Document 1 of 100

Cloud computing: items professional firms consider in selecting data storage firms

Author: Lewis, Stanley X; Burks, Eddy J; King, Ernest W; Smolinski, Carl

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Abstract:

This paper reports the results of a portion of an ongoing effort to study professional accounting firms in the U. S. All public accounting firms have certain legal and ethical obligations to protect their clients' interests and records (including electronic ones). However, they are also faced with the impact of changing technology. The research reported in this study describes the experiences of a CPA firm as it attempts to migrate from a traditional networked environment to a cloud computing environment which will also permit it to concurrently achieve success in meeting other firm goals including the CPA firm's continued viability and growth. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

One professional firm, identified in this research only as the CPA Firm, [CPAF] has undertaken strategic planning efforts including that for migrating to cloud computing to address issues of network server costs, file sharing through physical locations, reduction of traditional paper-based record management systems, and disaster recovery. The firm believes the migration will result in reduced operating costs, increased operating flexibility, a move toward a virtual office environment and allow for a quicker recovery from any disaster including disasters as experienced with Hurricane Katrina.

REVIEW OF LITERATURE

Introduced in the 1990s by IBM was the concept of e-business whereby the features of the Internet and the needs of business were linked together to meet the developing needs to replace existing business data exchange systems such as electronic-data-interchange or EDI. Whether known as web-enabled technology, web enabled application, on-Demand computing, web services or utility computing, Cloud Computing has advanced in sophistication and usage (O'Sullivan, 2009). In 2008 Kennedy provided an excellent summary of cloud computing:

"The term cloud is used because in this system, which includes things like virtual servers, it actually becomes a little difficult to point to exactly where all your data is being stored or managed. It's definitely not in your firm's server room. You also do not install the software you use on your own computer. It's accessible on a website through your browser (Kennedy, 2009)."

A review of the literature related to cloud computing provides the benchmarking needed by professional firms, whether public accounting, legal, or medical firms, to evaluate cloud computing and its business benefits to the practice. In 2009 Murphy and Samir described the impact that decline in core revenues generated by network service providers could be offset partially by migrating to web-enabled services (Murphy, 2009). In 2009 Ho reported the results of an IDC survey of the Asian Pacific region companies in which 11% report cloud computing is currently being used and another 41% were using the results of such applications and/or evaluating its use. The study results indicate that cloud computing services will grow to $42 billion by 2012 (Ho, 2009). Thus, one is able to surmise that the trend is from traditional network services to web-enabled services as demand, business and personal, changes the nature of services.

O'Sullivan described the benefits to businesses that mirror the decline by the network service providers as four critical business considerations: obtaining needed services at a lower cost, minimize or avoid capital expenditures, avoid disruptions of critical business activities, and reduce or avoid significant consulting and implementation fees (O'Sullivan, 2009). The dependence of individuals on technology with a merging of social and business uses into a common technology style was described by Orange in her study of a potential emerging trend of mining the data found in "data clouds" that are rapidly becoming commonplace for social and business activities (Orange, 2009).

In 2009 Cohen provided a descriptive structure for cloud computing options available to businesses: a) The Public Cloud or Internet that is an open, publicly accessible environment and external to the business and where computing resources, services, and applications are available from third-party service providers typically through a subscription and/or use-on-demand basis or charge with a firewall feature provided by the service provider. b) The Private Cloud or a proprietary developed (customized) restricted access environment with a firewall feature provided and maintained by the business. c) The Hybrid Cloud or a combination of the Public Cloud and Private Cloud options with integrates infrastructure features to maximize the access, security, and minimize resource costs (Cohen, 2009). In 2008 Enterprise Innovation described the trend toward cloud computing at its website as a return to a centralized computing model with simpler management, faster services and lower costs whereby businesses are able to procure technology, hardware and software, via the Internet from a pool either provided by a single service provider or multiple-providers (Chan, 2008).

The foundation of cloud computing is found in the use of interactive, collaborative, easyto- use web tools commonly known as Web 2.0 applications. As Cunningham and Wilkins state Web 2.0 applications have the potential to eliminate or at least significantly reduce the importance of traditional record management for business users (Cunningham, 2009). One key driver of the migration to cloud computing appears to be based upon economics in the form of cost consideration as documented in the network upgrade project at Cardinal Capital in which it determined that aging network servers could be upgraded for a cost of $320,000 or the company could migrate to cloud computing at a cost of $40,200 for over 95 percent of the server architecture (Thomas, 2009). The pros and cons of cloud computing have been discussed by Chan as an effective tool in leveling the playing field between large and small companies and thus effectively remove technology costs as a factor in competition as well as merging social usage with business usage (Chan, 2009).

The negative considerations of cloud computing appear to be centered around security over data and maintaining the integrity of corporate data. In a survey of cloud computing issues Hammond provides two views of these concerns: a) where's the data stored? b) users must migrate their applications and data to third parties' platform and in essence lose control over their applications (Hammond, 2008). Dzubeck further defines the negative considerations by expanding Hammond's views into five areas of concerns: a) Security, b) Performance, c) Management, d) Governance and Regulatory Compliance, and e) Financial (Dzubeck, 2008). In 2009 Robertson described the risks related to cloud computing as: a) Testing the risk of the provider, b) Establishing a level of control over your data locations, c) Reach an agreement about data extraction and code copy-options to insure you can get your data back out. d) Understand the provider's backup/restore capability and make sure you have a plan for change when there is a vendor failure as well as a separate backup of company data, e) Security from external parties that ensure the level of security over company data that you expect from in-house services (Robertson, 2009). The standardization of security over cloud computing platforms should meet the challenges of a) Web application security and intrusion prevention, b) Anti-malware and messaging security screening procedures, and c) UTM (Unified Threat Management) security considerations (Schwartz, 2008).

The CPA firm [CPAF] used as the basis for this case study is considered a full-service public accounting firm. The CPAF has a five -year strategic plan of being fully operational as a regional firm with offices located the small- and mid-size cities targeting businesses and not-forprofit organizations. The workload of the office is measured in terms of billable hours; rather than attempting to measured the firm in terms of the number of clients. Three clients serviced by the firm illustrate the complexity of coordinating the activities within the CPAF. One client is an independent oil and gas entrepreneur that operates over an expanded region which may involve operations in multi-states when exploration is active. A second client is a construction company that has crews operating in four states on a weekly basis. A final illustration is a client who is considering a relocation of his business and personal residence to Canada.

There is an exponential change in the data requirements, storage and retrieval for accounting and tax services with the addition or deletion of new clients to the existing client list. A concurrent change is that of administering a database to permit the firm to manage the required coordination between separate accountants working independently but for the same client. The firm's workforce is made up of partners, non-partner professionals (accounting seniors and juniors) and various other hourly personnel. The firm currently operates offices in locations within multiple states.

In a recent partner retreat six issues were identified as priority items to achieve the goals of the five-year strategic plan which must be addressed within the next two years if the firm wants to have success in its five-year plan, listed in Table 1 (Appendix). The CPAF partners agreed that a migration to cloud computing will result in reduced operating costs, increased operating flexibility, a move toward a virtual office environment connected "in the clouds" that will permit greater flexibility for all personnel in the firm as well as providing for a quicker recovery from any disaster including the one experienced with Hurricane Katrina as they move toward implementation of their five-year strategic plan.

The CPA Firm (CPAF) partners recognized within the past several years that a paper intensive environment had resulted in a firm-wide system that was in danger of collapse and that there existed a need to reexamine the parameters of the firm's organizational structure as needs of individuals, partners, professional staffmembers, and non-professional staffhave evolved in a technology-changed world. Change was necessary to react to internal factors of the CPAF - the number of employees that use multiple technologies is 100%, a majority of the partners and professional staffhave a desire to be employed with a flexible work schedule that permits them to address the needs of aging parents and other family members now residing in an increasingly dispersed geographical area, the increase in clients that are migrating to other locations due to the economic changes occurring within the nation. Thus, the partners decided to address these issues within the context of how does a firm continue to retain professional and non-professional employees as well as partner retention while individuals make decisions related to their own family situation. There have been some limited discussions concerning the costs of personnel leaving the CPAF to move to other geographic areas of the nation resulting in the loss of experienced professionals. One strategic concern for the CPAF is how to operate efficiently while retaining as many key employees as possible with the least cost to the firm. The firm will need to decide how many of the departing employees should be replaced, and if replaced, replaced by a person of what level of experience; can key employees be retained through the use of technology?

During the partners retreat a senior partner was assigned the specific task of developing implementation actions for each of the six strategic issues identified by the partners and the related technology mix that would address meet the needs of the firm. This charge is viewed by the partners as one that must be successful in a two year period for the firm to be successful in meeting the strategic goals to (1) to improve the management of the CPAF processes and work (data) flow within the firm's system and (2) to undertake implementation actions insure the firm's continued growth and success by improving cost efficiencies through better usage of technology described in its five-year strategic plan.

The research group (authors of the study) used the results of an interview of the senior partner of the CPAF as the basis to the planning and implementation project for a typical CPAF firm as it addresses issues by considering a migration to cloud computing.

STRATEGIC MIGRATION TO THE CLOUDS

The CPAF originally had self-contained computer-based information system housed internally in each of the physical locations of the firm. As growth of the CPAF occurred the firm added a part-time, consulting-in-nature IT support that continues today. Initially under the guidance of the IT consultant the firm's data was backed up on a periodic basis at each location and consistent with the partnership agreement clause governing the level of practice independence between partners. However, no uniform, comprehensive firm backup procedure existed that provided the integrated backup and file sharing-exchange that was effective as new physical locations were added. Rather the IT consultant simply implemented common sense and applied what experience had shown was the minimum service the firm needed. In short, simple use of backup tapes and disks as determined informally by the IT consultant as his time permitted and as decided by the managing partners at the different locations.

However, as the CPAF continued to grow the individual office partners-in-charge began to discuss a uniform, comprehensive plan for file sharing, exchange, and backup; however, the plan remained localized where the services were primarily provided to specific clients. In short, each location was viewed as being basically an independent operation with data (record) management housed locally, an easy plan to manage the merger of practices and addition of professional and non-professional staff. Some efforts were made to store duplicate copies of computerized files in offsite locations separate from where the where the master copies were located.

Experience proved to be a lesson learned. The offices of the firm are located in an area of the U. S. that is prone to hurricanes. While the offices are not located on the coast hurricane hardware and file loses has occurred within the firm and the partners learned from experience what they had been told by the IT consultant that offsite storage was the best course of action when considering disruptions and damage from natural and technology-based disasters. Thus a backup of computerized records with offsite storage became the plan for several years but with no collective decision by all partners due to cost considerations.

There has been also some, even though limited, discussion of personnel leaving to move to other geographic areas of the nation resulting in the loss of experienced professionals. These experiences formed the core of the discussions during the partners' retreat - how to operate with efficiency while addressing the retention issue of key employees with the least cost to the firm.

The senior partner, upon being charged with the responsibility to develop and implement actions for each of the six strategic issues identified by the partners and the related technology mix that would address meet the goals of the firm, met to discuss these actions with members of the research group and separately the IT consultant. The senior partner provided material for the group's use in exchange for input and advice from the research group on his fact-gathering efforts to determine the specific tasks, costs, and benefits to the CPAF in order to address and reach its strategic goals. Additionally, the individual partners and senior professional staffduring the CPAF effort were included in the discussion about alternatives and the impact on specific job requirements. The resulting plan was drafted and currently is in circulation to partners and key professional and non-professional staffmembers, see Table 2 (Appendix).

Address issues of increasing network server costs

The IT consultant provided an estimated cost range, excluding ongoing administration and upgrading, of between $35,000 and $50,000 to install, configure and deploy a network environment which would address the immediate needs related to migrating from the current independent location networks to a single network for multiple locations. An additional annual estimate of $40,000 to $60,000 for ongoing administration, performance monitoring and tuning work would also be required. The senior partner did some review of a study completed by the Crimson Consulting Group in 2005 and believes the estimated costs are likely lower than what actual costs will be once CPAF growth is added to the network needs (Tkach, 2005). His concern about this being the action for the firm to undertake was that the firm would be establishing a network environment that could prove costly to the partners and require a full time in-house IT staff. An option that the partners have expressed concerns about since their experience with clients is that an in-house IT area becomes a cost center rather than a profit center and outsourcing remains a less expensive option.

File sharing and exchanges between physical locations

The partners recognized that the firm had shifted to increasingly having both professional and non-professional staffwork at multiple locations within a metro area and thus had unconsciously begun to migrate from a brick-and-mortar view of the firm. Further, the partners recognized that the sharing and availability of client and firm files had become a problem that simple storage devices such as memory sticks, portable hard drives, etc. worked reasonably well but perhaps a firm-wide network was necessary. However, as the partners discussed the alternative solutions they raised the question, "why can we not store the data files somewhere on the Internet where everyone have access to them when needed and not pay for an expensive network upgrade that will be obsolete in a couple of years?" The senior partner estimated that such an expansion by the CPAF into additional states and perhaps countries the cost to establish networked new physical offices would likely add an additional annual $10,000 for each new location in terms of networking costs, a cost that is not desired by the partners.

Eliminating the restrictions inherent in a structure

One partner works around her family which includes a spouse on active duty and two young children. Her work is completed on time; however, often work is done at midnight and sent to others via email. To expect her to be at work when her spouse is overseas and her children need her at home after school is an unreasonable expectation, one that the other partners agree should not be made. An approach that allows the partner to maximize her schedule while contributing to the firm should be encouraged. A non-professional that has been a long-time, valued employee of the firm is experiencing the time constraints related to an elderly parent with chronic health issues. The partners agree that some approach is needed to keep this employee fully employed and retained by the firm. In both examples provided by the senior partner in discussion with the research group he emphasized that the partners were unanimous that the timely completion of work is the priority and not the time period in which the work is performed or even where it is performed.

Reduction of traditional paper-based record management systems

"Going green" is a good goal and meets the personal goals of the partners in the firm. As the senior partner stated to the research group "going green makes sense as a business decision. Any effort that reduces the increasing stacks of paper that we are being buried under in this firm is good. I am not going to tell you how much our annual costs are but it is amazing how much we spend on paper, printer toner, etc. I could go on a month's vacation overseas just on the cost of paper alone."

Recognizing changes in the nature of the workplace

"If our firm can eliminate the requirements that everyone show up at 8 a.m. each day and leave around 5 p.m. we can have a very happy workforce. I'm old school and believe in being here at 7 a.m. ready to work, but as I get older I do like to leave early. But we have several young employees that can't seem to get moving until mid-morning but have no problem staying until late night to get their work completed. Flex-time, variable work schedules - whatever is needed to get the work done. Heck, I even like coming in at 7 a.m. knowing staffwork is on my computer ready for me. So if they worked until 9 p.m. I don't really care if what I need is there for me. We need actual billable time and time worked, but when and how it is done, well that's changing in today's world. Hate to say it, but it is changing."

Security

The senior partner stressed that security, controlled access to all client and firm files and documents, protection of client information, identity theft, disaster recovery, and compliance with all professional and regulatory requirements were critical to the CPAF's success. He shared the evaluation criteria he located doing a search of the Internet that he would use from the website "Top Ten Review" which included criteria that are important to the firm:

* Security - multi-level and device specific

* Storage space/price

* Ability to expand storage space or have unlimited capacity

* Users ease of use

* Help/support - technical, telephone, email, online chat, tutorials, user manual (guide), user forums, FAQ

* User able to view specifications

* User able to view screenshots

* User features

* User remote and mobile access

* Private file sharing

* Public file sharing

* Scheduled backup

* File search ability

* Drag and drop features

* Accounts (folders) and sub-accounts (folders)

* SSL encryption

* Password protected (Online Storage Services Review, 2010)

The CPAF senior partner's initial estimate is that the firm initially can migrate to cloud computing for less than $5,000 in annual fees and charges, much less than the estimated costs for upgrades to the existing networked environment at the individual locations. When asked the senior partner declined to name the vendor selected, saying, "Let's wait until we get this working and then we will walk you through it and give a demonstration." The senior partner has circulated a request to firm partners requesting input on the folder-file-client identification structure since it will need to be uniform in detail for common storage. The initial input from two partners is they have similar yet different folders and a file-naming style. These will have to be made uniform prior to any uploading of firm and client files into the online storage system.

The senior partner has established an implementation plan that encourages each location to begin to upload current files effective January 21, 2010. The firm has been working on the plan to identify procedures to transfer stored files in a manner that will denote the latest draftor updated file but yet retain the prior copy for two update cycles. As the senior partner described it, "I learned in college forty years ago that we have backups to our backups and to use the grandfather-father-son concept. In my office we have done that since I have been partner; however, some of the younger ones don't think it is important. They will have to adapt whether they like it or not." The migration toward a more virtual office environment connected "in the clouds" permitting greater flexibility for all personnel in the firm as well as providing for a quicker recovery from any disaster has begun for the CPAF.

The IT consultant has been handed the task to facilitate the training of the nonprofessional stafffirst since they will be critical when the professionals ask for assistance. A series of demonstrations of the features of the cloud computing system have been scheduled for the various locations in early January 2010. Members of the research group have been invited to attend. The conversion of daily backup, of all databases and other files at remote sites to the online storage system, are to be handled by the IT consultant and through the 2010 tax season the existing backup at the local sites will continue. The senior partner indicated that his experience related to system conversions with clients that parallel processing until everyone is the best and the firm cannot run a risk during tax season of tax being lost. While this occurs it is estimated that additional IT billings and overtime for non-professional staffwill be incurred but are unavoidable costs.

The IT consultant recommended plans for the CPAF which addressed scheduling and needed plans to continue to migrate to online storage all records (files) that are not currently in electronic format and the effort that will be needed within the clerical staffto scan archived paper-based files based upon priorities established by the in-charge partner at each physical location. The IT consultant is to monitor the storage capacity of the online storage system and inform the senior partner when additional storage capacity needs to be arranged.

The CPAF contacted vendors that provided three basic software features for the firm: 1) general ledger system, 2) tax system, and 3) website hosting. From each vendor the firm obtained costs, capacity, maintenance, backup, security, and storage information. The CPAF declined to provide the details of those proposals.

The partners selected the alternative offered by the website hosting company to add cloud computing to its website hosting service which will allow it to address the basic issues raised in their deliberations of how to reduce traditional paper workflows, adjust to the changing nature of the workplace, maintain security over confidential client and firm data, and manage cost. The website host company had recently begun to offer cloud computing data storage capacity to its service options. The vendors for general ledger systems and tax services have begun to plan to provide such features but were not ready to do such when the partners wanted to finalize a decision.

Implementation became a four step plan of action to be completed by the CPAF. First, a change in the contract with the webhost vendor to add the cloud computing capability while having the anticipated increase in storage, usage and transmission capacity. Second, have the IT consultant and senior partner establish designed (assigned) controlled (encrypted security) data storage locations for all individual clients and firm data that must be available for staffand partners; and upload the data to the proper location. Third, train staffon usage, security control changes, and documentation requirements. Fourth, train clients on usage and address questions raised by them on security related to privacy and confidentiality concerns. Implementation results are:

* Contractual change - contract change and effective within one month.

* Designed data storage structure - senior partner and consultant met and created the security and documentation structure to be used. Effective the week after the webhost contract changes were implemented.

* Stafftraining - partners met with staffand went through the changes and the data storage structure. One day was devoted to stafftraining. Implemented effective immediately. Staffcurrently using cloud computing features and migrating client files to the cloud computing storage location.

* Client training - will be done on a client-by-client basis each time firm staffinteracts with a client.

CONCLUSIONS

An unanticipated opportunity to arose study a CPA firm's strategic planning to migrate to an online storage and retrieval system and collect data about the successes (and failures) when the firm completed planning activities, decision making, and began implementation. The changes occurring in data storage and cloud computing are rapidly being considered by CPA firms. The firm used in the research study was able to easily migrate to cloud computing with coordinated efforts by a vendor company to meet its strategic goals. This case study allowed researchers to understand the decision making efforts within a professional firm about its strategic goals related to technology usage to address issues related to traditional paper-based activities, a changing workforce environment, and continue a level of data security that is a must for the firm.

Subject: Cloud computing; Accounting firms; Information storage; Technological change; Case studies

Location: United States--US

Classification: 9130: Experiment/theoretical treatment; 8305: Professional services not elsewhere classified; 5220: Information technology management; 9190: United States

Publication title: Journal of Case Research in Business and Economics

Volume: 4

Pages: 1-12

Number of pages: 12

Publication year: 2012

Publication date: Jul 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1034969509

Document URL: http://search.proquest.com/docview/1034969509?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Sep 2012

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 2 of 100

An entrepreneurial decision: What if the market moves away from you?

Author: Dickinson, J Barry

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Abstract:

This case depicts a real entrepreneurial company and reveals some of the challenges faced by its founders. The small, closely held, C-corporation is facing a dilemma. By all accounts, the firm is successful: after nine years in operation, it has never had an unprofitable year; its gross revenues have grown nearly every year; it has reached $7 million in sales and employs over fifty; some of its customers hail from the Fortune 100. However, the technology industry in which the firm competes (repair and professional services for rugged mobile computer devices) has evolved dramatically. The firm succeeded by deploying a niche strategy. It provides services focused on only one manufacturer, who dominated the industry during the firm's early years. However, new entrants into the market have supplanted the original dominant manufacturer. The devices have evolved from being very manufacturer-specific to becoming virtually plug-and-play with other manufacturers' devices. Finally, the price of the hardware has contracted by well over fifty percent. At the present price levels, covering equipment with expensive, post-warranty service contracts makes less economical sense. Following the firm's annual strategic planning meeting, the owners can "see the writing on the wall." They must make a decision to preserve the equity that they have created in the corporation. The firm is facing a "leaky bucket" problem and its options are limited. Is it time to bail out of the ship? The case ends by asking the reader to make the decision for the owners. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Interactive Services Group, Inc. (ISG) (www.isg-service.com) specializes in mobile device repair and other related professional services. In fact, the firm is so specialized that it only repairs mobile devices manufactured by ONE company named Intermec Technologies (www.intermec.com). Intermec is a $1.0 billion manufacturer of mobile devices used for supply chain management, asset management, and field workforce management. The firm is also a leader in the radio frequency identification market with approximately seventy-five patents (Taghaboni-Dutta, A. Trappey, C. Trappey and Wu, 2009). As of 2003, ISG employed approximately fifty full time employees, had sales that exceeded $(US) 7.0 million as shown in Figure 1 (Appendix A), and had been in business for ten years. By all accounts the firm was very successful. However, the owners found themselves facing an important decision. They had just finished the 2003 annual strategic planning meeting. The owners conducted these meetings every year since the inception of the firm. It afforded them the opportunity to gather important input from the staff, reflect on developments that occurred during prior year, and establish a plan for the future. Part of the process is to conduct a "SWOT" analysis of the firm and its operating environment. A SWOT analysis is undertaken to determine the strategic direction of a firm (Karadakis, Kaplanidou and Karlis, 2010). The SWOT analysis examines the external threats and opportunities facing a firm and the internal strengths and weakness that define it. ISG gathered this data annually from many of its employees, partners, board members, and other key stakeholders. Once the information is gathered and consolidated, the owners review it, and use it as the basis for the formal annual strategic plan update. Interpreting input from so many people is similar to reading tea leaves. This year's interpretation of the tea leaves signaled a message of impending doom.

THE FORMING OF THE ENTREPRENEURIAL ENTERPRISE

ISG opened its doors for business in the first quarter of 1995. The firm was started by a father and son pair, Barry and JB Dickinson, respectively. Barry had worked in the computer repair business for nearly his entire professional career. When he began working in the industry, computers used punch cards and magnetic tapes to store information (see Yonck 2010). That was a LONG time ago! But he remained in the industry and continued to repair and maintain computers, and related technology, as the technology evolved. He worked for some of the most well-known computer manufacturers in the world including Honeywell, Okidata, and Hewlett Packard. His most recent corporate position was as regional service center manager with Intermec (then Norand Corp.). Barry's tenure with Intermec lasted approximately twelve years. In 1994, Barry unexpectedly found himself without a job. Intermec decided to consolidate all of its regional service centers into one main plant in the Midwest. Barry was given the opportunity to move to the Midwest and take a management position-of the night shift! He declined and started to investigate his options. Being in his mid-fifties, he was concerned about finding a new position with a new employer. Research certainly bears out his concern as up to 15% of older job seekers become discouraged workers and never find suitable employment (Maetas and Li, 2006).

Perhaps fortuitously, his son, JB, had just completed a Masters of Business (MBA) program in 1994. JB was in his mid-thirties at the time. Prior to, and during, his MBA program, he owned and operated a small business that helped pay the bills while he finished his degree. He had always believed in education and that having an MBA would improve his management skills and entrepreneurial spirit (Zhang and Yang, 2006). However, he decided to take a bit of a detour following the completion of his MBA. He decided to enter a doctoral program in business at a local university in the fall. This move would provide a deeper understanding of business, provide a sound educational foundation for the future, and allow him flexibility should he decide to move into teaching in the future (Enders, 2002). However, at the same time, he was very concerned about his father's situation and did not want to see him have to resurrect his career. Research indicates that his prospects were not particularly good (Sterns and Miklos, 2002). JB was determined to assist him in any way possible. Since his doctoral program and small business would not consume all of his time, he had could help his father pick up the pieces. Research indicated that one can manage both work and family obligations if commitment is high (Berg, Kalleberg, and Appelbaum, 2003).

JB approached his father with an idea: Why not start a business doing the same thing Barry had been doing for the last twelve years, repairing Intermec devices for end users? The only new wrinkle would be he would be doing it in competition with Intermec for service customers. Barry had already received calls from former customers asking him what they should do, as well as former employees. The only concern was Barry's non-compete agreement with Intermec. Some basic research indicated the lack of a time limit leftthe document virtually unenforceable (Vermeer and Johnson, 2004). JB verified this suspicion with a visit to a local labor attorney. Feeling confident that the non-compete agreement would not be a hindrance, they felt confident they could work together, bringing different capabilities to the table. Moreover, JB knew that partnerships were much more likely to succeed than sole proprietorships (Duchesneau and Gartner, 2002).

As they talked, they realized that there were several compelling reasons to start this business:

* There were very few competitors in the market. Almost all of the companies that bought Intermec devices just used Intermec for post-warranty service. There were only a handful of independent service organizations in the mobile device market, none of whom could repair Intermec devices. The new, prospective company would compete directly only with Intermec. JB knew that understanding the competition within an industry was a key ingredient in increasing the probability of success (Porter, 1980).

* Barry had an excellent relationship with his former customers and an excellent reputation in the service industry. Research indicates that reputation is correlated highly with customer perceived value and the new firm hoped to leverage Barry's reputation with his former customers (Cretu and Brodie, 2005).

* JB had experience operating a business and knew what was necessary to improve the probability of success. He also was very adept at conducting research which would be a key success factor in building a reliable supply chain, locating vendors, identifying prospective customers, and determining competitive actions. The new partners viewed the development of an effective supply chain as a critical issue for success for the new firm (Arend and Wisner, 2005).

* Barry had deep relationships with a broad network of mobile device market salesmen, suppliers, vendors, resellers, and potential employees. He also had access to a substantial supply of parts and equipment, schematics, engineering changes, customer lists, and other technical documents-all of which Intermec had instructed him to discard when he closed his office. The company had no interest in his inventory.

The two talked over the next few weeks and decided to investigate the idea further. JB began to put a strategic marketing plan together to ensure they were not missing anything and to develop a plan of action. JB knew that the development of a formal strategic plan was important for the long-term success of the firm (Berry, 1998). Once the plan was complete, along with a skeleton pro forma financial statement, they discussed it with several business leaders whose opinions they valued. Virtually everyone agreed it certainly looked like a good business concept and had a good chance for success. JB assembled a detailed business plan, including a series of five-year pro-forma financial statements. The Year 1 income statement pro-forma projected gross sales of $250,000, which would result in a profitable initial year. They decided to move ahead with the plan. Barry and JB began talking to potential employees (Barry's former technicians), lining up vendors and suppliers, acquired leased office space, and putting the marketing plan in action (Hellman, 2002).

GETTING OFF THE GROUND

Once everything was in place, Barry and JB began the process of drumming up business. Since they were selling ISG repair services to other companies, they were squarely in the business-to-business market (Reid and Plank, 2000). Therefore, they relied heavily on personal sales as the primary form of promotion. Personal selling is the best way to deploy a relationship marketing strategy in business markets (Weitz and Bradford, 1999). The primary target market, initially at least, was former customers of Barry while he was employed at Intermec. He knew they would not be happy to have to send their equipment half way across the country for repair instead of simply dropping them offat his office (Boyne, 1998). One of the first prospects they approached was a former, long-time customer with offices five minutes from the new ISG service center. This former customer was in the softdrink bottling industry and used approximately 500 mobile computers, printers, and other peripherals. If ISG could win even a percentage of this business, it would be a fantastic initial customer. Barry knew the contact at the bottler well and they had a great rapport. A meeting was arranged and Barry and JB told the ISG story. In response, the bottler said, "I have about 50 devices coming offwarranty in a couple of months. I will notify Intermec that I don't want them rolled over to our standing post-warranty service contract. I will award the service contract on those devices to your company and we will see how well you do." The prospect knew that one way to reduce the total cost of ownership (TCO) was to maintain continuous maintenance coverage (Chen and Chien, 2007). This was great news! JB told the contact he would get a contract over for her to review in a week or so. The next day, Barry received a phone call from his contact. She told him she needed a contract today. The contract would not be for 50 devices, but for all 500! She had called Intermec customer service and told them not to roll over the 50 devices coming offwarranty into a post-warranty maintenance contract. The Intermec representative essentially told her "it was all or nothing." The representative continued, stating that if she did not keep all of her equipment under a post-warranty maintenance contract, the cost of her hardware equipment would increase in the future. After hearing this, the prospective ISG client responded, "Lets just make it nothing, in that case." ISG earned its first service contract, for 500 devices, representing nearly $50,000 a year in revenue. This sort of big business inflexibility continued to alienate Intermec customers following the consolidation and translated into new ISG customers (Parasuraman, 1998). All was going well and the original strategic plan was working beautifully. During its first year of business, ISG booked over $1.25 million in gross sales!

The firm continued to thrive. It opened a second office in the southwest when Intermec shuttered that regional service center. ISG hired the service center manager and most of his former technicians and employees. The original office in NJ expanded several times over the years due to growth. By the end of 2004, ISG had exceeded $7 million in gross sales, employed over fifty in both offices combined and established itself as a dependable and reliable alternative to the manufacturer for repair services. Its list of customers included a number of Fortune 100 companies. ISG had built a reputation for standing behind its word and being very customer centric, which often translates into success (Sheth, Sisodia, and Sharma, 2000). It also had built a good core of very loyal and knowledgeable employees. Firms with employees possessing these characteristics often achieve superior financial performance (Loveman, 1998). The firm always put its employees first. The owners knew this was the best way to ensure that the employees would put the CUSTOMERS first (Webster, 1988). All fulltime employees earned salaries well above the industry norm, given 100% company-paid health insurance, offered a 401K retirement plan (to which the owners made matching contributions), and very generous paid personal time offallowances.

THE EVOLVING INDUSTRY

On the surface, things looked very promising for the upstart firm. But the 2004 planning meeting brought out several concerns about the future of the firm, and the industry, that could not be ignored. These issues had been evolving over time, so it was no surprise to the management team. However, it was evident that something had to be done to address them. The first issue was a gradual, but important, change in the industry that represented a threat in the SWOT analysis. When ISG opened its does in 1995, the mobile computers were very proprietary, in nature (West, 2003). Each manufacturer's devices were unique and managed by operating systems that were unique (among approximately ten major players in the industry). The printed circuit boards inside the devices were unique to the manufacturer and model of device. If one wanted to print from a mobile computer to a printer, the printer had to be from the same manufacturer as the mobile computer because communication between the two was proprietary (as was the physical connector). Additionally, one mobile computer sold for approximately $6,000 and one printer sold for over $2,000! At that level of capital investment, protecting the devices with a post-warranty service contract valued at approximately $200 per year was a no-brainer. That sort of capital outlay needed to be protected and the service contract was a bargain. By 2004, the industry had changed substantially. Virtually all mobile computers were running on a standard Microsoftoperating system (Pocket PC and/or Windows Mobile), could communicate among other devices with a standard wireless protocol (802.11, Bluetooth, wireless wide-area radios), and be able to print to any printer (regardless of manufacturer) (Chang, Chen, and Zhou, 2009). Since all of the devices now were running on Microsoftplatforms, the architecture (CPUs, video drivers, charging systems, etc.) became standardized across manufacturers. This all translated to one very apparent result-the price of the devices dropped dramatically (Varshney, Vetter, and Kalakota, 2000). By 2003, the price of a new Intermec mobile computer was just over $1,000 and Intermec mobile printer pricing hovered around $500. With the price of the technology coming down so drastically, the value of the post-warranty service contract dropped substantially in the buyers' minds (Stremersch, Wuyts, and Frambach, 2001). They started considering the devices as virtually disposable. Moreover, companies were beginning to take a hard look at expenses. ISG knew for years that maintenance contracts were not a good deal for the buyer. The buyer was much better offfinancially sending in devices for repair and paying a non-contract, per-incident fee than covering ALL of its devices for an annual fee. Buyers who scrutinized their expenses began to realize this fact. They looked at the number of repairs they sent in during a year and multiplied it by the per-incident price for each device. The total annual cost of service was virtually always dramatically more for an annual maintenance contract as compared to the per-incident total.

CUSTOMER CONCENTRATION

There was another change in the competitive environment that affected ISG dramatically over recent years. Intermec-related repair services represented nearly all of ISG's revenue. Revenue associated with services for other manufacturers' devices represented only about 5% of ISG total revenue. This customer concentration posed difficulties for ISG moving forward (Mulhern, 1999). This worked wonderfully over the years because Intermec dominated the mobile device market. At times, Intermec's market share of the mobile device market approached 85% (Mossannen-Amini, 2008). More recently, Symbol Technologies (now a subsidiary of Motorola) made dramatic inroads into the mobile device market. By 2003, Motorola controlled over 65% of the market and ISG did not repair Motorola devices. ISG had been watching major, long-time customers cancel contracts because they moved to a Motorola platform for several years. ISG had no way of recovering these lost accounts because it could not repair the Motorola devices. One of the things that had made ISG such a success, it unique expertise in repairing Intermec devices, was rapidly becoming its Achilles heel.

LAYING OUT THE DILEMA

These issues leftthe owners of ISG with a feeling of impending doom. Barry and JB had finally come to the realization that something had to be done. The owners believed that they had no more than three years until the firm begin to lose money. To date, ISG had never had an unprofitable year. The firm had, for years, attempted to expand its service capabilities, to no avail. As they saw it, shifts in the macro-environment in which ISG operated would dictate the future of ISG:

* The price of mobile devices, even ruggedized models, would continue to decrease. This makes long-term post-warranty maintenance contracts much less attractive.

* Open architecture makes the mixing and matching of various manufacturers' devices simple. This dilutes the effect of the unique expertise ISG possesses in repairing Intermec devices.

* Large, former ISG customers were migrating towards non-Intermec platforms.

* Industry consolidation (dairies, beverage bottlers, snack manufactures, etc.) makes it more difficult for ISG to attract new clients since they become acquired by large, global enterprises.

Even though the firm just completed a record year in sales, the writing on the wall was evident. The future of the firm was in jeopardy and the owners new something had to be done very quickly to preserve the equity they had built over the years. As the owners saw it, it was time to move forward with an exit strategy. They assembled a list of pertinent facts from which they could frame their decision:

* Barry was in his mid-sixties and ready to retire.

* JB was forty and still had many years of work ahead of him before he retired. He had two young children at home, ages one and five.

* JB and Barry had an open line of credit of $1 million for ISG, secured by personal guarantees signed by both owners.

* JB had completed his doctoral degree and had a passing interest in teaching college business courses.

* ISG was a closely-held, Delaware C-corporation, even though it was located in NJ and TX. If the owners do sell the company, the buyer (s) would have to acquire not only the assets of the firm but also the corporate shares.

* There were no "skeletons in the closet." That is, there were no lawsuits or legal proceedings pending or expected.

* About 20% of the employees had been with the company since the first year of operation.

* Both Barry and JB were paid salaries in excess of $100,000 per year. There was a management structure in place, relieving either Barry or JB from needing to be in the office on a daily basis.

* Both Barry and JB had amassed sizable 401K accounts by contributing the maximum amount allowable every year.

OPTIONS AND A DECISION

The owners saw their options as follows:

1. JB could buyout Barry and take over sole ownership of ISG.

2. ISG could find another firm with whom to partner.

3. The owners could sell the company to the ISG employees, forming an employee stock ownership program (ESOP).

4. JB and Barry could sell the entire firm to a buyer.

5. They could continue with a status quo strategy and hope that their prediction of the future was wrong.

If you were Barry and JB, which option would you select from the list above? Why? Are there other options available to the firm that the owners are overlooking?

Subject: Entrepreneurship; Market strategy; SWOT analysis; Case studies

Classification: 9130: Experiment/theoretical treatment; 7000: Marketing; 9520: Small business; 2310: Planning

Publication title: Journal of Case Research in Business and Economics

Volume: 4

Pages: 1-10

Number of pages: 10

Publication year: 2012

Publication date: Jul 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Graphs References

ProQuest document ID: 1034969514

Document URL: http://search.proquest.com/docview/1034969514?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Sep 2012

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 3 of 100

Assessment of the performance of micro enterprises in rural Nepal over time

Author: Pukar, K C

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Abstract:

The lack of sustained employment opportunities has remained as the primary cause of poverty in rural Nepal. The possibility of eliminating poverty by engaging the rural population in small scale industries has been recognized by the UNDP by launching the Micro Enterprise Development Program (MEDEP). With the success of the piloting phase from 1998 to 2003 for five years, the program was expanded in an additional 15 districts for a period of four years from 2004 to 2007. However, the performance of micro entrepreneurs that were trained by MEDEP has been different in different locations of rural Nepal. The disparity in business performance is the result of differences in socio economic and market conditions among the locations. However, with the use of ANCOVA analysis, the research demonstrates that the influence of such differences on the performance of Micro Enterprises diminished over time. Using statistical analysis, the research evaluates the influence of location on the performance of micro enterprises over time. However, an empirical judgment of why the influence of differences eventually declined is beyond the scope of the research, although argument is provided to support a reasonable conjecture. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

The Nepalese economy is characterized by high dependence on the agriculture sector with little diversification. With a GNI per capita of $440, Nepal has been classified as a low income economy by the World Bank. The UNDP classifies Nepal as a region of low human development with an HDI score of 0.4281. Although most of Nepal's terrain is mountainous and not suited for farming, nearly 70% of the population relies on agriculture to sustain their livelihoods. Nearly one third of the national income comes from agriculture. Heavy reliance on traditional agriculture has a severe downturn of creating seasonal unemployment. Farmers are usually out of work during the months of winter and fall. As a result, majority of the population of rural Nepal is faced with low income generating opportunities. Poverty headcount ratio at $2/day was 78% of the population in 20042.

Engaging the rural population in micro enterprises and small scale industries can be part of the solution to the problem of unemployment. In this context, the approach taken by the Micro Enterprise Development Program (MEDEP), initiated in 1998 as a joint effort of the UNDP and the Government of Nepal seems relevant. The program aims to provide vocational training to the rural population to enable them to start micro enterprises. With the success of the piloting phase (Phase I) from 1998 to 2003 for five years the program was expanded in an additional 15 districts for a period of four years from 2004 to 2007 (Phase II), and now the program covers 36 districts in its third phase from 2008.

Due to the differences in social backgrounds of the populations and geographical conditions of the districts, the performance of micro enterprises initiated by MEDEP has not been the same everywhere. Topographically, the country is characterized by high mountains and hills, but roughly 20% of the country is also plain land with tropical climate. There are also enormous differences in the social and ethnic composition of the populations that ultimately contributes to uneven development. A combination of the differences in social and geographical parameters can play significant role in determining market conditions. Ultimately, differences in market conditions lead to differences in the business performance of micro enterprises.

The research tries to analyze the influence of exogenous factors discussed above in the business performance of micro enterprises. It should be noted that in the context of the research, only the micro enterprises initiated by MEDEP are considered for analysis. By comparing the performance of micro enterprises in Phases I and II, the study shows how the influence of such factors changed over time. The study derives from a case study of two districts where the program was launched: Parbat and Dhanusha. These districts have enormous geographical and socio economic differences that create varying market conditions. Since the nature of micro enterprises established in both these districts are roughly the same, analysis can be performed to compare their performance.

Methodology

Field trip was conducted to 4 of the 36 districts where MEDEP has been launched. Out of the 4 districts (Nuwakot, Parbat, Nawalparasi and Dhanusha), the reasons for selecting Parbat and Dhanusha for statistical analysis are as follows:

Parbat lies in the hilly western zone and Dhanusha is in the plain land in the south east region of Nepal. Such contrasting geographical differences would allow for an apparent role of the exogenous variable 'location' on the performance of Micro Enterprises.

Data were available for these two districts over a longer period of time as the programs were launched there in 1998 during Phase I.

The data used for the statistical analysis was accessed from MEDEP's database. MEDEP officials collected the data by using surveys and interviewing the entrepreneurs who participated in the program. Out of a total of 2245 entrepreneurs in Parbat and 2348 entrepreneurs in Dhanusha, a random sample of 725 micro entrepreneurs from each district was constructed. Each of the entrepreneurs in the random sample participated in Phase I as well as II. A homogenous sample size of the two districts allowed for an easier comparison.

The following categorical data were considered for research:

1) Per Capita Income (PCI) before participating in entrepreneur training: Measured in Nepalese Rupees (NRS), this variable captures the financial status of the individual before participating in the program. Although the program targeted individuals from ultra-poor economic background, data suggests that several middle income individuals were also participants.

2) Level of education: Education plays a tremendous role in business success. The following scheme was developed to quantify the level of education of the entrepreneurs: Illiterate - 0, Primary - 1, Lower Secondary - 2, Secondary - 3, Higher Secondary - 4, In college - 5, Undergraduate degree - 6

3) Aggregate sales up to previous month: Also measured in NRS, the variable acts as a proxy for business success; higher sales imply more successful enterprise. However, it should be noted that older enterprises would obviously register higher aggregate sales. To control for time, statistical analysis for the two phases was run separately.

The following is a brief description of the districts on which the case study is based:

1) Dhanusha: Nepal is divided into 75 administrative units called 'districts'. Dhanusha is one of these districts that lies towards the south of the country and borders India. The district, with the city of Janakpur as its capital, is also a major tourist destination. The district is characterized by hot tropical climate. Dhanusha enjoys plain land suitable for agriculture. The southern districts of the country comprise a geographical region known as the Terai. Due to favorable climate and fertile soil, the Terai region is popularly known as the granary of the country as most of the agricultural output of the country comes from here. Despite such factors, Dhanusha suffers from low level of human development characterized by the prevalence of communicable diseases and high level of unemployment. HDI estimate for Dhanusha ranges from 0.400-0.449 3.

2) Parbat: Parbat literally means 'hills' in Nepali. The district is situated in the Western Development region of the country. It is characterized by a combination of subtropical and semisubartic climate. Fertile land suitable for agriculture is scarce in this hilly district. Terrace farming is popular. In recent years, many residents of this district have migrated to countries such as Malaysia, Saudi Arabia and India to seek employment. Thus, remittance is a significant source of income for Parbat. Parbat too suffers from low level of human development characterized by a traditional rural economy. HDI score for Parbat ranges from 0.450-0.499 3.

Descriptive statistics of the sample:

FINDINGS

Analysis of Covariance (ANCOVA) is performed to investigate the role of "location" on business performance of micro enterprises. Analysis of covariance is a statistical technique that combines regression analysis and analysis of covariance. It can be helpful in nonrandomized studies in drawing more accurate conclusions. Here, the study is nonrandomized as the participating individuals were selected according to a definite guideline developed by the administrative body of MEDEP. One way ANCOVA involves one independent categorical variable, one dependent continuous variable, and one or more covariates4. In this study, the dependent variable is S (Sales up to previous month (in NRS.)), and the independent variable is Region or Location. The covariates for the study are level of education and Per Capita Income before participating in MEDEP.

Choice of covariates:

A potential covariate is any variable that is significantly correlated with the dependent variable. Covariates must be significantly correlated with the dependent variable. In this study, both level of education (E) and per capita income (PCI) have shown significant correlations at the 0.01 level (2-tailed) as is summarized by the following table:

The numerical values are the Pearson Correlation figures. MEDEP selected a variety of individuals to participate in their training programs. These participants varied enormously in their level of education, ranging from illiterate to college graduates. There were individuals in the sample having a PCI of 0, indicating that they had completely no source of income before. A positive correlation between S and E and S and PCI implies that individuals having a higher level of education and more money at their disposal are more likely to register more sales. This is consistent with theory; more education and know how leads to entrepreneurial success. Similarly, individuals with larger PCI can make larger investments which would lead them to making higher sales.

The Dependent variable:

Aggregate sales in NRS serves as the dependent variable in the study. From the categorical data made available from MEDEP's database, another possible dependent variable that could be considered was aggregate quantity sold. However, since the products of entrepreneurs are of a wide variety, comparing quantities would not be appropriate due to lack of homogeneity.

The Independent Variable:

The primary research question being investigated is the role of the exogenous factor "Location" in determining business success. This is modeled by considering 'L' (Location) as the independent variable. The 2 Locations are Parbat and Dhanusha.

While investigating the role of location on business success, the ANCOVA model controls for the differences in the level of education and Per Capita Income. Controlling for the effects of the differences of education level and per capita income on aggregate sales allows deriving a better conclusion about the influence of location solely on business success. ANCOVA is run on SPSS (Statistical Package for Social Sciences) for Phases I and II separately.

Null Hypothesis (H0): The performance of micro entrepreneurs does not differ significantly according to location. In other words, there is no significant influence of location on business success of micro enterprises.

Alternative Hypothesis (HA): The performance of micro entrepreneurs differs according to location.

Running the test on SPSS, the following results were obtained:

The results of this one-way analysis of covariance are presented as follows:

A one-way analysis of covariance was conducted to compare the role of location on the performance of micro entrepreneurs for phase I. Preliminary checks were conducted to ensure that there was no violation of the assumptions of normality, linearity, homogeneity of variances, homogenous of regression slopes, and reliable measurement of the covariate. After adjusting for the influence of E and PCI as possible factors that would have contributed for the difference, there was seen a significant difference between the two Locations in regards to aggregate sales, (Significance =.000, which is less than 0.05). A partial Eta Squared value of 0.355 indicates that 35.5% of the variance in the dependent variable is explained by the difference in Location. We reject the null hypothesis for Phase I.

For Phase II, after adjusting for the influence of E and PCI as possible factors that would have contributed for the difference, we do not see a significant difference between the two locations in regards to aggregate sales (Significance =.211, which is greater than 0.05). We fail to reject the null hypothesis for phase II. A partial Eta Squared value of 0.010 indicates that only 1% of the variance in the dependent variable is explained by the difference in Location. The Null Hypothesis was rejected for Phase I, and for Phase II, we fail to reject it. The difference in results suggests that in case of Phase I, the independent variable Location played a more significant role in business performance than Phase II. Phase I denotes the period of time from 1998 to 2003 whereas Phase II denotes 2004 to 2007. A less significant role of location in the latter phase suggests that a relatively more proportionate business performance is seen in the two locations as time progresses. This implies that some factors that caused uneven development of micro enterprises in the two locations in the past were mitigated.

CONCLUSION

Ray (2010) suggests that balanced growth is an abstraction, and economic growth has been fundamentally uneven in developing countries. Here, the business performance of micro enterprises can be considered as a component of economic growth. In coherence with uneven growth manifested amongst the different sectors of a developing economy, the performance of micro enterprises can be expected to be uneven in accordance to the location where they are established. However, the results of the research indicate that in the second phase, location of the micro enterprise was less important of a factor in determining business success. It is interesting to note that such difference in significance levels took place in a short period of time. Since the sample size was large, the results of the statistical analysis are highly significant. Some possible reasons why such phenomenon was observed in the research might include the following: Development of infrastructures such as transportation and communication might have taken place in the two locations. Such development might lead to the two locations becoming more equally suitable for industrial growth. This would create the effect of inducing similarity in the performance of micro and small scale industries in the two districts. The development of infrastructure implies that the nature of the variable "location" may have intrinsically changed between Phases I and II.

More cultural exchange might have taken place between the two locations over time. Such cultural exchange can have the result of inspiring a similar trend of fashion or taste in the two districts. Thus, cultural exchange may have made demand conditions in the two regions more similar and homogenous. The upshot of homogenous demand conditions would be similarity in the performance of micro enterprises that produce the same goods.

The positive externalities created by the establishment of micro enterprises in Phase I might have affected the performance of micro enterprises in Phase II. The Micro Enterprise Development Program (MEDEP) provided entrepreneurship training to individuals in Parbat and Dhanusha. One positive spillover effect of the training was that the trainees went on to train other individuals in the local community. As a result, the level of vocational knowledge in the two districts must have risen manifold. Since the program was launched with approximately the same input in Phase I, it is reasonable to expect that by Phase II, the spillover effects must have culminated to similar levels. This would finally lead to creating similar supply conditions, by the virtue of which the micro enterprises in the two locations would exhibit similar performances. An empirical judgment of why the influence of location on micro enterprise performance declined over time is beyond the scope of this research. Perhaps a thorough investigation into this matter would be a topic for future research.

Subject: Rural areas; Socioeconomic factors; Case studies; Entrepreneurship education; Microfinance

Location: Nepal

Classification: 9130: Experiment/theoretical treatment; 9520: Small business; 9179: Asia & the Pacific; 1200: Social policy; 8100: Financial services industry

Publication title: Journal of Case Research in Business and Economics

Volume: 4

Pages: 1-7

Number of pages: 7

Publication year: 2012

Publication date: Jul 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 1034969517

Document URL: http://search.proquest.com/docview/1034969517?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Sep 2012

Last updated: 2013-09-09

Database: ABI/INFORM Complete

Document 4 of 100

CHRIS THOMPSON'S CAREER DILEMMA! WHAT SHOULD I DO?

Author: Greigre, Hafiz; Wilson, Shirley; Luthar, Harsh K

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Abstract:

This case discusses the moral dilemma experienced by Chris Thompson. Thompson, an African American University student and top athlete, accepted a summer internship at American Brands International, the nation ~ largest tobacco company. Although Chris Thompson held long-standing negative attitudes toward smoking and the use of tobacco products, he was flattered by the fact that American Brands, a company known for recruiting the best and brightest, aggressively recruited him for the internship with the potential for a bright future career in the organization. Chris accepted the internship based on pay, benefits, freedom on the job, and future advancement opportunities. However, as the internship progressed, he began to have doubts about whether or not American Brands was the right company for him. The case raises a variety of behavioral issues including the fit between personal and organizational values, the role of attitudes in job satisfaction, turnover and decision-making in organizations. This case, which has been used successfully in several Organizational Behavior classes, suggests that congruence between the individual and the organization is essential for both career development as well as organizational effectiveness. [PUBLICATION ABSTRACT]

Full text:

CIRIS THOMPSON'S DILEMMA

Chris Thompson, an African American university student is facing a difficult dilemma regarding a career choice that he will soon be making. Should he continue his internship at American Brands, the nation's top tobacco company or should he follow his conscious and resign his position? Although his father was a smoker, Chris hated cigarettes. As a child, whenever his father smoked in the house, Chris would run out of his bedroom and act like he was choking just so his father would stop smoking or at least smoke outside. As Chris grew older, he got into athletics and his attitude towards smoking became even more negative and hostile.

With a tremendous focus on health and fitness, Chris became a track star in high school. Now at the age of 21, his rigorous discipline and focus on excellence had placed him among the top athletes at his University.

As if this was not enough, Chris was also an academic superstar and had maintained a 3.85 GPA since his freshman year. Because of Chris' unique combination of talents he was often called on by the local elementary schools to talk about health and fitness and its importance in everyone's life. Chris always took the time to make presentations to the school children and explain how smoking and drugs can severely undermine athletic performance as well as academic performance, and the overall health of people.

All the values that Chris held dear were now being challenged by the attraction of a lucrative career opportunity and fmancial success.

THE RECRUITING PROCESS AM) DECISION TO JOIN

American Brands, International is the nation's largest tobacco company. Within the U.S., it controls nearly half of the tobacco market. Through its subsidiaries, American Brands engages in the manufacture and sale of cigarettes and other tobacco products in more than 160 countries around the world. Despite the public's negative attitude toward smoking, American Brands is considered an attractive place to work, offering new hires good pay and great benefits. Fortyseven percent of new hires since January, 2006, earned an annual base salary in the range of $40,000 and $44,000 annually. Over half received a signing bonus and all were eligible for perfonnance bonuses in theft first year of employment. In addition to a great starting salary, new hires at American Brands are eligible for reimbursement of educational expenses, an employersponsored health plan, and access to a 401k savings plan that becomes hilly vested after only three months of employment.

During the 2005-2006 academic years, American Brands actively recruited on 32 undergraduate campuses in the United States. In 2005, the number of applicants for entry-level jobs at American Brands was 83,207. The number of new hires from this pool of candidates was 148. American Brands, International is clearly in search of the best and the brightest.

Chris had picked a business management major, with a minor in legal studies while in college. When people asked him what business did he want to manage, he would reply, "My own, of course?" So it came as no surprise that when he started to interview, he would look for the company that allowed him the most freedom.

Freedom, however, was not the only deciding factor. He also wanted a position with great stability and a chance to move up the ranks. Since he would be graduating soon, he also needed a position that was well paid so that he could pay off his college debt in a short time frame. What job would have everything he was looking for? Quite remarkably, American Brands turned out to be the company that offered him everything he was looking for.

During Chris' sophomore year, a man named Gerald Spears made a guest presentation in his marketing class. Spears was representing the tobacco giant, American Brands. During the presentation, Chris raised many issues and objections regarding smoking and pointed out the harm that cigarettes cause. Spears, faithfully representing American Brands, responded to all of Chris' questions politely and professionally saying that in America, people had the freedom to choose what they wanted to consume and reminded Chris that cigarettes was a legal product. Chris was unconvinced by Spears' argument.

As fate would have it, during Chris' junior year, he became friends with a guy named Brian Alexander who sat next to him in theft legal studies class. Brian was smart, outspoken and determined to succeed. He had all of the qualities Chris admired. The two men got along well. Shortly after that first meeting, Chris received an email from Brian who was working for American Brands as an ambassador and intern. In his ambassador role, Brian was responsible for identif~'ing potential talent for the Company. Brian had asked Chris bluntly in the email, "Would you be interested in a fantastic internship at American Brands which more than likely would lead to a job offer three months before you even graduate?" Oddly enough, Chris emailed him back and said, "Yes, of course!"

Before he knew it, Chris was sitting in a chair across from Gerald Spears, the same man that had come to his marketing class sophomore year, being interviewed for a job at the multibillion dollar company. Chris was happy to be there, too. It seemed that all of a sudden he forgot who he was and the money and freedom that career success brings took over his thoughts. All of a sudden Chris' only goal was to get the internship that would lead to a job at American Brands.

It came as no surprise when Gerald called him back in two weeks to further discuss the position. Chris got through round one, but there was a slight problem. Because he had transferred to his current university he was technically a first semester junior instead of a second semester junior as the internship job required. So everything was put on hold, but that year American Brands did not hire any other student from his university.

Throughout the summer Gerald Spears, the American Brands district manager, kept in touch. During the next year's recruiting process, Spears wanted to speak to Chris and only Chris. He even requested that Chris' university not make the position public, but he was unable to accomplish that. Spears visited campus early in the fall just to touch base with Chris and to see how things were going. When Chris told him that he was considering several other companies, Spears said that Chris should not even bother with other jobs because he felt Chris would fit in at American Brands. Chris was so flattered! After all, Chris was a young African American male, from humble means, and this huge company was pursuing only him out of many other qualified candidates. Chris ate Spears' words up! Chris was then told that he would have to redo the interview process, but that was okay. He agreed to start at step one.

The interview process began for the second time. Chris successfully made it through three preliminaiy interviews with ease and confidence. After the fmal interview, Chris was sure that he would receive an offer. He had made it! He saw the green of money and the lure of freedom.

During this time, Chris had also been working his way up the ranks in the nation for track. It had always been his goal to make it to the Olympics, and now that could very well happen. He was ranked number two in the nation for the 400m and number nine for the 200m. Chris was happy at school; he had a potential job lined up that would offer $50,000 after the first year, and he was in better shape physically than ever before. He even earned a 4.0 GPA with seven classes the semester before. What more could a man ask for?

Chris had always wanted to go to the Olympics. His track times continued to improve. Chris had to decide whether he should continue working on his track with some possibility of qualif~'ing for the Olympics or the internship at American Brands. Although Chris was deeply conflicted, he decided that taking the American Brands Internship was the safe route. Chris' reasoning was that if he did not qualif~' for the Olympics, he would have nothing. However, the internship would give him the experience and foundation to support himself and jumpstart his career.

Chris was pleased with his decision to join American Brands and had no second thoughts about going to work for a tobacco company. Since he did not smoke, that was all that mattered. The important issue for Chris was the money he would be earning. As an intern, he would earn $19.50 an hour, and would be reimbursed $0.485 for every mile he drove. He would be earning more than enough money to help his family and have a great summer. Breaking from his past, Chris now had no moral issues with being one of the country's top athletes in track and working for a tobacco company at the same time. This was the same company Chris had spent most of his life fighting, still he had no problem with working for this company.

Chris was surprised to learn that his mother was happy when she learned of his internship. She was probably one person who hated smoking more than Chris. On the other hand, his father who was a long-term smoker was 100% against the internship. He felt that Chris should have joined a different company.

THE JOB

The actual job began on a Friday, which was orientation day. Chris and the other new hires were taught many of the technical aspects of the company in a fun, upbeat way. The orientation day reinforced Chris' thoughts that he made the right decision about joining American Brands despite his attitude about smoking and cigarettes in general.

At the orientation, he was given a specific project to complete during the tenure of his internship. The project would involve visiting Crown gas stations (which retail all American Brands cigarettes) In Massachusetts and Rhode Island and doing an analysis of theft operations. Finally, the orientation discussed the moral issues facing employees of American Brands. Chris felt that the American Brands culture encouraged everyone to speak up and not fear rejection of theft views. Positive communication and mutual respect were two values that formed the foundation of the day's activities.

After the two orientation thys, the real work began. Chris' job was to visit the Crown gas stations in his territory and provide support for theft retail efforts in selling more cigarettes. This could be as simple as fixing the signs located in retailer windows, or establishing an entirely new display for the products. This was done in teams with another American Brands employee. Whatever the challenge, Chris and his coworker were always able to tackle the issue.

After about a week or so of doing actual American Brands field work, Chris was still very much into the job. He felt that American Brands was the right company for him. He was well paid, and managed to take short vacation trips every weekend.

During the week Chris worked very long days, often leaving his house very early and arriving back home late in the evening. The job was very demanding, but he loved it! Chris had an expansive territoiy that involved a lot of driving. Often, he would awaken at 5:00 am and be out of the door at 6:15 am to get to a place that was about an hour and a half away, not including traffic. He had to make sure that he left early because you never know what might happen on the mad. And in the event that something did happen, you would have to be resourceffil enough to know what to do.

Chris quickly learned that a lot of time, planning and organization went into this job. After he got back home at the end of the day, he would go online and track the mileage he drove so that he could be reimbursed. He would have to check his email to see if anything had come up that he should be aware of. He would have to listen to his voice mail both morning and night to see if there was anything he should know.

Every day, after Chris fmished all of his paper work and other little things for the next thy, he would run out and get to the track. Sometimes he would not get to the track until about 8 at night and from there go to the gym. Often, he would not get back home until 11 pm, shower, go to bed, and get ready to do it all over again the next day. Still, despite the long hours, Chris loved the job.

YOU SOLD OUT CHRIS!

Things started to unravel when Chris visited his old high school for a reunion and bumped into some of his former teachers. They asked him what he was going to do after graduation. When Chris told them that he worked for American Brands, they were all taken aback.

His former coach gave him strange looks, as if to say, "Come on Chris, you can do much better than that." One of Chris' favorite teachers voiced her opinion more directly, calling him a "sellout," and challenging him to justif~' his decision to work for American Brands. As he put it, "Someday, you're going to look back on your life and question your decisions. There will be a thy ofjudgment and you will have to think about all of your actions. You'll have to ask yourself, `what did I do to make this world a better place?' It's not about how much money you made or how big a house you lived in or the number of cars you owned. It's about what did you do for your fellow man. You might be able to claim that cigarettes are lawful products that every adult has the right to buy, but we all know the risks associated with smoking. Can you really make peace with the company's mission?"

The high school encounter with his former coaches and teachers left Chris badly shaken. Things got worse from there.

As part of his community service requirement, Chris tutored students at a local Boys and Girls Club several times a month. Chris considered himself more than a tutor; he was a friend and role model to the kids. One evening after one of the tutoring sessions, some of the parents and the other club officials were talking to Chris and asked him what he was doing during the summer. When Chris told them what the job was, a grandmother who had brought her granddaughter that day for tutoring told him that he was working for the "devil". Another parent and also one of the officials made sarcastic comments that implied that Chris was a big hypocrite for preaching to the kids not to smoke, while working for the biggest tobacco company in the country.

Chris began to wrestle with these events. No other industry has been so deeply vilified and so thoroughly discredited as Big Tobacco and its largest domestic player, American Brands. Finally, one morning, in the quiet of his own apartment, the moral dilemma fmally hit him; he hated cigarettes and everything associated with them yet he worked for a cigarette company. He was ashamed to tell people that he worked for American Brands. He began to feel like he needed to fmd an escape route and he needed to fmd one fast. As an athlete he could not be associated with a tobacco company. He wanted to be able to talk to people about his work without them questioning why he would choose to work for a tobacco company. He wanted to be happy to tell people about his work, and lately, he was not! Still, American Brands was his employer and he owed them loyalty and his best efforts.

DISCUSSION QUESTIONS

1. What is the source of Chris' dilemma?

2. How does Chris fmd himself in this situation?

3. How does Chris perceive himself? Does his self-concept change over time? If yes, what factors influence the changes in his self-concept?

4. What OB theories explain the change in Chris' attitude?

5. What lessons does this case teach about career choices?

6. What decision making model did Chris use in deciding to accept the internship at American Brands? Was it an ethical decision given his attitudes toward cigarettes and the uses of tobacco products? Does he have an obligation to American Brands?

7. What should Chris do?

8. What are the implications of this case in other situations? What are your key takeaways from this case?

Subject: African Americans; Internships; Values; Tobacco industry; Job satisfaction

Location: United States--US

Classification: 2500: Organizational behavior; 8306: Schools and educational services; 9190: United States

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 5

Pages: 1-6

Number of pages: 6

Publication year: 2012

Publication date: 2012

Year: 2012

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: 1081807192

Document URL: http://search.proquest.com/docview/1081807192?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 5 of 100

Coordination in innovation-generating business networks - the case of Finnish Mobile TV development

Author: Ritala, Paavo; Hurmelinna-Laukkanen, Pia; Nätti, Satu

ProQuest document link

Abstract:

Purpose - In this study the authors seek to discuss and empirically analyze coordination mechanisms in innovation-generating business networks. Their aim is to explore how these coordination mechanisms, as well as the roles of actors, evolve during the development of such networks. Design/methodology/approach - The paper analyses an in-depth single case study on the development of Finnish Mobile TV in an innovation-generating business network comprising a heterogeneous range of actors. Findings - The findings suggest that coordination of innovation-generating business networks combines "management" and "orchestration", both of which have their distinct roles throughout the development of the network. The latter is used throughout the case in question to communicate vision and build social capital, and the former to coordinate phases closer to commercialization. Research limitations/implications - The study provides novel evidence in explicating how network coordination mechanisms of management and orchestration change as the innovation-generating business network evolves. However, there is a need to examine the issue further from different methodological standpoints in order to improve the generalizability of the results. Practical implications - Managers will be able to use the lessons learned in designing different coordination mechanisms to ensure that the network evolves in the desired direction, and in considering the role of their companies in this development. Originality/value - The paper enhances understanding of how coordination mechanisms evolve in different phases of innovation-generating business networks.

Full text:

An executive summary for managers and executive readers can be found at the end of this article.

1. Introduction

It is increasingly common in the contemporary business environment for firms to extract knowledge from multiple sources, and to join various networks in their innovation activities ([5] Chesbrough, 2003; [41] Peters et al. , 2010; [56] Westerlund and Rajala, 2010). In line with this, innovation-generating business networks can be defined as constellations comprising the focal firm and its stakeholders (customers, suppliers, other partners and even competitors; [34] Munksgaard and Freytag, 2011; [35] Möller and Rajala, 2007; [47] Ritala and Hurmelinna-Laukkanen, 2009), the aim of which is to generate new or modified sources of value for the participating actors and relevant external stakeholders in a sustainable way (e.g. [10] Donaldson and Preston, 1995; [13] Freeman et al. , 2004). However, bringing together different types of actors creates its own challenges, especially in terms of coordination ([40] Ojasalo, 2008). Collaborative innovation activities simultaneously incorporate stability and dynamism ([51] Sutton-Brady, 2008; [21] Hedaa and Törnroos, 2008), autonomy and interdependence, additional resources but also barriers to performance ([15] Geersbro and Ritter, 2010), a tendency to influence and to be influenced ([23] Håkansson and Ford, 2002; [28] Kragh and Andersen, 2009; [30] Low and Johnston, 2010), and the protection and sharing of knowledge. Thus, coordination of innovation networks is inherently characterized by the search for balance and the need for compromise.

According to the existing knowledge, coordination in networks can take various forms ([9] Dhanaraj and Parkhe, 2006). Two of these - management and orchestration - are taken under closer examination in this study. Network management refers to having explicit goals and timetables, as well as systems facilitating coordinated collaboration, for example (e.g. [35] Möller and Rajala, 2007). It also includes the idea of having some type of leadership, or a leader. The leader sets the rules (in collaboration with others) that are needed in order to reach the desired outcomes, and monitors how they are followed. On the other hand, orchestration (e.g. [9] Dhanaraj and Parkhe, 2006; [48] Ritala et al. , 2009) refers to activities that enable and facilitate (but do not dictate) the coordination of the network and the realization of the innovation outputs. In this context it is not about leading or directing the network, but more a question of discreetly influencing other firms and making sure that the premises for knowledge exchange, value creation and appropriation, and innovation are in place.

These two concepts are useful as they both incorporate issues such as trust and commitment, as well as control through contracting - often seen as complementary or supplementary governance mechanisms ([33] Morgan and Hunt, 1994; [55] Vlaar et al. , 2007; [39] Olander et al. , 2010), but the emphases vary depending on the approach. For instance, while management focuses on "coordination by commanding", orchestration has its emphasis on "coordination by enabling". It is recognized in this study that the two often co-exist in practice, thereby creating a hybrid form of coordination involving the simultaneous use of both.

The problem is, however, that existing literature does not really explicitly state in which situations different forms of coordination would function best. It has been shown that networks come in different sizes and shapes, and this surely influences the need of coordination and in its implementation ([35] Möller and Rajala, 2007). The number of involved actors, the power balance, the organization of the knowledge exchange, the aims of the network and the phase of the network evolution (together with external factors such as industry or economic context) have an effect on the possibilities to rely on certain forms of coordination as well as the efficiency of the coordination (see, e.g. [32] Medlin, 2004; [19] Halinen and Törnroos, 2005; [51] Sutton-Brady, 2008; [21] Hedaa and Törnroos, 2008; [28] Kragh and Andersen, 2009; [7] Claro and Claro, 2011). Of these issues, the evolutionary processes, in particular, are quite under-researched ([44] Provan et al. , 2007; [39] Olander et al. , 2010). Thus, there is a need for research that takes explicit focus on the interplay between network characteristics, its evolution, and the potential coordination mechanisms.

The following question is addressed in order to narrow this research gap: "How can the coordination of innovation-generating business networks be aligned with the network characteristics and evolution?" In order to find answers to this question, we conducted an in-depth case study of Finnish Mobile TV. We use the data to determine the network characteristics, and to find out how coordination appears in such a network. And more importantly, we analyze how coordination evolves, thereby obtaining evidence of the dynamics inherent in innovation-generating business networks.

This study contributes to the existing literature on business networks in following ways. First, we conceptualize the coordination mechanisms in two distinct categories: orchestration as "coordination by enabling" and management as "coordination by commanding". We also suggest that these mechanisms are not mutually exclusive, and that they vary in relative importance depending on the attributes (the central features of the network) and the phase (how close commercialization is) of the innovation/development process. Thus, an additional insight is the explicit evolutionary perspective on innovation-generating business networks used in this study, which has been somewhat neglected issue in network research (see, e.g. [45] Quintens and Matthyssens, 2010; [39] Olander et al. 2010). Second, we focus in our analysis on the network as a whole rather than on one firm's viewpoint, thereby further contributing to the discussion on network-coordination processes (e.g. [57] Woodside and Biemans, 2005; [26] Jack et al. , 2010). In doing this, the results also provide empirical evidence of how coordination is manifested as shared orchestration on the network level, as well as in terms of rotating leadership between individual actors (supporting the argument put forward by [8] Davis and Eisenhardt, 2007).

2. Innovation-generating business networks and network evolution

2.1 Characteristics and determination of innovation networks

Innovation networks are not alike. Differences emerge in terms of how many actors are involved, is network intentionally formed or "emergent" ([43] Powell and Grodal, 2005), the power balance between the actors ([24] Ibarra, 1993), and the level of trust and social capital ([25] Inkpen and Tsang, 2005). In addition, there are differences in the balance between knowledge exploitation vs. exploration ([20] Harryson et al. , 2008), level of stability ([25] Inkpen and Tsang, 2005), openness ([42] Pisano and Verganti, 2008) and the role of contractual relations and informal ties ([43] Powell and Grodal, 2005). Among the previous mentioned aspects are also those that change along the cooperation and developments towards both cohesion and loosening of the network (see, e.g. [46] Reagans and McEvily, 2003; [20] Harryson et al. , 2008).

There are many typologies based on addressing some or multiple of the aforementioned characteristics. In the context of this study, the level of determination of innovation networks - i.e. how determined/purposeful the network is towards certain objectives (see, e.g. [43] Powell and Grodal, 2005; [35] Möller and Rajala, 2007) - is the most interesting one, since it enables the investigation the evolution and change.

Innovation-generating business networks differ depending on the radicalness of innovation and looseness and cohesion of the network. In the most "fuzzy end", innovation activities are based on basic research, science and technology, and loosely connect together various actors such as universities, institutions and company-based research organizations. These networks typically generate radical innovations and influence emerging business and technological fields ([36] Möller and Svahn, 2006; [35] Möller and Rajala, 2007). The knowledge held in such innovation networks is often highly tacit, individual, and widely dispersed ([11] Doz et al. , 2000), and there is a high level of ambiguity (e.g. [15] Geersbro and Ritter, 2010). The relationship between existing and emergent knowledge is typically vague ([2] Arrow, 1974; [35] Möller and Rajala, 2007, see also [53] Strang and Still, 2006).

Aforementioned types of networks can be seen as a "primal form" of innovation-generating business networks, which often evolve to the next level - possibly into inter-firm networks focusing on technological innovation and creating dominant technological designs ([35] Möller and Rajala, 2007; [43] Powell and Grodal, 2005). Such networks are more target-oriented, the aim being to establish a dominant technological design in an emerging field of business (see, e.g. [1] Anderson and Tushman, 1990), and their existence is typically justified by the fact it is difficult for any one firm to achieve a dominant design on its own. These innovation networks typically involve collaborating and competing companies, together with other stakeholders such as officials and financial institutions.

Finally, innovation-generating business networks can aim at creating business applications with commercial potential from technological innovations. These networks represent the most organized form of innovation networks as they are generally driven by a hub company, and are more often characterized by collaboration between complementary technology producers as well as pilot customers ([35] Möller and Rajala, 2007), reflecting the tighter connection with actual commercialization. Moreover, the knowledge utilized becomes more explicit and codifiable.

2.2 Network evolution

The above discussion suggests that networks can evolve from one stage to another when the technologies and business models develop from highly explorative basic research to more commercially specifiable forms (see, e.g. [6] Chou and Zolkiewski, 2010). Indeed, [26] Jack et al. (2010, p. 318) note that networks can be seen "as a bundle of dynamic relationships, changing and process driven". Moreover, even if a network does not change enough to justify identifying it as a new (or the next) type of a network, continuous minor changes are likely to emerge.

Networks progress and evolve as their goals are modified or realized, as actors come and go, and as relationships are activated and deactivated (e.g., [17] Granovetter, 1985). Expectations of the actors involved also change, and adaptations are made accordingly ([32] Medlin, 2004). Indeed, as [21] Hedaa and Törnroos (2008) note, it is not only the structures of networks that deserve attention, but also the processes. This is particularly relevant in the coordination of innovation-generating networks: if network coordination does not change according to the changes in the network it may be that the functioning of the network suffers, and in the worst case, the desired results are not achieved. Thus, in order to understand the potential of a single firm (or a group of firms) to coordinate a particular network, it is necessary first to identify the central characteristics and the determination phase/type of the network (see, e.g. [35] Möller and Rajala, 2007), and then to align the coordination accordingly.

Summing up the discussion this far, it becomes evident that evolution within innovation-generating business networks includes both vaguely-defined phases and more concretely-defined phases. In other words, value which has been created is eventually also captured, if the network is to be commercially successful. While evolutionary phases certainly might go back and forth in time, the main tendency is towards eventually realizing the goals of a given network, and thus we approach network evolution from this perspective. In this sense, it could be said that the evolution proceeds naturally from explorative phases towards more exploitative phases. Adopting this perspective makes it possible to examine the role of network coordination mechanisms along the network evolution.

3. Coordination in innovation-generating business networks

The management of networks is a debated issue. Whereas researchers such as [27] Jarillo (1988) and [16] Gulati et al. (2000) suggest that management-like control is indeed possible, others (including [23] Håkansson and Ford, 2002, [49] Ritter et al. , 2004) see networks as adaptive systems that cannot be centrally directed. Accepting both of these perspectives simultaneously may be a viable approach in the context of our study: as network characteristics evolve, the means of coordination in them may vary accordingly.

3.1 Network management - "Coordination by commanding"

Whenever different organizations interact, there are likely to be differences in terms of influential power, motivation and activity. It is therefore also possible that one or two actors will be given or will assume more of a leading role - at least for a period of time ([8] Davis and Eisenhardt, 2007). The actors in networks in which the goals are relatively clear are quite well aware of their roles, and when considerable amounts of explicit knowledge are exchanged, it may be quite possible to apply more "traditional forms" of management to ensure that the processes run smoothly ([54] Thorgren et al. , 2009). Traditional management in this context means, for example, setting up schedules and structures that allow the monitoring of work phases, the allocation of tasks according to the capabilities and areas of relative advantage of the actors, and efficient project management in general ([50] Rizova, 2006; [29] Leonard-Barton, 2007; [35] Möller and Rajala, 2007; [31] McAdam et al. , 2008).

Management approach has also several types of alternatives in terms of innovativeness. While domineering leadership (where tight control practiced by a single actor easily leads to decline in the variety and dynamism; see [4] Bonner et al. , 2002) and consensus leadership (where multiple actors have an equal say, making compromise even too pronounced) both have certain shortcomings, rotating leadership allows the decision-making to circulate among the actors in different phases of the innovation process ([8] Davis and Eisenhardt, 2007). Rotating leadership thus has the potential to stimulate high-quality technological contributions, support variable network activation, change relationship trajectories, and mutually reinforce adaptive changes. However, in some situations it is necessary to adopt a different approach to coordination, which is discussed in the following section.

3.2 Network orchestration - "Coordination by enabling"

The inherent characteristics of the most fuzzy innovation networks restrict maneuvering potential, and trying to fight this may break the network, or at least weaken the position of the hub firm. Complexity, ambiguity ([15] Geersbro and Ritter, 2010), vast range of required resources, loose coupling and weak ties ([35] Möller and Rajala, 2007) does not fully comply with a traditional management approach ([14] Fulop, 2000; [3] Biggiero, 2001).

However, certain hub firms may possess capabilities that allow them to influence other organizations and the network as a whole in both building and coordinating the network. This discreet influence, or orchestration, has seen to operate in three main areas: knowledge mobility, network stability and innovation appropriability ([9] Dhanaraj and Parkhe, 2006). The "orchestrator" does not concentrate so much on exercising authority, but rather provides common vision, facilitates the process of collaboration, makes sure that the necessary structures and discussion forums are in place when needed, and otherwise supports the innovation activities (see, e.g. [18] Haga, 2009; [48] Ritala et al. , 2009). In fact, actors who are the most enthusiastic about the specific purpose and wellbeing of the network, and do not let any individual company take advantage of the network, may become best orchestrators and keep fuzzy, innovative networks up and running.

3.3 Aligning management and orchestration with network evolution

Drawing the line between management and orchestration is not straightforward, but certain generalizations can be made from the existing literature. In general, manageability typically increases with clarification of the actors' expectations and with more clearly defined processes - i.e. when the network shifts towards exploitative phases. In fact, having more explicit goals may even make a stricter approach a prerequisite for the functioning of the network - and thus orchestration would seem to suit well in explorative phases of innovation network evolution and management in more exploitative ones. For example, whereas the most vague innovation networks are typically self-coordinated and cannot be managed by a single actor alone without losing the potential that active and equal interaction between network members produces new combinations of knowledge ([8] Davis and Eisenhardt, 2007), networks with stronger commercial aims typically call for hub-firm direction and clearer responsibilities, structures ([35] Möller and Rajala, 2007) and administrative procedures ([54] Thorgren et al. , 2009). Similarly, [37] Möller and Svahn (2008) point to the importance of management-type coordination especially during the final stages when "net management" is needed in developing and coordinating efficient demand and supply channels.

However, it should be recognized that both coordination types actually co-exist in at different stages of their evolution, but they just have different types of roles and emphases. [50] Rizova (2006) gives an example of the thin boundary between management and orchestration, noting that formal organizational structures reinforcing social networks may be a prerequisite of successful innovation. In addition, [4] Bonner et al. (2002) note in their study of new-product-development projects and teams that leader-imposed process controls do not necessarily enhance success if implemented during the project, but that early and interactive decision-making on control mechanisms is important, suggesting that management approach is viable in the explorative phases as well. On the other hand, ensuring innovation appropriability and network stability through orchestration-types of mechanisms is important in the exploitative phase in order to support the innovation aims of the whole network throughout the process ([9] Dhanaraj and Parkhe, 2006; [48] Ritala et al. , 2009).

In sum, we suggest that innovation-generating business networks have a tendency to evolve from exploratory phases towards exploitative phases (for the sake of simplicity, we discuss about these two phases here, even though there might be multiple, even overlapping phases in the network evolution). In explorative phases, networks are more loosely structured and less determined, while in exploitative phases they have clearer structures and objectives. According to the earlier literature, both management and orchestration have their specific roles in these phases (see Figure 1 [Figure omitted. See Article Image.] for a summary).

While some suggestions exist in prior research on the different forms of coordination along innovation-generating network evolution, it seems that detailed understanding is still missing. We will examine this issue with the help of a case study, which will be presented in the following.

4. Case study - FIMTV

4.1 Case description

An explorative case study on the development of Finnish Mobile TV was conducted to gain empirical evidence on innovation network coordination. We focus on a particular innovation-generating network, called the Finnish Mobile TV Community (FiMTV - the official name since 2005). The common interest among the network actors was the DVB-H (Digital Video Broadcasting - Handheld) standard, related services, and complementary technologies. The core idea behind DVB-H was the broadcasting element - mobile TV content and services based on this technology would consume as much network capacity as the other options, thus providing a cost-effective way to deliver mobile TV to a large quantity of handsets.

The initial evolutionary phase of the FiMTV network started in 2001 when a group of companies (a handset manufacturer as the initiating force identifying the central players and contacting the largest telecom operators and the largest media companies) started working together. After lengthy period of pre-commercial and pre-competitive development and testing, the first large-scale commercial pilot (FinPilot) was conducted in March-July 2005. The results implied that there was a market for mobile TV and the related services. The FinPilot steering group, consisting of representatives of seven core companies, considered it worthwhile to continue the common development, and even decided to extend it to incorporate a larger developer community. In late summer 2005 one of the mobile operators assumed the key role of the development and coordination of the innovation network in terms of pushing the whole FiMTV network ahead in terms of arranging meetings, setting up schedules, and communication to both inside and outside stakeholders. Preparations by the City of Helsinki (the capital of Finland) to build what subsequently became the Forum Virium Helsinki (FVH) cluster began at the same time as it was considered that the network needed "an outsider" to bring the central players together. As a result, FiMTV became the first major project approved by the FVH.

The commercial-development potential became concrete when a network operator received the DVB-H network operating license in March 2006, and when the network was opened on December 1st. It was operational in Finnish markets in January 2007 (and covered 40 per cent of the Finnish population in 2008). The second pilot project (FinPilot2) was launched in summer 2007 and ended in spring 2008. This project was lead by VTT (Technical Research Centre of Finland), and the aim was to approach the customer's with piloted interactive services, and to find out which application of the technology would attract customer attention and thus commercial feasibility. FiMTV project officially ended in spring 2008, but the collaboration among the various stakeholders continues in other projects and forums (for a more in-depth description, see, e.g. [38] Nyström and Hanttu, 2007).

4.2 Methods and data collection

From research perspective, FiMTV provides a rich case through which to explore the characteristics and evolution of an innovation-generating business network, and its coordination. We chose to conduct a qualitative single-case study (see, e.g. [58] Yin, 2003) given our aim to provide a holistic description of a relatively unexplored phenomenon of network evolution and coordination (see, e.g. [12] Eisenhardt, 1989). Our approach could be defined as explorative ([58] Yin, 2003), and also as instrumental ([52] Stake, 1994) in that the idea is to extend understanding beyond the case in question. Moreover, the case method is particularly suitable in this research setting in that it allows a process perspective (see, e.g. [45] Quintens and Matthyssens, 2010).

Data was gathered in interviews with business managers responsible for the mobile TV business in their respective firms, representing 13 key organizations altogether (the whole network was represented: the infrastructure provider, the mobile equipment manufacturer, two telecom operators, eight content providers, and the City of Helsinki). The interviewees typically worked as development or technology managers, business-unit directors, VPs or CEOs, and represented their firms in the FiMTV. There were two interview stages. The first, during spring 2007, comprised semi-structured interviews with 15 informants. These interviews focused on the management challenges related to service innovation development during different phases of the FIMTV project (e.g. collaboration, actor expectations, competition, contracting, and formal and informal networks), as well as on the overall network structure. This gave us the understanding on the network actors and their roles, as well as on the technology and services under development. Second, three further interviews were conducted between autumn 2007 and spring 2008 in order to deepen our insights into network coordination in particular, and to understand how network has evolved over time. The interview questions at this stage mainly concerned on how network coordination has been achieved. All the interviews lasted between 30 and 120 minutes, and they were tape-recorded and transcribed (about 16 hours of interviews altogether). Additional data was gathered from public sources such as company and project web pages, public newspapers and news archives, and from the representatives of copyright organizations. The data was coded and grouped under relevant themes for content analysis. The interpretations of the researchers on the case were discussed on several occasions with industry experts involved in mobile TV development (including personal communication as well as a larger seminar with most of the main actors present). This increased the face validity of the study, as well as provided the authors with additional insights that were not immediately evident from the data.

5. Case analysis

5.1 FiMTV as an innovation-generating business network

The first step in analyzing the evolving coordination of the FiMTV network was to identify the central characteristics of the network. It is obvious that the participants had formed an innovation-generating business network, in that the objective of the project was to develop new services with the help of novel technology. The concrete markets of mobile TV were unidentified at the time of the launch, and thus the focus was on collaboratively creating a radical innovation (new products/services for new markets). Further, FiMTV focused on identifying dominant ways of utilizing new technology, and on setting up established services and a concrete customer base, and there were recognizable hub firms involved in various stages. While the hub role of the mobile handset manufacturer was pronounced very early ideation and exploration phases, the main emphasis shifted within the hands of a larger group of actors in the later exploitation phases. In these phases, the firms recognized the need for commercialization in explicitly noting the need for interoperable technologies and services. "No one can afford not being part of it! I cannot imagine markets evolving without operators cooperating." Moreover, competitors were involved, including all the major media companies and telecom operators: "There may be openings that we both consider so valuable that there's then a need for competitor collaboration as well." Thus, the network exhibited such features that would place it in between the most fuzzy innovation networks and well-structured innovation networks, with some relatively concrete individual pilot projects and less clear phases.

In terms of network coordination both orchestration and management seemed to play a role. However, the relative importance was not the same throughout the FiMTV project. Table I [Figure omitted. See Article Image.] summarizes the network characteristics, coordination roles, as well as the nature of the two coordination mechanisms in the three phases (we use the word "phase" to describe the most distinctive and identifiable events occurring along the network evolution). These are discussed in the following two sections.

5.2 Orchestration mechanisms

Based on the interviewees' comments, orchestration was naturally needed in the early ideation phase. The project was triggered by the vision of the handset manufacturer, who gathered the media companies and telecom operators together to discuss the emerging idea of utilizing a broadcasted TV signal as content for mobile phones. At that time (the early 2000s), mobile TV was a radical notion in that the technology required was not in use in any part of the world. Communicating a vision was essential in order to collaboratively achieve more concrete roadmaps for the future. This was quite intuitive given the ambiguity of the potential business model at that time.

All the orchestration mechanisms were more or less present during the process: maintaining stability, facilitating knowledge mobility, and securing innovation appropriability. In the early exploration phases the mobile handset manufacturer was the main actor orchestrating the network in terms of communicating vision and attracting interest from other key players (telecom operators and media companies). Interestingly, particularly in the latter exploitative phases these kinds of coordination mechanisms were shared in the network as a whole rather than in a distinct "hub firm". In fact, core firms pursued to orchestrate the network together in various ways, which are discussed in the following.

- Strengthening social capital in order to maintain stability. The orchestration type of coordination was evidently present when the actors were collaborating through technology-development forums (e.g. the RTT forum and Dimes Association, before the FiMTV organization was formed). The constant maintenance of close inter-firm and interpersonal relationships between the key actors fostered social capital. "The same people have been active in Mobile TV for a long time." This gave stability to the network because the participants were able to trust each other. "I know almost everybody involved and they also know each other", "... good guys and substance created trust". One important element of the strong social capital was the past history of the key actors in developing other technology and service solutions. On the other hand, new actors were brought on board in several development forums and initiatives during the two pilots.

- Open platforms for open discussion. The building of open discussion platforms facilitated knowledge mobility: "Certain openness is common to all of us [in our discussions]." Events took place in various forums, but what was common to these was that individual firms with commercial targets hung back and more "neutral" actors brought the parties together in practice. "We went to the Ministry of Transport and Communication to talk about this idea because we needed and outsider that would call the different players together [...] media companies and telecom operators regarded each other with suspicion in the beginning of 2000". In line with this, the later events included extensive discussion conducted under the name of Forum Virium Helsinki. "Without Forum Virium we would not be discussing these things any more ... it [mobile TV] would be dead". "The goal of Forum Virium ... is to foster understanding about the possibilities and about how we could explore these opportunities."

- Securing innovation appropriability. Contracts (e.g. NDAs) and other means of protection were used to secure the appropriability of the potential innovations of the different actors (e.g. service developers), especially in concrete projects such as FinPilot. The social capital among the network members also helped to reduce concerns related to free riding and opportunism - reflecting the focus on the subject matter rather than the commercial outcomes: "Research collaboration can provide a frame for the collaborative development of certain services or infrastructure, but for other things there are different arenas, where business contracts are drawn up and commitments are made. Mixing the different roles is not worth it and it may ruin the accomplishments of collaborative research."

