relationships BSC employs twelve major sales representative groups and over thirty-five sales people. In order to support these sales people BSC owns three permanent showrooms as well as six regional/representative showrooms and attends specialty and temporary shows throughout the year. BSC spends tens of thousands of dollars each year for these shows where the dealers come to see new products, make purchases, and find new vendor sources. The cost for attending these shows is expensive, but BSC feels that it is worth every penny it costs to make sure its dealers have a chance to view and purchase new products. It is also an important source for BSC in finding new dealers to represent its products, especially as the type of product lines increases and more market segments may be attracted to its products.

New Product Development

In the year 2002 BSC plans to expand their collections to include a number of new products and ideas. Not only will the existing collections be expanded, but new collections will make thenway into the BSC family.

The addition of new collections of stoneware, lamps and metal ware as well as the Hearthside Santa collection will bring new variety to BSC. These new products are created in the same image and with the same character as all previous collections produced by BSC.

Along with new products BSC is also changing its logo enough to differentiate the different product lines within the firm. The goal of BSC is to develop logos and brand marks to better communicate separation of the different collections.

With all these changes at BSC it is a very exciting time within the firm. However overshadowing all of these changes and improvements that are being made throughout BSC is a project with the National Audubon Society.

THE AUDUBON SONGBIRD COLLECTION

The National Audubon Society and BSC have worked on the development of a new BSC product line which would be used to raise money for the conservation of wildlife throughout North America. The product line would be called The Audubon Collection consisting of songbirds from different areas of North America.

This project provides some new opportunities for BSC, the expansion of global business and marketing to a different customer than that of the past. IfBSC goes ahead with this product line it will be the first time that BSC outsources the production of a product. The less expensive version of the collection will be made out of resin and produced in China. This new production method will allow BSC not only to experiment with outsourcing, but also with global business as BSC begins to expand to other markets around the world.

This product differs from the BSC products of the past. The items are less expensive than most BSC items. By offering a product consisting of resin BSC can sell these items for $79, far less than what is usually charged. However BSC is also offering the same birds, carved out of wood, in the traditional BSC fashion for those who have come to expect the best from BSC. This differentiation of products allows BSC to reach customers that usually would not buy BSC products due to the high price.

The Customer Profile

The customer that is targeted by this new partnership is one who sympathizes with what The Audubon Society is trying to do, protecting birds and other wildlife and the habitat that supports them. These products are designed for an outdoors person who doesn't want to see any further destruction of the environment. Many "birders" will take trips exotic or remote locations simply to see and hear special birds. However, the product is one that can appeal to people who venture no further than their backyard or the city park to enjoy the many songbirds that can be found in urban settings. It is very important to those who work with and for BSC to preserve the environment that they have grown so fond of over the years. The customer targeted is one who can recognize that goal and feel good about purchasing a product that helps the environment.

There will be two market segments that this product may appeal to. The resin birds costing $79 will allow those who don't want to spend much money on a wood carving to be able to purchase one of these items without guilt. The wood carved bird on the other hand, costing $200, allows those who have become collectors of BSC products over the years to purchase a product of the same quality as those purchased before.

Another important difference for this product is the increased focus on women as the target market for the product. The songbirds represent a more delicate, softer view of nature that may appeal to more women. Many of the BSC products are of larger animals such as deer or bear and most of the birds in the current collections represent game birds like ducks or pheasants. The songbirds are a way that BSC hopes to reach out to the wife of the sportsman. While women have purchased a number of BSC products in the past, the firm believes that these have frequently been gifts for the men in their lives. The songbirds are a way for BSC to extend their reach by having women buying BSC products for themselves.

The Product

The materials used to make the resin version of the songbirds in this collection are different than what is usually used by BSC. By using resin rather than wood it is hoped that the costs will be less and those savings in turn can be passed on to the customer. One thing that BSC is not sure of is how good the resin product will look in coming out of the factory. Up to this point all of the examples of the product that the BSC have been samples that have essentially been hand made. Once a contract with the factory is signed, a wooden model will been sent over. The factory will use the wood model to create a mold for the resin version. Only then will BSC be able to see actual production versions of the songbirds.