5.3 Management mechanisms

Management mechanisms were not in place at the early ideation stage because there was basically nothing to manage (the DVB-H technology was still in its infancy, and the network had only just started to emerge). However, various technology forums and industry associations (such as RTT and Dimes) took the leading role in coordinating the development and testing the technology during the technology development phase. By that time concrete mechanisms were in place to facilitate the scheduled meetings between the participants and draw up formal agreements on technology testing. The use of other management-type coordination mechanisms was not used, since the purpose was to collaboratively test and develop potential technologies and approaches for delivering mobile TV content.

In the later exploitative phases, the FiMTV network exhibited features that resembled traditional management more than orchestration. The two commercial pilots - FinPilot focusing on customer preferences and FinPilot 2 focusing on services - both had a clear hub actor managing the network, and they also were target-oriented: "Arriving at a common understanding of who will do what and how the responsibilities are shared in the pilot was one of the key challenges." "Cooperation was very active in FinPilot ... there was a concrete goal and a tight schedule." The first FinPilot was led by a mobile operator taking a managing role in orienting the actors towards a common goal. The idea was to have a single actor coordinating the meetings, promoting the development events, and taking care of the press releases and so on. A large applied research organization led the second FinPilot, the purpose of which was to pilot the services of different firms and actors in the commercial network. In both cases the role of the single actor was more dominant than in the orchestration phase of the overall coordination process. It also seemed that the actors could change roles and rotate the leadership during the developmental process: "After the pilot the hats were basically changed again". Without stricter management covering project coordination it would not have been possible to pursue explicit goals with clear deadlines.

6. Discussion and conclusions

The aim of this study was to analyze how innovation-generating business networks and their coordination evolve over time. In pursuance of this aim we distinguished between two types of coordination - network management as "coordination by commanding", and network orchestration as "coordination by enabling". Based on the earlier literature, we put forward a conceptual framework suggesting distinct roles for management and orchestration along the network evolution from exploratory phase towards more exploitative, goal oriented phases. We analyzed the evolution and usage of these coordination mechanisms with a case study focusing on a long-term innovation and development project focusing on mobile TV services in Finland. The main contribution of our study to the research on business networks lies in the explicit recognition of the evolutionary element inherent in innovation-generating networks and their various coordination types, which is an important, yet under-researched perspective (see, e.g. [21] Hedaa and Törnroos, 2008; [45] Quintens and Matthyssens, 2010).

Overall, our findings suggest that the characteristics of the Finnish Mobile TV project (FiMTV) place it between the fuzziest forms of innovation networks and the networks with the clear commercial targets. However, closer examination of the network evolution indicates that while in the beginning, uncertainties were more pronounced, at times (during pilot projects), quite clear goals and structures emerged. Thus, network coordination needed to develop accordingly. In particular, we found that network orchestration and management were emphasized differently during different evolutionary phases, and they had different roles. Orchestration ranged from creating the vision of mobile TV and communicating that vision at the beginning, to influencing actions of the key actors later on in terms of developing social capital, network structure and the operating principles that enabled them to collaborate and share knowledge, as well as to attract new members to the network. Management focused more on those aspects of the project that came closest to the commercialization of the emerging services (in line with the suggestions of [37] Möller and Svahn, 2008). This also reflects suggestions in previous studies advocating the absence of network management during the initiation phases ([14] Fulop, 2000; [3] Biggiero, 2001), and a large administrative function (comprising participants from various network organizations) when the innovation network is established and operating ([54] Thorgren et al. , 2009). As a whole, it can be said that hybrid form of coordination moving fluently between orchestration and management was beneficial when the network evolved from exploratory towards more exploitative phases.

The study also shows that there may be shifts in which the company takes the role of a "hub firm" during the evolution of the innovation network, suggesting that the positions of various focal actors evolve along the network. In particular, different actors can assume the coordination roles according to the emerging needs. The implication in this is that rotating leadership (as discussed in [8] Davis and Eisenhardt, 2007) may indeed be a viable way of keeping innovation-generating networks alive and developing. Another interesting observation is that when the network coordination resembles orchestration in its purest form, it might reside more on the network level than on the level of the individual "hub" firm. This became evident in the later phases of the network evolution when various actors started to engage in shared orchestration, and the whole business model was taken forward by the network and not by an individual firm (as it was in the earlier phases). Taken together, the evidence on rotating leadership and shared orchestration provides new insights on network coordination literature, potentially helping to unwind some of the conflicting approaches regarding to the manageability of innovation networks.

6.1 Managerial implications

Innovation-generating business networks are constantly evolving, and require careful managerial attention. The main managerial implications of this study are related to aligning and matching the central characteristics of the network and the coordination type as the network develops. In particular, both orchestration and management can have distinct and separate roles in the coordination of innovation-generating business networks - but it should be remembered they should both be used in order to reap the full benefits of such networks. Thus, managers should carefully evaluate the evolution and features of the network when making coordination decisions.

Orchestration - i.e. coordination by enabling - should be used throughout the network evolution to communicate the vision and build social capital, given the need for knowledge sharing, appropriability and open collaboration. In fact, if traditional management had been forced in the beginning of FiMTV, it is likely that some important actors would not have joined or would have soon dropped out. Useful mechanisms for network orchestration could be common platforms for discussion, seminars, and other types of communicative areas (physical or virtual) where the common vision and social capital can be facilitated. These are likely to be useful also in latter phases, where orchestration may bring out new innovative ideas even when things seem to be quite settled.

On the other hand, management - i.e. coordination by commanding - is needed to coordinate the phases that are closer to commercialization because the exploitation of any possible results requires stricter project control. In the FiMTV case, the pilot projects would have likely failed if no one had taken a clear responsibility of carrying them out. In this type of network coordination, management mechanisms such a separate project manager, clear deadlines and requested deliverables can be useful in this regard.

6.2 Limitations and further research

The limitations of this study lie in its explorative, case-based approach, which limit the generalizability of our results. Future qualitative and quantitative studies are needed to further elaborate the evolution of innovation-generating business networks and their coordination, and they will reveal more generalizable results. In particular, there is a need for research on how management and orchestration differ in terms of actor roles, suitability for different types of networks, and effectiveness. Thus, different types of business networks should be examined. Furthermore, since the influence possibilities and power of an individual actor on the network is central to the discussion on network coordination, studies assessing this issue both formally (quantitative approach) and qualitatively are needed.

Received: 8 March 2011 Revised: 9 March 2011 29 June 2011 14 DecemberAccepted: 2 January 2012

Subject: Leadership; Case studies; Evolution; Innovations; Business networking

Location: Finland

Classification: 9175: Western Europe; 2200: Managerial skills; 9130: Experimental/theoretical

Publication title: The Journal of Business & Industrial Marketing

Volume: 27

Issue: 4

Pages: 324-334

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Emerald Group Publishing, Limited

Place of publication: Santa Barbara

Country of publication: United Kingdom

Publication subject: Business And Economics--Marketing And Purchasing

ISSN: 08858624

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

DOI: http://dx.doi.org/10.1108/08858621211221698

ProQuest document ID: 971680695

Document URL: http://search.proquest.com/docview/971680695?accountid=38610

Copyright: Copyright Emerald Group Publishing Limited 2012

Last updated: 2013-09-10

Database: ABI/INFORM Complete

Document 6 of 100

New Bedford Whaling Museum

Author: McGuire, Stephen J J; Kretman, Kathy P

ProQuest document link

Abstract:

The story of how a museum director restored her institution to health and succeeded in integrating the museum in the community is presented. Light is shed on this transformation and on the challenges that lie ahead. [PUB ABSTRACT]

Full text:

New Bedford Whaling Museum

August 30, 2011

Anne Brengle, Executive Director of the New Bedford Whaling Museum, of New Bedford, Massachusetts, scooted on her moped over cobblestone streets past the renovated 19th-century buildings in the New Bedford Whaling National Park. She coasted to a stop behind the 1822 Sundial building that housed the Museum's administration. Across the street, the Green Grocer Market was already filled with customers - historians and literary scholars debating the lives and work of Herman Melville and Frederick Douglass over coffee. A noisy group of Boston schoolchildren marched towards the Museum on Johnny Cake Hill to gaze at the enormous skeleton of a rare blue whale suspended from the lobby ceiling, before heading to the ECHO Resource Center for a lesson in marine science. Tourists and visiting scholars, chattering in German, Portuguese, Japanese, Norwegian, English and a smattering of other languages, strolled through the Museum, some to visit the exhibitions, others to make use of the Museum's wireless Internet café, and still others to trace their genealogy in the Kendall Library archives.

Entering the Sundial building, Brengle marveled at the dramatic changes in the Museum during her 11 years as Executive Director. Once considered by some in the community to be a stuffy, elitist and inward-looking organization, the Museum was striving to engage the community and contribute to the revitalization of New Bedford and the South Coast Massachusetts region.

While proud of the Museum's new vitality, Brengle knew that there was much more to accomplish. What could the Museum do to open its arms to all members of the surrounding communities? Could the Museum find a balance between the apparently conflicting objectives of being the scholarly "world's foremost whaling museum" and a local organization active in the community? And, above all, could a small city institution with a tiny endowment continue its existing programs, never mind expand? To Brengle, the opportunities that fit with the Museum's strategy of community outreach, research, and preservation were plentiful.

Historical New Bedford and the whaling industry

Between 1800 and 1880, a significant portion of the U.S. economy depended on New Bedford and the surrounding South Coast of Massachusetts. The bustling city was the epicentre of the global whaling industry. Ships left New Bedford for the world's oceans to hunt whales, and returned with valuable goods: oil for illumination and lubrication, and spermaceti for candles. The whaling "boom" not only fueled the U.S. economy; it expanded America's contact with people across the world. New Bedford's reputation as the capital of the whaling industry attracted immigrants from the farthest reaches of the globe. In its heyday, the seaport town was a hub of activity, rich in its cultural diversity, commercial enterprises and flourishing arts community. The New Bedford whalers were legendary - an inspiration for great literary works such as Herman Melville's Moby-Dick.

In the end, the New Bedford whalers paid a dear price for their success. As the world's whale population diminished, the whalers had to search further for their prize, from Alaska's coasts to the Arctic Ocean. By the late 1880s, petroleum came into widespread use and the demand for whale oil plummeted. The world-wide whaling industry began to decline and eventually disappeared.

Old Dartmouth Historical Society

In 1903, as New Bedford's whaling industry was rapidly disappearing, 100 community members founded the Old Dartmouth Historical Society. The Society and its New Bedford Whaling Museum initially concentrated on collection, preservation and exhibition of significant historical documents, artifacts and artworks associated with whaling. In 1914, a full-time curator was appointed and, by 1922, two donated buildings in downtown New Bedford housed the collection. Remarkably for its time, the Museum assumed an educational role by sponsoring visits from school children. In addition, members of the Society assumed a larger community role. In the 1920s, the daughter of a whaling merchant and donor of a Museum building, Emily Bourne, was "intent on improving the unsavory neighborhood around the Seaman's Bethel and Johnny Cake Hill."

From its founding until 1942, the collection and Museum grew in size and sophistication. The number of visitors reached 10,000, many of whom traveled from other states and countries. During the war years, activities were curtailed but soon expanded, particularly when the 1956 movie Moby-Dick (starring Gregory Peck) rekindled the public's interest in whaling.

Through the 1960s to 1970s, the Museum focused on acquisition and display of its collection. In 1964, the Society approved a plan to "to make the collection the most comprehensive nationally and internationally." The 1970s coincided with international interest in environmental preservation and the birth of the "save-the-whale" movement. The Museum conducted pro-preservation research, among which was its well-known study of the endangered bowhead whale.

In 1974, the American Association of Museums (AAM) accredited the Museum, which retained accreditation thereafter.

In the 1980s and early 1990s, the Museum focused on education and community outreach in line with AAM standards, while continuing to develop its world-class collection. The Board of Trustees approved an ambitious project to establish an educational "Whale Discovery Center" in the tourist destination of Plymouth, Massachusetts. The Center was intended to attract new audiences and generate additional revenue. It opened in 1991 with great fanfare, only to be quietly closed after two years of deficits. Operating costs endangered the Whaling Museum's tiny endowment. In 1993, the Senior Curator announced his retirement. At the end of 1993, the Executive Director of the New Bedford Whaling Museum, Anthony Zane, announced his intention to resign. The Board sought an Executive Director who would restore the Museum to financial health and provide direction for the future.

New Bedford today

New Bedford, Massachusetts, located 54 miles south of Boston and 210 miles northeast of New York, was home to about 96,000 people from diverse racial and ethnic backgrounds, the most prominent being Portuguese (many from the Azores Islands, a former whaling centre), Cape Verdean, Hispanic, French and French Canadian, English, Irish, Italian and African American. The city's population diminished by 8% between 1970 and 2000 due to job losses in manufacturing, fishing and agriculture. Job growth occurred in the services sector, particularly in tourism. New Bedford has been described as a "close community of long-standing residents and families," where families stay in their neighbourhoods and work near home. The city has a low housing turnover rate and an average commute time of 16 minutes.

New Bedford was a blue-collar town. About 7% of New Bedford residents graduated from college, compared to 22% for the state of Massachusetts. In April 2005, the city's unemployment rate was 7.9%, a decline from 12% in 1990, yet considerably higher than the national average of 5.1%. Once among America's wealthiest cities, New Bedford's 2005 poverty rate hovered around 20%, with high incidence among minority residents. For example, nearly half of the city's Latino residents were considered to be below the poverty line, as well as a third of New Bedford's African Americans. Nonetheless, the port of New Bedford remained the United States' greatest fishing port in dollar terms (over $176 million in 2003), principally due to scallops.

The South Coast area, including New Bedford and five surrounding towns, was home to the descendents of the great whaling families - former ship-owners, captains, traders of oil and manufacturers whose fortunes were made in the era of New Bedford's historic economic boom. By 1993, many of these families continued to be members and trustees of the Old Dartmouth Historical Society. Interested in preserving their heritage, they were typically people of financial means with ancestors in the whaling industry.

Enter Anne Brengle

In 1994, the Board of Trustees selected Anne Brengle to serve as the Executive Director (E.D.) of the New Bedford Whaling Museum. The cover page of her application packet had nothing more than a quote from the Board's search committee: "Although there will never be enough whatever (money, staff, skill) to do all that we want in the way that we want, the Director must make it seem that there is."

Knowing that there would never be enough "whatever," Brengle took to heart the mission statement approved just one year earlier by the Board: "To educate and interest all the public in the historical interaction of humans and whales worldwide and in regional and maritime history." The mission implied a focus on education and community outreach, as well as a commitment to the Museum's global impact. Clarity of mission, however, would not be sufficient. Brengle was charged with restoring the financial health of the organization, maintaining and restoring the physical facilities, caring for and extending the Museum's collection and developing and implementing programs that fit the mission. Fulfilling this mandate required her to gain the trust and confidence of the Museum staff and volunteers.

Shortly after assuming her duties as E.D., Brengle found herself reading the Museum's internal newsletter, Spoutings. A headline caught her eye: "Exhibitions Up, Exhibitions Down - Chaos Reigns." Perhaps because of her training in interior design, Brengle had taken a "hands-on" approach to the layout of exhibits. The newsletter reported that "the Director likes this here and that there ... it's enough to make an old docent paranoid. ... But do not despair, things will settle down soon." But things were not about to settle down, and Brengle knew she needed to assert her authority and gain the trust of her staff. In a staff meeting, she made light of the Spoutings article and announced: "I reign here, chaos does not."

Brengle set out to understand what made her organization "tick." She distributed a climate survey to Museum employees; the results described some of the challenges that awaited her. She learned from the survey that the top three "blockages" to organizational performance were "low creativity," "confused organizational structure" and "poor teamwork." Moreover, every Museum employee who completed the survey agreed with the following three sentences: "Good suggestions are not taken seriously;" "Only top management participates in important decisions;" and "Competing organizations have brighter ideas." Together with the survey results, Brengle handed out to all staff members a short list entitled "Can-Do Winning Attitudes." She believed that the Museum's challenges needed a "can-do" team.

The national park initiative

Before joining the Museum, Brengle had been actively involved in a strategic initiative to preserve and restore historic New Bedford. Brengle joined WHALE - the Waterfront Historic Area League, which was dedicated to preserving and restoring New Bedford's downtown waterfront area. Although WHALE achieved some notable successes, local community resources were simply insufficient to restore the crumbling downtown infrastructure. She and other community leaders initiated a movement to establish a national park in New Bedford's historic downtown area. Massachusetts Senator Ted Kennedy and Congressman Barney Frank were enlisted to take up the cause in Washington. While still a candidate for the E.D. position, Brengle testified before Congress in support of the national park designation. In June and November 1995, now representing the Museum, Brengle testified again. Kennedy and Frank, in spite of Washington budget difficulties, moved mountains on Capitol Hill, and in January 1996, Congress passed legislation to establish the New Bedford Whaling National Historic Park. The Park would encompass the historic downtown area surrounding the Museum and, eventually, bring in federal dollars for preservation, renovation and support to tourists, students, educators and researchers. The cobblestone streets would be repaired and gas lights restored. The federal government would take care of the spaces surrounding the Museum. Although it took two years from the passage of the legislation to the opening of the park to the public, significant change had begun in New Bedford. The pace of change would only increase.

Changes inside the New Bedford Whaling Museum

In 1994, Brengle attended a professional development session for executive directors, sponsored by the Jessie Ball duPont Fund. The meeting allowed her to "swap notes" with other nonprofit leaders and learn about their practices and successes. She returned to New Bedford energized and further committed to transforming her organization.

New managerial talent. Given its continued faith in the Museum's mission to "educate and interest all the public," Brengle hired Lee Heald to manage educational programs. Heald, a brilliant and energetic Ph.D., had favorably impressed the Board when she was a candidate for the E.D. position. Brengle concurred. She knew the Museum needed an entrepreneurial thinker to revitalize its educational programs, given the organization's timidity after the closing of the Plymouth exhibit. Heald was hired in June 1995 as Deputy Director, with responsibilities for programs, education, the library and the volunteer council. Heald recalled that in one of her first staff meetings at the Museum, Brengle played a video clip of Whoopi Goldberg motivating a group of nuns to cooperate and sing together in the movie Sister Act. The message: With energy, teamwork and laughter, we can make this happen!

Lighting the way. One of the first transformational initiatives at the Museum was the "Lighting the Way" campaign, through which the Museum set out to restore its financial health. To some, the stated goal of raising $10 million seemed impossible, even ludicrous. Never before in its 90-year history had the museum even raised $2 million. However, the Board and senior management knew that significant fund raising was critical at this juncture to increase the Museum's fragile endowment of under $4 million and restore its infrastructure.

Education and outreach. A second initiative involved examining education and community outreach programs. Heald and Brengle planned a series of new programs to re-vitalize the Museum's education function. In spite of some trustees' reticence to embark on new adventures after the Plymouth "pull back," Heald and Brengle's enthusiasm carried the day. New programs such as the "Inner City Education," "Newspapers in the City," and others were approved and put in place. The New Bedford Whaling Museum was back in the business of "educating and interesting all the public," and in this case, reaching out to community members who might not otherwise enter the Johnny Cake Hill facilities.

Skills and organizational structure. A third transformative act addressed the Museum's staffing. Brengle recognized that the Museum needed a full-time development director to execute the "Lighting the Way" campaign and initiate additional funding opportunities. Helena Harnett, who had been serving as Brengle's informal, pro bono consultant, was asked to join as Deputy Director. With Harnett and Heald on board, it was time for Brengle to "tweak" the organization's formal structure - the first of a series of changes she would make in the coming years. The new management team was comprised of Brengle and four directors. Reporting to Brengle were the Curatorial Director (accountable for collection and preservation), the Program Director (accountable for the library, education, and the volunteer council), the Operations Director (accountable for finance, facilities and the Museum store), and the Development Director (accountable for development and marketing). The 1997 structure represented a dramatic shift of focus to align the organization with its mission. Fund development became a top priority. Educational programming, which previously had reported to the Curator, was not considered to be at the same level as collection/preservation. (See appendices 1 and 2.)

Strategy. While there was general agreement among the Board and staff on the Museum's overall mission, a new strategic plan was needed to clarify goals and prioritize actions. Liz Curtis, a consultant with Technical Development Corporation (TDC), was hired to facilitate the process of coming up with a new strategic plan. With grants provided by the Jessie Ball duPont Fund and Fidelity Foundation, the work began. During the course of a year, the Board's Long Range Planning Committee, Curtis, Brengle and the Museum's senior managers examined the New Bedford Whaling Museum in all of its aspects, compared it with 16 other museums, conducted a survey of the members and held focus groups with members and visitors. A new and ambitious vision was approved: "It is our vision to be the world's premier whaling museum and to be recognized as such by the public we serve as well as our professional colleagues." The four-year plan called for more than doubling the number of Museum visitors, becoming the keystone in the soon-to-be-opened Whaling National Historic Park, doubling the Museum's operating budget, fulfilling the promises of the "Lighting the Way" campaign, expanding and restoring the Museum space, expanding the collection, increasing education and community relations programs and adding $2.5 million to the endowment.

With a new, aggressive campaign, new, energetic senior managers, new, exciting programs, a new national historic park, a new organizational structure and a revised strategy, the 90-year-old institution had truly opened its arms to change. But nobody could have imagined how wide those arms would have to open until a blue whale washed up in Narragansett Bay.

The Blue Whale and the "Grand Opening"

Anne Brengle considered the blue whale exhibit to be the real beginning of the Museum's ability to tell the whale conservation story: a "sea change" for the organization. Although the Museum had taken a pro-conservation stance since the early 1970s, it was the blue whale that allowed the local community to get directly involved. Only about 500 blue whales, the largest creature that has ever lived on earth, still survive in the North Atlantic. In March 1998, a four-year-old male (only 65 feet long!) surfaced under a ship and was struck by the propeller. It floundered in a storm and was pushed by a tanker into Narragansett Bay. After careful consideration of several museums and universities, the National Marine Fisheries Service placed the skeleton in the care of the New Bedford Whaling Museum. The Museum decided that the skeleton would form the centrepiece in its new lobby gallery, where the story of whale conservation could be told free-of-charge to the public. A contest was held to name the whale. A New Bedford schoolgirl, Katie Hallett, won with the name KOBO - King of the Blue Ocean. Volunteers were needed to prepare the way for the skeleton and the community responded with enthusiasm. The whale carcass was delivered to New Bedford's landfill, where trained volunteers removed the flesh from its bones.

Community volunteers placed sections in 22 special cages and submerged them in the New Bedford harbour, for marine life to clean the bones. Bones were then moved to the Museum where they were scrubbed, dried and re-assembled under the guidance of a biologist and skeleton expert. The business community and City Hall got involved, donating the cages, towing the whale, moving the bones. The FIRSTFED Foundation asked if it could sponsor the display and donated $125,000 for the privilege.

The community's excitement about the whaling story was contagious. New Bedford Mayor Frederick Kalisz, Jr., already committed to the renovation and seven-day-a-week maintenance of the downtown historic area, arranged for a special exhibition of Azorean art to come to the city. The government of Portugal made a gift of $500,000 to the Museum to establish an Azorean Whaleman Gallery. The Kresge Foundation followed with a $500,000 challenge grant. The Jacobs family, members of the Old Dartmouth Historical Society, gave the Museum its first-ever donation of $1 million for the open-to-the-public lobby and gallery. The National Endowment for the Humanities made a challenge grant of $375,000. All of these actions culminated in the New Bedford Whaling Museum's July 2000 Centennial "Grand Opening," at which 30,000 people strolled through the downtown historic area in the National Park, visited the new Jacobs Family Gallery with the blue whale and examined the Azorean art exhibit. The Museum was reborn.

Sustaining the Momentum

Costa's promotion. Shortly after the "Grand Opening," Jason Costa, a finance clerk assigned to the Museum's construction project, asked Brengle for a meeting. Costa, who had been in Operations for two years, wanted to make a number of suggestions for planning and control, particularly given the extensive facility renovations that were taking place. Impressed by Costa's preparation for the meeting, his suggestions, and most of all his understanding of the Museum's mission and strategy, Brengle surprised Costa with a job offer: Deputy Director for Finance, Operations, and Facilities. The newly promoted Costa accompanied Brengle to the Summer 2000 Jessie Ball duPont Executive Institute, which focused on building organizational leadership capacity and strengthening board-staff relations.

Campaign conclusion and recognition. In December 2000, the Museum concluded the "Lighting the Way Campaign," two years early and $2.1 million dollars over its $10 million objective. A few months later, the Museum was awarded the 2001 Commonwealth Award for Institutional Excellence by the State of Massachusetts. The world outside New Bedford was beginning to take notice of the transformation taking place at the Whaling Museum.

Leadership team development. Sustaining the momentum would require the persistent, coordinated effort of the Museum's managers. In August 2001, Brengle, Heald, Hartnett and Costa attended their first leadership team retreat. Daniel McCoy, a consultant at The Jeremiah Group, facilitated discussion about the personality and style of each senior manager, as well as the team's capacity to work together and deal with conflict. Always curious about herself, Brengle was fascinated with the differences in personality and style of the four executives. She strongly believed that the leadership team's performance would be enhanced to the extent that each executive was self-aware and conscious of how he or she affected others.

Increasing community ties. If sustaining the momentum required a strong management team, it also required strong relationships outside the Museum. Brengle joined the board of the Council of Maritime Museums (CAMM). In order to strengthen ties with community partners, Heald, Brengle and other community leaders founded AHA! (Arts, History, and Architecture). AHA! was a collaborative effort of 15 New Bedford museums and art organizations, art galleries, merchants, restaurants and the National Historic Park. Among other activities, AHA! offered a monthly free "art and culture" night with live music or theatre and art exhibitions in the historic downtown.

In the summer of 2001, Brengle believed that the leadership team, the funds and the relationships appeared to be "in place" to implement the Museum's mission. However, as the first of seven children, she had grown up accustomed to big changes about every two years when her family welcomed a new member. Her Museum family would turn out to be no less surprising.

The Kendall Opportunity

In summer 2001, an extraordinary opportunity presented itself. The Kendall Whaling Museum in Sharon, Massachusetts was considering closing its doors permanently. Although it had both world-class curatorial expertise and an extraordinary collection of 70,000 objects related to nautical history and art, it also faced a potentially insurmountable challenge: how to obtain sufficient funds to preserve, maintain and exhibit its collection. Liz Curtis, the TDC consultant who had helped the New Bedford Whaling Museum with its strategic plan, was hired by Kendall to develop strategic options. The Kendall trustees had several possible courses of action, including the piece-by-piece sale of the collection, but they believed the best option was to find a new home. Given the extraordinary Kendall "dowry," finding a match would not be difficult - but which institution would provide the best home? The search ended in New Bedford. The New Bedford Whaling Museum conducted a feasibility study and the two museums began negotiations.

One thing was clear: the Kendall collection was a good fit with the New Bedford collection. The financial impact on the New Bedford Museum, however, was not so clear. It would cost at least half a million dollars to integrate the two collections. One trustee cautioned that the Kendall collection might turn out to be "the whale that ate the whale." Nonetheless, the Museum's leadership team, excited by the potential collection gift, moved to close the deal.

In September 2001, the Museum completed the preparation of its five-year budget, still uncertain about the Kendall gift. The Board approved the budget in early October, just days before the Kendall trustees announced their decision to donate the entire Kendall collection. The gift would practically double the size of New Bedford's collection and cause considerable strain on its operating budget. In the meantime, terrorists attacked New York City and the Pentagon; America's attention shifted from whalers to patriots, from field trips to Museums to staying safely at home. Admissions at America's museums dropped dramatically and donations dried up overnight.

Revisiting Strategy

Given such dramatic changes, the Museum's strategic plan required more than just a tune-up.

One, two, three. Brengle called on Liz Curtis to facilitate another strategic planning process - one consultant. Some trustees, concerned that Curtis had a conflict of interest because of her assignment with the Kendall Museum, thought it best to bring in additional help. The senior managers, impressed with Daniel McCoy's leadership team development work, asked McCoy to assist with strategic planning - two consultants. One trustee had worked with an expert in California, and provided funds to bring him onboard - three consultants. The strategic planning process, challenging in and of itself, soon approached unmanageable. Each consultant had his or her own approach to facilitation. Progress was slow, at best. The typically good-natured Board Planning Committee members found themselves disagreeing with the process; tempers flared. Finally, realizing that there were too many cooks in the kitchen, the Planning Committee terminated the California consultant's contract and asked Curtis to take the lead, assisted by McCoy.

Board changes. Inevitably, the function, composition and responsibilities of the Board of Trustees and its committees came under discussion. Community leaders had long considered that a board slot on the New Bedford Whaling Museum was a real honour. Trustee William Kennedy noted that it was "by far the most prestigious board to be on in town." An active governing body since the 1903 founding of the Museum, the 2001 Board needed new blood - trustees with energy and a commitment to address the challenges ahead. Janet Whitla, a member of the Old Dartmouth Historical Society who was asked to join the board in 2001, recalled the enthusiasm that pervaded the institution when she accepted. She credited it to Brengle's leadership. "Things seemed to be moving," Whitla remarked; actions were being taken that positively affected the quality of life in the city; one could observe that "year by year the place was transformed into a world-class institution." The changes made in just a few years, she noted, were "astonishing." The Board also needed greater diversity. Stocked with members of influential South Coast families - many descended from the great whaling captains and whale-oil merchants - the Board poorly reflected New Bedford's ethnic communities.

Board changes were underway. In November 2001 the Board approved a "Position Description of Trustee of the Old Dartmouth Historical Society - New Bedford Whaling Museum." The Board was enlarged from 25 to 35 members, with some of the new Board members representing New Bedford's diverse community and others bringing expertise in museum and arts. In practice, the Board began a transformation in the way it worked: from a group that analyzed every transaction to a governing board that had confidence in the Executive Director. Jason Costa, in particular, benefitted from mentors on the Board. Treasurer Calvin Siegal, a successful businessman, demanded as much accuracy in the Museum accounts as he did of his own businesses; he worked with Costa on the implementation of proper budget and control systems and the systematic preparation of contingency plans. Such plans would come in useful sooner than anybody expected.

Partnerships. Since the last strategic planning exercise, the Museum's attitudes toward partners had subtly changed. Always willing to work with other organizations, it had become clear that the Museum needed them. For the visitor experience, the Museum needed to collaborate with the National Whaling Historic Park, the City of New Bedford and other New Bedford museums. To have an impact in education, the Museum needed close ties with public schools, universities (in particular the nearby University of Massachusetts, Dartmouth) and scholars, such as the Melville Society. To extend its reach globally, it would need to strengthen ties with maritime and whaling institutions far away. The strategic plan would need to emphasize the importance of building strong partner relationships.

Vision and strategic plan. The strategic planning process took several months. The 1993 mission statement was not challenged, but the way to achieve that mission was debated. A comparative study with three other institutions was prepared. Members of the Planning Committee visited other museums. Museum executives from comparable institutions spent a day strategizing in New Bedford. The Planning Committee prepared a draft of a vision: what would the Museum strive to become in the future? The vision was "tested and subsequently modified, through a series of focus groups including trustees, volunteers, staff, Museum members, non-members, visitors, partnership organizations, funders, and community members." The process culminated in a Board retreat to examine the vision and the proposed 2002-2012 strategic plan. In spite of 9/11 (which implied diminished visitation) and the Kendall gift (which doubled the workload and greatly increased operating costs), the Board approved a plan that encouraged expansion. There would be no going back. The Museum would position itself as "the world's leading interpreter of the global whaling story." The strategic planning process resulted in a profoundly optimistic commitment to the mission and six core purposes: creating a compelling visitor experience; providing innovative education; outreach and access to a wide variety of audiences; collaboration with community partners; exceptional scholarship; and vigilant stewardship of the collection and all resources (see Appendix 3).

During the preparation of the 2002-2012 Strategic Plan, and in the months that followed its approval, the Museum's senior managers undertook a number of actions to strengthen their leadership team, as well as their individual managerial skills. Brengle, Heald, Hartnett and Costa attended a second leadership retreat with consultant Dan McCoy. Brengle attended executive training at the Getty Leadership Institute in Los Angeles. At the time, the Getty topic might have appeared irrelevant, given the Museum's energetic pursuit of growth and seemingly boundless opportunities. The Getty seminar was titled "Leading Retrenchment."

Trifecta Triumph: ECHO, the Kendall Library and the Sperm Whale

Mission-driven and optimistic, Museum trustees, staff and volunteers found themselves celebrating win after win after win.

ECHO. In 2002, the Museum and partner organizations were awarded a $1.7 million grant from the U.S. Department of Education, for culturally based education programs and cultural exchanges. Through ECHO (Education through Cultural and Historical Organizations), the New Bedford executives strengthened their partnerships with other institutions nearby (the Peabody Essex Museum, the New Bedford Oceanarium, New Bedford Global Learning Charter School, UMass, Dartmouth), and far away (the Inupiat Heritage Center in Barrow, Alaska, the Native Heritage Center in Anchorage, and the Bishop Museum in Honolulu). The ECHO grant enabled the Museum to provide sea life, history, whaling and marine science lessons to thousands of school children - in the Museum's laboratory/classroom and aboard the historic sailing vessel, Ernestina. Schoolteachers from the three regions gathered on a Hawaiian island, in New Bedford, or on the Arctic tundra to develop strategies to connect their students. Storytellers from Alaska, Hawaii and the Peabody Essex Museum descended on New Bedford to enchant 1,000 school children. Lee Heald described ECHO as the project that allowed them to "beef up" the system by really putting in place the education programs that the Museum had previously been unable to afford.

The Kendall Library. After two years of hard work, much of the Kendall collection had been integrated into the Museum. The Museum purchased a historic bank building and converted it into the new Kendall Library, which held the collection of ship journals, logbooks, scrolls, maps, sea charts, manuscripts and historic documents. The world's leading Scrimshaw Forensics Laboratory was opened, in which analysts could scrutinize and classify the carvings made on whale bone and teeth... as well as detect fraudulent items. Upstairs from the library, dormitories were set up for visiting scholars. Downstairs, the former bank lobby was converted to a place where researchers and curious amateurs could examine documents and make inquiries to Museum librarians and historians about whaling, maritime history, the history of Old Dartmouth, the global travels of whalers, family genealogy and the great literary works of the whaling era.

The sperm whale. As if to remind the New Bedford's historians that present-day whale protection and preservation were still critical issues, a deceased 45-ton sperm whale washed up on the shores of Nantucket in September 2003. As it had done with the blue whale, the National Marine Fisheries looked to place the great creature. Other museums and universities sought the skeleton, but there was little doubt that it belonged in New Bedford. After all, New Bedford's whaling fortune had been made because of the whale oil and spermaceti from sperm whales. Before electricity, the oil was used for lamps and the spermaceti for candles. In addition, the care shown by the City and the Museum for the blue whale made it obvious that no other place had greater expertise or commitment to such a project. Again, an appeal was made for volunteers and they responded with enthusiasm. Again, sections of the giant carcass were placed in special cages and immersed in New Bedford's Buzzard's Bay. Again, the mayor provided personnel and encouragement, and sent police divers to care for the cages. A partnership was struck with Roger Williams University in nearby Rhode Island, which provided expertise in the re-construction of the skeleton and the daunting task of hanging it from the Museum's ceiling, its home in a permanent exhibit. Win after win after win.

Retrenchment

In June 2004, the Museum found itself with a revenue shortfall of $158,000 (see Appendix 5). American museums had not recovered from 9/11. While such an amount in and of itself did not suggest a crisis, Brengle knew that when membership and admission revenues fell, gift shop sales and other revenues would follow. The ECHO and Institute of Museum and Library Services (IMLS) grants would be coming to an end. Jason Costa was aware of the need to wean the Museum off ECHO and the "joys and pains of federal funds" whereby important programs - and the employees working on those programs - were dependent on grant renewals for their survival. Under the mentorship of the Board Treasurer, Costa had prepared a contingency plan. The Museum knew ahead of time what costs would have to be cut if revenues fell below budget.

Mission-driven changes. Rather than making several small changes over time, Brengle presented a retrenchment plan to "take the hit" in a short period of time. Examining all activities through the lens of the Museum's mission, senior management decided that some programs must be maintained even if revenues were down, while other programs and activities would be curtailed or cut entirely. Money would somehow be found to fund educational programs that simply could not be cut without detriment to the mission. Managers would take a pay cut. Ten employees would lose their jobs. When the retrenchment plan was approved by the Board, Brengle prepared a carefully worded press release to announce the cutbacks. She began by saying that a full calendar of summer events and programs was scheduled by the Museum. She then wrote that the Museum would "streamline operations" and that the Museum was a "financially strong and secure institution." The press release ended with a statement from Board President Albert E. Lees III: "The Museum is poised to continue to grow, though perhaps not as fast as we had hoped. In no way will this affect our mission."

"Hemorrhaging red ink." Despite the calm, positive words from the Board and Executive Director, employees and the public were unfortunately caught by surprise. The news made the first page of New Bedford's newspaper, The Standard-Times, which reported that the Whaling Museum was "hemorrhaging red ink" and would lay off 10% of its staff and cut managers' pay (see Appendix 6). Brengle held a staff meeting at 5:00 p.m. to announce the changes. Ten people learned that they would lose their jobs within a month; some failed to understand why the cuts were necessary. Board President Albert E. Lees III and E.D. Brengle opened the 2004 annual report with the following message:

The first leg of many a 19th century whaling voyage was spent making short-term course corrections to avoid treacherous coastal shoals. Only when a vessel was in open ocean with a seasoned crew could it set sail more directly for its next destination and focus on the purpose, or "mission," of its voyage. Such has been the case for the New Bedford Whaling Museum - Old Dartmouth Historical Society as we have embarked on our 2002-2012 Strategic Plan.

Recovery

Recovery from the retrenchment meant re-building trust and morale with employees and community members, taking proactive steps to increase revenue and further management and leadership development. Above all else, Brengle believed, it meant ensuring that every action the Museum took was aligned with its mission. In July 2004, Old Dartmouth Society Member "Topsy" Montgomery pledged $1 million to the Museum to continue its educational programs. Shortly after, the Jessie Ball duPont Fund provided a grant that would allow school children to visit the Museum free of charge. Lee Heald remarked that support arrives when an organization is mission-driven: "If you are evangelical about your mission, you do attract support. It's like Velcro." Other donors came forward and Helena Hartnett redoubled her efforts to obtain grants that supported the Museum's mission.

Navigating the world. In January 2005, the Museum launched its most ambitious capital campaign ever. Through its "Navigating the World" campaign, it set out to raise a record $23 million dollars. To understand the strengths and weaknesses of its fundraising, the Museum commissioned a study by Jaques & Company, a Massachusetts consultant to nonprofit organizations. The consulting firm recommended an increase in staff devoted to development, but recognized that the Executive Director must play a prominent, personal role: "The success of the Navigating the World program will be determined in substantial measure by the amount of time that Museum President Anne Brengle can direct to it. We suggest that that commitment be not less than 30%."

The Museum needed to grow in terms of endowment and unrestricted funds. Brengle considered the current size of the museum, in the $3- to $5-million operating budget range, to be "awkward." For example, Lee Heald noted that 40 schools remained on a waiting list to participate in Museum programs. At 100 years of age, the Museum's $4.58 million dollar endowment was considerably smaller than that of comparable museums (see Appendix 4). However, the potential pool of contributors in the New Bedford area was limited. As Trustee Janet Whilta put it, "It isn't New York."

Leadership development. In 2004, Brengle attended a program at Harvard Business School on "Strategic Initiatives in Nonprofit Management." The experience further enhanced her commitment to ensuring that the Museum embarked upon mission-driven, sustainable programs, and found ways to fund them that did not rely on the whims of grant-makers. In April 2005, Brengle attended another Jessie Ball duPont Fund Institute Alumni meeting, this time on "Leading Organizational Change," hosted by Georgetown University's Center for Public and Nonprofit Leadership. As part of the "Change" session, she prepared a preliminary assessment of the Museum's "Entrepreneurial Organizational Culture" compared with other nonprofit and for-profit organizations. While the overall culture "score" of the Museum indicated a high degree of entrepreneurship, in some areas the Museum appeared less entrepreneurial than other nonprofits. Developing such a culture would imply greater proactiveness at all levels. In June 2005, Brengle, Heald, Hartnett and Costa attended a third team leadership retreat, this time with a focus on developing and delegating to middle managers. Further change and progress in New Bedford depended more than ever on developing the second layer of management at a Museum with 38 full-time employees and 120 volunteers, interns and visiting scholars. Helena Hartnett commented on how Anne Brengle had evolved from a hands-on manager to someone who had learned to delegate. Trustee William Kennedy noted that Brengle had "turned her job into a real CEO position." With an increased focus on fundraising for the Museum and involvement in external organizations with complementary missions, Brengle had come to accept that the Museum's three Vice-Presidents could "run the place." Continuing to expand her role as advocate for arts and culture, in June 2005, Brengle joined the Arctic Research Commission with the Alaskan museum partners, one more time reaching out to influence the environment in which the Whaling Museum operated.

Jason Costa commented that Brengle's true strength was attracting talented people: partner organizations, benefactors, government officials, trustees and employees. "She's like a magnet," Costa remarked, "she draws people to her success." Treasurer Calvin Siegal noted that Brengle spent considerable time to keep the Board fully informed. Trustee Janet Whitla added, "Anne is a saint. She keeps the Board abreast of our partnerships, runs these partnerships, and gives all partners a sense that they own the partnership equally." Brengle described in simple words her own philosophy about how to work with mayors, board presidents and other potential allies: "Love the one you're with." Brengle's optimism in spite of difficulties was well known; one trustee remarked, "Anne never sees a cloud in the sky." Her message to the Board had consistently been, 'We can do it.'

Organizational structure. At the end of 2004, the Board approved a new organizational structure (see Appendix 1). The structure acknowledged the emerging leadership team of Brengle, Heald, Hartnett and Costa. Reporting to Brengle (now called CEO) were three Vice Presidents: Vice President of Administration/CFO (Jason Costa); Vice President of Education, Exhibitions, and Programs (Lee Heald); and Vice President of Development and Communications (Helena Hartnett). While the new structure represented increased accountabilities for all three Vice Presidents, the most significant change was that Heald was made formally responsible for all curatorial and library functions; collection and education had officially come together.

Entrepreneurship Resumed

As of June 2005, the New Bedford Whaling Museum had largely recovered from the strains of retrenchment and was implementing new and innovative mission-driven projects.

Melville and Douglass. The Melville Society, a group of scholars of the works of the great author, renewed its partnership agreement with the Museum. The Museum, the City and the National Park promoted the Society's 2005 annual meeting on the lives and writings of Herman Melville and Frederick Douglass. The meeting drew 250 scholars to New Bedford - a testament to how relevant the Museum had become to the academic community.

Wireless Internet café. In order to reach out to the New Bedford community, in June 2005, the Museum opened a wireless Internet café in its open-to-the-public lobby. On tables beneath the blue whale skeleton, local residents and visiting scholars checked email, typed reports and browsed the web.

Three more whales! The Museum's reputation as the best location for the preparation and display of whale skeletons had become so firmly established that the National Marine Fisheries soon offered two additional whales. A right whale carcass was towed to New Bedford and buried on a nearby farm, where, with the help of manure, nature would clean the bones. In Alaska, a bowhead whale carcass was being chomped on by polar bears before the skeleton could be shipped to New Bedford. Scholars around the world were by now familiar with the Museum's collection and areas of competence: a researcher from Oxford University arrived to study the bowhead; an artist from New Zealand came to teach modern scrimshaw design. Finally, the Museum decided that it would make its own whale: an enormous whale puppet for use in City parades and school celebrations.

Window Back Gallery. In June 2005, the Board approved a $10,000 investment justified in a business plan put together by Costa and Brengle - the "Window Back Gallery," scheduled to open in July 2005. The Museum wanted to make its collection available to "all the public," yet it desperately needed additional sources of unrestricted revenue. It would offer for sale high-quality reproductions of selected items from its collection: maps, historical documents, photographs and paintings (seascapes, whaling ships at sea, lighthouses, historical figures and places, etc.). The reproductions would be sold in the Museum Gift Shop, where hours would be extended from the traditional 9 to 5 from Monday to Friday, to 9 a.m. to 9:30 p.m. six days a week. While the Museum store would certainly increase its sales, Costa and Brengle knew that the potential market for Museum reproductions was enormous... and most of that market would never physically travel to New Bedford. Merging technology and curatorial professionalism, the Museum was proceeding to digitally photograph its collection. The "Window Back Gallery" would allow customers to purchase digital reproductions of Museum items via the Internet. Book covers, calendars, photographs to hang on office walls... the possibilities were there. The "Window" plan projected total incremental revenues of $80,000, but the Museum executives believed the figure could be much higher given full marketing support. However, the true potential of the idea was yet unknown. How could Brengle and her team convince the Board that additional marketing expenditures were justified? Should the "Window" project proceed gradually and cautiously, or should Brengle push for a deep commitment to it - with the associated financial risk?

The Challenges Ahead

Since assuming the leadership of the New Bedford Whaling Museum in 1994, Anne Brengle had seen her organization grow and change. The image of the Museum in the community had changed: what was once thought to be an out-of-reach, elitist Yankee bastion, was gradually becoming seen as a community partner. The transformation had occurred through highs such as the blue whale exhibition opening, and lows such as the 2004 retrenchment. Was the transformation complete? Brengle did not think so - so much more could be accomplished and so many challenges lay ahead. She knew that there were many opportunities that fit with the Museum's mission, if only the organization were able to take advantage of them.

The Museum's mission and strategy demanded a global presence and local engagement. In the coming years, would it be able to achieve a balance between achieving global impact as a world-class organization and also being a local community partner?

The Museum had made great strides toward becoming engaged with the local community. With its limited resources, what more could be done to reach out to New Bedford and the surrounding South Coast towns? How could the Museum entice more members of under-represented groups to become members of the Society and assume Board roles? In addition, how well was the Museum actually reaching the audiences it sought to reach?

How would the Museum raise funds to support its current programs and ensure stewardship of its collection and other resources? Although it started with great optimism, was the $23-million "Navigating the World" campaign goal feasible, given the relatively small donor base? Such an amount had never been achieved before by the 100-year-old society. With its tiny endowment, what "tricks" could the Museum use to earn the money it needed to continue what it had begun? Was further expansion realistic?

Finally, Brengle wondered what more she needed to do to develop the organization's middle managers, retain the senior managers and institutionalize a culture of organizational entrepreneurship that remained mission-driven at all levels - members, trustees, managers, employees, and volunteers.

2012-04-23

Subject: Museums; Corporate planning; Organizational behavior; Management science; Case studies

Location: United States--US

Company / organization: Name: New Bedford Whaling Museum-Massachusetts; NAICS: 712110

Classification: 9190: United States; 8307: Arts, entertainment & recreation; 2500: Organizational behavior; 2310: Planning; 9130: Experimental/theoretical

Publication title: International Journal of Case Studies in Management (Online)

Volume: 10

Issue: 2

Pages: 1-25

Number of pages: 25

Publication year: 2012

Publication date: May 2012

Year: 2012

Publisher: HEC Montréal

Place of publication: Montréal

Country of publication: Canada

Publication subject: Business And Economics--Management

ISSN: 1911-2599

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1019048268

Document URL: http://search.proquest.com/docview/1019048268?accountid=38610

Copyright: Copyright HEC Montréal May 2012

Last updated: 2013-09-26

Database: ABI/INFORM Complete

Document 7 of 100

The Future of Espoir Cafés: Balancing Human Resources and Marketing

Author: Turgeon, Normand; Loudyi, Sara; Tremblay, Michel

ProQuest document link

Abstract:

The management team of a social cooperative called Espoir Cafés is looking for solutions to improve the profitability of its chain of coffee houses without compromising its mission and values. [PUB ABSTRACT]

Full text:

It was July 3, 2009, and the quarterly meeting of the management committee of the Autonome cooperative was about to begin. In the conference room where his colleagues had gathered, Benoit Therrien, manager of the Espoir Cafés division (see Appendix 1), could feel the tension mount. For some time, the management team of this Sherbrooke-based social cooperative had been trying to bolster the profitability of its coffee shop chain. When he had raised this problem at the previous meeting, in April, Benoit's fellow managers expressed conflicting opinions. He had opened a Pandora's box, but no real solution had been found. Julie Lemaire, president of the cooperative, had asked Sandra Morissette, director of marketing, sponsorships, events and fund drives, to survey the customers and employees to pinpoint the sources of the profitability problem and ease the implementation of corrective measures.

Early on this summer day, Julie started the discussion:

Good morning. As you know, today we will discuss the profitability of our cafés. Benoit raised this problem again in April, and each of us had a chance to express ourselves on this subject. As our opinions diverged considerably, I asked Sandra to help us sort things out. You have all received the analysis report [see Appendices 2 and 3]. The results of the customer and café staff surveys are worrisome, and we should try to agree on the measures to implement as soon as possible, ideally before the back-to-school season, which is a very important quarter.

Autonome Cooperative

Beginnings

Julie Lemaire formerly worked as a social worker at a local community service centre (CLSC). Her tasks consisted in helping elderly people or people with functional decline. Her responsibilities included ensuring that her clients and their families received appropriate services, and designing social programs to meet their many needs. Throughout her career, Julie witnessed the crucial role of unpaid caregivers. She gained keen insight into their responsibilities and real impact on improving the quality of life of the people in their care.

In the late 1980s, Julie wanted to launch a complete support program tailored to unpaid caregivers. Backed by her personal and professional network, she decided to retire from her position of social worker. With limited financial resources, she organized a fund drive that helped her launch the Autonome cooperative in 1992. The main rationale of Autonome is to manage the Maison de Soutien aux Aidants Naturels (MSAN - Support Centre for Unpaid Caregivers). The cooperative had expanded significantly since the opening of the first Espoir coffee shop in 1995. By 2009, it was running a regional chain of five coffee shops.

Mission and values

Autonome's status as a cooperative made it distinctive: the employees shared its values and strove to disseminate them. The charter of values (see Appendix 4) was the foundation of the culture that the cooperative undertook to promote, and that its members pledged to honour.

The cooperative's mission was to provide assistance to unpaid caregivers and their families and to help improve their living conditions through social programs adapted to their needs. The Maison de Soutien aux Aidants Naturels (MSAN - Support Centre for Unpaid Caregivers) was the specific entity that provided this service.

The MSAN

The MSAN had 10 full-time employees plus Caroline Bossou, the director. This division of the cooperative met a real need in the population because unpaid, or informal, caregivers supply more than 80% of the care required by people with prolonged health problems.1

The MSAN offered a variety of services in three main areas: psychology, food and logistics. Services provided by the psychology branch included support group meetings led by a psychologist and a telephone support service run by volunteers. The food division oversaw the preparation of menus and meals delivered by volunteers to the homes of seniors or people with functional decline. This service eased the burden of unpaid caregivers by guaranteeing hot, nutritious meals for the people in their care. Lastly, the logistics service supplied volunteer drivers that escorted clients from their home to hospitals, clinics or CLSCs. In total, the MSAN had over 50 volunteers that reported to Genevieve Renaud, human resources and volunteer manager.

Financing

The MSAN had five main sources of financing: fund drives organized by the Autonome cooperative, government and municipal subsidies, profits from the Espoir coffee shop chain, donations from local businesses (food, products, professional help when needed, etc.) and purchases of shares by members.1 The profits of the five Espoir coffee shops thus represented a non-negligible amount for the MSAN.

Espoir Cafés

History

In 1995, Julie Lemaire was trying to find innovative ways to finance the activities of the co-op. She had the vision to capitalize on the advent of the Internet by opening one of the first Internet cafés in the city. Such cafés were sprouting in all the large cities of the world, and the demand was also being felt in Sherbrooke. The first Espoir café opened on November 11, 1995. Situated in the heart of downtown, on King Street West, it was designed to be a friendly gathering place. Julie Lemaire was particularly intent on raising the customers' awareness about unpaid caregivers, a cause still little known in Quebec. To this effect, documentation was offered to the customers, and the coffee shop employees promoted the activities of the MSAN.

The late 1990s marked a turning point in the Espoir Cafés division. Julie Lemaire decided to make a radical shift because Internet access had become widely available at home, work and university. At the same time, she had noted that Quebecers' tastes in coffee had been evolving toward high-quality gourmet blends. The year 1999 saw the launch of the second Espoir café, on Galt Street West, near the University of Sherbrooke, and it featured a line of gourmet coffees. Sandra Morissette convinced the management committee to offer customers fair trade and organic products exclusively, which reflected the values embraced by the Autonome cooperative. As fair trade began to catch on, the new orientation of the cafés met with great success.

The new millennium also ushered in many changes. The two cafés in the city of Sherbrooke were certainly profitable, but competitive pressure was rising. Until 1999, rivals were very scarce, but after 2000 the number of downtown cafés spiraled. Consequently, to ensure the continuity of the cooperative, the chain of Espoir Cafés began to expand beyond the city of Sherbrooke: shops opened in downtown Magog2 in 2002, Mont Orford3 in 2003, and near Bishop's University in 2004.4

Given the increasingly fierce competition in the café sector and the business strategy designed to counter it, Julie was afraid that the cooperative would become indistinguishable from other companies. The business language used by some of her colleagues sometimes dismayed her, but she viewed it as perhaps the price to pay to maintain the services of MSAN.

Recent developments

Espoir Cafés achieved remarkable success. Until 2007, sales increased steadily (see Appendix 5), and customer loyalty was constantly growing, creating sufficient profits to support the development of MSAN (see Appendix 6). The product line expanded over the years, and in 2009 the coffee shops offered a large variety of fair trade drinks (regular coffees, gourmet coffees, teas and chocolate drinks). In addition, the menus were becoming increasingly diversified in response to customers' preferences. As Benoit Therrien told a local radio station:

Espoir cafés have a very specific brand image in the population. This image reflects the values of Autonome, and we are very aware of the need to manage this division in line with the principles of the cooperative. That is why when we developed the menus for coffee shop customers, we decided to use organic local products to promote responsible food consumption.

Nonetheless, in 2008, income plunged despite a growing advertising budget. With the onset of the global economic crisis, the projects for 2009 were adjusted downward, in line with the 2.5% decline forecast for the restaurant industry in Quebec.

Dominant values

The Espoir cafés abided by the "Charter of Values" of the Autonome cooperative, and helped promote responsible food consumption and social involvement among the general public.

The coffee shop chain thus offered fair trade certified coffee, tea and chocolate. These products were purchased at a fair price from producers organized in cooperatives or workers' associations that were certified by Fairtrade International. To set this fair price, unnecessary intermediaries were eliminated. Producers in the South thus sold their products directly to resellers in the North. These co-ops were managed democratically and transparently, and practised environmentally friendly agriculture. They collected a "fair trade premium" managed by a committee representing workers, which was entirely dedicated to financing community projects. The Espoir coffee shops played an important role in raising awareness of this type of alternative trade among the local population. This choice was dictated by the will of the Autonome cooperative to be a socially responsible player that set an example within its own community.

The Espoir chain's commitment to responsible food consumption was also manifested in its procurement modes. It made purchasing locally a priority for all products other than coffee, tea and chocolate. The cooperative recognized that globalization of sources of food product procurement had real negative effects on both the environment and on the health of the Quebec agricultural sector. Local food systems did less harm to the environment, largely because of the ecological cost of transport. They also stimulated the economy by creating jobs in Quebec,1 thus enhancing the well-being of local communities.

Uniqueness of the concept

The identity of Espoir cafés was shaped by the value system of the cooperative. When the first café opened, Julie Lemaire worked in concert with Benoit Therrien, then assistant manager, to ensure that the operations did not clash with the values of the cooperative, and reflected the image she wanted to project.

In 2009, the cafés were welcoming places where customers could savour superior-quality products while practising socially responsible consumption. The educational function was pivotal and the assistant managers of the cafés made sure that the staff raised customers' awareness about unpaid caregivers, their responsibilities, contribution to society and precarious situation. To this effect, detailed information brochures were made available to the public and decorative posters1 hung on the walls of the coffee shops informing the clientele of the cause of unpaid caregivers. In addition, many activities (mainly conferences) were organized regularly. Customers were also encouraged to make donations or to volunteer at MSAN.

Each café had its own personality, adapted to the preferences of its clientele and the limits of the premises. For instance, the shops on Galt Street West and Lennoxville, whose customers were predominantly students, had a calmer atmosphere during the week to accommodate a clientele seeking a quiet place to study. On weekends, evenings were livelier: the cafés became choice venues for cultural events that included improv nights, stand-up comics and shows featuring local bands. The cafés on King Street West and in downtown Magog were very different, because they mainly attracted business people and workers. Their customer volume was much higher, especially during peak periods. These café bistros quickly became prime locations for after-work get-togethers with colleagues. The Mont Orford outlet was a smaller location that drew Quebec and foreign tourists during the ski season, in summer and in the "fall colours" season in October. In addition to the regular product offering, this café housed a boutique where customers could buy a selection of products from the regional terroir. The educational dimension was certainly less present, although employees encouraged the customers to purchase products from the boutique, the proceeds of which went to the cooperative.

Competitors in the market

Over 40 coffee shops in Sherbrooke competed with Espoir cafés. Most were independently owned and local, offering specialty coffees. National chains were also present in the area, notably Tim Hortons and Van Houtte.

Although Tim Hortons certainly did not target the same type of clientele, it was a competitor that Espoir Cafés could not ignore. This international fast-food giant owned five coffee shops situated on the main arteries of the city, near three Espoir shops. Tim Hortons had strong brand capital in Canada and waged major promotional campaigns throughout the province of Quebec. The product line was directed at a diversified clientele. For example, customers could find both regular and gourmet coffees, coupled with a large variety of pastries and meals. The company was involved in various social projects 1 such as the offering of sustainable coffees2 and the Tim Hortons Children's Foundation.3

The Van Houtte chain served a more selective clientele that sought out quality products and gourmet coffees. This company, a retailer and wholesaler4 that roasted and marketed its own coffee,5 had a strong presence in Quebec. It was also a renowned pioneer in the introduction of café bistros in Quebec.6 Awareness of the Van Houtte brand was high in Canada because of its mass distribution by food retailers nationwide.7 The company was involved in various social projects.8 For instance, it offered coffees certified fair trade by Fairtrade Canada and supported the Old Brewery Mission in Montreal,9 Sun Youth10 and Moisson Montréal.11

Other competitors present in the Sherbrooke region were mainly independent operators or small local chains. Awareness of these businesses in the community was generally good, and they had built a loyal customer base. Their offering and the quality of their products were very viable and were strongly related to the types of target customers. One notable competitor, the Zybaldone, also promoted a major social mission. It was associated with Tremplin 16-30 [Springboard 16-30], an organization that supports young adults (ages 16 to 30) in difficulty. All its employees were the beneficiaries of its services or participants in the Solidarité Jeunesse12 [Youth Solidarity] program.

The coffee shop market in the Sherbrooke region was reaching a saturation point. However, there were persistent rumours that a large national chain planned to open branches there. Benoit Therrien thought the impact of the competition had to be taken into account in the long-term marketing strategy of Espoir Cafés. It also figured prominently in decisions related to human resources. The scarcity of competent human resources is a reality in the restaurant industry. With the increase in competitors in the Sherbrooke area, this phenomenon is intensifying and has become a major challenge for the Espoir Cafés division.

Café Management

The Board of Directors of the Autonome cooperative paid particular attention to management of this business unit. Whereas the managers of the cooperative defined the strategic orientation of the Espoir cafés, Benoit Therrien and his team of assistant managers were responsible for everyday operations.

Recruitment of employees

Each café was run by an assistant manager, who oversaw operations. All of the assistant managers were full-time employees who worked 35 hours a week. The assistant manager position was filled internally, by promoting employees who had proven their loyalty to the cooperative and shown strong commitment to its values. For example, Denis, the assistant manager of the café on King Street West, had worked at the shop since it opened in 1999. Initially assigned to wait on tables, he trained to become a barista1 so that he could perform several tasks in the café. He also showed his attachment to the values of the cooperative and his dedication to raising customers' awareness of the cause of unpaid caregivers. For instance, he came up with the idea of printing information on MSAN's activities on placemats that covered tables in the cafés. He was promoted to assistant manager in 2005, and had since held various responsibilities, including staff supervision and procurement (inventory management and product orders) while seeing to the profitability of the café.

The café employees were recruited by Genevieve Renaud, in tandem with each assistant manager, as needed. Very often, candidates were recommended by the employees. They were hired because of their values, experience in customer service and the interpersonal skills they displayed during the selection interview. Although no formal test was used, a serious effort was made to hire candidates who truly supported the values of the organization. Tasks of servers and baristas included taking orders, setting tables, preparing drinks and light meals, serving customers and maintaining the premises. Because management considered that being good natured and dynamic were indispensable qualities for café employees, the assistant managers tended to hire men and women aged 18 to 30. Overall, 30% of employees were working full-time, while 70% were considered part-time. However, the breakdown of employees in each café varied: whereas the Galt Street West café had 23% full-time employees, the proportion was 26% for the King Street West café, 29% for Lennoxville, 35% for Magog and 50% for Mont Orford.

Compensation programs

The assistant managers of the cafés were a key resource in the business unit. The management team was aware of their crucial role in ensuring the profitability of each store. To counter the high turnover rate that characterized the profession, the managers took every measure to foster satisfaction at work. One example was that compensation was very competitive compared with the market. Assistant managers were paid a fixed salary of between $19 and $22 an hour depending on their experience. Wage increases were pegged to seniority and cost-of-living increases. There was no performance-based pay, as Genevieve Renaud explained:

Above all, we are a cooperative. Our assistant managers all share the same values and care about the general well-being of the employees, while not losing sight of the ultimate goal: to generate funds to finance MSAN. Our pay scales are more advantageous than those of our competitors. We don't want to encourage a race to profitability that would push our associates to put their personal interests above the collective interest. We're one big family that shares the surpluses among our members as equally as possible.

As there was no performance bonus system, the performance measurement program for assistant managers was very limited. Once a year, the assistants met with Benoit and Genevieve, who informed them about how their outlet was performing compared with the other Espoir cafés. The meeting was intended to adjust the profitability of the cafés to the annual projections and ensure that the strategic orientations dictated by top management were being followed. It was also at this meeting that they learned their café's objectives for the coming year. Consequently, the atmosphere at meetings was often tense. The assistant managers did not always feel like things were highly structured, particularly their task description. They also resented the lack of consultation between them and Genevieve in setting the objectives, which they felt were being imposed on them. They also wanted to see closer and more ongoing communication with the human resources director.

Employees were paid at market rates, about $8.55 an hour plus tips left by customers, which were divided up collectively according to the number of hours worked during the week.

Training programs

Training programs developed within the Espoir Cafés division were relatively rudimentary until 2008. This investment was slightly higher than the minimum required by law. New recruits were trained for one week to perform various tasks, including operating the cash register, preparing coffee and meals and waiting tables.

Assistant managers attended a seminar once a year on the current and future activities of MSAN and trends related to unpaid caregivers in Quebec. Management thus kept up to date on new developments and could share them with their employees and customers. During the seminar, the trainer ensured that the assistant managers clearly understood the Espoir Cafés' role of educating consumers.

The cooperative thus fulfilled its obligation, under provincial law, to invest 1% of its payroll in employee training.

Difficulties at Espoir Cafés

At the end of the second quarter of 2009, the results confirmed Benoit Therrien's fears. Income growth at the business unit had stalled. Profits generated for MSAN were stagnating, although the need for funds was constantly growing. The causes seemed to be both internal and external.

Challenging economic environment

Since 2008, the restaurant industry throughout Quebec had been hobbled by the drop in the number of tourists, resulting from the rising Canadian dollar and the global economic crisis. In this context, restaurants and coffee shops were often among the first spending cuts consumers made.1

Discontented employees and customers

The turnover rate of café employees was quite high. Nonetheless, it was lower than that of the competition. This was certainly characteristic of the sector, and was attributable to work conditions (evening and weekend shifts, part-time work), lack of job security and the young age of the employees.2 However, a survey found that Espoir Café employees were dissatisfied with their working conditions. The salary, schedules, work climate and performance requirements had been the most frequently cited sources of frustration in the last few months. This discontent had already raised the first red flags, such as employee performance ratios below the industry average (see Appendix 7) and clashes between employees and assistant managers. The many factors causing tension included the number of hours granted to part-time employees, pressure from assistant managers to increase service speed and thus decrease wait times and the lack of consultation and information on some operational decisions. These conflicts had even begun to taint relations between the assistant managers and Benoit Therrien.

At the same time, the dissatisfaction felt by a non-negligible proportion of employees probably affected the customers' mood. The Espoir cafés were finding it increasingly difficult to cultivate customer loyalty. The division also faced a major problem of organization, as Benoit Therrien pointed out:

According to my assistant managers, the situation has become fairly problematic in two outlets. As the clientele has grown over the years, the layout of the two outlets has begun to show its limits. There can be a wait of 10 to 12 minutes at peak periods between the time the customer enters the café and when they go to the cash to place and pay for the order. The order then has to be brought to their table or handed to them for takeout. When the Espoir cafés opened, we decided not to take orders at tables, but I'm starting to wonder whether we made a mistake. The line-ups at the cash hamper the atmosphere of our cafés by inconveniencing the customers and increasing the stress of our employees.

A question of leadership?

The difficulties experienced by the café chain were discussed at the last two meetings of the management committee. The managers wanted to find viable solutions to the problems of growth and dissatisfaction before the end of the summer and the start of the back-to-school season. In addition, they had to find someone to replace the assistant manager of the café on Galt West Street, who was about to go on maternity leave. The quarterly meetings were an opportunity for managers to express themselves, but they did not always agree on the sources of the problems or the corrective measures needed.

Sandra Morissette: It was inevitable that growth at Espoir Cafés would taper off. Because we wanted to preserve the educational dimension and the value system of the outlets, we created the problem ourselves. Today, competitive pressure has created imperatives that are quite different from those of the '90s, or even the early 2000s. Our system for selecting assistant managers based on seniority or level of commitment to values is outmoded. This may explain the weaknesses seen at Espoir Cafés. Also, how can you expect them to be motivated to boost the profitability of their stores without any incentive pay? The leadership qualities of the assistant managers must be considered more in determining selection criteria than their commitment to the culture of the cooperative. The best way to help unpaid caregivers is to work on increasing the café sales, which provide the financing for MSAN.

Genevieve Renaud: But you have to keep in mind that we are above all a cooperative that promotes a system where the individual's well-being is a dominant value. Profitability, because I need to use this word, which in my view is not suited to our type of organization, is indeed an important concern, but assistant managers' identification with the values of MSAN is even more crucial. In other words, how can we hope to educate customers and raise their awareness of the cause of unpaid caregivers if our own intermediaries don't embrace these values? Compromising the mission of the cafés and imposing a for-profit business culture on our employees would inevitably aggravate the current situation. Our employees are the ambassadors of MSAN. Mobilizing them is vital for public education. I think the solution is to reinforce the compensation and motivation systems to encourage the stability of the staff, and to maintain the current recruitment criteria, which favour people who share the fundamental values of the cooperative. The key is employee satisfaction, which can translate into customer satisfaction.

Benoit Therrien: The growth of MSAN hinges on the growth of the café division, and intensification of competitive pressure certainly necessitates new work methods, as Sandra rightly noted. But Genevieve also raised a valid point: our image is that of socially responsible cafés, and therein lies our competitive advantage on the market. Assistant managers hold a key position because they are responsible for daily management of the cafés. I think this position requires more aptitudes and skills than those that the current assistant managers hold. Specifically, we have to motivate assistant managers to attain our dual objective (profitability and customer education) by offering appropriate compensation and rewards. My only concern is that the changes may negatively impact the employees, which will probably translate into an even higher turnover rate. We have to find a fair balance in all this!

Caroline Bossou: I must admit that this is a bit over my head. I have many responsibilities within MSAN, and it is important for me to know in advance if the financing generated by the café division will be below what we forecast in the annual budget. Julie, should I anticipate a reduction in the activities of MSAN because of a budget shortfall?

Julie Lemaire: No. I assure you that MSAN activities can continue as planned, for now. We have to focus on turning the current situation around and making projects to try to find the best measures to apply within the café division.

Future of Espoir Cafés

Better support for assistant managers and employees

In summer 2009, the assistant managers had considerable maneuvering room in the way they ran the cafés from day to day. This resulted from the stance of the Autonome cooperative management. Genevieve Renaud had always been a fervent defender of this management style, but Sandra Morissette and Benoit Therrien endorsed a new approach:

A lot of freedom is not necessarily a sufficient condition to increase motivation or the service quality of an employee. Today, business schools recommend "empowerment," where employees are given a global vision of the objectives to attain and the autonomy and legitimacy to reach them. The assistant managers must understand that their commitment to the cooperative is important but they must also demonstrate their motivation and capacity to attain the financial objectives of the cafés.

At a meeting with Benoit Therrien, the assistant managers of the five Espoir cafés clearly expressed their dissatisfaction with some practices of the Autonome cooperative, particularly concerning the setting of the objectives and responsibilities associated with their position. Sandra and Benoit agreed; they thought that the human resources department did not provide a detailed enough task description to allow employees to clearly understand their responsibilities (see Appendix 8).

Benoit Therrien: It is important to re-assess the tasks of assistant managers to be able to better describe the tasks and qualities, skills and knowledge required for that position. The competitive pressure in Sherbrooke has become too high for us to continue to ignore market practices. Some competitors are more selective (see Appendix 9) and attract better employees. It is time to adopt a more complete tool to facilitate selection, recruitment, training and coordination of our human resources, who are definitely the most important asset of the division. After having listened to our assistant managers, I am convinced that a more rigorous tack would boost their satisfaction and make it easier for them to supervise café employees.

The financial results of Espoir Cafés clearly demonstrated that the profitability of recent years was waning. The situation had become particularly alarming since early 2009, when sales plunged by 8.5% compared with projections. The café division manager attributed this drop to the effects of the economic crisis, and pointed out that all companies in the restaurant industry were in the same boat.

Francis Gregoire: Our growth problems are not solely attributable to the current economic crisis. My analyses show that growth had begun to decline prior to the crisis. We forecast a 2.5% decrease in growth, but we saw a net slowdown at the end of the second quarter of 2009. This indicates that the situation will be worse than initially expected. The Mont Orford café continues to post good results, and our main competitors are always full. In my view, this undeniably demonstrates weaknesses in the marketing of our cafés and human resources management.

Sandra Morissette: I agree. Our employees are somewhat dissatisfied. They represent the largest investment of the division and we will probably lose customers to our competitors because of them. Lack of skills is certainly a reality in the restaurant sector, but we are a cooperative and we must offer our employees means of improving. It's time to think about a better development program for our assistant managers. Communication and cooperation between them and top management leave much to be desired: operational management of the cafés is entirely in their hands, but they have absolutely no input in defining objectives or the strategic orientation, even though they're the ones at the heart of the action. We are asking them to apply the strategies without getting them involved, and we expect them to successfully improve the operating results without necessarily ensuring that they are even made aware of the objectives of their division. It is time to make participative management the cornerstone of our cooperative!

Genevieve Renaud: That's an interesting idea: employees who are involved are always more satisfied and more motivated at work. We can rethink our current training programs and focus more on developing assistant managers' management skills. Benoit, what would you think about calling them to a meeting right away where we could jointly define their tasks, practices they can use in their daily activities and the key objectives to attain by the end of the year? I could then get a better overview so I could put together a more effective training program for the rest of 2009. This could also allow me to rethink the recruitment and selection process and I can show you an outline of the new process at the next meeting of the management committee.

Better marketing management

The menu offered at most Espoir cafés was fairly varied (see Appendix 10), and included a range of products that met customers' needs, according to top management. The current differentiation strategy of the chain rested mainly on its belonging to the Autonome cooperative and its contribution to financing MSAN. Management had always set prices slightly below those of the competitors, in keeping with the philanthropic mission of Espoir Cafés.

Given the results of the customer survey and the latest financial results, Benoit Therrien felt that the Espoir Cafés division was probably entering another transition phase, and that the marketing orientation pursued to date had shown signs of flagging. At the end of the second quarter of 2009, their challenge was to upgrade the marketing strategy for the coming quarter, while taking into consideration the changes in the cafés' environment. As Benoit said at the meeting of the management committee:

The current situation is quite troubling, and it is vital that we re-evaluate our practices in anticipation of the back-to-school and fall season, which is a busier time in our cafés. Our media plan does not seem sufficient [see Appendix 11] given the recent developments, and it is crucial that we design a more creative strategy that would better target our customers and allow us to gain market share and encourage customer loyally. It would also be worth re-assessing other elements of our marketing mix to be able to adjust our strategy to the reality of our market.

Welding the team together

Francis mentioned that he was satisfied with the morning's discussion. He knew that the coming weeks would be hectic, and was exhilarated at this prospect. He was eager to receive clear answers about the new task description of the assistant managers, and the changes to the selection, recruitment, training and performance measurement processes for assistant managers. He also hoped that the new proposals to adapt the marketing mix to the market realities would boost the profitability of the cafés.

Julie was next to share her observations. The coming work weeks had to be planned, to prepare the Espoir Cafés division for the third and fourth quarters of the year, which would be crucial. She viewed it as essential that Genevieve, Sandra and Benoit cooperate more closely. Julie therefore suggested that the four of them meet in two weeks; each manager would then propose solutions to help the cause of the MSAN.

From Genevieve, whom she did not want to upset further, Julie expected to see identification of tools to mobilize assistant managers. She thought that the business leadership of assistant managers should be encouraged, starting with a better task description. Selection and skills development also needed to be reviewed. Other areas such as compensation and performance measures were certainly worth exploring.

In Julie's view, Benoit's contribution to the meeting was exemplary. He was right to ask that this topic be the sole item on the meeting's agenda. But beyond raising this major problem, he had to work toward solving it. Julie consequently asked Sandra to gather and analyze information jointly with Benoit. As president, Julie would have to differentiate the cafés that were contributing to the success of the cooperative from the others. To determine the outlook for business growth of each café, it was crucial that she identify their strengths and weaknesses. Customer satisfaction seemed a noble objective; she had to find ways to heighten it by increasing the number of customers and building their loyalty. This appeared urgent given the economic environment that loomed on the horizon.

Julie saw the customer experience as a unifying tool between the traditional roles of marketing and human resources. Thinking and, more importantly, acting outside of the silo was the most modern business approach, and the most pronounced and valid form of cooperation at work. Benoit, Genevieve and Sandra would have to tear down the walls that separated their respective responsibilities and jointly brainstorm about how to improve the situation.

After three hours of intense and fruitful discussion, Julie invited her team to lunch. It was time to relax before getting back to work.

2012-04-24

Subject: Strategic management; Coffeehouses; Corporate profits; Cooperatives; Marketing management; Human resource management; Case studies

Location: Canada

Classification: 9172: Canada; 7200: Advertising; 6100: Human resource planning; 8380: Hotels & restaurants; 2310: Planning; 9130: Experimental/theoretical

Publication title: International Journal of Case Studies in Management (Online)

Volume: 10

Issue: 2

Pages: 1-32

Number of pages: 32

Publication year: 2012

Publication date: May 2012

Year: 2012

Publisher: HEC Montréal

Place of publication: Montréal

Country of publication: Canada

Publication subject: Business And Economics--Management

ISSN: 1911-2599

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: References Graphs Tables

ProQuest document ID: 1019048577

Document URL: http://search.proquest.com/docview/1019048577?accountid=38610

Copyright: Copyright HEC Montréal May 2012

Last updated: 2013-09-26

Database: ABI/INFORM Complete

Document 8 of 100

Strategic Planning at Saint Francis de Sales Schools

Author: Klag, Malvina; Giroux, Hélène; Langley, Ann

ProQuest document link

Abstract:

The evolution of a formal strategic planning project at the Saint Francis de Sales Schools - a private Catholic school system in the district of Bristol, UK - from its inception to the point at which it stalled two years later, is discussed. [PUB ABSTRACT]

Full text:

It was the first week of October, 2009, early in the new academic school year. John Handover, President of the Board of Trustees of Saint Francis de Sales Schools, a private Catholic school system in the district of Bristol, England, had just completed the first year of his two-year mandate. He reviewed the agenda for an upcoming Board meeting with his Vice-President, Keith Regan. Strategic planning did not appear anywhere on the agenda. For two years, the Board of Trustees had attempted to initiate important strategic decisions about its future direction in order to pave the way for the long-term success it so deserved. Yet multiple planning projects just did not seem to gain traction and had failed to stem the declining enrolment and the financial distress that the school system continued to face. Nonetheless, John strongly believed that the school system could not move forward without a plan. John turned to Keith and said, "Keith, strategic planning has got to be back on the agenda for this meeting."

Saint Francis de Sales Schools: The Organization

Saint Francis de Sales Schools had been in existence for over a century. It had graduated a high number of students with accolades and boasted many world-renowned scientists, lawyers, professors, business people and politicians in its roster of alumni. It operated at two physical sites, called the Centre Site and the Urban Site, with a primary and secondary school at each site. The organizational structure of the school system appears in Appendix 1. For many years running, it had received the district's #1 performance rating in secondary school academic performance at the Centre Site. In fact, whenever John mentioned his position at the school to individuals who had either graduated from Saint Francis de Sales Schools themselves or had children who had graduated decades earlier, the comment was always the same: "That school is incredible, I don't know what its secret is, but the people who graduate are great people who go on to do great things...." The school system was largely funded by student tuition, district government grants and funding from the Bristol Catholic Community Funding Agency. It also received some project funding from private donors who were most often alumni of the school system.

The Bristol Catholic Community Funding Agency (BCCFA)

BCCFA was the umbrella funding agency for the Catholic community in the district of Bristol. It had been in existence since 1921 and was entirely funded by private donations from corporations, charitable foundations and individuals. The agency fundraised over £30 million annually. It played a central role in supporting Catholic educational institutions, informal religious educational programs in camps and churches, and local social services such as food banks, job training and meals for the underprivileged in the community. Catholic education was considered to be the most important priority for BCCFA, as the agency saw formal education as a critical vehicle through which to promote the continuity of Catholic values and practices for the future. As such, the agency provided financial assistance to Catholic schools in the community and even orchestrated professional development programs for teachers in the Catholic schools.

The BCCFA provided £464,000 of the approximate £7,200,000 of Saint Francis de Sales School's annual budget. Most of the funds from BCCFA were used to allow the school system to offer financial assistance to over 20% of families whose children would not otherwise have been able to afford a private education. This funding was extremely important for the school system, as it received a fixed subsidy from the district for each student enrolled in the school. This subsidy contributed to the fixed overhead costs of running the school. Without that 20% of its student body, the school system would not be able to fully cover its fixed costs.

A changing environment

Saint Francis de Sales Schools began as a small community school of 20 students in 1890. At its peak in the late 1980s, almost 100 years later, it housed more than 1,100 students. It was the first private Catholic school in its district. Saint Francis de Sales Schools had overcome multiple financial crises over the years necessitating relocations and/or site closings. However, it always managed to survive as the local community and BCCFA rallied to provide financial support.

As of the 2003-2004 academic school year, the school system had begun to encounter significant challenges affecting the overall health of the school system. In addition to increasing unionized teacher salaries, the district government had imposed curriculum reforms for all schools, necessitating dramatic changes in the way teachers prepared and taught their curriculums. A high rate of turnover in teaching staff and two changeovers in the secondary school principal for the Centre Site further contributed to the growing difficulties. The situation was exacerbated by significant enrolment declines that seemed to be linked not only to the staff volatility, but also to larger social trends: evolving family needs and decision-making patterns that were drawing more parents to other private schools; increasing integration of technology into schools across the United Kingdom that Saint Francis de Sales Schools was slow to embrace; and demographic trends, as explained below.

Evolving parent needs with respect to choice of schools

Over the years, one other Catholic school system had emerged that, while including Catholic studies in its curriculum, focused less on religious studies than did Saint Francis de Sales Schools, and more on secular studies. St. Francis de Sales tended to attract the more observant families who also wanted a high level of academic excellence. The other school tended to attract families who wanted their children in a Catholic environment, but with a lower level of religious study and more well-rounded curricular and extra-curricular programs. Over the years, the other Catholic school system had grown substantially and, as of 2009, housed more students than did St. Francis de Sales.

Whereas St. Francis de Sales Schools had once been revered for the high calibre of its academic programming, one-on-one interviews in 2007 by parent volunteers of the school with Catholic families making decisions about secondary schools in particular showed an increasing number of families looking for schools that would produce well-rounded graduates. Parents were in search of schools that could provide a multitude of extra-curricular activities, modern facilities and state-of-the art technology. These were all areas in which Saint Francis de Sales Schools could not effectively compete with multiple other, albeit more expensive, private schools in the community. Also, fewer parents relative to the past seemed to be interested in a high level of religious instruction.

Furthermore, whereas Saint Francis de Sales Schools, as a relatively small school, had always attracted parents looking for a home-like nurturing environment, the families interviewed seemed instead to be more concerned with having a large enough pool of students from which their children could form friendships. Finally, particularly for families who could afford to send their children to private schools, parents indicated that their children were having a significant influence on the choice of school, and that their children were drawn to the attractive physical facilities made available by other private schools in the area and by the other Catholic school system in the area that had received a large endowment from a private donor years earlier to fund completely new facilities. Saint Francis de Sales Schools, due to funding constraints, had not been able to extensively renovate in over 25 years.

Changing approaches to technology

Around the developed world, schools were increasingly integrating technology into the curriculum. Some schools, at the extreme end of the technological revolution, used smart board technology in every classroom1 and provided laptop computers for every student at the secondary school level. Saint Francis de Sales Schools had begun to make small inroads technologically. However, barriers to full technological integration were significant. First, the costs to do so were substantial. Second, many teachers had been with the institution for 30 years and were technologically illiterate, with little inclination to integrate technology into their teaching. Teachers' unions ensured that teachers could not be terminated after five years with the institution so that the perceived pressure to evolve to a new way of teaching was negligible.

Demographic trends

The school took great pride in providing financial assistance for many of its students. However, the changing face of the parent body in the area, including a significantly higher number of immigrants, resulted in an increasing number of parents unable to afford private schooling, even with partial tuition subsidies. Many of these families were turning to free public schools in the district. Furthermore, the number of young families in the geographic area of the Urban Site had been declining for the prior 10 years as younger families seemed to be moving to rural areas that offered more affordable housing.

The 2007 Decision to Merge the Two Sites

By October 2007, there were 687 students registered in the entire school system, compared to 802 in the prior academic school year (see Appendix 2 for enrolment trends). The two primary school sites were housing 218 students combined, operating at less than 50% of capacity. The Executive Committee engaged in several rounds of financial modeling to study various scenarios that would salvage the school, and finally voted to merge the two primary schools. At a meeting of the Board of Trustees in November, 2007, the President, Rolston Chamberland, presented a review of the expected financial statements for that academic school year should the school continue to operate at the status quo (Appendix 3). He stated: "Enrolment at Saint Francis de Sales Schools has been declining for some time. The key challenge is our primary schools, both of which are currently running well under capacity, and [...] have had declining enrolment for quite some time."

Rolston, speaking on behalf of the Executive Committee of the Board of Trustees, then formally presented a proposal to merge the two primary school sites:

In merging the two primary schools, we will realize improved cost savings on our administrative structure and services, such as salaries, programming, curriculum and technology enhancements as well as basics such as supplies, maintenance, cleaning and heating. The financial analyses and demographic studies we have been conducting for the past year and a half support this move for long term growth and viability.

Rolston added that several other strategic initiatives would be undertaken simultaneously to strengthen and renew the school system. First, he noted that the school had hired an expert change consultant, "to help find solutions and to help prepare a strategic plan to keep the schools viable." This change consultant had been jointly funded by Saint Francis de Sales Schools and the BCCFA, which had a vested interest in ensuring the long-term success of the school. Second, a new task force would be set up to review the possibility of opening an additional site in an area where the demographics could justify the presence of a Catholic school for the long term. Third, the school would immediately begin developing a plan for new and improved academic and extra-curricular programming.

Fourth and finally, he announced that an ad hoc New Building Committee had been appointed to design a new building on the grounds of the nearby Catholic Community Centre that would potentially be used for the secondary school near the merged Centre Site. This committee was to be chaired by Michael Murphy, an architect who was also a member of the Board of Trustees and had two children in the school system. Rolston added that a small group of donors who preferred to remain anonymous were considering donating substantial funds to the new building project and that the committee had already begun discussions with the Catholic Community Centre.

Heated discussion ensued during the Board meeting after Rolston put forth this proposal, with one member, a parent who would be directly affected by the closing, stating, "You and the Executive Committee are ramming this down our throats! We have never even participated in any discussions about this and you are asking for an immediate vote??! What is going on?!" Rolston insisted that there was no choice if the school was to be salvaged. A motion was put forth and passed to move forward with the merger. Of the 34 members present, 20 voted for the merger, though some did so grudgingly, 10 voted against it and four members abstained. Four members of the Board of Trustees walked out of the meeting immediately after the vote.

Rolston issued an email letter to the parent body that evening announcing the merger. Parents at the Urban Site Primary School were shocked. As one parent exclaimed, "The transparency in the process by which this decision was made was disastrous, absolutely disastrous. This is the first time we are even hearing about financial problems. We were never consulted, not even once!" Rolston received dozens of letters and a petition signed by 100 parents insisting that the decision be reversed. The Executive Committee met to discuss required actions based on the outcry and decided to hold an open Town Hall meeting the next evening. At that meeting, several parents came forward, some of whom had graduated from that very same school some 30 years before. They explained, with great anger and sadness, the significant impact that closing the school would have on their families. Members of the larger community, from local churches and other Catholic institutions remarked that closing the school would force them to close eventually as well and that this move would literally "kill the local Catholic community."

The day after the Town Hall meeting, several parents, also large donors to BCCFA, contacted BCCFA and threatened to discontinue their donations if BCCFA did not intervene to help keep the school open. In addition, a small group of parents of that campus quickly mobilized to collect £100,000 that would be given to Saint Francis de Sales Schools only if the Board of Trustees agreed to keep the primary school at the Urban Site open. They even set up their own student recruitment committee to directly assist in increasing enrolment. The members of the Board of Trustees were shocked, not having realized how quickly and effectively the parent body could mobilize to block their decision.

The Reversal of the Merger Decision

After the Town Hall meeting and the immediate fundraising and recruiting efforts of the parent body, the members of the school system's Executive Committee felt compelled to meet with BCCFA to see if additional funding support could be secured to keep the site open. However, many Executive Committee members, including Rolston, still felt that the merger was a necessary step on the road to financial health.

After multiple meetings between the Board of Trustees and concerned parents, several meetings of the smaller Executive Committee, and approval and financial support from BCCFA, the closure decision was officially revoked by Rolston in March 2008, via a letter to the Board of Trustees:

On behalf of the entire Executive, we would like to, once again, thank everyone who has been working tirelessly to ensure the health of our school system. The energy and efforts of our parent body over the past five months has been extraordinary. Thanks to your fundraising and recruitment efforts, we are pleased to announce that the recommendation for both schools to remain open has been approved!

A joint task force comprised of members of Saint Francis de Sales Schools' Board of Trustees and members of BCCFA was formed in order to monitor the school's ongoing financial health and to ensure that steps were being taken by the school to improve its financial position. In return for increased financial support to the school, BCCFA mandated the school to commit to specific annual enrolment and fundraising targets. BCCFA also insisted on having two of its representatives attend all of the school system's Board of Trustee meetings from that point on.

In the meantime, some of the strategic initiatives presented at the November 2007 meeting were launched, including the hiring of the external change consultant. A steering committee for this project was formed by BCCFA that same month, with representation from two members of Saint Francis de Sales Schools' Board of Trustees, its Headmistress Mrs. Deirdre Frye, and two staff members from BCCFA.

Report from the External Change Consultant

In March 2008, a preliminary report was submitted by the external change consultant, first to the project steering committee for review and approval, and then to the Board of Trustees of Saint Francis de Sales Schools and BCCFA, with the final report submitted in the summer of 2008. The report called for a dramatic organizational overhaul with respect to overall governance, professional leadership and organizational structure. The report also called for the hiring of a Director of Recruitment to increase enrolment and a Fundraising Director, as well as "bold and visionary leadership at the top in order to generate real energy and excitement about the future of Saint Francis de Sales Schools." Finally, the report called for a strategic planning process, as noted in the following excerpt:

The Board should undertake a strategic planning process with an outside facilitator. Identifying specific goals and priorities as well as developing benchmarks for the school's progress in achieving those goals over the next five years is an important process for the Board.

Soon after the preliminary report was presented, Deirdre, with the blessing of the Executive Committee, took steps to address some of the actions called for in the report, including the hiring of a Recruitment Officer, Mr. Patrick Shannon, and a Fundraising Director, Mr. Alex Worther.

John Takes Over as President

It was around the time that the external consultant submitted his final report in the summer of 2008 that Rolston's presidential term expired and John, already a member of the Board of Trustees and the Executive Committee for five years prior to this point, was nominated for, and accepted to become, President of the Board of Trustees. The nominating process had been tumultuous. For the first time ever in the history of the school, the slate of directors proposed to the parent body by the nominating committee was immediately rebuked. A group of concerned parents, having lost trust in Rolston and several members of the Executive Committee after the merger debacle, came forth with an alternative slate. John was nominated as President on both slates. However, the Executive and Board of Trustee members were different on the two slates. The nominating committee called the parents who had organized this alternative slate and suggested negotiating a compromise slate. Finally, at the annual meeting, at which a record number of parents were present, a vote was taken and the compromise slate was approved.

John had a difficult decision to make. He knew that he would be coming into a situation in which there would be divisiveness. He knew that those board members directly affected by the merger incident were still angry and lacked trust in some of the Board and Executive Committee members. He knew that the school system had reached a crossroad at which major decisions would have to be taken. Yet, having attended the school himself, having four children at the school, being committed to its future, and knowing that no other individual was willing to step into the position, he felt a moral obligation to accept a two-year term.

John's First Two Months: Operational Upheaval

The challenges faced by the school seemed so daunting and complex. The staff was overwhelmed with urgent day-to-day issues and periodic short-term planning for the academic year. Overall staff morale was low due to multiple pressures: financial constraints affecting their ability to purchase teaching materials and to participate in professional development programs, ongoing enrolment issues that they knew put the school system at risk and the additional workload accompanying the government-imposed curriculum reform that they had to absorb given the lack of funding for additional staff. The collective agreement for the teachers' union was up for renewal and there was uncertainty with respect to pending union demands for wages and working conditions. In addition to having to grapple with an uncertain future, the members of the Board of Trustees were divided with respect to their own priorities and required roles at that point. Some members insisted that the Board of Trustees should focus on fundraising and on donating their own funds in order to help turn around the financial situation. Others felt that the Board of Trustees absolutely had to focus on developing a strategic direction for the future. All members agreed that change was required in some form.

Meanwhile, as President of the Board of Trustees, John quickly became frustrated at having to be deeply involved in the school system's day-to-day operations. After all, he had a full-time job and this position was a volunteer position! Furthermore, he had no training as an educator. He simply wanted to help the school that he had come to love, having graduated from the school himself and having put all his children through the same school.

John's Growing Conviction of the Need for a Comprehensive Planning Effort

Historically, it seemed as if the board had always played a hands-on role in day-to-day operations and overall decision making. The day-to-day emergencies required attention in order to allow the school to "live another day." However, what seemed to be a perpetual cycle of financial crisis could not, in John's view, be broken without a proper plan and vision for the future. Moreover, making decisions related to the everyday urgent issues was becoming increasingly difficult without knowing the overall direction of the school for the medium and long term. As only one example, the other private Catholic school in the community had recently decided to slash its tuition for kindergarten, using kindergarten entry as a "loss leader." This would potentially affect enrolment at Saint Francis de Sales Schools at a time when enrolment was already a significant issue and the financial situation was tenuous. On the other hand, entering into a price war could have serious ramifications. How much could the school afford? How far should the school go to ensure enrolment is sustained? How could the school make a decision around this issue without some serious deliberations about its optimal "target market," number of students and overall fee structure?

Without strategic grounding, the same issues seemed to get "rehashed" over and over again by the Board and staff, often with much disagreement about the direction to take and, ultimately, without definitive decisions being taken. Moreover, the accreditation body of the U.K. Education Ministry included a strategic plan as part of the necessary elements for the accreditation that was now being mandated by BCCFA. Finally, Alex had approached John repeatedly asking for a strategic plan on which he could base a fundraising plan for the school. John decided that one of his key priorities would necessarily be to ensure that the school system underwent a strategic planning process.

The notion of strategic planning had been raised many times in different meetings with respect to the new building project, the potential closure of the school, the need to improve the financial situation, the need for a fundraising plan which Alex felt had to be based on an overall strategic plan and the external consultant's report as noted. During one Executive Committee meeting on July 2, 2008, there were multiple references to strategic issues. John had asked, as per the meeting minutes, "How can we enter into a new building project without being clear on strategy?" Michael, as chair of the New Building Committee, insisted on the need for a strategic planning work group, "We cannot move forward on designing a new building without knowing what the overall vision, goals and strategies of the school system are. The building must be designed to meet certain strategic parameters that have not been identified!" Another member noted, "We really need a strategic plan and funding commitments in order to go out publicly with our new building plans." Yet another member added, "What is needed is the buzz and excitement that comes from committing to a vision and direction." One of the professional senior management team members attending the meeting, the Head of the Secondary School, asked whether or not "strategically the school wishes to grow in numbers."

After that July 2 meeting, John reflected on the numerous questions and comments about strategy, as well as the remarks in the report from the change consultant calling for a strategic plan. The school system, as far back as he could remember, had never undergone the proper strategic planning process it deserved. The need for this was now unquestionable. The process would necessarily have to be consultative in order to avoid the disaster of the merger decision that was ultimately revoked earlier in the year.

John asked a member of the Executive Committee, Ferdinand Smythe, to co-chair an ad hoc Strategic Planning Committee. Ferdinand accepted the mandate and, together, John and Ferdinand asked Emily Burns to be the second co-chair, in response to the change consultant's recommendation for an outside facilitator. Emily, while not directly involved with the school at the time, had a significant interest in, and many years of experience volunteering for, the local Catholic community.

Developing a Strategic Orientation Grid

The two co-chairs, Ferdinand and Emily, met to develop a framework for the strategic planning process. They decided that the end product of the process was to be a grid that would identify all the key areas to be addressed, along with preliminary information on how, when and by whom each area would be addressed. This grid, according to Ferdinand, had been successfully used at another local school as a tool to guide strategic planning process participants toward a concrete end product.

The process from that point through to the projected end point, a completed grid, ran smoothly. The co-chairs officially began the process on August 14, 2008, by chairing a structured workshop attended by Deirdre, her direct reports, all Executive Committee members and two BCCFA members. The purpose of the workshop was to identify the key strategic areas to be addressed by the school system over the following three to five years. The participants were divided into small groups of four people each. Each person at the workshop was first asked to individually note the three most important short- and medium-term issues they felt had to be addressed. Then, each group of four came to a consensus on these issues. The group next convened as a whole to develop a full list of strategic areas identified by all groups. The four categories of priorities identified by the group were, as per the minutes of that meeting:

1) Mission statement;

2) Funding development / Stability building;

3) Human resources - staff and volunteers - empower them, show appreciation for them so that they will be school ambassadors;

4) Physical resources and facilities - allow the school to operate at acceptable standards.

The group also began to discuss preliminary goals, actions, tasks and responsibilities and timelines, where possible, for each strategic area. This was accomplished with the use of flip charts. One Executive Committee member, Reginald Corsick, stated that it would be important to examine strengths, weaknesses, opportunities and threats (SWOT analysis) before developing a plan. Reginald also sat on the New Building Committee and was the driving force behind the new building negotiations with the Catholic Community Centre. Reginald had been the lead person in the solicitations to, and ongoing communications with, the donor group for the potential new building. After discussing a preliminary set of goals, actions, tasks, responsibilities and timelines by area, Ferdinand and Emily summarized the next steps as follows, "We will synthesize our priorities, compile them, put them on the grid and show responsibilities, required actions, et cetera. This will then be brought back to this group at the next Executive meeting." Emily thanked everyone for their diligent work and time - and especially for the mutual respect exhibited by all groups during the discussions.

After the workshop, Ferdinand and Emily met, synthesized the information from the flip charts and formulated four overriding goals for the school system that they felt had emerged from the workshop. These were:

1. Achieve financial stability;

2. Develop a vision and mission statement for the school;

3. Become an attractive schooling option for families who value Catholic education;

4. Deliver state-of-the-art academic excellence.

They developed the first draft of the strategic orientation grid, and sent it, along with the four goals, to the workshop participants for review.

After comments were received and incorporated, Ferdinand and Emily took the preliminary grid, still with many blank spaces with respect to specific budgets, timing and responsibilities, to a Board of Trustees meeting in October 2008. Emily presented the grid, and then opened the floor for discussion. There were few questions or comments. She asked the members to review the goals and the grid in detail after the meeting and to forward any feedback prior to the next meeting that would take place in December.

At that October meeting, the Board decided to move forward on another ad hoc committee to revisit the school system's mission statement, as the mission had been identified as a key strategic area in the preliminary grid. The development of a vision and a mission statement had also been identified as one of the four overriding goals. This committee would be chaired by the recently hired Fundraising Director, Alex Worther. Ferdinand volunteered to sit on that committee. Alex asked two senior staff members to join the committee, as well as an external member who was a generous donor and long-standing, staunch supporter of the school system.

By November 2008, Ferdinand and Emily had received little feedback on the grid from the members of the Board of Trustees. One member suggested, during an informal conversation with both Ferdinand and Emily, that the Board of Trustees would have been more engaged in the process if it had had more of an active role in developing the strategic areas, as opposed to only reviewing what had already been developed at the workshop.

John, Ferdinand and Emily decided to set up a special Board meeting on November 24, 2008, to engage the Board members in an open discussion on strategic areas. At that meeting, Ferdinand and Emily brought the overriding goals to the Board for their comments and solicited feedback from each member on the key strategic areas to be addressed, as well as the next steps moving forward for each one. At the end of the session, Ferdinand thanked the members for their input and remarked that the session had been productive. After that meeting, Ferdinand and Emily revised the grid based on feedback and re-issued it to the Board of Trustees for comments.

Hope is Lost for a New Building with the Catholic Community Centre

On November 28, 2008, during this period of development of the strategic orientation grid, the negotiations for a new building on the grounds of the Catholic Community Centre collapsed, as Saint Francis de Sales Schools and the Catholic Community Centre were unable to agree on the financial terms of the agreement. There were no other options for alternate sites for a new building. Though the Board of Trustees and Executive Committee were in agreement with the termination, this development was a blow to many of the members who had begun to really see a brighter future at a new site. The New Building Committee decided to forge ahead to find an alternative site.

Progress on the Development of a Mission Statement and Strategic Orientation Grid

At the next meeting of the Board of Trustees in December 2008, Alex returned to the Board of Trustees with a proposed mission statement. With slight suggested changes from two members, a motion to approve the new mission statement was passed with unanimous support. The mission statement was as follows:

Our mission is to foster academic achievement

by creating a nurturing environment

and promoting excellence in all aspects of life.

We embrace the diverse Catholic community

of modern Bristol and encourage students

to reach out to their fellow brothers and sisters,

in the true Christian spirit.

Ferdinand noted that "the new mission statement will guide us for the Strategic Plan." He further noted that the task force had yet to develop a fully articulated vision for the school system.

At that same meeting, Ferdinand and Emily asked that final comments on the revised strategic plan grid be submitted to them before the next Board meeting in January 2009, at which the final grid would be tabled for Board approval. At that meeting, John thanked both Ferdinand and Emily "for the outstanding work" on the strategic plan. One member of the Board of Trustees noted, as per the meeting minutes, "that a lot of what is in the Strategic Plan has been implemented and worked on. We are making progress."

At the January 2009 Board meeting, before voting on the final strategic plan grid, Ferdinand reminded everyone that "adopting the strategic plan means that we are all taking responsibility to make it happen." A motion to approve the strategic plan grid was passed, with no objections and one abstention by Rolston, who proposed that there was a need to focus on fundraising as opposed to strategic planning. The completed grid appears in Appendix 4.

Reduced Momentum: Taking Stock of Strategic Planning Accomplishments and Required Next Steps

The two co-chairs, Ferdinand and Emily, had set out to develop a strategic planning grid and, by all accounts, had succeeded in that mission. Several members of the Board of Trustees referred to this grid as the strategic plan for the school system. Sub-committees were formed to address some of the specific strategic areas of the grid. Ferdinand and Emily saw this grid as the end of the strategic planning process for which they had been engaged by John. They further assumed that this grid would, from that point on, drive priorities for the school system. Ferdinand recommended that the grid be used as a benchmark with which to focus Executive Committee and Board of Trustee meetings and monitor progress on the areas defined.

However, it quickly became apparent to both Ferdinand and Emily that the strategic plan, as an area of focus, had become buried amidst ongoing operational crises and urgent needs for short-term decisions to ensure that enrolment targets could be met for the following academic school year. In fact, the strategic plan did not appear on the agenda of any subsequent Executive or Board of Trustee meetings for the following eight months, though particular initiatives such as the new building deliberations continued to be discussed at these meetings.

Ferdinand and Emily had assumed that once the overall strategic orientations were ratified by the Board of Trustees, Deirdre, in her role as Headmistress, would next undertake to operationalize a plan based on these orientations. In February 2009, Ferdinand and Emily met with John on this issue. Ferdinand remarked, "Wouldn't it be logical for the senior management to now take the lead as the plan becomes operationalized? Emily and I, as well as the members of the Board of Trustees, are just volunteers! We are not sufficiently skilled to delve into the details of how to run an educational institution. It is also critically important that the staff begin to take ownership of this plan that they ultimately will have the responsibility to execute."

John agreed and asked Deirdre to take the lead on an operational plan during one of their weekly status report meetings. Deirdre seemed uncomfortable, "I have never had to do anything like this before and it really does not fall within my job description." In fact, Deirdre, in her role as Headmistress of the school system over the prior eight years, had been tasked mainly with administrative duties related to physical plant, unions, school calendar, hiring and management of administrative and teaching staff, and curriculum, as well as with maintaining relationships with representatives of the District of Bristol. Furthermore, the Board of Trustees had always been highly involved in any important decisions that would affect the future of the school. Given Deirdre's lack of experience in strategic planning, John offered her coaching from an outside strategic planning expert who had worked in a school environment, to which Deirdre agreed. This coaching took place in March 2009. Ferdinand, Emily and John then met with Deirdre and advised her to set up an ad hoc task force to develop the operational plan. They suggested that the membership be comprised of senior management and a few members of the Board of Trustees who had experience in strategic planning. Ferdinand offered to be a part of this task force as did John. Ferdinand provided Deirdre with a proposed plan format he had used for an operational plan of another non-profit organization for which he had served in the past. The format would specify, for each identified strategic area, the goals, strategies, beginning dates and completion dates. He also suggested that annual financial projections over a three-year period should accompany the plan.

Strategic Questions Resurface

By April 2009, Deirdre had not yet convened the Plan Operationalization Task Force to a meeting. At an Executive Committee meeting that month, strategic questions began to resurface once again related to the potential new building, as per the meeting minutes:

Michael Murphy stated that the committee had met several times. They had looked for a venue to replace the Catholic Community Centre site. At this time, there is no such site. They had begun to look at renovating the existing building. This site offered a central location, proximity to the Catholic Community Centre, and close proximity to public transit. He added that several strategic questions had to be answered in the context of an overall plan in order to move forward:

- Who is this school for?

- Who does it serve?

- Would it serve both the primary and secondary school or would they consider two separate buildings for these?

- What are the strategic goals of the school?

- What are the required timelines and allotted budget?

Once he would have answers to these questions, the committee would be able to assess the suitability of the current building or of alternative sites. He also noted that before any of these questions could be answered, an overall vision for the school was required.

At that same meeting, as per the meeting minutes, John brought forward an urgent issue related to the ongoing cash flow:

Over the last few weeks, the bank has become very tight with respect to our capacity to stay below the maximum allowable limit on our credit line. The bank is very nervous. Most recent cash flow shows that we have gone over our credit line and will continue to do so in the near future. This is a critical two weeks period before the next payroll goes through. The bank has told us that they are not happy with the situation and want to know what we are going to do about it. They want to reduce our credit line effective immediately. There is a meeting on Monday with the bank in which they expect us to present a plan. There is a group that is willing to help with cash flow problem in form of interest free loan with condition that it gets repaid within 12 months.

One of the members of BCCFA who attended that meeting noted, as per the minutes:

The short-term cash flow situation must be solved immediately. However, the longer-term strategic and financial plans must be attended to as well.

During this period, although the decision to merge the two sites had been reversed, fewer parents were enrolling their children at the kindergarten level of the Urban primary school site as they had lost confidence in the longer term future of the school at that site.

From Strategic Orientation Grid to Plan Operationalization - Gridlock

On May 1, 2009, the newly constituted Plan Operationalization Task Force, chaired by Deirdre, met for the first time. The members of the task force included the Head of the Secondary School, the Urban Site Primary School Principal, Ferdinand, Michael and Reginald. Deirdre handed out an agenda for the meeting and began the meeting by asking, "Ferdinand, given your extensive experience bringing us to this point, may I please ask you to chair this meeting?" Ferdinand deferred to Deirdre, noting that it was critically important for the professional staff to lead the process at that particular point. Deirdre proceeded to present the latest enrolment statistics as well as some demographic projections for the Catholic community for the following five years. The discussion quickly reverted to the question of whether to merge the two sites.

By the end of the meeting, two hours later, there had been much discussion about the sites with no closure on the issue. Reginald suggested, as he had in the preliminary workshop for the development of the strategic orientation grid, that an analysis of strengths, weaknesses, opportunities and threats was needed (SWOT). The committee agreed that the Head of the Secondary School and the Urban Site Primary School Principal would prepare a draft SWOT chart for the next meeting as a discussion document. They did so and circulated the preliminary SWOT analysis to the committee members via email (Appendix 5).

The process then evolved intermittently, with multiple meeting cancellations and without visible progress on an operational planning document. The committee never got to discuss the SWOT chart. At the next meeting on May 15, 2008, Deirdre and John were not present, as Deirdre had been asked by John to meet with him on an urgent financial issue instead. At this meeting, once again, the discussion often reverted to the sites, in terms of which one(s) should remain open and which students should be housed where. This issue remained unresolved. John was unable to attend many of the subsequent meetings, as his time was taken up by day-to-day issues. Between meetings, Ferdinand and Reginald expressed frustration at the lack of progress both to each other and to all committee members via email. Michael reiterated the need to have strategic questions answered in order to move the new building project forward.

In the summer of 2009, Deirdre announced at a task force meeting that she did not have the time or resources to complete financial scenarios and analysis for the operationalization of the strategic plan and that the task force deliberations would have to be delayed in the face of the financial crisis faced by the school. Enrolment and fundraising targets that had been put in place by the BCCFA were not being met. That summer, Alex resigned as Fundraising Director, stating that he felt unable to fulfill his mandate.

In September 2009, as per the minutes of the meeting of the Board of Trustees, Deirdre provided an update to the members on the plan operationalization process:

As administrators we continue to be concerned with the numbers in our four schools. Our administrator's team has been brainstorming possible scenarios to ensure the financial viability of our schools. Since we were very much involved with our school opening we put this issue on hold until we can give it our full attention.

John reflected on all the important decisions to be made and all the significant events that had transpired over the prior two years. The timeline for some of the key events, strategic initiatives and strategic planning processes between 2007 and 2009 appears in Appendix 6. No Board members had responded to the above comments made by Deirdre a month earlier at the Board of Trustees meeting. There had been no formal approval to halt the planning process at that meeting. However, no one argued the point either. The members just continued onto another discussion on enrolment for the current year. The school was in crisis without any solid way out. There were enrolment and financial targets that BCCFA had set in order for it to continue providing financial support. The private interest-free loan provided to the school system had to be repaid within six months. It seemed to him that strategic planning had to be back on the agenda for the upcoming Board of Trustees meeting and that he should find a way to move it forward quickly.

2012-04-16

Subject: School systems; Catholic schools; Strategic planning; Business cycles; Management styles; Case studies

Location: United Kingdom--UK

Classification: 9175: Western Europe; 2310: Planning; 8306: Schools and educational services; 2200: Managerial skills; 9130: Experimental/theoretical

Publication title: International Journal of Case Studies in Management (Online)

Volume: 10

Issue: 2

Pages: 1-20

Number of pages: 20

Publication year: 2012

Publication date: May 2012

Year: 2012

Publisher: HEC Montréal

Place of publication: Montréal

Country of publication: Canada

Publication subject: Business And Economics--Management

ISSN: 1911-2599

Source type: Reports

Language of publication: English

Document type: Feature, Business Case

Document feature: Charts References Tables

ProQuest document ID: 1019048587

Document URL: http://search.proquest.com/docview/1019048587?accountid=38610

Copyright: Copyright HEC Montréal May 2012

Last updated: 2013-09-26

Database: ABI/INFORM Complete

Document 9 of 100

Developing Crisis Management Skills Through A Realistic Case Involving A Chemical Spill

Author: Budden, Connie B.; Budden, Michael C.

ProQuest document link

Abstract:

Increasingly, managers and public relations officials seem to be at the forefront of newscasts as a variety of organizational crises develop. Business educators attempting to teach appropriate crises management knowledge and develop skills needed to address such a crises should incorporate realistic case scenarios to challenge students. Such realistic cases should appropriately address communication and management needs related to crises that may develop. This paper presents a realistic case that has been used to instill crisis management skills in a business public relations class. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Public relations; Management of crises; Chemical spills; Case studies; Business communications

Classification: 5200: Communications & information management; 2310: Planning; 8640: Chemical industry; 2400: Public relations; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 261

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418710339

Document URL: http://search.proquest.com/docview/1418710339?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 10 of 100

Business Intelligence Case Study: Hotel Taxes Receipts

Author: Crockett, Henry D.

ProQuest document link

Abstract:

This case is based upon consulting projects the author has conducted for both corporate and governmental groups. Many governmental agencies now provide large amounts of data for use by their constituents. It is very effective to use this live data in a classroom environment instead of that provided by textbooks and/or publishers. This case describes a process whereby the use of business intelligence in many forms could be used for the solution. The state of Texas Comptroller's office currently collects information concerning hotel taxes receipts that not only details remittances to both the state and local governments, they are also required to use the same data to predict the next years hotel tax receipts for use in a state budget. This case allows the professor to discuss or actually develop a solution. Since the data is provided in a rotating thirteen month cycle, solutions will never be numerically equivalent each time the course is taught. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Case studies; Competitive intelligence; Information systems; Remittances; Hotel occupancy taxes

Location: United States--US

Classification: 4210: Institutional taxation; 8380: Hotels & restaurants; 5250: Telecommunications systems & Internet communications; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 265

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References Tables

ProQuest document ID: 1418710431

Document URL: http://search.proquest.com/docview/1418710431?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 11 of 100

Royal Caribbean Cruises Ltd.: Innovation At A Cost?

Author: Gupta, Atul; Cox, Aaron

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Abstract:

With 39 ships fewer than five separate brands sailing in and out of dozens of ports worldwide, Royal Caribbean Cruise Lines, Ltd. is one of the world's premier cruise providers. They have been growing this fleet with new additions, such as Oasis of Seas and Allure of Seas. By launching these new ships in the middle of the current recession, how will it differentiate in the market? Going forward, what should be their growth strategies amid the gloomy economic forecasts? [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Case studies; Strategic management; Travel industry; Cruise lines; Operations management; Brands; Market strategy

Location: United States--US

Company / organization: Name: Royal Caribbean Cruises Ltd; NAICS: 483112, 551112

Classification: 7000: Marketing; 2310: Planning; 8350: Transportation & travel industry; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 269

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References Tables

ProQuest document ID: 1418710267

Document URL: http://search.proquest.com/docview/1418710267?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 12 of 100

Internal Control And Accounting Systems Documentation: A Case Study

Author: Michelman, Jeffrey E.; Waldrup, Bobby E.; Gillman, Melanie R.

ProQuest document link

Abstract:

This case chronicles the experiences of a student intern as she assists in the transformation of a transportation company's internal audit department in a process to go public and come into compliance with the provisions of the Sarbanes-Oxley Act. It is designed to give students an in-the-trenches viewpoint of the sweeping effects that SOX has on the internal control structure of regulated firms. The topics of co-sourcing, documentation, re-performance, and mentoring are weaved into the story as examples of how the accounting profession affects organizational behavior and culture. The case is appropriate for undergraduate and graduate auditing, systems or internal audit classes. Moreover, the case would serve as an excellent aid for faculty and students involved in accounting internships. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Public Company Accounting Reform & Investor Protection Act 2002-US; Internal controls; Internal auditing; Case studies; Mentors

Location: United States--US

Classification: 9110: Company specific; 4120: Accounting policies & procedures; 4320: Legislation; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 279

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 1418709616

Document URL: http://search.proquest.com/docview/1418709616?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 13 of 100

The Tale of Two Managers: A Value-Based Saga

Author: Prabhu, Narayan Krishna

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Abstract:

Human resource development managers are concerned about recruiting competent and value-based people in organizations. Values can be seen at the individual, organizational and corporate levels and also in a national context. Culture and society play an important part in shaping values and behavior. This paper relates the cases of two managers, born in different periods of time, having particular generational values, and consequently different dominant work values and personality traits. The interviews with stakeholders and other role holders also echo the same. Amongst a cross-section of employees, it is seen that some values are commonly found, whereas other values are unevenly distributed. Personality attributes, as propounded by organizational experts - like Type A personality traits, proactive personality constructs, core self-evaluation risk-taking and high-flyer dimensions - are seen in varying degrees in the employees. Again, there are issues like integrity, loyalty, and whistleblowing which are prevalent in a skewed manner. Organizational commitment is seen as responsible for bonding. Stories about the founder have kept the organizations surging forward. All these artifacts are seen suffused with values. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Personality traits; Human resource management; Management styles; Case studies; Psychological aspects; Organizational behavior

Classification: 1220: Social trends & culture; 6100: Human resource planning; 2500: Organizational behavior; 2200: Managerial skills; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 297

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418708945

Document URL: http://search.proquest.com/docview/1418708945?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 14 of 100

A Case Study Of Crisis Communication, Image Restoration And Utilitarian Ethics: A Recall Of Contaminated Peanut Butter Examined

Author: Roman, Kylie D.; Moore, Maria A.

ProQuest document link

Abstract:

In a publicized crisis, the goal to ethically and restoratively regain public trust is paramount to most corporations. In 2009, the food industry in the USA was thrust into a crisis when the Peanut Corporation of America (PCA), a small peanut processing company in Georgia, was linked to a salmonella outbreak resulting in illness, fatalities, and the recall of close to 4,000 products. Many large food product companies bore the economic impact, though they were not the cause of the problem. Consumers became confused about which products were safe. The oversight stewardship abilities of the Food & Drug Administration (FDA) became suspect. PCA went bankrupt and its owners face federal prosecution. To fully understand the public communication decisions made by PCA, principles of Image Restoration Theory are used to examine and evaluate PCA's responses to this event. To render generalizable knowledge for others from this historic case, Utilitarian Ethics are applied to the actions of PCA, the FDA, and the peanut industry as a whole. This analysis of past events may serve to empower business leaders and corporate communicators faced with correcting future food borne illness problems and communicating with their key constituencies of regulators, business partners and consumers. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Case studies; Food contamination & poisoning; Salmonella; Food safety; Business communications; Business ethics; Peanuts

Location: United States--US

Company: Peanut Corp of America

Classification: 5340: Safety management; 5200: Communications & information management; 2400: Public relations; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 311

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418710719

Document URL: http://search.proquest.com/docview/1418710719?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 15 of 100

Using The Resource-Based View To Explore The Jamaican Health Tourism Sector As A Service: A Preliminary Examination

Author: Pearcy, Dawn H.; Gorodnia, Daria; Lester, Jacquelyn

ProQuest document link

Abstract:

Tourism plays a key role in the economy of the Caribbean Island of Jamaica, generating substantial revenues and contributing to employment. Jamaica endeavors to grow its economy and achieve developed nation status within the next two decades and is looking to tourism to help the country reach this goal. Specifically, Jamaica seeks to diversify its tourism offering by making a significant foray into what has been projected to be a highly lucrative health tourism market. While the potential for Jamaica to capitalize on the opportunities presented by this sector is substantial, much remains undiscovered about Jamaica's current position as well as what might be required to advance the nation in this area. The purpose of this paper is to provide a preliminary examination of Jamaica's health tourism sector within a resource-based view framework, highlighting the manner in which customers might serve as valuable resources and to examine a key element of the service delivery process. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Medical tourism; Economic development; Market strategy; Market entry; Case studies

Location: Jamaica

Classification: 1120: Economic policy & planning; 8350: Transportation & travel industry; 7000: Marketing; 9173: Latin America; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 325

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418710268

Document URL: http://search.proquest.com/docview/1418710268?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 16 of 100

Should I Give Grandma An iPod For Christmas? Music Consumption Behavior In The Digital Age

Author: Coleman, Joshua T.; Castleberry, Stephen B.

ProQuest document link

Abstract:

Ryan has to help an aspiring tribute artist learn how to best market his music to the elderly market. He does so by collecting data via Internet research, sales analysis, field observation, and a survey. The case requires students to evaluate the quality of the research conducted and then provide marketing direction. The case could be used in the following undergraduate or graduate courses: marketing research, principles of marketing, marketing strategy, consumer behavior. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Case studies; Market research; Consumer behavior; Nostalgia; Market strategy; Consumer electronics

Classification: 9110: Company specific; 8650: Electrical & electronics industries; 7100: Market research; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 335

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References Tables

ProQuest document ID: 1418709812

Document URL: http://search.proquest.com/docview/1418709812?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 17 of 100

Fixed-Cost Models In Manufacturing Glass: The Case Of Juleno Crystals

Author: Abuizam, Raida

ProQuest document link

Abstract:

The Juleno Crystals case illustrates how spreadsheet modeling can be used to solve linear programming problems without the use of algebraic formulations. It also enriches students' knowledge on how to use integer linear programming with binary (0-1) variables in dealing with problems that include fixed costs. Binary variables are often used to transform a nonlinear model into a linear (integer) model. Students completing the Juleno Crystals case will be able to develop a spreadsheet model that will maximize the company's profit while correctly incorporating fixed costs and staying within the limits of the available resources. [PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Case studies; Integer programming; Operations management; Profit maximization; Glass & glassware industry; Strategic management

Classification: 3400: Investment analysis & personal finance; 8640: Chemical industry; 2310: Planning; 2600: Management science/operations research; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 3

Pages: 349

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References Tables

ProQuest document ID: 1418708969

Document URL: http://search.proquest.com/docview/1418708969?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 18 of 100

Pursuing Financial Inclusion of Family Firms at the Base of the Pyramid (BoP): The Case of Convenience Stores and Microenterprises in Nuevo León, Mexico

Author: Trevinyo-Rodríguez, Rosa Nelly; Chamiec-Case, Linda

ProQuest document link

Abstract:

In order to tackle one of the multi features contributing to the growth and survival challenge Latin American, family-owned and run microenterprises face, this paper proposes a "private" business model to generate mutual value creation at the Base of the Pyramid (BoP) in which large Mexican family-owned convenience stores provide financial services to "changarros," which are Mexican family-owned microenterprises. This initiative aims to: 1) support the economic growth, and hence survival chances, of Mexican family-owned microenterprises-changarros: 2) promote, to some extent, "financial inclusion" for those at the BoP in Nuevo León, Mexico; and 3) generate the creation of an enhanced business network between two different kinds (especially in size) of family firms-the convenience stores and the changarros- which will allow them to collaborate and co-opt, instead of compete. [PUBLICATION ABSTRACT]

Full text:

(ProQuest: ... denotes formulae omitted.)

Introduction

In September 2000, 189 countries endorsed the United Nations Millennium Declaration, where one of the ultimate goals was to "End poverty by 2015." Today (2012), twelve years later, has progress been made? Indeed, more than 310 million people now live below the basic subsistence level of US$1 dollar per day. That number is expected to grow to 420 million by 2015. And, despite $1.5 trillion invested in aid and subsidies to the developing world during the past 50 years, disparities have more than widened within and between countries, with no indication that this trend will reverse in the near future. Thus, and in order to explain how to break the poverty trap, during the last few years, development economists have proclaimed new solutions: entrepreneurship and innovation. These solutions have been heard the most by the private sector, nongovernmental organizations, community- based entities and other social movements in emerging countries, producing new kinds of entrepreneurs and business model ventures which focus especially in enhancing the quality of life and economic opportunities of those at the Base of the Pyramid (BoP), linking therefore, economic profit to human development of the poor. On that account, in an attempt to contribute to the proclaimed solutions to break the poverty trap, and considering entrepreneurial activity at the BoP as fundamental for emerging economies to develop, in this paper, we analyze a concrete possibility to implement a new, private business model initiative that benefits Latin American family-owned microenterprises at the BoP, particularly a specific kind of businesses located in Mexico called "changarros."

We focused on Mexico for two reasons: 1) due to its foreseen economic high growth potential, and 2) due to the fact that Mexico is the 10th to 13th country with the highest number of poor in the world (approximately 111,212,000 individuals at the BoP). In the business/entrepreneurial setting, we direct our attention to changarros-small family-owned and run corner stores-because they represent the most common, privately held entrepreneurial activity at the BoP in Mexico. These businesses not only face growth challenges, but also struggle to survive, as they compete with convenience stores, supermarkets and other microenterprises, dealing simultaneously with the market financial and structural constraints. Additionally, the family-owned and run attribute, complicates their operation, since non-economic goals, emotional moods, and values are continuously articulated along with economic objectives, being therefore forces that stimulate current and future decision making in family enterprises-succession planning, ownership distribution among siblings, etc.

As a matter of fact, the purpose of this paper is threefold. First, it tries to find an entrepreneurial and innovative solution to the growth and survival challenge changarros face by proposing a private business model that generates mutual value creation at the Base of the Pyramid (BoP) in which large Mexican family-owned convenience stores provide financial services to Mexican family-owned microenterprises-therefore creating an enhanced economic business network between two different kinds (especially in size) of family firms, the convenience stores and the changarros. Second, it intends to analyze if the "family business" characteristic impacts in any way the sustainability of the proposed business model, considering succession planning as a potential variable to evaluate. Third, it promotes, to some extent, financial inclusion for those enterprises at the BoP as a way to break the poverty trap and foster the firms' growth and survival. Along these lines, we strive to answer the following research questions:

1. Can Mexican family-owned microenterprises (changarros) tackle the growth and 1. survival problems they face by making alliances or integrating themselves in the business networks of large convenience stores (e.g., becoming their customers) instead of competing with them?

2. Are there specific "family-business"-related factors that could contribute in the long 2. term to the changarro success (survival/sustainability) or failure (disappearance)?

3. Is financial inclusion for Mexican BoP enterprises such as changarros a feasible 3. growth and survival strategy? If so, what entity should provide these services to changarros?

This study contributes to the literature that discusses entrepreneurship, family business and the BoP in emerging countries by exposing a new perspective where different kinds of private, family-owned enterprises (large "Grupos" and microenterprises) could create synergies among them by creating a network where an "inclusive" financial business model could be implemented, therefore collaborating and co-opting, instead of competing. We focus on a private BoP business model among family-owned firms to overpass institutional voids in emerging economies (in order to make it happen). By doing so, we start bridging the gap between theoretical concepts and practical implementation.

Our main findings show that changarros are business entities that generate constant or increasing profits and attain scale, making them able to afford financial business services-for instance, microfinance services. Unfortunately, these financial services, provided by a small number of banks in Mexico, are sometimes not "available" or "adequate" for this type of enterprises-which may not even be subject to credit. Therefore, an out-of-the-box solution needs to be developed if these BoP firms are to tackle their growth and survival challenges, which are in some way linked to their owners' low financial education and structure. Interestingly, we realize that convenience stores are not perceived as the primary competitors of changarros, being it viable for these two enterprises to support one another. They could strive for a win-win solution that could help changarros to achieve growth-by developing their infrastructure and processes-and convenience stores to diversify their assets by getting into a new business-providing financial services to similar/related firms. Finally, we point out that changarro business "success" or "failure" in the long term is mediated by family business owners implementing or not their succession plans (succession planning), maintaining this variable as the key factor in the proposed business model for sustainability.

It is noteworthy to mention that our findings cannot be generalized to Mexico as a whole (country) since the explorative research we present here was carried out in the northern state of Nuevo León-one of the most developed regions in Mexico, where many enterprises (of all sizes) are located and where the headquarters of two (out of three) of the large family-owned convenience stores analyzed are situated.

This paper is organized as follows. First, we study the situation of family-owned firms in Latin America, linking this information to Mexican changarros operating at the BoP. Second, we present an overview of how financial inclusion in Mexico has been stimulated during the last years through the use of microfinance and the expansion of the branchless banking model. Third, we expose our proposed financial business model followed by an explanation of our research design, measures, and analysis. Fourth, we conclude with implications of the obtained results and remarks on future research ideas.

The Mexican Changarro: A Special Kind of Family-Owned and Run Firm at the BoP

Different authors (Trevinyo-Rodríguez, 2009, 2010; Carraher, 2005; Borkowski, 2001) coincide on the fact that almost 90% of all enterprises in Latin American countries are either family owned or controlled, reaching the whole size spectrum, from microenterprises located in the rural and/or urban areas to the multinational conglomerates, or Grupos, whose economic and social influence is felt all over the Latin American geography. Actually, these multi-size, multi-sector enterprises, which have rich cultures grounded in strong value systems, play a significant role in the economy by contributing to the growth of GDP by 45-65% (Carraher, 2005), being also partly responsible for employment-for instance, in Mexico, family firms generate 78% of all jobs (Trevinyo-Rodríguez, 2010).

When analyzing family-owned microenterprises in Latin America, we observe a recent and quick increase in their creation and development. Most of these newly created family-owned microenterprises tend to be located at the upper layer of what C.K. Prahalad and Hammond (2002) would describe as the Base of the Pyramid (BoP)-a market containing the four billion poorest people in the world; those making less than $2,000 per year (purchasing power parity in US dollars), and who according to London (2007), primarily transact in an informal market economy.

One type of Latin American BoP family firm central to Mexico's economy and development is the "changarro," a family-owned and run microenterprise which basically sells groceries, food and other miscellaneous products. These are the most traditional family-owned microenterprises in the country, accounting for 39% of Mexico's GDP. Moreover, studies (Amador, 2010) indicate that 60% of the economically active Mexican population buys primary goods in changarros or convenience stores. In spite of the latter, changarros tend to stay small during all their life cycle. Only a few of them exhibit infrastructure growth or expansion. Suggested reasons for the latter tend to be related to a lack of competitiveness by this kind of firms (Alonso, 2010), which is generally due to low financial and management education on the part of the owners-BoP entrepreneurs. Yet, considering that changarros tend to be conveniently located near the customer-even better than convenience stores and supermarkets-that they sell cheaper than the latter, and that their potential market is of about 40 million individuals, we suggest that staying small and not achieving economies of scale (growth) may not be motivated (although it might be a consequence of) by a lack of competitiveness (which drives either rather low profits or no profits at all), but could be, in fact, a strategy of BoP entrepreneurs in order not to rise to their level of incompetence-where they will not be able to control their firm and where they could lose their whole life investment (or even the whole BoP family wealth). So, considering that most of these BoP entrepreneurs do not have access to credit (loans), they will generally tend not to risk their (or their family's) only capital in order to seek business growth. Still, the fact that they stay small does not imply that they cannot reach scale (measure of magnitude, not of growth) by generating large revenues and clientele, being therefore able to afford financial services if provided. Thus, we hypothesize that:

H1a: Changarros generate constant or increasing profits.

H1b: Changarros can reach scale by generating large revenues and clientele.

Actually, the main challenges to family firms in Latin America include growth, adaptation of their ownership structure in succession periods, and family conflict (Trevinyo-Rodríguez, 2009). Additionally, the research and literature (Kraus, Harms and Fink, 2011) suggest that support is needed to ensure the continuity of family firms, as unfortunately the average life span of a family business, in both Latin and Anglo-Saxon countries is less than 25 years (Borkowski, 2001), and many experience serious succession issues. The latter applies also to BoP changarros. Consequently, we suggest that the "family factor"-the fact of being owned and run by family members-adds up to the changarros survival problem, since most changarro owners-especially those in the first generation (initial entrepreneurs)-tend NOT to plan for the long term in relationship to succession planning and next generation member's (second generation-siblings) involvement in the business. Accordingly, it might happen that after a whole life working in the changarro, the business owner suddenly finds out that there is no one who could take his place when he is gone; therefore, evaluating the option of closing or selling his business.

Due to the fact that family firms are complex cultural systems (Kraus, Harms and Fink, 2011) in which business and family dynamics mix in various ways impacting family members' behaviors as well as short- and long-term business decisions, next generation member's involvement must start as early as possible (Trevinyo-Rodríguez, 2009). Lamentably, research and practice shows that it is not until the business scale and operation demand more attention that the business owners start thinking about involving their kids in the operation, which would lead sooner or later to succession planning. If the latter holds true for BoP changarros, we could expect that business success could drive family involvement, and later on, succession planning. Yet, if growth was never experienced (the changarro stayed small), the possibilities of potentially involving other family members in the microenterprise become remote, since there is no need for doing so. Hence, we can hypothesize the following:

H2: There is a negative relationship between the implementation of succession plans by owners and the probability that the changarro will close within the next five years.

H3: There is a positive relationship between the success of a changarro (measured in terms of scale and profit growth) and the implementation of succession plans that involve one's child in the business.

H4: The majority of changarro owners do NOT implement measures to plan for their succession to ensure the sustainability of the business over generations.

Changarros vs. Convenience Stores and Supermarkets

Trends over the past 10 years show that changarros have decreased their participation in formal business channels, whereas large supermarket companies have increased it. In 1999, traditional changarros occupied 43.3% of the market but, by 2008, this figure dropped to 32.3% (Alonso, 2010). At the same time, large supermarket chains like Wal-Mart Mexico, Soriana, and others grew from 42.9% to 51.7%. Furthermore, convenience stores like Oxxo, 7-Eleven, and others grew their market share from 6.3% to 8.3% (Alonso, 2010). And while supermarket chains and convenience stores have significant plans for growth and expansion during 2011-2015, their smaller traditional counterparts seem to be struggling and fading. Experts attribute this phenomenon to aggressive growth of companies in retail consumption and the lack of competitiveness of small businesses. The ramifications of these trends for Mexican workers and the economy are serious, as changarros employ over one million people in the country.

The common belief held in Mexico is that for every convenience store that opens, 10 changarros are "killed." Many feel that changarros are being pushed out by larger multinational chains and are being forced to franchise. Since our research (proposed financial business model) suggests a new collaborative relationship between changarros and convenience stores, we need to investigate if this conventional belief is supported or not in order to assess the feasibility of collaboration between these two entities. Thus, we hypothesize the following:

H5: Changarros do not perceive convenience stores to be primary competitors.

If the latter happens to be true, convenience stores could then evaluate the possibility of diversifying their product offer by becoming financial service providers to BoP changarros. By the same token, changarros could analyze the possibility of becoming part of the convenience stores business system (enhanced network), being therefore able to become customers or even small-scale distributors of some of their branded products.

Financial Inclusion in Mexico: Microfinance and the Branchless Banking Model

Although the incidence of credit constraints in Mexico is significant, particularly among individual BoP entrepreneurs (Love and Sánchez, 2009), the country has made significant strides in many areas since 1995. Nonetheless, studies continue to reveal that financial penetration needs to be increased as currently only 14.1% of GDP is being reached. Additionally, 67% of the market is controlled by five of 40 operating banks in Mexico as a result of mergers and other financial groups that arose during the recovery of the banking system (Gardeva et al., 2009). In an effort to reverse this trend, authorities have encouraged financial inclusion via the authorization of new smaller, non-traditional banks (branchless banking model) to create competition for services which optimistically will, in turn, lower the cost of financial services and increase market penetration.

Financial inclusion, defined as sustainable access to financial services (including credit, savings, life insurance, and payment services) on a large scale for all socio-economic demographics (Gardeva et al., 2009), not only needs to be granted to promote social development (e.g., reduce poverty) but also to promote the sustainability of entrepreneurial ventures already operating at the BoP (economic stability).

Many argue that microfinance, the practice of providing small-scale financial services designed to meet the unique finance needs of low-income populations (Gessaghi, Gehrke and Perez, 2007) at the BoP, is an effective means of pursuing financial inclusion (Love and Sánchez, 2009; Gessaghi, Gehrke and Perez, 2007; Gardeva et al., 2009). However, in order for microenterprise owners to leverage on the benefits of microfinance, they must be able to pay back loans. If for any reasons payments are not accomplished, they will lose (most of the times) access to their credit line and their social standing will be affected. Hence, for microenterprise/changarro owners to take advantage of this financial mechanism, their businesses must be able to generate enough profits to repay the loan they have received (as suggested in H1a), which might well be related (or not) to the scale attained in terms of revenues and clientele (as suggested in H1b).

Likewise, achieving financial inclusion hinges on increasing access to financial services. Building more branches for new or currently existing financial institutions would provide physical access but would be very costly. Therefore, alternative channels, which find non-traditional means to disburse credit and other services, must be pursued. One way to pursue this is through branchless banking, a system in which retail stores are utilized as banking agents. Indeed, a variety of reputable companies in Mexico have already recognized the potential of this idea and have begun offering financial services to reach new types of customer; examples include Wal-Mart (Banco Wal-Mart de México "Adelante"), the Coppel Retail Group (BanCoppel), the Chedraui Group (Banco Fácil), Elektra Group (Banco Azteca) and FAMSA (Banco Ahorro FAMSA).

The literature (Jacob, 2005) indicates that branchless banking through various banking agents is an effective model generating mutual value creation at the BoP-providing needed financial services and simultaneously generating profit for the agent. In this paper, we like to suggest that this model can be specifically applied to the Mexican economy through family-owned convenience stores offering financial services to Mexican family-owned and run changarros. We dare to suggest the latter, since most of the convenience stores analyzed within this study already act as "agents" within the branchless banking system. However, instead of doing "corporate BoP services"-meaning providing services to BoP microenterprises- they limit themselves to providing a few services related to receiving payments (e.g., telephone, gas and electricity bills) and deposit checks to individual households. Convenience stores could therefore become a "niche" bank microfinance service provider, being thus able to distribute their own branded products through changarros-acquiring as a result not only financial service customers but also BoP distributors-and hence opening new, or widening previous, distribution channels. In fact, convenience stores can offer changarro owners, instead of a cash loan, a line of credit that they could use to stock their own changarros (with products from the convenience store-branded or not). In an effort to benefit from this win-win relationship, convenience stores may even consider passing on to the changarros some of their own economies of scale, selling them some goods at a lower price. Furthermore, it could also be the case that convenience stores offer selected changarros (based on their growth potential and business owner characteristics) a "license"-legal permission to turn their changarro into a branded convenience store; although this latter option would definitely need further analysis (changarros would require to be evaluated thoroughly on different matters in order to see if they qualify).

Of course, as previously stated in H1 (a, b) and H5, in order for changarros to be interested in "acquiring" financial services (credit or a license) from convenience stores, and for convenience stores to consider changarros as consumers of interest with significant purchasing power, two requisites must be met: 1) changarros must be capable of generating profits and reaching scale-in terms of revenues and clientele-in order for them to be able to repay loans and project growth potential (to warrant investing); and 2) convenience stores must not be perceived as the primary or direct competitors of changarros. If the latter holds true, then, we hypothesize the following:

H6a: There exists a positive relationship between changarro scale and the probability that it is interested in financial services (credit) from convenience stores.

H6b: There exists a positive relationship between changarro scale and the probability that it is interested in financial services (license) from convenience stores.

In fact, we suggest that changarros will experience economic growth as a result of the financial services (credit, H6a; or licenses, H6b) the convenience stores can provide to them. We intend to support this argument with our research results by arguing that there exists indeed demand from changarros for these financial services (credit or licenses). Thus, by considering the changarro as the client consuming a needed service for development, and the convenience stores acting as agents providing services and profiting from them (experiencing economic growth based on the changarro acting as a client), our model will result in both, economic growth at the BoP and mutual value creation for both businesses. It is noteworthy to point out that the success of the changarro, meaning its survival over time, is an essential component for this model to work out, and as such, we highlight succession planning and next generation members' early involvement as main determinants impacting this long-term business-to-business relationship. Below, we illustrate our proposed financial private business model.

Data and Methods

Sample

A survey was developed and tested for internal consistency and construct validity based on the family business and sociology literature. This literature includes studies on family and business relationships, commitment, success, and motivation (Trevinyo-Rodríguez, 2007, 2010). Also considered was the prior experience of the researchers, who introduced other indicators dealing with the environment, cultural settings and business opportunities. The survey was administered to a full sample of 470 changarro owners in three different cities- Monterrey, Guadalupe, and San Nicolás-in the state of Nuevo León, Mexico, within a 13-month time period from January 2009 to February 2010. We considered the geographical location of convenience stores' headquarters relevant when limiting the initial project survey to the state of Nuevo León (specifically to Monterrey, Guadalupe and San Nicolás, where two out of the three convenience stores headquarters are situated) due to the fact that in order to promote this new business model along their nationwide branches, a small-scale pilot project needed to be developed and run by these companies. Generally, pilot projects are run near headquarters, since they can be better evaluated and the decision-making process, especially when dealing with adaptations to the original proposition, is quicker.

Subjects interviewed were asked to provide information on the survey questions to the researchers, who filled out the survey form by themselves based on the information received. After excluding surveys that were incomplete, approximately 3% of this full sample of changarro business owners in Monterrey, Guadalupe and San Nicolás refused to answer the whole questionnaire, especially those questions dealing with income and clientele, a total of 455 useable responses remained. In order for the reader to assess the complexity of getting the data for this study, we have to mention that the survey was administered by 15 researchers, who during a 13-month period (in a consistent and continuous form) walked, with the help of a map, through each and every street of the three cities analyzed-Monterrey, Guadalupe and San Nicolás-in order to locate this full sample of changarros (there is no database or information available about the location of most changarros in the state of Nuevo León). Two vans were used to transport researchers whenever needed. Additionally, 20 in-depth interviews were selectively conducted by the authors with changarro business owners in order to triangulate the received information.

The summary statistics of our final sample are shown in Table 1.

Methods and Variables

A description of the variables used, their meaning, and their composition (constructs) is shown below. As a general overview, constructs (e.g., involvement-referred to as "involve" in Table 2) were already validated in previous studies (Trevinyo-Rodríguez, 2007; 2010). Additionally, dummy variables were used to represent covariates.

Simple summary statistics and t-significance tests are sufficient to test hypotheses one, four and five. To test hypotheses two, three, and six, two ordered probit and three probit regression models were constructed. The two ordered probit regressions estimate success of the changarro and implementation of succession plans, which involve next generation members. We utilize two different variables to measure a changarro's success: changarro scale (SCALE) and changarro profit growth (PROFIT).

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We consider scale as an indicator with significant reservation, taking into consideration that it is a measure of magnitude and not of growth. Although scale and success are often highly correlated, we recognize that it is possible for a changarro to be of a small scale (small revenues, small clientele) but still growing quickly and being highly successful.

Our three probit models explain the probability of a changarro considering a license from a convenience store (LICD), considering credit from a convenience store (CREDITD), or planning to close within the next five years (CLOSE).

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We determined relevant explanatory variables for the ordered probit and probit models by correlating all variables from the data set against the dependent variables to determine which variables were significantly correlated and by running an exploratory factor analysis. We then ran a multiple linear regression or probit regression (as relevant) for each dependent variable against their group of correlated variables, selecting the significant variables for the model. To determine functional form we chose the form of each variable (linear, quadratic, or log) to maximize the R2 (or pseudo R2) of the regression. Note some dependent variables have two regression models with two different sets of independent variables. This is because some independent variables (e.g., scale and profit growth) are highly correlated, creating issues of multicollinearity when regressed in the same model.

To determine which dummy variables were significant for each regression we utilized the Lagrange multiplier test, selecting dummy variables that yielded significant chi-squared values. Additionally, all models were also tested for multicollinearity and endogeneity.

Analysis and Results

The data shows that changarros are able to generate constant or increasing profits and reach scale by generating large revenues and clientele, thus supporting H1a and H1b. Indeed, our analysis demonstrates that despite the difficult economic situation in 2007-2008, 45.5% of changarros reported constant or increasing profits.

a. Changarros demonstrate ability to reach scale as demonstrated by the fact that 62.25% of changarros claim more than MXN$5000 in monthly revenue (about US$415), with 17.2% reporting > above MXN$9000 (> above US$745 approx.). As a reference, in Mexico, the minimum daily salary per person is on average MXN$58.5 (about US$5), and the minimum monthly salary per person is about MXN$1814 (about US$151).

b. Additionally, 72.7% of changarros in our survey have more than 50 clients, and 34.8% of them have more than 100 clients.

Hypothesis five (H5) was also confirmed by demonstrating that the majority of changarros (85%) do not consider convenience stores-defined as Store A, store B, or Store C- to be their primary competitors. The following table describes the percentage of surveyed owners that rate each store at each level of competition: 1 (primary competitor) to 5 (least competitor).

Our findings display that the primary goods sold in changarros are refreshments and alcohol: 65.6% report refreshments and 19.1% report alcohol. And, although these goods are usually the ones sold by convenience stores, the main differences between changarros and convenience stores are the following:

1. Convenience stores do not sell "single" items (e.g., a changarro can sell one ciga1. rette, the convenience store sells the complete pack);

2. Convenience stores do not sell on credit (e.g., changarro owners know the neigh2. borhood-and their clients-so they lend them goods and keep track of their debt and credit line);

3. Convenience stores do not deliver directly door-to-door (e.g., since changarro 3. owners know their clients, they sometimes deliver "basic" goods directly to their houses).

The obtained information does not provide support for H6a since it shows that there is no significant relationship between changarro scale and the probability that the changarro is interested in credit. Although we were unable to support this hypothesis, these models do provide valuable information that explains a relationship between several significant variables and the probability of interest in credit. "Number of family employees" and "the weekly amount the changarro loans" are both significantly and positively related to probability of credit interest. The first is linearly related, the second log linearly related (thus, with diminishing marginal returns). We draw these conclusions with caution, as the models yield a low pseudo R2 of 0.1065 and 0.1433, respectively.

However, Hypothesis 6b (H6b) was indeed, empirically verified. The scale of a changarro is positively and linearly related with probable interest in a license. In this way, our data suggests that larger-scale changarros are more likely to be interested in a license.

The data also supports hypothesis two (H2) by showing a negative relationship between the implementation of succession plans (succlid and succkid) and the probability that the changarro will close within the next five years. This model also provides useful information about indicators that could be of use when evaluating the "failure potential" of a changarro. For instance, both the "scale of the business" and "being located in the city of San Nicolás" are negatively related to the probability of closure; the latter may be due to the fact that there are significantly fewer changarros in San Nicolás than there are in Guadalupe and Monterrey, meaning far less competition in the area.

Furthermore, our analysis also confirms H3, showing that the owner planning for his/her succession by involving his/her child in the business is positively related to scale and profit growth. Our models also offer important information about how to identify successful changarros-they detect some critical success factors. The latter may be of great help if interested in providing them with credit or a license. We see that profit growth (model 1) is positively and linearly related to the education of the owner, log linearly and positively related to frequency of restocking, and quadratically and negatively related to the degree of family involvement (as more family members work in the changarro, less profit growth is achieved). The other dummy variables measuring the primary way in which a changarro spends its money were insignificant. Model 2 (scale) also supports H3. Additionally, it shows that there is a positive quadratic relationship between the amount that a changarro loans to its clients and the scale of the business. Furthermore, a negative relationship between "scale" and "changarro closing within the next five years" was also detected. Interestingly, as in model 1 (profit growth) there is a negative quadratic relationship between scale and degree of family involvement (as more family members work in the changarro, less scale is attained). The dummy variables show that there is a negative relationship between a changarro loaning to friends and family and the scale of the business. The rest of the dummy vatiables were not significant.

Hypothesis 4 (H4), related to the fact that changarro owners do not really plan their succession processes, was also supported. Although the majority (70.43%) of changarro owners think, and completely agree, that there is someone capable of taking over their business in the family, 25.96% completely disagree that there is someone who wishes to take over within the family, and over a third (35.89%) have never even considered the issue before this question was directly asked to them (by the authors). This lack of planning and lack of a desiring candidate lead us to conclude that changarros do not have an organized and established process to deal with succession issues, thus supporting the hypothesis. A summary of our research findings is shown below.

Conclusion

Throughout this paper, we have illustrated a new perspective-using our proposed financial private business model-that could be of help when dealing with the multi-features contributing to the growth and survival problem Latin American family-owned and run microenterprises face. Indeed, through this work, we expect to have contributed to an extent in providing a more focused approach to study Mexican changarros, as well as to explore potential business-to-business relationships (synergy creation) that could be of help when devising alternatives to foster these BoP microenterprises' development and continuity.

Interestingly enough, we found out that even when convenience stores are expanding and plan to continue doing so, they do not really compete with changarros-which have specific target customers and provide one-to-one niche services that convenience stores cannot afford (due to their scale and standardization procedures). Thus, we devise a potential win-win business relationship between these BoP family-owned and run microenterprises and large family-owned Grupos (convenience stores), in which convenience stores could provide financial and even (re)stocking services to changarros-which they could use in order to grow, develop and/or survive-profit from them, and also provide them with the means and access to credit, licenses or products (e.g., changarros can become convenience stores' distributors of branded products). In fact, we think this approach represents:

1. the generation of a business model that fosters mutual value creation at the BoP-1. co-creation of value (where large family-controlled convenience stores provide financial services to changarros);

2. the creation and development of synergies (collaborative business-to-business rela2. tionships) and of an enhanced network where partners and customers (in this case, microenterprises and convenience stores) are part of the whole consumer-supplier business system-changarros can get credit or products from convenience stores and, in exchange, they can provide convenience stores with distribution channels at the BoP that they could not have opened by themselves (they do not know the people personally and, therefore they are not aware of their specific needs-this niche market (BoP) is extensively covered by changarros).

3. the insight of using financial inclusion as a way to deal with the growth and sur3. vival problems family-owned and run changarros must cope with.

Yet, in order to make the model operational, changarros need to be evaluated regarding their business potential. On this subject, we have detected some critical success factors that may help convenience stores to filter and select only those changarros that could really benefit from the service they provide, and utilize it in a productive/effective way. Some important variables (critical success factors) to include in the selection criteria are, according to our research, the changarro owner education, the frequency of restocking, the number of family members involved in the business, the amount the changarro loans to customers, the existence of a succession planning process, etc. The latter is important when analyzing the credit capacity of the changarro, or even when the convenience store is evaluating whether to offer a license to the microenterprise.

Limitations of this research include a potential response bias in the survey questions dealing with owners' intentions (e.g., their intention to close within the next five years), and the fact that it was a regional study constrained to the state of Nuevo León, México. Further research needs to be done in other regions of Mexico in order to compare and contrast these findings. Additionally, convenience stores need to evaluate the possible logistic challenges that providing services to changarros could imply, meaning that they might have to develop a good filtering mechanism that allows them to evaluate the economic and networking potential of the changarro in order not to lose money or product while offering their services.

Implications for practice of this paper have to do with the implementation of a "similar" kind of branchless banking model, but using convenience stores as a way to bridge the gap between financial inclusion theory and practice; being thus a way of coping with the growth and survival challenges family-owned microenterprises face. Also, this paper could provide ideas to practitioners for them to develop a complete set (instrument) of questions and observations that could predict the changarro possibility of survival under certain business circumstances (predict their success or failure by analyzing their operation).

Contact

For further information about this article, contact:

Rosa Nelly Trevinyo-Rodríguez, Tecnológico de Monterrey

E-mail: rosa.nelly.trevino@itesm.mx

Linda Chamiec-Case, Tecnológico de Monterrey

E-mail: lchamiec@gmail.com

Subject: Convenience stores; Family owned businesses; Business models; Financial services; Case studies

Location: Mexico

Classification: 8100: Financial services industry; 2310: Planning; 9520: Small business; 8390: Retailing industry; 9173: Latin America; 9130: Experiment/theoretical treatment

Publication title: Journal of Small Business and Entrepreneurship

Volume: 25

Issue: 2

Pages: 231-248,253-254

Number of pages: 20

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Taylor & Francis Ltd., Journal of Small Business and Entrepreneurship, Taylor & Francis Ltd.

Place of publication: Regina

Country of publication: United Kingdom

Publication subject: Business And Economics--Small Business

ISSN: 08276331

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

Document feature: Diagrams Tables Equations References

ProQuest document ID: 1022709688

Document URL: http://search.proquest.com/docview/1022709688?accountid=38610

Copyright: Copyright Journal of Small Business and Entrepreneurship 2012

Last updated: 2013-10-01

Database: ABI/INFORM Complete

Document 19 of 100

INCOME SMOOTHING: MANAGEMENT CONSEQUENCES AND AUDITOR RESPONSIBILITES IN THE CASE OF BEAZER HOMES

Author: Schneider, Gary P; Sheikh, Aamer; Simione, Kathleen

ProQuest document link

Abstract:

This case provides students with a real world example of alleged income smoothing and its consequences. Students learn how earnings were allegedly manipulated, why they were allegedly manipulated, and what the ultimate results of these alleged tactics were for the company. They are asked to analyze the earnings management techniques used and identify ways in which the auditors might have identified the activity and how their audit planning could have been modified given the industry-specific risks and the requirements of SOX. The case raises issues related to internal controls, auditor responsibility and professional and ethical principles and standards. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Beazer Homes USA, Inc. (Beazer Homes) has been accused of using specific earnings management techniques to smooth income. Income smoothing is the result of carefully managing earnings (net income) to show a smooth, steady growth in earnings each year rather than dramatic ups and downs. Companies with volatile earnings are considered to be more risky and therefore less valuable than companies with stable patterns of income growth. Earnings management practices include understating income during good periods by deferring income or accelerating expenses and overstating income during bad business years by accelerating income or deferring expenses. In this case, you will learn about Beazer Homes, the home building industry in general, and income smoothing in general. Then you will learn how Beazer Homes allegedly used specific earnings management practices to smooth its income. You will then be asked to answer questions about the actions and responsibilities of Beazer Homes' top management team and its independent auditor.

BEAZER HOMES

Beazer Homes builds and sells predominately single-family residences in 17 states across the United States. In recent years, the company has been ranked consistently as one of the top ten residential home builders in the country, based on number of homes built and sold (Beazer Homes, 2002; Beazer Homes, 2005; Beazer Homes, 2008).

Beazer has grown continually since its 1985 entry into the U.S. residential housing market. The company has followed a strategy of doing business primarily in communities that have higher than average population growth and builds homes in a price range that appeals to first-time home buyers or buyers making their first move to a better home. Beazer also sells title insurance in some markets and, until February of 2008, offered home mortgage loans through a finance subsidiary. Beazer' s success has led to its many homebuilding honors and awards and its listings as one of Forbes 400 Best Big Companies in 2005 and 2006 and as one of the Forbes Global 2000 in 2005, 2006 and 2007 (Funding Universe, 2009; Hoover's, 2009).

The company started as Beazer PLC, a home builder in the United Kingdom. Beazer Homes entered the U.S. residential housing markets in 1985 with the purchase of Atlanta home builder, Cohn Communities. Shortly thereafter the company acquired two more home builders in the Southeast. The company continued its expansion with the purchase of additional home builders and a number of other related companies in the building industry, including GiffordHill, a Dallas cement producer; Tidewater Construction, a heavy construction contractor; and Koppers, a major producer of construction materials in Pittsburgh. The Koppers acquisition was a hostile takeover which led the company into several court battles with Kopper's management and investors. However, Beazer eventually raised its offer price enough to pacify the objections and acquired the company in 1988 (Williams, 1988).

The Koppers acquisition, financed completely with bank loans, gave Beazer Homes a strong presence in the U.S. construction market, but saddled the company with substantial debt just in time to face the declining housing markets in both the United Kingdom and the United States in the early 1990s. After several years of negotiating with banks regarding repayment plans for this debt, the company was acquired by Hanson PLC, a British company. Hanson PLC spun off Beazer homes in 1994 and the company went public later that year as an independent, U.S.-only home construction conglomerate (Lurz, 1994; New York Times, 1994).

As the U.S. real estate markets improved, Beazer Homes made additional acquisitions were made that expanded Beazer Homes into new regions in the Southeast, Mid-Atlantic, and West. By 2000 the company was selling about 8,000 homes each year and by 2005 they were selling more than 18,100. However, the real estate crisis, the general recession, and the nearcollapse of the financial markets hit all major home builders hard. Beazer Homes was not immune to these industry trends and the company's sales dropped dramatically to 7,700 homes in 2008 (Funding Universe, 2009).

THE RESIDENTIAL HOME BUILDING INDUSTRY

The U.S. residential home building industry has gone through several dramatic business cycles in the last two decades. In the early 1990s, the industry was at a low point. The 1990-1992 recession had battered home builders and house prices in many local markets were at ten-year lows. The market took several years to recover, but as the economy grew in the 1990s, home builders participated in that growth. Areas of the country that saw rapid increases in population, especially parts of the Southeast and the Southwest saw equally rapid growth in the home building industry. Las Vegas and Phoenix were notable growth areas for home builders (Joint Center for Housing Studies, 2000).

The economic slowdown of 2000-2002 caused a temporary pullback in home construction, but as that recession ended and the Federal Reserve Bank held interest rates at an historically low level to increase the pace of economic recovery, home building was one of the prime beneficiaries. When the economy strengthened and interest rates increased, the housing markets continued to grow because changes in the structure of mortgage lending industry made money readily available to borrowers who were not well qualified by historical lending standards (Joint Center for Housing Studies, 2009).

When house prices began to decline in 2007, borrowers struggled to make payments on loans, many of which had payment escalation features, that they could no longer afford. Consequently, the number of loan foreclosures climbed rapidly (Joint Center for Housing Studies, 2009). As the credit markets and the economy deteriorated, home prices fell precipitously. This caused a significant drop in home building activity. According to the U.S. Census Bureau, housing starts in May, 2009 were down by more than 37% and completions decreased by almost 27% over the previous year (U.S. Department of Commerce, 2009). The downturn in home building has forced many companies in the industry to cut back construction, hiring, and investment. A growing number of these companies have entered bankruptcy proceedings or gone out of business. Although the survivors look forward to increases in housing starts in the future, that future still looks uncertain today (Professional Builder, 2009).

INCOME SMOOTHING AND EARNINGS MANAGEMENT

Companies with volatile earnings are considered by investors to have higher degrees of inherent risk than companies that report earnings that grow in a steady pattern, showing regular increases every year. Because of the increased level of risk perceived as inherent in companies with volatile earnings increases and decreases, the stock of those companies trades at a discount relative to the stock of companies with smooth and steady earnings growth (Brigham and Ehrhardt, 2007). Income smoothing is the result of carefully managing earnings (net income) to show a smooth, steady growth in earnings each year rather than volatility (Buckmaster, 2001).

Earnings management has received a great deal of scrutiny over the years. Researchers often focus on the factors that motivate earnings management. Many studies (see, for example: Bergstresser and Philippon, 2006; Cheng and Warfield, 2005; Cohen et al, 2008; Cornett et al, 2008; Dikolli et al, 2009; Laux and Laux, 2009; Skousen et al, 2007; and Weber, 2006) have examined the relationship between managers' compensation (in the form of both salary and stock options), and earnings management. The results of these research studies indicate that managers of these firms cause the firms frequently to report manipulated earnings numbers that meet earnings targets (which gives the managers bonuses or other incentive compensation) or the expectations of financial analysts.

Earnings management can also be used to understate earnings in good years and overstate earnings in bad years. This income smoothing strategy reduces variability in reported earnings. Revenues and expenses are shifted between accounting periods. Firms report higher revenues and/or expenses in some periods and lower in other periods, effectively shifting net income from successful periods to less successful periods. Firms use income smoothing to temper income volatility and reporting very good or very bad earnings in any given year. Reporting a stable income is more likely to instill and maintain the confidence of stakeholders (Healy and Whalen, 1999) particularly investors (Fogarty et al, 2008), lead to higher market valuations (Bitner and Dolan, 1996) and gives managers a way to meet bonus or incentive compensation plan targets when the company's actual performance would leave them short (Goel and Thakor, 2003). It follows then that the average rate on return on stockholder equity for smoothing firms is significantly less than the returns of non-smoothing firms (Tseng and Lai, 2007). Although the incidence of earning management appears to have declined in the wake of the enactment of laws, such as SOX, that make managers specifically responsible for the veracity of their financial statements (Cohen et al, 2008), the combination of the pressure to report better earnings every year and the discretion that generally accepted accounting principles (GAAP) provide, it is not surprising that many managers engage in this behavior.

GOVERNMENT INVESTIGATIONS OF BEAZER

The investigations of Beazer Homes began with a series of investigations by the U.S. Department of Housing and Urban Development, the civil division of the U.S. Department of Justice, and the North Carolina Real Estate Commission into irregularities in its mortgage lending business. These investigations ultimately alleged that Beazer Mortgage Corp. engaged in fraudulent mortgage origination activities (Kendal and Lynch, 2009). These included requiring purchasers to pay interest discount points at closing, but then keeping the cash and failing to reduce the loan interest rates; providing cash gifts to borrowers to use as down payments through charities it controlled, assuring the borrowers the gifts would not need to be repaid, then increasing the homes' purchase prices to offset the amounts of the gifts.

To settle these charges, Beazer agreed to close its mortgage lending business and pay $5 million in fines to the government. It also agreed to pay up to $48 million in damages to the victimized borrowers National Mortgage News, 2009).

SEC Investigations and Actions

Shortly after the investigations of Beazer' s mortgage business were announced, the SEC began an informal inquiry into violations of Federal securities laws at Beazer Homes. In 2007, the SEC inquiry became a formal order of investigation (Wall Street Journal, 2007).

The alleged accounting irregularities stemmed from abusive earnings management that resulted in fraudulent misstatements of net income over a multi-year period. Specifically, the SEC alleged that improper recording of Beazer' s cost of goods sold for land development and house costs and improper revenue recognition in accounting for sale-leaseback transactions caused a material and fraudulent misstatement of net income (Corkery, 2008).

By the time the SEC had completed their investigation, Beazer found itself charged with submitting materially false company filings for years 2001 through 2007. Specifically, Beazer was charged with the fraudulent misstatement of net income for the purpose of improperly managing its quarterly and annual earnings. Although never admitting or denying the SEC allegations, Beazer Homes did reach a settlement with the government. As part of that settlement, Beazer adjusted and restated its financial statements for the fiscal years 1998 through 2006 and the first two quarters of fiscal year 2007 (Corkery, 2008). The company also consented to the entry of a cease and desist order for future violations. The SEC noted both Beazer' s remedial actions and its cooperation as factors in reaching the settlement (SEC, 2008).

The consequences for Beazer Homes of these problems have been significant, especially when combined with the general malaise in the home building industry. Beazer' s stock price reached a high of $79.12 on January 13, 2006; in 2009, the stock consistently traded below one dollar per share, hitting a low of $0.25 on March 9, 2009. Beazer Homes announced that its chief accounting officer (CAO), Michael T. Rand, was terminated as a result of his alleged efforts to destroy documents related to the SEC investigation. The SEC filed a separate complaint against Rand after settling the charges with Beazer Homes (SEC, 2009). The SEC alleges that Rand's misconduct led to inflated reserves and other accrued liabilities in earlier periods. Further, the complaint alleges that Rand's conduct was intended to maximize bonuses and meet or exceed analysts' expectations. In effect, the SEC in this complaint is holding Rand accountable for all of the charges made against the company.

Specific Alleged Accounting Irregularities

According to SEC (2009), Rand's scheme to manage the earnings of the homebuilder was multi-faceted. The first part of the scheme involved manipulation of the land inventory accounts. As Beazer constructed its subdivisions, costs accumulated in the land inventory accounts were allocated to individual home lots. When the home was later sold, the allocated costs in the account were expensed as a cost of sale.

From 2000 to 2005 Beazer over-allocated land inventory costs in material amounts that gave it excessive reserves and other accrued liabilities in violation of GAAP. This caused Beazer to understate income by a cumulative total of $42 million between 2000 and 2005. Beginning in 2006, the over-allocations were reversed, causing an overstatement of income of $17 million in 2006 and the first two quarters of 2007 (SEC, 2008; 2009).

In another part of the scheme, the "house cost to complete" reserves were manipulated in a similar manner. The company established a reserve for completed homes to cover minor expenses such as small repairs or final cosmetic touchups. Typically, the reserve was $2,000 to $4,000 per home. Within nine months after a sale, Beazer would close out that house's reserve with any remaining amounts taken to income. From 2000 to 2005 the reserve was over-allocated, which resulted in an understatement of income. Beginning in 2006, the scheme was reversed; amounts over-reserved in earlier periods were taken into income, which created an overstatement of income. The cumulative result was an understatement of net income of $6 million between 2000 and 2005. After the reversal of the scheme in 2006, Beazer overstated net income by $1.2 million. In the first two quarters of 2007, Beazer overstated its net loss by $1 million (SEC, 2008; 2009).

Yet another part of the alleged earnings management scheme involved sale-leaseback transactions. In a sale-leaseback transaction, a property owner sells the property and then leases it back from the buyer. The seller receives cash and retains possession and use of the property. The buyer generally benefits by acquiring the property at a price lower than market value. The buyer also receives periodic payments as well as any tax benefits of ownership.

In the time under investigation that preceded 2006, Beazer owned most (70-80%) of its model homes. The models it did not own were financed using sale-lease back arrangements with third parties. Revenue on these transactions was recognized in full at the beginning of the lease term. Near the end of 2005, however, Beazer entered into several sale-leaseback transactions that included written side agreements in which Beazer retained the right to a percentage of the appreciation on the home up through the time of its eventual sale. Beazer' s independent auditor advised Beazer that the substance of these transactions outweighed their form and that Beazer would have to account for them as financing transactions, which would preclude Beazer from recording the sales as revenue at the beginning of the lease term. To avoid this accounting treatment, Beazer is alleged to have included the appreciation rights in oral side agreements, which it allegedly did not disclose to its auditors. The alleged resulting overstatement of revenues was $117 million and net income was allegedly overstated by $14 million (SEC, 2008; 2009).

Section 404 of the Sarbanes-Oxley Act of 2002

The various SEC filings summarized above tell us what type of earnings management is alleged to have occurred, why it happened and the specifics of how it is alleged to have happened. However, these documents do not tell us how this could have occurred given Beazer Homes' system of internal controls, particularly after the implementation of SOX Section 404. Section 404 calls for public companies' annual reports to include both "(1) a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) management's assessment, as of the end of the company's most recent fiscal year, of the effectiveness of the company's internal control structure and procedures for financial reporting" (SEC, 2003).

Section 404 also requires "the company's auditor to attest to, and report on management's assessment of the effectiveness of the company's internal controls and procedures for financial reporting in accordance with standards established by the Public Company Accounting Oversight Board" (SEC, 2003).

QUESTIONS

Most of these questions will require that you do research beyond reading the case. You can use the resources of your library and the Web, especially the SEC Web site, to conduct this research. Your instructor might recommend specific resources for particular questions.

1. Did any of the officers of Beazer Homes, other than the CAO, face consequences as a result of the company's settlement with the SEC?

2. Why did Beazer Homes' management fire their CAO for destruction of documents rather than for carrying out the alleged accounting irregularities?

3. Most auditing textbooks outline procedures for identifying accounting irregularities that overstate income, such as recording revenue from fictitious sales. How are the alleged earnings manipulation schemes at Beazer different from the irregularities you have discussed in your auditing classes?

4. What are the most likely reasons that Beazer engaged in the alleged accounting irregularities?

5. Is it possible to identify a pattern of earnings management in Beazer' s restated earnings?

6. Did the passage of the Sarbanes-Oxley Act of 2002 appear to have any impact on the alleged accounting manipulations at Beazer Homes?

7. Why did Beazer' s independent auditor raise concerns over the accounting for the saleleaseback transactions that had written side agreements giving Beazer an interest in the appreciation of the model homes it sold and leased back?

8. What could the independent auditors have done to detect the alleged earnings management at Beazer Homes?

9. What specific audit standards apply to earnings management and what is the auditor's responsibility under those standards?

10. What were the specific effects on the financial statements of the restatements to which Beazer agreed?

11. Some accounting researchers have argued that companies in some industries might be more likely than companies in other industries to engage in income smoothing. Do you believe that companies in the home building industry would be more likely tempted to engage in income smoothing? If so, explain why. Also outline how a higher likelihood of firms engaging in income smoothing should affect audit planning.

DISCLAIMER

This case was written using publicly available information to provide a setting for student learning. It is not intended to provide commentary on or evaluation of the effectiveness or appropriateness of any party's handling of the situation described.

Subject: Home building; Case studies; Internal controls; Business ethics; Accounting irregularities

Location: United States--US

Company / organization: Name: Beazer Homes USA Inc; NAICS: 236115

Classification: 8370: Construction & engineering industry; 4120: Accounting policies & procedures; 9130: Experiment/theoretical treatment; 9190: United States; 2410: Social responsibility

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 1-10

Number of pages: 10

Publication year: 2012

Publication date: 2012

Year: 2012

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: 1037815156

Document URL: http://search.proquest.com/docview/1037815156?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 20 of 100

ACCOUNTING FOR REVENUE AND THE FASB/IASB CONVERGENCE PROJECT: A CASE STUDY EXPLORING THE NEW EXPOSURE DRAFT

Author: James, Marianne L

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Abstract:

Accounting for revenue and sales/service related transactions will change significantly. In June of 2010, the Financial Accounting Standards Board and the International Accounting Standards Board jointly issued an exposure draft that will change accounting for revenue and related transactions under both US Generally Accepted Accounting Principles and International Financial Reporting Standards. The exposure draft, which introduces a five-step performance obligation model, proposes significant changes to the measurement, classification, and potentially, the timing of recognition of revenue and related transactions, such as warranty costs, returns and allowances, provisions for uncollectible accounts, and multiple deliverables. This case focuses on the key issues that are common and important to most business entities. This case focuses on the new revenue recognition model, provides an overview of key changes to current requirements that are proposed under the new exposure draft, and explores strategic business as well as ethical considerations.

Full text:

INTRODUCTION AND BACKGROUND

Recognition of revenues and related issues will soon be changing. On June 24, 2010, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly issued an exposure draft (ED) entitled, "Revenue from Contracts with Customers" (FASB & IASB, 2010). The changes proposed in the ED will significantly affect revenue recognition and the recognition of sales and service related issues and transactions for many entities in the U.S. as well as in the nearly 120 nations that currently utilize International Financial Reporting Standards (IFRS).

The revenue recognition ED was issued as part of the FASB/IASB convergence project. The primary objective of the convergence project is to eliminate differences between U.S. GAAP and IFRS and to facilitate the development of high quality global financial reporting standards. (FASB & IASB, 2002). The Boards identified revenue recognition as one their priority projects (FASB & IASB, 2010) and intend to issue a final standard during 2011. Once a final standard becomes effective, it will supersede all revenue related standards under both U.S. GAAP and IFRS.

A target effective date, on which companies must start applying the new requirements, has not yet been announced. However, because of the critical importance of revenue, the significant changes proposed in the ED, and the potential effect on companies' financial statements, accounting educators should already start preparing their students for the expected changes. Educators should focus on the conceptual differences between the current and the expected revenue recognition rules and explore the proposed requirements for transactions and events that are common to many business entities and industries.

This case deals with a hypothetical telecommunication company and has several important aspects. The case introduces students to the fundamental changes to revenue recognition, compares current and proposed accounting treatments, and explores strategic as well as ethical considerations that companies and accounting professionals must consider.

Case-specific as well as research-based questions are included in the case. Each question is independent and can be assigned without loss of related context or continuity. The case has technical accounting, critical thinking, analytical, research, ethical, and communications aspects.

THE CASE*

Company Background

Margot Johansson is the Controller of Vielfalt Corporation, a global telecommunication company that is headquartered in the U.S. The consolidated entity holds majority ownership in fourteen consolidated subsidiaries; nine of these subsidiaries are located in Europe, two in Asia, and three in the U.S. All of the company's European and Asian subsidiaries prepare their financial statements consistent with International Financial Reporting Standards (IFRS). As the head of the accounting department, Margot is responsible for the reliability of the financial accounting and reporting system and the preparation of the consolidated financial statements. Preparation of the consolidated financial statements is a complex process, involving foreign currency translation of the subsidiaries' financial statements, conversion of the subsidiaries' IFRS -based financial statements to U.S. GAAP, and completion of the complex consolidation process.

Margot is very aware of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board's (IASB) convergence project. She keeps abreast of new developments and consistently disseminates new information available on the Boards' project links such as discussion memorandums, exposure drafts, and project updates. She also regularly participates in related web seminars sponsored by the large public accounting firms and in FASB and IASB podcasts.

Margot' s management strategy is to delegate responsibility to her senior and midlevel staff as see deems appropriate. She also is committed to helping her junior accounting staff develop their professional knowledge. She has nurtured an environment of high ethical conduct, which allows her to delegate effectively. Every few months, Margot holds seminars on new accounting issues for her accounting staff. Her objective in holding these seminars is to inform and instruct her staff on new issues and also to reinforce the importance of ethical financial reporting. All members of the accounting staffare encouraged to participate in her seminars.

Margot knows that the proposed requirements of several recent exposure drafts that were issued jointly by the FASB and IASB may significantly affect Vielfalt Company's financial accounting and reporting, and potentially its financial results once a final standard is issued and implemented. After careful consideration, she believes that the FASB/IASB exposure draft entitled, "Revenue Recognition - Revenue from Contracts with Customers" will have the most pervasive impact on the company's financial accounting and reporting system. She decides to hold a seminar on revenue recognition for her staff on April 6, 201 1 .

The purpose of the seminar is to: (1) summarize the most important provisions of the FASB/IASB revenue recognition ED and identify the differences to current accounting practice, (2) explore the effect of some of the provisions on Vielfalt Company's timing and measurement of revenue, and (3) explore accounting issues and potential ethical considerations that may arise in applying the provisions set forth in the ED.

Selected Financial Information

The following information is extracted from Vielfalt Corporation's 2010 financial statements:

* Total assets: $ 25.5 billion

* Total liabilities : $ 1 5 .2 billion

* Net Revenue: 12.8 billion

* Operating income: 920 million

* Controlling share of net income: 880 million

Business Environment and Strategies - Revenue Recognition

Contracts with Customers - Sales Channels

Vielfalt Corporation derives approximately 70% of its revenue from providing telecommunication services and 30% from the sale of telecommunications equipment. The majority of its revenue involves bundling of service and equipment. Sales and service contracts originate though two channels. Approximately 60% of the company's contracts involve direct contact with customers through internet or telephone order, or the company's many stores. The remaining 40% of the sales are originated indirectly through third party authorized dealers.

Returns and Cancellations

Customers can return or exchange equipment for a full refund within 30 days of purchase. Service contracts typically range from one to two years. If customers cancel their service prior to the expiration of their contract, the customer is charged an average cancellation fee of $185. In the past, returns and allowances were approximately six percent of sales revenue. Returned equipment typically can be used as replacement for effective equipment.

Product Warranties

Equipment typically is sold with a one-year limited warranty. Under this warranty, the company will replace or repair equipment that fails to perform as promised because of either latent or subsequent defects; the warranty specifically precludes coverage of defects resulting from accidental damage. In the past, repair and replacement of defective equipment covered by the warranty were between four and five percent of sales revenue.

Uncollectible Accounts

The company's strong accounts receivable department allows the company to minimize its risk of losses from unpaid customer accounts. In the past, uncollectible accounts were approximately three percent of net sales and service revenue.

Diversification Strategies

The company's board of directors recently decided to approve a proposed acquisition of a struggling commercial construction company. This acquisition is consistent with the company's planned diversification. Based on an analysis, the board believes that the construction company's stock is currently undervalued. Vielfalt' s strong financial performance over the past decade and its positive cash flows allows the company to finance the acquisition by paying 45% of the acquisition price in cash and by issuing additional shares of Vielfalt' s common stock for the remainder. The construction company currently is using the percentage of completion method for recognizing revenue.

Margot' s Staff Seminar

During the seminar, Margot summarizes key points of the revenue recognition ED. An outline of the information presented during the seminar, which is based on the ED (FASB & IASB, 2010, 201 1) is provided below.

Background

* Joint FASB/IASB Project

* Exposure draft (referred to as proposed Accounting Standards Update in the U.S.)

* Issued June 24, 20 10

* Comment period ended Oct 22, 20 1 0

* Boards plan to issue final standard by end of 2nd quarter of 20 1 1

* Expected to replace IAS 18, IAS 11, and several interpretations

* Expected to supersede many different U.S. GAAP standards as codified in Accounting Standards Codification Topic 605

Basic principle - model

* Revenue recognized when contract asset increases (or liability decreases) in response to fulfillment of performance obligation

* Performance obligation model

Five step performance obligation model

1 . Identify contract

2. Identify any separate performance obligations

3 . Determine the transaction price

4. Allocate the transaction price

5. Recognize the revenue when the performance obligation is satisfied

Step one - identify contract

Contract may be:

* Written

* Verbal

* Implied

Step two - identify any separate performance obligations

* Separate performance obligations may be explicit or implied

* A separate performance obligation exists if it has a:

* Distinct profit margin

* Distinct function

Step three - determine the transaction price

* This is the amount of consideration expected to be received

* Includes several considerations

* Probability of collectability

* Time value of money

* Any non-cash considerations

* Consideration payable to the customer or client

* Contingent and variable considerations

Step four - allocate the transaction price

* Allocate to separate performance obligations

* Use the respective stand-alone selling prices of each performance obligation

* Stand-alone selling prices can be estimated

Step five - recognize revenue

* Performance obligation must be satisfied

* Requires the transfer of control

Special Considerations

* Rights of return

* Product warranties and other contingencies

* May require significant estimation and judgment

* May result in differences (compared to current GAAP)

Right of Return

* Not considered a separate performance obligation

* Revenue recognized:

* Only for goods or services not expected to be returned

* i.e., excludes amount relating to return estimate

* Return estimate recognized as liability

* Related inventory cost is recognized as right of return asset (related cost of goods sold is recognized when return period expires)

Warranties

* Latent (existing) defects

* Not a separate performance obligation

* Revenue and cost of goods sold exclude estimated defective products

* Subsequent defects

* Separate performance obligation

* Allocate contract price

Uncollectible Accounts

* Estimate at time of sale

* Exclude estimated amount from revenue

To reinforce and assess their understanding and to qualify for continuing professional education credit, the seminar participants are asked to answer several questions. Some of the participants decide to further investigate the issues by conducting their own research.

ASSIGNMENTS

Pretend that you are a staff accountant working for Vielfalt Corporation. Your daily responsibilities include accounting for the revenue and receivable cycle. Answer the questions assigned by your instructor.