The production of this product is going to be outsourced to a factory in China. This method of production is necessary to keep the costs low enough to be able to sell them profitably for the projected price of $79. If the resin songbird were to be made in Montana, the labor cost of the BSC employees would significantly higher than from the factory in China. An additional benefit from outsourcing the production is that it will allow more time for the production of other collections in the BSC workshop.

The Price

The new Audubon resin songbirds will be priced lower than most other products from BSC. It is hoped that the lower price will play a significant role in helping to make this product line a success. By pricing this collection lower than most, BSC will be able to sell this collection in more channels than what is traditionally used. However, since this product will be sold as a means of generating funds for the Audubon Society, a portion of the retail price will go directly to the Society. While the exact amount has not yet been determined, there have been discussions regarding whether it should be a set amount or a percentage of the retail price. BSC would like it to be a percentage of the retail price (in the range of five to ten percent) and have the retailer send the money directly to the Society. The retailers would expect a lower wholesale price based upon the lowered revenue generated from each item. The Audubon Society, and most of the retailers that BSC has talked to about this project, feel that it would be better to have a set amount per item shipped and let BSC send it directly to the Society. This amount could then be put on the display information as "X amount of dollars from the sale of this product goes directly to support The Audubon Society." The amount for each item has been suggested by The Audubon Society and the retailers to be in the range of five to eight dollars in order to stimulate purchasing.

The Distribution

Another issue for BSC is the distribution of the product. The wooden version of the songbirds will undoubtedly get sales through the channels of distribution that BSC has developed over the years. This part of the product line will be viewed by these retailers as a routine product extension for them and they will simply have to decide if they have room to merchandise this new product.

The resin songbird will not necessarily be going through the same distributors. While there is no doubt that some of the current dealers will be happy to have a lower price point product to sell, many of the dealers pride themselves on dealing in only high quality and collectible products. The resin songbird will not fit in their product mix. But there may be a number of new dealers that might be attracted to this product as it would be the first product from BSC that would really fit within the price category that their customers have come to expect. The difficulty for BSC will really be in finding those new dealers and trying to convince them to carry more than just a very small portion of the total BSC product assortment.

A final issue associated with distribution would be the sales of the product through The Audubon Society. The Society would like to put the product line on its website and its literature that it sends out to its members. The Society would then order the products necessary to fill these orders from BSC. This method of distribution is similar to what occurs with the Ducks Unlimited products, but BSC has found that it is rather expensive to ship out a number of small orders and would rather have both groups direct their members to purchase through a licensed BSC dealer. This type of arrangement may be difficult for a new product like the resin songbirds where only a few or select dealers are carrying the resin songbird.

THE DECISION

Marc Pierce has to make the decision about whether or not to include The Audubon Society Collection for the next year's product assortment before he goes on vacation. He feels that while it is not a decision that will either make or break the company, it is one which represents some significant risks and opportunities:

It would give BSC a chance to gain experience with a new product material and new production facilities that are off-shore, however, it might also upset the current workforce who could view the new product line and production method as a threat to their jobs;

It would give BSC a new product line which might open doors to new dealers and new target markets, but it also might alienate some current dealers who could view the new product offering as a lowering of quality of the BSC products;

The pricing on the product leaves little room for error and if it does not generate enough volume it will probably not generate sufficient profit.

AuthorAffiliation

R. Sitki Karahan, Montana State University - Bozeman

Tim Christiansen, Montana State University - Bozeman

Subject: Wood products; Handicrafts; Success factors; Product development; Co-branding; Case studies

Location: United States--US

Company / organization: Name: Big Sky Carvers; NAICS: 321999

Classification: 7500: Product planning & development; 8630: Lumber & wood products industries; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 1

Pages: 103-115

Number of pages: 13

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 216272111

Document URL: http://search.proquest.com/docview/216272111?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

Document 100 of 100

SPORTS DE FRANCE, S.A.

Author: Smith, D K "Skip"; Chamorand, Claude

ProQuest document link

Abstract:

Bernard LaCrois is Special Assistant to Louis Verdun, Chairman of Sports de France. For the past 10 years, the company has been attempting to increase its revenues and profits by developing small retail sporting goods shops in city centers in France. Based on the company's inability to generate profits from the city center shops, Chairman Verdun has decided to terminate this initiative, and has assigned LaCrois responsibility for accomplishing this objective within the next 180 days. However, discussions with the retail consultant hired to help terminate this initiative have convinced LaCrois that one last attempt should be made to see whether the city center shops can be made profitable. Data and information in the case include: 1. description of the challenge faced by the company, 2. characteristics of the retail strategy which the company has been using for its city center shops, and 3. characteristics of the competitive situation.

Full text:

Headnote

CASE OVERVIEW

This case poses a dilemma faced by mature retail chains: how can the company continue to increase revenues when it can no longer grow (for environmental, financial, and/or legal reasons) by inserting clones of existing stores into new markets? The case begins by indicating that Sports de France, a major sporting goods retailer with outlets throughout suburban Europe, has decided to terminate its unsuccessful 10 year initiative to increase revenues and profits by introducing retail sporting goods shops in city centres in France. At the last minute, however, the experienced manager assigned to terminate the initiative finds reasons to believe that adoption of a new retail strategy for the city centre shops could save the project. The challenge for students is to develop a new and profitable retail strategy. The case is based on discussions conducted by the authors in France. The case is appropriate for undergraduates as well as students in MBA and Executive Development programs. It is designed to be taught in a 1.5 hour long class session, and is likely to require a couple of hours of preparation by students.

CASE SYNOPSIS

Bernard LaCrois is Special Assistant to Louis Verdun, Chairman of Sports de France. The company owns and successfully operates a chain of large sporting goods stores in suburban locations not only throughout France but also throughout Europe as well. For the past 10 years, the company has been attempting to increase its revenues and profits by developing small retail sporting goods shops in city centres in France. Each of these last 10 years, however, this city centre initiative has generated losses of approximately half a million dollars. Based on the company's inability to generate profits from the city centre shops, Chairman Verdun has decided to terminate this initiative, and has assigned LaCrois responsibility for accomplishing this objective within the next 180 days. However, discussions with the retail consultant hired to help terminate this initiative have convinced LaCrois that one last attempt should be made to see whether the city centre shops can be made profitable. Data and information in the case include:

1. Description of the challenge faced by the company.

2. On the company: Historical overview, current performance, and the business model underlying that performance.

3. Characteristics of the retail strategy which the company has been using for its city centre shops.

4. Characteristics of the competitive situation.

5. Information on the attitudes, shopping behaviors, and lifestyles of consumers living in city centres in France.

THE SITUATION

After a ten-year effort, Sports de France Chairman and owner Louis Verdun had announced his decision to terminate the company's City Centre Shops Project. As members of the management team packed up their notes and printouts, Verdun summoned Bernard LaCrois, special assistant to the Chairman, to give him instructions regarding the termination. Verdun's instructions were simple, and focused on three points: (1) LaCrois would be in command of the liquidation; (2) Verdun did not care how LaCrois executed the closure; and (3) Verdun wanted the City Centre Shops Project and the string of loses which it had generated over the previous ten years terminated within the next 180 days.

THE INDUSTRY

Global trade in leisure and sporting goods has increased dramatically, based on increased interest in sports from the French and many other nationalities. Over the last 25 years, the number of sport and leisure stores in France has doubled, and the number of employees working in such shops has quadrupled. The sector now employs 45,000 people (more than 2% of all retail employees), working in nearly 1 1 ,000 shops. On average, there is one sporting goods store in France for each 5,300 inhabitants. Over the last five years, sales turnover for this sector has increased 20%; during the same period, sales for all nonfood retailers grew only 10%.

While independent sporting goods shops still exist, sporting goods and apparel is a strongly concentrated industry. Worldwide, as indicated in Table 1 , the top 1 1 brands account for more than 2/3 of total sales.

In France, two giants (Sports de France and Go Sport) dominate the sector. Go Sport operates a chain of more than 100 sporting goods stores, mostly in France but also in Belgium and Poland. GO Sport's stores have shifted focus away from apparel sales, to selling and renting sporting equipment. The company markets well-known sports equipment names as well as its own brands of sporting goods under the "GO Sport" and "Wannabee" labels. French parent Rallye (a food retailer), which owns 70% of the company, plans to merge GO Sport with its sports shoe retailing subsidiary, called "Courir." Courir operates more than 130 stores. In France, Sports de France and Go Sport hold an increasing share of the sporting goods market. In this category, and as indicated in Table 2, specialty stores dominate other all other vendors of sporting goods.