CONCLUSION

Because of the critical importance of revenue to business entities, significant changes to the recognition and measurement of revenue and related transactions are extremely important to accounting professionals and company executives. Accounting students must become familiar with the expected changes and understand the implications of these changes. This case can be used by accounting educators to accomplish these goals.

Subject: FASB exposure drafts; Case studies; Accounting standards; Business ethics

Location: United States--US

Classification: 9190: United States; 4120: Accounting policies & procedures; 9130: Experiment/theoretical treatment

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 15-21

Number of pages: 7

Publication year: 2012

Publication date: 2012

Year: 2012

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: 1037815147

Document URL: http://search.proquest.com/docview/1037815147?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 21 of 100

SOCIAL MARKETING AND ROCK'N'ROLL: THE POWER OF THE U2 BRAND

Author: Khare, Virginie Pioche; Popovich, Karen

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Abstract:

This case was written to demonstrate the power of social marketing in adding to the success of the band U2. The case first reviews the history of the Irish band up to their 2010-2011 360° tour and their rise to fame and concludes with questions on future decisions to be made. Keys to their success have been their focus on the U.S. market, their touring choices and their close relation to fans. From their early beginning, the band also chose to support various social causes, from fighting AIDS devastation, malaria and famines in poor developing Africa to the defense of human rights in Burma, to the protection of the environment. The case explains how U2 communicated about the causes they support via their web site and how they were integrated in their product delivery. Finally, choices of sponsors, whether global or local, are discussed. The conversation between Paul McGuinness, U2's manager, and the band demonstrates that all band members are involved in the planning process, marketing strategies, and are aware of the environmental impact and high cost of tour operations. The case ends with a conversation between the band and their manager as they are discussing future strategies. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

"I can't believe the news today

Oh, I can't close my eyes and make it go away

How long, how long must we sing this song?

How long, how long

Cause tonight

We can be as one tonight

Broken bottles under children's feet

Bodies strewn across the dead end street

But I won't heed the battle call

It puts my back up

Puts my back up against the wall

Sunday, bloody Sunday. . ."

Paul McGuinness caught himself tapping his feet to the tune as he looked out to a crowd of more than 60,000 people dancing and singing in the rain. U2 was playing their third to last song on the set list before their encore at Luzhniki Stadium in Moscow, Russia the evening of August 25, 2010. He smiled in appreciation as he watched Bono and The Edge bring the crowd to a thunderous roar with their energy.

"The Claw" stage with its video screen was an impressive site as well as a technological feat and the fans were having a great time. Paul was proud of their work on the 360° Tour. There were still a number of concerts left on the European program before they moved on to Australia and then back to North America for the final leg in 2011.

Paul remembered the release of "Sunday, Bloody Sunday" from the 1983 War album. At the time, he only had hopes that these lyrics would be an indicator of the future greatness of the band, not only for its musical talent but also for its stance against the ills of society.

Over the last 30 years, U2 has created an international community of fans through effective targeting strategies in their tours and a sophisticated social marketing approach. Songs such as "With or without you", "New Year's Day," "War," "I still haven't found what I'm looking for," "Pride (In the Name of Love)" and "Beautiful Day" have withstood several decades of change in the music industry and an ever evolving global marketplace.

While other bands and musicians from the same era have come and gone (most not breaking national barriers), "U2 is known for being super smart... Their rise was meteoric, but together they've carefully planned every step of the band's evolution, keeping all elements (stage show, videos, promo, packaging and PR - as well as the actual music) relevant" (Sampson, 2008).

Paul was not a stranger to the entertainment industry, since, in his earlier years, he was the assistant director to John Boorman's "Zardoz". He was 26 years old when he met the members of the U2 band. He remembered, "I was the only one who could drive" (Olsen, 2005). "Sure we've made mistakes along the way but the lineup hasn't changed in 3 1 years. They are as ambitious and hardworking as ever, and each time they make a record and tour, it's better than the last time. They are doing their best work now" (McGuinness, 2008). Paul is also well known for his speech on digital music and the relationship that needs to exist between the technology and music industries. On numerous occasions, he has called on the music industry to protect the music distribution (illegal downloading) and fair contracts for musicians.

Paul could hear the fans cheering as one as he made his way back to the staging area. He would let Bono rest before their debriefing session tomorrow. As he pulled on his jacket, Paul quickly added up the costs and benefits of the 360° tour. Just tonight, the show was only 75% filled as Luzhniki stadium could hold over 80,000 people (www.stadiumguide.com). Paul was concerned over the growing costs of this extraordinary tour.

U2's History

The band U2, originally known as "Feedback," was formed in 1978 in Dublin, Ireland. Back then, and today, U2 consisted of four members:

* Paul Hewson (stage name 'Bono') on vocals

* Dave Evans (stage name 'The Edge') on guitar

* Adam Clayton on bass guitar

* Larry Mullen Jr. rounded out the percussion section.

The band hired Paul McGuinness as their band manager in 1979. After several failed attempts, it was McGuinness who managed to sign U2 with Island Records, whose artists included Bob Marley and the Wailers, Roxy Music, Jimmy Cliff, Robert Palmer, Melissa Etheridge, and Nine Inch Nails (U2 A De-Lux Excursion0, 2009). Island Records continues to be U2's label today.

Paul McGuinness recognized early on the importance of cracking the American market (The Escape Pod, 2009). To ignore the UK market was unorthodox at the time, but McGuinness understood that America was the key strategy to mass marketing the newly created band. This approach was not unknown territory since it worked earlier for "super-groups" like the Rolling Stones and The Beatles. Table 1 shows performance locations for U2's early years.

U2 was labeled "The Band of the 80's,"and "Rock's Hottest Ticket" (Rock's Hottest Ticket, 1987). U2 has maintained its pop status through the years and recently was named as one of Rolling Stone's eight "Artists of the Decade" in 2009. The group's tours were also ranked second in total concert grosses for the decade, following The Rolling Stones. Table 2 identifies the top city performances. Their success is well reflected in the number of awards earned by the band, both at national and global levels, as illustrated in Table 3. U2's discography includes 12 studio albums not counting the numerous B-sides, live or compilation albums. As reflected in Table 4, U2's albums have received worldwide success.

Sales of these albums were fostered by constant worldwide touring. By 2010, U2 had 14 multi-national world tours under its belt, and continued this trend with the latest, "U2 360° Tour."

TOURING

For any band or artist, touring is one of the most important aspects of becoming a household name. Through touring, a band can make connections through venues, artists, and labels. Touring also does the obvious, it connects the band with the main objective, the fans that buy the music and support the artist. "Acts like Iggy Pop and Sonic Youth, which never had radio hit singles, are making more money than they did 20 years ago because they have been faithful to their audience (through touring)"(Goldburg, 2008). Bands that have historically toured furiously for the benefit of their fans have inevitably created a longer run in the industry. As the music industry grows and artists are signed and dropped in order to find the next "big hit," it is hard for a band to find support from the record industry. "Tour support is not an option in today's music economy. There is a serious crisis about how to construct pathways for the next generation of superstars and what business structures can help create such careers." (Goldburg, 2008) Many concert series and venues have turned to brand sponsorships to gain financial support for touring needs.

U2 Tours America

In a 2008 speech given at Marché International du Disque et de l'Edition Musicale (MIDEM), the music industry mega-conference that takes place yearly in Cannes, France, Paul McGuinness gave credit to the label Island Records for tour support to build an audience for U2. From the very beginning, U2 understood the importance of touring as a marketing strategy, and as mentioned already, they understood the importance of focusing first on the U.S. market. In 1980, U2 attempted its initial live U.S. target by launching its first multinational tour, Boy, promoting the album of the same. The tour started in its European homeland but then branched out into an American leg before returning home. Afterwards, for every new album release, U2 created another international tour, expanding its dates in the U.S. faster than in other countries.

U2 and Live Aid

In the beginning of their career, U2 participated in several festivals and multi-act concerts. The Live Aid concert for Ethiopian famine relief was held at Wembley Stadium in July 1985. "U2's performance in front of 82,000 fans was a pivotal point in the band's career. During a 14-minute performance of the song 'Bad,' Bono leapt down off the stage to embrace and dance with a fan, showing a television audience of millions the personal connection that Bono could make with audiences" (Kaufman, 2005).

Live Aid opened U2 to a global socially-conscious audience who would appreciate their human rights efforts. From that moment at Live Aid, Bono, and U2 would be known for making personal connections at all of their concerts. Two years after Live Aid, U2 produced another album and created a tour of the same name, The Joshua Tree. For The Joshua Tree tour, McGuinness would deploy U2 on their largest tour yet, covering more geographical locations than ever. U2 would also keep to their U.S. market dominance strategy by beginning and ending the tour in America. Table 5 illustrates U2's tour performance timeline.

Connecting on Tour

Throughout its 14 tours, U2 always provided an enjoyable and interactive tour opportunity. It was during the band's Elevation Tour in 2001 that much of U2's American sentiment would pay off. After the terrorist attacks of 9/1 1, U2 continued their Elevation Tour through the U.S.

U2 audience participation always plays a factor in the band's success, and now it was America's turn. During songs such as "Sunday, Bloody Sunday" peace signs, along with American and Irish flags intertwined, as Bono sympathized with the crowds. Fans and critics alike bragged about the uplifting and almost spiritual performances introducing slogans like, "U2, more necessary than ever" (Kot, 2001). Even in a time when U2's music may not have kept them on top, their concerts and tours made sure the band remained relevant to their audience.

U2 360° Tour

In 2009, U2 launched its biggest and most elaborate tour yet. The U2 360° Tour is the band's largest international tour, spanning over one hundred cities and still finding new ways to engage their audience. U2's idea of connecting with their fans has hit a new level; the band plays in stadiums on a giant circular stage fully surrounded by the crowd. U2 performs under a structure known as "The Claw" which features a 14,000 square foot 360-degree video screen, complete with a satellite link up to space (Farragher, 2009). (See Figure 1).

A highlight of the show includes an actual conversation with the International Space Station via satellite where Bono asks "Commander can you see (us)?" and the astronaut replies, "Right now the most beautiful sight is the blue planet Earth," segueing into the song "Beautiful Day." This experience provides a connection unlikely to be created at any other concert.

As U2 was finishing the song "MLK," Paul thought about how U2's music and stance on social justice and climate change was a tribute to their passion and hardworking nature, making each tour and record better than the last. Everything certainly was becoming more high tech and digital. Just earlier today, The Edge had captured video from fans that greeted the band at the Moscow airport on his cell phone and posted it to the U2.com website. Paul was very proud of the band and felt that they were far from being finished with their work. He wondered how they were going to top the 360° performances.

SOCIAL MARKETING

The U2 360° tour would not be complete without a cause to support. It is perhaps the causes they support that have created the U2 loyal fan base found around the world. Cause marketing is sometimes used interchangeably with social marketing and refers to the planning and implementation of programs designed to support social causes using concepts from commercial marketing (Hawkins et al, 2010). Social marketing seeks to influence social behaviors not to benefit the marketer, but to benefit the target audience and the general society. U2 and its lead singer, Bono, have taken on many causes and used the band's fame and marketing techniques to promote these causes. U2's approach to bring about social change is to use their tours as platforms. While it is not believed that U2 promotes these social campaigns to further their success but for the greater good, it can be argued that it has had the inverse effect as well.

Captive Audience

Following the leadership of Bono, who has already made the list of potential Nobel Peace Prize nominees, U2 has consistently linked itself to global causes. Maybe one of U2's lead singer's most important acts is the call for the cancellation of debts owed by a number of Third World countries to the world's richest countries. He has become a leading advocate for global health, directly involved in raising money for The Global Fund. In 2006, Bono co-founded (PRODUCT) RED; select products from popular brands, such as The Gap, that are designed to invest consumer dollars directly into HIV and AIDS programs in Africa. "We can win the fight against the three diseases," Bono stated. "We can turn the tide on TB [tuberculosis] . . . We have the tools to prevent and treat malaria. Death by mosquito bite?- No! Not in the 21st century, we're not having that!" (The Global Fund, press release, 2010).

While all of the band members do their part off the road to promote their social causes, it is during tours that they can have the most influence on their captive target audience. The band's social marketing efforts have had a snowball effect for the band's tours. Fans have been known to say that "using his celebrity to drive important issues is why I don't mind paying a lot of money for his shows" (Memmott, 2001). The band goes out to promote and create social awareness through specific campaigns and concerts and in turn they create a larger committed audience. This larger audience then goes out and promotes the social causes connected to U2, bringing yet newer prospective fans to the group as a result.

The U2 360° tour's set list includes the song "Walk On," which Bono dedicates to Aung San Suu Kyi, the democratically elected leader of Burma and Nobel Peace winner, who has been under house arrest for most of the time since her election (Farragher, 2009). Along with the dedication of the song, the band has created support for Burma and Aung San Suu Kyi with creative flair. U2 has created a web page on their website, U2.com, that is dedicated strictly to Aung San Suu Kyi. On the web page, fans can cut out masks of Aung San Suu Kyi's face and provide support by wearing them to the band's concerts. U2 also encourages its fans to take pictures across the world with the masks on and submit them to the website to be posted. The Aung San Suu Kyi page on U2.com has been flooded with such pictures, creating a support group larger than could be connected by individual efforts.

Internet and Social Media

The global connection does not stop at the concert level but extends to the internet. The band's elaborate website contains an entire section labeled "Heart + Mind," listing and describing social causes and organizations that U2 supports (U2 A De-Lux Excursion , 2009). These campaigns include: Music Rising, The Angiogenesis Foundation, (RED), ONE, Free Burma!, Greenpeace, Amnesty International and The Chernobyl Children's Project (see Table 6 for details). These organizations are not centered on one geographical region but are scattered throughout the world in turn creating a larger market. U2 has been recognized by organizations for their outstanding work. The band and their manager have received the "Ambassador of Conscience Award" from Amnesty International (Kagan, 2002).

Social media have also been part of U2's communication strategy.U2's main concern is connecting with its global fan base. With the help ofU2.com, Facebook, and Twitter as media, this task has been accomplished. The band's website, managed by Live Nation, a large global marketer with resources that an individual artist could not manage on their own, contains a "Community" tab that connects a global audience not only to the band, but to each other (Datamonitor, 2009). Members of the page can post photos, messages, forums, links or any other information they would like to share with the U2 community.

The U2 website provides direct connections to other social sites such as Facebook, Hike, and MySpaceMusic. An interesting and rewarding part of the website is the band's interaction with the fans. In fact, on Facebook, there are more than 7 million followers that "Like U2." Their website, U2.com, has created a home where U2 enthusiasts they can gather and bond. Social media has become a huge trend for marketing and U2 has committed to provide a network that includes the world, with the help of partners such as Live Nation, who has a reputation for providing assistance and results in the international music industry. On the subject of the new partnership Bono stated, "We want a closer, more direct relationship between the band and its audience and Live Nation has pledged to help us with that" (PR Newswire, press release, 2009).

Environmentally Conscious Tour

Live Nation has also used U2.com and the U2 360° Tour to promote the band's own social causes. Live Nation has committed to "producing the largest concert tour in history in an environmentally responsible manner with a goal of balancing the Tour's direct carbon footprint through a comprehensive reduction and offset strategy" (Flynn, 2009). The band known for its social responsibility has taken a new effort in social marketing by creating a type of "green concert." Live Nation has hired MusicMatters as the tour's Environmental Advisor to work with production, venues and fans to reduce the environmental impact of the tour without compromising the quality of the fan experience. This involves recycling stations, access to filtered water in concerts to reduce plastic bottle waste. The "Í/2 360° Tour Environmental Impact Strategy" will be the new standard for touring artists trying to differentiate themselves (U2 A De-Lux Excursion3, 2009).

SPONSORSHIPS

U2 has also been extremely successful in selecting the right sponsors. Artists turn to sponsorships to support a tour they could not manage on their own, but also to reach their target demographics (Enterntainment 3Sixty, 2010). Artists choose a brand that reflexes their image or can add value to their concert experience. Ray Waddell, Billboard's Executive Director has stated, "Today sponsorships are as much a part of the concert experience as service charges. For artists, they've become not just a payday, but an important marketing tool" (Waddell, 2007). Successful sponsorships will not only offset ticket prices, but create a partnership in shared objectives on what to offer consumers and provide a more personal experience (Peters, 2009).

Global Sponsorship

U2 has also made a major shift in selecting the U2 360° Tour sponsors. U2 has had several successful sponsorships in the past, including a very memorable Apple campaign. However, in 2009, U2 partnered with Research in Motion (RIM) and RIM' s Blackberry became the global sponsor for the 360° Tour (Sorkin, 2009). According to statement made by McGuinness, "this marks the first stage of a relationship and shared vision between RIM and U2 that we expect will lead to new and innovative ways to enhance the mobile music experience on the BlackBerry platform for U2 fans." (www.U2tours.com) The collaboration is an effort to market to a global audience of BlackBerry users and U2 fans. One of the slogans seen around concert sites is "BlackBerry loves U2." It will take time to see if the socially conscious U2 audiences love BlackBerry as much in return.

Regional Sponsorship

While U2 is working on marketing its tour with an international sponsor, the band also uses smaller brands at the local level. For instance, Absolute Radio is co-promoting the UK leg of the 360° Tour in an effort to ramp up its support of live music (Media: Absolute's commitment, 2009). BBC has sponsored a day of programming tied in with U2's album, "No Line on the Horizon" promoted by the 360° Tour. The highlight of the event was a 'surprise' gig played by the band on the roof of Broadcasting House (Andrews, 2009). The goal for BBC was to show the two big names in media and entertainment together, as displayed on the BBC website on a page titled 'U2=BBC. These local partnerships provide credibility and a sense of local pride to a global tour. When a customer goes to a concert that is part of a global tour, it is a connection point to bring in local sponsorships. U2's combination of global sponsor clout and smaller local partnerships provide financial and marketing benefits for all.

U2 360° DERIEFING SESSION

The next morning, during a very late breakfast, Paul started the debriefing by saying "U2 has reached global fame. We never set our sights on being a local "indie" (independent) band, but on the bigger picture of becoming a household name in every country."

Bono responded by saying "You have consistently pushed for innovation and new experiences for us. Our focus from the very beginning has been to create relationships and build connections with our fans and to play music that can change the world."

"I agree," Paul continued, "The concept of touring often and making it a personal experience provided a marketing tool in itself. Our "Claw" stage with its video screen is a perfect example. When we used to play "in the round," we would not be able to fill an entire stadium. Under this current set up, we can."

Paul, taking a bite of blini, a traditional Russian thin pancake, continued, "We found a niche as a socially responsible band in support of worldwide campaigns. U2 has turned a passion for music and human nature into a profitable business that does not have any market boundaries."

He paused, letting Bono and the band enjoy their moment of success before continuing. "We have some concerns. Our daily overhead, whether we play or not, is about $750,000. Environmentalists are questioning our "carbon footprint" since it takes about 200 trucks to move the production from one venue to the next. Just the stage requires about 120 trucks. Our engineering problems are enormous and costly. We will log about 70,000 air miles alone."

"Paul," Dave Evans (The Edge) interrupted, "we are spending the money on our fans. I don't think there is a better way to spend it."

Standing up to stretch, Bono chimed in, "Also, we are setting ticket prices to allow fans to come see us. At least 10,000 tickets at each performance are priced around $30 and the close section of seats we set up as the "Red Zone" is designed solely to support The Global Fund. Even though last night's performance was not sold out, many of our shows are."

"Exactly!" Paul, stated, excitedly. "Which is why we need to start thinking about what is next. The 30 year anniversary of your first record is coming up. Our strong and growing relationship with Live Nation offers many promises as does social media networking."

"Well, boys," Bono piped up, "hold on to your hats... we are off and running again!" Bono and the band members grinned and continued enjoying their breakfast before leaving to catch the flight for Australia.

Subject: Social marketing; Rock music; Case studies; Bands; Strategic planning

Location: United Kingdom--UK

Company / organization: Name: U2 (musical group); NAICS: 711130

Classification: 8307: Arts, entertainment & recreation; 7000: Marketing; 9130: Experiment/theoretical treatment; 5250: Telecommunications systems & Internet communications; 2310: Planning; 9175: Western Europe

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 23-37

Number of pages: 15

Publication year: 2012

Publication date: 2012

Year: 2012

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 Illustrations References

ProQuest document ID: 1037815155

Document URL: http://search.proquest.com/docview/1037815155?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 22 of 100

STARBUCKS: MAINTAINING A CLEAR POSITION

Author: Seaford, Bryan C; Culp, Robert C; Brooks, Bradley W

ProQuest document link

Abstract:

When Starbucks originated in Seattle, Washington in 1971 as a purveyor of dark roasted coffee beans and coffee merchandise, its founding owners didn't anticipate the extraordinary brand evolution to come. Under the direction of Howard Schultz, who became sole proprietor in 1987, Starbucks transformed into a beverage provider that mirrored the experience of Italian coffee houses including espresso drinks, and elegant camaraderie. This strategy, as part of Starbucks' brand positioning as the consumer's "Third Place" to spend his/her time between home and work, ignited a period of extraordinary expansion. By the 1990s, however, Starbucks had begun offering specialty coffee-based drinks (such as its trademarked Frappuccino drinks, etc.) through mass retail stores. The company also licensed Sodexho to operate Starbucks on naval bases that, despite being traditional Starbucks stores, served a wide variety of other products including pastries, sandwiches, salads, and various merchandise.

Full text:

INTRODUCTION

In early 2008, mixed emotions swirled among the executives of Starbucks. In light of the company's plummeting stock price, Howard Schultz' memo from the previous year seemed almost prophetic.

Starbucks had been enjoying the benefits of a relatively new concept: offering breakfast, lunch, and other food items outside of the traditional offerings of coffee, pastries, muffins, and biscotti that had become the Starbucks Experience. Through strong initial sales this newly implemented strategy had begun offering positive returns very quickly. Schultz, the company's founder and current chairman, commented, however that "over the past ten years, in order to achieve growth, ... we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of the brand. Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces." (See Appendix 5 for entire quote.)

ORIGINS OF AN AMERICAN ICON

Jerry Baldwin, Gordon Bowker, and Zev Siegel opened the original Starbucks (a precursor to Schultz' subsequent company that took the same name) in 1971 after having frequently visited Peet's Coffee and Tea in Berkeley, California. They had become hooked on the dark-roasted coffee Alfred Peet advocated over the light-roasted coffee found in most large stores. Peet had encouraged their desires to bring dark-roasted coffee to the Seattle, Washington marketplace. He taught them that the fullest flavor is from a very dark roasting of the coffee beans (Schultz, 1997).

The First Starbucks

The three partners initially disagreed over naming their new coffee company. Gordon consulted with a creative business associate, artist Terry Heckler, about naming the store "Pequod" after the ship in Herman Melville's Moby Dick. Terry told him, "You're crazy! No one's going to drink a cup of Pequod!" (Schultz, 1997). Eventually, the Starbucks name was chosen as a derivative of "Starbo," the name of a Mt. Rainier mining camp in the 1930s (Skoog, 2002). Baldwin liked the additional connection to Starbuck, a character from Moby Dick.

The first store opened in Pike's Place Market in Seattle. Consistent with locating in such a key port city, the first Starbucks had nautical décor. The one employee, Siegel, wore a white apron. The store sold 30 varieties of coffee beans (direct from Peet's) as well as other coffeerelated merchandise but no ready-to-drink beverages.

The original Starbucks logo was based on a 15th century wood carving of a two-tailed siren, or mermaid. (See Figures 1, 2, 4, and 5 for the evolution of the Starbucks logo) In the wood carving, the siren wore a crown, was bare-chested with breasts exposed, and held the end of one of her two tails in each outstretched hand. The logo encircled this image with the words: "Starbucks" at the top, "Coffee · Tea · Spices" at the bottom. The main colors in the logo were brown and white (Krakovskiy, 2007).

Peet's roasted its own beans, and remained Starbucks' coffee supplier until the company purchased its own roasting equipment after the first year of operations. Starbucks soon grew to four stores within the Seattle area (Schultz, 1997).

Early Growth

Like many Starbucks suppliers, Hammarplast, a manufacturer of drip coffee makers among other items, began receiving consistently increasing orders from Starbucks. Intrigued by the growing orders, Howard Schultz, a Hammarplast vice president, decided to visit Seattle in 198 1 . One year later Schultz joined Starbucks as the director of marketing and operations.

While on a business trip to Italy in 1983, Schultz discovered what he described as the "coffeehouse culture." Italian coffee houses (or "espresso bars") were neighborhood gathering places that brought people together over espresso-based drinks and camaraderie. Schultz was enamored with the way the baristas (the coffee house servers) pulled each shot of espresso artfully while making casual and comfortable conversation with the customers. The baristas knew most of the customers by name and they even knew some personal history of the regular customers. Music was often provided by a classical instrumentalist who would be playing in or near the coffee house. With no chairs, the customers stood and mingled freely with the baristas and with each other. It was more than a cup of coffee. It was an experience. Schultz determined to bring this experience back with him to Starbucks.

"I wanted to blend coffee with romance, to dare to achieve what others said was impossible, to defy the odds with innovative ideas, and to do all this with elegance and style."

(Schultz, 1997 p. 11)

Starbucks purchased the assets of Peet's Coffee and Tea in 1984. That same year, Jerry Baldwin allowed Schultz the opportunity to offer espresso in the newest (the sixth) Starbucks store, in downtown Seattle. Despite only a small percentage of space in the store (300 square feet) dedicated to espresso, sales of the freshly brewed drinks accounted for a significant portion of the store's revenue. Schultz was thrilled as he shared the positive results with the ownership almost daily.

Baldwin, however, believed the Starbucks* brand was best developed in selling fine, darkroasted, whole-bean coffees. He told Schultz he didn't want to be in the restaurant business, and felt the selling of "coffee drinks" detracted from the selling of the dark-roasted whole-bean coffees. Coffee drinks were allowed, however, in four of the six stores, but always in the back of the store.

As the beverage business proved increasingly lucrative and popular in the stores, Schultz quickly became frustrated with the owners of Starbucks. He saw a great business opportunity in providing customers dark-roasted coffee drinks in every coffee store.

II Giornale: A New Brand Offering

Desiring to bring the Italian espresso bar experience to America, Schultz opened II Giornale Coffee Company with the goodwill and financial backing of Starbucks. Il Giornale offered dark-roasted fine coffee along with live music and no chairs. The beans were purchased from Starbucks, and the business became a rapid success.

Il Giornale was branded differently from Starbucks in noticeable ways. The aprons at Starbucks were brown - at II Giornale a welcoming green was chosen. Starbucks carried a nautical theme, and everything about II Giornale was Italian. Starbucks focused on selling darkroasted whole-bean coffees. Il Giornale focused on selling espresso and espresso-based beverages. Figure 2 shows the logo for II Giornale.

In 1987, the Starbucks founders decided to sell their interests in the company. In August of 1987 Schultz, who owned three II Giornale locations, purchased each of Starbucks' six locations and adopted the Starbucks name for all nine stores.

CREATING AN INTEGRATED BRAND

After the acquisition, the Starbucks brand became a blend of the two concepts. No longer relegated to the back of the stores with minimal space, the beverage counter was placed prominently in all stores. The new format had the feel both of an espresso bar and a fine coffee purveyor, thereby serving customers seeking either or both product types.

Schultz' objective was to target young and middle aged professionals, particularly those in middle to high social classes. He desired to create a clearly differentiated brand image that would foster a personal connection between these customers and Starbucks. Schultz envisioned customers viewing Starbucks as their "Third Place" (both physically and emotionally) - first home, then the workplace, then Starbucks. In so doing, Starbucks sought to provide an inviting and refined place for these individuals to relax despite their demanding schedules.

As such, every detail of the Starbucks' experience had to provide a high class atmosphere where individuals would feel the same sophistication as a true coffee aficionado. The baristas would enhance this sophistication effect by always smiling pleasantly and by knowing each customer by name. This affordable luxury became highly appealing to America's vast middle class (Adegoke, 2007).

The high end coffee was served in a very relaxing, appealing atmosphere that invited the consumer to unwind while enjoying a fine coffee experience. This strategy differed from the approach used by traditional fast food restaurants, which offered inexpensive products and sought to maximize volumes of customers by minimizing the customers' time spent at a table. Fast food restaurants such as McDonald's (the industry leader) touted convenience in designing a quick customer experience that allowed for greater traffic capacity (Kowalski, 2006). The perceptual map shown in Figure 3 demonstrates how Starbucks' positioning set it apart from all other quick-service competitors in providing a "high-end" product in a relaxing "high-end" atmosphere. Without significant competitors in the quick-service industry directly positioned against Starbucks on these key attributes, the company enjoyed extraordinary success.

With the company strategically so well positioned, Starbucks grew from 9 locations to 17 by the end of 1987.

The logo for this newly revised Starbucks was also modified. (See Figure 4.) It was similar to the original Starbucks logo, but encircling the siren were the words "Starbucks Coffee." The siren's hair was longer than before, covering the exposed breasts but leaving the exposed navel. The art was more stylized, no longer looking like a 15th century carving. The brown was replaced with the green of II Giornale for a more "affirming" look to customers (Moore, 2005).

Rapid growth continued for the next several years. Starbucks could be found in 33 locations by the end of 1988. (See Appendix 2 for annual store counts from 1987 through 2006.)

1990s - Embracing Growth

In 1992, the logo changed again. (See Figure 5). This time the siren was brought closer to the viewer, eliminating the navel. Otherwise, it was very similar to the 1987 logo.

Looking to maintain its high growth rates, Starbucks installed a drive-through window in a test store in Southern California in 1994. Prior to this test, the company had consistently resisted installing any drive-through windows. (Gillespie, 2006). Consumers clearly appreciated the convenience of purchasing Starbucks products without ever leaving their cars. Positive sales results led to a rapidly increasing number of stores with drive-through windows. The challenge became implementing the "3rd Place" atmosphere via the drive-through.

In 1998, Starbucks launched www.starbucks.com, the company web site. Starbucks considered expanding its corporate image by merchandising coffee, furniture, vidéocassettes, and more through its web site, and invested in several online retailers. In mid- 1999 the stock price dropped over 20% which indicated that investors wanted Starbucks to refocus (Antlers, 2001). By 2001 online and catalog purchases combined for less than 2% of revenues. Starbucks divested itself of many of the online retailers in subsequent months.

COMPETITION

McDonald's

The competitive environment soon began to change. Quick-service restaurants began developing coffee offerings to compete directly against Starbucks. In May 2001, hamburger giant McDonald's reinvigorated a concept called McCafé that it had originally started in Australia in the 90s (Adamy 2008). Within the fast food industry, McDonald's had traditionally positioned itself with an Americana-oriented family image. This concept, however, called for a McDonald' s-run coffee counter inside of McDonald's stores, offering espresso drinks as well as teas and pastries. Starbucks considered McCafé as merely an indirect competitor since McDonald's competed in a lower-end marketplace. This concept, however, had the potential to alter McDonald's image more toward expensive coffee. In May 2007, Starbucks executives couldn't have been happy when Consumer Reports magazine rated McDonald's regular coffee as better tasting than Starbucks as well as other national competitors (Consumer Reports 2007).

In January 2008, McDonald's announced it would begin installing coffee bars with "baristas" throughout its US stores over the next two years. McDonald's estimated that its baristas (who were easily identifiable since they wore aprons) would add an annual $ 1 billion in sales of cappuccinos, lattes, mochas, and "frappes" to its previous revenues of $2 1 .6 billion. McDonald's priced these drinks between $1.99 and $3.29 (Adamy, 2008). By comparison, Starbucks' comparable drink versions were priced between $2.65 and $4.15, a premium of approximately one-third.

Dunkin Donuts

Throughout its history, Dunkin Donuts was known for quick, inexpensive no-frills donuts. Doughnuts, not coffee, was the primary focus of Dunkin Donuts' positioning (ManningSchaffel, 2008). Like McDonald's, Starbucks viewed Dunkin Donuts as an indirect competitor that competed only within the lower-end convenience-oriented fast-food market.

Throughout the decade of the 00s, however, Dunkin Donuts pursued an aggressive growth strategy that shifted its positioning to coffee. In the midst of rapid store expansion, Dunkin Donuts began a promotional campaign entitled, "America Runs on Dunkin" (Dunkin Donuts Press Release, 2006), a direct reference to its coffee products. By 2006, Dunkin Donuts was the top selling retailer of coffee-by-the-cup in America at 2.7 million cups a day, close to one billion cups a year (Dunkin Donuts, Press Release 2006).

Although Dunkin Donuts didn't introduce a vast array of new coffee offerings with fancy names to rival Starbucks, it did introduce sandwiches that were similar to paninis in look and feel. The company also began offering free Wi-Fi and piped-in music. These changes increased the warmth within the retail stores (Manning- S chaffel, 2008).

Panera Bread Company

Competition also began increasing dramatically within the higher-end segments of quickservice food offerings, some of whom included high-end gourmet style coffees. Early in the 2000s, Panera Bread Company became a nationwide provider of quick-serve food and high-end coffee with a pleasant, relaxing atmosphere. Panera Bread also began offering free wireless internet connections in most of its stores. Other regional fresh café-style restaurants also began growing rapidly throughout the 2000s with no slowdown in expansion for the foreseeable future.

Over time, consumers perceived less brand differentiation between Starbucks and other options. The perceptual map in Figure 6 displays how Starbucks was perceived on its own two key attributes as compared to other quick-service providers as of 2007.

2000S - EVOLVING STRATEGY MODIFICATIONS

As competition intensified, Starbucks sought new ways to increase revenues. To complement its store expansion and leverage its loyal customer base (Restaurants, 2005), Starbucks chose to focus on two strategies for additional revenue growth.

Licensing and Joint Ventures

In the early 2000s, Drey er' s (ice cream) began producing a Starbucks-branded ice cream through a licensing agreement with the growing coffee company. Concurrently, Starbucks also began distributing Frappuccino® and DoubleShot® beverages through the mass retail segment throughout the US.

Hyatt Hotels announced in September of 2005 that room service coffee would be Starbucks in a personal pot with a French press (a traditional and popular style of coffee maker in which the grounds are added directly to hot water, then a filter is "pressed" through the water, removing the spent grounds). The program was to roll out to all Hyatt properties in the United States. The personal pot of Starbucks was also to be offered at all Hyatt Hotels restaurants.

In late 2005, Sodexho (a giant in the food distribution industry) and Starbucks announced that Sodexho would operate up to 30 Starbucks stores on U.S. naval bases. In response to demands for full-service Starbucks Coffee operations, the ten-year Navy contract required stores to operate as traditional Starbucks stores complete with coffees, teas, and other beverages, as well as pastries, sandwiches, salads, and even select merchandise (Elan, 2005; Sodexo Press Release, 2005).

Expanding Product Offerings

The expanded menu in the Navy contract reflects the changes Starbucks had been making in its product strategy. Throughout the '00s decade Starbucks had been accelerating its product line to include a variety of food offerings such as sandwiches, pastries, and candies. (See Appendix 3 for a timeline of product changes.) To drive food sales Starbucks had also begun offering wireless Internet connectivity in its stores for a fee in 2001. The goal was to bring customers back to Starbucks to use the Internet for work or play while enjoying an afternoon snack or coffee (Antlers, 2001).

With food offerings accounting for approximately 12% of company sales by 2003 (Matthews and Braitman, 2004), Starbucks decided to focus ever increasing attention on its noncore product offerings. In September 2003, shareholders in Starbucks Coffee Japan even approved the sale of alcohol in its stores. The Kobe, Japan store began offering coffee-themed mixed drinks. Starbucks Coffee Japan also planned to offer hot foods starting in October of the same year. Starbucks was encouraged by the favorable reviews these concepts received in US publications such as Datamonitor, which noted in 2003 that "ideas such as the introduction of more extensive menus and hot foods could easily find their way into US Starbucks outlets."

Confirming the Datamonitor prediction, by mid-2005 Starbucks had rolled out several new US offerings. Black Apron, a higher-end exclusive coffee, was introduced. New flavored drinks and teas were also introduced. Restaurants & Institutions, a leading industry magazine, wrote on its web site: "New pastries, desserts, and lunch items were launched to appeal to diners beyond the morning day-part crowd. But it's not only the menu that keeps customers so rabidly devoted to the brand. Starbucks locations are being reinvented with music and Wi-Fi connectivity."

Steve Forbes lauded Starbucks in 2005 for execution and marketing in a commodity market. He was impressed that Starbucks remained a high margin brand, and that the customer experience was well-executed and consistent across the stores (Forbes, 2005). He also was impressed with the naming of the drink sizes: a small is a "tall," a medium is a "grande," and a large is a "venti."

During the Christmas season in 2006, Starbucks announced it would begin selling a limited number of books in its stores. The rollout began with a single title: For One More Day by Mitch Albom, a well-known contemporary author. Drinking coffee and reading a book seemed a natural combination upon which Starbucks could capitalize (Nawotka, 2006). Some stores were also equipped with Hear Music (Starbucks' music label) areas for customers to create custom CDs for purchase. Appendix 4 provides a list of Starbucks product offerings.

EFFECTS OF STRATEGY CHANGES

By the end of 2007 more than two-thirds of company-owned US Starbucks locations were serving lunch items such as sandwiches. Some Starbucks baristas began expressing concerns, however, that their managers had begun instructing them to ask customers if they would like a breakfast sandwich with their coffee. This technique for upgrading a customer's order, however, had long been popular within the fast-food industry (Adamy, 2008). Starbucks even began considering expanding its menu to include more beverages aimed directly at children and teens (Linn 2007).

Overall, Starbucks appeared to be profiting from its strategic changes (see Starbucks' operating results in Table 1). The company's changes in product strategy seemed well aimed at the American culture's desires for convenience, even if they may not have been perfectly true to Schultz' original "Third Place" branding concept.

In February 2007, Schultz wrote an internal memo to CEO Jim Donald entitled "The Commoditization of the Starbucks Experience." (See Appendix 1 for entire memo). In the email, Schultz noted two specific trade-offs that had been made to gain efficiency and scope of operations: manual pulling of espresso shots was replaced by machine; and beans were shipped in special packaging instead of being stored in bins in sight of the customer. His message further stated that "some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee." After the e-mail was eventually leaked to the media, it became national news and it triggered many articles speculating the future direction of Starbucks.

POTENTIAL CROSSROADS

One year later, Schultz' memo still posed a potential dilemma for Starbucks. Many of Starbucks' product and branding evolutions were generating profitable returns. While the majority of Starbucks' revenues were still driven by sales of coffee drinks, these newer revenue sources offered some interesting advantages:

* Licensing sales represented margins that were close to 100% contribution.

* Merchandising sales were closely correlated with customer traffic within the stores, which Starbucks believed to be a positive sign.

* Sales for sandwiches and other food products were going well

* Drive-through service windows were making a dramatic difference in sales almost everywhere they were opened. Stores with drive-through service, now more than 30% of company-owned stores (Rothbort, 2007), derived a majority of their sales from the drive-through window as opposed to walk-in sales.

Total company sales were at or near historical highs and still increasing. In many regards, the company's decisions appeared to be working.

However:

* Food sales offered much lower contribution margins than did sales of coffee. Consistently, company profit margins had dropped each year from approximately 8.7% in 2004 (Palmer, 2007) to approximately 7.1% in 2007 (Hoovers, 2008) and were a mere 3% in the first quarter of 2008 (Hoovers, 2008).

* Although food products added an average of roughly $35,000 to a store's sales volumes in 2006, same store sales only rose 7% that year. By comparison, same store sales had grown at a rate of 10% in 2004 (Palmer, 2007).

* Same store sales had grown only 1% in the final quarter of 2007 (Goldman, 2008).

Such news was particularly alarming to a company with approximately 85 % of all revenues derived from the company-owned stores (Valuecruncher, 2007). Investors seemed alarmed as well: Starbucks stock price dropped roughly one third in 2007 to end the year around $20 per share. It closed the first quarter 2008 around $17.50 per share, approximately half its value of late 2006. By comparison, the Dow Jones Industrial Average had risen in 2007, but closed the end of 2008 near its ending 2006 level. Panera Bread's stock price had dropped significantly in 2007, but it gained in the first quarter 2008 to close at approximately two-thirds its ending 2006 level. McDonald's stock price rose in 2007 and ended the first quarter 2008 significantly higher than its 2006 value. (See Appendix 5). Dunkin Brands was not publically traded.

Some industry forecasters foresaw Starbucks' disappointing performance as an early indicator of a weakening economy (Adegoke, 2007), arguing that a slowing economy could have been leading consumers to resist high priced lattes in favor of less expensive offerings from Starbucks' competitors. Starbucks' internal research, however, indicated that the company had not been losing customers to competitor brands due to a slowing economy (Stelter, 2008). This research demonstrated that Starbucks customers continued to purchase at Starbucks, but unlike America's previous economic downturn of the early 1990s (when US sales of specialty coffee drinks actually increased significantly (Maxwell, 1993)), the slowing economy might have led customers to purchase fewer of the more expensive coffee drinks such as lattes and cappuccinos in favor of other Starbucks offerings (Stelter, 2008). These findings indicated that a weakening economy was not likely the primary cause of the company's disappointing performance.

Starbucks appeared to be facing a potential trade-off between extending the brand to increase immediate short-term profitability vs. potentially moving away from the brand name at the expense of its long-term competitive distinction. The value of Starbucks to its customers; to its partners; and to its shareholders; hung in the balance.

Subject: Nonalcoholic beverages; Case studies; Coffeehouses

Location: United States--US

Company / organization: Name: Starbucks Corp; NAICS: 722213

Classification: 9190: United States; 8380: Hotels & restaurants; 9130: Experiment/theoretical treatment

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 39-57

Number of pages: 19

Publication year: 2012

Publication date: 2012

Year: 2012

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: Photographs Tables Graphs References

ProQuest document ID: 1037815154

Document URL: http://search.proquest.com/docview/1037815154?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 23 of 100

TO BREW, OR NOT TO BREW-THAT IS THE QUESTION: AN ANALYSIS OF COMPETITIVE FORCES IN THE CRAFT BREW INDUSTRY

Author: Kleban, Jack; Nickerson, Inge

ProQuest document link

Abstract:

This case analyzes the craft brewing industry in the U.S. It encompasses a description of what defines craft brewers, the different categories of craft breweries depending on size in the U.S. and the major competitors in the industry according to annual volume output of craft beer. Recent growth in the craft beer industry compared to the general U.S. beer industry is detailed. In addition to craft beer brewer characteristics, the case outlines market structure, competition, and business strategies of craft breweries. Also considered are branding and social media marketing and social responsibility considerations, followed by distribution, and regulation and taxation of the craft brewing segment of the beer and beverage industry. [PUBLICATION ABSTRACT]

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INTRODUCTION

Craft breweries' operations are small, and they are considered to be traditional and independent. Traditional in the sense that they produce a malt flagship or brew füll- bodied beers which many are made from recipes taken from German or English brewing origins. The malt is high grade, the brewing process is relatively slow and the production is small scale. The main differentiating factors of craft brewers are their unique styles of brewing which can lead to enhanced flavor and taste (www.craftbrewersassociation.org).

The craft brewery industry in the U.S. is experiencing rapid growth. In 2008, craft breweries solda combined 8.5 million barrels of beer, and in 2009 they sold over

9 million barrels of beer. Although the general beer sales in the U.S. experienced a decline in sales by volume of 2.7% in the first half of 2010, and sales of imported beer were down by 9.8% in 2009, craft breweries were able to increase their sales by volume in the U.S. by 9%. In 2006, the reported number of craft breweries in the U.S. was 1370, and in 2010, 1625 craft breweries were reported. This represents a growth of over 1 8% in less than five years, the highest growth rate in U.S. history since before the prohibition era (www.craftbreweresassociation.org).

As evidenced, craft beer production and its consumption in the U.S. is on the rise. This case provides an in-depth look at the industry and its potential for growth in the near future. We also provide information about the industry's market structure, including competition within the sector.

Market Definition

Since 2006, the craft beer industry has been able to outperform the normal beer industry segment on both percentage margins and percentage growth because of their unique product characteristics, organizational structure and different marketing approach.

Craft breweries tend be small in size, typically producing less than 6 million barrels of beer (BBL) per year. They are independent, as less than 25% of the breweries are owned or controlled by an alcoholic beverage industry member that is not themselves a craft brewer, and traditional, as at least 50% of its volume is in either all malt beers or utilizes enhancers in order to create full-flavored beers (www.breweresassotiation.org).

Craft brewers focus on differentiation. Their value derives from utilizing both traditional styles such as using malted barley, combined with their own unique formulas by adding nontraditional ingredients, hence developing new styles that have no precedent.

Craft brewers tend to operate locally not only on the production side but, as well, they are very involved with the communities they serve. They are participate in a number of corporate social responsibility programs such as product donations, volunteerism, sustainable development, sponsorships, and other philanthropic endeavors (www.breweresassotiation.org).

Craft breweries are horizontally differentiated and have a limited number of substitutes. The main differentiating factor between the craft beers and other normal beers is the brewing styles and distinctive flavors. Craft beers have their unique taste and likeness, which come from the traditional slow brewing styles and recipes that have been perfected over the years. This is how craft beers differentiate themselves horizontally based on the taste and quality.

Craft type of beers appeal to consumers who are seeking a "taste revolution." For this particular consumer group, the increase in product features enhances their economic benefit, thus giving them more satisfaction. Due to this unique feature, the price elasticity of demand for craft beers is much lower than for regular beers. Because of the economic benefit provided by craft beers, they can demand higher prices, thereby capturing higher margins. The craft brewers are also geographically differentiated. A particular geographical area boasts a unique type of craft brew (i.e. Boston Beer Company, located in Boston, Massachusetts). The success of the craft brew industry and its appeal to the general population is based on two main factors: the higher perceived economic value consumers get and the very experience of drinking craft beer (http ://www.stumptown.com/articles/mgmtbeer.html) .

The Craft Beer Making Process: Where Differentiation Begins

The primary natural ingredients for making beer are hops, yeast, malted grain and water. Craft breweries traditionally select only the finest quality of all these ingredients - particularly barley malt, with strains having two rows of grain in each ear. Hops are chosen according to the need of a specific flavor or taste. Some hops impart slight bitterness to the beer, while others are used to bring out distinctive aromas. The most commonly used yeasts for the fermentation process are Saccharomyces Cerevisiae used in production of ale, and Saccharomyces Uvarum used to produce lagers. There are many different strains of these yeasts and craft breweries carefully choose the correct combination of these ingredients according to their in-house recipes.

The brewing process starts with milling specific strains of malts and then mixing them with warm water. A mash tun is used to stir and heat the mixture, converting simple carbohydrates and sugars into fermentable sugars with the help of naturally occurring enzymes. This mash is then strained and rinsed in the lauter tun to produce a residual liquid dense in fermentable sugars called wort. Wort is then boiled and condensed in a brew kettle, and hops are introduced in intervals to not only act as natural preservatives for the beer but, as well, to reach the adequate bitterness and aroma according to the recipe.

Sometimes a mixture of different varieties of hops is used to create a distinct flavor and taste. After the boil, the wort is strained and cooled down before it is moved to the fermentation cellar, where the internally cultivated specific yeast is added to induce the fermentation. Yeast metabolizes worts' sugars to produce alcohol and CO2. CO2 is partially captured and absorbed by beer, providing a natural source of carbonation. After the fermentation is over, the beer is cooled for several days during which beer gets clarified and develops a full-flavor. The unwanted yeast is removed from the beer by filtration, which is completed in roughly 14 to 21 days.

The fermenters and other necessary equipment required for the brewery are easily available for purchase in the market. Different breweries employ different styles and types of equipment. Once the beer is ready, it is generally packed in kegs and bottles. Most of the microbreweries and nanobreweries have manually operated bottling equipment. To enhance shelf life, the bottling operations are done under maximum CO2 concentrations to ensure that minimal amount of O2 gets dissolved in the beer. Craft breweries are known for their environmentally conscious practices and utilize lighter- weight glass bottles, tins or bigger (1/2 liter) size bottles to serve beer.

Quality assurance (QA) is a key factor in order to maintain the consistency required in craft beer quality and flavor. QA for small breweries is generally done by tasting beer randomly within different batches. Large breweries, like the Boston Beer Co., maintain a separate Quality Assurance Department which oversees microbiology, brewing chemistry, sensory evaluations, and packaging quality and integrity. These subdivisions within the Quality Assurance Department oversee qualitative and quantitative analysis of the batches to ensure superior product quality. Each new product is thoroughly tested and retested before it is mass-produced and sold in the market. Larger breweries allocate extensive amount of their budget to QA departments (http://www.redhook.com/Default.aspx?p=2 1).

Scope of Craft Breweries

Craft breweries can be separated into different categories according to production output in barrels of beer (BBL) per year. (Where 1 BBL = 339 12 oz bottles of beer or 235 half-liter bottles of beer.) Craft beer production for all categories can range anywhere between less than 30 BBL and up to 6 million BBL per year. It is within this range of volume output that craft breweries get their name categorization.

* Nanobreweries: Nanobreweries operate at a slower rate than traditional microbreweries, with a volume output of less than 30 barrels of beer per year. They are not a good choice for long-term setup as the effort/profit ratio is very narrow.

* Microbreweries: Microbreweries produce less than 15 thousand barrels of beer per year. More than 75% of its beer production is sold outside the brewery. Microbreweries sell to the public in three different methods:

Brewery -> Wholesaler -> Retailer -> Consumer

Brewery as Wholesaler -> Retailer -> Consumer

Brewery (As a Bar/On-site Tap sale) -> Consumer

* Brewpub: Brewpubs are restaurant-based breweries where more than 25% of beer is sold on the same floor. Restaurants maintain these breweries and beer is dispensed from the storage tanks. Many laws and regulations have to be taken into consideration for these brewpubs; and, if allowed by law, it is possible to sell beer to offsite places or offer "beer to go." The majority of restaurants that operate a Brewpub are located in the northeast sector of the U.S. This is due to the fact that the local population in the northeast demands locally brewed beers.

* Contract Brewing Company: They comprise brewing companies that outsource their production to other already established breweries. The main brewery provides the exact specifications for brewing the beer. The contract brewing company is responsible for the marketing, distribution and selling aspects of the business, while the brewery provides the space, apparatus and infrastructure for brewing. Examples of these breweries include Pete's Brewing Co. and Boston Beer Co. Boston Beer Co. is the largest brewery with its flagship products Samuel Adams (SA) Boston Lager, Boston Ale, SA Octoberfest, SA Wheat, and SA Winter Lager, etc.

* Regional Craft Brewery: Regional craft breweries produce anywhere between 15 thousand and 2 million barrels of beer per year, and over 50% or more of their volume production focuses on all-malt beers and/or their malt flagship. Regional craft breweries are typically known for adding flavor-enhancers in order to produce strong-tasting beers. Examples include Sierra Nevada Brewing Co., Red Hook Ale Brewery and Anchor Brewing Co.

* Large Brewery: These breweries have an annual production capacity of up to 6 million barrels of beer. The only craft brewery that comes close to this definition is the Boston Beer Company with annual production of 1,841,348 barrels per year.

Leading Companies and Market Share

Boston Beer Co.

* ANNUAL SALES: 1,841,348 BARRELS

* SEGMENT MARKET SHARE: 20.20%

Headquartered in Boston, Massachusetts, the Boston Beer Co. is the largest craft brewery in the U.S. They produce the widely popular Samuel Adams brand, and they also produce a diversity of craft beer types. Boston Beer Co. is also known as the largest Contract Brewing Company. Although the most popular brew is their Boston Lager, the company is also popular for their seasonal and specialty beers, such as the high-priced Utopias, which contain 27% alcohol by volume and are aged over 16 years.

Following the acquisition of Anheuser-Busch by InBev, the Boston Beer Company is the largest American-owned brewery, producing over 1.8 million barrels annually. The Boston Beer Co. was founded by Jim Koch and uses the original recipe from his ancestor's pre-prohibition formula.

Sierra Nevada Brewing Co.

* ANNUAL SALES: 723, 880 BARRELS

* SHARE OF SEGMENT: 7. 94%

Established in 1980 by Ken Grossman and Paul Camusi, Sierra Nevada Brewing Co. is the second largest craft brewery in the U.S. and is located in Chico, California. It produces over 723,000 barrels of beer annually, and its most popular brew is the company's pale ale. Sierra Nevada has a wide range of seasonal brews, porters, stouts and special releases.

New Belgium Brewing Co.

* ANNUAL SALES: 583, 1 60 BARRELS

* SHARE OF SEGMENT: 6.40%

Located in Fort Collins, Colorado, New Belgium Brewing Co. is the third largest craft brewery in the U.S. Founded in 1991, the brewery began when Jeff Lebesch decided to take his passion for home brewing to a commercial level. Fat Tire, the company's flagship beer, originated from a bicycle trip Lebesch took across Belgium from brewery to brewery, and the icon of a bicycle is also displayed in company logos and labels. The company's beers are distributed in 19 different U.S states.

Spoetzl Brewing Co.

* ANNUAL SALES: 409, 000 BARRELS

* SHARE OF SEGMENT: 4. 49%

Located in Shiner, Texas, and known as the "little brewery in Shiner," was founded in 1909. Spoetzl is the oldest brewery in Texas and is distributed across 41 states across the U.S. Brewed since 1913, Spoetzl' s flagship beer is the Shiner Bock.

Pyramid Breweries. Inc.

* ANNUAL SALES: 1 92, 1 99 BARRELS

* SHARE OF SEGMENT: 2.11%

Headquartered in Seattle, Washington, Pyramid Breweries was acquired by North American Breweries, Inc. in August 2010. With the introduction of its Apricot Ale in 1994, Pyramid has been known as a leader in the fruit beer category. They operate several alehouses and restaurants in Washington, Oregon and California.

Deschutes Breweries. Inc.

* ANNUAL SALES: 186, 783 BARRELS

* SHARE OF SEGMENT: 2. 05%

Located in Bend, Oregon, Deschutes Brewery produces a range of beers, including Black Butte Porter and Mirror Pond Pale Ale as well as a specialty brew called The Abyss, which is an imperial stout with 11% alcohol by volume. Aged in bourbon barrels, "The Abyss" has won numerous awards since its 2007 release and is considered to be one of the finest beers in the country.

Matt Brewing, Co.

* ANNUAL SALES: 1 71, 700 BARRELS

* SHARE OF SEGMENT: 1.88%

Matt Brewing Co. brews Saranac Beers, and is the third largest craft brewery in the U.S. Located in Utica, New York, this family-owned brewery also produces soft drinks and is primarily available on the East Coast.

Magic Hat Brewing, Co.

* ANNUAL SALES: 154,236 BARRELS

* SHARE OF SEGMENT: 1.69%

Located in South Burlington, Vermont, Magic Hat brews four year-round beers, and four seasonal beers, with "#9" as its flagship beverage. In August 2010, Rochester based North American Breweries, Inc., along with several other brewers, acquired Magic Hat.

Boulevard Brewing. Co.

* ANNUAL SALES: 138,954 BARRELS

* SHARE OF SEGMENT: 1.52%

Boulevard is a regional brewery located in Kansas City, Missouri. When Anheuser-Busch was sold to InBev, Boulevard became the largest independent American brewery in Missouri. Their beers are primarily available in 20 states across the Midwest and Great Plains. Boulevard has recently completed an expansion of their brewing facility that gives them the capacity to produce up to 700,000 barrels per year.

Harpoon Brewing, Co.

* ANNUAL SALES: 130,516 BARRELS

* SHARE OF SEGMENT: 1.43%

Headquartered in Boston, Massachusetts, Harpoon Brewery is known best for its India Pale Ale, but also has a range of beers, including award- winning Munich Dark, 1636 brew and four seasonal beers.

The U.S. Beer Market and its Performance Compared to Craft Beer

The U.S. beer sales market has experienced a downturn in recent years. Beer sales by volume were down an estimated 2.2% in 2009 and 2.7% in the first half of 2010. Imported beers have also experienced a downturn in sales of 9.8% in 2009 (equivalent to 2.8M barrels). Conversely, the craft beer brewing industry has experienced sales growth in recent years. Craft beer sales by volume in 2009 were 7.2%, and 10.3% by dollars compared to growth in 2008 of 5.9% by volume and 10.1% by dollars. This transfers into a 4.3% by volume and 6.9% by dollars of craft brewing sales share as of 2009. (www.brewersassociation.org).

Craft brewers sold an estimated 9,1 15,635 barrels of beer in 2009, up troni 8,501,713 in 2008. Craft brewer retail dollar value in 2009 was an estimated $6.98 billion, up from $6.32 billion in 2008.

Business Strategies Employed by Craft Brewers

As craft breweries grow and continually plan to expand their operations throughout the U.S., they combine a precise set of strategies that prove to be effective within their industry. Table 1 explains them and the tactics used to achieve them.

Market Structure and Competition

Because craft breweries differentiate themselves from the regular beer producers by focusing on quality, their organizational structure is consequently different. Furthermore, craft breweries cannot compete with large breweries on price due to their advantages with higher economies of scale.

Competition within the domestic craft beer segment and other high quality beer categories is based on product quality, consistency, freshness and taste. Craft breweries must also be keen in their ability to differentiate products by utilizing a variety of methods, mainly: promotional tactics, customer satisfaction programs, distribution costs and price. In order for craft breweries to maintain their identity, they must follow their differentiation strategy (by using a combination of the methods mentioned). Otherwise, they would be considered as part of a regular beer product category and, hence, would compete with beer, wines, spirits and other flavored alcohol beverages.

The craft beer segment has become highly competitive in recent years due to easy availability of funds to finance the startup operations, which has led to the explosive growth in the number of craft breweries operational in US market. Competition varies with the regional markets, depending upon the local market preferences and distribution techniques.

Within the craft brewing industry, microbreweries experience the most competition. This is due to the fact that there are many of them and their market shares are noticeably small. Due to their wider distribution zones, national craft brewers have the financial backing necessary to support their products with expensive promotions. On the other hand, microbreweries possess the competitive advantages of being even more unique than national craft breweries and highly appealing to local consumers.

Craft brewers also compete with imported craft brews such as Dark Ales, Pale Ales, Lagers and other alcoholic segment products from Belgium, France, Germany, and other countries. The imported beer segment has a large market share in US and is economically stronger than most of the local craft brewers. However, due to the growth in the craft brew market in the U.S., the imported beer segment has lost some market share. Craft brewers are taking advantage of several factors, such as lower transportation costs, quality and flavor of beers, proximity and familiarity with local consumers, federal and state tax incentives, higher degree of product freshness and crispness.

Competition for craft beers is also present from the wine and spirits segment. The regular beer segment has lost about 1% of their market share to wine and spirits segment every year since 2003. However, this trend is declining due to the recent economic downturn. As the numbers indicate, the craft beers segment has shown growth despite the economic crisis, indicating a bright future and potential for further growth in this industry. The Pacific Northwest and California are said to be the most competitive craft beer markets in the U.S. in both number of breweries and consumer awareness. The market is currently healthy and competitive, but specialists believe that soon this competition will be based on price, leading to a drastic decline in the quality and integrity of the products. This in turn can potentially damage the image of the industry as the industry is primarily based on differentiation via quality of product(s). Craft brewers attempting to capture more market share are focusing on consumer awareness, redesigning their brands and aligning their product lines (http://www.konabrewingco.com/ uploads/CB A_Kona_Partner.pdf) .

Market Concentration

Producers:

The market concentration in the industry is high, with two distinctive sets of trends that set the competition in the market. The positive acceptance of craft brews by the U.S. population has led to the extensive growth in the industry. This acceptance, in turn, has led to growth in the number and diversity of craft brewers. Consequently, large breweries are either acquiring or are being acquired by other national or foreign brewers in order to gain more market share in the expanding craft brew market.

SABMiller and Molson Coors came together in joint venture, merging their U.S. operations as Miller-Coors to compete head on with market leader Anhauser-Busch. MillerCoors was then momentarily the world's largest brewer by volume until InBev's acquisition of Anhauser Busch in the fourth quarter of 2008. According to industry statistics, Anhauser Busch and Miller-Coors have accounted for roughly 80% of total beer shipped in the United States, including imports, since 2008. While in the craft brew segment, Boston Beer Co. became the largest brewer of craft brews. The U.S. beer market is similarly and increasingly concentrated in a small number of microbrewers, nanobrewers and brewpubs.

The largest four have established a combined market share estimated at just over 50% of the world market. Budweiser-brewer, AB-InBev, had beer volumes of around 350 million hectoliters in 2009, Miller-brewer SABMiller at just under 250 million, Heineken at just over 200 million, and Carlsberg around 125 million, while Tsingtao trailed at just over 50 million hectoliters a year (http://www.sabmiller.com/index.asp?pageid=1878&blogid=45).

Consumers:

The majority of craft beer drinkers are Caucasian (90%), male (70%), urban (65%) who have household incomes of at least $50,000 per year (75%), are college educated (65%) and are between ages 21 to 50 (90%). The national market for craft brewers has an eight-firm concentration ratio of 53.4%. The largest of this share goes to Boston Beer Co., which holds a market share of 25.1%>. Thus, the craft brewing industry has a large untapped market, which is made up of small to very small brewers.

Most of the larger brewers are trying to gain market share in the craft brew segment. The Chicago based Miller-Coors have established a separate division named Tenth and Blake Beer Co. which will focus on the domestic and imported craft beer segment, and it carries beers like Blue Moon, Peroni and Pilsner Urquell. The trend is supporting this move, as most of the current consumers are choosing flavored, innovative, full-bodied and diversified beers over regular beers. Guinness has also started concentrating on the craft brew industry with the launch of Guinness Black Lager, designed for Guinness drinkers who are looking for a taste revolution (http://articles.chicagotribune.com/2010-09-21/business/ct-biz-0922-craft-beers-new20 1 0092 1_ 1 craft-beer-craft-segment-craft-brewers).

The Branding of a Craft Beer Brand

Building successful beer brands is a step-by-step process that takes into consideration various factors such as quality of beers, availability in the marketplace, competitive pricing, marketing and promotions, etc.

The balanced combination of 'Push' and 'Pull' in the marketplace creates brand recognition and attracts both new and repeat customers. Push strategies utilize the resourcefulness of distributors to put the brands on retailers' shelves, while Pull strategies create a liking for the brands in the minds of consumers. Creating this pull strategy is highly essential for the creation of a successful brand, as it focuses on consumers, their interests, and strategically aligns the brands to meet them.

Identify your customers:

Identifying your target market is important. Every craft brewer should know the demographics of the market but at the same time should understand the age groups, income levels, and other key attributes of their consumers who are buying their product. Sellers should know why a particular age group is buying their product, who their repeat customers are, what other age groups are drinking and why. The craft brewer should try and reach for a dedicated niche market based on product quality and pricing. Once a loyal base has been established, craft brewers can expand further by creating targeted marketing campaigns.

Craft a dedicated brand message:

Every craft brewer needs to establish a clear communication channel with the consumer. The message should be clear, concise and appealing. It should be repeated until it becomes second nature to every level throughout the organization from the brewers to distributors to retailers and to consumers. Brands packaging and accessory materials should reiterate the message, (i.e. Boston Beer Co.: The leading brewer of handcrafted and full-flavored beers).

The brand message should take into consideration the vision and mission for the brand. The strategy behind building a message is customers will then be able to identify your brands based on the unique message.

Creating image of the brand:

Creating an image or reputation is essential. This is usually done through designing unique logos or images that will make a craft brew brand stand out from the rest. Reputation is also dependent on the quality of beer and customer service provided.

Providing consistent quality:

Quality can be conveyed in many ways, but for a craft brewer the most important factor is product consistency. The freshness and crispness of the beer should be same in every batch, every bottle should bear the same logo and brand message and every product packaging should be identical. Every brewery regardless of its size should have a basic level of quality control. Quality Control programs are very costly, but each brewery should have at least the following:

* A program that measures the quality of the beer before it sets out for sale.

* A well calculated and defined shelf life for each type of beer and a technique to identify age of the product at retail outlets ("best before" date stamp).

* A consistent way to randomly sample the products to enforce consistency in products.

* Sufficient budget to remove the expired beer from the shelves and returning it to the brewery.

Brand recognition

Making your brand recognizable is most important. Breweries that are dominating the market have recognized the need for establishing brand recognition by getting more shelf space for their products. The more customers see a particular brand and begin remembering it, the more chances there are for its consumption and demand. This can be achieved by simple steps such as hanging a sign outside the door, creating accessories such as pouches for beer bottles, tshirts, pens, mouse pads, etc. These are excellent means to spread the brand name.

Consumer Ownership

People choose a particular brand because they feel a sense of attachment with the brand. Most of the brands try to create an aura around them which makes them attractive to targeted customers. For craft brews, it can be the taste revolution which most of the customers are seeking nowadays which can instantly attach a peculiar taste with a brand, or a visit to the brewery which has gone really well and consumers establish an attachment towards the brewery and its brands. Craft brewers should give the necessary attention to each and every consumer who demonstrates interest in their product, as these people then act as brand ambassadors to the brand. A customer centric approach must be a priority when creating a brand image in the craft brew industry.

Packaging

Packaging conveys how the consumer perceives your brand. If consumers are going to pay a special price to buy a craft brew, the package must reflect the consumer's perception. Good packaging should not only stand out but, as well, fit in. It should be compelling, interesting and comfortable. Most craft breweries re-evaluate their packaging every time they make changes in their package designs, logo changes, etc. They allow their packaging to evolve as the brand matures. The subtle changes in brand packaging can be easily understood if famous brands from successful craft breweries such as The Sierra Nevada Brewing Co., and The Boston Beer Co. packaging from last 15 years are studied (http://www.probrewer.com/resources/ library/brandbuilding.php).

Some craft breweries like the Oskar Blues Brewery in Colorado, despite criticism from the craft brewing community, have packaged their products in tin cans. Packaging in tin cans is more affordable and easier to recycle. Aficionados expressed concern that such a package affects the integrity of the taste and quality of the product, claiming that UV rays and oxidation occur easier with tin cans. It has been proven that the taste and integrity of beer in tin cans is just as good as glass, and currently less than 1% of the craft beers are canned. Some 52 breweries in the U.S. now offer canned beers. The point of view towards canned beer in the craft beer industry is changing, especially after larger craft breweries are shifting to green initiatives. It is estimated that in a few years canning of craft beer will increase multifold as more customers realize its true advantages (http://www.inc.com/ss/canned-beer-renaissance?nav=related).

Contingency Planning

Contingency planning is essential to building a successful craft beer portfolio. Craft breweries need to watch individual brands' sales records very carefully, and adapt accordingly. There can be several reasons why a brand might not be selling as well as expected, including sudden drop of demand, lower production volumes, difficulties in accessing the raw materials, etc. On the other hand, through contingency planning, craft breweries can focus on their main products in the scenario of an increase in competition in other segments. The craft beer industry is currently a niche market and limited to the people who are following the taste revolution. But as it is growing exponentially every year, large beer companies like Miller-Coors, A-?, etc. are trying to gain market access, and also every year many new microbreweries are staring up. Thus, in face of rapidly changing scenarios in the craft beer industry, contingency planning is highly important (http://www.bplans.conVbrewery_business_plan/controls_fc.cfin#ixzzlOBxMSyeU).

Social Media Marketing for Craft Breweries

Craft brewers have picked up on the scent of this new marketing platform. They are using social media to send and receive instantaneous feedback about their existing and upcoming products. In the world of beer makers, it has always been the case that a company with more financial resources to spare had an upper hand because of their extensive marketing expenditure. But the situation is changing, as social media has brought microbreweries, nanobreweries and large breweries to a common battlefield; and the one who will strategically utilize these networking resources, will prevail.

The giants of the social media stream are Facebook, Twitter and YouTube. Every company/brand or product is marking its presence on these social media websites. On Facebook they create a fan page, on Twitter they create an official Twitter account which allows its followers to stay on top of the brand, and on YouTube they have company- dedicated channels through which they share their videos about the brand, best practices, etc.

There are some common strategies that are used by craft brewers. Most of the craft brewers create a Facebook fan page and make users aware of it. Some even give out free beer samples or pints once customers become fans. This is a strategy to increase the sphere of influence on Facebook. The more followers the brand has, the more chances there are that a new user will consider checking the brand out once he/she stumbles onto the page.

The second strategy is creating an official account on Twitter. Twitter allows users to follow the brands and celebrities they like. The sphere of influence on Twitter is roughly calculated by how many followers a brand will have plus how far a message posted by brand/company travels.

The third most commonly used strategy is by creating a dedicated video stream on YouTube. The videos included by craft brewers will focus on their best practices, fun to make beer videos, etc.

After marking the presence of the brands and companies on various social media platforms, companies then need to pay attention to what customers are saying about them, how their competitors are interacting with their customers and how effective their influence on social media is.

Nano and microbreweries can easily gather information about their current customers and spread the word to their potential customers with a very low marketing budget. The social media network is a boon for small breweries that cannot dedicate much of their finances to specialize and engage in costly marketing practices.

After the generation of followers, there are specialized online tools which are available for the companies through which they can determine the level of influence the company has, how many new followers the company/brand have gathered, how effective their social media strategy was, etc. The return on investment of a Social Media Marketing plan for a craft brewer is an increase in its sphere of influence, which can be directly translated to more effective pull for his/her products by the market (http://www.bplans.conVbrewery_business_plan/controls_fc.crm; http://craftbeer.us/2010/02/14/film-it-and-they-will-watch/).

Corporate Social Responsibility

Craft brewers are seen as revolutionaries, who are more localized, green and typically adopt socially responsible business models with focus on quality and diversity over massproduced beer. In his book, Fermenting Revolution: How to Drink Beer and Save the World, author and beer activist Chris O 'Brian, states that "American craft brewers are the country's unlikely revolutionaries, and their adoption of sustainable business practices helps fight globalization and break the market control of major beer companies."

Microbreweries are fighting in the smaller markets but with larger players, they are supporting their communities by using fresh local ingredients for their brews; they understand their customers and they have the ability to develop and respond to the needs of the local markets. They are building loyal followers, giving back to the society by promoting various events, something that has not been done by the beer giants.

From the bigger craft beer breweries like The New Belgium Brewing Co., The Boston Beer Co., and Red Hook Ale to small microbreweries, such as The Main Beer Company http://mainebeercompany.com/About_the_Trainer.html and brewpubs, an overwhelming number of craft brewers have embraced green technology to run their businesses. But maintaining a sustainable modern-day brewery involves more than just buying local ingredients and following a protocol. Eco-friendly brewers need to be aware of things like the type of energy used to power their operations, the sources of raw materials, the equipment used to build the brewery, the packing and distribution materials used and how to dispose of the waste products.

Vermont has highest breweries per capita in the U.S, where there is a craft brewery for every 32,698 people. Vermont also boasts the first certified organic brewery in the nation: Wolaver's Brewery. Wolaver's believe that people are attached to a particular type of Craft beer because they feel a connection for that brewery. And part of building and nurturing that connection is through implementing local, sustainable business practices. They have the vision: "local, organic, collective, green and background." Every step of their beer-making process has been well defined to be sustainable.

The Alaskan Brewing Company in Juneau is the first beer producer who has started recycling the CO2 naturally created during the fermentation process. The Alaskan Brewing Company tries to tie in their location and environment to their brewing process. They state that if a consumer is enjoying their product, he/she is not only supporting the environment and helping the local community become sustainable but also supporting a business that is consciously trying to make a difference.

Sedibeng Breweries are actively involved in a wide range of social responsibility engagement programs, which aim to invest back into the community. Through their social responsibility program they are trying to assist in improving people's lives. They contribute to development in a sustainable way and they support projects that communities need. They study the community requirements, rather than strictly creating solutions for our communities. This works because then they can spread their resources widely on various sustainable projects. However, before the company commits to a project, it ensures that skills will be transferred, communities are involved and the projects will be able to become self-sustaining. Wherever it can, the company assists and sometimes forms partnerships to increase capacity.

Small brewpubs are also paving the way for environmentally sustainable business in America. Salt Lake Brewing Company in Utah was awarded the 2006 Environmental Company of The Year award by the Recycling Coalition of Utah, while Kona Brewing Company in Hawaii employs a full-time sustainability coordinator.

The ultimate sustainable brewpub in the country is theHopworks Urban Brewery in Portland, Oregon. Formed by award- winning Laurelwood brewmaster Christian Ettinger, Hopworks considers sustainability its primary motto. It uses biofuel made from oil used in the deep fryers to run its trucks and uses pizza ovens to heat the brewing water. The brewery is cleaned with collected rainwater caught from the roof, and the entire brewery building is built from reclaimed or recycled materials.

Local, sustainable beer is infusing the American beer market. According to the Organic Trade Association (OTA), organic craft beer sales increased 40 percent in 2005, tying only with organic coffee as the fastest-growing organic beverage segment in the country. The big companies are also starting to notice the glitter produced by the organic beers. Anheuser-Busch released two organic beers to the market named Wild Hop Lager and Stone Mill Pale Ale. Since then A-B have dedicated separate sustainable development departments to improve their social corporate responsibility rating. In 2008 the Molson Coors Brewing Co. set the rolling global target to reduce water-use efficiency by four percent. And, according to a 2008 promo video, Miller claims to now be recycling 99.9% of all packaging waste.

Most of the larger players in beer business have taken up environmental initiatives, which have resulted in reductions of carbon footprints, and in less water and energy usages. But these sly larger players are going green for better PR, the proof lies in the lobbying of the U.S. Department of Agriculture by Anheuser Busch to drop the hops as the item on the list of organic beers' ingredients which doesn't have to actually be organic. According to the USDA, for a product to be considered organic, it must be made with at least 95 percent organic ingredients. The company now claims to be using 100% organic hops in its organic beer (http://www.bplans.con^rewery_busmess^lan/strategy_and_implementation_summary_ #ixzz 1 OBwnF 1 Yy ; http ://www.triplepundit.com/20 11/01 /green-brewhaha-craft-beer-makersgreen/).

Distribution Channels

Distributors are very important personnel in the craft beer industry. They are responsible for transportation, cold storage requirements and maintenance of perishable beer from the time it leaves the brewery till the time it arrives for sale at restaurants, bars or retailers. Distributors add value in the beer distribution channel in many ways. Particularly, distributors provide the necessary infrastructure for small brewers so that their products can reach a wide network of retailers. The consumers of the beers benefit by having a wide variety of choices of famous brands, from large domestic or international breweries to specialty craft microbreweries. Because of the economic efficiencies of the distribution system, retailers can offer hundreds of choices of beers at a great price.

Storage and Transportation

Each distributor is equipped with state of art cold storage facilities. They secure the beer from a variety of breweries and preserve it until it is delivered with the utmost freshness. They are the face of the beer brands to the retailers, employing skilled sales and marketing crews to market the products they carry to different retailers. Distributors have a variety of trucks, and they employ many drivers who deliver a customized inventory to a vast network of small and large retailers, which include different retailers, restaurants, pubs, bars and neighborhood stores.

Chain of Custody

The distributors work with a "chain-of-custody" method in the sale of beer. This system makes it very easy to enforce state laws and local ordinances. The same system also regulates the sales to the retailers ensuring that they hold the correct licenses, do not sell to the underage, pay the required state and local taxes and comply with the state and local alcohol beverage laws.

The same regulations that check for the accountability in beer sales also allow the states to effectively collect the taxes on the sale of alcoholic products. Distributors monitor the data of the sales from the point where the beer leaves the brewery till it arrives at the licensed retail outlet, thus they have all the necessary information to collect taxes. Many states find it much easier to collect the taxes from a limited number of federally- and state-licensed beer distributors than from thousands of individual retail outlets.

Market Access

Distributors are spread throughout different states across the country. For craft breweries, selling the beer through distributors allows them to get their product to diverse markets, and it provides the small scale retailers the opportunity to offer a broad range of beer under one roof. The system provides the same level playing field for all the breweries regardless of their size. Distributors facilitate a healthy competition among the breweries.

STATE ALCOHOL CONTROL

Due to the nature of alcoholic drinks, the rules and regulations for alcohol are different across the states. Alcoholic beverages are unique and can have negative consequences if consumed illegally by underage teens or abused by adults. The 21st amendment gives states the total control to design and implement their own rules and regulations for the sale of alcoholic beverages. This regulatory system allows states the flexibility to deal with the local circumstances (www.centraldistributors.com; www.probrewer.com/resources/distribution/ specialty .php; http://nbwa.org/mdustry-tech/craft-beer-distributor-of-the-year-award).

INVESTORS FOR CRAFT BREWERY STARTUPS

Many investors are lining up to support the exploding growth in the craft beer industry. But investors are being very careful in selecting the breweries they want to invest in. There are many factors that influence their investment decisions in craft breweries, mainly:

* Increased competition in the craft brew industry

* A petition is currently filed against craft brewers with the U.S Treasury Department Bureau of Alcohol, Tobacco and Firearms on behalf of Anheuser - Busch, Red Hook Ale and several other breweries, demanding that craft brewers add names of who actually brewed their beer on their bottles.

* The growth of the craft beer industry is mainly because customers think craft brews give them added value.

* The outsourcing of craft beer production, also known as contract brewing (i.e. Boston Beer Co.).

* Investors' fear that craft brewers are expanding based on hype created by bigger players, and one missed step can hurl the industry into downward direction.

Microbreweries on the other hand are looking forward to the lawmakers' tax cuts for the craft beer industry. Craft brewers have different sets of tax burden even if they fall in the broad category of small businesses. For these brewers the tax is levied on the production rather than on the actual sales. The tax cut bill will reduce this $7 per barrel for first 60,000 barrels of beer to nearly $3.50 per barrel. And for breweries producing more than 60,000, it will reduce tax from $18 to $16 per barrel. If the bill is passed, it will bring the small breweries on the same playing field as the small business owners. A Harvard study shows that, if the bill is passed, it will create 2,700 new jobs within 18 months and 375 new jobs will be created every year throughout the next four to five years.

Thus, as most of the investors are trying to figure out which upcoming breweries in which to invest, microbreweries are hopeful that more investors will line up as the craft brew market explodes in terms of market share and total beer sales (www.inc.com/ magazine/201 0 100 1/a-craft-beer-stimulus-plan.html; www.cnbc.com/id/39232270/Craft_Beer_ Business_Is_Booming).

Taxation and Regulations that Pertain to Alcoholic Beverages

All of the Craft breweries are highly regulated at the federal, state and local level. These levels govern the production and distribution of the beer, including permitting, licensing, labeling, marketing, trade practices, distributor agreements, advertising, and more. There are different entities at federal, state and local level that collect various taxes, licensing fees and other similar charges. They also make sure each brewery is adhering to the laws and regulations.

All the breweries that sell beer commercially are subject to licensing and permit approvals by a number of governmental authorities at the Federal, state and local level. At the Federal level, the Alcohol and Tobacco Tax and Trade Bureau of the U.S Treasury Department ("TTB") is responsible for administration and enforcement of the related Federal laws and tax codes to production and taxation of alcoholic products. A Federal brewer's notice is required by each brewer in order to brew beer for public consumption, and an amended brewer's notice is to be filed if there is any change in material processing, brewing equipment, brewing or warehousing locations, brewery ownership or change in management team. Similar types of TTB permits are required when a brewery is entering into a contract brewing agreement or into an alternating proprietorship agreement. These are very important permits and they can be revoked, cancelled or suspended in case the brewery does not comply with the correct protocol and standards, thereby directly affecting the companies' production and reputation. Also TTB can inspect or audit any brewery at any time.

At the local and state levels, the level of regulation varies widely. Some of the breweries distribute their products in areas where just a notice to the authorities regarding the change in the operations, management, materials or ownership is sufficient, but in other areas an advance notice and approval is required. State and local laws and regulations, which govern the sale of the craft beers within a particular state, especially for an out-of-state brewing company, vary from locale to locale.

Taxation by production numbers:

Breweries producing less than 60,000 barrels of beer pay taxes of $7 per keg in taxes, while large breweries brewing more than 60,000 barrels pay $ 1 8 per keg in taxes. The tax is on production and applies as soon as a keg is moved out as a finished product. The individual states in which the breweries operate also impose excise taxes on beer and other alcoholic beverages, which may vary depending on state.

ENVIRONMENTAL REGULATIONS

The environmental regulations differ at a federal and state level. There are special environmental permits required by the federal and state authorities. These requirements consider permissions for air emissions, water discharges from the brewery, and handling and proper disposal of hazardous waste materials. The established protocols need to be strictly followed by the breweries, and violation of such protocols can lead to adverse effects on breweries' credibility.

Subject: Social marketing; Social responsibility; Marketing; Case studies; Microbreweries

Location: United States--US

Classification: 2410: Social responsibility; 7000: Marketing; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 59-81

Number of pages: 23

Publication year: 2012

Publication date: 2012

Year: 2012

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: Diagrams Tables Graphs References

ProQuest document ID: 1037815153

Document URL: http://search.proquest.com/docview/1037815153?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 24 of 100

THE LITTLE BEE THAT COULD: JOLLIBEE OF THE PHILIPPINES V. MCDONALD'S

Author: Rarick, Charles; Falk, Gideon; Barczyk, Casimir

ProQuest document link

Abstract:

The Filipino Company, Jollibee, is imitating McDonald's in some ways but has its own twist on offering unique products that emphasize local spices and local taste preferences. This fast growing restaurant chain has benefited from the increased demand for fast food in Southeast Asia and has developed a unique business strategy. This case examines Jollibee's success and how the company is successfully competing with McDonald's. With its rapid growth, the company is now ready to expand with new concept restaurant to the rest of the world. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Jollibee Foods Corporation (JFC), known distinctively by its red and yellow bumble bee mascot, operates a number of concept restaurants in the Philippines and beyond. From its core business, a McDonald's-like restaurant, Jollibee has expanded into a pizza chain, fast food Chinese restaurants, bakeries, breakfast bars, and a tea house. The company competes well with multinationals in the Philippines, and has begun a large expansion into the international market, including China and the United States. Jollibee, the original flagship brand, together with its additional product concepts, dreams of becoming a global powerhouse in the restaurant industry.

Jolibee's dreams will be challenging given the economic uncertainties that surfaced in 2009 and the 0.6% contraction in the world economy. With sound planning and leadership, however, the company is taking active steps to effectively manage its business. JFC's systemwide sales grew by 9.6% amidst weakened consumer spending in the Philippines and throughout most of the world. In 2009 Jollibee opened 168 new stores worldwide and even more impressively, opened 434 in 2010.

THE PHILIPPINES

The Republic of the Philippines is a country in Southeast Asia consisting of over 7,000 islands. The Philippines was "discovered" by Ferdinand Magellan in 1521, who claimed the islands for Spain. While Magellan met his death soon after arriving in the Philippines, the country was under Spanish control for almost 400 hundred years. The Philippines came under the rule of the United States in 1898 when Admiral Dewey defeated the Spanish and Spain ceded the islands under the Treaty of Paris. While Tagalog, or Filipino, is the official language of the Philippines, English is widely spoken, especially among educated Filipinos. In 1935 the US government decided that the Philippines should become a self-governing commonwealth and the country gained complete independence in 1946. After a number of different political administrations, strongman Ferdinand Marcos ruled the country from 1965 to 1986, maintaining close ties with the United States. With increasing discontent among Filipinos over its government, citizens in the opposition movement organized a "people's revolution" in 1986, and Marcos was forced to leave the country. Political instability ensued for a short time, but democracy quickly took a firm hold in the Philippines. The newly-formed democracy could be described as somewhat fragile, having been forced to endure the stresses of political corruption and attempted coups.

The population of the Philippines is approximately 98 million, with an estimated population growth rate of slightly less than 2% per year. The Filipino people have a rich ancestral heritage that can be traced to populations from Malaysia, Indonesia, Spain, and China. The ethnic Chinese have been very influential in the Filipino economy. Filipino culture is rooted in Asian, Spanish, and American values.

Total GDP for the Philippines in 2009 was $161.2 billion, with a growth rate of 1.1%, as compared with the U.S. GDP growth rate of -2.4% for the same period. In 2010 the estimated GDP for the Philippines was $189.1 billion with a growth rate of 7.0%>, as compared with an estimated U.S. GDP growth rate of 2.7%. Per capita GDP was $1886 in 2009 and $2077 in 2010. The currency of the Philippines is the peso (PHP), trading at 43.9 PHP in December 2010 and ranging between 40 and 53 PHP per U.S. dollar over the past five years.

HISTORY AND MISSION OF JOLLIBEE

What would eventually become Jollibee Foods was once an ice cream parlor named Magnolia, started by Tony Tan in 1975 as a family-based business in the Philippines. Over time the company began offering hot meals and sandwiches. From this humble operation the concept of a fast food hamburger business was developed and Jollibee has expanded in terms of revenue and concentric diversification. In 1978 the company began a bakery and by 1986 it was operating its first international eatery in Taiwan. With the acquisition and development of additional restaurant concepts, Jollibee catapulted itself into an array of food service businesses including pizzerias, breakfast cafes, Chinese fast food chains, and a teahouse. Much of this diversification has come in recent years. While mostly known for its Jollibee hamburger franchise, the company has ventured into many additional fast food areas, significantly expanding its number of outlets and geographical coverage.

The mission of Jollibee Foods is simple: To serve great tasting food, bringing the joy of eating to everyone. Jollibee has a vision statement that expresses not only its values, but also its aspirations.

VISION

We are the best QSR...

The most endearing brand ...

that has ever been ...

We will lead in product taste at all times ...

We will provide FSC excellence

in every encounter

Happiness in every moment ...

By year 2020, with over 4,000 stores worldwide,

Jollibee is truly a GLOBAL BRAND

Jollibee has strategically established its brand by focusing on quality and customer service. It is committed to sustainability as a quality requirement, making Forest Stewardship Council (FSC) excellence a corporate priority. Its vision statement positions the company to be the best quick service restaurant (QSR) that has ever existed. JFC is concerned with consumer perceptions and actively manages them through extensive advertising, hiring of celebrity endorsers with wholesome images, and engagement in charitable works.

STRATEGIC BUSINESS UNITS AND EXPANSION

Jollibee Foods Corporation (JFC) consists of a number of SBUs that cut across different food groups. Its system-wide retail sales for 2010 were 70.3 billion PHP ($1.6 billion USD), representing a 10.2% increase over 2009. Net income in 2010 was 3.1 billion PHP ($70.6 million USD), which grew by 16.3% over 2009 income.

At the core of JFC is Jollibee, the McDonald's-like hamburger restaurant. The unit sells a standard fare of lunch and breakfast items, but adds a local touch with products such as the Amazing Aloha Burger (slice of pineapple on top of a burger), the Jolly Hotdog Taco Style, Chickjoy with Rice, and Palabok (noodles with a spicy sauce, boiled egg, shrimp, and ground pork). Jollibee competes with McDonald's on the basis of price, local product offerings, and national identity. JFC also owns Chow King, a Chinese fast food restaurant chain with operations in a number of countries. The firm has a pizza restaurant chain called Greenwich and a bakery chain called Red Ribbon.

JFC is looking internationally to increase sales and recently acquired Yonghe King, a "contemporary Chinese fast food" restaurant chain in China. It operates restaurants in the Philippines, China, Brunei, Vietnam, Saipan, Indonesia, Dubai, and the United States. The units in the U.S. are located in areas with large Filipino-American populations. JFC feels that international expansion is important not only to grow the company, but because it believes that "Being open to different cultures widens one's spectrum of tastes, style, and ways of seeing food." JFC's management feels that international expansion provides for organizational learning, and the leveraging of this learning into new markets. JFC is always searching for new product concepts, including its new pilot store called Tio Pepe Karinderia. This new restaurant concept serves very low-priced typical Filipino dishes and seeks to compete with street vendors by offering a more hygienic and cost-efficient alternative.

Financial data and the number of stores by chain are summarized in Table 1.