SPORTING GOODS-RELATED BEHAVIORS AND ATTITUDES IN FRANCE

Ten years ago, the primary market would have been sportsmen in search of reliable and functional technical gear. Today, however, a third of French consumers practice sports at least once per week. Furthermore, many people today buy sporting goods to improve their physical well-being, their comfort, and/or their health. At 120 euros per capita, spending in France on sporting goods is higher than in any other country in Europe except Germany and Sweden. The percentages of these expenditures spent on sporting equipment, sporting apparel, and sporting footwear are 29%, 42%, and 22%, respectively. Part of the explanation for the fact that high percentages of sporting goods expenditures are for apparel and shoes is that consumers use these items not only for sport but for casual wear as well. In 1 996, sporting apparel and shoes in France represented a market of more than two billion dollars.

THE COMPANY AND ITS CITY CENTRE SHOP PROJECT

Thirty years ago, Sports de France (hence, SDF) launched the idea of large (7000 square meters) self-service retail sporting goods stores in suburban shopping malls in France. The basic idea was to offer a wide assortment of sporting equipment and sports-related apparel to the young adults and families living in suburban France. For these customers, typical shopping behaviors would include driving to the mall once a week, parking in the lots surrounding the store, making their purchases, and then driving themselves and their purchases home.

SDF' s "self-service large sporting goods stores" concept was successful, and the company grew rapidly, both in terms of revenues and profits and in terms of number of stores. However, the suburban customers targeted by the company were price-sensitive. For this reason, about 10 years after opening its first store, SDF began introducing its own private brand sporting equipment. These products were manufactured by third parties to specifications which SDF set at world-class levels and monitored intensively. Ultimately, the range of products manufactured by SDF and sold under one of its brand names included archery equipment, bicycles, fishing tackle, hiking and mountaineering gear, riding equipment, running shoes and clothing, team sport-related clothing and equipment (cricket, rugby, soccer), windsurfing clothing and equipment, etc. The products were manufactured not only in France and other European locations, but also in South America (Brazil and Mexico) and in Asia (Bangladesh, China, India, Korea, Japan, Taiwan, Thailand, and Vietnam).

For SDF, this private brand strategy had two important advantages: (1) It allowed the company to sell at lower prices than major sporting goods manufacturers such as Aididas, Solomon, and Nike; and (2) Under French law, only producers are allowed to advertise on national television. Because SDF was now selling its own private brand equipment, it was now allowed to advertise those brands on national television.

The private brands allowed SDF to offer its sporting goods customers very good value for money compared to national and/or international brands such as Aididas, Nike, and Solomon. Consequently, sales from existing stores grew rapidly. The company continued to add new locations, both in France and overseas. As it approached its 30th anniversary, SDF had more than 300 stores, approximately 2/3 of which were located in France. All but a few of the remainder were located elsewhere in Europe (specifically, Belgium, England, Germany, Italy, Netherlands, Portugal, and Spain). In recent years, total revenues from the stores have exceeded two billion dollars. Because its margins on the private brand goods are high, SDF has been highly profitable.

As indicated above, SDF' s "self-service large sporting goods store" concept has been highly successful. However, as the number of stores increased and the number of attractive suburban markets in Europe (and especially, in France) without a SDF store decreased, the company found it was becoming difficult to grow. For this reason (i.e., in an attempt to find new ways to grow its business), 10 years ago the company launched an initiative to put small shops (500 square meters) in town and city center locations. Initial characteristics of the City Centre Shops Project (hence, CCSP) initiative included:

1 . Except for sleeping bags and climbing ropes, the products carried in CCSP locations were limited to sports-related apparel such as SDF' s private brand ski jackets, jogging suits, swimming suits, etc. Management's rationale for this decision was that because many shoppers would be on foot (parking in city centres is difficult, and many city centre customers do not own a car), it would be difficult for CCSP customers to go home with heavy equipment such as golf clubs, skis, windsurfers, etc. Compared to the internationally-branded sporting goods equipment and clothing on display in competing city centre shops and stores, the product assortment on display in CCSP shops was not impressive.

2. Because the number of CCSP locations was small, promotional efforts used newspapers in local markets, instead of the national television used for the large suburban stores.

3. Other elements of the marketing strategy for the CCSP locations were similar to those used at SDF' s large suburban stores. Prices at the CCSP locations were the same as prices at SDF's suburban stores; in other words, CCSP prices were very low compared with prices at surrounding city centre retail shops. Levels of customer assistance, service, and staffing were similar at the CCSP locations as at SDF's selfservice suburban locations, that is, very low compared to the service available to other city centre shops.

Over the following ten years, SDF' s CCSP project lost half a million dollars each year. Ultimately, the executive in charge of the CCSP was fired, and (as indicated earlier) Bernard LaCrois, special assistant to the Chairman, was assigned the task of terminating the project. To help him fire CCSP staff and dispose of the CCSP properties which SDF had purchased or leased, LaCrois hired a consultant with many years experience in managing city centre retail stores in France. Over the next several days, LaCrois spent hours listening to the consultant's comments about the attitudes and behaviors of customers living in city centres in France. Comments made by the consultant included the following:

1. As indicated earlier, 75% of the French population lives in urban areas, so the retail potential of city centre shops could be huge. In short, the retail consultant confirmed the fact that SDF' s interest in using CCSP locations to grow the company was in fact a reasonable idea.

2. The assumption that only old people (that is, grandparents) live in city centres is not correct. While city centres in France do include old people, there are young families living there as well, many with children. Of course, city centres in university towns have large numbers of students.

3. Adults (both singles and married couples, with or without children) and children living in city centres tend to be busy. They also tend to be on predictable schedules. Older consumers tend to go out and visit shops between 9:00- 1 0:00 am, after having breakfast. Working adults living in French city centres tend to be free for lunch from 1:00-2:00 pm each day. Children going to school in city centres tend to be released from school for lunch from 1 1 :30 am- 12:30 pm. Mothers not working outside the home are likely to spend the time from 4:30-5:00 pm (just before children get out of school) shopping. The 30 minutes just before dinner (6:30-7:00 pm) is a time when both adults and children (including teenagers) are likely to shop. While customers patronizing suburban locations are likely to do one large shopping trip each week, customers in city centre locations may shop several times each day, making small purchases each time.

4. Because city centre customers are likely to make multiple small purchases each day, shop staff who are both knowledgeable on the one hand and able and willing to build personal relationships with customers on the other can be very important. In other words, close bonds between shop staff and customers can impact powerfully on the performance of retail shops located in city centres.

5. Older customers in France (both men and women) tend to favor blue and/or black colors. Children and teenagers prefer brighter colors. As for young adults (both married and unmarried), research conducted by SDF suggests that young women are far more likely to patronize city centre shops than young men. SDF research also indicates that the young women patronizing city centre shops are looking for clothing that is not only fashionable, colorful, and correct-sized, but also has the technical characteristics (for example, waterproof, breathable, etc.) of serious outdoor equipment.

6. For big purchases, city centre customers are likely to shop the suburbs during weekends. However, city centre customers are also likely to come to the city centre shops during the week to see what sorts of products and services are available. In other words, during the week these consumers may collect information for their upcoming large weekend purchases in the suburbs.

7. For city centre customers, price comparisons are likely to be based on the prices they see in other city centre shops. For this reason, special promotions by city centre shops can be very effective. Most city centre shops carry national and/or international brand names (Aididas, Solomon, Nike, etc.). City centre shop patrons appear to have strong preferences for these national and/or international brands, as opposed to the private brand products which SDF has been selling successfully in its suburban stores.

THE CHALLENGE

Assume you are Bernard LaCrois. Based on what your consultant has told you about the attitudes and behaviors of consumers living in city centres in France, you have decided to make one last quick attempt to achieve success with the CCSP project. What will you do, and why?

AuthorAffiliation

D.K. "Skip" Smith, Southeast Missouri State University

Claude Chamorand, University of Law, Economies, and Sciences of Aix

Subject: Retail stores; Sporting goods; Market strategy; Profitability; Case studies

Location: France

Classification: 7000: Marketing; 8390: Retailing industry; 9175: Western Europe; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 10

Issue: 1

Pages: 123-130

Number of pages: 8

Publication year: 2004

Publication date: 2004

Year: 2004

Publisher: Jordan Whitney Enterprises, Inc

Place of publication: Arden

Country of publication: United States

Publication subject: Business And Economics

ISSN: 10784950

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 216297463

Document URL: http://search.proquest.com/docview/216297463?accountid=38610

Last updated: 2013-09-16

Database: ABI/INFORM Complete

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