LOOKING AHEAD

As Jollibee looks to the future it seeks greater expansion opportunities. The company plans on opening more stores, and in more markets, including the Indian market. Jollibee has experienced great success in its relatively short history, but it now faces a number of challenges. Rising food and fuel costs are putting pressure on the company to raise prices. Consumer spending in the Philippines is starting to weaken, especially among lower income consumers as their disposable income has declined. In addition, the flagship brand is coming under attack from McDonald's as it continues to open more new stores in the Philippines. According to a 2007 report by Tony Lopez in the Manila Times, McDonald's beats Jollibee in revenue per store, and has been gaining ground through better customer service, better kid's meals, and better cost and supply chain management.

Undeterred by these developments, Jollibee continues to look ahead by opening restaurant chains in new markets. In 2010 alone it opened 434 additional stores worldwide, representing a 23% increase over the number of stores in 2009. While JFC expands its profitable chains, it has eliminated some marginally performing, mostly aging stores. According to a February 201 1 statement, JFC Chairman and CEO Tony Tan Caktiong said, "Practically all our brands in all countries where we operate achieved growth... We were able to preserve and even slightly improve our profit margins despite the fast rising cost of labor, power and raw materials.... We look forward to continued robust sales and profit growth in the Philippines and abroad in the years ahead." It appears that the same pioneering spirit that enabled Mr. Caktiong to establish the first ice cream shop in 1975 lives on.

DISCUSSION QUESTIONS

1. What advantages does a domestic firm have over a MNC in its local market?

2. Can Jollibee Foods Corporation continue to successfully leverage its brands and products in other geographic markets, including the United States? Explain.

3. In what way should Jollibee expand? Which countries are likely to be profitable markets?

4. What strategic direction would you suggest for Jollibee Foods Corporation?

Subject: Fast food industry; Business growth; Competition; Success factors; Case studies

Location: Philippines

Company / organization: Name: Jollibee Foods Corp; NAICS: 722211

Classification: 8380: Hotels & restaurants; 9130: Experiment/theoretical treatment; 9179: Asia & the Pacific

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 83-88

Number of pages: 6

Publication year: 2012

Publication date: 2012

Year: 2012

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: 1037815152

Document URL: http://search.proquest.com/docview/1037815152?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 25 of 100

CHANGES IN THE GLOBAL MOBILE MARKET AND NEW CHALLENGES FOR LG MOBILE

Author: Park, Namgyoo K; Lee, Jeonghwan; Suh, Junghyun; Kim, Hyojung

ProQuest document link

Abstract:

The global mobile phone market has long maintained a double-digit growth rate, and its total sales volume has reached 1.24 billion. Today, the global market is dichotomized into developed markets and developing markets; alternative demands dominate the former, and new demands dominate the latter. The rise of smartphones is one of the hottest issues in developed markets. Recent changes in the global market landscape, initiated by the arrival of smartphones, is bringing to an end the market domination by the top five companies -- Nokia, Samsung Electronics, LG Electronics, Motorola, and Sony-Ericsson. The decline of Motorola and Sony-Ericsson, and the sudden rise of smartphone specialists such as RIM, Apple, and HTC are disrupting the market structure, and causing increasing uncertainty within the wireless business. Despite increasing market uncertainty, LG Electronics managed to become the third-largest global mobile phone manufacturer by 2009.

Full text:

INTRODUCTION

LG Electronics will achieve global market share of 10% and sales of a hundred million units by the end of 2009. By 2012, we will become the second-largest mobile phone manufacturer in the world.

Mr. Seung-Kwon Ahn of LGE, at the Mobile World Congress in February 2009

In February 2009, when global economies were experiencing the aftermath of the financial crisis initiated by the sub-prime mortgage loans, the Mobile World Congress (MWC) of 2009 opened its first session at Barcelona, Spain. Mr. Seung-Kwon Ahn, the chief of the mobile communication division of LG Electronics Corporation (LGE), declared his future strategies with strong confidence to the attendants from all over the world. However, most of the audience was not convinced about the feasibility of his plans in the short term.

It did not take long to prove the detractors wrong. At the end of the fourth quarter of 2008, LGE claimed third position in the mobile phone market, and its market share exceeded 10% for the first time in its corporate history. These surprising performances in fact reflected the goals promised by Mr. Ahn nearly half a year earlier. The double digit global market share of the LGE mobile division gains even more significance since the global economy was yet to recover from the crisis, and LGE acquired only a few top mobile telecommunication carriers. These numbers effectively killed possible concerns about the future of LGE and other related questions.

Although initial doubts about the capability of LGE and its top management team had died down, LGE knew that it still had a long way to go. The volatile global mobile phone market made it difficult to look into the future, and situations could turn against them at any moment. As can be seen from the history of the market, a significant change in a mobile phone technology or product has always been followed by an acute change in market competition. As the core technology shifted from analog to digital, Motorola experienced a downfall while Nokia emerged a winner; LGE and Samsung Electronics Corporation (SEC) joined the top five brands when the mobile phone evolved from a simple gadget for voice communication to a complex multimedia device. These changes were just a beginning compared to the market transformation that the current mobile phone market is experiencing. With smartphones on the rise, the competition in the mobile phone market is entering a whole new phase.

LG Electronics began to experience difficulties in such a business environment, with the market share in the smartphone market remaining modest, at best. In early September 2009, Mr. Ahn said to the executives of the Mobile Communications Business Division in a concerned tone:

We must put the success achieved so far behind us. Now we are facing a serious crisis in terms of future competition centered on smartphones. The entire company needs to contemplate on how to overcome this situation. I want to ask each department to establish plans to acquire competitiveness for our smartphones.

GLOBAL MOBILE PHONE MARKET

OVERVIEW OF THE MOBILE PHONE MARKET

The global mobile phone market in 2008 was predicted to be 1 .24 billion in total volume, which reflects a 7.6% growth from 1.15 billion in 2007. This showed that the growth rate of mobile phone markets, which remained in double digits for the past several years, was falling, mainly due to the maturing global market and the effects of the financial crisis that originated in the US. Moreover, the market in 2009 was expected to drop to 1.2 billion, dropping 3.2% from 2008, due to decreased demand in the stagnating economy.

The uncertain global economy rapidly caused the domination of the mobile phone industry by the five major manufacturers to crumble. Motorola's prolonged slump in North America and Sony-Ericsson's weakened presence in Europe stimulated the restructuring of the global handset market. Nokia, SEC, and LGE formed the new triumvirate, dominating almost 70% of the global market in the second quarter of 2008. Motorola and Sony-Ericsson's market strength was quickly dwindling; the aggregated market share of the two companies was less than that of LGE alone.

Although the growth rate of the mobile phone market is in a decline overall, there are a few promising segments where high growth rates can be observed. First of all, the markets in the emerging countries collectively referred to as the BRICs (Brazil, Russia, India, and China) show high growth potential. For instance, Brazil is currently the largest mobile phone market in Central America, accounting for 35% of the total Central American market. It also showed a drastic increase in growth rate: from 34.88 million in 2003, subscribers jumped to 86.21 million in 2005, 99.91 million in December 2006, and 1.7141 billion in January 2007. The Russian market, notorious for the massive distribution of smuggled mobile phones until the first half of 2005, is becoming more transparent with the help of strong governmental regulation imposed as part of the market transparency policy. The Russian government is strongly supporting the regulatory efforts to meet the qualifications that are required to join the WTO.

India and China, with even bigger opportunities for market expansion, are attracting manufacturers. Their vast population - easily over 35% of the world total - is expected to provide unprecedented market growth in the years to come. The number of mobile phone subscribers in India reached 100 million in April 2006, and the Indian mobile phone market recorded an annual growth rate of 47.3%. Since only 30% of the Indian population possesses a mobile phone, enormous potential for further growth still exists. China, whose population exceeds 1.3 billion, is an especially promising market for 3G mobile phones. The double-digit growth of mobile phone subscribers in China had mostly been centered on 2G services. In recent years, the growth rate of 2G subscribers gradually decreased as more customers signed up for 3 G phones. In contrast to the Indian market, where low-end devices dominate, the Chinese market has demand for both high-end and low-end devices, and is also famous for its high preference for global brands. In short, the Chinese market wins a few points over India, and is perceived as one of the most attractive markets for global mobile phone manufacturers (Kim, 2008).

The developed markets, on the other hand, with subscription rates reaching nearly 100%, are showing stagnation in quantitative growth, reflected in the low number of new subscribers. Alternative demands for high functional devices constitute the strongest demand in these markets. The smartphone market in particular, which was once largely limited to North America, is growing at double-digit rates, and is leading to the rapid replacement of existing 2 G and 3 G mobile phones in the developed markets. According to Gartner, a market research institute, the overall mobile phone market in the second quarter of 2009 declined by 6.1% in sales volumes, while smartphone sales increased by 27%. The polarized state of the global mobile phone market, with smartphones at one end and low-end phones at the other, is expected to continue for a while. The demand for expensive smartphones is high in high-end markets, including North America, Europe, Japan, and Korea, while the demand in countries with less-developed economies is more for relatively cheap, low-end products.

RAPID GROWTH OF THE SMARTPHONE MARKET

The history of the smartphone market goes back to the launch by Palm of its first PDA 10 years ago. Although this device was more of a portable personal computer (PC) than a communication device, it was embedded with a communication module, which justifies its being treated it as the origin of the smartphone. However, the Palm PDA failed to succeed with the masses due to its limited communication functions and applications, and appealed only to a handful of early adopters. The first smartphone that really opened up the potential for a whole new market was the BlackBerry, introduced by the Canadian company Research In Motion (RIM).

Although the BlackBerry was successfully introduced into the market, RIM' s growth was mostly confined to North America as it targeted corporate customers by providing solutions along with the product, such as the Instant Messenger service and an e-mail system linked with Enterprise Resource Planning (ERP). BlackBerry also adopted the QWERTY keypad, which is the standard keyboard layout, for easy utilization of its powerful computing functions. The mass market for smartphones began to grow at a much faster pace after Apple released the iPhone. The iPhone was first introduced to the public at the Macworld Conference & Expo held in San Francisco on January 9, 2007. In the first week of its release, the iPhone became a million-seller, signaling the beginning of the smartphone era.

A smartphone is a mobile phone equipped with computing power similar to that of a PC. Mobile phone manufacturers, content providers, and customers all have their own reasons to covet smartphones, placing the product under the IT spotlight. Manufacturers can earn higher profit margins since smartphones are sold at higher prices; content developers are able to gain direct access to customers through the application stores (commonly referred to as app stores), without having to rely on other content providers or distributors; customers are drawn to smartphones as they increasingly wish to add mobility to their computing experience, such as by accessing e-mail, browsing the Internet, watching streaming videos, and so on. Smartphones, with their added computing power and faster network access, are considered to be the ideal choice to meet such needs.

The recent boom of smartphones can be attributed to the advancement of technology, both inside and outside of smartphones. One of the reasons why early smartphones were not widely accepted was that they were simply not capable of executing the tasks the customers expected of them. Recently, the mobile CPU used in smartphones was upgraded to 1 GHz, which is almost up to the level of a PC, making the computing power of smartphones comparable to that of desktop or laptop computers. On the infrastructure front, HSPDA technology was applied to allow 14.4 Mbps of network speed when downloading data. Further, new touchscreen technologies allowed a more graceful and user-friendly UI, while full-browsing technology provided webpage screens identical to those on a PC. Smartphones are increasingly being perceived as a user-friendly device with convenient access to digital services, rather than as a special device for select corporate customers or early adopters.

The explosive growth of the smartphone market, which started around 2005, is not showing any signs of slowing down. The annual growth rate of the smartphone market touched 45% in 2006, and smartphones are forecasted to take up 33.6% of the total market in a few years. In Korea and Japan, where broadband Internet access is widely available throughout the country, a mass demand for smartphones has only begun to appear. In the case of Europe and the US, however, broadband Internet access is not as widespread as in Korea or Japan; this drove the need for devices with highly functional mobile Internet access in these markets. Moreover, the need for mobile devices with fast network access is also rising in emerging markets, which will create more demand in the near future. Subscribers to mobile communication services, numbering around 3 billion in 2007, are expected to increase to 5.5 billion by the end of 2013. Nearly a billion new subscribers are expected from China and India. After a few years, after the number of subscribers grows to a certain level, alternative demand is expected to become greater than new demand, even in emerging markets. This would be especially true for the BRICs if their continuous growth in GDP maintains its current pace. Alternative demand, which represents the demand to replace existing mobile devices with new ones, will result in increased demand for high-end devices over low-end devices. A few particularly fast-growing emerging markets, including India, are heading straight toward building a nationwide wireless Internet network instead of investing in costly broadband Internet infrastructure; such a move would trigger new demands for smartphone in these emerging markets, where traditional 2 G and 3 G phones have reigned.

ANALYSIS OF THE COMPETITION

Until recently, the global mobile phone market had remained mostly stable, with the dominance of the Big 5: Nokia, SEC, LGE, Motorola, and Sony-Ericsson. The Big 5 dominated more than 80% of the total market. However, the market is going through a major transformation due to the fall of Motorola and Sony-Ericsson, Nokia's slump, and the huge success of Samsung Electronics and LG Electronics, along with the rise of specialized smartphone manufacturers.

FALL OF MOTOROLA AND SONY-ERICSSON

Motorola

Motorola originally started its business as a battery manufacturer in Chicago, and then boldly jumped into the radiotelegraph and wireless communication business. The new business proved to be an enormous success. Motorola tripled its earnings between 1990 and 1995, and became the leader among the first-generation mobile communication players. Motorola's dominance of the market came to an end when the second-generation mobile phones were introduced in the market. In 1998, the company lost its market leadership to Nokia, as it failed to secure the digital cellular technology that was critical to build second-generation mobile phones. In 2001 and 2002, Motorola recorded losses to the tune of USD 3.9 billion and USD 2.5 billion, respectively.

To turn the things around, Motorola hired Ed Zander, former chief operating officer (COO) of Sun Microsystems, as the new CEO. The first thing Zander wanted to do was to improve Motorola's new product development capability. The main office of Motorola was moved to a chic, modern-looking place in the urban area, which was meant to provide an innovative atmosphere to the organization. Zander also hired Geoffrey Frost, former Nike brand campaign master, as the chief marketing officer (CMO). These efforts immediately showed results, and the outcome was RAZR, an ultra-slim mobile phone, which became a megahit as soon as it was released.

Motorola's comeback, led by Ed Zander, unfortunately ended with RAZR. Its subsequent products failed to outperform the multimedia phones of its competitors such as LGE and SEC, and Motorola was back on the downward track. Motorola not only experienced a record-breaking loss of USD 4.2 billon in 2008 but also failed to effectively take on the emerging markets in Asia and Africa with its low-price handsets. It was not surprising when Motorola's global market share plummeted to 5%. Motorola also suffered in its main market, North America. Motorola's market share in North America dropped to 17%, and the first and second place went to SEC and LGE, respectively. In the second quarter of 2009, Motorola's operating profit fell to 13%. Motorola had announced several layoff plans since the second half of 2008 in an effort to improve its profitability that had remained in the red since 2007. In addition to the layoff plans, newly hired CEOs Greg Brown and Sanjay Jha (former COO of Qualcomm) have been concentrating fully on the smartphone market as their core strategy to put the company back on track. The results of their strategy were Droid and Click, which were released very recently. These Android-base smartphones were developed through collaborations with Google, and were very well accepted by the market. However, it remains to be seen whether the commercial success of these two models would be enough to restore Motorola's lost glory.

Sony-Ericsson

Sony-Ericsson was formed by a 50:50 joint venture of Sony (Japan) and Ericsson (Telefonaktiebolaget LM Ericsson, Sweden). With Sony's brand power and business know-how in the electronic devices market and Ericsson's mobile communications technology, the joint venture ranked third in the global market soon after its launch. Sony-Ericsson's differentiation strategy had mainly focused on emphasizing the superior multimedia performance of its products. However, Sony-Ericsson began to lose its competitive edge when other companies also introduced popular multimedia mobile phones. Sony-Ericsson's decline picked up speed due to stagnation in the western European market, which the company heavily relied on; this directly damaged the company's overall performance. To make matters worse, Sony-Ericsson had difficulties in entering emerging markets because its product portfolio was mainly composed of expensive high-end devices.

By the end of 2010, the objective of Sony-Ericsson was to save 880 million Euros from operating expenses to cover up the losses and to secure liquidity. To meet the objective, SonyEricsson has been undergoing a major restructuring process since 2008, and has replaced Hideki Dick Komiyama with Bert Nordberg, former head of Ericsson's US technology division, who took over as the new CEO and president. However, given the present conditions - SonyEricsson's global market share of 8.1% in the first quarter of 2008 dropped to 4.7% in one year, and its operating margin in the second quarter of 2009 marked only 16.2% - not too many people believe Sony-Ericsson will bounce back.

STAGGERING NOKIA

Nokia's history dates back to the nineteenth century. The Nokia Company (Nokia Aktiebolag), Finnish Rubber Works Ltd. (Suomen Gummitehdas Oy), and Finnish Cable Works Ltd. were established in 1865, 1898, and 1912, respectively. These companies merged in 1967, and the current Nokia group was established. When the group was first formed, Nokia engaged in very diverse business fields, including rubber, tires, electricity cables, paper pulp, and so on. Jorma Ollila, who was appointed CEO in 1992, saw this as a misuse of the group's resources and decided to focus on one business segment. This decision led Nokia to become the world's leading company in the mobile communications and multimedia sector. Nokia quickly overtook the market leader Motorola, and dragged them down to second place in 1998. Since then, Nokia has remained the undisputed leader in the mobile phone industry.

There are two driving forces behind Nokia's success. First, Nokia dominates not only the developed markets but also emerging markets such as Asia, the Middle East, and Africa. In fact, Nokia's presence is stronger in the emerging markets. Nokia's 2008 second-quarter market share of 47% in the Asian market and 66% in the African market indicate how much influence the company has in these markets. Unlike developed markets, which are mostly facing stagnation in the mobile phone industry, such emerging markets are expected to maintain an annual growth of over 4%. Successful market diversification helped Nokia keep its place as the market leader despite a strong euro and the economic crisis. One of the unique characteristics of the mobile phone market in the emerging countries is that the manufacturers are themselves responsible for distribution most of the time. Nokia already possesses its own distribution channels in the major emerging markets (100,000 in India, 120,000 in Africa, and 60,000 in China), while many other manufacturers are facing difficulties in even entering these emerging markets because they lack distribution channels.

Second, Nokia's superior manufacturing capabilities are also responsible for its success. According to Gartner, Nokia's sales volume was 15 million in the second quarter of 2009; this was higher than the aggregated total of the other Big 5 companies, even though Nokia had lost 8.9% points of its market share in that quarter. This gap in sales volume provides much stronger economies of scale for Nokia, which in turn enables more cost reduction. Nokia applied the platform strategy to its manufacturing system from 2000, and is currently pushing toward the standardization of its hardware components by introducing the MIPI (Mobile Industry Processor Interface). Nokia also aims to standardize the software for its devices by building all operating platforms based on the Symbian operating system (OS). Nokia now possesses an even stronger manufacturing competence to supply a wide selection of devices at lower prices.

In August 2007, Nokia announced the launch of Ovi, its new service platform. Ovi was launched to extend Nokia's reach, and to re-position itself as a web platform service provider rather than a simple device manufacturer. Further, Nokia restructured its existing four business groups (mobile phones group, multimedia group, enterprise solutions group, and networks group) into three new business units in January 2008: device unit, service & software unit, and market unit. This move was a clear indication of Nokia's determination to become a platformbased service and software provider. After restructuring internal organizations, Nokia went on to acquire companies such as NAVTEQ (a navigation software manufacturer) and Loudeye (the leading music content provider).

Until around 2005, Nokia's position as the market leader seemed unshakeable. However, the recent changes in the global market put Nokia in a difficult situation. Nokia's overall market share has been decreasing from the time when it recorded a high of 40.4% in 2007, and its disparity with SEC (which had been almost up to 30%) is also continuously decreasing. Nokia is losing market shares in high-end markets where manufacturers specializing in smartphones are cutting into Nokia's share of the market. Ironically, the problem lies with Nokia's platform strategy, which was the driving force of its strong manufacturing ability. The platform strategy enables the production of many different devices on a single platform, thus greatly reducing cost. However, when Nokia wants to produce a fundamentally new device, the company has to rebuild the whole platform, which could take more than two years to complete. A platform strategy lacks flexibility in unpredictable conditions. Despite all its market power and resources, Nokia was not the first to release the full touchscreen phone. In addition, the success of Apple's iPhone and App Store, together with the recent surge of Google's Android-based smartphones, made inroads into the potential customer base of Nokia as a web platform provider. As a result, both Nokia's year-to-year sales and market share decreased by 12.4% and 8.9%, respectively, in the second quarter of 2009. Symbian's market share in the OS market also experienced a significant decrease from 63.5% in 2007 to 52 .4% in 2008. Nokia is taking various measures such as reducing production, announcing temporary layoffs, and increasing investments in high-end device developments, in an effort to turn the status around.

THRIVING SAMSUNG ELECTRONICS

Samsung Electronics Corporation (SEC) was the first Korean company to produce its own mobile phones. The company began its domination of the Korean domestic market in 1994 with the release of the Anycall brand of mobile phones. The company quickly extended its reach to the global market. It built up technological development and product design capability with amazing speed. With its accumulated capability, SEC is now accepted as a notable mobile phone manufacturer across the world.

As the mobile phone business of SEC developed and its markets began to mature, the company actively transferred its factories overseas, in order to maintain the cost competitiveness of its products. Samsung moved most of its factories to locations where cheap labor was readily available, except for the one factory in Gumi, Korea, where SEC manufactured its premium products. The new factory locations included Tianjin, Shantung, and Xien Jien in China, and Haryana, India. The factories set up in China and India were specifically intended to manufacture low-price devices. The contribution of the Gumi plant to total production volume gradually decreased from 63.3% in 2006, to 52% in 2007, and then to 34.7% in 2008. Samsung also actively adopted the platform strategy of Nokia to further reduce costs. As a result, the average selling price of Samsung mobile phones constantly dropped, reducing the disparity between SEC and Nokia from USD 38 in 2007 to USD 24 in the fourth quarter of 2009.

Samsung, which had always aimed to overtake Nokia and become the global leader, is currently facing another challenge, as the market is shifting to smartphones. In the North American market, Samsung sold 2.5 million Black Jack handsets through AT&T and 1.5 million Instinct handsets through Sprint in 2008. According to Gartner, SEC had a market share of 4.2% in the smartphone market, selling 1.6 million devices in the fourth quarter of 2008. This was a 2.6%) increase from 1.8% in the fourth quarter of 2007. One of SEC's most recent moves was the unveiling of the S 8500 Wave handset at the Mobile World Congress (MWC). Wave is the first handset operating on the Bada OS that was developed by SEC. Bada and Wave were both part of SEC's initiative to develop its own set of unique standards encompassing handsets, operating system, and an app store. Samsung is currently aiming at sales of 10 million smartphones operating on Bada and developing at least 1 ,000 applications that could run on the platform by the end of 2010.

THE RISE OF SPECIALIZED SMARTPHONE VENDORS

The sluggish economy seems to have had little effect on manufacturers specializing in smartphones. Even as the overall mobile phone market was slowing down, they showed impressive growth rates. Apple of the US, RIM of Canada, and HTC of Taiwan had the most outstanding results. Their market share tripled since the third quarter of 2007, adding up to 5.4% of the total mobile phone market in the second quarter of 2009. The average growth rate of these companies in the same period reached 15.9%.

Research In Motion

The Canadian communication device manufacturer, Research In Motion (RIM), which was established in 1984, quickly became the leader in the smartphone market after it released the BlackBerry. The most significant feature of the BlackBerry was its e-mail solution. BlackBerry users can send and receive e-mails regardless of where they are, allowing them to deal with pressing business matters faster. Users can also easily manage their schedule through the Outlook program, and chat with other people using the instant messaging service installed on BlackBerry. The beauty of this device was that users could do all of these functions even as they were striding down the sidewalk, far from any desktop computer (Kim, 2008). BlackBerry adopted the QWERTY keypad, and there was a track-ball in the center of the device (which performs the same functions as a mouse does for a PC); these features were meant to provide as much of a PC-like environment as possible.

Fortune selected RIM as one of the world's 100 fastest-growing companies in 2009. Even as Apple's iPhone generated a buzz in the global market, Rim outperformed the iPhone in the North American market in the first half of 2009, reclaiming its dominance in the US smartphone market. The BlackBerry is most commonly used by business people in North America and Europe, which are advanced markets in B2B solutions. There are about 19 million users across more than 130 nations. During the last three years, RIM recorded an average increase of 84% in earnings per share, and a 77% annual sales growth.

Apple

Apple Computer Ine, established by Steve Jobs and Steve Wozniak, started as a computer manufacturing company in 1977. Apple literally led the world into an era of personal computers by successfully launching the world's first desktop computers with a keyboard and a monitor (i.e., Apple I and Apple II). Apple was also the first to introduce the concept of a graphic user interface (GUI) through its Macintosh products. Such accomplishments made Apple a symbol of innovation in the computer industry of the twentieth century. Apple did have some difficult times in the early years of the twenty-first century, when several of its new products failed in the market, and Steve Jobs was driven out of the company. When Jobs returned, Apple got a fresh lease of life, and started launching a series of innovative products from 2007, such as the iPod (a portable MP3 player), Apple TV (a multimedia device for households), the iPhone (a smartphone), and the iPad (a tablet computer). The iPod and iPhone especially were well received in the market.

Apple entered the mobile handset market, which had already been showing signs of saturation, for two reasons. First, the iPod was losing its initial glamour, and Apple was looking for a new growth engine. The sales of the iPod had been growing at a whopping annual rate of 200%, which was unquestionably the main driving force behind Apple's rapid growth. Since 2006, however, iPod's sales growth had slowed down to double-digit rates. Of course, this was only natural as the iPod had by then claimed more than 50% of the total MP3 player market. Nevertheless, Apple wanted to find its next growth engine that could replace the iPod in order to keep the company on the rise.

A more fundamental reason could be found in Steve Jobs' s forecast of the IT market. At "All Things Digital," a conference hosted by the Wall Street Journal on May 30, 2007, Jobs stated that the future of IT lies in mobile phones. This was in sharp contrast to what Microsoft's Bill Gates had forecast; he had previously claimed that personal computers would become the black hole of other IT-related devices. Although seemingly contradictory, these remarks clearly indicate that the players in the mobile phone and PC industries would soon cross paths. Apple's entry into the mobile phone market was not simply about developing new products to secure a future growth engine, but was really about forming a foundation to build competitiveness in the future IT market.

The iPhone attracted a great deal of attention, causing a huge impact on the mobile phone market upon its release. The first iPhone was sold in the US at 6 p.m. on June 29, 2007. Customers formed endless lines at outlets to buy the new device. A million units were sold in the first week, and the hype continues with its share of ups and downs. One of the reasons for the iPhone's success was its good looks, of course. Apple's service model, designed to maximize the user experience, was another main reason behind the scene. The iTunes service, which had made the iPod so successful, was applied directly to the iPhone. This caused a large number of customers who had already experienced and loved using iPod to shift to the iPhone and Apple's App Store.

Despite its grand opening, the iPhone fell a little short of the groundbreaking results that iPod had shown initially. Apple only sold 6 million units of the second-generation iPhone; it had expected to sell 10 million. The most critical reason for the insufficient sales was its excessively high price (USD 499 for the 4 GB model and USD 599 for the 8 GB model) compared to the average price of other mobile phones (USD 130 in 2007). To increase the sales of the iPhone, Apple gave up its profit-sharing model. Apple stopped receiving part of the profit from the mobile communication service providers, and cut down the price to USD 199 (4 GB) and USD 299 (8 GB). iPhone's market share leaped to 10.7% in the fourth quarter of 2008, from 5.2% in the previous year. The iPhone is currently sold in about 80 countries, including the US, Canada, France, Germany, Japan, Taiwan, and Korea.

HTC

Established in 1997, Taiwan's HTC started its business as an original design manufacturer (ODM) for other companies in the mobile phone business. HTC pioneered the smartphone market hand in hand with major OS providers, such as Microsoft and Google. HTC also maintained strategic partnerships with Intel, Texas Instruments, Qualcomm, and other global communications service providers (such as Orange, T-Mobile, Vodafone, Verizon, and NTT Docomo). Having accumulated sufficient knowledge and experience, the company unveiled its own brand of smartphones in June 2006.

Before unveiling its own brand, HTC showed remarkable growth by releasing a series of well-accepted products for other companies: the Microsoft smartphone (2002), the first Microsoft 3 G phone (2005), and the first Microsoft Windows 5.0 Smartphone (2006). Even after releasing its own brand of phones, HTC manufactured the first Google phone, Nexus One (2010). HTC was ranked number two on Business Week's Asian Top Information Technology companies in 2007, and number three among global IT companies in 2006. HTC annually invests 25% of its total profit for R&D and for developing its manufacturing capabilities.

PAST AND PRESENT OF LG ELECTRONICS

HISTORY OF LGE'S MOBILE PHONE BUSINESS

The history of LGE's mobile phone business can be traced back to 1995. On March 6, 1995, LGE held the launch of Hwa Tong, an analog handset. This event signaled LGE's entrance into the mobile phone industry. LGE initially organized their handset division under LG Information & Communications, Ltd, which merged with LGE in September 2000. LGE invested a substantial part of its retained earnings on information and communications throughout this process to build competence in a field with high growth potential. LGE's devotion toward the handset business began to produce concrete results by 2001. In the first quarter of 2001, the company recorded a 2.5% share in the global market, and joined the ranks of the global top ten for the first time. In the fourth quarter of 2001, LGE had sold 10 million handsets worldwide, and became one of the top eight global manufacturers.

With strong performance in 2001, we are now confident that the mobile handset business will be our core business in mid- and long-term perspective.

-LG Electronics Annual Report, Kim Jong-eun, Head of Mobile Communications Division

In August 2001, LGE decided to enter the European market, which primarily used the Global System for Mobile Communication (GSM). This indicated LGE's efforts to become a truly global company, as GSM accounted for 70% of the global market at the time. In the first quarter of 2003, LGE increased its market share to 5.2%, and jumped ahead of Sony-Ericsson to become the global number five. LGE achieved greater success in the third-generation WCDMA handset market. In the fourth quarter of 2004, its efforts to succeed in the future communications market paid off: LGE became the global leader in the third-generation WCDMA handset market. The capability to effectively embed multimedia technology into digital devices, which LGE had accumulated while manufacturing digital household appliances, made this possible. Its WCDMA handsets were ahead of those of its competitors in features such as visual communication and battery life.

The global success of the Chocolate Phone, introduced to the market in October 2005, proved LGE's global competitiveness. It became a global steady seller, with sales of 15 million units. LGE also became a pioneer in using touchscreen technology with the success of the Chocolate Phone. Since the Chocolate Phone was one of the earliest handsets with a full touchscreen, the phone's success made the technology popular in the mobile phone industry. Since then, LGE released many other highly successful handsets, such as the Shine Phone (with a stainless steel casing) and the Beauty Phone (with an aluminum case and a built-in 5 -megapixel camera). All these helped to push LGE up to the third place in the global handset market in 2009.

BEHIND THE SUCCESS OF LG ELECTRONICS

LGE has frequently used a strategy that simultaneously targets the developed markets (i.e., US and Europe) and the developing markets (i.e., Central/South America and Asia). Emphasizing both sides of the global market resulted in the balanced sales of LGE mobile phone devices in both developed and developing markets.

As part of this strategy, LGE is planning to open about a hundred LG Mobile brand shops to expose customers in developing markets to LGE's high-end goods. This was an alternative solution intended to promote the sales of its premium devices, since existing shops in developing markets were not suitable for emphasizing LGE's prestigious image. LGE plans to maintain its profit margin to a reasonable level by focusing on the sales of its premium handsets, and by preventing the "chicken game" price war that can occur - especially when the product portfolio is focused only on low-end products.

LGE performed particularly well in the North American market. A study of the North American market showed that SMS usage was more than doubling every year, along with the need to send e-mails using mobile phones. LGE took the findings of this study seriously, and released mobile phones equipped with QWERTY keypads to maximize messaging efficiency. The devices were dubbed Envy and Rumor. The Envy series generated sales of more than 8 million units in North America. Envy's successors such as Envy Touch and Xenon also became million-sellers. The success of these models in one of the most developed markets in the world contributed to LG' s reputation, and increased its market share in the North American market to 22.6%. This was the biggest success for LGE so far, considering that LGE's global market share was marked at 10.7% in the second quarter of 2009.

LGE's strategy of covering developed and developing markets simultaneously has another advantage: it increases the total supply, thus strengthening the economies of scale, and hedging the impact of various regional economic factors. In other words, diversifying the sales market reduced the risk of global operations. For example, LGE made up for the decrease in demand in the North, Central, and South American markets as well as the Korean market in 2008 (caused by the economic crisis) with the increase in sales in the Indian market. This contrasts with the strategies adopted by Motorola and Sony-Ericsson, which had either neglected developing markets or depended solely on a single market.

The strongest driving force behind LGE' s success, however, was its capability in developing innovative products through the active adoption of new technology and hardware designs. Its innovative products are certainly the most important reason behind LGE's success in the developed markets. The Prada Phone, the Chocolate Phone, the Shine Phone, and the Voyager all used innovative technologies that stood out from the competition: touchscreen technology, QWERTY keypad, stainless steel casing that had not been used before due to signal disturbance caused by the metal, and so on. These products set the trend in the global market with innovative technology and excellent design, contributing to building LGE's presence as a premium brand.

LGE has its own channels of substantial scale to efficiently deliver key components; this fact had a favorable impact on LGE's positioning of itself as a premium brand. The cost and quality of the different modules, such as the MP3 player and camera, are decisive factors in the total price of a handset, as the costs for these components take up most of the production cost. Having these components supplied at a low cost is crucial for mobile phone makers in order to cut down the price (Pak & Kim 2007).

LGE is a conglomerate with a highly efficient, vertically integrated organizational structure. The core components can be sourced from internal suppliers like LG-Philips LCD and LG Chemicals, allowing efficient cost management. Efficiently managed intercompany transactions within the group enabled LG to eliminate unnecessary costs, and this enhanced the price competitiveness of LG' s final products in the global market. The managers were able to accumulate know-how on effective intercompany dealings, and could strengthen the link between partner companies through repeated transactions. Transportation costs were also reduced because the locations were nearby. Another advantage of using internal suppliers is that suppliers tend to provide their best products, manufactured on the best infrastructure, without the need for too much tiresome negotiations or supervision, since a long-term relationship is assured (Williamson, 1975, 1983). Increased competitiveness derived from internal partnership (as in this case) is being successfully practiced in Korean conglomerates, where a top-down command approach is the norm; this makes it difficult for other companies with different cultural backgrounds to imitate this model (Barney, 1991). This is one of the factors behind the success of LGE and SEC that has enabled them to step ahead of their competitors in manufacturing complex multimedia handsets that require various modules with diverse embedded functions.

THE NEW ORDER IN THE SMARTPHONE MARKET

Smartphones, often referred to as the PC at your fingertips, require a whole new level of manufacturing capabilities compared to mobile phones. Hardware quality and distinguishable designs, which were the key success factors in the past, became less important. One of the key factors in making smartphones is to provide high-quality content services to the users. As most of the contents provided to smartphone users come in the form of various applications, this creates pressure on handset makers to supply an ample volume of useful applications. Applications, in turn, cannot operate by themselves. The need for a fast and reliable OS that can enhance the computing performances of smartphones has also greatly increased. The few companies with the capability to develop their own OS for smartphones gained a powerful voice in the transformed mobile phone market. All these new factors in the current smartphone market changed the competition, and made it much more complicated. In order to measure a company's competitiveness in the current smartphone market, a comprehensive evaluation is necessary that would encompass the hardware devices, OS, and applications offered by the company.

COMPETITION IN HANDSETS

The main contenders vying for excellence in the smartphone market include the traditional mobile phone manufacturers (Nokia, SEC, LGE, Motorola, and Sony-Ericsson) and the specialized smartphone manufacturers (RIM, Apple, and HTC). Nokia remains at the top among these players, with the highest market share, even though it is experiencing a sharp decrease in its market power. In order to overcome the situation, Nokia began to actively release smartphones in 2006, and upgraded its product portfolio to a higher level. Nokia's efforts to increase the portion of smartphone sales to over one-third of Nokia's total sales paid off. However, Nokia was a step behind its competitors in releasing smartphones, and had lost a substantial amount of market strength in North America, more than in other markets, where the demand for smartphones was increasing explosively.

Among the specialized smartphone manufacturers, RIM and Apple are growing stronger in the smartphone market, with HTC following closely behind. RIM provides strong enterprise solutions, and is well known in the North American market, although its high reliance on the North American market could also be its weak point. Nearly 80% of RIM' s total sales come from the North American market, and AT&T accounts for about half of these sales. Apple's remarkable growth is in part propelled by the Apple App Store, which is believed to be the most successful application store to date. The competence of the iPhone comes not only from the device itself, but also from the synergy created by its App Store. However, some worry that the closed architecture of Mac's OS and App Store, along with the iPhone's extremely limited hardware portfolio, will have a negative influence on the future growth of Apple. The Taiwanese smartphone maker HTC became more widely known to the public because of its Google Phone.

SEC and LGE, which are number two and three in the global mobile phone market, have released smartphones since the second half of 2008, and are currently holding on to relatively small market shares. Motorola and Sony-Ericsson, on the other hand, have kept from investing large sums in the smartphone market due to their ongoing restructuring.

COMPETITION IN OPERATING SYSTEMS

Smartphone users are very sensitive when it comes to choosing which operating system (OS) to use; this decision is just as crucial as deciding on the device itself. They demand that the computing performance of the OS is close to that of a PC, and they expect their use of the smartphone to be an extension of their PC usage experience. Therefore, it is very important for smartphone companies to equip their devices with a fast and reliable OS that can support a certain amount of workload with minimum errors. Currently, Nokia's Symbian, Microsoft's Windows Mobile, and Google's Android operating systems are competing to be loaded on to various devices, while RIM and Apple had developed exclusive operating systems for their devices.

A recent trend in the smartphone OS industry is the emergence of open source OS. An open source OS allows users to develop applications, using the software development kit (SDK) provided by the OS developers. Leaving the source codes of the software open to other developers would ultimately enable the open source OS to be upgraded faster, and would provide a wider variety of applications to consumers than the closed-source systems would. This is essentially why many analysts predict that Google Android would be the most successful player in the future. Strategy Analytics, a US market research company, projected that Google Android would increase its OS market share to 4.4% by the end of 2009, from its current market share of 0.5%. The Android OS aspires to be an open source OS, and is based on the Linux system, promising broad potential for further service development. LGE, SEC, Motorola, and SonyEricsson, along with HTC, are planning to or are already actively releasing smartphones using the Android OS.

Nokia, while gradually losing market dominance due to the surge of Android and iOS (Apple's OS), still dominates the smartphone market with a 45 % share, and is most likely to achieve the strongest economies of scale. Its decision to change from Symbian to an open source OS would certainly support its current strong market position. Nokia, however, has canceled its plans to release an Android handset due to fears of losing Symbian's market leadership.

COMPETITION IN APPLICATIONS

As the hardware and operating systems of smartphones are improving rapidly, the competition to provide various applications that run on smartphones is also receiving new attention. An app store refers to an online space where various applications are sold or provided free to users. Application developers, varying from huge corporations to individuals, can upload their products to an app store, which is then sold directly to users. The applications that are downloaded by the users can be used without any further processes. The profit generated from the sales of applications is shared between the app store operator and the software developer according to the terms of their agreement. The most distinct characteristic of app stores is the openness in developing applications: app store operators disclose their software development kit (SDK) to the public, and anyone can utilize the SDK to develop a new application, and commercialize it.

The current app store competition was initiated by the success of Apple's App Store. Apple's App Store opened in July 2008, and accumulated 1.5 billion downloads and 65,000 applications by July 2009. Companies running app stores are not limited to manufacturers specializing in smartphones such as Apple, RIM, and Palm. Major handset makers (such as Nokia, Samsung, and LG), OS developers such as Google and Microsoft, and mobile communication service providers (such as Vodafone, T-Mobile, and Verizon) are all currently operating app stores, or have plans to open an app store in the future. Although an app store is generally characterized by its openness from the point of view of the developers, the consumer's perspective of the extent of this openness varies, depending on the providers. For instance, only customers with Apple devices can use Apple's App Store, and their devices do not have access to other app stores. On the other hand, companies without their own app stores or mobile OS do not prevent their users from downloading applications from other companies' app stores. The recently opened LGE app store has also adopted this format. In certain other cases, companies with their own OS do not allow access to other users, but do permit their customers to access other app stores.

The importance of contents distribution can be clearly seen by comparing the market share and return on sales of the different mobile phone providers. The top three players of the market - Nokia, Samsung, and LG - had a total market share of 70% in the second quarter of 2009, but their return on sales was only about 10%. In contrast, RIM and Apple, with only 2.7% and 1 .9% market share, respectively, had return on sales of over 20% each. These differences occur due to the disparity between the cost of sales, sales expenses, and operating expenses for the two groups. The profit of traditional mobile phone manufacturers is mostly generated by hardware sales; manufacturing hardware, unfortunately, involves high cost of sales, high sales expenses, and high operating expenses. RIM and Apple, on the other hand, generate their profit not only from selling hardware but also from selling contents, which requires extremely low fixed and variable costs.

COMPETITIVENESS OF LG ELECTRONICS IN THE SMARTPHONE MARKET

Based on its strength in hardware manufacturing, LGE leaped to third place in the global mobile phone market in terms of global market share. Nevertheless, LGE' s competitiveness still remains insufficient to make it the top player in such a fast-evolving smartphone market. The OS for LGE phones are supplied by Google and Microsoft, and the LG Application Store is still in the early stages of development. The current conditions of LGE are well captured by the evaluation of the competitiveness of the smartphone makers in 2008 which showed that LGE was ahead of its competitors in hardware designs, WCDMA Chipset technology, and basic manufacturing capability. However, LGE was weak in areas such as software, intellectual property rights, and brand, signifying that the advantages of LGE in the smartphone market are limited to the capabilities the company already had in the traditional mobile phone market.

However, LGE has a few reasons to be optimistic about its future in the smartphone market. For instance, there are many ways to make up for the capabilities that are lacking, by cooperating with other companies. The success of Apple and HTC each gives inspiration, in rather contrasting ways. Apple had its strength in its OS and applications, but it had no previous handset manufacturing experience. Despite such circumstances, Apple achieved its success in the mobile phone market through its partnership with Hon Hai Precision Industry (an electronics manufacturing services company in Taiwan) that had mobile phone manufacturing ability. This was possible because providing fast computing experience is much more important for smartphones than simply providing good quality calls; this enabled the company to make up for the deficiencies in manufacturing capacity with OS and contents related capabilities. In contrast, Nokia, which enjoyed its cost competitiveness through the efficient platform strategy that no competitors could imitate, is currently struggling in the smartphone market.

On the other hand, HTC possessed competitiveness in hardware development and manufacturing, while being less competent in OS and application development capabilities. However, HTC was able to become number four in the global smartphone market as a result of its close ties with Microsoft since the beginning of its business. The cooperation with Microsoft strengthened its software competitiveness, which is a crucial element in developing smartphones. HTC learned to manufacture smartphone devices best suited for the OS provided by other companies, and supplied devices to companies (such as Sony-Ericsson and Palm) using Microsoft's OS. HTC currently manufactures devices under its own brand, using Google Android. While Apple's case indicates that software competitiveness is more important than manufacturing capacity, HTC s case indicates that a company with an excellent smartphone manufacturing capacity can thrive in the smartphone market through partnerships with software vendors.

Due to the multi-faceted competition in the smartphone market, it is hard for a single company to claim monopoly in all segments. A single company with all of the capabilities needed to create good smartphones - the capacity to manufacture high-quality handset devices, strong economies of scale in distribution, continuous innovation in hardware manufacturing capacity, the ability to develop and maintain a stable and user-friendly OS, and an attractive app store - is very unlikely to appear in the near future. It would be a much smarter move to find the right partners, as Apple and HTC did, in order to thrive in the smartphone market, rather than to try to cope with all of the problems single-handedly.

In this context, the recently initiated LG Enterprise Application Partnership Program to target the B2B smartphone market in North America is a notable initiative taken by LGE. The objective of this program is to provide differentiated software services to LGE's corporate clients, under close cooperation with thirteen partner companies, including Microsoft, Bloomberg, and Good Technology. Although this move shows that LGE is seeking to remove its weaknesses through partnerships, it does not imply that LGE will only focus on such a method. While LGE agreed to participate in creating the Wholesale Application Community (WAC) that will act as an open app store platform, it also clearly stated the commitment to expand its own LG Application Store. It is obvious that LG has chosen another direction when compared to Samsung, which is currently striving to create a standard of its own, and dreaming to foster its own mobile ecosystem. The future outcomes of these contrasting decisions by the two giants are already attracting interest.

EPILOGUE

Since launching its mobile phone business in 1995, LGE has recorded an annual growth rate of 32.4% in the first decade of the twenty-first century. LGE became the third-largest mobile phone manufacturer in the first half of 2009, with over 10% share in the global market. However, LGE cannot yet rest on its achievements in the highly uncertain environment of the global mobile phone market. As the smartphone rapidly expanded its presence in the mobile phone market, the structure of competition became more complex with handset devices, OS, and applications all coming into play. LGE suffered from low market share in smartphones due to the absence of competitive advantage in some of these areas. Competition among the participants is becoming fiercer as the global market landscape changes, along with the need to apply different strategies for manufacturing handset devices, developing OS, and providing applications.

LGE now needs to establish and effectively implement a new strategy in order to secure competitiveness in the smartphone market. Can LGE continue its success in the smartphone markets in North America and Europe with its current positioning? Maintaining LGE' s success or realizing an even higher goal depends on its future strategies, and their implementation. Changes taking place in the mobile phone market has already led, and will continue to lead, to seismic shifts in the industry. Companies reluctant to change have always fallen behind in the new order of competition.

What strategic decisions should LGE make in order to secure competitiveness in a short period of time, when a new business model centered on the smartphone is being established in the market?

Subject: Cellular telephones; Case studies; Globalization; Strategic management

Classification: 8650: Electrical & electronics industries; 9130: Experiment/theoretical treatment; 2310: Planning

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 89-115

Number of pages: 27

Publication year: 2012

Publication date: 2012

Year: 2012

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: Graphs Tables References

ProQuest document ID: 1037815157

Document URL: http://search.proquest.com/docview/1037815157?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 26 of 100

INTEREST RATE SWAPS AT HOLOGEN INC

Author: Dow, Benjamin L; Kunz, David

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Abstract:

Hologen Inc., a diversified medical technology company, currently operates in three business segments (Breast Health, GYN Surgical, and Skeletal Health). Hologen's CEO has suggested the company pursue an acquisition that would diversify its product line as well as increase its exposure in international markets. Hologen's vision is to become the world's largest pure-play women's health-care company. In order to achieve this status, Hologen would need to enter the diagnostic health-care segment of the industry and expand international sales. Hologen felt the quickest and more cost effective way to accomplish these goals was through an acquisition of an existing diagnostic company with an international clientele. The company Hologen is interested in acquiring is a British firm, Cybertech. Cybertech, a publicly traded company listed on the London Stock Exchange, has a current market capitalization of about 252 million British pounds. In order to make a tender offer for Cybertech, Hologen will need to borrow the equivalent of about $200 million dollars and is exploring three different borrowing alternatives. [PUBLICATION ABSTRACT]

Full text:

BACKGROUND

Hologen, Inc. is a diversified medical technology company that develops, manufactures, and distributes medical imaging systems and surgical products for serving the healthcare needs of women. The company currently operates in three segments: Breast Health, GYN Surgical, and Skeletal Health. The Breast Health segment offers breast imaging products. This segment also develops a breast imaging platform to produce 3D images. The GYN Surgical segment offers a minimally-invasive procedure that allows physicians to treat women suffering from excessive menstrual bleeding; and a form of permanent female contraception intended as an alternative to tubal ligation. The Skeletal Health segment assesses the bone density of fracture sites and the bone density of heels as well as an extremity MRI for detecting rheumatoid arthritis and orthopedics. Hologen, Inc. sells its products through a combination of direct sales and service force, and a network of independent distributors and sales representatives primarily in the United States and Asia. The company was founded in 1987 and is headquartered in San Francisco, CA.

The breast health segment is Hologen' s largest division, contributing to about 60% of sales. The majority of revenues in the breast health division are derived from the sale of imaging devices, with digital imagining driving sales. Over the past few years, sales from the breast health division have been expanding due to a shift from analog to digital imaging by hospitals and clinics. Hologen's GYN surgical division has been performing steadily. The established sales force with strong connections to OB/GYN physicians has proven effective at delivering consistent 7%-8% revenue growth over the last 5 years. However, this division is the smallest in terms of revenue contribution (only about 15% of total sales). Hologen's skeletal health segment, which represents about 25% of total revenue, has come under pressure from lower reimbursement rates and the company is anticipating a decline in revenue growth from this division over the next few years.

Even though Hologen is well positioned in the digital mammography segment, with a market leading 65% share in the United States, the company is concerned this area of business is becoming saturated. Contributing to declining sales is the gap or extension of the replacement cycle by hospitals as they continue to cut capital spending on many big-ticket devices, such as digital imagers.

THE SITUATION

During the first week of 2011, Hologen's CEO John Rollins was reviewing the most recent fourth quarter financial statements. The results were disappointing. Revenues were down 8%) for the quarter and this mirrored the full-year results in which sales were down almost 3%, mostly due to weaker results from the breast health segment.

To date, Hologen's current strategy for long-term growth has been focused on the breast health segment. Hologen has continued to invest in research and development to maintain a competitive advantage in the digital market. In addition, the company has focused heavily on 3D imaging devices, which the company believes is the next frontier for digital mammography. This strategy has potential vulnerability as large conglomerates such as GE and Siemens also compete in this business segment. If either of these competitors decides to focus their vast research budgets on digital imaging, Hologen's superior technological advantage may be severely diminished. GE and Siemens could also use their broad product lines and large sales force to erode away Hologen's current leading market share position in this segment.

In response to the potential vulnerability to the breast health division, Rollins had suggested to Hologen's board that the company pursue an acquisition that would diversify its product line as well as increase its international exposure. Currently Hologen had very little access to developed markets such as Europe, which Rollins feels Hologen must penetrate in order to achieve consistent earnings growth over the long-run. Moreover, Rollins wants to position Hologen as a future player in emerging markets where the potential for growth is extremely promising. Rollins vision is for Hologen is to become the world's largest pure-play women's health-care company. In order to achieve this status, Hologen would need to become a participant in the diagnostic health-care segment and increase international sales. Rollins felt the quickest and more cost effective way to accomplish these goals was through an acquisition of an existing diagnostic company that had an international presence and ties to emerging markets.

The company Rollins is interested in acquiring is a British firm, Cybertech. Cybertech is a molecular diagnostic company whose main product line is T-Prep, the most widely used method for cervical cancer screening in both Europe and the United States. In addition, Cybertech had been expanding market penetration to include Asia, India and Brazil. Over the last year, they had seen some especially positive results from expansion into India. About a month ago, Rollins was at a major medical conference in Las Vegas where he met Jim Burns, the CEO of Cybertech. They had briefly met at a reception where both had been presenting new products for the upcoming year. Rollins remembered that he had really liked Burns' vision for Cybertech' s role in the diagnostic screening procedure market. Burns had a philosophy for running a business that matched well with Rollins. The two had had dinner together and talked mostly about the challenges of the healthcare sector.

When Rollins had returned from the conference, he began to research Cybertech and found their sales were fairly predictable and the company had a number of other market leading products in the diagnostic segment in addition to the well-known T-Prep. Rollins had asked his CFO, Tim Scott to work with their investment bank and come up with a preliminary valuation for Cybertech. Rollins estimated that if Hologen were able to acquire Cybertech' s existing diagnostic business and strong international sales force, it would provide Hologen an opportunity to realize additional revenue benefits from cross-selling existing Hologen products via Cybertech' s sales network. Furthermore, Rollins expected net margins might also improve by eliminating some duplicate research and development expenditures and lowering other costs.

Tim Scott's initial reaction to the proposed acquisition was centered on the price they would have to pay for Cybertech. With Cybertech trading at around 420 pence, up from 220 pence a year ago, the current market capitalization is 252 million pounds. Furthermore, the pound is trading at around $1.60, up from $1.40 two years ago. In US dollars, Cybertech market value is a little over $400 million. Scott casually mentioned he wished Rollins had thought of acquiring Cybertech a year ago when the US dollar equivalent market capitalization for Cybertech was under $185 million. The pound has been strengthening and Cybertech' s stock has almost doubled over the last year, partially due to the world economic recovery and partially due to Cybertech's recent success in India. Scott also noted that an acquisition of a public company would also have to include about a 15% to 35% premium in order to persuade the target's board of directors and current shareholders to approve the acquisition. Rollins, Scott, their investment banker and the board of directors had spent a few weeks performing due diligence on the Cybertech acquisition and had concluded Cybertech should move forward with an initial cash tender offer of 290 million pounds. Given Hologen's current financial position, the company would need to borrow an additional 125 million pounds (the equivalent of about $200 million) if Hologen wanted to make a cash offer to acquire Cybertech. Rollins instructed Scott to meet with their investment banker and determine the cost of borrowing an additional $200 million dollars.

THE TASK

The investment banker helping Hologen with the Cybertech acquisition had done some preliminary research and concluded that Hologen could raise $200 million dollars by issuing a 5% coupon bond (paid semi-annually) at face value with a maturity of 10 years. However, the investment banker also noted that at present, there was considerably more client interest in funding investment grade floating rate notes. Given Hologen's ?-rated credit quality, they could borrow $200 million for 10 years at a floating rate of 6-month LIBOR plus 1.5% with interest paid semi-annually. Tim Scott suggested that the riskiness of the international acquisition would lead Rollins to prefer fixed rate debt, even if floating rate debt is relatively more attractive at the present time. The investment banker suggested Scott should seriously consider the floating rate debt and he would try to find an appropriate party for an interest rate swap in order to take advantage of the current high demand for floating rate debt. Scott was a little uncertain about interest rate swaps but his investment banker assured him that the interest rate swap is more common that he might think. He remarked that the notional principal for interest rate swaps have grown from $12.8 trillion in 1995, to $48.8 trillion in 2000, to $128 trillion in 2005, to about $347 trillion in 2010. As interest rate swaps become more and more common place in the financial markets, the investment banker suggested Scott should stronger consider this possibility.

Two days later, the investment banker called Scott and reported that he found a company, LC Inc. who is able to borrow $200 million at a fixed rate of 6.1%> for 10 years but prefers floating rate debt to take advantage of the steep upward sloping yield curve and initially lower interest payments. Unfortunately LC Inc. is just below investment grade in terms of credit quality and they are not able to fully take advantage of current favorable market conditions for floating rate debt. It would cost LC Inc. 6-month LIBOR plus 3.4% to borrow in the floating rate market.

The investment banker suggests Hologen and LC Ine enter into an interest rate swap that can be set up by National Bank who will act as a dealer in the interest rate swap. Hologen will pay National Bank a fixed 3.1% interest on $200 million dollars over 10 years in exchange for the 6-month LIBOR rate interest on $200 million. National Bank will also have an agreement with LC Inc. LC Ine will pay National Bank 6-month LIBOR rate interest on $200 million in exchange for a fixed rate of 3% interest. The cost of financing for Hologen and LC Ine as well as the swap terms are summarized below:

Tim Scott went back to his office to prepare a presentation of the three different alternatives available to Hologen in terms of raising the $200 million needed for the acquisition. Scott must include the details of the fixed rate bond, floating rate note and interest rate swap in such a manner that Rollins and the Board would be able to make an informed decision. Scott listed a few major discussion points that needed to be covered in his presentation. Considering that Rollins and the Board would almost certainly want to borrow at a fixed rate, Scott had to make sure his presentation explained in some detail why it would be better for Hologen to issue a floating rate note and engage in an interest rate swap.

1) Why might investors prefer floating rate notes over a fixed rate bond?

2) Why might Hologen prefer to issue fixed rate bonds rather than floating rate notes?

3) What is the anomaly in current market conditions that makes an interest rate swap a viable option for both parties involved in the swap?

4) If Hologen issues a floating rate note and engages in the interest rate swap, what is the net cost of financing for Hologen after the interest rate swap? How does this compare to the cost of financing if Hologen issues a fixed rate bond?

5) If LC Ine issues a fixed rate bonds and engages in the interest rate swap, what is the net cost of financing for LC Inc. after the interest rate swap? How does this compare to the cost of financing if LC Ine issues a floating rate note?

6) What is National Bank's role in the interest rate swap and how much will they be compensated for their involvement in this transaction?

7) How does the interest rate swap reduce the cost of borrowing for both parties and allow the intermediary to be compensated?

Subject: Interest rate swaps; Medical technology; Case studies; Acquisitions & mergers; Globalization

Location: United Kingdom--UK

Classification: 9175: Western Europe; 3400: Investment analysis & personal finance; 9130: Experiment/theoretical treatment

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 117-124

Number of pages: 8

Publication year: 2012

Publication date: 2012

Year: 2012

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 Diagrams Graphs References

ProQuest document ID: 1037815151

Document URL: http://search.proquest.com/docview/1037815151?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 27 of 100

MURPHY WAREHOUSE COMPANY

Author: Pesch, Michael J; Murphy, Richard T; Ahmad, Sohel

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Abstract:

Imagine that you are Richard Murphy Jr., the CEO of Murphy Warehouse Company, a family-run company that began over 100 years ago. You feel the weight of responsibility to maintain the financial viability of the company that is now in its fourth generation of family ownership. One of your biggest challenges is to understand how the company should adapt to a changing business environment while conserving the company's financial resources and protecting the core business model that has sustained it for so long. One major force in the current business environment is the sustainability movement, which focuses on the responsible use of natural resources. If you are Richard Murphy, you are trying to find the opportunities to adopt sustainable practices that also make financial sense to Murphy Warehouse Company. While you have successfully implemented several sustainable projects in your company, you are now faced with deciding to invest over a half million dollars in a stormwater project that presents an unusually long payback period. It is a complicated decision that involves high expense, multiple tangible and intangible variables, and a fair amount of risk that something might go wrong. What do you do? [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Richard Murphy Jr., CEO of Murphy Warehouse Company, sat at his desk and shook his head as he reviewed another stormwater bill from the City of Minneapolis for Warehouse 701. The bill was significant for the 22-acre facility: $17,000 on average, every three months, or $68,000 per year. Murphy thought to himself, "I'm literally pouring money down the drain - or in this case, the storm sewer!"

Murphy Warehouse Company (MWC) is one of the Upper Midwest's largest logistics companies. It is a family-owned private company that was founded in 1904. Richard Murphy Jr. represented the fourth generation of family leadership of the company. MWC operated twelve warehouses in the Twin Cities metropolitan area that together total 2.6 million square feet of space, of which four are Murphy owned totaling 1.1 million sq. ft.

In 1987, amendments to the Clean Water Act imposed a federal mandate on local governments to conduct stormwater quality management to protect against pollutants from stormwater entering rivers and lakes. The federal mandate provided no funds for local governments to build and operate the infrastructure to manage stormwater. To cover their costs, municipalities resorted to user fees to pay for their stormwater systems. In 2005, Minneapolis started assessing a stormwater fee on all property owners, including residential.

Warehouse 701 was the oldest of MWC's four owned warehouses. Original buildings were constructed on the site in 1904, with several expansions over the decades leading to the present 550,000 square foot facility. MWC's other three warehouses were built in the 1990s and included large on-site stormwater retention basins to hold stormwater and filter out pollutants as the water seeps slowly into the ground. These basins were built to conform to building codes and integrated into the site designs for the construction of the new warehouses. The newer warehouses could handle all of their stormwater and municipal stormwater fees were not assessed on these properties.

Warehouse 701 was a different situation. Ninety-five percent of the 22-acre site was comprised of water-impervious roof or pavement that generated tremendous volumes of stormwater runoff from a typical July thunderstorm. Most of this water was diverted into the Minneapolis storm sewer system, costing MWC tens of thousands of dollars per year.

Murphy did his research and found an engineer who could design and construct a stormwater system for Warehouse 701 at a cost of $580,000. It would include a large retention basin, three rain gardens to absorb water runoff, and modified roof outlets to manage stormwater surge.

The challenge for Murphy was determining whether the high cost of the project and the longer than normal payback period could be justified. Sure, the project would, for the most part, eliminate the quarterly storm sewer bills from the City of Minneapolis. And processing stormwater on-site also was the environmentally responsible thing to do. But spending well over a half million dollars was without a doubt a steep price to pay, especially when there were so many other ways to invest in MWC's future. At what cost should Murphy say the project should be rejected?

BACKGROUND

Due to increased awareness of environmental issues over past few years, consumers are not only demanding environmentally friendly products and services but are also expecting that companies run their businesses by taking into account the environmental impact of their operations. Corporations are responding to this demand by evaluating ways to adopt the best practices in environmental sustainability. Increasingly, more companies are embedding environmental performance and other green values and measures into their core business goals, making their environmental sustainability plans and achievements public, and requiring that their suppliers incorporate green practices in their operations.

Recently, Wal-Mart announced a plan to develop a Sustainable Product Index that will measure sustainability of each product the company sells. This plan requires a Wal-Mart supplier to complete a self-assessment survey in four areas: energy and climate, natural resources, material efficiency, and people and community. The information from the suppliers will then be combined with the information about the lifecycle of the product (from raw materials to disposal) to create an index representing environmental sustainability of each product. The purpose of this index is to provide a rating system so that customers can understand environmental implications of the products they buy (Quinn, 2009).

Starbucks has taken a firm stand on environmental issues. Currently, Starbucks cups are recycled in Seattle and composted in San Francisco, but neither process is available in many locations. Starbucks aims to make its cups recyclable or compostable by 2012 in all locations. To understand relevant issues, Starbucks held a 'cup summit' in 2009 where attendees included the Starbucks task force, cup manufacturers, beverage partners, recyclers, local municipal governments, environmental non-governmental organizations (NGOs), and experts from academia (Yepsen, 2009).

Many companies that are much smaller than Wal-Mart and Starbucks want to make environmentally friendly changes to their business practices, but the high costs of many of these proposals require some difficult tradeoff decisions. This makes environmental sustainability especially difficult for small businesses that are struggling to survive in the competitive marketplace. Yet most of these companies can ill-afford to ignore the opportunities and competitive requirements that sustainable business practices present. The high cost of energy, industry trends, and direct pressure from customers are persuasive forces that push company leaders to think deeply and creatively about how sustainability fits with their future business strategies. This is especially true in the transportation/logistics industry. In the United States, transportation accounted for about 28% of energy consumption and 33% of carbon dioxide emissions in 2007 (www.eia.doe.gov; http://ftp.eia.doe.gov).

For this reason, focusing on business supply chains, particularly the management of warehouses and distribution networks, can yield significant progress in sustainability. This view is shared by many experts and corporate leaders, including Brian Walker, CEO of furniture maker Herman Miller, who asserts, "you are only as green as your supply chain" (Walker, 2008).

Warehouses are key players in the supply chain networks of countless businesses and industries. According to industry statistics for 2009, there is five billion square feet of warehousing space in the United States-sixteen square feet for every person in the country. The total annual cost of warehousing services in the United States is approximately $122 billion (or $407 per person).

Warehouses significantly impact the cost, efficiency, and environmental effects of supply chain systems. They occupy vast tracts of land that turn water-absorbing soil surfaces into water-impermeable roof and asphalt. They often feature acres of surrounding green space that require mowing, watering, fertilizing, and the application of herbicides and pesticides. Warehouses also are heavy users of energy to light, heat, and sometimes cool hundreds of thousands of square feet of interior space. They are often major contributors to the "urban heat island" effect where buildings and parking lots absorb and retain heat from the sun and raise the overall average temperature of metropolitan communities.

Increasingly, new warehouses are being built to comply with environmental standards developed by the U.S. Green Building Council (USGBC). For example, ProLogis, a global developer and manager of distribution facilities, wants all of its new developments in the U.S. to be built according to USGBC standards and to be considered for LEED (Leadership in Energy and Environmental Design) certification (Rizzo, 2008). Some existing warehouses are also being revamped to make them more efficient, with modifications such as additional insulation and long gridded windows to ensure ample natural light (Cohen, 2007).

SUSTAINABILITY PROJECTS AT MURPHY WAREHOUSE COMPANY

In the mid-1990s, Richard Murphy took a hard look at MWC's operations and saw several opportunities to capture cost and efficiency advantages for his company by investing in sustainable projects. Murphy knew he had a business to run, so he wasn't plunging headlong into just any sustainable or "green" idea that came along. Financial analysis of any investment proposal had to be a key driver for decisions that involved company resources. But for Murphy and MWC, financial analysis was accompanied by a strong culture of making decisions for the long-term, being a good corporate citizen, and doing the right thing. Just because a project didn't have a 2-3 year financial payback didn't necessarily exclude it from consideration.

CONVERSION OF LAWN TO PRAIRIE

In one of his first ventures into sustainable practices, Murphy looked at the costs of maintaining 10.19 total acres of lawn that would surround two of his new warehouse facilities in Fridley, Minnesota (Table 1).

Besides being MWC's CEO, Murphy was also formally trained as a landscape architect and taught design and business as an adjunct professor at the University of Minnesota's College of Design for over 23 years. He knew the advantages of replacing traditional Kentucky bluegrass acreage that was expensive to grow and maintain, and required wasteful sprinkler irrigation, with native prairie flowers and grasses. He contacted Prairie Restorations, a company that specializes in installing and maintaining native prairies. Together, Murphy and the people from Prairie Restorations replaced six acres of lawn with native prairie, with an installation cost of $6,575 per acre.

(To maintain aesthetic appearances, not all acreage can be converted from lawn to prairie. One of the drawbacks of prairie landscaping is the sometimes ragged and unkempt look it conveys to passersby along roadways, sidewalks, and driveways. Murphy and Prairie Restorations were careful to design the prairie space so that it was bordered by a flowing strip of lawn so the prairie would be defined, contained, and the public would understand that it's "supposed to be that way." Designing prairie areas in this way is called "enframing.")

The prairie landscape provided immediate cost savings to MWC. Although low maintenance, native prairie does require occasional attention, including prescribed burning, exotic species control, wildflower maintenance, and dormant mowing. The per-acre annual cost of maintaining MWC's prairie areas was $707 - less than 14% of the cost of mowing, watering, and fertilizing Kentucky bluegrass.

In addition to this prairie project and two others, MWC captured several benefits by planting 732 trees on its warehouse campuses. The trees helped reduce the "urban heat island" effect by cooling the air through respiration and by shading the surrounding ground surfaces. They also provided attractive buffers between the warehouse operations and adjacent commercial properties and residential neighborhoods. The trees and the prairie plantings also attracted a variety of wildlife, including waterfowl, raptors, song birds, deer, and fox.

DOCK BLANKETS

Another sustainable practice at MWC was the adoption of dock blankets for covering steel dock plates that extend from the outdoor wall to ten feet inside the loading areas in the warehouses. The steel plates caused significant heat loss by 1) transferring winter's cold outdoor temperatures directly into the warehouses and 2) because steel on steel joints are impossible to keep tight against wind penetration. Murphy thinks of these steel dock plates as "ice cubes" sitting inside the building, cooling the space just like ice in a drink.

To combat the heat loss problem, the operations team custom-ordered insulated blankets of the type used by the furniture moving industry. The blankets were sized to fit the dock plates in the warehouse, and during winter the employees covered the dock plates whenever they weren't being used, even for only ten minutes. Immediately, MWC's heating costs fell by ten percent and the temperatures around the dock areas increased by ten or more degrees, a result which pleased the dock workers. The relatively minor investment in dock blankets was paid back within days by employee comfort and within a few months from heating bill savings.

LIGHTING

Lighting is an area where dramatic improvements in energy efficiency in the past fifteen years have prompted MWC to repeatedly invest in lighting upgrades to capture newly available savings. For example, MWC recently replaced lighting systems that were only five years old because the new "T-8" fixtures reduced lighting expense by nearly 20 percent over the old fixtures. (The five-year-old system was considered "state of the art" at the time it was installed.) The payback period on the new T-8 lighting systems was only 14-16 months, which reinforced Murphy's belief that it pays dividends to stay on top of new energy saving technologies.

Another important measure taken by MWC to improve lighting performance was painting warehouse ceilings white so light was reflected downward from the ceiling instead of being absorbed. Historically, warehouses were almost always built with dark grey ceilings.

HEATING SYSTEMS

A significant challenge in heating large high-ceilinged spaces is maintaining sufficient warmth near the floor because of the fact that warm air rises and cold air falls. In high-ceilinged warehouses where the air is not well circulated, the air temperature at the ceiling can be 8-10 degrees warmer than on the floor.

To save on heating costs, Murphy installed numerous "High Air Turnover" (HAT) furnace units on the floor of one warehouse. These HAT units differed significantly from conventional industrial ceiling-mounted furnace blowers that move heated air around the upper half of the warehouse, but are not very effective at circulating air from the ceiling to the floor. HAT units stand two stories tall on the warehouse floor and pull cold air from the floor, heat it and then blow it at ceiling elevation, creating a circulation pattern that repeatedly turns the air and significantly eliminates temperature stratification.

Each of the HAT units was capable of heating 50,000 square feet of space. The installation of HAT units is an example of a low-technology solution for achieving sustainability goals. There is nothing high-tech about HAT units; they are just engineered to move air more effectively to achieve energy cost savings.

FUTURE PLANS FOR SUSTAINABILITY

Richard Murphy planned to move forward to make sustainability an important part of keeping MWC competitive and profitable. From his heavy involvement in the business community and his conversations with clients, he knew that sustainability was increasingly becoming a major criterion in winning new business. More customers were looking for partnerships with logistics providers who could complement their own green initiatives, and sustainability was becoming inextricably linked to economic performance criteria.

LEED CERTIFICATION

Murphy was currently working with a consultant to prepare and submit MWC's application for LEED Gold certification. According to Wikipedia, "The Leadership in Energy and Environmental Design (LEED) Green Building Rating System, developed by the U.S. Green Building Council (USGBC), provides a suite of standards for environmentally sustainable construction. The hallmark of LEED is that it is an open and transparent process where the technical criteria proposed by the LEED committees are publicly reviewed for approval by the more than 10,000 membership organizations that currently constitute the USGBC."

There are four levels of LEED certification: Certified, Silver, Gold, and Platinum. While many companies seek LEED certification, as few as 13 percent of these ever complete the process. "Gold" is the second highest level of LEED certification and a distinct accomplishment that MWC could use to solicit new customers.

ENERGY STAR CERTIFICATION

As part of the LEED certification process, it was discovered that MWC's facilities also met the EPA' s Energy Star Certification, with scores in the 99th percentile for being "Most Efficient." According to Wikipedia, "The U.S. (Environmental Protection Agency's) Energy Star program has developed energy performance rating systems for several commercial and institutional building types and manufacturing facilities. These ratings, on a scale of 1 to 100, provide a means for benchmarking the energy efficiency of specific buildings and industrial plants against the energy performance of similar facilities. The ratings are used by building and energy managers to evaluate the energy performance of existing buildings and industrial plants. The rating systems are also used by EPA to determine if a building or plant can qualify to earn Energy Star recognition."

ISO 14000 CERTIFICATION

Another MWC green initiative was the preparation and submission for ISO 14001 certification as a green practitioner. According to the International Organization for Standardization (ISO), the major objective of the ISO 14000 series of norms is "to promote more effective and efficient environmental management in organizations and to provide useful and usable tools-ones that are cost effective, system-based, flexible and reflect the best organizations and the best organizational practices available for gathering, interpreting and communicating environmentally relevant information." The goal of being ISO 14000-certified is the improvement of environmental performance.

NEW GREEN INITIATIVES

Richard Murphy was confident that the sustainable measures his company had taken so far were sufficient to achieve LEED and ISO 14001 certification. But he also knew that there were other emerging green initiatives he might consider adopting.

In the current economic and political environment, there were several tax incentives being passed by Congress as part of stimulus spending packages to promote new energy technologies in solar-generated power, wind energy, and geothermal heating and cooling. Murphy was currently in discussions with the local utilities to determine if he could benefit from any rebates or incentive programs to adopt one or more of these new technologies.

As he pondered the future of his company, Murphy knew that as leader of a familyowned company, he was part of a tradition of taking the longer-term perspective. He wasn't so quick to reject investment projects that had payback periods beyond the typical 3-4 years that public companies needed before approving an investment. He knew that sustainable projects were part of building long-term competitiveness, and it was okay if it took a while for a project to generate a positive return if it was part of MWC's strategic plan.

THE STORMWATER PROJECT: APPROVE OR DECLINE?

Despite his long-term orientation toward his company's strategic investments, Murphy knew he had to make wise decisions in the short-term to protect the finances of his company. Spending $580,000 on the stormwater project was a major commitment of company resources, especially for a property that was over 100 years old. Murphy knew that this cost figure was only an estimate. What if the project, once underway, encountered unforeseen challenges such as soil issues, complications with utilities, etc. that involved additional cost?

Based on information from his Chief Financial Officer, Murphy knew that though the project cost was $580,000, an available 21% first-year tax credit would result in a net project cost of $458,200. Other financial information is provided as follows:

* The $458,200 net capital requirement would be financed with the company 's cash reserves.

* A 5% risk-free discount rate is assumed.

* The $580,000 project is depreciated at a rate of 13.333% per year over 15 years.

* Annual cash savings is assumed to be $68,000 in the first year, with annual increases of 5%.

* The corporate tax rate on taxable income is 42%.

* Aside from the initial project cost, no additional fixed or variable costs are assumed.

Richard Murphy also knew that during the two-month construction period, MWC's operations efficiency would be negatively impacted by disruptions in normal warehouse activities. Additional costs might have to be absorbed to minimize these disruptions. For example, construction holes might have to be covered and uncovered to enable truck traffic at night and weekends when construction wasn't taking place. Also, overtime might be required to maintain customer service levels in the midst of the work disruptions. As Murphy thought about his dilemma, he looked out the window and saw a dark thunderhead cloud looming on the horizon, promising another deluge.

Subject: Sustainable development; Warehouses; Case studies; Family owned businesses

Location: United States--US

Company / organization: Name: Murphy Warehouse Co; NAICS: 493110

Classification: 9190: United States; 5160: Transportation management; 9130: Experiment/theoretical treatment; 9520: Small business; 1540: Pollution control

Publication title: Journal of the International Academy for Case Studies

Volume: 18

Issue: 3

Pages: 125-133

Number of pages: 9

Publication year: 2012

Publication date: 2012

Year: 2012

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

ProQuest document ID: 1037815149

Document URL: http://search.proquest.com/docview/1037815149?accountid=38610

Copyright: Copyright The DreamCatchers Group, LLC 2012

Last updated: 2013-09-11

Database: ABI/INFORM Complete

Document 28 of 100

CASE STUDY: When Vibram couldn't meet demand for its hot new shoes, counterfeiters stepped in

Author: Alsever, Jennifer

ProQuest document link

Abstract:

In the spring of 2010, a pair of shoes arrived at the Franklin, MA, warehouse of Vibram USA. A customer was demanding a refund for a pair of the company's popular FiveFingers running shoes. But the shoes, which were marred by split seams and separating soles, were fakes. Over the next two weeks, the warehouse received 50 more pairs of bogus shoes, all with the same problems. It wasn't hard to see how customers had been fooled. The counterfeits almost perfectly mimicked Vibram's colors, styles, and logos; they even arrived in Vibram boxes with perfectly rendered return-shipping labels. Tony Post, CEO of Vibram USA, did some investigating and learned the extent of the problem: More than 100 Web sites had flooded the market with phony FiveFingers. It was clear he had a huge problem on his hands. Vibram, in Post's view, had two issues to confront. It needed to stop the fakes. And it had to get more shoes into stores.

Full text: Not available.

Subject: Shoes & boots; Demand; Counterfeiting; Corporate profiles; Black markets; Web sites; Case studies

Location: United States--US

Company / organization: Name: Vibram; NAICS: 316999

Classification: 5250: Telecommunications systems & Internet communications; 1110: Economic conditions & forecasts; 9110: Company specific; 8620: Textile & apparel industries; 9190: United States

Publication title: Inc

Volume: 34

Issue: 2

Pages: 87-89

Number of pages: 3

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Section: STRATEGY

Publisher: Mansueto Ventures LLC

Place of publication: Boston

Country of publication: United States

Publication subject: Business And Economics--Small Business

ISSN: 01628968

CODEN: INCCDU

Source type: Magazines

Language of publication: English

Document type: Feature, Business Case

Document feature: Photographs

ProQuest document ID: 923769603

Document URL: http://search.proquest.com/docview/923769603?accountid=38610

Copyright: Copyright Mansueto Ventures LLC Mar 2012

Last updated: 2014-04-12

Database: ABI/INFORM Complete

Document 29 of 100

Effects of business environment on international retail operations: case study evidence from China

Author: Yu, Wantao; Ramanathan, Ramakrishnan

ProQuest document link

Abstract:

Purpose - The purpose of this paper is to investigate the impacts of the business environment on operations strategy encompassed by competitive priorities in China's retail sector. Design/methodology/approach - This is a case study of a multinational retailer to understand how the company develops appropriate operations strategies to survive in the competitive and dynamic Chinese business environment. Findings - The study identifies that companies intending to expand their businesses in emerging markets face many challenges in the new business environment, and that various dimensions of the business environment (e.g. business cost, competitive hostility, and environmental dynamism) affect the development of retail operations strategy. The strategy of flexibility is particularly important for international companies to survive in an increasingly dynamic and competitive environment. Foreign retailers need to be flexible and agile, adapting to the Chinese market environment in many ways in order to succeed. Originality/value - This study seems to be the first in investigating the effects of the business environment on international operations strategy in the service (retail) sector, especially in the Chinese context.

Full text:

1. Introduction

An increase in the internationalisation of retail companies and markets appears to be one of the most significant trends in today's business environment ([43] Vida and Fairhurst, 1998). Large retail operations are increasingly international in their operations and orientation ([26] Myers and Alexander, 2007). The changing nature of the international business environment calls attention to the impediments to internationalisation ([13] Evans et al. , 2008). The retailer aiming to expand its business in a global market faces with the complexity and uncertainty inherent in the dynamic nature of the market, for example, new business environments, unfamiliar consumer preferences, location choices for performing business activities, and effective co-ordination of global operations ([10] Dawson, 2003; [4] Burt et al. , 2003; [43] Vida and Fairhurst, 1998). In today's environment the risks associated with strategic errors are significant ([10] Dawson, 2003), and companies are forced to constantly adapt to fast-changing circumstances. It is argued that an operations strategy is a vital ingredient for the success of many retailers ([22] Lowson, 2005; [50] Yu, 2011). Companies seeking to achieve success in global markets must formulate appropriate operations strategies that are suited to the external environments, and employ resources in ways that support these strategies ([34] Prasad et al. , 2001; [50] Yu, 2011). Therefore, the present study examines the impacts of business environment on operations strategy in the international retail sector.

A few previous studies in manufacturing environments have found evidence of a relationship between environmental factors and operations strategy (e.g. [45] Ward et al. , 1995; [1] Amoako-Gyampah and Boye, 2001; [2] Anand and Ward, 2004). However, all of these studies involved collecting samples drawn from multiple manufacturing industries and deriving conclusions purely based on a purely statistical analysis of pre-formatted questionnaires. Also, there is no previous study that focuses on the link in the context of retail operations. Over years there have been some calls for more case and field research in operations strategy (e.g. [44] Voss et al. , 2002; [41] Stuart et al. , 2002), especially in the service sector.

Although the approaches to a company's internationalisation have received considerable recognition in the academic community, few empirical studies have examined how the retail internationalisation process evolves, particularly regarding how to formulate retail operations strategy in emerging economies ([43] Vida and Fairhurst, 1998). Some scholars (e.g. [34] Prasad et al. , 2001) have called for more research that examines international operations strategy development in a developing country context. China provides a particularly interesting setting for this study because of its rapid economic growth. As one of the main service industries in China, the retail sector has been experiencing unprecedented development during the transformation process from a centrally-planned to a market economy ([50] Yu, 2011). However, a review of the literature reveals that relatively little is known about the operations strategies adopted by multinational retailers in China. Thus, the purpose of this study is to investigate the effects of business environment on international operations strategy, using a case study of a multinational retailer in China.

The remainder of this paper is organised as follows. First, a theoretical framework is proposed building on previous studies. Second, the design of this study and the methodological procedures are described. Third, the findings of the study are presented and discussed, and a set of managerial implications are drawn. Finally, we conclude with a summary of findings and conclusions, as well as discuss the main limitations of this study and opportunities for future research.

2. Theories and conceptual framework

2.1 Business environment

The traditional contingency theory suggests that business environment influences organisational strategy ([11] Dess and Beard, 1984; [24] Miller and Friesen, 1983). A review of the literature reveals that the dimensions of dynamism and hostility have commonly been used to characterize business environment. [23] Miller and Friesen (1978) stated that increases in environmental dynamism and hostility are related to specific changes in the amount of analysis which characterizes strategy-making activity. Hostile environments intensify challenges to the company, and often complicate these challenges. Environmental hostility is characterized by intense price competition, rising business costs, low profit margins, severe regulatory restrictions, shortages of labour and/or raw materials, and unfavourable demographic trends, which offer few opportunities to exploit ([24] Miller and Friesen, 1983). Therefore, greater analytical effort must be devoted to understanding and mastering threats ([17] Khandwalla, 1972).

On the other hand, environmental dynamism refers to the extent of the unpredictability of change within the company's environment ([11] Dess and Beard, 1984). This change can arise from many sources, including the rate of change and innovation in the company's principal industries, the introduction of new products and services, and the uncertainty or unpredictability of competitors' actions and customers' preferences ([19] Lawrence and Lorsch, 1967; [24] Miller and Friesen, 1983). Companies operating in a dynamic environment have to contend with rapid changes in technology, customer needs and preferences, as well as competitive action ([24] Miller and Friesen, 1983).

For multinational companies, the superior environment scanning capabilities is becoming critical for their success in global markets ([35] Preble et al. , 1988). International retailers scan the environment in order to understand external forces of change so that they can improve their abilities to adapt to the outside environment ([50] Yu, 2011). Research evidence shows that environmental scanning is linked to strategic decision-making and improved organisational international performance ([40] Smith et al. , 1991). As stated earlier, China's retail market has experienced exponential growth in the last 20 years ([42] Uncles, 2010). However, the high levels of economic development have generated business environmental pressures such as increasingly keen competition, increasing consumer awareness, changing consumer tastes and patterns; rapidly evolving retail technology, and high operating costs in the retail sector ([21] Lo et al. , 2001; [7] CCFA, 2009; [25] Mofcom, 2011; [42] Uncles, 2010; [50] Yu, 2011). Therefore, one of the aims of this study is to examine the current business environment of China's retail market.

2.2 International retail operations

Companies are increasingly entering global markets, since the globalisation confers access to foreign markets, high growth rates, cheap labour, and other advantages ([9] Dawson, 1994; [48] Williams, 1992). Although international expansion offers many benefits to the companies operating, there is also the increasing level of uncertainty and complexity in the multiple and geographically dispersed operating environments ([26] Myers and Alexander, 2007; [9] Dawson, 1994; [4] Burt et al. , 2003). Multinational companies face cultural barriers and complex environment when expanding internationally, for instance they face multiple political, economic, legal, social and cultural changes at varying rates in each country they do business in ([12] Evans and Bridson, 2005). Such environmental factors have a stronger impact on internationalisation than do others ([13] Evans et al. , 2008).

In an era of globalisation, success or failure of a business will depend on whether it can compete effectively in global markets ([31] Palmer and Quinn, 2005; [32] Palmer and Quinn, 2007; [29] Palmer, 2006). [9] Dawson (1994) stated that the strategy of internationalisation is commonplace in retailing. The companies must "think global" but "act local" ([36] Quelch and Hoff, 1986). Given the company's resources and capabilities in relation to the dynamic business environment, a company must decide to what extent its strategy, particularly marketing and operations strategies, will be standardised or adapted ([13] Evans et al. , 2008). Retail companies will perform better when they adopt marketing and retailing strategies that accommodate the differences in markets and respond to changes in the business environment ([5] Calantone et al. , 2006). To be a successful international retailer, the ability to apply and adjust the retail marketing mix elements according to specific target-market conditions and a wider global strategy is very important ([47] Wigley and Chiang, 2009). Global strategy plays a vital role in determining organisational performance in the global market. In the case of an increasing number of successful multinational companies today, international operations strategies constitute the leading strategies that shape their competitive vitality and determine their prosperity ([34] Prasad et al. , 2001).

2.3 Previous studies on business environment and operation strategy

Environmental uncertainty and its dimensions of dynamism and hostility have received extensive coverage in the operations strategy literature ([50] Yu, 2011). The alignment between environment and operations strategy is critical for companies to achieve success ([39] Skinner, 1969; [16] Hayes and Wheelwright, 1984). Operations strategy literature suggests that it is similarly critical that the operations strategies of companies are suited to the external environments in which they operate (e.g. [39] Skinner, 1969; [20] Leong et al. , 1990). The necessity of fit of the operations strategy with external environmental factors is supported by a few empirical studies (e.g. [45] Ward et al. , 1995; [1] Amoako-Gyampah and Boye, 2001; [3] Badri et al. , 2000; [27] Pagell and Krause, 2004). These studies showed that various dimensions of the environment cause manufacturing companies to react differently. The main findings of these studies are summarized in Table I [Figure omitted. See Article Image.].

As shown in Table I [Figure omitted. See Article Image.], all of these studies used questionnaire surveys to test the relationships between business environment and operations strategy in manufacturing environments. Empirical studies using case study and field research to explore these links are quite rare, especially in the retail sector and more so in the Chinese context.

2.4 Conceptual framework

Building on the previous work, we develop a conceptual framework links business environment and retail operations strategy (see Figure 1 [Figure omitted. See Article Image.]). Business environment is characterized by three main factors that are outside the short-run control of company management, namely business cost, competitive hostility, and environmental dynamism ([19] Lawrence and Lorsch, 1967; [24] Miller and Friesen, 1983). Many researchers stated that operations strategy focuses on developing specific capabilities called "competitive priorities" (e.g. [16] Hayes and Wheelwright, 1984; [37] Roth and van der Velde, 1991). Despite the differences in terminology, there is broad agreement that operations strategy can be expressed in terms of at least four basic competitive priorities:

low cost;

quality;

delivery performance; and

flexibility ([16] Hayes and Wheelwright, 1984; [46] Ward et al. , 1998).

Thus, we will define retail operations strategy to include the four familiar competitive priorities.

Research method

3.1 Field research

This study employed an interpretative qualitative methodology to examine the relationships between business environment and operations strategy. Case study and field research can be extremely useful in answering questions about "how" or "why" phenomena ([49] Yin, 2003) or relationships between variables are observed in operations management ([44] Voss et al. , 2002). This methodology is typically aimed at generating deeper insights about international retail operations issues and problems through direct observation and on-the-spot data collection ([44] Voss et al. , 2002; [41] Stuart et al. , 2002). For that reason, we chose to carry out in-depth single case study to investigate how retail managers in China develop operations strategies to survive in a competitive and dynamic environment.

The case study design adopted in this study is a holistic single case design. Typically, single case designs are appropriate when the case has something special to reveal that might act as a point of departure for challenging received highlighted that where contextual issues are likely to be important (as in the current study), concentrating on a single case generates "deeper" and "richer" insights than a "cases" based study that typically focuses on comparisons between cases rather than the in-depth understanding of a particular setting ([49] Yin, 2003). The single case approach has been an increasingly popular methodology within the production and operations management literature and the retail internationalisation literature (e.g. [14] Fernie and Arnold, 2002; [28] Palmer, 2005; [15] Halepete et al. , 2008). [49] Yin (2003) also emphasized that the number and type of case study depend on the purpose of the inquiry. Our case study is intended to understand how a multinational retailer, new to the Chinese context, develops effective operations strategy. As a consequence we decided that an instrumental single case would be more suited to the purpose of this exploration. This study used convergent in-depth interviewing that allows the researcher to develop, clarify, and refine the core issues of the interview protocol. It consists of a number of interviews in which the procedure is both structured and unstructured.

A leading international retailer in China was selected as a case study. For confidentiality reasons, the name of the case company has been disguised as "A-Retailer". A-Retailer entered China in 2004, when it set up a joint-venture with a Chinese business partner. A-Retailer subsequently acquired a 50 per cent stake from its joint venture partner. In 2006, it raised its stake to 90 per cent, giving the group control of the entity and making the Chinese partner as its subsidiary.

3.2 Data collection

Our interviews were guided by the conceptual framework presented in Figure 1 [Figure omitted. See Article Image.]. The purpose of the in-depth interviews is to investigate the interviewees' opinions on how to develop competitive operations strategy to survive in today's complex and dynamic market. We undertook face-to-face interviews and interviews via telephone and Internet during April-November 2008.

To minimize perceptual biases linked to managers' specific organizational roles, we attempted to include informants with diverse functional and managerial backgrounds from different levels. As part of this field research, a total of eleven interviews were carried out with four senior managers in the case company, who were in charge of the retail operations function. Field research that investigates the views and opinions of companies directly and indirectly involved in the decision-making process is becoming increasing prevalent within the literature ([30] Palmer and Quinn, 2003). Therefore, three more interviews were also conducted with a cashier, a stockperson, and a salesman. In addition, shop visits were arranged immediately after interviews so that we could have a better understanding of case company operations.

The length of the interviews typically varied from half-an-hour to two-hours. All of the interviews were tape recorded. For confidentiality reasons, the identities of respondents are not disclosed in this paper. Questions arising from the interview notes were answered by interviewees through follow-up e-mails and phone calls ([49] Yin, 2003). Interviewees were invited to comment on the transcripts and to clarify points which had remained potentially unclear. Some statistics reported in this study have also been modified due to confidentiality reasons. In addition, multiple and independent sources of evidence, including market research reports, government statistics, company profiles, financial statements and other media were used to corroborate the interview data and develop convergent lines of inquiry ([49] Yin, 2003; [44] Voss et al. , 2002). The use of multiple respondents and multiple types of data mitigates the biases of a single respondent and increases the odds of capturing the organization's view of a construct ([49] Yin, 2003).

4. Findings

We report the findings from our in-depth interviews in this section. This case study will largely be formatted in the same way as the dimensions outlined in our conceptual framework (see Figure 1 [Figure omitted. See Article Image.]). The main body of findings directly examines the current business environment of China's retail market within which A-Retailer operates, including the costs of doing business cost in China, competitive hostility, and environmental dynamism.

4.1 The cost of doing business in China

The rising business cost was widely cited in the interviews as the main characteristics of the Chinese retail market. The cost of doing business in China is rising. China has been the world's factory and the anchor of the global dichotomy between rising material prices and lower consumer prices, but these halcyon days are drawing to a close. According to all of the interviewees, rising rental and transformation costs, the current global financial recession, and fluctuating exchange rates are all adding to the cost of doing business in China. Particularly, the interviewees highlighted that China's advantage in labour costs is diminishing. The new labour contract law, which took effect in 2008, increased the costs of operating businesses in China since it brought more labour costs and risk to the employer. For example, the new law requires individual labour contracts to incorporate terms that seek to protect the rights and interests of employees. These trade union rights include minimum wages, working hours, leave and rest, scope and place of work, training, severance pay, and social insurance premiums.

4.2 Competitive hostility

Competition from local retailers and other foreign retailers

China's retail sector is becoming increasingly competitive. A-Retailer faces keen competition not only from local retailers also from other multinational retailers in China. Over the last decades, a number of leading domestic giants have established dominating sales records and a national brand name. A-Retailer's operations manager remarked:

We [A-Retailer] currently compete with the leading Chinese retailers to snatch market share. China's retail market is often likened to be a big "cake", and retailer giants rush to get a piece of this cake. Over the last few years, some leading retailers, especially local giants, have occupied a great deal of markets in some big cities, and ate "the best" part of the cake.

A-Retailer will invest substantially, and it has plans to expand its operations in China by opening about 12 new stores every year. By the end of 2008, A-Retailer had opened 62 stores in China. Nineteen stores are based around Shanghai, and most stores in the capital cities are located out of town, and not in the central business districts.

China's entry into WTO further opened up the retail market and attracted more foreign investors ([7] CCFA, 2009). More and more foreign retailers are looking for opportunities to expand their business in China. At the end of 2005, at least 35 of the global top 50 retailers (such as Wal-Mart and Carrefour) had already developed a foothold in China, and some foreign retailers had been operating in China for more than ten years ([7] CCFA, 2009). Some of the main multinational competitors of A-Retailer in China are presented in Table II [Figure omitted. See Article Image.]. An operations manager from A-Retailer highlighted:

We [A-Retailer] entered China in 2004 and is now ranked among the top ten largest foreign retailers in China in terms of market share, but the market shares were purchased from our Chinese partner.

Comparing with some leading local retailers or other multinational retailers in China, A-Retailer's sales and marketing manager commented:

We [A-Retailer] have a long way to go in order to catch up in terms of establishing brand awareness. We do not have sufficient competitive advantages in brand image, customer loyalty, and close relationship with suppliers. While some other foreign retailers have been marketing for several years under their own names, A-Retailer sat coyly behind its Chinese partner's logo.

Moreover, our interviewees widely highlighted that the profit margins are quite low. Particularly in the food retail sector, some daily products have zero profit margins ([7] CCFA, 2009). Price competition is becoming more and more intense in the Chinese retail market.

Government regulations change

Over the last few years, a number of relevant important regulations on the retail sector have been issued by the central government, such as China's New Labour Laws, strict food safety and quality standards, and environmental protection. In particular, A-Retailer's operations manager remarked:

Since the Sanlu milk powder incident in 2008, central and local governments have begun to pay much more attention on food safety and quality control than ever before. A number of relevant laws and regulations have been issued and taken effect over the last few months.

4.3 Environment dynamism

Our interviewees reported that the shopping habits and lifestyles of Chinese consumers are very different from those of Western countries. A sales and marketing manager of A-Retailer remarked:

In order to compete in the Chinese retail market, it is very important to fully understand the fundamentals of Chinese consumers' unique shopping habits.

In particular, Chinese consumers largely emphasise the economics of their purchase and are very cost-conscious. When purchasing for home consumption, Chinese consumers, especially in small- and medium-sized cities, tend to focus their purchasing decisions on the price of a product and buy whatever is least expensive. Our interviewees widely acknowledged that most people do not consider store brands, and customers just shop at stores providing them with the required products at the cheapest price. Price competition is becoming more and more intense in the Chinese retail market.

While Chinese consumers are price sensitive, they also value convenience and quality. Retail customers in China are a big and rapidly growing group with increasing buying power. Over the last few decades, the standard of living in China has drastically increased. Shopping is no longer about basic need-fulfilment; customers also want the products to have some added value in terms of quality. Furthermore, Chinese consumers, even those with lower incomes, remain conscious of food quality, particularly its freshness. The interviewees highlighted that Chinese consumers have become more discerning and demand higher quality products and services. People are purchasing well-known, genuine brands instead of the previously ubiquitous, counterfeit alternatives ([7] CCFA, 2009; [25] Mofcom, 2011). This is actually part of the same development that has changed the customer behaviour from buying from traditional marketplaces and roadside markets to supermarkets or hypermarkets. More and more Chinese consumers have begun to pursue better quality of life through better quality products and fashion clothing. Therefore, it is very difficult to achieve and maintain strong customer loyalty in China's retail market. A-Retailer's sales and marketing manager highlighted:

Customer loyalty in China's retail market is ephemeral, and customers are easily poached.

5. Discussions

To survive in today's competitive and dynamic business environment, A-Retailer has developed appropriate operations strategies (such as low cost, quality, delivery and flexibility). The main empirical insights from our case study are discussed further throughout the remainder of the section.

Business environment and low cost strategy

Our interview data suggests retailers facing more rising business cost respond with a greater emphasis on a low cost strategy (such as introducing retail technology). As mentioned previously, over the last few years, business costs (such as labour, rental and transport costs) have increased tremendously in China. In particular, the current global financial recession has direct influence on retail sales volumes. Our interviewees reported that A-Retailer has made great efforts (such as introducing retail technologies and opening energy-saving stores) to reduce its business costs. A-Retailer adopted advanced retail technologies (such ERP, EDI and PoS) from its global headquarters, to improve retail efficiency and productivity. Retailing is a brands and products management sector with providing thousands of varieties of food and non-food products, so procedure of inventory management and data processing is very complicated and time-consuming. Information technology can be used to resolve this problem. Our interviewees widely acknowledged although investment in retail technology would be a huge expense, the successful technology applications are valuable for business cost reduction and performance improvement. In addition, A-Retailer opened some energy-saving stores. The energy-saving stores use new types of lighting, heating and ventilation equipment that help to reduce power losses and overall business costs. The introduction of technology and innovation is playing the critical role during the process of retail internationalisation ([9] Dawson, 1994). Technology is a key determinant for multinationals to explore possibilities of gaining competitive advantage and generating good profits globally ([6] Cavusgil and Nevin, 1981; [8] Cox and Brittain, 2000).

Business environment and flexibility strategy

Our case analysis suggests that foreign retailers need to adapt to Chinese culture in many ways in order to succeed. Flexibility is particularly important in an increasingly volatile business, and it permits a company to respond and exploit the uncertainty over future changes in areas such as customer preference and taste, competitive moves, or government policy ([2] Anand and Ward, 2004; [18] Kogut and Kulatilaka, 1994). Generally, flexibility is one capability that international retailers can develop to cope with a dynamic environment in which the behaviours of customers and suppliers are difficult to predict.

Today, understanding culture may be the primary problem associated with doing business in China. China has unique cultural characteristics, different even than other Asian countries. Our interviewees reported that expanding a business in China with a non-homogenous consumer base offers a great challenge for them. The study of relationships between culture and retailing reveals that cultural barriers to retail internationalisation might be more important than technical obstacles ([12] Evans and Bridson, 2005; [13] Evans et al. , 2008). For example, selection of overseas markets and entry modes lies at the very heart of any international strategy ([38] Sarkar and Cavusgil, 1996; [33] Palmer et al. , 2010). Since many elements of external, internal, and environment bear significantly on the conduct and outcomes of the market and entry mode selection. Therefore, A-Retailer initially set up a joint-venture with a Chinese partner to share its partner's extensive local knowledge and operating expertise.

Our interviewees acknowledged that Chinese consumers' shopping habits are very different from those of Western countries. A-Retailer learned from the joint venture partner so it can understand and respond to what local people want, beginning when the company plans to open a new store. In the industrial sector, learning in the context of international joint ventures has been identified as an important way to shape the whole international retail process ([31] Palmer and Quinn, 2005; [29] Palmer, 2006). Chinese people like to eat fresh foods, and therefore A-Retailer in its daily counter introduced hundreds of ready-to-eat, freshly-cooked foods in Chinese style. In addition, A-Retailer offered street style food such as little dumplings ( mantou in Chinese) and rice cakes in the chain stores. To meet customer's needs, A-Retailer set up the special shelves to offer some imported products. According to the shopping habits of Chinese consumers, during the promotional period and different season periods (e.g. national holidays and Chinese New Year), A-Retailer provided a large range of products, free storage service for reserved electrical appliances for three months and deliver on customer requirements. During that period of time, it also offered special services such as free consultancy service and mend/fix/repair service. In addition, China is a big place, and because customer needs are very different across regions, it is impossible to run all stores from one central office. Understanding these regional differences, A-Retailer appointed three regional managing directors who will each look after different regions: the North and North East region, the Eastern region, and the Southern region. The interview data clearly indicates that a multinational retailer should recognise the unique needs of the foreign market and adapt the retail offer accordingly ([13] Evans et al. , 2008). Our findings are consistent with previous studies demonstrating the importance of flexibility in international retail operations. Using sample survey data from 106 retailers in China, [51] Yu and Ramanathan (2011) found that, comparing with local retailers, product/service flexibility is particularly important for foreign retailers to survive in an increasingly volatile business.

Local market knowledge and flexibility are essential to success of international retail operations ([33] Palmer et al. , 2010; [13] Evans et al. , 2008). Our interviewees reported that A-Retailer sought to improve its operational flexibility to survive in the current fiercely competitive Chinese retail market. As noted above, A-Retailer is facing competition not only from local retailers also from other foreign retailers. The increasingly tough competition in the supermarket business has shown its effects. The price competition is becoming more and more intense in the Chinese retail market ([7] CCFA, 2009). Our interviewees also widely acknowledged that the customer loyalty is quite thin in China, and customers are easily lost. To compete with other leading retailers and to enhance customer loyalty, A-Retailer tried to identify strengths and weaknesses of main competitors through competitor analysis. A-Retailer set up a special marketing research team. They are responsible for checking the price of about 50 household products every day in other supermarkets and hypermarkets, and then adjusting A-Retailer's price. Generally, local retailers tend to obtain consumer confidence from their low prices rather than quality. So, to compete with domestic retailers and develop consumer confidence, A-Retailer provided unconditional refunds, even without product quality problems, whereas few domestic retailers provide such guarantees. In addition, A-Retailer offered a nicer shopping environment than domestic retail stores. The effective competitor analysis helped A-Retailer gain knowledge of China's retail market. In-depth local market knowledge and expertise have been identified as potential incentives or barriers to the retail internationalisation ([33] Palmer et al. , 2010). Some previous studies (e.g. [51] Yu and Ramanathan, 2011) have also identified that international retailers facing greater competitive hostility responded with a greater emphasis on flexibility strategy, for example creating innovative and creative solutions to problems that are encountered in satisfying customers.

Business environment and quality strategy

Our interview data suggests that the standard of living in China has drastically increased over the last decades. The rapid rise in household income has simultaneously increased the demand for consumer goods. Consumers, especially in big cities, are becoming more discerning and demanding in terms of quality. More and more Chinese consumers have begun to pursue better quality of life through better quality products and services. Moreover, central and local governments have issued the relevant regulations and placed heavy emphasis on food safety and quality control. To address these concerns, A-Retailer set up a special Trade Law and Technology (TLT) department for quality control. The quality control engineers and managers in this department are responsible for checking the quality of own-brand products and the products selected by purchasing agents. Our interviewees also highlighted that A-Retailer maintained quality testing facilities within its production bases and distribution centres to ensure high-quality products. A-Retailer required all suppliers to pass a formal certification of food safety and quality improvement system (e.g. QS and ISO9001). Our interviewees further acknowledged that the standardised international marketing strategy on "quality, value and service" helped A-Retailer build a strong brand image in China's retail market. In the industrial sector, establishing a clear and consistent global brand positioning image plays an important role in international retail operations ([13] Evans et al. , 2008). Some previous studies using survey data in a developing country context (e.g. [51] Yu and Ramanathan, 2011) have also identified strong relationships between environmental factors (such as government regulations and increasing consumer awareness) and the quality strategy adopted by multinational retailers.

Business environment and delivery strategy

Our interview data shows that the standard of living in China has drastically increased over the last few decades. Chinese consumers have become more demand higher speed and dependability. Time seems to be the factor most critical to customers' shopping experience, especially in grocery stores or supermarkets. Speed of service has become a competitive weapon in retail operations ([50] Yu, 2011). Our interviewees widely acknowledged that providing fast and reliable delivery service for customer is crucial for retail success in China. A-Retailer endeavoured to use its skills and knowledge to improve supply chains. A-Retailer currently has three purchasing centres in Shanghai, Shenzhen, and Hong Kong, and shares logistics information with its global headquarters through the ERP system. In March 2007, A-Retailer opened a new fresh food distribution centre (FFDC) in Shanghai which now supplies 30 stores in Shanghai, Jiangsu and Zhejiang provinces. Having control of its distribution network means A-Retailer can improve the shelf life of its products through better temperature control and ensure consistent quality. Additionally, A-Retailer also purchased products directly from manufacturers or a third-party delivery company (a company that subcontracts with both the retailer and the supplier to deliver goods), and required its suppliers to directly deliver their products (such as fresh fruits and vegetables) to supermarkets. Our interviewees commented that such innovative logistics have provided fast and reliable delivery, and reduced purchasing and labour costs. The empirical analysis clearly reveals that an extensive logistics network combining international purchasing, distribution centres and direct store delivery play an important role in supporting international retail operations. Some studies (e.g. [22] Lowson, 2005; [51] Yu and Ramanathan, 2011) have made similar observations concerning relationships between environmental uncertainty and competitive positioning of speed and responsiveness in a dynamic retail market.

6. Conclusion

This study has investigated the effects of business environment on retail operations strategy, using a case study of a fast-growing foreign retailer in China. The study enriches the literature on international retail operations in a number of different ways. Our study has indicated that retailers that intend to expand their businesses in emerging markets face many challenges on new business environment, such as rising operating costs, cultural differences, government regulation, and increasing consumer awareness. Our results are consistent with findings in the international retail literature that identified a range of factors that impede the process of internationalisation (e.g. [43] Vida and Fairhurst, 1998; [10] Dawson, 2003; [4] Burt et al. , 2003; [13] Evans et al. , 2008). Our case analysis has further suggested that business environment appears to have substantial impacts on retail operations strategy (such as low cost, quality, flexibility and delivery). More specifically, a flexibility strategy is particularly important for international retailers to survive in an increasingly dynamic and complex environment. Foreign retailers need to be flexible and agile, adapting to Chinese culture in many ways in order to succeed. These findings are consistent with previous research showing that the environmental factors that drive and inhibit retail internationalisation also influence the business strategy adopted in foreign markets ([12] Evans and Bridson, 2005; [13] Evans et al. , 2008). Moreover, this research has provided new insights into international retail operations strategy (competitive priorities of cost, quality, flexibility and delivery), especially in the Chinese context. Our results have confirmed the findings obtained by empirical studies in operations strategy using questionnaire surveys (e.g. [45] Ward et al. , 1995; [51] Yu and Ramanathan, 2011), and provided some detailed empirical evidence which was not given by those previous studies.

Our study has its limitations which opens opportunities for future research. Like all case studies the external validity of our proposed model needs to be empirically tested in a much larger sample. The research reported here draws on a very small sample. As such, any analytical generalisations drawn from a limited number of case studies, no matter how carefully sampled and researched, clearly deserve healthy caution. Most notably, future efforts should include measures which capture environmental complexity ([24] Miller and Friesen, 1983; [11] Dess and Beard, 1984), dimensions not explored in this research. Since China's market and retailers will evolve with social, cultural, and historical change, and the business environment is constantly changing, longitudinal follow-up studies should be designed to identify these changes and re-examine whether and how these relationships are changing. Moreover, empirical research into the international retailing in terms of operation management should be welcomed. Future research could undertake further empirical investigation into the problem areas encountered and the root causes of those problems, with particular attention to international retail operations strategy. Operations strategy in this study was characterized by four familiar competitive priorities of cost, quality, flexibility, and delivery performance. However, the traditional four critical success factors in operations have counterparts in service companies ([37] Roth and van der Velde, 1991). Future study may identify more foremost critical success factors for service companies. Moreover, future research can explore the unique characteristics of service operations in other service industries (e.g. banking, insurance, tourism, and hospitality sectors) and also confirm the results obtained in this research. Our present study focuses on Chinese retailers. Since similar studies have been carried out in other country context, a comparative study of Chinese and other retailers may be an interesting future course of research.

Subject: Competition; Models; Environmental scanning; Technological change; Corporate planning; Field study; Service industries; Success factors; Retail stores; Case studies

Location: China

Classification: 8390: Retailing industry; 9179: Asia & the Pacific; 9130: Experimental/theoretical

Publication title: International Journal of Retail & Distribution Management

Volume: 40

Issue: 3

Pages: 218-234

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Emerald Group Publishing, Limited

Place of publication: Bradford

Country of publication: United Kingdom

Publication subject: Business And Economics--Marketing And Purchasing

ISSN: 09590552

CODEN: IRDMEQ

Source type: Scholarly Journals

Language of publication: English

Document type: Business Case, Feature

DOI: http://dx.doi.org/10.1108/09590551211207175

ProQuest document ID: 927125558

Document URL: http://search.proquest.com/docview/927125558?accountid=38610

Copyright: Copyright Emerald Group Publishing Limited 2012

Last updated: 2013-09-06

Database: ABI/INFORM Complete

Document 30 of 100

Reporting Contingencies: Environmental Liabilities

Author: Fernandez, Daniel P.; Andrews, Christine P.; Conrecode, Jacqueline R.

ProQuest document link

Abstract:

The dawn of environmental regulation in the late 1960's and its proliferation through the early 1980's resulted in a new regulatory climate for business and increased potential contingent liabilities. Recent efforts toward convergence with international accounting standards increase disclosure and improve transparency for decision makers but also impact financial reporting. This article uses a case study set in the context of potential liability under the federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) to illustrate financial reporting with respect to uncertain environmental liabilities under current and proposed requirements of Financial Accounting Standard 5 Accounting for Contingencies (SFAS 5), now known as Accounting Standards Update 450 (ASU 450). Financial reporting under the proposed requirements provides increased transparency for users and more complete information upon which to make decisions.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Accounting standards; Financial reporting; Accrued liabilities; Environment; Case studies; Regulation

Location: United States--US

Classification: 9190: United States; 1540: Pollution control; 4120: Accounting policies & procedures; 4310: Regulation; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 123

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418708876

Document URL: http://search.proquest.com/docview/1418708876?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 31 of 100

Legend Airlines: American Airlines' Worst Nightmare?

Author: Dodds, William B.; Hunt, Kenneth A.

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Abstract:

This case reviews the air battles American Airlines (AA) and Legend Airlines (LA) engaged in over the right to fly out of Love Field in Dallas, Texas, the home of American Airlines based at Dallas-Fort Worth International Airport. Legend Airlines was attacking the industry with a value proposition of quality flights and superior customer service with a laser focus on passengers who traveled frequently and paid top fares. The case is designed for classroom discussion and application to understand the economic consequences American Airlines faced with the up-scale entry of Legend Airlines into the heart of American Airlines market.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Airline industry; Competition; Customer services; Economics; Case studies

Location: United States--US

Company / organization: Name: American Airlines Inc; NAICS: 481111; Name: Legend Airlines Inc; NAICS: 481111

Classification: 1130: Economic theory; 9190: United States; 2400: Public relations; 8350: Transportation & travel industry; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 135

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418709196

Document URL: http://search.proquest.com/docview/1418709196?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 32 of 100

Retail Promotion Strategy Analysis: The Challenges At Bob Evans Restaurants

Author: Whang, Yun-Oh

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Abstract:

The case presents a challenge Bob Evans restaurants face in the wake of 2010. With the traditional target market of baby boomers aging, a new retail strategy targeting young families with children has been formulated, and a new advertising agency (Brunner, Pittsburgh, PA) was hired to "contemporize" the brand and make it relevant in today's marketplace. The major challenge to Bob Evans is that it is not effectively attracting new customers to its restaurants despite the strong loyalty by the traditional baby boomer segment. Brunner carefully examined the current retail promotional tools used by Bob Evans and asks what changes should be made to effectively communicate and promote Bob Evans to newly identified target market of young families with children.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Restaurants; Corporate profiles; Market strategy; Brand image; Advertising agencies; Case studies

Location: United States--US

Company / organization: Name: Bob Evans Farms Inc; NAICS: 311412, 311612, 722511

Classification: 9190: United States; 8301: Advertising agencies; 2420: Image; 7000: Marketing; 9130: Experimental/theoretical; 8380: Hotels & restaurants

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 141

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 1418709115

Document URL: http://search.proquest.com/docview/1418709115?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 33 of 100

Transitional Exporting: A Case Of Two Emerging Markets

Author: Daly, S.; Murusidze, G.

ProQuest document link

Abstract:

This international business case allows for the evaluation of Eastern European markets and highlights their unique nature. Eastern Bloc countries are newer entrants to the global arena and offer opportunities for understanding an array of emerging markets. The case presents one start-up business and the process, opportunities and roadblocks encountered.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: International trade; Embargoes & blockades; Emerging markets; Exports; Case studies; Entrepreneurship

Location: Eastern Europe

Classification: 9176: Eastern Europe; 1300: International trade & foreign investment; 9520: Small business; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 147

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 1418709997

Document URL: http://search.proquest.com/docview/1418709997?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 34 of 100

The Case Of ABC Tech And Its Variable Interest Entities: When Is Consolidation Required?

Author: Kelley, Tim; Margheim, Loren

ProQuest document link

Abstract:

In this case, students interpret GAAP requirements with respect to the accounting for variable interest entities. The case requires students (who take on the role of an audit manager) to critically apply GAAP requirements to the fact situation facing a fictitious technology company. The fictitious company is highly leveraged and has two large variable interest entities and the CEO of the company is determined to keep these entities off of his company's financial statements. The case requires critical thinking and judgment to determine if one or both of the company's variable interest entities must be consolidated according to current GAAP. Students are to summarize their findings in a memo to the audit partner in charge of the local office.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Consolidation; GAAP; Case studies; Variable interest entities; Liabilities

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 4120: Accounting policies & procedures

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 151

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 1418709009

Document URL: http://search.proquest.com/docview/1418709009?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 35 of 100

Common Sense As Corporate Culture

Author: Simms, John E.; Chan, Hung; Hsieh, Jim

ProQuest document link

Abstract:

A discussion of the problems associated with the implementation of FAS 157 and inherent risk for small- to-medium sized firms in the mortgage industry. Emphasis is placed on components of corporate culture and an example is provided using Network Funding, L.P., a Houston-based mortgage banking firm.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Subprime lending; Mortgages; Corporate culture; Mortgage banks; Case studies

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 2500: Organizational behavior; 8120: Retail banking services

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 165

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 1418709039

Document URL: http://search.proquest.com/docview/1418709039?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 36 of 100

The Lack Of Industrialization, The Limited Number Of Private Corporations, And The Retardation Of Management In Private Business Enterprises In Greece

Author: Theodore, John

ProQuest document link

Abstract:

The purpose of this article was to examine and evaluate how 1) the late arrival of industrialization in Greece and the subsequent de-industrialization of the country deterred the formation and expansion of private corporations and impeded the mergers of small private enterprises in creating larger ones in the corporate form of business and 2) how the limited presence of private corporations retarded the development of management. Corporations are created through a planned initial formation and/or through the mergers of smaller corporate and non-corporate entities, such as proprietorships, partnerships, and family-owned non-stock corporations. Subsequently, the ample factors of production within the corporation allow the formation of professional management and the principles of organization which result in advanced managerial and organizational performance.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Private sector; Organizational structure; Organization development; Size of enterprise; Acquisitions & mergers; Case studies

Location: Greece

Classification: 9176: Eastern Europe; 2330: Acquisitions & mergers; 2320: Organizational structure; 2500: Organizational behavior; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 169

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418709827

Document URL: http://search.proquest.com/docview/1418709827?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 37 of 100

Case Study: Potential Drug Usage In The Workplace

Author: Lucas, John J.

ProQuest document link

Abstract:

This HRM case focuses on potential drug usage in the workplace and the appropriate steps to address this issue. This case is based upon an actual event that occurred in production plant of a Fortune 500 company. The case study can be used for any undergraduate or graduate level human resource management class.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Drug abuse; Industrial plants; Human resource management; Drug testing; Case studies; Employee problems

Location: United States--US

Classification: 9190: United States; 6100: Human resource planning; 6500: Employee problems; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 177

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 1418708953

Document URL: http://search.proquest.com/docview/1418708953?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 38 of 100

The Case Of Alpha Inc.: A study In Forecasting And Valuation

Author: Lakehal-Ayat, Merouane

ProQuest document link

Abstract:

ALPHA Inc., a manufacturing entity, hired James to help put their records in for 2006 and 2007. James completed the financial statements to gain an understanding of the accounting transactions and financial results. In addition, ALPHA Inc. requested a five-year forecast for future financing and wanted a valuation of the company for possible sale or merger. After students complete the accounting relationships, financial analysis, forecast and valuation, they will have a solid background to complete the financial section of a business plan. This case is most appropriate for an upper division accounting or finance course.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Financial statements; Forecasting; Valuation; Statistical analysis; Case studies

Location: United States--US

Classification: 9190: United States; 9130: Experimental/theoretical; 4120: Accounting policies & procedures

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 179

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 1418709041

Document URL: http://search.proquest.com/docview/1418709041?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 39 of 100

Accounting Fraud, And White-Collar Crimes In The United States

Author: Yallapragada, RamMohan R.; Roe, C. William; Toma, Alfred G.

ProQuest document link

Abstract:

Time was when fraud used to involve a simple exchange of tangible items, by the perpetrator of fraud, tricking the victims to part with something valuable and in return receive something almost worthless. In recent times, the exponential growth in communication technology and proliferation of computers paved the way for phenomenal upsurge in corporate fraud, while-collar crime, and identity theft. These crimes are costing the country hundreds of billions of dollars every year. The nation is witnessing a peculiar trend in the nature of crimes. While crimes of violence such as murder and rape and property crimes like armed robbery, burglary, and car thefts are on the decline, crimes involving accounting fraud, white-collar crime and embezzlement have shown a meteoric rise. Accounting fraud is defined as knowingly falsifying accounting records in order to boost sales revenue and net income. Accounting fraud is perpetrated by corporations by means of presenting false information, using funds for illegal purposes, overstating revenues, understating expenses, overstating the value of corporate assets, and understating liabilities. Many spectacular corporate scandals such as Enron in the past decade involved large scale accounting fraud. Corporate fraud can have devastating consequences, not just to the investors in the company's stock but also to tens of thousands of employees who invested their retirement savings in the company's 401K accounts. Several laws were enacted to prevent corporate fraud with mixed results. Accounting students in this country have been receiving no training at all in the area of prevention and detection of fraud. This paper presents a short history of corporate fraud, the laws enacted to deal with the problem, and the role of codes of ethics for business firms in dealing with corporate fraud.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: White collar crime; Accounting; Information technology; Business ethics; Federal legislation; Case studies; Fraud

Location: United States--US

Company / organization: Name: Enron Corp; NAICS: 211111, 221210, 324110

Classification: 9190: United States; 5200: Communications & information management; 4120: Accounting policies & procedures; 4320: Legislation; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 187

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418710206

Document URL: http://search.proquest.com/docview/1418710206?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 40 of 100

A Study Of The Management Of Thai Food Shops In Auckland, New Zealand

Author: Na Sakolnakorn, Thongphon Promsaka

ProQuest document link

Abstract:

This study aims to present: (1) the motivations behind the decision to set up Thai food shops in Auckland, New Zealand, (2) how the owners manage their business, and (3) the support requirements from the Thai government. This study includes an in-depth interview of a Thai man who is an owner of three food shops in Auckland. From the study, we found the motivations of the owner to set up business in New Zealand were that he likes the country, because the people have discipline and follow the rules, and he has a girlfriend who previously worked in Auckland. In addition, we found that to run a Thai food shop in New Zealand, a businessman must know service, marketing, food standards, consumer behavior, and other aspects of running a business, such as the costs of labor and operating expenses.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Restaurants; Ethnic foods; Market entry; International markets; Business government relations; Case studies

Location: Auckland New Zealand, Thailand

Classification: 2430: Business-government relations; 9179: Asia & the Pacific; 9180: International; 7000: Marketing; 8380: Hotels & restaurants; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 193

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Journal Article, Business Case

ProQuest document ID: 1418710357

Document URL: http://search.proquest.com/docview/1418710357?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 41 of 100

The Whole New World: Nintendo's Targeting Choice

Author: Rusetski, Alexander

ProQuest document link

Abstract:

The case is set at the end of 2006 when Nintendo and Sony were preparing to launch their seventh generation gaming consoles while Microsoft had its console on the market for more than a year. Starting with the fifth generation (when the PlayStation was first introduced), the competition among the three main players in the market was focused mostly at the segment of "hard-core" gamers - young adults spending substantial time playing elaborate games. By 2006 Nintendo was hopelessly losing the competition in this segment. The company had to come up with a bold move to remain relevant in the industry. So, rather than staying within the confines of the familiar segment, Nintendo decided to target its new console to a market that was all but neglected in the previous decade - the casual gamers: kids, women, older folks, and families. The case is used as a basis for the discussion of targeting decision process.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Computer & video games; Electronics industry; Product development; Brands; Market positioning; Competition; Case studies

Location: United States--US

Company / organization: Name: Nintendo of America Inc; NAICS: 334419

Classification: 9190: United States; 9130: Experimental/theoretical; 7500: Product planning & development; 8650: Electrical & electronics industries

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 197

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 1418709153

Document URL: http://search.proquest.com/docview/1418709153?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 42 of 100

Internal Controls For Public Sector Entities

Author: Decker, Jeffrey L.

ProQuest document link

Abstract:

In a manner consistent with Heinze et al (2010), this paper focuses on revenue-related internal controls in the public sector. This paper can be used to benchmark whether public sector entities have proper internal controls in place. Finally, this paper can be used in the classroom to demonstrate how public sector entity internal controls need to be designed.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Public sector; Internal controls; Case studies

Location: United States--US

Classification: 9190: United States; 4130: Auditing; 9550: Public sector; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 213

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 1418709617

Document URL: http://search.proquest.com/docview/1418709617?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 43 of 100

An Examination Of Traditional Business Case Studies - Are They Outdated In Today's Technology Connected Environment?

Author: Sparks, Roland J.; Langford, Jeri

ProQuest document link

Abstract:

The paper examines the effectiveness of using business case studies in today's Internet connected environment. The findings show that 87.8% of Harvard Business Review case solutions are commonly available on the Internet and that students can find an answer within 7.37 minutes. Based on this evidence, the authors contend that current use of business case studies as a learning tool requires a different approach. Standard case questions are no longer sufficient to ensure learning. Alternate approaches suggested are: students developing their own case analysis format, using local companies and data, the Real-Time Case Method, changing classifications and framing of cases, and contrasting case analysis.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Publications; Internet; Students; Case studies

Location: United States--US

Company / organization: Name: Harvard Business Review; NAICS: 511120

Classification: 9190: United States; 9130: Experimental/theoretical; 5250: Telecommunications systems & Internet communications; 8690: Publishing industry

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 217

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 1418708813

Document URL: http://search.proquest.com/docview/1418708813?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 44 of 100

Coffee Anyone? An Unstructured Capital Budgeting Project To Encourage Critical Thinking Skills In Accounting Students

Author: Silvester, Katherine J.

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Abstract:

This paper presents an unstructured, semester-long team-based capital budgeting project for senior level undergraduate accounting students. Successfully completing this project requires accounting students to step outside of their narrow accounting transactions framework and to apply extensive organizational, analytical, information gathering, and critical thinking skills. Specifically, this project requires students to assess a market opportunity, define the scope of their analysis, and to structure their own business solution to the problem. Students are then required to collect external data with which to project annual after-tax net income, after-tax cash flows, and the associated performance measures. Based on their financial analysis, students must subsequently assess the viability of their solution and reach a "go" or "no-go" decision.[PUBLICATION ABSTRACT

Full text: Not available.

Subject: Capital budgeting; Critical thinking; Business plans; Students; Projects; Case studies

Location: United States--US

Classification: 9190: United States; 8306: Schools and educational services; 2310: Planning; 3100: Capital & debt management; 9130: Experimental/theoretical

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 223

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418710475

Document URL: http://search.proquest.com/docview/1418710475?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 45 of 100

Herbal Garden Tourism Development In Thailand: A Case Study

Author: Chaiyakot, Prachyakorn; Visuthismajarn, Parichart

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Abstract:

This article aims to study species of herbs and their properties to develop a tourism site in Baan Nai Wang, Baanna Sub-district, Srinakarin District, Phatthalung Province, present healthy food menus for tourists that use local raw ingredients, and develop an herbal garden tourism handbook for the Songkhla Lake Basin. Data were collected through a field survey, focus group discussions involving stakeholders, and in-depth interviews with herbal experts. The study found that there are two private vegetables and herbal gardens and one public area suitable for tourism sites. Thirty-three species of herbs are used for cooking, 17 species of herbs are used for curing disease, and 5 healthy food menus use local herbs as ingredients. We found that the area should be developed as a tourism destination for visitors to learn more about herbal species and herbal properties and to cure diseases using herbs.[PUBLICATION ABSTRACT]

Full text: Not available.

Subject: Case studies; Medical tourism; Herbal medicine; Functional foods & nutraceuticals

Location: Thailand

Classification: 9179: Asia & the Pacific; 8350: Transportation & travel industry; 9130: Experimental/theoretical; 8320: Health care industry

Publication title: Journal of Business Case Studies (Online)

Volume: 8

Issue: 2

Pages: 237

Publication year: 2012

Publication date: 2012

Year: 2012

Publisher: Clute Institute for Academic Research

Place of publication: Littleton

Country of publication: United States

Publication subject: Business And Economics--Management

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 1418710409

Document URL: http://search.proquest.com/docview/1418710409?accountid=38610

Copyright: Copyright Clute Institute for Academic Research 2012

Last updated: 2013-09-17

Database: ABI/INFORM Complete

Document 46 of 100

Al-Jo'anee Company: support department cost allocations with matrices to improve decision making

Author: Hussein, Saad S; Togo, Dennis F

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Abstract:

The direct, step-down and reciprocal methods are commonly used for allocating costs of support departments. While each method has benefits and drawbacks, the direct and step-down methods are used often because of their simplicity in allocating costs. In contrast, the preferred reciprocal method is difficult to adopt as simultaneous equations are needed for solving reciprocated costs of each support department. The Al-Jo'anee Company presents a matrix approach to model support services among departments, to solve for reciprocated costs of support departments, and to allocate the reciprocated costs to five support departments. [PUBLICATION ABSTRACT]

Full text:

(ProQuest: ... denotes formula omitted.)

INTRODUCTION

Support department costs are allocated to operating departments that generate revenues for the organization and create the need for support services. Hence, cost allocations are used to provide information for economic decisions, to motivate managers and other employees, to justify costs or compute reimbursements, and to measure income and assets for financial reporting (Horngren et al., 2006). As the number of support departments and their costs increase, the allocation of support department costs becomes increasingly important. While there is a preferred method of allocating support department costs, businesses have chosen to adopt simple methods of allocating costs even when they have drawbacks.

There are three methods of allocating support department costs: the direct, step-down and reciprocal. The key differences among the methods are the assumptions as to how services provided by one support department are allocated to other support departments. The direct method ignores services provided by one support department to another; hence, the direct method allocates support department costs only to operating departments. In contrast to the direct method, the reciprocal method captures all of the support departments' services to other support departments. Hence, the reciprocal method allocates not only a support department's own costs but costs allocated to it from other support departments. The step-down method represents a compromise between the direct and reciprocal methods in that it recognizes some, but not all of the services of support departments.

COST ALLOCATION METHODS

The direct method is the simplest of the three cost allocation methods. It ignores reciprocal or interdepartmental services among the support departments. The direct method allocates all costs of service departments directly to operating departments; hence, even if a service department provides a large amount of service to another service department, no allocations are made between the two departments.

The step-down method allocates costs of a service department to production departments and to some service departments. This method allows for only partial recognition of the services rendered by support departments. It is called the step-down method because a service department that has been allocated (closed) can receive no cost allocations back to it from the remaining unclosed support departments. Hence, the order of closing support departments will result in different allocations of support department costs to operating departments (Horngren et al., 2000).

The reciprocal allocation method is conceptually the best of the three methods because it recognizes all services among support departments. This method defines reciprocated costs of a support department as its own cost plus costs allocated to it from other support departments. It is the reciprocated costs of a support department that are allocated to all other departments based on their use of services.

While the reciprocal method is preferred over the direct and step-down methods, its adoption has been hindered by the requirement to solve for reciprocated costs of service departments using an algebraic set of simultaneous equations. Textbook examples will limit the number of support departments to three so students will not have much difficulty solving for the reciprocated costs of each support department. However, in many organizations the number of support departments often exceeds three, and accounting graduates will have difficulty using the reciprocal method without another approach to solving simultaneous equations.

Spreadsheets have the capability to solve simultaneous equations with the use of matrices. The following case presents the matrix functions needed to model the reciprocal relationships among many service and operating departments, to solve for reciprocated costs of the service departments, and to allocate the reciprocated costs of a service department to other departments.

AL-JO'ANEE COMPANY

Background

Al-Jo'anee Company manufactures air-conditioning equipment in the Middle East. The demand for its products is increasing very quickly as more people are able to afford air conditioning. Hence, Al-Jo'anee has had to expand its product line to meet the new demand. As a consequence, the company is experiencing much higher costs in its support departments A, B, C, D and E.

In the past, the accounting department used the direct method for allocating support department costs to revenue generating departments. Managers of the profit centers have begun to complain that the allocations no longer reflect actual use of support services by revenuegenerating and support departments. Top management also recognizes the need for more accurate allocations of support departments in an attempt to control increasing support costs.

The accountant at Al-Jo'anee refers to cost accounting textbooks and determines that the reciprocal method for allocating supporting department costs must be adopted. While it requires more data and work, the accountant knows that the reciprocal method should be acceptable to profit center managers. The accountant begins to gather data for implementing the reciprocal method.

Departmental Data

The cost for support departments A, B, C, D and E and two operating departments X and Y before any cost allocations are presented below. In addition, the percent of services provided by each support department to all other departments is presented. For example, Department A provides 0.04 and 0.40 of its services to Departments B and Y. The total of services for each support department is equal to 0.00, as the 1.00 sum of provided services is netted with the -1.00 allocated services.

Reciprocal Method Simultaneous Equations

In the following algebraic expressions, A, B, C, D and E represent the reciprocated costs for the support departments of Al-Jo'anee Company. For Department A below, the reciprocated cost A is equal to its own costs of $1,000,000 and 0.06 of Department B's reciprocated cost, 0.05 of Department C, 0.07 of Department D, and 0.03 of Department E. The equation can then be placed in a format more suited for matrix multiplication. Similarly, the formulas for reciprocated costs of the five departments are listed below as a set of simultaneous equations.

Department A: + 1.00A = 1000000 = +06B + 0.05C + 0.07D + 0.03E

Department A: + 1.00A - 0.06B - 0.05C - 0.07D - 0.03E = 1000000

Department B: - 0.04A + 1.00B - 0.06C - 0.05D - 0.04E = 800000

Department C: - 0.08A - 0.09B + 1.00C - 0.05D - 0.07E = 600000

Department D: - 0.09A - 0.07B - 0.06C + 1.00D - 0.05E = 400000

Department E: - 0.07A - 0.08B - 0.09C - 0.08D + 1.00E = 200000

Matrix For Simultaneous Equations

An equivalent matrix equation for the formulas above is [L] × [M] = [N] as shown below. The [L] 5x5 matrix is from the simultaneous equations above, which is the negative transposition of departmental services provided among the support departments. The [M] 5x1 matrix is the reciprocated cost variables A, B, C, D and E. The [N] 5x1 matrix is the individual costs of the five departments. Each value within a matrix is identified by specifying the matrix and its row and column. For example, (L1,3) is equal to -0.05 as it is found in the L matrix at row 1 and column 3. An array of numbers is noted as (L1,1:L5,5), which is equivalent to the L matrix.

Solving For Reciprocated Costs

The reciprocated cost for each department is computed by multiplying both sides of the matrix equation with the [L-1] inverse of matrix [L], such that [L-1] x [L] = [I] identity matrix and [I] x [M] = [M].

Given: [L] × [M] = [N]

[L-1] × [L] × [M] = [L-1] × [N]

[I] x [M] = [L-1] × [N]

[M] = [L-1] × [N

After selecting a 5x1 range for the [M] solution, the following Excel formula multiplies [L-1] with [N] to solve for [M] reciprocated costs of each department. Press the Ctrl + Shift t + Enter keys together to generate [M].

Excel formula: = mmult(minverse([L]),[N]) = mmult(minverse(L1,1:L5,5),N11:N5,1)

...

Reciprocated Costs Allocations

The allocation of reciprocated costs for each support department to all other departments is performed by multiplying two matrices. The [DM] × [P] = [A] matrix multiplication is shown below, where the 5x5 [DM] matrix is the diagonal matrix of [M], and the 5x7 [P] matrix is the original service departmental data. The Excel formula for the matrix multiplication follows.

Excel formula: = mmult(minverse([DM]),[P])

= mmult(minverse(DM1,1:DM5,5),P11:P5,7)

The resultant 5x7 [A] matrix is the allocation of reciprocated costs of support departments to all other departments. The [A] matrix is placed in the cost allocation table below. The cost allocation is complete as support Departments A, B, C, D and E have zero balances and the total cost of all the departments remain the same at $6,000,000.

The reciprocal cost allocation method has transferred all support department costs to the operating departments and at the same time recognized all services performed by support departments.

CONCLUSION

The Al-Jo'anee Company case uses spreadsheet matrix function to allocate the costs of support departments to operating departments for the reciprocal method. The matrix-based approach facilitates the use of the preferred reciprocal method of allocating support costs to operating departments. Solving for reciprocated costs of many support departments no longer requires tedious and difficult computations by hand. Matrix functions for multiplication and inverses of a matrix are useful tools for solving simultaneous equations. The allocation of reciprocated costs for each department to other support and operating departments is simplified with the matrix multiplication function.

Accounting faculty and practicing accountants can now emphasize the reciprocal method for allocating support department costs to operating departments because of facilitative matrix functions available on spreadsheets. The use of the reciprocal method will improve cost information in making key management decisions.

Subject: Decision making; Business models; Cost allocation methods; Case studies

Classification: 4120: Accounting policies & procedures; 2310: Planning; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-6

Number of pages: 6

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables Equations References

ProQuest document ID: 963331512

Document URL: http://search.proquest.com/docview/963331512?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 47 of 100

Life without parole sentence for juvenile offenders Loggins v. Thomas in The United States Court of Appeals for the Eleventh Circuit No. 09-13267

Author: Neil, Benjamin

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Abstract:

This case provides students with the opportunity to apply their knowledge of the legal system. In doing so, they will be afforded the opportunity to analyze and discuss the recent cases involving sentencing of juvenile offenders in a murder case, in light of the holding by the Supreme Court in Roper v. Simmons, 543 U.S. 552 (2005). [PUBLICATION ABSTRACT]

Full text:

Introduction

Kenneth Loggins was convicted and sentenced to death in 1995 for the sadistic and brutal murder of Vickie Deblieux. Because he was seventeen years old when he committed the murder, the state courts eventually set aside his death sentence based on Roper v. Simmons, 543 U.S. 551, 125 S.Ct. 1183 (2005), which held that it was unconstitutional to execute anyone who was under eighteen years of age at the time of the crime, id. at 578-79, 125 S.Ct. at 1200. See Loggins v. State, No. CR-04-1567 (Ala. Crim. App. Dec. 8, 2005) (order remanding to trial court for resentencing). Loggins was resentenced to life imprisonment without parole, see Loggins v. State, No. CR-04-1567 (Ala. Crim. App. Apr. 21, 2006) (unpublished memorandum opinion), which was the next most severe penalty Alabama law provided for the crime that he had committed, see Ala. Code §§13A-5-39, 13A-5-45. Having escaped the death penalty Loggins now seeks to escape his life without parole sentence, contending that it, too, is an unconstitutional penalty for him because he was not yet eighteen years old at the time he committed the murder.

Premise

On the night of February 21, 1994, a friend dropped Vickie Deblieux off on Interstate 59 near Chattanooga, Tennessee. She intended to hitchhike to her mother's home in West Monroe, Louisiana, and had telephoned her mother to let her know that she was coming. Deblieux made it as far south as Jefferson County, Alabama. Unfortunately for her, Kenneth Loggins and three of his friends were also out that night, drinking beer and using drugs. They spotted Deblieux at an interstate exit in Jefferson County.

Promising to take her to Louisiana, Loggins and the other men lured Deblieux into their car and then drove her to a remote wooded area on the pretense of picking up another vehicle. When she protested being taken there, Loggins assured her that everything was okay. Of course, it wasn't. Once they arrived in the wooded area where the truck was located and got out of the car, Loggins and the three other men began drinking again. One of them hit Deblieux in the head with a beer bottle. She tried to run away, but they tackled her. As she lay on the ground, Loggins and the other men kicked Deblieux all over her body, over and over again. When they realized that she was still alive despite the vicious beating they had inflicted on her, Loggins stood on her throat until she gurgled up blood. She finally said "Okay, I'll party." Then she died.

Loggins and the other men threw Deblieux's body into the back of their pickup truck, and drove to Bald Rock Mountain in adjacent St. Clair County, Alabama. Once there, they removed all of Deblieux's clothes. After playing with her naked corpse for awhile, they tossed it over the side of a cliff. Loggins and the others then left and went to a car wash in a nearby town. There they washed the blood out of the truck and rummaged through Deblieux's luggage before scattering it in the woods near the car wash.

Later that night, Loggins and two of the other men returned to Bald Rock Mountain and defiled Deblieux's body. They cut off her fingers, and they removed one of her teeth, and they cut out her left lung. According to Loggins, that was not all that they did. He later bragged to some friends that he and one of the other men had removed part of Deblieux's heart, taken a bite out of it, and "spit it into her face." Loggins' desecration of his innocent victim's body was consistent with some of his other behavior: he was involved with a "skinhead group," he sometimes slept in a cemetery, and he carried around a black notebook in which he indicated his fascination with death, dying, and "Satan worship."

The morning after the murder Loggins' girlfriend and another woman were looking for him. They found him and two of his friends asleep in a pickup truck in the parking lot of a fast food restaurant. All three men were covered in blood and mud. When asked what they had been doing, Loggins replied that they "had killed a dog or something that was chasing [his] truck."

On February 26, 1994, a group of hikers on Bald Rock Mountain discovered Deblieux's mutilated body and called the police. The body was taken to the medical examiner's office, where a full autopsy was conducted. The autopsy revealed that Deblieux's face was covered with lacerations, every bone in her face was fractured at least once, almost every bone in her skull was fractured, a tooth was missing, her left eye was collapsed, her right eye had hemorrhaged, there were two large incisions in her chest, her left lung had been removed, she had 180 postmortem stab wounds, and all of her fingers and both thumbs had been cut off.

In the weeks following the murder, when Loggins and the other three murderers "seem[ed] bored," they "would kind of jokingly say let's go pick up a hitchhiker" and allude to other facts of their crime. A member of the group showed a friend of his one of Deblieux's severed fingers, which he had been keeping in a ziplock bag. That led to the arrest of all four of those who had participated in Deblieux's murder.

Questions

1. Decide the case morally. Not legally. Ignore the law.

2. Decide the case under the law, support your verdict with arguments and show the weaknesses (if any) in the case decision.

3. Write a judicial opinion. Imagine that you have taken an oath to uphold the law. Don't appeal to your personal morality.

4. Hold a discussion in which your group takes on the role of the prosecutors deciding how to prosecute the case.

5. Hold a discussion in which your group takes on the role of the jury. Your job is to reach consensus, if you can. You are not bound by the constraints that bind judges and you have the power, if not also the right, of nullification.

6. Hold a discussion in which the group takes on the role of the legislative sub-committee charged with drafting a new statute for this type of case. What would you write into the new law. And how would you reach those decisions?

7. What is the legal rule of law at issue in this case?

8. After reading the case, do you think that the decision is straight forward?

Teaching Notes

1. Decide the case morally. Not legally. Ignore the law.

Morality involves the concept of right and wrong. Law deals with Common Law and Statutory Law which provides the parameters within which to decide a particular factual scenario. Morals are Biblical in nature and depend on the mores of a society.

Generally, most societies have an "eye for an eye" philosophy, so that morally if Kenneth Loggins murdered Vicky Deblieux then it would be appropriate for that society to resort to the same remedy, i.e. putting Kenneth Loggins to death irrespective of his age.

2. Decide the case under the law, support your verdict with arguments and show the weaknesses (if any) in the case decision.

The Supreme Court in Roper v. Simmons, 543 U.S. 551, 125 S.Ct. 1183 (2005) makes it unconstitutional to execute anyone who is under the age of eighteen years of age at the time of the commission of the crime. There is generally a philosophy in the juvenile law area that irrespective of the criminal offense, that the youthful offender can be rehabilitated. While it is a clear statement of law in the Roper case that it is unconstitutional to execute anyone who is under eighteen years of age at the time of the crime, this statement fails to take into account the depravity of Loggins standing on her throat until she "gurgled up blood". Given the heinous type of crime, I think one could argue that if someone acts in a manner which shocks the conscious of the Court, i.e. outrageous conduct that an exception should be carved out of this unconstitutional death penalty. Someone who is a child of tender years would not have acted this way.

3. Write a judicial opinion. Imagine that you have taken an oath to uphold the law. Don't appeal to your personal morality.

A student to write a legal opinion should follow the following pattern of a Statement of the Facts; Statement of the Issues; the Ruling; an analysis which is a Discussion of Law and the Conclusion.

The facts do not need to be rehashed in a legal opinion except to say that Kenneth Loggins and some friends of his picked up Vicky Deblieux, a hitch hiker and proceeded to beat her and actually stood on her throat until she choked on her own blood. Loggins and an other friend returned to where they had thrown her off the side of the cliff to defile her body to cut off her fingers and took a bite out of her heart. Loggins was involved in a "skinhead" group and "Satan Worship". Kenneth Loggins was below the age of eighteen when the killing occurred. The issue is whether someone who is below the age of eighteen can be sentenced to death. The answer is that someone below the age of eighteen at the time of the crime is not subject to the imposition of the death penalty. The death penalty has been part of our judicial system for a long period of time. There are a number of Supreme Court cases which held that the death penalty was being arbitrarily applied so that for a time period it was unconstitutional. The majority of Statutes regarding death penalty require that there be a finding of first degree murder. That is, a murder which is premeditated. Also, they require a finding of aggravating circumstances, such as killing a police officer, correctional officer, kidnapping or robbery. There are additional limitations to the imposition of the death penalty eligibility. One is the Roper v. Simmons, 543 U.S. 551, 125 S.Ct. 1183 (2005).

Conclusion in this Case: Although there is not question that the murder was premeditated as he stood on her throat to choke her to death and that there was a predicate action of kidnapping, Loggins could not be put to death because of the limitation provided in the Roper case in that penalty being unconstitutional to anyone under the age of eighteen years of age.

4. Hold a discussion in which your group takes on the role of the prosecutors deciding how to prosecute the case.

In a group, a prosecutor must move very carefully in dealing with youthful offenders. While the crime is a heinous crime, one must move very carefully not to invoke sympathy because the person is a juvenile. Additionally, you have to play down the actions of the victim in accepting a ride and being out on her own and emphasize that she telephoned her mother to let her know that she was coming and that she was naïve about accepting a ride with or getting in a car with Kenneth Loggins and three of his friends. You have to emphasize the viciousness of Kenneth Loggins' acts, plus the way that they defiled her body by cutting off fingers and the like.

5. Hold a discussion in which your group takes on the role of the jury. Your job is to reach consensus, if you can. You are not bound by the constraints that bind judges and you have the power, if not also the right, of nullification.

In a jury trial in a criminal matter, there are twelve members of the jury. There will be diverse opinions as to the appropriateness and legality of the death penalty. Some will object to its imposition under any circumstances, while others will support the death penalty at all costs. Jury nullification involves the concept that the jury can decide what it wants to irrespective of what the law is in a particular State. In some States, the jury is both the Judge of what the law is and the facts and most often this is used in the finding of not guilty on the part of the criminal defendant. Obviously, when you have the closing arguments of the attorneys involved in the case and an instruction as to the law, most States have adopted Model Pattern Jury Instructions and it would a reversible error to instruct the jury on the death penalty. Again, it appears that the best approach to reach a onsensus is to emphasize the facts of the case and while we are given the factual pattern in the actual trial of the case, the Defendant may not take the stand so that these issues may not come directly before the jury.

6. Hold a discussion in which your group takes on the role of legislative subcommittee charged with drafting a new statute for this type of caw. What would you write into the new law. And how would you reach those decisions?

What would you write into the new law: I talked earlier about the finding of first degree murder and aggravating circumstances such as a predicate felony such a robbery, kidnapping, etc. The aggravating circumstances would be if one is a juvenile and there is an aggravating circumstance of kidnapping, robbery. There may have to be an additional requirement that the juvenile defendant acting in a depraved manner or other outrageous conduct.

7. What is the legal rule of law at issue in this case?

The legal rule of law at issue in this case is whether is a society has the right to take the life of another and more specifically, whether society has the right to impose the death penalty or life without parole on someone who is a juvenile. In a broader sense, you have to determine what theory allows one to invoke the death penalty. Is it under natural law, or whether it is through human reasoning or the legal positivism? There is no connection between law and morality or the legal realism. The law has a force that it does because of what legislators, judges and executives do with it because of the regulation of society. Historically, it was determined by the arbitrary age of the defendant alone.

8. After reading the case, do you think that the decision is straight forward?

To the student, it may seem that you take a case such as Roper v. Simmons and apply it by its rule and that is the end of it. That is, you cannot execute anyone who is under the age of eighteen at the time of the crime. In reality, there is a much broader context at work here because the law is not static, but rather a dynamic situation. The facts determine the outcome and while the facts here are straightforward, they can be proven as they are presented that Kenneth Loggins is a cold blooded killer. The case may be proven by DNA evidence, including evidence from the scene of the crime and his truck or found when he was rummaging through the Ms. Deblieux's luggage. This is a starting point of two larger issues. The first is the expansion of the death penalties to a minor by specifying specific aggravating circumstances. The second is the issue of what is the minimum age to have someone death penalty eligible. This opens Pandora's Box of the use of the arbitrary age of eighteen as a cut-off. In this electronic age, juveniles are much more experienced and exposed to violent crimes. The juvenile's actions should indicate whether the death penalty is appropriate.

Subject: Capital punishment; Juvenile offenders; Supreme Court decisions; Case studies

Location: United States--US

Classification: 4330: Litigation; 9190: United States; 9130: Experimental/theoretical

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-6

Number of pages: 6

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 963331394

Document URL: http://search.proquest.com/docview/963331394?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 48 of 100

Understanding the entrepreneurs in the night market business

Author: Ishak, Nor Khomar; Latif, Rohaizah Abdul; Aziz, Khursiah Abdul

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Abstract:

The future growth of the Malaysian economy depends, to a large extent, on the development of entrepreneurs with the ability to develop creative homegrown products. This case examined at least 4 traders in each of the 5 night markets that were investigated. The findings indicated one common trait of the traders - their strength and determination to succeed in spite of the minimal educational background. Most were contented with their business, operating in several night markets per week, and had no plans to expand them to retail outlets with fixed location. [PUBLICATION ABSTRACT]

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INTRODUCTION

One way to strengthen the Malaysian economy is through entrepreneurial development and to create entrepreneurs with the ability to develop creative homegrown product concepts. These budding small retail entrepreneurs' and petty traders' contributions to the nation's informal economy should be recognized and be supported, among others, in the form of financial aids and skill training. According to the Bernama.com, the Malaysian National News Agency report on Business on March 31, 2006; in the Ninth Malaysia Plan, the Bumiputra Entrepreneur in the field of Retailing or, in short, the PROSPER (Projek Usahawan Bumiputera Dalam Bidang Peruncitan) programme was expanded in order to nurture 1,250 new entrepreneurs, as an effort to increase bumiputera participation. The report also added that the Training programmes on the management of modern businesses, especially for small and medium scale enterprises (SMEs), would be intensified to enable them to undertake and implement new approaches in wholesale and retail activities. According to the New Straits Times of August 30th. 2008, "the government has introduced various measures to help increase disposable income to mitigate the impact of the higher cost of living, thus demonstrating that it is a caring government.. enhancing training and skills programmes is a timely move by the government to attract more locals into the industry and avoid being too dependent on foreign labour". For smaller traditional enterprises such as those operating, food courts, farmers markets (pasar tani) and night markets (pasar malam) the government agency responsible would identify strategic locations. Mohamed Arif, the Executive Director and Shanker Nambiar, Research Fellow of the Malaysian Institute of Economic Research, Malaysia, in their report stated that a pivotal element that makes it possible for entrepreneurship to succeed is the ability to gain access to markets and to develop those markets. They added that the small-scale enterprises and micro-enterprises have far fewer resources at their disposal than do larger companies. The Ministry of Entrepreneur Development which were fully aware of this constraint, had directed its attention to the smaller enterprises through a two-prong efforts: enabling entrepreneurs to obtain the resources (financial and non-financial) they required, and building social capital.

There was a sense of urgency for Malaysia to encourage entrepreneurial development and to intensify the entrepreneurial activities. This was to ensure the future success of Malaysia's regional industry's competitiveness. These petty individual entrepreneurs, in a few years, would formed the backbone of the nation's retail and wholesale business owners since they would have by then, acquired the learning curve required to compete on a regional, if not at a global level.

PURPOSE OF THE PAPER

This case study examined the traders in 5 night markets in Kuala Selangor in order to understand their roles, characteristics, motivations and contributions towards the night markets' dynamism and to investigate the depth of their involvement in the night market business.. Night Market traders were defined as small, petty traders, who participated in the night market selling activities, either as a full time job, or as a side job to supplement their income, or for the purposes of learning business skills.

RESEARCH METHODOLOGY

The case study research design was adopted to identify the entrepreneurial characteristics, and to identify the skills, and the determination of the entrepreneurs to ensure the success in the night market business. This included an investigation of the entrepreneur's family background, the relationships with suppliers and customers, and among other traders. Five night markets in Kuala Selangor were investigated and at least 4 traders were interviewed in-depth to understand the roles, characteristics, motivations and contributions. These interviews were conducted on-site, guided by a semi-structured questionnaire. Observations were also made while they were conducting their business to see how they interact with their customers and with each other. These data collection were carried out twice for each night market with the total time spent of about 8 hours for each period at each night market. Follow-up telephone interviews were also conducted for some respondents in order to get more information.

FINDINGS

Overview of the Night Markets, the Traders and the Range Of Products

There were a total of 363 traders in the 5 night markets. Tanjung Karang had the most traders with 109, followed by Bandar Baru with 72, Bestari Jaya with 71, Ijok with 66, and Pasir Panjang with only 45 traders. Most of the traders in all the 5 night markets were Malays; with the highest percent in of 93% in Ijok, followed by Tanjung Karang at 84%. The other night markets had a Malay majority trader that ranged between 65% to 76%. Thus, the Malay traders account for 78.5% in all the night markets studied, followed by 16.8% Chinese traders and 4.7% Indian traders. This finding was not surprising since the majority of the population in the 5 areas were also Malays. The following table showed the breakdown of traders by ethnic group in each of the night market.

There were 712 total stall lots in the 5 night market with 74 or 10% vacant stall lots. Thus, the overall number occupied stall lots 638 stalls. The Bandar Baru night market had the highest percentage (30%) of vacant stall lots. There were 363 total night market traders therefore; the ratio of stall lots per trader was approximately 2 stall lots per trader. The products offered for sale at the night markets could be classified into the following group: (1) Cooked Food, (2) Beverages, (3) Meat - chicken and beef, (4) Fish and Seafood, (5) Vegetables, (6) Fruits, (7) Dry Goods , Groceries and Eggs, (8) Clothes, (9) Accessories - watches, hand phone, books and toys, (10) Household goods, and (11) Others/Miscellaneous. As indicated in the following table, of the total 363 traders, 178 or 49% offered cooked food in a total of 242 stall lots. The ratio of stall lots to traders for Cooked Food was approximately 1.35 stalls to 1 trader. The number of Clothes and Accessories traders was 39 each, with Clothes traders occupying 93 stalls, and Accessories traders occupying 91 stalls. Both occupied 28% of the night markets stall lot space. Each trader therefore, on average occupied 2.4 stall lots. The third highest number of traders was the vegetable traders who represented 6% of total traders and they occupied 22 stall lots. These vegetable traders occupied 56 stalls or 8.6% of the total number of stalls. Each vegetable trader, on average occupied 2.5 stalls.

The Beverage/Drink traders totaled 15 or 4% of the total number of traders. Each trader occupied about 1.7 stall lots. The 14 fruit traders occupied about 2.3 stall lots per trader. Twelve traders offered dry goods, groceries and/or eggs, and they occupied 34 stall lots, thus accounting for the ratio of 2.8 stalls per trader. The fish and seafood traders and the household goods traders accounted for 23 and 18 stall lots respectively. Thus, the dry goods, groceries and/or eggs traders, on average occupied the highest ratio of stall to trader at 2.8 stall lots per trader, followed by the vegetable traders with 2.5 stall lots per trader. The clothes and accessories traders had a ratio of 2.4 stall lots per trader. This was followed by the fruits and fish and seafood traders with 2.3 and 2.1 stall lots per trader. The least space per trader was the cooked food traders with only 1.3 stall lots per trader. The following table showed the breakdown of trader types, the number of stall lots occupied and the percent of stalls occupied by each trader type for the 5 night markets.

Overview of Each Night Market and the Traders

(1) Bandar Baru Night Market

Bandar Baru Night Market was located along Jalan Pendidikan and it extended about 400 meters in length, running parallel to the main North-South trunk road. It operated on Friday from 3:30pm to 10:00 pm. The area was surrounded by single-storey and double-storey terrace houses on both sides of the road. At one end, there was a school; while at the other end was the Telekom and the Magistrate Court House buildings. The stall lots totaled 204 and formed an I-shaped, with two rows of stalls on each side of Jalan Pendidikan. However, on the day of the study, 61 stalls were vacant. This was due to the upcoming long weekend holiday, and some traders had chosen not to do business. Trends had indicated that there would be few customers on such a day.

A total of 72 traders occupied 143 stall lots in the Bandar Baru night market. The dry good traders had, on average, 3.5 stall lots per trader. The household good traders occupied 3 stall lots each, and the fruits traders had on average, 2.8 stall lot spaces. The estimated total earnings for all the traders combined for the night market was RM15,000. That would mean that on average, a trader could earn about RM205.

An in-depth interviewed was directed at 4 traders to get an insight on the traders' behavior and profiles. All the 4 traders interviewed were Malays, ranging in age from 24 to 51 years old. The first trader interviewed was Mr. Rabani bin Bustam. Prior to becoming a night market trader, he worked as a contractor in Tanjung Karang. He had 3 children, with 2 still studying at the primary school level. He quitted his contractor job be his own boss. He knew that he could earn more by running business at night market. He had experimented various ways of making satay and ayam percik during his off days then. After getting rave reviews from his friends and family members on the taste of the two dishes and with his wife's encouragement, he applied for and was granted night stall operation permit by the local authority, the Kuala Selangor Town Council. He was required to attend a day course on food sanitation and hygiene organized by the local authority. Later on, Mr. Rubani expanded his business and operated in 4 other night markets (Bukit Rotan, Sg. Sirih, Bestari Jaya, and Tanjung Karang) during a week. He took a break from business every Monday. On other days he would be busy collecting the raw materials from the Supplier in Tanjung Karang Market and preparing the satay and ayam percik. He had 4 suppliers who would deliver all his orders to his home also in Tanjung Karang. Thus far, he had maintained good working relationships with the suppliers, and they did provide good discounts for bulk purchase. Mr. Rubani modestly indicated that he earned about RM 1,000 revenue a night, and his profit was about 50%. On a good day with good weather, he could earned 20% higher.

Mr.Rubani would usually arrive at the night market at 3 pm. It would take him and his family about 15 minutes to set up the barbeque pits and the other necessary items. He drove to the night market in a van from his home located about 20 minutes away. When he first started, he offered only satay and ayam percik, but since then, he had included fish balls and chicken balls. To supplement his income, he would also do catering services with his satay business. He would go to the customer's requested location for the catering business on days when he did not have any night market business.

The second trader interviewed was Madam Marini binti Ismail. She had five children, four girls and one boy, and all were still schooling at either the primary or secondary schools. Her husband was a fireman whose fire station was based in Kuala Selangor. Mdm. Marini worked as a school clerk in Ijok during the day, where she earned a salary of RM 1,700 per month. She started her night market business 3 years ago offering hijab/headscaves and blouses for sale. She had started the business with RM1500. She was helped by her daughter. The night market was located about 30 minutes drive from her home in Taman Melawati. She also ran her business 3 other locations - Bukit Belimbing, Paya Jaras, and Pantai Remis, all in the Kuala Selangor district. She purchased her supplies from the Persona Boutique located at Chow Kit Market in Kuala Lumpur. Initially, she had some problems with the supplier since she could not made sufficient income to get the supplies that she wanted, but now she had no difficulty paying for them. She could earned a profit of RM300 on nights when the weather was good and during school holidays. Other challenges that she faced were related to the customers' preference on the colour and style of headscaves and blouses. She would carefully noted the customers' requests and preference and would try to get them from the suppliers. She would give up to 15% discounts for quantity purchase and also if they are repeat customers.

The third trader interviewed was Mr. Azam, an enterprising 24-year old youngster. Upon completing his secondary education, he helped his family business at the night market selling meat. Other than working at night market, he reared cows for additional income. For this, he had built a cowshed behind his family house. He would get quite good return on selling his cows, especially during the Haj period when the Muslims wished to do korban/slaughtering for religious reason. He had been doing that and the night market business for the last 8 years. His family helped him at the night market. He also did business at two other night markets - Ijok and Bukit Badung. Mr. Azam would usually arrived at the Bandar Baru night market at 3.30 pm. It would take him about 15 minute by truck from his house in Bukit Badung. He purchased the meat supply from Pasar Borong Selayang, twice a week. In Bandar Baru night market, Mr. Saiful could earned up to RM 1,700 profits. In other markets, on a good day he would get a profit of RM 1,400, but on an average night he would earned about RM 1,000 per night. On his days off from the night market business, he would do odd jobs at the nearby plantations.

The fourth trader interviewed was Mr. Daud Zambri. He had 4 children, 2 were already workin, while the other two were in secondary school. Before venturing into the night market business, he was an army personnel based at the Port Dickson camp. He opted for optional retirement from the army and started the kebab business at the night market. He had learned kebab making from Chef Din cooking classes that he attended in Taman Melawati, Kuala Selangor. He paid RM280 per session for a 3-session class. He did some modification to the original kebab recipe until he felt that it would be good enough to sell. He also offered kebab for sale at 3 other night markets - Tanjung Karang on Sunday, Bukit Cherakah on Thursday, and Kapar on Friday). He had been doing that for 10 years, and he managed his kebab business without any helper. He purchased his supplies from Kuala Selangor Market. On his off days which were Monday, Tuesday and Wednesday, he would spend time making the kebab sauce and marinating the beef and chicken meat. He started the business with RM2,500 which went towards buying the kebab machine which cost RM2,000. On an average night, he could earn RM200 profits, and he double that amount on a good day. He hoped to secure permits to start his kebab business at 2 additional night markets.

(2) Bestari Jaya Night Market

Bestari Jaya Night Market was located at Jalan Bukit Badong, next to the main road to Ijok town. It was situated in the midst of the bustling town close to a heavy traffic intersection. Nearby was the Batang Berjuntai National Secondary School and a sprawling rubber glove factory. The night market operated on Saturdays from 2:30 pm to 10:00 pm. Within walking distance were the Taman Suria, Taman Seri Bestari and Taman Sentosa 2 residential areas. The night market was of medium size with 124 stall lots occupied and 6 vacant lots. The night market layout was an awkward P-shaped where customers would need to do some backtracking to cover all parts of the market.

There were 71 traders occupying 118 stall lots at the Bestari Jaya night market. Thus, on average, each trader occupied 1.7 stalls. The widest stall lot spaces occupied by a trader were the 2 traders selling household goods who occupied 3.5 stall lots each. The total estimated earnings of the night market per night was RM63,350 This meant that on average each trader earned RM537. There were 4 traders interviewed, 3 were Malays, and 1 was an Indian. The first trader interviewed was Puan Noni who, in her 40's was working alongside her husband Mr. Jalal, selling ice cream and drinks. She and her husband started their night market business since 1993, thus they had over 17 years of experience making and selling ice cream and drinks. They came from Sekinchan and had 3 children. She had learned ice cream making at an IKS course that she had attended. For the beverages that they sell, they used reverse osmosis water which gave the distinctive taste to their beverage products. Their startup capital was RM6,000 mainly for the ice cream making machine, the beverage containers and other supplies. They had managed to generate an income of between RM700 and RM800 per night. Over the years, from their income, they had managed to acquire a van which they used for transporting the things from their home to the night markets. They got their supplies from the Chow Kit market in Kuala Lumpur. Besides the night market in Bestari Jaya, they also operated at 3 other night market locations - Tanjung Karang, Sekinchan and Kuala Selangor. On average they earned monthly income of RM 11,000.

The next person interviewed was Mr. Kassim who was in his late 60's. Together with his wife, they offered a type of fried dough called 'Kuih Cakoi'. He would mix the dough at their home in Kuala Selangor and would transport the dough in two large containers in his minivan. Upon arrival at their stall at the night market, he and his wife would light up the stove and placed a very large wok or 'kuali' that was half filled with cooking oil. He would set a table next to the stove, where he would knead and cut the dough into thin 6 inches long parts. When the oil had heated up, he would fry the dough, and the dough would be light and fluffy. As they turned golden brown, he would lift them up in strainers and placed them on a tray lined with greaseproof papers. Each Kuih Cakoi cost 50 sen. Mr. Kassim was a member of the Royal Malaysian Navy until his retirement in 1990, where upon he set up the kuih cakor business for the simple reason, he loved Kuih Cakoi. Besides doing business at the Bestari Jaya night market, they also had a stall at the Bukit Rotan night market. He purchased his supplies from a mini market near his home. His food cost for a night amounted to about RM20 only, but he could generate as much as RM500 in revenue. Thus, for a month, he could earned about RM4,000. That, together with the monthly pension that he received, he and his wife had live comfortably.

The third trader interviewed was Mr. Zahir and at 26 years old, he was the youngest trader interviewed at that night market. He sold bundle clothes such as jeans, t-shirts, cotton and polyester shirts, blouses, socks and man's under garments. He had been doing that since 2005 and he planned to go on doing that. He was a cheerful and guy and he had managed to attract customers by his constant calling out to them to stop and had a look in his stall. He did not pressured sell, allowing the customers to browse through without closing in on them. He had this big budging small bag hanging from his waist from where he placed the collected cash and returned change to the customers. His customers were mainly teenagers or college students. His drove to the night market his minivan which he used for transportation from his home in Sekinchan. He had stall lots in three other night markets -Tanjung Karang, Sekinchan, and at the Shah Alam market near the stadium. He started the business with RM30,000 which he used mainly to buy stocks. On a good, clear .night he could earn a profit of RM800, thus on average monthly, his net income would be about RM9,600.

The last person interviewed at Bestari Jaya night market was an Indian trader, Mr. Murthy who was 29 years old. He hailed from Taman Sinaran, a short distance from the night market site. He started the business in 2004 selling groceries and dry goods. He enjoyed working at the night market and this was the only night market that he participated in. During most days, his worked part time at a palm oil plantation which is also located in the town. He had started the night market business with his hard earned money of RM5,000 which he had saved for 10 years working fulltime at the same plantation. He could get RM 1,200 a night. He would took off one day in a week to get his supplies from Pasar Borong Selayang, which was about an hour drive from his home.

(3) Ijok Night Market

Ijok Night Market was located alongside the town only main road and near a busy intersection. At one end was the National Chinese Secondary School, a Petronas Gas Station, the Main Bus Terminal, and at the other was the Caltex Station gas Station. The night market opened on Sundays from 1:30 noon to 7:30 pm. There were 103 stall lots in total and 7 were unoccupied at the time of the study. The stall lots formed a T-shaped with one elongated arm.

There were only 66 traders working in the 103 stall lots at this night market, thus making it the smallest of the 5 night market in the study. The majority of them, about 51%, offered cooked food. The first trader interviewed was Puan Som, a 50 years old lady, sold only one type of cooked food, the Ambeng Rice (Nasi Ambeng). Her stall was quite popular for there would be at least three customers waiting to get their Ambeng Rice She had been selling Nasi Ambeng at Ijok and 2 other night markets (Bestari Jaya and Bukit Badung) for the past 3 years. Prior to that, she worked as a Kindergarten teacher for she had a diploma in preschool teaching. She could communicate well in both the English and Malay languages. She had learned to cook the special dish from her late mother. Her late mother had migrated here from the Java Island some 60 years ago. She had brought with her the special Ambeng Rice recipe and had been selling that to bring up her daughter, Puan Som. Puan Som decided to quit her teaching job so as to have more time bringing up her two children. She started the business with RM2,000 which was used mainly to buy a stove, a large cooking pot and the raw ingredients to make the Ambeng Rice. Initially she started selling only 150 packets a night. Currently, she could earned about RM1,500 per night and for a month she could make about RM 18,000. She had almost 300 repeat customers and she could tell when teach one would arrive to buy the Nasi Ambeng. She would get her supplies for the Nasi Ambeng at any grovery stores in Ijok. On her off days from selling at another 3 night markets, she and her husband would operate a traditional massage and spa business from their home at Batu 26 in Ijok.

The next person approached for the interview was Mr. Zuhdi, a 26-year old guy who sold clothes. He home was Paya Jaras in Sungai Buluh about 15 kilometers away. He had been selling clothes in the night market for the past 5 years that was since he had completed his secondary education. He had decided not to continue his tertiary education, even though he had the opportunity to do the matriculation program at one of the public colleges, because he wanted to support his family who was very poor. He had two friends working with him initially, but now he worked on his own. He had always wanted to be his own boss because that gave him more freedom to select clothes that he thought customers would prefer. He had his sister, Hasimah working with him..He started on his own with a capital of RM4,000 and per night he could get between RM300-400 in net income. He could get on average of 100 customers per night. He had been toying with the idea of starting a restaurant business, but he had to wait until he had accumulated sufficient savings and also acquired some cooking skills. He had always admired his good friend who was a hotel chef who had been telling him about the interesting recipes that he had concocted.

Puan Sharifah and her husband were the next two people interviewed. They had been vegetable traders for the past 6 years at the Ijok night market. Before that, Puan Sharifah had a school canteen business, selling light meals and snacks to the primary school children. That was hard work, so she decided to start her night market business because she believed that she could earn more money with the same effort. She had selected to sell at Ijok night market because she had known a few friends who had been trading here and they had told her about the opportunities to make money here. She applied and was granted a perm by the Kuala Selangor authority, so she and her husband started the business with a RM7,000. After 3 years, she applied for another night market permit from the Shah Alam local council to get a stall at a Shah Alam night market. So now they were operating at two night markets. They travelled back and forth from their home in Tanjung Karang. All their vegetable and fresh produce supplies were bought from farmers and markets in and around Tanjung Karang. On average, a night they could earned about RM400 from the Ijok night market and from the Shah Alam night market they could get RM 1,000. Another trader interviewed was Mr. Munir bin Sofi who was in early 40's. He completed his secondary education about 20 years ago and had decided to go into business. He had started his business at the Ijok night market since 2002. Prior to the current business, he had been selling drinks and beverages. He had decided to look for something he could sell that could bring him more money. So he surveyed other night markets in Kuala Lumpur and Klang and he observed that the traders selling spring potatoes were getting a lot of customers. So he discontinued selling drinks and beverages and went into the spring potato business. He spent RM7,000 of his savings to buy the machine to make the spring potato. It was a very good decision because since then his income had almost doubled to RM 1,000 per night from the average of 100 customers he received per night. This night market business was his only source of income. His unmarried elder sister helped him as the cashier. They both stayed at a terrace house in Ijok.

(4) Tanjung Karang Night Market

Tanjung Karang Night Market was located adjacent to the main North-South trunk road, amidst the busy town of Tanjung Karang. There were at least 5 rows of 3- and 4-storey shophouses around the night market. Within its vicinity was the Pilgrimage Board building, a children playground and a food court. This night market was unique since the local authority allowed the cooked food traders to set up dining areas in front of their stalls. There were a total of 209 stall lots and all were occupied. The stalls were arranged in 3 I-shaped formation. There were 109 traders with 209 stall lots at the Tanjung Karang night market. Therefore, the average stall space occupied by each trader was 1.9 stall. The vegetable traders occupied the most stall lot spaces with an average of 3 stall lots per trader. The night market generated an earning between RM53.650 and RM88,900, thus on average each trader earned an estimated RM492 to RM816.

There were 4 traders interviewed at the Tanjung Karang night market. The first trader interviewed was Mr. Zaini who, at 50 years old, was busy setting up his stall at about 3:30. He had his 4 children and two workers helping him pitching up the tents and laying out the tables. Mr. Zaini, who lived with his family Tanjung Karang, was the son of an Indonesian immigrant from Pekan Baru, Indonesia. His mother was a Malaysian from Selangor. His parents and grandparents had earned their living through the food business. They had developed their own special recipe for mini Pancake Turnover (Apam Balik) with a variety of fillings such as chocolate, 'Pulut Hitam' or 'Pandan' flavour. They had started the Pancake Turnover and Fish Sausage ('Keropok Lekor') business about 18 years ago after he quit his job at UMW Toyota Factory in Shah Alam. He had worked there for 10 years before he decided to do something that could earned him a better living. He and his wife decided to start a small business with the little savings that he had accumulated over the 10 years. His wife had some experience in small business since she had been accommodating to their neighbours' request for her to make some afternoon tea cakes for them. In between looking after her young kids, she had managed to earn some money for her own expenses. Mr. Zaini said that his wife had always encouraged him to start the business at the night market, so both of them were contented with their business then. Other than the night market in Tanjung Karang, he had stalls in 4 other night markets (Bestari Jaya, Bandar Baru, Sekinchan, and Saujana Putra). The family worked very hard, but they spend time together not only during business, but also on their off days.

Puan Limah, a very shy 54-year old lady selling mixed vegetable with special sauce called 'Pecal Jawa', was the next person that consented to be interviewed. She arrived with her husband Mr. Jomo from Parit Satu in Tanjung Karang to open their stall at 3:30 pm. Initially, she started the business on her own to help supplement her husband's income. Her husband worked as a labourer and his income was insufficient to support the family of eight including their children, 3 boys and 3 girls. Prior to the night market business, she had worked as a helper at a vegetable farm near her house. She felt indebted to her Chinese employer for he had often helped advanced her wages and gave her time off to cater to her children's needs while her husband was away on his shift work. She was sad to leave his employment, but she had to earn more to meet the needs of her growing up children. Streams of customers were seen queuing to get her 'Pecal Jawa' which she sold at RM2.50 per pack. Rice cake (Nasi Impit) and some prawn crackers were added to make her pecal special. The 'Pecal Jawa' had 2 different gravies, the peanut and spicy gravies that she had developed herself. She used banana leaves to line the pecal container for, according to her, that provided the unique pleasant aroma for her pecal. It also reduced her cost since there were a few banana trees at her backyard. She would only start preparing the vegetables at about 11.00 am so that they remained crispy and fresh for her customers, who would start coming in at 4:00 pm. Her husband bought all the supplies from the Tajung Karang Market, located very close to the night market site. They started their business about 25 years ago with only RM 1,500. Now, they could earn a profit of between RM300 to RM500 per night. They also had stalls at two other night markets - Pasar Sungai Sireh and Parit 1 Batu 11 Simpang Sungai Sireh. Their children were all grown up now, and 3 of them had their own families. In fact, all of them could support themselves and had insisted that Puan Limah and Mr. Jomo retired from the business and stayed with them in the city. parents. But, according to Mr. Jomo, they would continue the business for that was the only thing that they do best, and also they enjoyed the friends they had made at the night market over the years.

The third trader interviewed was Puan Azlin who was 34 years old. She and her family of 4 daughters had stayed at a house in Jalan Adam, Tanjung Karang. She and her husband, Mr. Kamarul, sold coffee powder, chili paste and some traditional cake such as Sweet Glutinous Rice cake called 'Dodol'. She had started in business by selling homemade chili paste from her house because that did not require alarge capital. But then, it was not easy to get customers. So, after 4 years of doing that she decided to start the night market business. She applied for a stall permit and was told by the authority that she had to specify the type of products that she intended to sell. The authority had a policy to encourage diversity in the type of products that were sold at the night markets. She discussed with her husband and decided to sell coffee powder as their main product. With a startup capital of RM10,000, she paid RM4,600 for the coffee bean grinding machine, and the stock of coffee beans. They had a small truck which opened up at 3-sides. On the upper side of the truck, they had inscribed the sentence 'Agriculture is business' and they had placed several newspaper cuttings on their business on the side of the opened compartment. The coffee grinding machine and other utensils were placed in the truck and they were within easy reach. The variety of coffee beans was placed in transparent plastic containers with openings at the base. The coffee powder was sold for RM5 for 360 gram and customers were given free samples to help them select he one that they preferred. Mr. Kamarul would go north to Baling, in the state of Kedah, once a week, to get their coffee ben supply. The supplier sold 10 kilogram for RM90. They could earn a profit of at least RM500 per night.

Puan Norhana Hashim was the fourth trader interviewed at the Tanjung Karang night Market. She was 50 years old who originally was from Sungai Nibong in Penang. She had stayed in Sekinchan after she married her husband who was from there. Her husband who was the sole breadwinner, passed away from stroke 10 years ago. She had to find ways of supporting her 6 children who were still schooling then. Unfortunately, one of her children, a 12-year old died from the dengue fever 2 years ago. Her husband had started the night market business 22 years ago selling dry goods and groceries, but she was not involved in it at all. After her husband passed away, she decided to carried on the business, helped by her children and her son-in-law. Her supplier, also in Tanjung Karang, would deliver to her home,the supplies that she ordered once a week. She could earned between RM800 to RM 1,500 per night. Her late husband started the business with only RM800. Over the years, she had acquired a van and a small lorry to transport the goods from her house to the night markets. Her son-in-law would drive the lorry while she drove the van. The lorry carried almost all the goods and small goods such as cooking oil, onions and packet spices would be carried in the van. Other than the Tanjung Karang night market, she had stalls in 4 other night markets - Pasir Panjang, Andelas, Sungai Buluh and Saujana Putra. Puan Norhana wanted to open a mini market in the near future. But, her children wanted her to retire and passed on the business to Mr. Kuza, her trusted son-in-law. Her second child who was teaching at a school in Sabah had wanted her to stay with her in Sabah.

(5) Pasir Panjang Night Market

Pasir Panjang Night Market ran parallel to the main North-South trunk road, alongside the one and only row of shop lots in Ijok town. It operated every Saturday from 3:30 pm to 9:00 pm. The Pasir Panjang night market was small with only 45 stall lots of which none were vacant. There was a mosque, and green paddy fields with fruit trees nearby. On the other side of the shop lots were several rows of newly constructed single storey linked houses. The stall lots were arranged in an L-shaped.

The Pasir Panjang night market was the smallest among the night market studied. There were only 45 traders and 72 stalls. Forty-one percent of the stall lots were occupied by traders selling cooked food. The total estimated earnings for a night from the night market was RM9,450. Therefore, on average, each trader earned RM210.

The first trader interviewed was Puan Mazuin who was 55 years old. She was originally from Masjid Tanah in the state of Melaka. She married Mr. Zulkifli in 1991 and moved with her husband to Pasir Panjang. Before she started the night market business, she had taken care of her two young sons. Now that they were grown up and had their own life, she decided to start a business to fill her time. Her husband had always complimented on her great tasting 'Nasi Lemak' which she had frequently sent to be sold at a nearby coffee stall. She did that, not because they needed the money, but her close friend was running the coffee stall and she had wanted her to help out by supplying the Nasi lemak. Determined to look for something more challenging, she apply for a night market stall permit and began her business selling Nasi Lemak and some fresh vegetables especially spinach which she had planted at a nearby paddy field. Her friends had placed in various mini cake or 'kuih' such as Sago cake, 'Kuih Cucur Badak', Yam Doughnut, and some other tea cakes. She sold the kuih at RM1 for 3 pieces and she earned a commission of 30% for every piece that was sold. The unsold kuih would be taken back by her friends, the suppliers. Mr. Zulkifli had not been well lately, but he would accompany her at the stall.

The second person interviewed was a young trader named Razif Sulaiman. He had a friend named Mohd. Isa who worked with him. Both of them were 21 years old. Razif had just graduated with a certificate in Electronic engineering course from Giat Mara at Sungai Panjang. Both of them live in Sabak Bernam. Their specialties were making Bahulu . a kind of steamed mini sponge cake called Bahulu Kukus' and steamed bun called 'Pau' with a variety of fillings -maung beans, egg yolks with coconut milk, chicken and beef curry and shredded coconut. The Bahulu Kukus looked very attractive with multicoloured layers, and were very soft. They would taste great with tea or coffee in the afternoon or evening. The profit that they earned for the night would be divided equally between them and with some put aside for the following rolling capital. They also had a stall at the Bagan Nakhoda Omar Market. They rented a van from Aswat Enterprise for transportation. They had enjoy doing business because they would have ample leisure time during the day to hang out with their friends. These two fast friends were very ambitious and they would always be looking for ways to expand the business. They were then experimenting on ways to make frozen pau and frozen bahulu because they were hoping to penetrate the big players by supplying hypermarkets and supermarkets with their frozen products. They had a friend who worked in the frozen division of a major food supplier company who had been helping them with the experimentation during his off days.

The third trader interviewed was Mr. Matnor who was 43 years old. He was selling his own special ice cream and there was always a large crowd at his stall. He had started the night market ice cream business since 1997. Prior to that, he had been selling clothes for almost 8 years. He was doing well in the clothing business until the recession of 1997. He was badly affected by the economic downturn, so he decided to switch to selling ice cream instead. This decision was made after he had made numerous observations on the products and selling activities at several night markets in Kuala Lumpur. His facts finding venture indicated that there were very few homemade ice cream vendors, so he decided to sell ice cream. After several more trips, he found out that the machine for making ice cream, the kind that he wanted, was only available in Bangkok. He contacted the supplier, travelled to Bangkok bought the stainless steel machine for RM800 and the recipe for making ice cream. It required only a few steps to make the 'magic ice cream' as he named his ice cream. The first step was to place some milk, carbonate water and ice cubes into moulds and sticks were placed in the center for ease in lifting and licking. Next, the top of the ice cream machine is given a hard shake, and the ice cream is pulled out via the sticks. He mixed ice cube with some salt water to quick freeze the ice cream. He had also developed his own unique ice cream flavours. Mr. Matnor spent about RM31 a day for the supplies. The minimum profit that he could earn per night was RM80. According to him, most of his customers were children; therefore he could only sell his single flavour ice cream at a very low price of RM0.50 each. Additional price would be charged for additional flavours. However, his customers were not limited to children only, for he did get quite a few adult customers who were also attracted to the different coloured ice creams. His ice cream tasted very different from the other well known ice cream brands.

The last trader interviewed was Mr. Sanusi. He sold perishable products like mushroom, vegetables, lemon grass and other root vegetables, and some fresh and dried fish or 'ikan kering', and fresh seafood. He had been selling at the Pasir Panjang night market for almost 8 years. Prior to that, he worked at an architectural company after completing a certificate course in electrical engineering from a Kelantan Polytechnic. He quit the job because he wanted to go into business and had some free time for his family and friends. He would prepare the dried fish himself. After cleaning the fish, he marinated and dried them off in the sun. He had learned the art of preparing the dried fish from his mother. The local community here, who were mainly farmers and fishermen, had also placed their products to be sold at his stalls and for which they paid him a commission of 10% of sales. He got his seafood and fish supplies from the Fishermen Association which was housed in a building near Sungai Besar. The prices that he was charged were very reasonable but he would had to get there at about 4:00 am. The Fishermen Association building was where the fish and shellfish that were just brought in by the fishermen, were sorted and divided according to size and quality. They were sold mainly to wholesale traders and restaurant operators. Mr. Sanusi was a very friendly person and he volunteered substantial information on the night market operations. He also operated in two other night markets - Sabak Bernam and Sekinchan. He stated that this was a lucrative business which he could earned about RM1,200 a night, but it was a 'smelly' business.

CONCLUSIONS

Individually, the night markets' traders had developed their own personal management style and their own way of dealing with customers and suppliers. These individual traders' characteristics and attitude were one main component that accounted for the vibrant, colours, and dynamism of the night market environment. For the elderly traders who depended on the night market for their main income source, they did not have any plans to enlarge their business, they had the necessary skills to survive and continued on doing well, by their standards, in the night market business. They had developed the skills to accommodate to the variety of customers' needs, and since most were repeat customers, the approach had almost become a repertoire. Their approached in business cannot be easily learned or replicated. There was no available business textbooks that could prescribed the ways on how the informal business should be conducted. At best, it could be described as the layback approached with the pull factors and service orientations that could only be understood through the combination of business, culture, and human psychology knowledge. To suggest that they should, as prescribed by the business textbooks, designed proper packaging and labeling, laid out their products in attractive displays, learned sales, marketing or promotion principles; would sound vain, ignorant and inappropriate. For them, the ways that they had been conducting their business had worked and it would be a grave mistake to suggest otherwise. Their learning curves had been invaluable for the sustainability of the night market business.

For the young entrepreneurs who had just venture into the night market business, the hands-on experiences, the trials and tribulations faced thus far, and the skill learned at the night market would form the basis of their strength, characters, and the integrity to face the onslaught of challenges ahead. The lessons learned could not be derived through the education systems, or inherited from their parents. Each trader interviewed had their own unique experience and their own reasons for venturing into the night market business. For some, it was not their choice and they were thrown into it due to circumstances. For others, it was the promise of more earnings, and improved quality of life. Whatever the reasons, the central theme common to all traders was the need to have a unique product.

It might be inappropriate to suggest that traders should be more 'professional' in managing their business. This orientation might alter the course of the night market's organic growth and change the 'atmosphere' of the night markets. It might thus, loose the special characteristics of the night market itself. For instance, a requirement for proper counters, utensils and stall set up might pushed prices up and the night markets would lose their competitiveness to the supermarket. To enforce proper packaging and product labeling might discouraged new entrants, and destabilized the elder traders and caused them undue stress. However, minor adjustments or improvements could be made without major repercussions on traders' and customers' wellbeing. Improvements such as attractive products display, proper packaging with easily handle, attractive containers/boxes, and queuing system to minimize crowding and waiting could be instituted with minimum disruption. Other aspects that could be improved included the hygiene, sanitation and cleanliness of the traders and the entire night markets. Perhaps, one of the ways to implement these improvements would be to provide free consultation on-site.

QUESTIONS:

1. What is the major issue of the case? Why?

2. Identify the major problems faced by the Night Markets traders. Why?

3. Describe the diversity of traders and explain the advantages and disadvantages of having diverse traders at the Night Markets.

4. Discuss the contributions of the Night Markets to the local economy.

5. Suggest on improvements to be made for the night markets and indicate the reasons why they have to be made.

6. If you intend to start a night market business, explain the steps that you will take to ensure your success in the business.

Subject: Entrepreneurs; Retailing; Economic growth; Suppliers; Case studies

Location: Malaysia

Classification: 9179: Asia & the Pacific; 9130: Experiment/theoretical treatment; 1110: Economic conditions & forecasts; 8390: Retailing industry; 9520: Small business

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-15

Number of pages: 15

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 963331457

Document URL: http://search.proquest.com/docview/963331457?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 49 of 100

Case study: Transforming from a service to a products based business

Author: Kaliski, John A; Booker, Queen

ProQuest document link

Abstract:

This paper describes how a family-owned, portable sawmill business transformed from a services-only business to a products-based business, moving from a focused differentiation strategy to a differentiation strategy to support profitability growth. The business began as a profitable, service-based sawmill specializing in on-site, small to medium-sized sawmilling jobs. After 8 years in business, the company shifted strategy away of a services-orientation to a products-based business. While still providing onsite milling services, the company primarily focuses on milling, drying, finishing environmentally-friendly hardwood lumber and finished wood products. This paper investigates the motivations for this strategic change, the risks involved, the process of transforming this business, the implications on profitability and scalability . Also discussed are the personal implications of this change to the owners of this business. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

According to Michael Porter, businesses must have a competitive strategy, that is, a plan to compete in a particular market or industry. His framework for competitive strategies is well accepted, that is, that firms compete on cost, differentiation, or a focused model of either cost or differentiation. Small business owners are no different. They too must decide how they plan to compete in a particular industry or market segment, and how the selected competitive strategy will contribute to a competitive advantage leading to profitability growth. (Dessler and Phillips, 2008; Allen, 2007)

The business described in this paper is a small, family-owned, portable sawmill business named Run Of The Mill (RTM) located in Southern Minnesota. RTM began in 2001 as a services sawmill specializing in on-site, small to medium-sized sawmilling jobs. Through the use of a portable sawmill, the original business model was to pull the sawmill to a customer's site and cut the customers logs into custom-sized lumber to be dried. For the RTM, the advantages of this model included profitability, ease of operations and planning, and flexibility to the needs of the owner. The advantages for the customer were the elimination of the need to move heavy logs, reuse of logs that would have otherwise been wasted, and access to custom sized lumber at costs far lower than typical retail rates.

This paper describes how RTM transformed from a services-only business to a products-based business, moving from a focused differentiation strategy to a differentiation strategy to support profitability growth. While RTM still provides onsite sawmilling services, the company primarily focuses now on milling, drying, finishing and selling environmentally-friendly hardwood lumber and finished wood products. The purpose of the change was not to grow in size but to benefit more from the value earned by the customer. With the services-based model, the cost savings (value added) to the customer was the production of lumber at a small fraction of the price the customer would have paid to a lumber yard. The goal of the strategic shift to a products-based model was to retain more of the cost savings from the business process for the business itself rather than passing all the cost savings to the customer. The owners wanted a business process that did not require fundamental change in the core competencies and equipment assets of the business.

COMPANY OVERVIEW

RTM is a family-owned, portable sawmill business located in Southern Minnesota specializing in on-site, small to medium-sized sawmilling jobs and hardwood lumber sales. The company was formed in 2001 in response to a perceived need for small scale, boutique sawmill services to the private individual. The stated goal of RTM is to "convert your logs to valuable lumber where the trees once stood. Our milling is environmentally friendly and lawn safe.We are environmentally sensitive. We do not use heavy equipment that can damage your landscaping or compact the earth. Keep your trees from the landfill. Recycle the wood. Save money and the environment..." (RTM 2011) RTM's original business model was to provide an environmentally-friendly and economically attractive option to disposing of unwanted or damaged/dying hardwood trees.

RTM has 2 employees: the founder of the business and an hourly employee. While a small scale operation, RTM is a full service, vertically integrated business. Starting from a fallen tree, RTM is able to produce wide variety of product in a wide variety of finished states. RTM can produce rough sawn lumber of virtually any size/cut, can kiln dry the lumber, and surface the dried lumber into finished lumber, tongue and grove flooring, moldings, etc. RTM's significant market differentiator is that it offers an environmentally-friendly, full service, one stop, custom hardwood manufacturing focused on the end consumer or small business.

ORIGINAL BUSINESS MODEL

For the first several years of RTM's operation, only a services model was pursued. "All of our work is completed on site starting from the fallen tree. The sawmill is pulled to the job site and quickly setup After the log is placed on the mill and squared to a cant, the lumber production begins. The rough sawn lumber is then stacked for drying; after the lumber is dried a single pass through a surface planer is usually enough to finish the wood." (RTM, 2011)

This services model has several significant advantages. The first is ease of starting and maintaining the business. After a startup phase, the majority of effort was spent in directly billable activity. Overhead activities such as maintaining the equipment, and advertising were relatively small investments of time and money. Most of the effort and expense with the services-based model coincide with revenue generation. This coordination between revenue and expense made managing the business relatively easy. After the business startup phase, cash flow was generally positive because the structural, fixed costs were relatively small. The owner is accustomed to and successful with the services business model. The business was stable and profitable for more than 8 years.

The portable sawmill service business model is dramatically different when compared to the traditional sawmill business model. Compared to a traditional sawmilling operation, RTM's fixed costs tend to be much lower with the portable sawmill because there is little need for a physical factory location, for a large array of material handling equipment, for dozens/hundreds of employees and the associated high insurance and tax rates, and for the acquisition and inventory of raw material and finished goods. These differences make the portable sawmill services business model more sustainable, flexible and less exposed to the natural fluctuations of the hardwood commodity markets.

Unfortunately the services model is not without its challenges. The primary challenge is scalability. Operating a portable sawmill is a physically demanding, dangerous occupation. Extra vigilance towards safety must be maintained to reduce the likelihood of injury. Obviously there are a limited number of hours an individual can do such work within a given period of time. To scale the services model of the business, owner is faced either with purchasing additional, more efficient equipment to speed production or hire and train additional employees. Given the likelihood of personal injury, the worker's compensation insurance for such employees is daunting. Of course taking these growth steps implies a significant increase in the fixed costs and liabilities.

Another challenge associated with scaling the services model is the nature of the sales. Most of the transactions are with private individuals since few business's have access to a small quantity of logs. In a short period of time, sawmills can produce a large quantity of material; the volume of material can fill the needs of a typical individual customer for months/years. Even though customer satisfaction is high, the likelihood of even yearly-repeat business from a given customer is low. With the services model, reoccurring revenue is severely lacking. Future revenue requires that the business generate a constant stream of new customers.

CONVERTING TO THE PRODUCT-BASED BUSINESS

During 2007, RTM's owner had a desire to expand the business. Initially the owner investigated hiring additional employees to expand the services business but this initiative was soon abandoned. In addition to the increased wage and insurance costs, it became apparent that finding a supply of diligent, reliable, safety-conscious workers was problematic. Also the owner found that his management duties increased dramatically as workers were added. Unlike many sawmilling operations the owner had made the conscious decision that he wished the business to remain a small, family run enterprise.

As an alternative grow path RTM decided to add product sales to RTM's operations, while still maintaining some of the service-based business model. The motivation for this decision was driven by the desire to obtain better marginal returns for the resources expended. The owner explains:

"When we saw and dry a hardwood log for a customer, the customer gets tremendous value for their money. If all of the customer's costs are added together, their total out of pocket for our services usually hover around $1.50 per boardfoot. Depending on the species, the retail value for that board is dramatically higher than that. For example if we are cutting walnut or cherry for a customer the retail price can be $9 per boardfoot or more. My goal with adding the product sales was to keep some of this different for myself. If I sell that same board as a finished product for $6/boardfoot I can beat the pants off of any big box retailers in the area. My customers want both great prices and environmentally friendly wood. I want to offer my retail customer a great deal while simultaneously increasing my revenue. Everybody wins."

It is not RTM's goal to directly compete against with the well established, multinational manufacturers of high-volume, low-margin commodity wood products. RTM's owner views his business as a boutique operation. One obvious implication of the shift to a products model is the need for a reliable stream of raw material. The owner now does environmentally-friendly harvesting of logs from his local area. Most of the raw materials come from recycled resources such as storm damaged trees, urban timber from tree services, standing dead timber, etc. The ability to harvest in an environmentally friendly, cost effective, sustainable manner was consistent with the Minnesota State Forests Certified Sustainable Initiative (MnFSC, 2006). The type of equipment and the available timber combined to provide RTM its competitive advantage over the larger companies.

In addition to the green manufacturing part of the strategy, RTM also chose to vertically integrate their operation in an attempt to capture more stages of the value chain. According to RTM's owner:

"We wanted to be a full services shop. I wanted to be able to start at the log as my raw material and finish at the locally-sourced, environmentally friendly, finished hardwood boards, crown molding, tongue and groove flooring, paneling, etc. By doing so, I can attract more customers and charge a premium for my product. I can then sell to not only the hobbyist but also to other small businesses which allows me to attract repeat business."

The goal of vertical integration is itself fraught with challenges. In the wood business vertical integration would typically translate to long process times, large capitalization, large physical plant, space and equipment to maintain the raw material, in process, and finished goods inventory. Of course employees would need to be added to perform all of these tasks.

To avoid the added size, complexity, and risk, the owner adopted a modified supply chain model. Traditionally in lumber processing most of the operations can be completed quickly with the exception of kiln drying. With the usual technology this stage requires 6 to 10 weeks to complete for one inch thick boards. During this drying only one type and thickness of lumber can be dried at a time. Because of this delay, most businesses then need to process large quantities of a particular species and thickness combination with which each run which in turn causes the need for large inventories sited above.

To avoid this delay and to more closely emulate a supply chain, RTM chose to different wood drying technology that reduces the drying times down to 5 to 7 days. While this technology is more expensive to purchase, maintain and operate, it allows RTM to maintain a just in time approach to their orders. While a small inventory of commonly requested finished products are maintained, the work and expense for most orders begin only once the order has been received. This helps RTM to avoid carrying significant in process and finished goods inventories and the associated the physical plant and labor. Also, RTM does not need to guess at what the market demands; instead RTM's modified supply chain strategy responds to those shifts automatically without risking large quantities of unsellable inventory. The primary inventory needed for the business is a small supply of hardwood logs and on-demand access standing dead trees in local forests.

To support the vertically integrated supply chain RTM did a significant renovation on an existing building and equipment at its current location; the renovation cost in excess of $30,000 and took almost 1 year to complete. While the renovation was in progress the business continued full operations. The building houses RTM postsawing operations.

IMPLICATIONS OF THE SHIFT

Business Velocity and Complexity

RTM's shift from the services-only to product-focused model has been in effect for approximately two years. Many advantages and disadvantages are now apparent from the shift. The owner views the shift as:

"Selling mostly products has been a real culture shift for us. It has been a great growth experience for me. I've learned a lot. Initially I thought that I would just setup the production facilities and we'd be off and running. Wow, I wish it were that simple. There are so many more things to think about and learn and do than there used to be.

In general customers like our products and services. Our revenue is up more than 30% over what it used to be. I think adding to the product side has helped us to survive an awful market slump; I'm not sure we would have been able to survive these last couple of years on just custom sawing.

With that said there is a lot more to it as well. I'm working more hours than I used to. Some days I feel pulled in a thousand directions; there seems to be more ups and downs than when I was just a guy with a portable sawmill."

On the advantage side, the hoped-for increased revenue opportunity has materialized. The customer base for RTM has expanded and word of mouth advertising has increased dramatically. The business has completely paid off the sunk cost of the change. The marketability of RTM products closely aligns with green, sustainable movement in the construction industry. RTM's products are derived from logs harvested using sustainable logging practices; all materials are locally sourced with a small carbon footprint. This is a sustainable differentiator for the company. The company's diversification (service and product) has allowed RTM to survive difficult economic times.

Since the shift RTM has started to accumulate several consistent repeat customers. This is something the owner has been trying to do for many years. The repeat business represents a more consistent source of revenue and provides some stability for the business. It also lessens the need to generate a constant stream of new leads. Most of these customers are from the construction industry; they tend to request more finished products such as hardwood flooring, paneling, and mantels for project they are working on.

Unfortunately the shift has not been without its disadvantages. Clearly the owner feels the complexity and stress level associated with the business has increased dramatically. The product-based, supply chain business model is more intricate; it requires the careful timing of a continual supply of raw materials, additional inventory holding space for both raw materials and finished goods, a process for waste removal, more involved bookkeeping and reporting, careful process and quality control measures, and a process for handling product returns. Further the raw material acquisition is dependent on weather, disease and other natural phenomenon to provide the timber for harvesting. These external factors are difficult to predict when calculating the need for raw materials inventory. Also this dependency on already damaged or downed trees creates a necessary change in alliance strategy. The owner has proactively sought to develop business relationships with local tree services and others with access to the resource. With this added complexity of the supply chain business model, a much larger percent of the owner's time is now spent in activities that are not immediately billable.

Human Resources

With the addition of product lines, the complexity and velocity of the business has increased dramatically. Coupled with this increase is an increase in the importance of RTM's single employee. The owner relies on his single employee to perform an amazing variety of tasks:

"I have had a series of employees one at a time, on and off, for many years. In the past they have tended towards hourly people who would help with some of the muscle work around the shop and did basic fixing and maintenance on machines. Now with our product activities, my current employee has really become key. Of course he still helps with all of the muscle work and maintenance, but he also does so much more. He has redesigned a couple of our machines to work more consistently, we both are constantly tweaking the shop layout to be more efficient, he has designing a new way for us to handle our in-progress and finished inventories, and so much more. I am considering having him become the contact person for some of our new accounts. I couldn't keep up without him."

Unintentionally RTM has shifted its human resource strategy. Previously employees where hired and viewed as low-skilled, hourly people to help the manual labor. The employee is now viewed as a strategic asset. Because of this, the owner has decided to pay a much higher wage rate and has spent a significant amount of effort in training. On a frequent basis, more responsibilities are added to the employee job description.

Accounting

An unanticipated effect of the strategic shift is the increased importance of accounting in general, and account receives and collections specifically. The owner laments:

"When we are only services I never had to think about Accounts Receivable. It was simple. We would cut a job; at the end of the job we'd get a check and that would be it. Now that we are doing products for lots of construction projects I need to submit bids, track the customer deposit, do the work, submit a final invoice, monitor my receivables. I learned very quickly that if I wasn't careful with what people owed me that it was easy to build up a large, overdue AR. Collections have become important."

IMPACTS ON THE OWNER

Two years after the strategic shift, the personal impacts on the owner have been mixed. Now that the expenses from the shift have been paid off, his return potential from the business has substantially increased. The shift has also the owner to professionally grow in a variety of ways. He derives tremendous satisfaction at learning how to operate new equipment, successfully modifying his plant and equipment to work more efficiently and effectively, and exploring different markets for his products. He thrives with the hands-on portion of the business.

In addition to the operational growth sited above, the owner has also matured as a business person. The shift to a product strategy has forced him to carefully consider and study aspects of his business that were previously underdeveloped during the serviceonly days. His understanding of marketing, operations, accounting, and financial has improved dramatically in a short period of time.

As with any strategic business change, there have been challenges to the owner as well. He is consistently working much longer hours than before in a physically demanding environments. Because of the location of the business the owner frequently has to cope rigors of a challenging climate. It is hard on both the owner and his equipment.

Beyond the physical demands the owner feels more stress from the business. Because of his increased investment in the business, increase in RTM fixed costs, and stringent time schedules and for product delivery and very little available inventory, each job causes its own tension.

LESSONS LEARNED

After surviving the difficulty of starting a business, many small business owners face the question of next stages of development for a new business. Does the business easily scale? What is the best way to grow the business? Many business owners choose to invest heavily in capital equipment and/or to hire many addition employees. In doing so, the owners dramatically increase their fixed costs and risk their current success for the promise of future gain. RTM owner choose a different path. By modifying his offering to produce specialty products, by shortening the production cycle and by adopting a supply chain mentality, RTM's owner has found a way to have both grow the business and increase his market reach.

While in general the strategic change has been a positive for RTM, it has not been without its challenges. The owner has experienced several unanticipated consequences from the change such as the increased importance of his employee and the need for collections. Even after two years new consequences arise occasionally.

With his modified supply chain, the owner has learned several important lessons:

"Our supply chain was key to the switchover, without it we could not have afforded to pursue our products business. It keeps us in the ballgame - we can compete with much larger outfits because of how we have things setup. With that said, supply chain is also really nerve racking. There are no tolerances for error - and errors happen all the time. When a piece of equipment breaks down or a storm slows our operation, we have to really scramble to get the order out on time and on budget. That is the hardest part of the business to deal with. Sometimes I think we should increase inventory to make our lives easier. The problem there is that I'm not sure where I'd put the inventory and which items I would stock."

Future Direction(s)?

The owner is exploring several different options for the future. On one end of the spectrum, RTM is considering re-emphasizing services instead of products. Because of the personal toll the business extracts from him he is considering scaling back on the product side of his operation and returning to the services model he had previously. He knows that doing so would reduce the RTM's size and revenue potential but it may be a more sustainable in the long run.

On the other end of the spectrum, the owner is in active discussions with a local cooperative that focuses on producing a huge variety of reclaimed lumber products from old barns and warehouses. RTM's operation could be used without modification to produce those reclaimed products. If RTM were to join the cooperative, all parties would benefit; the cooperative would simultaneously expand its products offering and would reduce its costs of goods sold. RTM would add a new outlet for its products at favorable price points.

If RTM continues with its product focus, the owner is also considering adding facilities to maintain a more significant finished goods inventory. While he is aware that doing so will increase his fixed costs, the increased inventory may help to reduce the daily stress levels caused by disturbances in RTM's operations.

Conclusions

The product based model offers greater potential for growth. This assumption is consistent with traditional business models when a company has a consistent product to offer, it can increase its profit margins. However, the potential for growth is limited to the restrictions logging opportunities and the shelf life of the sawn lumber. If fewer trees die, fall or are affected by nature, then supply has to turn to non-damaged trees. The owner must carefully balance the ease of his services operation and the market potential of his products business. How would such a process fit into the larger, environmentally safe harvesting? The raw material factor plus the limited inventory holding space and management creates additional challenges.

Even with strong business plans and feasibility, actual sales and actual processing gives the owner insight into what can be accomplished which frequently results in interesting refinements of the original business idea. Without explicitly stating it, the owner of RTM essentially does his own informal SWOT analysis of the business repeatedly. This owner has learned that market demands change frequently and he feels a need to remain nimble in the market. While time must pass to determine if the chosen path of environmentally safe harvesting and a primarily product based focus is the correct, sustainable path to grow profitability, the owner must continue to adapt his business model and expectation to meet the demands of a dynamically shifting market.

Subject: Organizational change; Family owned businesses; Entrepreneurship; Business models; Case studies

Classification: 9520: Small business; 2310: Planning; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-14

Number of pages: 14

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 963331518

Document URL: http://search.proquest.com/docview/963331518?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 50 of 100

Corner Table Incorporated: establishing a frozen food division

Author: Pilloff, Steven J

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Abstract:

In this fictitious case, Corner Table Incorporated owns and operates a chain of 47 Lisa C's restaurants in six states. Maxwell Alexander, the firm's founder and CEO, is in the process of determining how to continue the company's tradition of successful growth. One obvious strategy would be to continue the approach taken in the past and add more restaurants. However, Maxwell is very concerned that effectively managing more restaurants and maintaining the quality of the customer experience would stretch the company thin and be extremely difficult to achieve. As a result, he has rejected opening more Lisa C's restaurants at this time. Maxwell and other senior managers have been considering alternative opportunities for growth. The most promising alternative is the sale at grocery stores of prepackaged versions of Lisa C's most popular desserts. Two alternative approaches for Corner Table to sell frozen desserts have been developed. The first approach is a widespread distribution strategy, whereby frozen desserts would be offered to any grocery store or supermarket chain that wants to sell them. The second approach is an exclusive distribution strategy. Under this approach, one supermarket chain would be selected as the exclusive retailer of Lisa C's frozen desserts. Maxwell Alexander has assigned students the task of analyzing whether Corner Table should sell Lisa C's desserts through grocery stores, and if so, which potential growth strategy should be pursued. [PUBLICATION ABSTRACT]

Full text:

TEACHING NOTE - CORNER TABLE INCORPORATED: ESTABLISHING A FROZEN FOOD DIVISION

Case Overview

In this fictitious case, Corner Table Incorporated owns and operates a chain of 47 Lisa C's restaurants in six states. Maxwell Alexander, the firm's founder and CEO, is in the process of determining how to continue the company's tradition of successful growth.

One obvious strategy would be to continue the approach taken in the past and add more restaurants. However, Maxwell is very concerned that effectively managing more restaurants and maintaining the quality of the customer experience would stretch the company thin and be extremely difficult to achieve. As a result, he has rejected opening more Lisa C's restaurants at this time.

Maxwell and other senior managers have been considering alternative opportunities for growth. The most promising alternative is the sale at grocery stores of prepackaged versions of Lisa C's most popular desserts.

Two alternative approaches for Corner Table to sell frozen desserts have been developed. The first approach is a widespread distribution strategy, whereby frozen desserts would be offered to any grocery store or supermarket chain that wants to sell them. The second approach is an exclusive distribution strategy. Under this approach, one supermarket chain would be selected as the exclusive retailer of Lisa C's frozen desserts.

Maxwell Alexander has assigned students the task of analyzing whether Corner Table should sell Lisa C's desserts through grocery stores, and if so, which potential growth strategy should be pursued.

Learning Objectives

The purpose of this case is to give students the opportunity to conduct an in-depth analysis of two mutually exclusive projects and then determine which, if either, should be pursued. The case incorporates many of the elements often taught in an introductory finance course at the MBA or undergraduate level.

To decide among the two expansion opportunities, students must compute the net present value of each alternative. This process involves two primary tasks. First, students must analyze a variety of information to determine the relevant expected annual cash flows for each expansion strategy. Second, students must ascertain the appropriate discount rate for each project. The cost of capital for each project can be found by computing the firm's weighted-average cost of capital and adjusting it for the relative risk of each expansion alternative.

The firm's capital structure includes common stock, preferred stock, a bond, and a loan. For the common stock, monthly data are given that allow students to estimate beta and the expected return of Corner Table common stock. The expected return for the preferred stock and bond and the current market value of the loan must also be computed using information given in the case and standard models.

This case involves a great deal of number crunching. It gives students extensive opportunities to apply many financial models and incorporate many skills that are commonly taught in finance classes, especially ones covering basic fundamentals. The case also requires a written report, which provides students with the opportunity to develop writing and data presentation skills.

The case is easy for instructors to modify to be more consistent with their approach to the material. For example, in the provided solutions, beta is estimated from excess returns using the rate on three-month Treasury Bills as a proxy for the risk-free rate. However, beta could be estimated other ways such as with a traditional market-model approach with unadjusted returns. If the estimation were done differently in Excel, all the relevant numbers would change automatically and the instructor would be able to easily see the effect of any changes.

An Excel workbook with all relevant quantitative analysis is available to instructors.

CASE - CORNER TABLE INCORPORATED: ESTABLISHING A FROZEN FOOD DIVISION

Company Overview

Corner Table Incorporated began operating on February 3, 1993, when it opened its first Lisa C's restaurant in Frederick, Maryland. It was an instant hit. The restaurant's assortment of delicious desserts attracted a tremendous amount of attention and resulted in strong customer loyalty. The desserts were so beloved that customers would wait up to several hours for the opportunity to enjoy one of several daily specials referred to as "Treats from Grandma's Kitchen."

By mid-1993, it became clear to Maxwell Alexander, president of Corner Table, that he should expand the company by opening a restaurant at another location. The second Lisa C's was opened in Baltimore in 1994. Like the first restaurant, it was an immediate success. Waits of up to three hours were not uncommon. Over the next several years, Corner Table continued to expand by opening new restaurants throughout Maryland. In each case, customers were passionate about the restaurant's desserts.

On January 1, 1999, Corner Table issued common stock in an initial public offering to raise funds for an even more aggressive expansion into several neighboring states. Four years later, preferred stock was issued to raise additional funds. Two years ago, on January 1, 2009, a 15-year bond was issued to help finance additional expansion.

Today (January 1, 2011), Corner Table owns and operates a chain of 47 Lisa C's restaurants in six states. To raise funds, the firm has issued common stock, preferred stock, and a fixed-rate bond, as well as taken out a bank loan.

Capital Structure

Corner Table has 15 million shares of common stock outstanding. The stock is currently priced at $21.87 per share.

Corner Table also has two million shares of preferred stock outstanding priced at $31.69 per share. The stock has paid an annual dividend of $2.25 on every December 31 since 2003. The dividend is expected to remain unchanged.

Monthly rates of return for three-month Treasury bills, month-end share prices for Corner Table common stock, and month-end values for the Traders 1000, a widely used index to estimate returns for the entire stock market, are reported in table. Data from December 31, 2005, to December 31, 2010, are provided.

Corner Table's third source of public financing is a bond issue that was initially sold to the public on January 1, 2009, with a maturity of 15 years. The 150,000 bonds outstanding have a face value of $1,000 each and a fixed annual coupon rate of 7.76 percent. Coupons are paid annually on December 31, and all principal is scheduled to be repaid at maturity on December 31, 2023. The bonds are currently selling for $968.66.

Finally, Corner Table took out a loan for $150 million from Frederick Financial. The loan was taken out on January 1, 1998, for 20 years and matures on December 31, 2017. At the time of origination, the overall level of interest rates was high and Corner Table was viewed as being quite risky, so the annual interest rate on the loan is substantial at 12.4 percent. The loan involves annual interest payments on December 31 with all principal repaid at maturity. Today, if Corner Table were to take out a loan for $150 million that matured on December 31, 2017, the bank would charge it an annual interest rate of 5.7 percent.

Current situation

Corner Table has been a successful, profitable, and growing company for almost 2 decades. New restaurants have been opened, and they have not only been profitable, but they have continued to deliver consistently good service and delicious food, especially the desserts. Maxwell Alexander is in the process of determining how to continue the company's tradition of successful growth.

One obvious strategy would be to continue the approach taken in the past and add more restaurants. However, Maxwell is very concerned that effectively managing more restaurants and maintaining the quality of the customer experience would stretch the company thin and be extremely difficult to achieve. As a result, he has rejected opening more Lisa C's restaurants at this time.

Therefore, Maxwell and other senior managers have been considering alternative opportunities. To assist them with this process, they hired Pasha Consulting on December 31, 2009, to explore possible options for expansion. The contract between Corner Table and Pasha called for an immediate payment to Pasha of $200,000, as well as annual payments of $100,000 two and three years after the consulting firm was initially hired. Each of these $100,000 payments would increase to $150,000 if Corner Table were to adopt one of Pasha's proposed strategies.

The most promising alternative that Pasha has proposed is the sale of prepackaged versions of Lisa C's most popular desserts at grocery stores. Moreover, the consulting firm identified a manufacturer, Shingo Corporation, that has developed specialized equipment and processes that can make frozen versions of three of Lisa C's most popular desserts-Peanut Butter Cookie Bombs, Stockholm Apple Pie, and CrumbleBerry Cobbler.

One week ago, when Maxwell tasted Shingo's versions of his company's desserts, he was very impressed with the similarity between the restaurant and frozen versions of each dessert. Being a very impulsive person, Maxwell immediately created the frozen food division and decided that, as long as the numbers supported it, the next phase of Corner Table's growth would involve selling the three desserts through retail distribution.

Pasha has developed two alternative approaches for Corner Table to sell frozen desserts. The first approach is a widespread distribution strategy, whereby the three frozen desserts would be offered to any grocery store or supermarket chain that wants to sell them. The primary advantage of this strategy is that it would enable Corner Table to sell high volumes, which would result in expected economies of scale and relatively low production and distribution costs.

The second approach is an exclusive distribution strategy. Under this approach, one supermarket chain would be selected as the exclusive retailer of Lisa C's Treats from Grandma's Kitchen. The primary advantage of this strategy is that the supermarket chain, and therefore Corner Table, would be able to charge a premium for the desserts. Moreover, the supermarket chain would contribute heavily to marketing costs.

Widespread distribution approach

If Corner Table pursues the widespread distribution approach, the firm expects that sales would be sufficiently high that purchasing the necessary equipment from Shingo would be more cost-efficient than paying Shingo to produce the desserts for them. The equipment needed to manufacture all three types of desserts would cost $11,500,000. Payment would be due immediately. The equipment would be depreciated straight-line to $1,000,000 over 7 years. Corner Table believes that it would be able to sell the used equipment for $2,700,000 on December 31, 2016.

Production and sale of frozen desserts could begin immediately, and Corner Table anticipates selling 350,000 frozen desserts in 2011 for $10.00 each. The desserts are expected to be popular and unit volume is expected to increase annually by 50 percent from January 1, 2012, through December 31, 2013; by 25 percent from January 1, 2014, to December 31, 2016; and by 8 percent thereafter. The unit price of the desserts is expected to increase at the rate of inflation, which has been forecast to be 3.5 percent per year.

Under the widespread distribution approach, Corner Table would have a variety of variable annual costs. First, Corner Table would be obligated to pay Shingo a fee of 40 cents per unit sold. This fee is not expected to change over time. In addition, other variable costs such as ingredients, labor, electricity, distribution costs, etc. are expected to equal 45 percent of the total revenues from selling frozen desserts.

In 2011, Corner Table expects fixed costs, except for marketing costs, to be $81.5 million if the firm pursues the widespread distribution strategy. If the firm does not expand into frozen food distribution, fixed costs, except for marketing costs, are expected to be $76.2 million. Regardless of whether Corner Table expands into the widespread distribution of frozen desserts, fixed costs are expected to increase annually by 5 percent.

In addition to the fixed costs noted in the previous paragraph, the firm also has annual marketing costs. Without widespread distribution of frozen desserts, the firm's total marketing costs would be allocated evenly to each of Lisa C's 47 restaurants, with each restaurant being allocated a marketing expense of $60,000 in 2008.

If Corner Table pursues widespread distribution of frozen desserts, then total marketing costs for the firm are expected to be $3,200,000 in 2011. Of this total, 70 percent would be allocated to the existing restaurant division of Corner Table and 30 percent would be allocated to the newly created frozen food division. Like the other fixed costs, total marketing costs are expected to increase by 5 percent a year, regardless of whether or not Corner Table pursues widespread distribution of frozen desserts.

Incremental net working capital associated with frozen food activities at the end of any given year is expected to equal 27 percent of the revenues forecast for the following year. Net working capital associated with frozen foods was zero on December 31, 2010, but would equal 27 percent of the revenues forecast for 2011 on January 1, 2011, at the start of the project if the widespread distribution approach to growth was pursued.

Annual cash flows through December 31, 2016, associated with Corner Table's strategy of growing through widespread distribution of frozen desserts should be carefully estimated based on all relevant information. However, for cash flows after December 31, 2016, Corner Table believes that a more general approach can be taken, as the project will have matured and sales growth will have moderated by then. Corner Table expects total project-related cash flows in 2017 to be $1,400,000, and that cash flows will grow steadily by 4 percent a year after December 31, 2017.

Corner Table believes that selling frozen desserts through supermarkets is riskier than the company's traditional activities associated with operating restaurants. As a result, the firm believes that the appropriate discount rate for the project is equal to 2.00 percentage points more than the discount rate it would use on a project that is of average risk for the company.

Exclusive distribution approach

The exclusive distribution approach to frozen-food sales involves making a single, large supermarket chain the exclusive seller of Lisa C's frozen desserts. Maxwell Alexander believes that grocery retailers would be interested in becoming the exclusive seller of Lisa C's desserts, and interviews of leading grocers by Pasha Consulting confirms this belief.

If Corner Table undertakes the exclusive distribution approach, the company does not forecast sales being sufficiently high that purchasing equipment from Shingo Corporation would be cost efficient. Instead, Corner Table would contract production of all desserts to Shingo, which would be paid an estimated amount each year equal to 78 percent of the revenues from the sale of frozen desserts during that same year. Corner Table expects no other variable costs.

Under the likely terms of an arrangement with Shingo, production could begin immediately. Corner Table anticipates selling 80,000 frozen desserts in the first year for $14.50 each. Note that this volume is much smaller than under the widespread distribution approach, but that the anticipated price is higher.

The desserts are expected to be popular and unit volume is expected to increase annually by 40 percent from January 1, 2012, through December 31, 2014; by 20 percent from January 1, 2015, to December 31, 2018; and by 5 percent thereafter. The unit price of the desserts is expected to increase by 4.0 percent per year, slightly more than the forecast rate of inflation.

In 2011, Corner Table expects fixed costs, except for marketing costs, to be $77.9 million if the firm pursues the exclusive distribution strategy. If the firm does not expand into frozen food distribution, fixed costs, except for marketing costs, are expected to be $76.2 million. Regardless of whether Corner Table expands into the widespread distribution of frozen desserts, fixed costs are expected to increase annually by 5 percent.

In addition to the fixed costs noted in the previous paragraph, the firm also has annual marketing costs. Without exclusive distribution of frozen desserts, the firm's total marketing costs would be allocated evenly to each of Lisa C's 47 restaurants, with each restaurant being allocated a marketing expense of $60,000 in 2011.

One of the benefits of the exclusive distribution approach is that Corner Table expects its retail partner to make a substantial contribution to marketing the products. As a result, under exclusive distribution, total marketing costs for the firm are expected to be $2,000,000 in 2011. Of this total, 80 percent would be allocated to Corner Table's restaurant division and 20 percent would be allocated to the newly created frozen food division. Like the other fixed costs, total marketing costs are expected to increase by 5 percent a year, regardless of whether or not Corner Table sells frozen desserts.

Incremental net working capital associated with frozen food activities at the end of any year is expected to equal 18 percent of the revenues forecast for the following year.

Annual cash flows through December 31, 2018, associated with the exclusive distribution of frozen Lisa C's desserts should be carefully estimated based on information provided. However, for cash flows after December 31, 2018, a more general approach can be taken, as sales growth is expected to have reached its long-term level by that time. Corner Table believes that total project-related cash flows in 2019 will be $300,000 and that total cash flows will grow steadily by 3 percent a year after December 31, 2019.

Corner Table believes that selling frozen desserts through exclusive distribution is not only riskier than its traditional activities associated with operating restaurants, but riskier than widespread distribution of frozen desserts. As a result of the high level of risk associated with the exclusive approach, Maxwell believes that the appropriate discount rate for exclusive distribution is equal to 4.00 percentage points more than the discount rate it would use on a project that is of average risk for the company.

Assignment

Maxwell Alexander has assigned you the task of analyzing how Corner Table should proceed. Specifically, he wants a written report that answers the following question:

Should Corner Table choose the widespread distribution approach, the exclusive distribution approach, or neither?

Maxwell Alexander has a short attention span. He wants the main body of the report to be no more than three pages long (double spaced, 12 point Times New Roman font, and at least 1 inch margins). The main body should include an introduction and conclusion, as well as one or more main sections that summarizes and discusses all analysis.

Despite the strict page limit on the body of the report, Maxwell knows that assertions, comments, discussion, and suggestions must be well supported, so he has placed no limit on the number and length of appendixes that can be included. Although he has a short attention span, many of Corner Table's highly paid executives, including the chief financial officer, prefer details to be thoroughly and clearly presented.

Additional notes and information

This section provides notes and information that may assist in the analysis of the two growth alternatives:

* Whenever relevant, use information over as long a period of time as possible.

* Use the most appropriate approach to estimate the value and expected return for each type of equity and debt.

* Do not round any calculations. For example, any monetary figure such as a stock dividend, dessert price, or total costs should not be rounded to the nearest penny. Moreover, any figure expressed as units such as the number of frozen desserts sold in a year should not be rounded to the nearest whole number. Although rounding should not be conducted in calculations, students should present figures in tables and text in ways that are clear and informative. This likely involves rounding figures that are presented.

* In future years, Corner Table plans to maintain the same proportions of common and preferred equity, short- and long-term bonds, and short- and long-term loans as it has now.

* The corporate tax rate is 40 percent.

* Currently, the annual rate of return on three-month Treasury bills is 5.40 percent and the expected annual return on the Traders 1000 is 12.50 percent.

* If taxable income associated with an approach to expansion is negative, then assume that incremental income taxes paid would be negative, as the negative income from the expansion project could be used by Corner Table to offset positive taxable income from restaurant activities.

* Unless clearly stated otherwise, assume information reflects incremental frozen-food activities.

* Cash flows that take place over a year, such as those associated with revenues and expenses, should be treated as taking place at the end of the relevant year. So for example, revenues and expenses for 2012 should be treated as taking place on December 31, 2012.

Subject: Capital budgeting; Expansion; Strategic planning; Case studies

Classification: 2310: Planning; 3100: Capital & debt management; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-10

Number of pages: 10

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 963331459

Document URL: http://search.proquest.com/docview/963331459?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 51 of 100

Evaluating a cohort library's performance reporting

Author: Brennan, Paul J

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Abstract:

This case provides an introduction to the Governmental Accounting Standards Board's Service Efforts and Accomplishments Reporting (SEA) guidelines for state and local government agencies and offers an application exercise to evaluate the performance reporting of a municipal library under those guidelines. SEA reporting concentrates on the efficiency and effectiveness of government services and was developed as a valuable supplement to traditional government reports concentrating on financial condition. The SEA data and narrative information for the subject library were taken from published reports of the municipal library and additional information supplied by the library director. The case evaluators of the library information (officials of a cohort municipality) are fictional. The applied exercises required students to evaluate the informational quality of the SEA reporting using the GASB guidelines and to suggest improvements. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Tom Rogers was serving his second year as Assistant to the City Manager of Riverton. He was appointed as the coordinator of the city's Service Efforts and Accomplishments (SEA) Reporting initiative. SEA Reporting involved creating, tracking, and communicating local government performance information to the community. The SEA Project was Tom's first major assignment. He decided to begin by researching the general purpose and guidelines of SEA reporting and by searching for a comparable municipality already reporting that information to use as a reference model. Despite relatively few municipalities publishing SEA information under the Governmental Accounting Standards Board (GASB) initiative, he was able to find a very comparable cohort in the City of Turnersville.

Turnersville was a city of similar size and demographics to Riverton and was located in the same region of the country. The City of Turnersville promoted its report as a tool to help citizens decide whether they were receiving their tax money's worth in city services. SEA reporting was voluntary, but the City of Turnersville embraced the SEA initiative and had been recognized for the quality of its performance reporting by the Association of Governmental Accountants. The City included each of its service divisions within its SEA report. Goals, future initiatives, and the results of operations were presented for the city as a whole and for each of the divisions. The SEA data compiled for each of the city's divisions was included the annual departmental budget binders and incorporated into budget worksheets. The SEA data were referenced when considering requests for additional funds for projects or services. The Turnersville SEA Reports predated the publication of GASB's suggested guidelines for SEA reporting. Tom hoped to use the Turnersville report and the new GASB guidelines as tools for developing Riverton's performance reporting system.

Tom had a morning meeting scheduled with Jennifer Simpson, the director of the Riverton Public Library to discuss the development of performance reporting for the library. As Tom walked toward the city library, he thought, "What does a typical citizen want to know about the performance of a city library? What does a city council member want to know? How much do they really want or need to know? Maybe Jennifer Simpson can answer these questions. I hope she's ready, willing, and able."

Jennifer Simpson took another glance at her notes before her morning meeting with Tom Rogers. Tom sent Jennifer a copy of Turnersville's Service Efforts and Accomplishments report and she had reviewed and compiled information from it in preparation for their meeting. Jennifer liked the idea of city wide performance reports, but knew selecting the right information relevant to varying stakeholders' interests would be challenging

THE MEETING

Tom entered Jennifer's office and they exchanged greetings. Tom asked, "Have you had the chance to review some of the Turnersville Library's SEA information? Did the city's report give you a general idea of SEA reporting?"

Jennifer answered that she had reviewed Turnersville's report and particularly its library's information. She also obtained a recent copy of the library's annual report and learned even more from speaking to the library director whom she had met before at a professional conference. She told Tom that she had gained a sense of SEA reporting from reviewing Turnersville's report but she would like to have more detailed knowledge about its purpose and guidelines.

Tom answered that the goal of SEA reporting was to provide information on the efficiency and effectiveness of government services. The reporting was intended to provide greater insight into a government's service operations than could be gained by reviewing traditional financial statements focusing on line item financial amounts. "I've written a general overview of SEA Reporting for all of the department heads along with links to GASB's SEA guidelines for more detailed explanations," said Tom. Tom provided her with a hard copy of the document (See appendix entitled An Overview of Service Efforts and Accomplishments Reporting at the end of this case). Jennifer asked if she could take a moment to read Tom's overview before continuing their conversation.

"Thank you, Tom, for providing that overview and further references," said Jennifer. "I think I now understand much better the framework of the report I reviewed. I also compiled narrative information about the operations of the Turnersville Public Library for you to review (See section entitled The Turnersville Library following this section)."

"Thanks for all of that info. You must have spent some time compiling that," Tom said after reading Jennifer's descriptions. "I feel I now know a lot more about their library's services and probably have a better understanding of ours, too."

"Yes, I felt that their services and challenges were similar to ours when I compiled the information," said Jennifer.

"I made copies of the tables of quantitative information provided in the library's section of the Turnersville SEA Report (See section entitled Library Information From the Turnersville Citywide SEA Report). I also compiled selected narrative information related to the library included in various sections of the city's report," said Jennifer.

Jennifer described the tables of SEA information relating to the library. List 1 contained selected narrative information relating to the library in the Turnersville city report. Table 1 contained quantitative measures of the types Tom described in his overview of SEA reporting (Described in the case appendix and additional resources for students). Table 2 provided a relative breakdown of a typical household's property tax bill to various city services.

"The tables include a fair amount of information to review, but the amount doesn't seem too overwhelming," said Tom.

Jennifer continued. Marian Hopkins was the Director of the Turnersville Public Library. Her collection, tracking, and reporting of library data preceded the SEA initiative. Much of the data collected for the SEA reports had been included in reports to her state library association and reports to the library's governing board. Part of the library's SEA information was developed in consultation with citizen focus groups. The library already had been forming focus groups prior to the city's SEA reporting initiative so a structure already existed to provide citizen input.

Marian liked the format of the SEA reports and used the information in her duties as Library Director. The city's SEA initiative required reporting by all departments and used a consistent, integrated framework that could be used by city administration and department heads over time. Marian felt that the SEA reports were heavily used as references by city officials and departmental heads but doubted that significant numbers of citizens and library patrons consulted the reports despite their availability in hardcopy and digital forms.

"Well, even if most of our citizens don't read our performance reports, we can still use them ourselves. I remember from my school days that internal reporting was a primary goal of managerial accounting so one way or another something useful should come from these efforts," Tom said cheerfully.

Jennifer described how the Turnersville Library used additional means to communicate with the public and its patrons. The library published an annual report with more library focused information than included in the city-wide SEA report and that report was also an important reference for city officials. The library's primary instruments for communicating with its users were internally generated newsletters and e-mails to user groups.

Tom proceeded to conclude the discussion and discuss the next steps. "Our city departments don't have a lot of excess time or resources to spend on development of performance data. Rather than reinvent the wheel, I thought we could use Turnersville's reporting as a reference model and evaluate how well their SEA information communicated the use of resources and effectiveness under the new GASB guidelines. Reviewing their reports along with the GASB guidelines may help to stimulate ideas for developing our own performance data. We could emulate some of Turnersville's reporting practices if we find them satisfactory or improve upon them using the GASB guidelines." said Tom

"Do you want my department to review the Turnersville Library SEA data, suggest which measures we can use, and what additional information we should develop for performance reporting?" asked Jennifer.

"I was hoping you would volunteer for that!" said Tom. "Assembling the overall SEA report and preparing the Management's Discussion and Analysis Section will be the responsibility of the city manager's office with an assist from the finance division, but the department heads will be the primary evaluators and developers of the departmental information."

"OK, I think I can manage that. This might be fun in a way. How about I send you my evaluation within a month?" said Jennifer.

"Perfect," said Tom.

"Any parting advice?" asked Jennifer.

"Well, I guess I would first look at the GASB SEA guidelines to form a clearer understanding of the basic types of tabled information: inputs, outputs, outcomes, and input to output/outcome ratios. I would identify how well those items are represented in the Turnersville Library report. Then, I would consult the GASB document again to form a clearer impression of the qualitative characteristics of SEA information. When thinking about the GASB qualitative criteria, my guess is that the characteristic of relevance would be the most important yet most difficult to evaluate. To a large degree, what is relevant is in the eye of the beholder, but the SEA proposal does offer some factors to consider. Performance information does require some context, so we should keep the comparability factor in mind, too. Let's see what we like from our cohort's model and consider what adjustments or improvements we would make for our own reporting. Of course, this is your library, and the SEA initiative provides an opportunity for you to tell the community about a valued and necessary service of our town. Good luck, thanks in advance for your expert assistance, and see you soon!" said Tom.

THE TURNERSVILLE LIBRARY

Mission and Basic Structure

The Turnersville Library's mission was to support lifelong learning and enjoyment in a welcoming environment that was a primary community destination. A board of trustees appointed by the mayor and city council oversaw the library. The director of the library was appointed by the board of trustees and oversaw a staff of seven full-time librarians. The library was also guided and supported by a foundation whose purpose was to promote enhancement and improvement of the library.

The Board and the Director were committed to professional development of library staff. Full-time staffers were required to participate in continuing education to maintain certification through the State Library. The staffers also regularly participated in in-house workshops dealing with issues of technology and customer service.

Materials and Services

The library continually added to its materials collections. Over 3,000 books had been added during the past year but periodical collections remained steady in recent years. Significant additions had been made to video/DVD materials as the library, consistent with available resources, tried to keep up with the latest formats in audio visual materials. Smaller increases had been made to the library's audio collection in recent years. Digital resources were the fastest rising library resources. Collections of downloadable audio books increased from 0 to 3,000 in a three year period and online databases doubled from eight to sixteen during the same time. In addition to circulation materials, the library provided a significant number of programs to users of all ages. Participation in the library's programs increased from just below 12,000 users in 2004 to just below 23,000 users in 2007. The number of library programs increased from about 475 to about 955 over the same period.

The library provided instructional services and classes for adults focusing on a wide range of topics of interest including genealogy, computer security and prevention of identity theft, Medicare, and job search tips. The library held monthly computer classes to provide training in the basics of Microsoft Office, e-mail, techniques for using search engines, and selling on E-BAY. The library also hosted book discussions twice monthly. Programs for children and teens were among the most popular programs offered by the library. Summer activities included reading programs, story times, group trips, and performances by local entertainers. Over 13,500 patrons attended summer programs in the most recent year reported (an increase of 33% over the prior year). The library provided separate spaces for teens and younger children. The teen area held book groups, after school movies, and video gaming activities.

Community partnerships supported the children's summer programs. Businesses donated coupons and prize materials. Other significant partners were the school district, local day care centers, and continuing education programs. The school district offered its facilities for larger events and distributed the library calendar of events to its children. Day care centers were invited to bring their children and continuing education assisted with planning for children's activities. Demand for the library's resources and services increased with the economic downturn. Libraries provided low cost family entertainment products and services but also provided resources to assist job searches. For the most recent year reported, visits to the library increased 11%, checkouts increased 12%, computer use increased 14%, and use of in-house service increased 20% (e.g., for use of computers, newspapers, periodicals, audio visual materials, and reference services). Program attendance increased 25% to an all-time record.

Reference librarians were overwhelmed with computer training in the regularly scheduled programs and with walk-in requests. Much of the demand was driven by needs for online resume preparation, job application, and searches of online databases. The demand for more personalized library services from its information specialists required adjustments to workload scheduling. The staff regularly discussed suggestions for reducing the amount of time spent on administrative tasks so that more time was available for more personalized services. The demand for the library's materials and services resulted in a need for a larger space. The current facility was 25,000 square feet. A 2008 study recommended construction of a new facility at twice the size of the current one because further investment in the existing facility, given its size and technology limitations, was not considered a best use of community resources. Planning for the new facility was still in the developmental stage.

Funding and Promotional Efforts

The library participated in a national library cooperative marketing program designed to create community awareness of the importance of public libraries and the critical funding issues faced by them, particularly in difficult economic times. The demands for library materials and services had increased but public funding had not kept pace with the rising demand and the library's ability to charge user fees (outside of fines and copying and faxing charges) was discouraged by State library accreditation provisions. Over ninety percent of the library's funds came from its own local government and from the county government to support use of the library by county residents outside the city limits, but the county's payment was scheduled for significant reduction. The promotional campaign stressed that libraries were truly a resource for everyone in the community and served lifelong learning regardless of each citizen's position in the community, passions, or interests. Public libraries were the one place where everyone had equal and free access to learning resources, computers, and internet time.

The library's related foundation organized a group of "friends of the foundation" in 2007 to support fund raising activities such as mailings, special events, and book sales. The foundation developed donor packets for citizens, patrons, and businesses to solicit contributions toward library projects, materials, and technology.

LIBRARY INFORMATION FROM THE TURNERSVILLE CITYWIDE SEA REPORT

List 1 - Selected Library Related Narrative Information from the Turnersville SEA Report

1) Over the four-year period tracked by the SEA report, city property taxes had contributed about 70% of the library's funding. The county had contributed another 24% as a benefit for county residents to have full library privileges. The state had contributed a very small amount to the library and about 5% of the library's funding came from other sources including fines and fees. The SEA report noted that the county's expected contribution was scheduled to be reduced by about half over the next two years.

2) The city listed among its goals for the coming years as evaluating library space needs while experiencing anticipated revenue shortfalls from the county for support of the library. The SEA report noted that options considered to compensate for the revenue shortfall were allocation of general fund amounts to the library and/or reduction of library services.

3) The City surveyed its citizens during selected years. Two questions from the 2005 city-wide survey of citizens pertained to the library. 85% of citizens rated the library as good or excellent in 2005 and 79% gave those same ratings to the library's materials. The proportions giving those ratings were virtually unchanged from the 2003 survey.

Subject: Governmental accounting; Balanced Scorecard; Associations; Libraries; Case studies

Location: United States--US

Company / organization: Name: Governmental Accounting Standards Board; NAICS: 813920

Classification: 9190: United States; 2310: Planning; 9550: Public sector; 4120: Accounting policies & procedures; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-18

Number of pages: 18

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 963331463

Document URL: http://search.proquest.com/docview/963331463?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 52 of 100

Financial exploitation of the elderly and disabled: can banks be held liable? A business law case study

Author: Hardin, Cindy A

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Abstract:

This case study requires students to examine the legal obligations of financial institutions when dealing with current or potential elderly and/or disabled customers. It allows students to delve into the role financial institutions play in deterring and preventing financial abuse or exploitation of two of the most vulnerable segments of society. In addition, students are required to address basic legal concepts of joint ownership, rights of survivorship, Americans with Disabilities Act, duty of care and negligence. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

Today it is suggested that over 12% of the population over the age of 65 are the victims of financial abuse or exploitation. In many of those cases, the perpetrator is a family member or close family acquaintance.

The problem is compounded by the fact that, for a variety of reasons, in the vast majority of cases, the exploitation or victimization is never reported to the authorities. There are many reasons for this. Many times, the elderly or disabled victim fears that they cannot report the exploitation because they are reliant upon the exploiter as a caregiver. Other times, the victims fear that by reporting the theft and exploitation, their family will take away their independence and freedom by establishing a guardianship or placing them in a nursing home. Sometimes, the victim is just too embarrassed to admit to their family and friends that they were naïve enough to become victims. Finally, because of the nature of the disability or infirmity, the victim may be unable to discover that they were the victim of financial fraud and exploitation.

Since financial exploitation often involves the victim's bank accounts and deposits, this case study, focuses on a financial institution that is faced with a factual scenario in which a caregiver is given or somehow obtains unfettered control over an elderly and disabled customer's accounts.

THE CASE

An elderly woman, who was a brittle diabetic, wheelchair-bound, and totally blind, settled a medical malpractice lawsuit that resulted in a payment to her of over $680,000. At the time of the settlement, the elderly, blind woman hired an attorney to prepare a Trust and a Last Will and Testament. The woman intended to put the money from the lawsuit into the trust and to use the trust to take care of her during the remainder of her life, and then to take care of her only son. The attorney properly prepared all of the documents.

At that same time, the woman was living with and being cared for by her sister. As a result, the settlement check was sent to the sister/caregiver's address. When the check arrived, rather than placing the check in the trust account that had been established by the woman's attorney, the sister/caregiver took the elderly, blind, wheelchair-bound woman to a local branch of a national bank whether neither the sister nor the woman had ever banked before.

Upon entering the National Bank branch office, the sister/caregiver rolled the elderly, blind woman up to a bank officer's desk and instructed the bank officer that she and the elderly woman wanted to open a joint bank account using the elderly woman's $680,000 check, reiterating that the account should be made in the sister/caregiver's and the elderly woman's names. The bank officer asked the elderly woman, in her sister/caregiver's presence, if that is what she wanted to do. She said yes. The bank officer asked no other questions of the elderly woman. She was not questioned about her specific understanding of the transaction, nor were any documents or agreements read to her. No explanation of the effect of placing her money in a joint account with her sister was given to the elderly woman and nothing was done to ascertain whether the sister/caregiver was exerting undue influence or otherwise wrongfully exploiting her. In addition, no one at the bank spoke with or questioned the elderly, blind, wheelchair-bound woman outside the presence of her sister/caregiver.

Within one-and-half months after opening the account with the $680,000 deposit, the sister/caregiver spent most of the money in the account on personal items and gifts for herself and friends. The elderly woman passed away shortly thereafter, and the sister/caregiver spent the rest of the money, leaving the elderly woman's trust and estate penniless and the woman's son with nothing.

THE TEACHING NOTE

This case is based on actual facts and is appropriate for use in an undergraduate legal environment of business, business law, or commercial law course. It deals with what duties, if any, a bank or financial institution owes its elderly or disabled customers; what the legal ramifications are of putting your money in joint bank accounts; whether the bank or financial institution breached its duty of care to its customer, and what a bank or financial institution can do to better protect its elderly or disabled customers.

CASE QUESTIONS

1. Who legally owns the joint bank account opened by the elderly, blind, wheelchair-bound woman and her sister/caregiver while they are both alive?

2. What should legally happen to the money remaining in the joint bank account when the elderly woman dies?

3. Did the bank owe a legal duty of care to the elderly woman to ensure that she was not being exploited or unduly influenced by her sister/caregiver?

4. Did the bank owe any legal duty of care to the elderly woman under the Americans with Disabilities Act?

5. What actions could the bank have taken to protect the elderly woman from acts of exploitation or undue influence by her sister?

SUGGESTED SOLUTIONS TO CASE QUESTIONS

1. Who legally owns the joint bank account opened by the elderly, blind, wheelchair-bound woman and her sister/caregiver while they are both alive?

Both the elderly woman and her sister/caregiver have joint ownership which means that each owns the money in the account in totality with no restrictions on their access to or use of the funds.

2. What should legally happen to the money remaining in the joint bank account when the elderly woman dies?

When one joint owner of an account dies, the funds in the account automatically belong to the surviving owner. This is due to the fact that owners of a joint account have rights of survivorship under the law.

3. Did the bank owe a legal duty of care to the elderly woman to ensure that she was not being exploited or unduly influenced by her sister/caregiver?

Generally banks have a duty to exercise ordinary care to protect their customers from wrongful acts of third parties. However, a bank's liability is limited under the Uniform Commercial Code if the customer fails to discover the unauthorized transactions in their bank accounts and report it to the bank within the time prescribed by the UCC or state law. UCC §40406 In addition, historically, many states have held that banks do not have a duty of care to inquire into the competency of customers who had not be declared incompetent by a court of law. In fact, some courts have even suggested that if a bank fails to honor and elderly customer's instructions because of concerns that the customer might be incompetent, the bank could face liability based on the premise that they are not allowing the customer to transact business. However, recently the vast majority of states have passed statutes mandating any "bank, savings and loan, or credit union officer, trustee, or employee, who knows or has a reasonable cause to suspect that an aged person or disabled adult is an abused, neglected or exploited person shall immediately report such knowledge or suspicion to the central abuse registry" (Florida Statute §415.1034) Under statutes like this, it is now the obligation of banks and other financial institutions to develop compliance programs so that their officers, trustees and employees know when they should make a report. Under these statutes financial institutions must give clear instructions to officers and frontline employees so that they will know what should be reported and how to report it. Republic National Bank of Miami v. Johnson, 622 So.2d 1015 (Fla. 3d DC A 1992) Failure to develop a compliance program or to follow a properly implemented compliance program may give rise to legal liability on the bank's behalf. Mora v. South Broward Hospital District, 710 So. 2d 633 (Fla. 4th DCA 1998) Obviously, the case law in this area is still developing, so the outcome of this question, based on the facts stated and the applicable jurisdiction may vary.

4.Did the bank owe any legal duty of care to the elderly woman under the Americans with Disabilities Act?

The ADA defines a place of public accommodation as a "facility, operated by a private entity, whose operations affect commerce and fall within at least one of [a number of categories]" Contained within those categories are banks. §36.104(6) Public accommodations, under the ADA, are required to provide "auxiliary aids and services" for people with disabilities, such as readers, in order to ensure effective communication with those individuals. §36.303(b)(c) Based on this, it can be argued that the bank in this case owed a legal duty under the ADA to provide someone to read the banking documents to the elderly woman. Since nothing in the facts indicates that a reader was provided, the bank could be found to be in violation of ADA requirements. However, since the elderly woman is dead, there would be no avenue for recourse since the ADA only provides for injunctive relief. §36.501

5. What actions could the bank have taken to protect the elderly woman from acts of exploitation or undue influence by her sister?

The Arizona Elder Abuse Coalition has created a list of suggestions for financial institutions can help detect and prevent financial exploitation of the elderly. In it's article "Financial Exploitation of the Elderly", the Coalition has suggested that financial institutions can help prevent exploitation by: 1) educating and training employees about financial exploitation so that they will recognize it when it occurs and report it to the proper authorities; 2) appointing a supervisory employee to whom other employees must report suspicious financial transactions; 3) developing procedures and guidelines for reporting possible financial exploitation to the proper authorities; 4) training employees on how to properly interview elderly and disabled customers; 5) educating employees on how to recognize signs of financial exploitation and fraud.

Subject: Financial institutions; Commercial law; Disabled people; Elder care; Case studies

Classification: 4300: Law; 8100: Financial services industry; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-5

Number of pages: 5

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: References

ProQuest document ID: 963331527

Document URL: http://search.proquest.com/docview/963331527?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 53 of 100

A case of ethical dilemmas in an application for faculty promotion

Author: Eckrich, Donald W; Burress, Joanne

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Abstract:

While policies and practices associated with academic promotion and tenure decisions vary across institutions, they all include qualitative and quantitative criteria, analyzed and interpreted through multiple levels of review (e.g. department, school, university, etc.). From a candidate's initial application for promotion through the final recommendation to the highest governing official, each step of the process is capable of creating ethical dilemmas related to objectivity, honesty, fairness, confidentiality, integrity, and timeliness, among other issues. This case enables the user to review several decisions as they unfolded for one faculty member at hypothetical Teacher's University, confident his combined teaching, scholarship, and service records far surpassed the criteria published in the university's policies. At several junctures during the review, however, decisions made by several parties involved in the promotional process provide the basis for further analysis and discussions of the ethical standards involved. Questions and answers associated with six specific concerns are provided to focus the review and discussion. [PUBLICATION ABSTRACT]

Full text:

INTRODUCTION

As is typical at most colleges and universities, the criteria for faculty promotion from associate professor to full professor at Teacher's University (hereafter TU) also include both quantitative and qualitative assessments. Quantitatively, for instance, a candidate for promotion at TU must have "a minimum of four years of teaching experience as an associate professor." Qualitatively, a candidate must demonstrate a "continuing record of significant scholarly attainment." To reduce the subjectivity in qualitative assessments, promotion policies often include clarifying statements and examples. For instance, to demonstrate "continuing scholarly attainment," the policy provides modest guidance by specifying the minimum threshold as "having had accepted six refereed journal articles or equivalent and three other scholarly activities." Nevertheless, definitions of refereed journal articles, their equivalents, and other scholarly activities often remain vague and open-ended. Therefore, considerable opportunities for ethical dilemmas exist allowing for ethically-questionable interpretations, depending on each candidate's unique qualifications.

On the other hand, criteria for membership on the Faculty Promotion Committee (hereafter F-P-C), the school-level committee responsible for conducting the primary evaluation of a candidate, are typically specific and unambiguous. For instance, the F-P-C committee at TU consisted of one full professor from each department, one associate or full professor at-large, and one full professor from another school on campus. In the case of TU, five schools comprised the university and the School of Business was organized into five departments. If a department had no full professors able to serve, an academically qualified1 associate professor from that department could serve." Therefore the F-P-C consisted of seven members whose qualifications were clear and where the opportunities allowing for ethically-questionable interpretations should be reduced, if not eliminated.

This case centers on the application for promotion by professor Ronald Sewell, Ph.D., an associate professor in the School of Business at TU who was convinced his professional accomplishments easily surpassed the minimum criteria specified in the school's policies. It highlights several potential ethical dilemmas inherent in the use of any formalized policies, even those seemingly quantified and unambiguous.

BACKGROUND

Dr. Sewell earned his Ph.D. in finance at Monroe University in their AACSB-accredited School of Business. His primary mentor and dissertation committee chair was James Crandall, Ph.D a tenured, associate professor of finance. After Dr. Sewell received his doctorate, Dr. Crandall resigned his position at Monroe to accept an appointment as chairman of the finance department at TU. His initial contract negotiations resulted in his receiving one of the highest faculty salaries at TU, even as an associate professor.

Through his continuing close association and numerous jointly-authored scholarly works with Dr. Sewell, Crandall successfully recruited him and Dr. Sewell was officially appointed to a tenured, associate professorship. He also successfully negotiated one of the highest faculty salaries at TU. In addition, he successfully negotiated a limited, 3-day-per-week teaching schedule as part of his appointment contract. Thus, the university was contractually bound to a limited 3 day per week teaching schedule, while all other faculty were subject to alternating schedules involving various combinations of five days per week.

COMMITTEE MEMBERSHIP

At the time of his application for promotion, Dr. Sewell was one of five tenured associate professors in the Finance Department of the School of Business2 and was also serving as the chairman of the department. A sixth member of the department (Dr. Ambuss) was the only full professor in the department and was serving a term on the Campus-wide Tenure & Promotion Committee (hereafter CT&P). In this role, Dr. Ambuss served alongside six other campus-wide representatives (one from each school) and two at-large members. The CT&P was responsible for evaluating every applicant for tenure or promotion on campus, reviewing and weighing all school-level assessments, and making recommendations to the Provost of the College.

Membership on the F-P-C committee, as stipulated in the school's policy manual, was comprised of one full professor from each department, one associate or full professor at-large, and one outside-the-school senior professor. As a full professor, Dr. Ambuss was technically eligible to sit on both committees, but college policy stipulated he could only vote in one of the roles, not both. In similar cases, the choice of voting role was left up to the individual faculty member to decide. The standard practice on campus was for the F-P-C role to take precedence. When this happened, the faculty member was replaced on the CT&P with another qualified faculty from the same school. Since several departments at TU were quite small, Ambuss' predicament was not uncommon.

With Dr. Ambuss already serving on the CT&P as the representative from the School of Business, Chairperson Sewell unilaterally decided to appoint Dr. Crandall to his own F-P-C committee as the departmental representative. Dr. Sewell announced his appointment of Dr. Crandall through an e-mail addressed to the dean of the school while copying other members of the department. His rationale was simple and seemingly sensitive to Dr. Ambuss. Since he was already serving on the CT&P, he didn't want to further burden him. Thus, he felt justified in his appointment of a qualified alternate without consultation with anyone in the department.

As the ranking senior professor in the department, however, Dr. Ambuss was naturally distressed that he had not been personally consulted or even contacted. Even more importantly, he was alarmed the department did not have any opportunity to meet and discuss this important decision. He felt Crandall and Sewell were essentially strong-arming departmental decisions through the collective strength of their long-standing personal relationship. The remaining members of the department did not share close personal bonds, and for a variety of reasons were very rarely inclined to challenge the pair's actions.

Unsure of his options, Dr. Ambuss made an appointment to visit with his dean to present the facts as he knew them noting especially that the department faculty had not been involved in the selection and that no departmental vote had been taken. From his perspective, he felt it should have simply been assumed that he would serve since the school's rules required a full professor from each department. He also suggested that having one's dissertation chair and frequent co-author as a committee member might be seen as inappropriate by some and therefore potentially detrimental to Sewell. Finally, he pointed out that appointing an associate professor might jeopardize the candidate's chances for promotion given that members from outside the department would be full professors, each carrying long-standing tenure at TU, and sensitive to the contractual and financial agreements negotiated by Crandall and Sewell.

Since Dr. Sewell's e-mail had naturally arrived before Dr. Ambuss' visit with the dean, the dean had already accepted Dr. Sewell's appointment and was preparing to charge the committee as it had been constituted. In fact, the dean's initial response was to defend Dr. Sewell's actions by re-asserting his original logic and adding that Dr. Crandall was the only other academically-qualified member of the department eligible to serve (besides Dr. Ambuss). When Ambuss pointed out the dean's error and that five of the six members of the department were actually academically-qualified, the dean asked Dr. Sewell to vacate his decision and allow the department to meet to recommend the final appointment. Sewell agreed.

At that meeting, all members of the department were present except Sewell. From the outset, Dr. Crandall passionately asserted his interest in serving on the committee while arguing the department was already well represented at the college-level by Dr. Ambuss. It was also well known that the dean was likely to support both Dr. Sewell's promotion and his original appointment of Dr. Crandall to the F-P-C committee. Trying to avoid further inflaming the situation in the finance department, and because Dr. Sewell was responsible for his annual reviews and salary increases, Dr. Ambuss did not strongly object and assert his right to be on the F-P-C. Since no other department colleagues were interested in serving and did not view the decision with the same critical perspective as Dr. Ambuss, Dr. Crandall was duly elected by the department. Dr. Ambuss not only felt the department had succumbed to the dominance of Crandall and Sewell and their unofficial alliance with the dean, but that peer pressure to keep meetings as short as possible played a role.

THE F-P-C COMMITTEE MEETS

With the finance department's representative officially selected, the F-P-C committee met to receive its charge from the dean, to select its chair, and to schedule its meetings. Immediately after receiving the dean's charge and corresponding deadlines, Dr. Crandall again immediately asserted his interest in chairing the committee. Since it was fairly common practice for school's F-P-Cs to be chaired by a full professor, it was a bit unusual for an associate professor to even be considered. Every other member on the committee was a full professor, and more than one offered to be chair in lieu of Dr. Crandall. Nevertheless, Dr. Crandall persisted aggressively, highlighting the length of his close association with the candidate and emphasizing his depth of familiarity with the candidate's professional accomplishments in the same discipline. After much discussion, some of which repeated Dr. Ambuss' previously expressed reservations, he was nevertheless elected to chair the F-P-C. His staunch unwillingness to exhibit any deference to his higher ranking colleagues was noteworthy, but was neither directly confronted nor openly discussed by others on the committee. Needless to say, the committee was not uniformly pleased with his being elected and some felt that subtle repercussions not favorable to the candidate might surface later.

As the committee got down to business, some members who shared concerns associated with Dr. Crandall's chairmanship began to question the quality of the candidate's scholarly production. While the candidate demonstrated authorship of more than the minimum number of refereed journal articles required as one criterion, concerns involving qualitative issues such as characteristics of various publication venues emerged (i.e. overall quality, acceptance rates, reviewing procedures, etc.). Further, since every article had been co-authored with Dr. Crandall, questions concerning the chair's ability to assess the quality and significance of his own works began entering the discussions. Some felt that Dr. Crandall's role as dissertation chair further confounded his ability to make unbiased judgments about his shared publications. As each publication was scrutinized by the committee, few were viewed as either sufficiently significant or evidence of a continuing record of scholarly attainment to warrant promotion. As the range of doubts grew, relations between the committee and the chair increasingly deteriorated.

Finally, and without authorization from the committee, Dr. Crandall wrote a letter to Dr. Sewell seeking additional information and his reactions to some of the committee's specific concerns. When Dr. Sewell's response was later brought to the attention of the committee, their outrage was unanimous. The extent to which Dr. Crandall apparently divulged confidential information to the candidate was neither authorized by the committee nor permitted by official policies related to confidentiality. From the materials and clarifications later submitted by the candidate, it was alleged that Dr. Crandall actually identified individuals on the committee along with their specific pro/con positions (e.g. characterizing a journal as low in quality compared to one in their discipline).

The relationship between the chair and the committee reached its lowest point when open discussions of specific committee deliberations were occurring in the hallways among non-committee members. The word-on-the-street was the candidate himself had authorized unfettered access to his dossier for anyone to review while correspondingly approaching several faculty allies not on the committee to share his plight and plead his case. As a result, the entire process broke down and some committee members actually abstained from further deliberations and voting.

When the dean learned of the strange, apparently incomplete, and indecisive outcome, he intervened by sending e-mails to committee members asking them to re-vote and change their abstentions to yea's or nay's. Not all members responded to the dean's request, and the final vote remained mixed. However, abstentions were counted in the affirmative (i.e. recommending promotion). Thus, the application advanced to the next step with a majority of positive votes.

Meanwhile, apparently thinking that Dr. Ambuss was growing less and less likely to support his application at the CT&P-level, Dr. Sewell approached him to request he excuse himself from the CT&P' s deliberations and eventual vote on his case. Somewhat flabbergasted by the unusual request, he contacted the college attorney. The legal opinion he received was to remain on the committee, participate and vote as he was officially authorized to do. As a result, he remained on the CT&P and preserved his right to vote.

Ironically, when Dr. Sewell's application eventually came under review by the CT&P and before any substantive or qualitative evaluation had begun, it was determined to be "significantly out of conformance" with the standard Guidelines for Promotion File Preparation set forth in the college's long-standing policies manual. In other words, the dossier simply did not adhere to the prescribed standards for file preparation. Facing this unusual circumstance, the CT&P committee sought the opinion of the Provost. When he concurred with the committee's determination, Dr. Sewell was given the option of voluntarily withdrawing his application rather than risking its rejection by the CT&P. He chose to exercise the option and voluntarily withdrew his application from any further consideration.

QUESTIONS FOR DISCUSSION

(1) As chairman, Dr. Sewell needed to identify a member of his department to serve on the school's F-P-C committee. Do you agree with his initial decision to unilaterally appoint Dr. Crandall to the F-P-C committee? Is there anything unethical about his dissertation chairman and frequent co-author serving on the committee as one of his professional reviewers and voting on his promotion?

(2) When Dr. Crandall successfully pushed to become chair of the school's F-P-C committee even though he was the lowest ranking member, other members felt "subtle repercussions" might jeopardize the candidate's chances for promotion. What might some of these repercussions be and how would they impact the candidate's chances? Are they unethical?

(3) Was it ethical for Dr. Sewell to allow unfettered access to his application and all supporting documents when he learned that not all committee members viewed his application favorably?

(4) Was it ethical for the dean to request and expect F-P-C committee members to re-vote and change their original votes? Why?

(5) When the finance department met to elect their representative to the school F-P-C committee, most members of the department were not "inclined to challenge" Crandall and Sewell's initiatives and decisions. What might reasons be for their apparent lack of interest or involvement? Are these reasons ethically justified?

(6) What should be done when a committee chairperson divulges information about the committee's confidential deliberations and positions before the committee has completed its deliberations?

TEACHING NOTES FOR DISCUSSION

(1) The School's policies stipulated that one full professor from each department serve on the F-P-C committee. Since Dr. Crandall was not a full professor, Dr. Sewell should not have appointed him to the F-P-C committee. Dr. Sewell should have first consulted with Dr. Ambuss about whether he planned to serve on the F-P-C committee. If Dr. Ambuss did not wish to serve on the F-P-C committee, Dr. Sewell then should have asked the finance department to submit nominations from the eligible faculty and vote for the committee member. Dr. Sewell tried to justify his appointment and lack of a vote for the F-P-C member as a way of being efficient (e.g. avoiding a meeting). In fact, Dr. Sewell and Dr. Crandall often made many of the decisions for the department without consulting other department members. Appointing any member to your own F-P-C committee could be viewed as a possible conflict-of-interest and unethical. The fact that Dr. Crandall was his dissertation chairman and frequent co-author , although not against any rules, might also be viewed as unethical since Dr. Crandall would not be an unbiased reviewer, but actually have a stake in the outcome of Dr. Sewell's promotion.

(2) When Dr. Crandall was recruited to TU, he successfully and legitimately negotiated the highest faculty salary on campus. Nevertheless, and despite whatever he did to perform at a very high level, his output (whether exhibited in scholarly production, or teaching, or service) was always viewed in the context of being among the highest paid faculty. That he was neither the highest ranking nor longest tenured faculty member in the school or his department, only served to magnify whatever shortcomings he unavoidably brought to his position and further heightened sensitivities among the large number of senior faculty in the school. Thus, his "pushiness" to become chair of the F-P-C committee and his lack of deference to the other members who outranked him and held longer tenure only prompted further disdain from them. When coupled with his close personal friendship with Dr. Sewell, most committee members became resentful of his seeming complete lack of professional sensitivities. The subtle repercussions about which members were increasingly concerned were the many opportunities for qualitative assessments of Dr. Sewell's productivity to actually be reflections of their views of Dr. Crandall. For example, despite having met the quantitative criteria for publishing refereed journal articles, all were published with Dr. Crandall as a co-author. Thus, any negative perceptions of Dr. Crandall could easily lead to a diminished view of Dr. Sewell's work. A guilt-by-association type of reaction. Such reactions might be completely ethical and wholly defensible if it were honestly judged that Sewell's and Crandall's work represented insufficient scholarly attainment. On the other hand, jealousy, retribution, and disdain for Crandall's salary and less-than deferential demeanor could easily induce some members to take-it-out on Sewell and purposely (but undetectably) lower his productivity rating. Any attempt to "even the score" with Crandall would be an example of a subtle, but totally unethical repercussion.

(3) Dr. Sewell had every right to offer to share his complete dossier with any faculty in the school. Making public his accomplishments, even while the F-P-C committee was deliberating, was certainly his prerogative. However, his intentions in doing so and expectations that non- committee members would thereby judge him favorably and both directly and indirectly pressure the committee to support his candidacy, was totally unethical. Above all, it was evidence that the confidentiality of the committee's deliberations had been breached. How else would Dr. Sewell have been aware that the deliberations were not going as favorably as he had hoped? Secondly, it was the committee's recommendation that would be forwarded for further review, not the informal support he might garner from non-committee colleagues. Any colleague approached by Sewell would also be placed in an untenable and probably uncomfortable position. Imposing on colleagues and friends for self-advancement, personal gain, and placing them in unwanted situations is unethical.

(4) Despite what were probably good intentions to clarify whatever recommendation was arrived at by the committee, the dean's decision to ask the F-P-C committee to re-vote could be considered unethical. First, it unnecessarily calls into question the legitimacy and autonomy of the F-P-C s deliberations and eventual recommendation and thereby diminishes perceptions of the quality of the committee's hard work. It is a common and general practice for abstentions to attach to the affirmative vote (YEA's). In this case, the committee originally reached a non- unanimous, but affirmative recommendation supporting Dr. Sewell. If the dean's intervention was to burden the committee so as to influence the "appearance" of the vote (i.e. would a mixed vote count negatively against the candidate), the dean's decision to ask for a re-vote was dishonest in its intent. Second, unlike the college-level policy, there was no official policy outlawing abstentions at the school level. Had there been such a policy at the school-level, the dean's decision would have actually been mandated, and therefore wholly ethical. On the other hand, the dean's decision was not supported by any policy and the committee's vote should have been accepted on its face, regardless of the nature of the final tally. Finally, since the dean was generally thought to have exhibited subtle signs of favoritism toward both Sewell and Crandall in the past, the decision to ask for a re-vote appeared to add fuel to the argument. Was he inclined to support the candidate's promotion irrespective of the committee's qualitative assessments, and before he fully deliberated and/or discussed the reasons for the abstentions? The answer will never be fully known but his motives to support the candidate appeared to out-weigh his professionalism and good judgment. While he may have felt justified in his decision for good and ethically defensible reasons, it didn't appear that way to the committee, nor members of the faculty they represented.

(5) Members of the finance department were not inclined to challenge any decisions made by Dr. Sewell or Dr. Crandall. One or the other of them had been chair of the department since Dr. Crandall first started at TU. Chairs are responsible for assigning courses and course schedules, annually reviewing department faculty, and recommending merit pay increases. The close alliance between Sewell and Crandall made it difficult for the finance department to feel they could challenge either of them without the likelihood of some form of subtle retribution. Dr. Ambuss had often expressed this concern to the dean but without any results. It is unethical for the dean and department chair not to provide the department members with a non-hostile workplace.

(6) When the evidence strongly suggested that a breach of confidentiality had occurred, the dean should have met with the committee and openly discussed his concerns. If there was sufficient evidence to suspect that a breach occurred and was attributable to only one committee member, that committee member should have been immediately removed from the committee and brought up on formal charges of ethics policy violations for adjudication by the appropriate college governing body (e.g. faculty senate, the provost's office, or others). If the evidence suggested multiple breaches had occurred, he could have disbanded the entire F-P-C committee and had the departments re-elect/appoint new members and started the process all over again from scratch. He could have also levied charges of ethics violations against any members of the committee thought to be involved in the breach of confidentiality.

Subject: School faculty; Employee promotions; Education policy; Honesty; Business ethics; Case studies

Classification: 2410: Social responsibility; 9130: Experiment/theoretical treatment; 1200: Social policy; 8306: Schools and educational services

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-8

Number of pages: 8

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 963331391

Document URL: http://search.proquest.com/docview/963331391?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 54 of 100

It's my money and I want to recognize it now!

Author: Squires, Karen D; Garcia, Michael L

ProQuest document link

Abstract:

The following case will help students determine when revenue is to be recognized for financial reporting purposes and for income tax purposes within a current accounting period or if it should be postponed until the forthcoming accounting period. The issue arises from an insurance agent's claim that most of his time and effort in estimating commercial insurance policies for a new large regional client should be claimed as income in the current period. Proceeds from the insurance policies were received by the end of the current calendar year; however, the policy term starts in the subsequent calendar year. Students are asked to explore other comprehensive basis of accounting (OCBOA), a CPA's role in preparation of financial projections and forecasts as well as how international accounting standards (IAS/IFRS) would impact their answers. [PUBLICATION ABSTRACT]

Full text:

CASE SCENARIO

During high school Rusty Baines started working part time for his Uncle John's construction company, Stable & Sons Construction, Inc. (Stable.) Florida is a "right to work" state which means that union membership is not required to obtain employment. In fact, the normal practice in Florida is for construction contractors to be non-union, thus made it very easy for Rusty to start working in this industry.

Stable was licensed for both residential and commercial projects in the seven counties which comprise the Tampa Bay area of Florida. The company's niche was commercial strip centers, office buildings and light industrial buildings generally ranging from 10,000 to 20,000 square feet. Uncle John worked with several area architects who would ask him to bid on projects they had designed. Upon receiving appropriate governmental approvals for the plans, Stable became the general contractor for the construction phase of the project.

Rusty started out as a classic "gofer", filling in where ever he could. He worked part time during the school year and full time during the summers. In college Rusty majored in Environmental Science and minored in Business Administration. It was in one of his business classes that he met a woman who made his heart skip a beat! Ruby was majoring in finance. When Stable's accounts payable clerk rook maternity leave, Rusty suggested that Ruby to fill in. She did a great job.

After graduation Rusty and Ruby got married and both took full time positions with Stable. Ruby's responsibilities included working with banks to produce documents required for loan approval, obtaining construction draws (progress payments) as well as developing budgeting and cash flow projections for internal use. Rusty reached the point that he could be the general contractor for any of Stable projects. Ultimately he became a licensed mechanical and electrical contractor. He was meticulous in making sure that the construction was done right and on time. Building inspectors loved him because he was so thorough and so honest. People in the business started referring to him as "Trusty Rusty."

The Plan

Uncle John had reached his mid-fifties and had started succession planning with his two sons and other family members. The next generation would begin to take over all phases of the business. Everyone felt that Trusty Rusty and Ruby should continue to work for Stable as well as get an ownership interest when Uncle John finally decided to retire. It was clearly time to share their own plan with the family before the succession plans were finalized.

Trusty and Ruby enjoyed being part of Stable. However, as Ruby explained to Trusty, the family needs some diversity in its "jobs portfolio." While the Stable had a long successful track record, having all of the family members working for one company might prove risky. Trusty agreed with her. Further, working for his mother's brother was okay but he wanted to prove to himself that he could succeed on his own.

During their years with Stable, Ruby had developed relationships with a large number of commercial loan officers. Trusty knew all of the developers and landlords who were customers of Stable as well as every building inspector in the 7 county area. Trusty and Ruby proposed to the family that they wanted to open two businesses. One would perform building inspections & appraisals; the other would be an insurance agency. Trusty would take the point for building inspections. And Ruby would be the broker for the insurance agency. They would continue their jobs at Stable while they obtained all of the necessary licenses and credentials and gradually transition to their new businesses.

Trusty Rusty wanted to run his inspection and appraisal business as a branch of Stable until he reached a sufficient volume to open his own business. Stable would bill the client, keep 10% then include the difference as part of gross wages in Rusty's next paycheck. Rusty anticipated that his revenue would come from 3 sources: building sales inspections, tenant building inspections and periodic loan inspections. A common lease clause is to periodically require property inspections as an assurance to the owner that the property was being maintained in conformance with lease requirements. Lessors would also hire Trusty to inspect their property when a tenant moved out.

In late 2010 Ruby and Trusty completed their property and casualty insurance licensing. As a broker, Ruby had to have her own office and legally couldn't run this business as a subsidiary of Stable. She also obtained signed agreements with more than a dozen insurance companies to sell insurance for them. Trusty obtained his insurance agent's license to sell insurance through Ruby's agency. This created another market for his inspection business. It's possible for insurance premiums to be significantly reduced if the property is physically inspected instead of simply sending pictures to the agency.

The Baines Insurance Agency, Inc. and The Baines Inspections and Appraisals Service, Inc. officially opened on January 1, 2011. Their CPA, Rosalie Lowe recommended that the business entities be organized as subchapter S corporations (S Corps.) These are entities that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S Corps report the flow-through of income and losses on their personal tax returns. However, any shareholder who actively participates in the business must be paid reasonable compensation as wages. Since their businesses were new, it was impossible to determine the amount of reasonable compensation. Therefore, Rosalie had them hire a payroll processing company and to pay themselves a salary of $1,000 per month from each of the companies. At the end of the year Rusty would get two W2's: one from Baines Insurance for $12,000; one from Baines Inspections for $12,000. The same would be true for Ruby. They each owned 50% of the businesses and agreed to split the net profit or loss of each company equally. Rosalie emailed them her list of records they would need to keep. Trusty and Ruby knew most of this since they were already used to doing these things when they were with Stable. They kept mileage logs when using their personal vehicles for business purposes, they used their business credit cards only for business related purchases and when they took someone out for dinner or other entertainment, documented the circumstances. The IRS requires that the company keep a record of who attended the event and the business purpose. It was agreed that Ruby (would?) pay the bills and deposit customer checks using QuickBooks to keep those records. Ruby opened two bank accounts and kept two sets of books, one for each entity. Rosalie helped Ruby set up QuickBooks for each of the businesses. The QuickBooks program has standard templates for a wide variety of businesses, so it was really just a case of picking the correct template. Rosalie made sure that each company had a "drawings" account to use whenever money, other than their salaries, was taken out of the business checking account for personal use. She also included an equipment account for any expenditures for items expected to last more than a year and costing more than $1,000. If equipment cost less than $1,000 Ruby should put that expenditure in either a supplies or an office supplies account. Both businesses operated out of the same office which they rented in a small shopping center. For situations like this, Ruby would record the half of the rent expense in each company. Rosalie stressed that it was important to keep each business as well as their personal banking activities all separate. And if they needed to use some of their own money to cover their business expenses, they should first write a check to the appropriate company an owner investment, not revenue. Then pay the expenses from the business account.

Rusty already had a steady income stream from the business he developed while part of Stable. He was at least able to cover their business expenses. Through their efforts and community networking their businesses grew exponentially in 2011 and by the end of the year their economic status was strong, but not as strong as they would have wanted it to be. Then one day in September Rusty walked into the office to see Ruby chatting with a former contracting client, Larry Pinder, who smiled an exclaimed, "Office life sure does agree with you Trusty!" Rusty was happy to see Larry and asked him how they could be of service. Larry explained that he wanted Rusty to give him a bid for a one year casualty insurance policy on a commercial shopping center which would go into effect on October 1, 2010. Larry explained to Rusty that he was shopping for property and casualty insurance coverage. He pays the taxes and insurance on his rental property and a portion of the tenants' periodic lease payments include an amount to cover these items. Sometimes leases refer to these as executory costs. Another phrase which describes this practice is "triple net" leases. After the preliminary interview with Larry, Rusty had the necessary information needed to bid out the insurance policy. Rusty had also mentioned to his friend that due to the building's age it would behoove Larry to get a building inspection of the property. "What is the cost?" Larry asked, and Rusty replied for this type of property an inspection would $600. And if this doesn't save you more in insurance premiums than the cost of the inspection, the inspection is free. Larry exclaimed, "Go for it Trusty" and handed him his credit card to process for the inspection fee. It took Rusty a couple of hours to perform the inspection. Pinder had done a great job of maintaining the property. The roof, HVAC systems, etc. were in much better shape than what he typically saw in structures of this age. Rusty spent a lot of time writing-up the insurance proposal, and preparing his presentation for Larry. On the day of the presentation Rusty showed Larry the findings of the inspection, thoroughly discussed the policy coverage, and finally that the insurance premium would be $9,000 (and the Baines commission was $540.) Larry awe-struck by Rusty's work and the fact that his bid was 22% lower all of the other bids he had received. Larry signed the check for the insurance premium and Rusty handed him his insurance policy. Rusty said "Larry, just remember that we here for you. If anything comes up, you know where to find us." Ruby deposited the premium check as $540 Commission Revenue and the net amount as Accounts Payable (to the company insuring the property.)

At the end of October Larry returned to the office and wanted to take Rusty and Ruby to lunch. During lunch, Larry told Rusty and Ruby that he wanted them to bid on all of his 25 of his commercial properties. Larry explained to Rusty that he needed an insurance agent who was proactive and wanted to save his client's money. You're that agency for me. With a grin and a hand shake Rusty told Larry that he will have his bids for all of Larry's properties by December 15th. Larry agreed and said, "Trusty Rusty, the game is afoot."

After coordinating the logistics of the property inspections, Rusty and Ruby worked at a feverish pitch on Larry's properties as well as servicing their other clients. There were a lot of nights and weekends when the office lights were on. Rusty had just had enough time to prepare his presentation for Larry by December 15th.

Again, Rusty hit the proverbial ball out-of-the-park. All but one of the insurance bids were lower than the previous year's policy premiums! Further, the savings were greater than the charge for the inspections. Rusty told Larry that his Seminole Heights area property's sprinkler system is obsolete and the electrical system has to be replaced because it was in violation of building codes. "This will not be a quick fix," Rusty said, "but if you can have the work completed by the end of next your insurance premium on that property will drop significantly." Larry said with a smile, "No problem, think your Uncle's company could handle the repairs?"

The next day Rusty called Rosalie's to schedule a telephone conference to answer some accounting questions he had. Rosalie was able to take the call. Rosalie agreed to Rusty's request to put her on speaker so that Ruby could participate as well. Rusty explained that the Insurance Agency might receive a large premium check at the end of the year resulting in $36,000 of commissions, which fell within the normal 10% to 20% range of the premiums on commercial property and casualty insurance. This is based upon a premium for insurance policy coverage starting on January 1, 2012. The premium had to be paid by December 31, 2011 for Larry Pinder's insurance to go into effect on the desired date. What he wanted to know was if this money received in December would it be considered income for the 2011 accounting period or the 2012 accounting period? Rosalie said that there might be some flexibility about that. Since Baines Insurance hadn't yet picked an accounting method, the tax code allows small corporations to use either accrual or modified cash accounting. Rosalie said that with a new business she evaluates the circumstances and, after discussing it with her client, chooses the method that result in the lowest tax for the client. Then Rosalie cautioned, "Once an entity picks a method, it has to use the same one for year to year until it gets so big that the IRS requires the entity to use accrual accounting."

Rusty said, "Rosalie, keep in mind that we will have finished all of the requirements to earn this commission revenue. It's our money, and we want it in income now!" Rusty added the real issue is that they may need to show higher income because they wanted to refinance their home. They planned to build an attached income property. Then if it became necessary, simple alterations would allow Ruby's parents to move in with them. Presently they were in perfect health. Ruby said, "It's my understanding that the bank will want to see our 2011 tax returns - in the best possible light - to help us qualify for the loans."

Rosalie told Rusty that he since he had no flexibility on when he was going to receive the insurance commission; she suggested that as soon as possible after December 31 the Baines upload the following information into the CPA firm's cyber file cabinet. She needed the QuickBooks files, the mileage logs and a list of any equipment that they brought from home and were using in the business. Rosalie added that this time of year she normally reminded clients to buy any equipment they needed prior to December 31. This would reduce their taxable income. Rusty shot a look to Ruby that said "reduce income? I wonder if our CPA understands the issue?!"

Rusty had just hung up with his CPA when his phone rang again. It was Larry. He asked "Do you guys do work in the Orlando area?" Rusty said, "Yes we're licensed to do business anywhere in the state." Larry said "Great! I have 10 properties there that I'd like for you to work on. The only problem is that the insurance on those properties expires on March 31. While I've only had insurance coverage for 75% of the policy year, my current insurance company will not refund the 25% balance of the premiums I've paid. So the Orlando property insurance will be a project for the first quarter of 2012." Then Larry added, "My golf foursome has a 9 am tee time tomorrow. The other three are also developers. Wait until they hear about Baines Insurance! Better print up some more business cards!"

On December 29th Larry entered Rusty's office with two checks. One check was for the building inspections totaling $15,000. The second check was for annual policies on the 25 commercial properties totaling $222,000. Rusty said "Are you sure that you want to pay 100% of your premiums now?" Larry said "Yes, the installment payment option would have cost me approximately 5% in interest. The banks aren't paying any significant interest on money market accounts so it makes sense to pay of the premium all in one lump sum." Rusty said, "Okay, if that's the way you want it. And you understand that just like your previous insurer, while you are paying $18,500 a month for insurance coverage, they retain around $32,000 a month for refund calculation purposes." Larry nodded and then said, "Don't return the $600 inspection fee because you are worth every dollar." Rusty enthusiastically shook Larry's hand, thanked him then wished him and his family a happy new year.

The following Monday they went to work pulling together the information for their CPA. They emailed her that their banker suggested that, in addition to their tax returns, their loan application should include something called a financial statement compilation for 2010 and a financial statement forecast for 2011. The banker referred to using other comprehensive basis of accounting (OCBOA) and told Rosalie that they had no idea what he was talking about.

On January 20 they arrived for a meeting at Rosalie's accounting office. The Baines each accepted a cup of coffee then everyone sat down to get the meeting started. Rosalie said, "You guys did a great job of record keeping which is going to really help me prepare your tax returns. This will involve returns for your two S Corps's and your personal returns. You should be getting some more Form 1099's for brokerage and banking account interest. And thank you for signing and uploading your tax return engagement letter to your cyber file cabinet. Do you have any questions?"

Rusty chimed in, "We're pretty confused about the other reports that our banker recommended. Is there a book somewhere explaining OCBOA to dummies?" Rosalie laughed saying that there wasn't any book that she knew of, but that she'd give it a try. She reminded Ruby and Rusty that her CPA firm audited Stable and Sons, Inc. and that those financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP) which is what they studied in school years ago.

"When you took accounting in school what you learned was GAAP accrual accounting. With accrual accounting, revenues are recorded when services are performed, not when the cash is received. Until the revenue is earned, the money involved is in a liability account generally called something like unearned revenue. By the same token, expenses are matched to revenues and recorded as an expense when the service is received. If cash is paid prior to receiving the services, the dollars involved are shown as a prepaid asset. Does this sound familiar?" Again her clients nodded, although less enthusiastically. "Okay, let me give you an example. Suppose we agree that you want me to: (1) do your taxes; (2) prepare a compilation; and (3) prepare a forecast. If you paid me for all three in December, under accrual accounting you would record the entire amount as something like prepaid accounting fees. Then when you get your tax returns, you transfer part of that the prepaid amount to accounting fees expense. You'd do that a second time when you get the compilation and a third time when you get the forecast."

She could tell from the look in their eyes that they understood, so she continued. "Whereas when my firm receives your check, under accrual accounting that amount would be recorded as unearned revenue. Once the tax return is sent out, the fees for that service are transferred from unearned to revenue." Rusty interjected "and then when the compilation is finished that portion of the unearned fees become revenue?" "Exactly!" said Rosalie. "This is a situation where the components can be identified and accounted for separately." I noticed that your insurance agency has a billboard on the interstate close to the industrial area of town and that you paid $6,000 for it on November 1. How long is the contract for?" Ruby responded "Six months." Rosalie continued, "Okay, assuming the cost to design the billboard was part of the total contract, under accrual accounting there's no way to identify components so the expense for you and the revenue for the billboard company are both allocated on a straight line basis." She asked, "How much revenue will the billboard company record in 2011 and how much in 2012?" "$2,000 in 2011 and $4,000 in 2012?" asked Ruby. Rosalie said, "Precisely! And your insurance agency would mirror that by having $2,000 of expense in 2011 and $4,000 of expense in 2012." And finally, there are expenses like your printing costs for business cards and brochures. Those are expenses immediately because there's no way to predict when you will hand those out or when they will play a role in actually generating revenue."

"The other extreme is cash basis. Under cash basis accounting, the general case is that when the cash is received it is revenue and when cash is paid it's an expense. Usually accountants use the phrase modified cash basis because if a business were to purchase a new office building for cash, it simply doesn't make sense to call that an expense in one year when they will be using the building for 30 or more years. So even under cash basis accounting, items of property, plant and equipment are recorded as long term assets and depreciated. There are other exceptions like making loans or receiving loans. So there's GAAP, and then there are several other ways of presenting financial information, that's where OCBOA comes from. Modified cash basis is one of those. Income tax basis is another. Remember that a business picks either cash or accrual basis to use for its first tax filing and then and continues using that method until it gets millions of dollars of revenue. I normally have all of my business clients on accrual basis accounting. As a general rule it results in lower taxes." Ruby concluded, "You may not realize it, but I've just described 3 kinds of OCBOA methods: (1) modified cash basis; (2) Income tax - modified cash basis; and (3) Income tax - accrual basis."

Rusty said, "What? There are two versions of modified cash basis?"

Rosalie responded, "Yes. What they have in common is that almost all of the expenses for the modified cash basis are also deductions for the tax version. However the tax code allows additional deductions which would not be expenses otherwise. An example would be an expensive piece of equipment that you buy for your inspection business which you expect to last for 5 years. Under the modified cash basis that equipment would be recorded as an asset and depreciated. The tax code allows companies to deduct the cost of any equipment in the year of purchase as long as certain criteria are met, and your company does."

She continued, "I suspect that this is why your banker suggested that you have me prepare a compilation for your businesses, it will probably show higher income than your tax return. The American Institute of CPAs (AICPA) has rules that I am required to follow when preparing compiled financial statements. I will email a separate engagement letter for you to sign which will then permit me to work prepare these financial statements for both businesses. You will notice that the engagement letter will state that the compilations will consist of only an income statement (called a statement of revenues and expenses - modified cash basis) and a balance sheet (called a statement assets, liabilities and retained earnings - modified cash basis) and that all disclosures are omitted. There's also a standard cover letter that I am required to prepare. I've worked with your banker frequently and in my experience that it's all that is required to help him to evaluate your businesses' performance for 2011. Are you okay with that?" Both Ruby and Rusty nodded. Ruby promised to email the engagement letter within 48 hours.

Looking to the future

Ruby asked them to tell her what was currently going on with their business to give her a foundation for the forecast. They told her about Larry Pinder, the 26 new commercial insurance policies, the potential for 10 more, just from him. They told her about Pinder marketing their services to all of his buddies so they could be looking at an explosion of revenue in both businesses. Basically we expect revenues to more than double in 2012 They were thinking about hiring an administrative assistant to handle appointment scheduling, taking over other office functions like the bookkeeping to free up Ruby to be more active generating leads and selling insurance policies.

Rosalie said, "Just like with compilations, the AICPA has rules for forecast engagements. I'll have to get an engagement letter from you. I'll forward a copy of the cover letter from my firm that will be attached to the forecast. The forecast can be limited to the income statement. And here's a key point: The AICPA requires that you have sufficiently objective basis for the assumptions used to develop the amounts for each of the key factors -and these assumptions have to be disclosed."

Rosalie indicated that the Baines could expect to receive the compilation report and tax returns within a month. She also suggested that they donsider talking to your banker to get a preliminary evaluation as to whether you might qualify for the re-fi of if the bank will still need the forecast.

Case Questions:

1. How much revenue will Baines Inspections and Appraisals, Inc. recognize for the inspections performed for Pinder and justify your answers?

2. How much revenue will Baines Insurance, Inc. recognize for the policies sold to Pinder and justify your answers?

3. The IRS requires that owners of S Corporations who are actively participating in the business receive reasonable compensation. While there are no specific rules as to what constitutes reasonable compensation, courts have included: duties and responsibilities; time devoted to the business; pay for similar services in comparable business. Develop some suggestions for the Baines to consider using to update their compensation formula.

4. You have been given a print out of the QuickBooks file for 2011 and for 2012 to date. How many months of activity in 2012 would the CPA need in order to meet the AICPA requirement of having "have sufficiently objective basis for the assumptions?"

TEACHING NOTE FOR INSTRUCTOR

Case Overview

This case helps the student to analyze and determine the recognition of revenue from both an accrual and tax accounting perspective and Other Comprehensive Basis of Accounting (OCBOA). The primary stakeholders of this case are owners of both an insurance agency and a building inspection business. One of the owners prepares the largest bid of his entire career at the end of his current accounting period for policies to cover properties next fiscal year. All funds are received and are unencumbered at the end of the current period. The owners want to present financial information for a loan application which will reflect the massive amount of new business. The question is whether to claim this cash as revenue in the year when the money is received. Secondarily the case raises issues associated with closely held family businesses, such as succession planning which makes the case interesting to entrepreneurial students.

Learning objectives and suggested use of the case are as follows:

1. Understanding and implementation of the principle of revenue recognition.

2. Understanding the differences between accrual basis and cash basis and (OCBOA) accounting. And how this might change under international accounting standards (IAS) which may be reflected when convergence to IFRS occurs.

3. Understand the higher borrowing requirements faced by self-employed loan applicants.

4. Understand the role that a CPA can play in the loan application process by preparing forecasts and projections.

5. Expose students to operating issues in a variety of industries including construction, insurance, commercial lending, and small business succession planning.

Suggested Audience

This case is intended for a variety of classes including entrepreneurship, finance, financial accounting, and individual/corporate tax.

Suggested Answers to Case Questions

1. How much revenue will Baines Inspections and Appraisals, Inc. recognize for the inspections performed for Pinder and justify your answer? ($600 x 25) + $600. Paid in 2011 and all of the work was performed in 2011.

2. How much revenue will Baines Insurance, Inc. recognize for the policies sold to Pinder? Keep in mind that Revenue recognition is in transition; however the treatment shown here is the same as the revenue recognition rules under International Accounting Standard (IAS) No. 18.

3. The IRS requires that owners of S Corporations who are actively participating in the business receive reasonable compensation. While there are no specific rules as to what constitutes reasonable compensation, courts have included: duties and responsibilities; time devoted to the business; pay for similar services in comparable business. Develop some suggestions for the Baines to consider using to update their compensation formula.

There is no correct answer to this question. The instructor may wish to suggest that for each of the companies Ruby and Rusty receive a salary for their management responsibilities plus half of any of the revenue they bring to the company. The other half would presumably go to cover the organizational overhead. Since both Ruby and Rusty know some of the same people, there may be times when there is a question of which person was responsible for the sale. There might be a banker they both know who refers a customer to the business. Perhaps under these circumstances the Baines both get credit for the insurance sale and split that commission. If the referral is for an inspection or appraisal, Rusty is the owner who will do the work. Should Ruby get any credit for this business in the proposed formula?

4. You have been given a print out of the QuickBooks file for 2011 and for 2012 to date. How many months of activity in 2012 would the CPA need in order to meet the AICPA requirement of having "have sufficiently objective basis for the assumptions?"

Realistically the CPA firm would not be able to complete a forecast engagement until after tax season. Assuming they completed the forecast for the 2012 calendar year on May 1. It would be possible to determine how many insurance policies were renewed for a second year. If 90% of the policies were renewed to date, that amount could be used to forecast most of the revenue for the balance of 2012, exclusive of Pinder. If Larry Pinder does contract for insurance of his Orlando properties on April 1, it will be safe to assume that he will be renewing the insurance on the 26 properties arising in 2011. Further it will be possible to monitor to what extent additional new business has been obtained. If to date in 2012 they've experienced a 20% growth, then that growth rate can be used to predict revenue for the year.

Subject: Entrepreneurship; Revenue recognition; Corporate income tax; Lending; Insurance; Case studies

Location: United States--US

Classification: 9190: United States; 4210: Institutional taxation; 4120: Accounting policies & procedures; 9520: Small business; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-10

Number of pages: 10

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables References

ProQuest document ID: 963331522

Document URL: http://search.proquest.com/docview/963331522?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 55 of 100

Mak Tim Resort

Author: Ishak, Nor Khomar; Abdullah, Fakhrul Zaman

ProQuest document link

Abstract:

The case presented the challenging problems in managing a family business. Discussion relates on how to ensure the business will continue to grow and how to ensure that the organization will successfully move from the entrepreneurial phase to the growth phase. [PUBLICATION ABSTRACT]

Full text:

BACKGROUND

Mak Tim Resort was a family business ran by Zainal and his wife Raihan. The land on which the resort was built was owned by Fazil, Zainal's father. Fazil had initially started the accommodation business informally, on the same piece of land by renting out 2 rooms in his house. Back then, it was known as the Mak Tim Homestay. Fazil had 9 children, but only Zainal had shown interest in the plans that Fazil had for the land. Fazil had inherited the 3-acre land from his late father, and he had indicated that under no circumstances should the land be sold. The land was fringed on one side by white sandy beaches and the South China Sea, and on the other side was a narrow village road. There were a few traditional village houses and a wide open well-maintained grassy area that separated Mak Tim's resort from the main west coast trunk road.

ACCESSIBILITY AND LOCATION

Mak Tim Resort was located at Kampung Cherating Baru (New Cherating Village) about 45 kilometers to the north of the town of Kuantan, on the coastal road to Kuala Terengganu. The access road to the resort was shared with the 5-star 5 storey Legend Hotel, which had recently open for business. The resort, located about 100 meters behind the Legend Hotel, was not visible from the main road and its small indistinctive signage could barely be seen. In addition, there were numerous food stalls along the main road that distracted travelers from the signage. These stalls sold local delicacies and rice dishes at prices ranging from RM3 to RM8 per meal, and therefore were able to attract any visitors or travellers. Guests from Mak Tim resort would often take the short stroll to those food stalls, rather than having their meals at the resort's restaurant.

THE BUSINESS MODEL

Upon the demise of Fazil in 1992, the land title was passed to Zainal. Zainal had a discussion then with his 8 siblings and they decided that any family members could build a chalet house on the land, using their own funds, but it would be managed by Zainal. For that service, Zainal would charge a 5% fee of the revenue collected for operating costs. Well before Fazil's death, all the children had moved out from the family house, except for Zainal and his wife and 2 sons. They had stayed on at Fazil's request since he was quite close to Zainal's young sons.

In 1993, Zainal began the resort business by building 3 units of chalet houses. Each unit had 2 family rooms. The 3 wooden houses had a front porch and basic room furniture. The chalet houses were built by local skilled craftsmen who had intricately design the wooden panels of the window and door frames according to Malay traditional patterns. Zainal and Raihan were very proud of the design concept for it provided the distinctiveness of Mak Tim Resort from other resorts in the area. Guests had often admired these wood carvings and Raihan would proudly show an article written on the chalet design in a popular architectural magazine.

Each unit, including the furnishings, cost RM60,000. Zainal had also built an extension to the family house for used as office cum reception area. This cost him RM5,000, but he had not included this in as capital cost as he felt that it was for his own family benefit. Two years later, he added another 6 units of chalet houses, each costing also RM60,000, and a 50-seat restaurant that cost RM50,000. By 1997, there were a total of 15 units of chalet houses, 4 guest houses which cost RM25,000 each for building and furnishing, and an outdoor grill area costing RM45,000. The later development was funded through the revenue generated, and also from funds contributed by two of Zainal's brothers. Each gave RM60,000 for building two units of chalet houses and the furnishings. So Zainal, as agreed upon earlier, had indicated that the revenue, after the deduction of all expenses, would be prorated and given to the two brothers.

Since starting the business, Zainal had made countless offers to his other siblings to fund the building of more chalet houses. He had even segmented the land area so that each sibling would get a sea front area for their chalet houses. Except for the two brothers, the others had not taken up the offer, mainly because they were not financially stable to do so. After several discussions with his wife and the two brothers, a decision was made that the other 6 siblings would also be given a share of the income. Zainal suggested, and it was agreed, that 30% on the net income would be deposited as Retained Earnings in Zainal's Fixed Deposit Account. The balance of the net profit would then be equally divided among the siblings, including Zainal and the 2 brothers who had invested. They had also agreed that Zainal would be paid a salary of RM8,000 and his wife would get RM6,000 per month.

THE PRODUCT

The Mak Tim Resort had 15 chalet houses with 30 rooms, and 4 guest houses. The following were the breakdown of the different types of units and the number for each type.

Table 1: Types and Number of Units

All rooms at the resort were equipped with a television set, a lounge set, a writing table, and a chair. The bathroom had amenities such as bath towels, bath soap, and shampoo. At the chalet houses' front porch, there were 2 chairs and a table. There was no laundry service and guests could opt to send their clothes to a nearby Laundry shop. Mak Tim Resort did not provide any recreational facilities or services, but guests could easily, for small fees, rent boats, jet ski, hang glider, or buy kites at several nearby beachside makeshift stalls. These stalls were operated by enterprising village youths. They would even, if the weather was good, take guests for snorkeling or deep sea fishing trips, at minimal fees. These youths were excellent tourist guides and they were quite fluent in a few foreign languages. During the late evening and night they would often sat by their stalls, strumming their guitars and singing along with guests from surrounding resorts or hotel.

The resort had a 50-seat restaurant which opened from 7:30 am to 10:00 pm, and it had a small outdoor annex that could cater for maximum 100 customers. The restaurant was rented out to a local catering company for RM 1,200 per month. The restaurant's tenant had the flexibility to decide on the type of food and prices to be charged, but Zainal determined the operating hours to ensure that his resort guests would have the food and beverage services, if they wanted.

THE RESORT OPERATION

Zainal was responsible for the finances, accounts, maintenance, landscaping works, and security. The only 'security' worked often required was chasing away strayed goats that had wandered onto the resort area from neighbouring villages. The major daily ground maintenance work required was the removal of the fallen coconut tree leaves. Raihan handled all administrative tasks including reservations, reception, special requests from guests, and also housekeeping tasks such as assignment of employee/s duties. Zainal and Raihan would discuss and decide on major issues. One full-time employee did all the housekeeping work. During peak season, the resort would hire a part time maid to help with the cleaning and housekeeping tasks. Local villagers were readily available to work part-time, and many had work experience in cleaning chalet houses. The employee was paid RM4 for cleaning each chalet house. Zainal and Raihan had the help of their two sons during the busy weekends. During weekdays, they studied at a college in Kuantan.

SALES AND OPERATING COSTS

The room rates ranged from RM80 to RM400, and the average annual occupancy rates ranged from 40% to 70%. The room rates would remain fixed regardless of monsoon or dry seasons. Mak Tim Resort usually had 4 foreign backpacker guests who would stay for half a year, and they would occupy 4 double bed rooms with fans. Each paid RM10,000 for the duration of their stay.

Table 2: Room Rates and Occupancy Rates

All transactions were on cash basis. Zainal had not set up a proper accounting system, and since every transaction was on cash basis the only recording made were for cash received and cash payment. The resort incurred the following monthly expenses:

* Electricity, water and utility expenses at RM10 per day for every occupied room

* Labour cost: Full-time employee RM800.00 per month

Part time employee at RM4 per unit of the chalet house, estimated at 10% of occupied rooms

* Cleaning supply costs RM300 per month

* License and assessment rent RM1500 per year

* Other expenses were estimated at 10% of Revenue

* Income Tax rate at 15%

* Zakat Payment at 5 % of Net Income

CUSTOMER ANALYSIS

Eighty percent of customers were family groups that stayed in the chalet houses and guests rooms over the weekends from Friday to Sunday. Thus, on weekends, the Resort's average occupancy would be about 90%. It would be full-house if not for the no-shows or last minute cancellations. Another 10% were customers who were members of associations, clubs, NGOs, schools, or other organizations. The minor customer segments were mainly individual travelers. Eighty-five percent of the customers were Malaysians, mainly from cities of Kuala Lumpur, Johor Baru, and Ipoh. The remaining guests were from Singapore, and a few backpackers from Australia. The guests usually arrive by car. It took about 3 hours driving time from the capital city of Kuala Lumpur and 5 hours from Singapore to get to the resort. The average family groups consisted of 5 members whose ages ranged from 3 to 45 years. On weekdays, the average occupancy rate would be about 50%, with the majority of customers staying for only a night, stopping by for a night's rest before resuming their business trip to the north or south. Over 40% of the weekday customers were repeat customers.

Customers stayed at the resort mainly due to the convenient location and the reasonable rates. Some indicated that they liked the cleaned, open and spacious chalet's compound which was surrounded by coconut trees. Cherating was a popular tourist destination with stretches of sandy beaches and seafront activities. The roadside area had several seafood restaurants that sold local delicacies such as fish crackers and fish cakes, and the popular grilled fish or 'Ikan Bakar'. At dusk, the eating places would be transformed into an outdoor food haven with multi-coloured lights, and streams of people either eating or walking about enjoying the cool, breezy night air.

COMPETITORS' ANALYSIS

Competitions were quite stiff with many resort businesses in Cherating that ran budget type to 4-star resort hotel business. There were 30 budget type resort operators along the 10-mile road stretch which extended from the old Cherating village to the new Cherating village. The number of room in each budget resort operation ranged from 3 units to 50 units. Twenty-seven of the budget resort operations were located at the old Cherating village which was located about 5 kilometers from Mak Tim Resort in the new Cherating village. The other 3 budget resort operations, with rooms ranging from 30 units to 50 units, were located in the new Cherating village, within close proximity to Mak Tim Resort. The following were information on two major competitors:

Table 3: Analysis of Major Competitors

THE FUTURE OF MAK TIM RESORT BUSINESS

Mak Tim Resort had been facing stiff competition and a steady increase in operating cost which had slowly eroded the profit margin. Additionally, like any other seafront resort properties, Mak Time Resort had to spent substantial amount of money for building upkeep and maintenance, and very soon Mak Tim Resort would need to spent at least RM40,000 for major repair works. Zainal and Raihan were thinking of removing the wood carving panels and replaced them with aluminum panels so as to save replacement cost, but that would eliminate the resort's unique identity. Another point that they have been discussing a lot lately was on whether they should employ a professional manager to manage the resort because, for the last 15 years, they had hardly any quality family time and had missed numerous family gatherings and celebrations.

QUESTIONS:

1. Discuss the Business Model

2. Do you believe that the Investment and the Return on Investment for the Resort are sufficient?

3. Discuss on the benefits that each of the following derived from the business:

- Zainal

- Each of the 2 brothers

- Each of the other 6 siblings

4. What are the various alternatives for increasing the revenue of Mak Tim Resort? Evaluate the costs and benefits for each alternative.

5. Suggest the possible marketing Plan for the Resort.

Subject: Family owned businesses; Resorts & spas; Business models; Entrepreneurs; Case studies

Classification: 9520: Small business; 2310: Planning; 8380: Hotels & restaurants; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-7

Number of pages: 7

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Tables

ProQuest document ID: 963331393

Document URL: http://search.proquest.com/docview/963331393?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 56 of 100

Case study: super saver SDN BHD - where is the saving?

Author: Tajudin, Raja Hanaliza Raja Ahmad

ProQuest document link

Abstract:

Mr. Ayuni Asuko, the chairman of Super Saver Sdn Bhd (SSSB) a company dealing in consumer products was shocked when told that a CitiBank loan facility had been recalled. The company had grown by leaps and bounds over the last five year, constantly generating good profits. Bonuses and high increments were given to staff to ensure their loyalty and dedication to the company. The problem had begun when the franchisees undertook cash transactions rather than the selling of products. This had been profitable for the whole chain from franchisee to agents and supervisors of the branches who received daily cash apart from commissions and monthly salaries. Customers however felt cheated due to their low cash receipts and high installments. Collections started to stagnate and SSSB found difficulty in servicing their bank loans. Citibank then decided to recall its facility of RM100.0 million. Other banks also wanted their loans to be repaid, which further burdened the company. [PUBLICATION ABSTRACT]

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INTRODUCTION

In October 2010, Mr. Ayuni Asuko, Chairman of SSSB received a call from Mr. George Adams, Citibank's Vice President in Malaysia, informing him that the loan facility of SSSB would be recalled and that SSSB had been given a grace period of 1 month to settle the loan. He wondered how a company with such a good track record could have had its facility revoked by a foreign bank.

Just three years ago, in 2007, Mr. Asuko had been pursued by many merchant banks to get the company listed within a time frame of 3 years. In the end, Arab Malaysian Merchant Bank had been chosen as the lead financial institution for the listing process.

Mr. Asuko had also placed great confidence in his young management team, praising them often during Board Meetings from 2008 to 2009. He had expressed his contentment with the dynamic and focused team and hoped many more new and young graduates would be recruited to head the functional units.

The Working Committee members were also of high repute, all of whom were ex-Chief Secretaries of the Government and ex-Secretary Generals of Ministries from the Main Board of the Co-operative. They had been appointed together with Mr. Asuko in 1989 when SSSB was established. They later became Board Members when SSSB became a limited company in 2007.

He picked up the phone and instructed his secretary to call the General Manager of SSSB.

"Please call SSSB's top management for an urgent meeting tomorrow morning at 9.30. They are to explain the current situation of the company".

Background

In 1999, Super Saver Co-Operative Berhad bought Kokonus Trading, which traded in consumer products, from Kokonus Co-Operative, renaming it Super Saver Trading (SST). By the year 2006, SST sales had grown to RM187.8M compared to only RM5.0M in the year of takeover (2002), a growth of over 376%. Annual sales growth of about 30% to 40% was a common feature of SST. In January 1, 2007 the Co-Operative decided to turn SST into a wholly-owned subsidiary company called Super Saver Sdn Bhd (SSSB).

A new GM, Mr. Zahiri Ahrif, was appointed from within the company to head the new entity. He previously headed the marketing division. Mr. Ahrif said,

"I will take this challenge to groom it to grow by leaps and bounds and overtake all competitors with the biggest market share in consumer products"

After becoming a corporation, SSSB bought a building in Jalan Pahang. Its staff strength was 396, with a total payroll of RM1.7 million per month. (See Exhibit A for the organisation chart of the Co-Operative and its subsidiaries)

The Business Operations of SSSB

SST had operated on a simple franchise method. There were 10 franchisees throughout Peninsular Malaysia displaying SST electrical appliances such as televisions, fridges, washing machines, microwaves, toasters, fans and irons.

When SST became Super Saver Sdn Bhd (SSSB), its product line was expanded to include jewellery, motorcycles, furniture, accessories of cars and motorcycles. As these goods were on consignment, no deposits were needed to pay the suppliers. In late September 2008, SSSB recruited two additional franchisees from Sabah and Sarawak making SSSB the biggest consumer trading company in Malaysia.

All the franchisees had to put a deposit with an amount of RM50,000 to RM 100,000 with SSSB, a practice that was continued from SST. The franchisee could take loans of up to 95% of the deposits from Majlis Amanah Rakyat (MARA) or Council of Trust for Bumiputera of Malaysia, as long as SSSB gave an assurance that the deposits would be disbursed back in full to MARA in case the franchisees withdrew or went out of business.

Deposits amounts were only 50% of the value of electrical products that were placed in the franchisee's showrooms. Any old display units would be replaced by the Operations Department and if the deposits were RM100,000, only products up to RM200,000 were in the showroom. The deposits were to ensure that franchisees would take good care of the products within their premises. Arguments often occurred as franchisees wanted new models and the Operations Department asked for higher deposits.

The franchisee from Malacca, Mr. Baker, complained to the manager of Operations.

"Items placed in the showroom were obsolete products while headquarters were harping on the deposit of RM100,000 which was considered low in comparison to items in the showroom."

The Manager, Mr. Zelchi replied,

"You are too slow in selling the products on display. Give some discounts and also look at other franchisees. Their products on displays are always the latest edition."

To increase sales, SSSB had increased its product range and the credit availability period from 36 months to a maximum of 60 months. These new guidelines provided customers with more flexibility with payments from 12, 24, 36, 48 and 60 months to choose from and at the same time increasing customer purchasing power.

SSSB also reviewed its guarantor policies. During the SST's operation, all transactions required a guarantor, and transactions above RM 10,000 required two guarantors. SSSB's conservative stance on guarantors changed when it required a guarantor for transactions above RM5,000 and two guarantors for transactions above RM20,000 to a maximum of RM25,000. All buyers and guarantors could cross guarantee once.

Ninety-nine percent of the customers of SSSB were government employees in the C & D groups. The C & D groups were those in the supervisory level, clerks and general workers categories. The customers were required to furnish 3 months original pay slips to prevent them from purchasing or borrowing from other companies. The same applied to the guarantors. If they cross guaranteed then photocopies of the pay slips were accepted. They paid for their purchases by monthly salary deductions through Angkasa, a body which deducted all government loans for cooperatives and also other government bodies. Angkasa charged a slightly higher fee for SSSB for the salary deductions because, despite its legal status as a corporation, it was the 100% subsidiary of a co-operative. The period of installments ranged from the shortest period of 12 months to the longest 60 months.

A customer at one of the outlets was heard complimenting SSSB:

"I am happy that SSSB has a wide range of products and a processing time of only a maximum of two working days. It has the best system of processing compared to Arastu that takes up more than one week to approve a transaction of less than RM5,000.

It was through this kind of word of mouth appreciation together with heavy advertisement in the media that helped SSSB to grow and expand its sales.

The Challenges

As the sales volume increased, reports began to emerge regarding 'cash transactions' in SSSB that were in violation of company policy. Customers, under the pretext of purchasing products, took cash money instead of obtaining the goods or products.

Initially, the headquarters had no knowledge of these violations as most of these transactions occurred for consignment goods. Headquarters could not detect the movement of such stock as easily as it could with its own stock, either from display units or new orders.

The customer would sign an invoice of the purchase price, the delivery order, and also a letter agreeing not to sell the products until full settlement to SSSB. The supplier would then pay the customers 40% - 45% net of the actual invoiced value. The supplier had to also pay an equivalent of 1 month's installment to the supervisor, agent and the franchisee for facilitating a quick approval. These payments to the three parties would account for another 10% of the actual invoice value. The agents were the main culprits in these transactions, marketing these cash transactions through advertisements in the local newspapers such as The Malay Mail and Berita Harian. The advertisement below was a typical example that appeared in these papers:

"You can come to our outlets for easy cash if you are in financial difficulties and pay only what you receive plus a bit of interest over a period of 12 to 60 months. Processing is done within 48 hours."

Contact: Abu 019-3753750

Agents were not salaried staff of SSSB but worked based on commission of 3.5% of total sales value paid 2 or 3 months later upon SSSB's collection from Angkasa.

These transactions became very popular in late 1998 as the financial crisis hit. Many of the customers came for cash transactions because of difficulties in paying credit cards and other assorted financial problems. An agent who had a high business turnover was heard saying to customers, "Don't worry about the installments. You just need to sign and thumb prints the forms and take your time to pay the installments".

The agent further added that the customers needed to pay whatever cash received plus 10% for the profit of the company. They were informed that they need not worry about the higher prices shown on the invoices.

This helped to attract many customers as they could avoid the illegal loan providers who could charge up to 100% interest and harass customers if payments were late.

At the showroom in Campbell, two SSSB's customers, Azli and Johari were exchanging their views on SSSB and its services:

Azli : "Hi, you are buying something for the house?"

Johari : "No, I heard this company can give cash loan, did you know about that?"

Azli : "Yes, we can get straight cash instead of the products. We only pay what we get and not what we sign on the forms."

Johari : "If that is the case I am very interested, but only cash as I have to settle my credit card bills. The collection agent waits for me every day at the office. I am so embarrassed."

Azli : "Oh yes, other friends of mine have done the same, moreover SSSB's records are not well kept. It will be at least a year before Angkasa does its collection. By then we may have been transferred or resigned from our jobs.

Johari : "That's good. Can the loan be for RM20,000?"

Azli : "Yes, and we must take the maximum eligible and also the maximum credit period. Your maximum loan according to yourpay slip will only be RM12, 000 not RM20,000*"

Johari : "Yes, yes and thank you.

* (Note: The eligibility of Johari is RM 12,000 for products purchased. If it is cash transaction, he will received maximum RM4,800)

In the year 2000, 70% of sales came from cash transactions with only 30% constituting actual sales of goods. Headquarters was happy with the increase in sales turnover and good bonuses were distributed to the employees. As far as Headquarters was concerned, documentations were properly done and it was the customers who cheated themselves by signing for high invoice prices and getting very little cash. The Operations Department (Headquarters) then imposed thumb prints of customers on delivery order forms to counter any claims by customers on non-receipt of goods.

Collection Policies

About 55% of the customers opted for 60 months credit period where the average cycle of 45 months would be enough to cover for existing loans. The loans taken from the banks were for a period of 36 months to 42 months with bank loans settled upon getting the collections from customers at the end of the cycle.

One banker from Perwira Affin Bank Bhd remarked:

"Why is SSSB not settling its loans? After all, their collection is 100% full proof because Angkasa deducts directly from the customers' salary and moreover they are all Government employees with no bad debts expected."

The operations staff of SSSB answered:

"That is because SSSB's sales are continuously increasing so the banks do not have to worry. They are actually funding for higher sales and that has nothing to do with the collection system."

Competitors

When SST was taken over in 1999, there were only a few competitors selling consumer products. Arastu and Singer were the main competitors in electrical items selling through monthly deductions. They appointed agents to do their monthly collection. Other competitors were retail outlets such as Hock Seng Leong, Batu Road Supermarket, and a few Chinese owned family shops which facilitated purchases by installments. Bank Rakyat and some thrift and loan co-operatives provided personal loans of about 6 months to 1 year's equivalent salary. These loans could then be used to pay for cash purchases of consumer products from those outlets.

Later in 2003, Redifussion was set up by Tan Sri Azman Hashim to sell only electrical items. Courts Mammoth, a consumer product retailer with a variety of products, was also beginning to move up from the southern states to Kuala Lumpur and proved to be a major competitor to SSSB.

By 2007, SSSB boasted that 90% of the purchases were approved within 24 hours or at the latest 48 hours for purchases of substantial amounts. It offered a wide range of products, even including boats sold on installments in the Eastern states. This move was in anticipation of competitors that could enter the market. By 2008 it had captured at least 70% of the government employees' market in terms of consumer products.

Marketing Functions (See Exhibit B for the organization structure of SSSB)

The main function of this department, headed by Mr. Zelchi, was to look for new products and suppliers to be added to the existing product line. He was also responsible for establishing good working relationships with all government departments and to carry out promotions from time to time at these offices.

The franchisees could also request additional products to display or suggest new suppliers for other products. All approvals were given only by the department. However, in 2010 and 2011, the ordering levels of electrical products had slowly decreased with the increase sales of consignment products. Jewelery became the main attraction in sales.

Prices were determined by the cost of funds and comparisons of pricing against competitors made within this department. Purchases of electrical products were usually done in bulk to get better discounts from suppliers.

Higher discounts were usually promoted by electrical suppliers for products that often were obsolete or products that were due to be discontinued in 6 months to a year's time. This was done without the knowledge of SSSB marketing personnel.

The marketing personnel also visited the branches/sub-branches to determine that the display of items was in accordance with the required standards. The marketing department also did stock checks to ensure that the products displayed in totality would be equated to the requirement of the franchisees deposits. If the product value were higher, the marketing department would request for additional deposits. New areas of development, for instance the need for franchisees to open either main branch or sub-branches, would also be approved by this department.

At the end of every year, the marketing department would then decide which products could go on special sales or sold at a discount. These were usually those products that were obsolete or discontinued after being on the shelf for 2 to 3 years. Usually, displayed prices were only in the form of monthly installments for a period of 12, 24, 36, 48 and 60 months. SSSB discouraged walk-in customers who would like to buy in cash because it was not profitable. At any rate, these transactions were readily available at most retail supermarkets.

a) Operations Functions

The manager for operations, Mr. Zuree, reviewed all the credit documents that were sent by the branches to the headquarters. His main function was to monitor the documentation process which included the checking on calculations of eligibility done at the branch level. All branches had one supervisor and two support staff in charge of operations and accounts. The supervisors would mainly look at the marketing and promotions and was also being paid a commission of 0.5% on sales in addition to salaries. They were also to vet through all documents and ensure that only eligible customers could purchase products from the branches.

The operations department would check whether all these procedures and calculations were correctly done. From time to time, there would be government's circulars allowing for additional allowances or additional credit facility and the Operation Department were to monitor all these. They would then inform branches on the new guidelines. A strict policy was enforced requiring thumb prints to show proof of the sales of products.

Work at the operations department was very routine. When SSSB needed to borrow from financial institutions, this department would need to prepare all the transaction contracts to be pledged to the banks. These contracts would be valued at 120% of its value against the loan taken.

At the same time, these contracts were to be replaced every 6 months to the banks as collections were received by SSSB. Local banks would usually not do any follow up on the replacement contract. The staff handling replacement contract would just file them in a file and label the bank's name. When there were new loans, the replacement contracts would be given for the new loan. Citibank, however, collected the replacement contracts and passed all expired contracts to SSSB.

This department also took action on customers who lapsed in their payments to Angkasa. The Recovery Unit would monitor the bad accounts after receiving outstanding payment reports from EDP Department. Legal action was taken only after 9 months of non-payment. The legal action sometimes took 9 to 12 months from the issuance of the letter of demand to bringing these customers to court.

b) Finance & Accounts Department

Finance and Accounts Department, headed by Mr. Rambo, had two sections, Accounts Payable and Accounts Receivables. Apart from catering for statutory requirements, this department also monitored the requirements of cash and borrowings of the company.

Lately, the department had financed through private debt securities. This was done through the issuance of bonds and the rating of the company through Rating Agency Malaysia (RAM). In the year 2008, SSSB managed to secure a rating of triple BBB, a rating that indicated it could meet its repayment scheme. With such ratings, the interest rate charged could be very low and competitive.

The cost of financing was lower due to the private debt issues from discount houses and insurance companies. These institutions were not required to make statutory payments to Bank Negara. Their cost of funds was always lower compared to other banks by 1.5% because of the waiver to statutory reserves.

The Finance & Accounts Department would also visit all branches to ensure the first three months' collections in cash were well documented and banked-in within 24 hours. Angkasa only started the deductions of customers' salaries on the fourth month due to its lengthy documentation processes. Customers were required to pay their first three months installments direct to showrooms before their deduction started. However, the collections were seldom matched against the customers' accounts. Staff in the Accounts Department who was on their visit to franchisees' showrooms would have quarrel with the Accounts Clerk. At one time, Ms. Azizah from Headquarters was shocked to find out that Kota Bharu's franchisee had only 40% collection from the customers. The clerk was reprimanded despite showing proof that she had properly followed up by sending reminders to customers who did not respond. She had failed in her responsibility to inform Headquarters of the poor collection received. Had she done so, Headquarters would have taken sterner action against the customers, such as sending letters of demand through their in-house lawyers.

The marketing department and operations department would also inform the Finance and Accounts Department of the need to increase deposits due to higher stock level. At the same time when stocks went missing and were in disrepair due to franchisees negligence, their deposits would be forfeited and the franchisees would have to pay the differences.

c) Human Resource Department

The Human Resource Department was divided into two sub-units, human resource unit and administration unit, headed by Mr. Caleddin. The Human Resource unit looked at career development processes, salary adjustments and also training for the staff. Performance ratings were also calculated. For example, in years 2005 - 2009, the bonuses paid were almost 7-9 months' salary equivalent because of high sales turnover and good profits.

Supervisors would be transferred after two years of service at a branch. This was to avoid complacency and close attachment to the franchisee and prevent undue influence by the franchisees. The Human Resource Manager also visited branches to monitor the disciplinary problems at branches. Other functions included the need to settle problems at branches in terms of clocking in and out, staff leaves and other administrative issues.

Requests for staffing and transfers were approved by this unit. Five of SSSB's staff were also seconded to Angkasa to help speed up the process of collection. The department maintained asset register for new purchases and maintenance. This unit also safeguarded the fire safety equipment, the licensing and safety maintenance of offices.

d) Electronic Data Process Unit (EDP)

In 2000, The EDP Unit, headed by Ms. Hatita, bought an ICL Computer to monitor the movement of customers' accounts. However with the high turnover of sales, the computer system crashed in 2003. Peat Marwick Consultant was then appointed as consultant for the purchase of a new computer system at the end of 2005. In between the year 2003 and 2005, a programme was written by Mr Aris a consultant to help secure some of the lost data and also to record the transactions of 2003 and 2004. The programme could not support the system and crashed again in June 2004.

Various vendors submitted their pricing and Peat Marwick helped in the selection process. In the end, Hewlett Packard (HP) was chosen to do the customized package for RM1.5 million. Peat Marwick was paid RM0.5 million and the computer system was fully operational by middle of 2005.

In 2000, the computer system had data on nearly 400,000 government servants from the C & D groups. The staff strength of the EDP Unit was about 15 and they had to do housekeeping everyday after office hours. All sales at branches could be monitored by the next day at 10 o'clock in the morning if the clerks keyed in the most up-to-date information. However the three months collections were usually not updated due to low collection.

However, for the years 2003 to mid 2005, the lost data were in the region of 30,000 customers. The data had to be collected and updated manually through hard copy files. Three contract staff were hired for weekend work to help sort and record the data.

Resolving the dilemma

In early 2008, Arab Malaysian Merchant Bank informed the chairman, Mr. Asuko, of its concern that sales that were not expanding enough and that company borrowing continued to increase. It therefore recommended the delay of the public listing.

The chairman had also been troubled by the Citibank call and wanted to get to the bottom of the cause of delay in the public listing, the decline in sales, and the continuing need to borrow.

His musings were interrupted when his secretary walked entered the office and said, "I managed to speak to Mr. Ahrif and he said that the management team will see you tomorrow with their documents."

EPILOGUE

In the end, SSSB stopped its operations. Banks and creditors were owed RM350 million and collections by Angkasa were pro-rated to all banks in the ratio of their borrowings. The other creditors who were suppliers (mostly involved in providing the cash) did not receive any payment. Legal suits were being taken by the group of creditors. The cases were heard twice and postponed to the end of 2011 on the grounds that there was not enough information available and that witnesses were unwilling to attend.

Case Questions:

1) Do a SWOT analysis to identify major issues in the case study

2) Identify and discuss the issues of ethics and corporate governance.

3) What steps should be taken to stop the cash transactions?

4) What were the underlying reasons for the continuing need for bank loans even after a cycle had been reached?

EXHIBITS

Exhibit A

Organisation chart of the Co-Operative and its subsidiaries

SUPER SAVER CO-OPERATIVE BERHAD

All chairmen reported the activities of subsidiaries to the Board of Directors. Chairman and Working Committee Members were also members of the Board of Directors.

EXHIBIT B

Organization Chart

The Organization structure of SSSB with all functional heads (all Degree holders):

CASE TEACHING NOTES

Suggestions for Using the Case

It would be good for postgraduate (Masters) students to provide the following answers:

1) SWOT analysis, to identify major issues in the case study

2) Identify issues on ethics and corporate governance

3) Reason why the company could not go for listing?

4) How to stop the cash transaction?

5) Why the continuing need for bank loans?

* even after a cycle has been reached

Expected time;1 hour of reading and understanding;

30 minutes of making notes; and

1 hour and 30 minutes of writing.

Suggested methodology: Group work and presentation Or Individual assignment Or Examination question

SUGGESTED ANSWERS: SSSB

1.) SWOT ANALYSIS - STRENGTH, WEAKNESSES OPPORTUNITIES & THREATS OF THE COMPANY

A) Strength

1. Company is stable with good track record, 70% share of the government employees market.

2. Has good and credible Directors, ex-chief Secretaries to the Government & ex Secretary Generals of Ministries.

3. Professional managers who were Degree holders.

4. Has many franchisee outlets and well spread all over the country.

5. Good product mix - cater for different market segment like boats for the East Coast.

6. Good rapport with MARA where the deposits of franchisees upon SSSB's offer to become franchisees were given loans of up to RM 150,000 to be pledged to MTSB.

7. Profits were in the region of RM6 to RM7 million which almost equal to that of a public listed company (in the Annual Report) - (2007, 2008 Annual Accounts).

8. Pricing for products were lower due to bulk discounts.

9. Good rapport with suppliers.

10. Employees were well taken care of with good yearly salary raises and fat bonuses.

11. Collection system was at source from Angkasa and were very safe, with little bad debts.

12. Cash flow required only for electrical products whereas other product outlets were on consignment and no payment needed.

B) Weaknesses

1. The same core business have not changed, only additional products and new locations were identified, resulting in monotonous transactions of the same nature. Employees took for granted their work and might result in carelessness especially checking of documentations.

2. Ethical issues with supervisors and agents appointed by Headquarters at the franchisees' outlets not following instructions whereby cash transactions took place. They were also given outright commission in cash and encouraged these transactions further for personal gains.

3. Franchisees were also involved in cash transactions for personal gains.

4. Managers of functional units do not look at detailed reports regarding performances of franchisees.

5. The inadequacy of collection due to poor system of monitoring by EDP and Accounts staff at branches (First 3 months' collection).

6. EDP's records not fully updated.

C) Opportunities

1. Franchise system well planned and can be expanded.

2. Government salary increase/rise could further increase sales.

3. New and wider range of electrical item such as LCD TV, Video 2 in 1, iPODS, Mp3 equipments - (New products available in the market currently as at May 2008).

4. New government employees being hired/appointed - SSSB can increase market share further - (Government directories from time to time to increase Government employees).

5. Market development - opening branches in small towns - (To expand to other region areas).

6. Market penetration to expand to Sabah and Sarawak - (To expand to other region areas).

7. Product development include after sales service such as servicing warranties and installation - (as a marketing tool).

8. Product enhancements include TV screens to act as computers, control of air conditioning to body temperature, etc - (as a marketing tool).

D) Threats

1. Police report on the cash transactions where there is no money lending licenses.

2. Close down of franchisees outlets during investigations leading to loss of income.

3. Recall and suspension of the loan facilities by banks.

4. Loss of jobs due to shrinking activities of SSSB if loans were recalled.

5. RAM will downgrade rating of SSSB, resulting in higher interest charges.

6. Heavy staff strength with repetitive documentation and process.

7. Customers continue taking cash on the verge of resigning or being transferred which will result in difficulties in tracing them and increased accumulation of bad debts.

2) ETHICS AND CORPORATE GOVERNANCE ISSUES.

The issue on ethics and corporate governance is when personal gains become an objective. Secondly, the company's benefits or gains, is not looked at and company is susceptible to losses not due to negligence but act of fraud and deceitby the people in the company who can make decisions. The documentation and processes are ignored in order for a person/s to benefit directly.

On this case, the following were detected as against ethical conduct:-

i) Agent's advertisement in newspapers for easy cash and easy documentation whereas the company is actually selling product. This shows that it is the agent's desire to cheat customers and the company for personal benefits.

ii) Franchisees getting commission payments out of "cash transaction". They should only get commission from the company's HQ upon actual selling.

iii) Supervisors who are custodians and salaried employees bounded by rules and regulations of the company. They were paid salary plus commission on actual transactions. Commission paid was to increase their motivation to work but instead got the outright cash for wrong transactions.

iv) Contract papers which were supposed to be for replacement due to receipts from existing loans were utilized for pledges on new loans by the Credit Department. This lack of supervision can amount to fraud and be sued by the banks.

v) Supplier also took advantage of SSSB by providing bulk discount whereas the products were to be discontinued or obsolete.

3) COMPANY HAD TO DEFER THE LISTING

In order for a company to be listed on the Kuala Lumpur Stock Exchange Board (Bursa) sales and profit if not on the rise should remain consistent throughout 3 years before its listing accounts. Unfortunately SSSB's performance can be discussed as below:

1. Sales dropping from RM212 million in 2007 to RM165 million in 2008, a drop of 23% -(Annual Accounts)

2. Collection not enough to cover on operations expenses and to pay full for suppliers and bank loans.

3. Loans on the increase. Old loans went on rollovers with the existing banks.

4. Ordering level of goods dropped because there was no demand for physical goods due to the cash transactions.

5. Stock in showrooms became slow moving due to:

a) Demand for goods reducing as cash transaction increasesm.

b) Bulk purchases consist of phased out products.

c) Display items may not be attractive enough.

6. Trade debtors increasing at alarming stage from 17% to 69% over the years 2006 to 2010 in comparison to increase in sales of 2000 to 2005 only at 13% - (Annual Accounts 2006 to 2010).

7. Profit although on the increase was because of previous years carried forward profits that were classified as pro-rated profits - (Annual Accounts year 2006 to 2010).

4) MEASURES TO STOP THE CASH TRANSACTIONS

1. Ethical issues to be addressed where policies and procedures must be monitored rigorously.

2. Heavy monitoring of transactions and penalties to be in place.

3. More involvement of HQ staff in terms of checking and supervising.

4. Rotation of staff from various branches.

5. Reports by customers to be taken seriously.

6. Monitoring of newspaper advertisements and taking legal action on wrong advertisements.

7. Agent, supervisors and franchisees to be shown show cause letters followed by disciplinary actions and sacking for not following proper procedures.

8. Suggestion boxes to be placed at all showrooms.

5) WHY THE CONTINUING NEED FOR BANK LOANS ?

There is continuing need for higher loans as can be seen from the Balance Sheet for years 2006 to 2010 caused by the following:

a) Sales were still high from RM187.8m to RM212m (2006), RM164m (2007), RM183m (2008) RM181m (2009) and RM183m (2010).

b) Collection received were not reflective of the sales as can be seen from the table below:

Note : This table is constructed based on the Accounts released from the company's Annual Report.

c) 50% - 75% sales were conducted on 'cash transactions' where most customers were actually 'fraud cases' whereby they were on the verge of resigning or being transferred. Another common practice is that they do not pay the amount in full as they feel that for example the invoice of RM 10,000 versus RM4,500 cash received is too expensive. They then pay only at the most 4,500 + 10% = 4,950 which is a big loss to SSSB.

d) Legal recourse on these customers takes at least 9 to 12 months, plus there will be additional costs to the company in terms of legal and recovery. In the meantime these customers do not make payments pending outcome of the court.

e) Cashflow is not enough as suppliers credit terms of payment were for 45 days where borrowings are necessary to settle with suppliers so that MTSB gets new supply of products - (Annual Accounts 2005 to 2010).

f) (i) Collection of RM218,516,548 for year 1999 is to meet compulsory payments incurred below to make sure that SSSB will be a going concern.

Salary RM1.7m x 12

Interest charged by banks

Rental

74% sales (RM181,220,483) is to be paid to suppliers as the cost of products (cost of goods)

RM 20.40m

RM 43.01m

RM 0.56m

RM 134.00m

RM 197.97m

However, total payments needed for backdated payments of suppliers, commission payments and other operating expenses for the year (2009) totaling RM331.0m.

(ii) Collections were only enough to pay operational expenses such as bank interests, salaries, rental, utilities but not enough to make payments to the banks.

(iii) Assuming that interest charged by banks is in the region of 7%, interest payment alone on long term and short term loans of 2005 and 2010 would be around RM43.01m per year or RM3.58m per month. In terms of collection of RM 219.0m will never be enough to cover total compulsory expenses of RM331.0m, let alone to pay bank loans and to settle in full payments to the suppliers.

Subject: Consumer goods; Bank loans; Commissions; Case studies

Classification: 6400: Employee benefits & compensation; 8120: Retail banking services; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-15

Number of pages: 15

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

Document feature: Diagrams Tables

ProQuest document ID: 963331461

Document URL: http://search.proquest.com/docview/963331461?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 57 of 100

MarvCAD, Inc. - An entrepreneurial case study

Author: Fehr, David

ProQuest document link

Abstract:

This case study and related teaching note address the progression toward commercialization of a computer software invention by a serial entrepreneur. This case study will be appropriate for use in executive training, for graduate students and/or for undergraduates. This entrepreneurial business facilitator with the opportunity to address elements of a successful/unsuccessful business development along a variety of business disciplines. This business strategy case provides the case facilitator with the opportunity to address elements of a marketing plan for a superior technological innovation, including: 1. customer identification; 2. choice of and presentation of the configuration of the product; 3. organization of firm activities to promote the marketing plan; and 4. working with 3rd party collaboration.

Full text:

BACKGROUND

Marvin Hill is a self made multi-millionaire. After graduating from his state's large, flagship public university with an electrical engineering degree, he took a job as an engineer with the Ford Motor Company. As he settled into the routine of day-to-day employment for this large manufacturer, he quickly determined that it was not the job for him - he felt constrained by corporate politics and his job did not involve high level electrical engineering work.

Finally, in 1995 after six years with Ford, Marv had amassed sufficient cash to found a start-up company around his passion: developing computer-aided-design (CAD) software to assist with large scale electrical engineering projects. Within five years, Hill and his staff had developed cutting edge CAD software that was beginning to garner a well deserved reputation in the marketplace. Marv financed the growth of his company, MarvCAD, Inc., with a modest amount of debt financing, and angel investors provided the necessary equity capital during the first two years. Marv also made it a point to work hard to sell even the early versions of his software. In addition to providing much needed revenue and cash flow, these sales provided "proof of principle" evidence for his software and also evidence of the existence of a legitimate commercial market for his technology. Marv knew that the acquisition of these so-called "alpha customers" would accelerate and expand financial opportunities for his firm, be it the raising of capital from professional investors or in the positioning of his firm for sale. In fact, in 2000, to raise capital for business expansion and to fund development of the successful CAD software on multiple computer operating systems, MarvCAD went public via an initial public offering (IPO). Thereafter, within one year, MarvCAD was purchased via takeover by a large software vendor which wanted to expand its offerings to engineering clients. Marvin agreed to run what was previously MarvCAD as a division of the new firm. So, within twelve years after college graduation, Hill was wealthy (he had been able to retain a large block of MarvCAD equity) and back working for a large corporation. The former was good news, but the latter was bad news -Marv hated his new job, so he "retired" to the golf course after 18 months.

Marv began living it up - golf in the summer, skiing in the winter and extensive travel year-round. He lived in a big house in a swanky neighborhood and enrolled his children in the most prestigious private school in his area. His oldest daughter, Dorothy, took to the private school and became a squash racquets aficionado and prep school champion. In fact, during her high school career, Dot decided that her goals were to play squash on a professional level and to join the women's professional tour. Since squash at its highest levels was played in Europe and Asia, not the US, Dot would need to regularly train and compete in those locales. Marvin was willing and able to support Dot's squash dream, but it meant that Dot would miss large blocks of school time on a regular basis.

By this point, Marv was tiring of a life of leisure and had begun to tiptoe back into the business world. The non-compete agreement that he had signed with the large software company had expired, and he and a small staff had begun developing a CAD electrical engineering product, but in this start-up the emphasis was not the development of the most sophisticated electrical engineering CAD software (as was MarvCAD), but software to train potential users of CAD electrical engineering products. The real value added in his new software came from the product's ability to train individuals in an extremely complicated subject matter, CAD electrical engineering, in a virtual, online environment. Unbeknownst to Marv, the capabilities of his online training shell software were every bit as sophisticated as in the popular platform that Blackboard, Inc., sold to many academic institutions. In fact, an argument could be made that Hill's software was superior - users could seamlessly work with audio, visual, website and proprietary content; extensive search capabilities allowed users to quickly find information in any of the delivery formats; and since each piece of the software was modularized, extensive customization and use of 3rd party add-ins could be easily accommodated.

As with his first start-up back in 1995, Marv was diligent in marketing his product from the outset. By 2007, he had leased his system to a few mid-range manufacturing firms and was about to close a deal with the Pentagon to provide training to selected military personnel. Again, as in 1995, these sales were driven by the fact that his software was exquisite and that his software innovations were apparent and deemed highly valuable by the customers. It is truly amazing however, that Marv was able to close these sales given that his entire staff numbered six people, that he had no technical support department of any consequence and that he had no dedicated sales staff other than himself.

NEXT STEPS

As in many endeavors in life, happenstance entered to change the direction of Marv's new business. Marv had begun to worry about how Dorothy would maintain her school work while traveling for squash. During meetings with her teachers and administrators, the school presented no viable approach that would keep Dorothy current in her studies during her time away. Marv's reaction to this was to fix the problem! In short order, working with various teachers at the school, he put his daughter's courses in calculus, physics, history and English entirely online using his software. As was Marv's modus operandi, the online courses were of a high quality - richly formatted with audio and video resources in all curriculum materials and employing best practices in online delivery.

During this development, Marv became smitten with online course delivery and decided that he would shift his new firm's efforts in that direction. He would hope to keep the CAD electrical products as ongoing cash flow generators, but his intention was to change the thrust of his company.

One of Hill's golfing partners, Dr. William "Snooks" Tonkin, was a recently retired finance professor from a local university. During libations at the 19th hole following a round of golf early in the 2008 season, Hill discussed his latest thinking with Snooks and asked if Snooks might like to collaborate to develop finance-based content for use with Marv's delivery system. Snooks was aware of Marv's successful background, but was hesitant to participate. While an academic, Snooks had had an active consulting practice focusing on early stage business development and he knew well that failures were common, that start-ups didn't often have sufficient cash to pay consultants and that equity participation in the start-up often led to nothing. Furthermore, Snooks knew that he would never agree to develop content "on the come", but that there would need to be tangible payment for his efforts. Snooks and Marv agreed to meet the next day, at which time Hill would demonstrate the software and discuss business strategy.

Snooks arrived at Marv's offices the next day, a Saturday at 10am. No other employees were in the office. After some pleasantries, Marv demonstrated the capabilities of the software using the CAD programs. Snooks was duly impressed; the software was incredibly slick. Next, Snooks began to question Hill about his business strategy and, at this point, the discussion went decidedly downhill. Marv could not articulate a strategy and it seemed like he was moving in several directions at once with no focus. It was utterly surprising to Snooks that an engineer who was clearly highly disciplined in the development of high-end software could be so scattered and unfocused in his business direction - or was he simply keeping information close to his vest.

Marv went on to describe some additional content for which he and "subject matter experts" had built training courses using his software. Topics included ethnic cooking and bicycle repair. Marv claimed that his plan was to sell these online training courses to retail customers. Again, he could not articulate how he would market the training materials (he still had no sales staff) nor who his competitors were. He obliquely referred to using 3rd party distributors. Marv also planned to maintain and expand his presence in the CAD electrical engineering space, but again, no specifics.

After about two hours, most of which were used to preview all of the bells and whistles on the impressive software, the meeting ended with both parties wanting to evaluate whether it made sense to proceed. Marv and Snooks agreed to meet again in one week. To give Hill an idea of the type and quality of finance content he could provide, Snooks gave Marv a CD containing financial literacy curriculum materials that he had developed just before retiring. He pointed out to Marv that the development of these curriculum modules had been funded by the Albion House Educational Foundation as a resource for non-commercial educational use.

A few days later, Marv called to say that he definitely wanted to meet and that he had built a proto-type training package using his software and the financial content that Snooks had provided. Further, Marv had used a facilitator with whom he had experience to "deliver" the materials via audio and video segments. This development caught Snooks completely off guard; his first reaction was to reiterate that the Foundation would definitely not support any commercial usage of the curriculum. In any case, they agreed to meet again in three days.

Snooks needed to determine if he would become a content provider for Marv, and if so, under what terms and conditions. Also, based on his friendship with Hill, Snooks wanted to give Hill his best advice on business strategy. Dr. Tonkin began to organize his thinking.

Regarding Marv's plan to sell content via his delivery system:

* Did Snooks want to be a subject matter expert?

* If so, how would Snooks get paid?

* Did the marketing strategy to use 3rd party distributors have a future?

* Was it reasonable to expect that end users, i.e.,-retail customers, would appreciate and attribute proper value to Marv's delivery system?

* Would there be any scenario under which Snooks could recommend building a de novo sales operation to market content commercially at retail?

Further, Snooks wondered if there was any project that he could suggest that would allow him to earn a reasonable per diem consulting rate and also benefit Marv's business. For example, might Marv pre-sell a finance training program to his existing CAD clients? Might the Pentagon be willing to offer financial literacy training to the military using Marv's system with which they are satisfied and familiar? Such an approach could fund Snooks' initial developmental work, after which he would be willing to be paid royalties on possible future sales.

Snooks also wondered if the best business approach involved content at all:

* Wasn't the real value added in the software itself?

* Could it be preferable to sell/license the technology software itself without any content (maybe to a firm like Blackboard, Inc.)?

* How long would it be before other software competitors perfected similar or superior technology?

In this vein, Snooks recalled that Marv had asked several times if Snooks' previous employer, Magnus Normal University, might be interested in adopting the software for its considerable online education program. It was clear to Snooks that Marv was fishing for an introduction and recommendation to Magnus Normal.

Snooks now began to prepare his talking points for the upcoming meeting.

CASE TEACHING NOTE

An interesting way to begin discussion of this case could be to review the career trajectory for Marvin Hill. He would appear to be a typical serial entrepreneur. In fact, while not stated in the case, Marv also took small equity stakes in various start-ups in his area in return for mentoring the start-up entrepreneurs. It would also be interesting to explore Marv's understanding that the marketing of his technology was just as important as building elegant software. This level of business understanding is often not apparent to scientists or engineers. The class might consider:

* How important was Marv's concentration on marketing, even the early stage versions of his products?

* How can business managers stimulate scientists and engineers to realize that developing the most elegant product (especially at the beginning) may not be optimal?

* How did Marv's "proof of principle" evidence speed up the timeframe by which Marv was able to do his IPO? For example, he knew that potential professional investors would value any "de-risking" that the firm had done, i.e., any steps taken to resolve uncertainty associated with the startup.

It would also be interesting to speculate how Marv was able to sell the MarvCAD product(s). With no sales staff or meaningful customer support, either Marv is a super salesperson or his technology is over the top. One wonders if his ex-colleagues from Ford might have made introductions. We also don't know if Ford was a customer - it is certainly not unusual for a company to work with ex-employees. If Marv left Ford on good terms, given what we know about the quality of his electrical engineering CAD product, it is not unreasonable to think that Ford would become a MarvCAD customer. The case facilitator has considerable latitude to use Marvin Hill to explore issues around the potential struggles that are often encountered when technical specialists enter the business arena.

By the time Marv faced his daughter's dilemma, he was back into software development and was ready to repeat his earlier success in a different market segment of the electrical engineering CAD space. A stimulating discussion could center on how Marv would likely have proceeded if his daughter hadn't discovered squash. The class might consider whether his daughter's situation pushed his business in a non-optimal direction, or was it evident that he would sooner or later expand into online training for different content topics. Under the assumption that Marv wishes to maximize the value of his new firm and to monetize his equity position as soon as possible, might he have been better to concentrate fully in the more narrow electrical engineering market niche? A qualitative discussion about factors that are relevant in setting business strategy would be appropriate at this point.

By the time that the professor became involved, Marv was well on his way to transitioning away from electrical engineering CAD (although he would likely deny it) and to moving toward selling online content training at retail. Snooks' first impression was that there were several aspects of the situation that were quite bizarre:

* Why would Marv develop ethnic cooking and bicycle repair training software? Was his software that easy to work with that there was a very low cost to go off on these tangents? Certainly selling finance content was likely to be to a fundamentally different market segment than cooking content! Was he simply throwing everything possible against the wall to see what would stick?

* How could Marv have no clue to as to his business strategy, or was he, as the case speculates, being coy in his dealing with Snooks. It was hard for Snooks to believe that the former was true, but why was Hill focusing on electrical engineering, cooking, bicycle repair and finance with no apparent ability to discriminate? If the latter was true, Snooks would certainly not want to collaborate as he had had previously disastrous consulting experiences with that personality type.

* What was Marv up to with the Foundation funded financial literacy materials? Maybe it was an innocent effort by Marv to demonstrate his level of interest in a collaboration. Marv certainly knew that any commercial use of the financial literacy curriculum was out of bounds - Snooks knew that he made this point perfectly clear when he provided the curriculum materials.

Snooks divided his analysis into three areas:

1. Selling content at retail via Marv's online delivery system;

2. Selling a finance product to Marv's existing CAD clients; and

3. Maximizing the value of technology by forgetting about content all together.

Snooks quickly decided that approach #1 was a non-starter, and he would almost certainly not end up getting paid for any work he performed. Snooks recalled that Marv had mentioned the 'publisher's model" for compensation under which the distributor and the developer split revenues equally. Assuming that Marv would need to work with 3rd party distributors, Marv and Snooks would split 1⁄2 of the sales revenues. Marv had pointed out that content developers in this situation typically receive 10-15% of revenues. Quite apart from the level of the revenue split, Snooks knew that he would not work on a contingency basis. Furthermore, he believed that this approach would not be a business success. Wouldn't Marv essentially be competing with the Amazons of the world? If so, that sounded like a losing proposition to Snooks. As such, Snooks could not recommend either the use of 3rd party distributors or the building of an in-house sales force. The first alternative may well work in some circumstances, but the second approach was clearly beyond the scope of Marv's firm. Additionally, Snooks believed that no retail customer would appreciate Marv's special software delivery system at the time of purchase.

Snooks could see a possibility via the second approach: pre-selling a finance product to Marv's existing CAD clients. It would appear that these clients are large enough and have the need (especially the Pentagon), but it would be important to emphasize to Marv that the existence of a paying customer would be a necessary condition for Snooks' participation.

Clearly, the last approach that involved marketing the technology directly appeared to have the most potential. Marv already had his "proof of principle" in the CAD product and the few novelty products.

Students could be asked to perform an actual market study to explore this option. Who are Marv's competitors? Who are the likely buyers of his technology? Has there been recent acquisition activity in this space? The students would find, for example, that Blackboard, Inc., has been quite active in acquiring potential competitors. The students would also quickly realize that Marv likely has a very short window during which his product will remain superior. An array of competitors is sure to bring similar technology to the marketplace in short order.

Regarding the potential adoption of the software by Snooks' previous university, Snooks was confident that Magnus Normal would not adopt Marv's technology. The school was entrenched in the Blackboard technology and, over the years, had devoted massive employee resources in the Blackboard system. Snooks knew that Magnus Normal would view a transition to Marv's technology to be risky and too big a step. To make his point, Snooks intended to tell Marv that this strategy would not work even if he provided the software to Magnus Normal for free.

As of the writing of the case, Snooks was still waiting to meet again with Marv.

Dorothy, Marv's squash playing daughter, spent a lot of her high school career training, playing and having fun in Europe and Asia. By the time she graduated (barely) from high school, she had completely lost interest in squash.

Subject: Software; Entrepreneurs; Commercialization; Market strategy; Product design; Case studies

Classification: 7000: Marketing; 9520: Small business; 5240: Software & systems; 9130: Experiment/theoretical treatment

Publication title: Journal of Business Cases and Applications

Volume: 5

Pages: 1-7

Number of pages: 7

Publication year: 2012

Publication date: Mar 2012

Year: 2012

Publisher: Academic and Business Research Institute (AABRI)

Place of publication: Jacksonville

Country of publication: United States

Publication subject: Business And Economics

Source type: Scholarly Journals

Language of publication: English

Document type: Feature, Business Case

ProQuest document ID: 963331392

Document URL: http://search.proquest.com/docview/963331392?accountid=38610

Copyright: Copyright Academic and Business Research Institute (AABRI) Mar 2012

Last updated: 2013-09-19

Database: ABI/INFORM Complete

Document 58 of 100

A business sustainability model: a European case study

Author: Høgevold, Nils M; Svensson, Göran

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Abstract:

Purpose - "Business sustainability" refers to the total effort of a company - including its demand and supply chain networks - to reduce the impact on the Earth's life- and eco-systems. The objective of this paper is to describe a business sustainability model based upon a case study of a European manufacturer. Design/methodology/approach - A case study approach was applied describing the efforts of business sustainability in the demand and supply chain networks of a Norwegian office chair producer. It is based upon a series of semi-structured in-depth interviews with top executives of the company as well as observations and content analyses of internal and external documents about the company's efforts of business sustainability. Findings - The case study shows that business sustainability is not about doing just one thing, but that a multitude of simultaneous efforts (e.g. actors, resources and activities) should be in place. Furthermore, business sustainability is not only about a company's own business operations, but its whole demand and supply chain networks which need to be included and taken into consideration. Research limitations/implications - The case study in focus is limited to just one company's effort of business sustainability and its demand and supply chain networks. It provides a business sustainability model that offers opportunities for further research. Practical implications - Focusing on the corporate impact of the natural environment can be highly profitable. Business sustainability and by extension the carbon footprint of demand and supply chain networks is becoming a criterion in the decision-making process of customers across industries. Business sustainability is a concern to everybody in society as the indicatives of climate change and global warming become more evident and troublesome. No one can have missed the fact that the weather is becoming more extreme, causing damage around the globe. Originality/value - The authors argue that research into business sustainability needs at this stage of development to be inductive rather than deductive - it may be an irreversible mistake to try to re-package existing theory into business sustainability, as climate change prediction and the poor condition of the Earth have not been fully understood or comprised in previous theory.

Full text:

An executive summary for managers and executive readers can be found at the end of this article.

Introduction

[18] Stead and Stead (1994) argue that companies in the twenty-first century will have to change fundamental assumptions and values which underlie their relationships with the larger natural environment. By this they mean integrating ecological performance into strategic planning, as well as at the operational level and undertaking regular market research to capture changing consumer attitudes towards environmental issues, modifying performance and adopting new operating principles.

Companies must go through "corporate self-greenewal" a term coined by [17] Shrivastava (1992, p. 18) which involves transformational processes and adjustment to new market forces, realignment of products, systems and resources based on a close relationship with the natural environment. [18] Stead and Stead (1994) emphasise this ability to perceive the limits of the natural environment, the physical interconnection between organisations and the ecosystem as well as the true long-term ecological implications of company strategic choices.

Recent developments of predicated climate change as presented in the UN repor, the [9] IPCC WGI (2007)Fourth Assessment Report , points implicitly to the urgent need for sustainability efforts. This report describes human and natural drivers of climate change, observed climate change, climate processes and attribution, and estimates of predicted future climate change. This report raises indirectly the quest for business sustainability. We refer to "business sustainability" as the total effort of a company - including its demand and supply chain networks - to reduce the impact on the Earth's life- and eco-systems - i.e. the total e-footprint ([22] Svensson and Wagner, 2011a). Empirical insights of practices in business sustainability are needed and so far this has only been addressed to a minor extent in previous research (e.g. [23], [24] Svensson and Wagner, 2011b, c).

Interestingly, the concern for business sustainability in the marketplace and society is far from being a recent topic (e.g. [3] Carson, 1962). Indeed the Brundtland Report ([1] Brundtland, 1987) concluded that the development of companies' business sustainability models should meet present requirements without compromising the ability of future generations to meet their own needs. Research in the field of business is, to the best of our knowledge, far from addressing the core requirements and the multiple aspects of business sustainability - e.g. models, processes or cycles (e.g. [27] Wagner and Svensson, 2010, [28] 2011). In fact, case studies of business sustainability efforts are still rare in literature. Therefore, the objective is to describe a corporate effort to implement a business sustainability model based upon a case study of a European manufacturer.

Context of business sustainability

Ecological trends concerning the natural environment, depletion of natural resources, and an unprecedented recognition of the causes and consequences of global warming are now a major government and industry foci worldwide. The 2007 Bali Treaty, and more recently COP15 (2009) in Copenhagen[1] and COP16 (2010) in Cancun[2] , highlighted the fact that reaching consensus on climate change initiatives is difficult on a global political level; however, there are a number of important industry solutions that should be in place by 2020. These include the means of preserving energy, better raw material sourcing, reducing packaging and other wasteful resources. All are crucial especially in difficult economic circumstances when costs are volatile.

Successful management of business sustainability therefore have to involve coordination of product design, manufacturing, delivery, distribution and disposal throughout the product life cycle ([7] Hong et al. , 2009). Subsequently, driving forces in the marketplace and society in general will most likely encourage the emergence of business sustainability models.

Purchasing policies have direct and/or indirect connections to our natural environment because they may be based on natural or value-added resources, brought into business for value-adding primary and or support activities ([15] Porter, 1985). This is a crucial phase where corporate efforts of business sustainability can have an impact in terms of a "zero sum" on the natural environment. The role of purchasing in facilitating internally-driven environmental activities such as re-use, recycling and source reduction is essential as is the importance of business networks risk management (Business in the Environment, 1992, cited in [11] Lamming and Hampson, 1996).

In order to achieve sustainability in business networks, organisations need to take a much broader perspective to demonstrate chain custody where environmental and social aspects extend beyond organisational boundaries ([4] Carter and Rogers, 2008). In the quest for sustainability in business networks, corporate policies play a vanguard role and many organisations have implemented codes of conduct that have already been incorporated into supplier contracts (see [5] Ciliberti et al. , 2009).

The value-adding processes consist of both primary and supportive activities. This is a stage where sustainable or non-sustainable business should become evident. For example, what kind of sources (i.e. natural and or non-natural resources) are used, are they renewable or not and are they recyclable or not? What is the short- and long-term impact on the natural environment? Furthermore, how are the inbound and outbound processes managed (e.g. storage of materials and inventory)? Sustainable value-adding processes necessitate changes in production practices which include design, engineering and operations, indeed all matters that focus on environmental preservation ([7] Hong et al. , 2009). This poses challenges and opportunities for manufacturing organisations to initiate change to advances innovation while simultaneously improving business efficiency and performance (Florida and Davison, 2001, cited in [7] Hong et al. , 2009). However, manufacturers cannot undertake this task alone and have to look to other companies in the business network for support. Clearly this requires early supplier involvement ([8] Humphreys et al. , 2005; [16] Seuring and Müller, 2008, in [7] Hong et al. , 2009).

Intermediaries (e.g. wholesalers) and transportation (e.g. deliveries and returns such as reverse logistics) may be either in-house operated or outsourced. Considerable attention is required to determine what business approach is most sustainable and logistics and channel management play a key part in the implementation of environmental strategy (Goldsby and Stank, 2000, cited in [13] Markely and Davis, 2007). Distribution involves transportation and storage from inbound delivery of raw materials, to delivering the final product to market. An integral part of business networks is that such activities may be by company-owned resources, or by outsourcing to a third party logistics (3PL) organisation.

Enormous social and environmental issues (and opportunities) throughout the supply chain need to be considered, such as reducing raw material waste, energy use, water pollution, rainwater harvesting and safety in manufacturing. Business sustainability aspects may include better warehouse design and management, reducing packaging, and enhancing safety, bearing in mind the potential social impact of working hours. Improved transportation, in particular, can reduce freight vehicle numbers, fuel usage and emissions and alleviate congestion. In distribution centres, good planning and scheduling can help serve less populated areas within the country and strategically positioned regional distribution centres will facilitate distribution to remote areas (e.g. Tesco). More and better cooperative practices are needed to develop sustainable logistics systems that overcome many of the obstacles and create value for all stakeholders. As a consequence logistical integration risk associated with investment in environment-related activity is reduced when organisations work collaboratively and the necessity for close environmental monitoring becomes less important ([26] Vachon and Klassen, 2006). Clearly, intermediaries and transportation can contribute to enhancing the outcome of a sustainable business approach.

Retailers have been forced to take notice of the environmental, economic and social impact of their activities ([10] Jones et al. , 2005), so that increasingly, addressing sustainable development is high in their agenda. As leaders they hold the key to implementing business sustainability models across business networks. They have a responsibility to run their operations as most sustainable as possible and at the same time with communications as transparent as possible. The environmental performance of many retailers is considerably variable. UK grocery multiples are among the best developed supply chains in the world with infrastructure and buying power able to promote greener practices upstream. The best of them have environmental programs that address issues such as energy efficiency, water consumption, carbon dioxide emissions, vehicle emissions, reduction in packaging waste and management of recycling improved traceability and reducing traffic congestion (see ASDA and Tesco). Also growing number of large retailers are starting to benchmark performance that addresses their own sustainable agendas (see [10] Jones et al. , 2005).

Although one might well argue that increasing consumption of goods is economically beneficial, often consumerism is viewed as chronic purchasing with little attention being paid to the true need, origins or environmental consequences (www.verdant.net/society.htm). Ethical consumption has increased since the 1990s and generally consumers are becoming more interested in environmental issues that directly affect them (Peattie 1995, cited in [19] Strong, 1997). Reasons for this trend may include increased pressure group support for fairer trading practices in developing countries, media interest, corporate social responsibility and greater supplier power in the marketplace ([19] Strong, 1997). Such consumerism influences global interest in business sustainability. Also the role of consumerism in achieving long-term business sustainability is fundamentally based on the decision-making power of the consumer ([19] Strong, 1997). Consumers are becoming more demanding and empowered. As markets become transparent and information about companies, their suppliers and products easier to access and retrieve, it may be argued that consumers are gaining power ([6] Fuchs et al. , 2010). Such conditions empower consumers who ultimately decide which products or services will be bought and those which will not.

There is still little continuous exchange between research findings in natural sciences and business research that could be useful and valuable in developing business sustainability models ([21] Svensson, 2008). Nevertheless, scientific evidence regarding progressive global warming and climate change is becoming an essential aspect that may influence the ongoing discourse across subject areas in business research as well as in business practices. The evidence presented in the above mentioned 2007 UN-report provides useful knowledge and valuable foresight that may speed up development of business sustainability models, in both practice and theory.

The dilemma is that it may take place at a time when the effects of a global economic crisis are concurrent with evident climate change ([20] Stern, 2007). In fact, a crucial recent event took place in Copenhagen and Cancun where about 200 countries and political leaders joined to meet the challenges of climate change (COP15 and COP16). Unfortunately, this summit did not generate any explicit commitments to care for the Earth and to guide governments. Thus it appears that the business world may have to take the lead of business sustainability towards minimising and optimising its e-footprint ([22] Svensson and Wagner, 2011a).

Many companies have begun to realise that it is necessary to achieve long-term business sustainability ([25] Turner, 2009). This is needed not only in their own business doings, but also in the whole demand and supply chain network of their business. Rather than being seen as costly inconveniences, business sustainability is nowadays competitively imperative ([12] Mahler, 2007). A study by A.T. Kearney revealed that many companies have implemented initiatives of business sustainability (though minor) that strengthen their brand names or differentiate their products ([12] Mahler, 2007). Today a brand is comprised not just of the product, but also includes how it is made, who the suppliers, producers and other business partners are, and how it is delivered ([14] Mulani, 2009). Reputation and brand value may be enhanced by investments in people, ecological impact and local communities ([2] Byrne, 2007).

Evidently it is important that the world of business takes the initiative and responsibility to change current practices. We demonstrate here one company's efforts to implement a business sustainability model in the case study that follows. There has been little research undertaken to address the efforts of business sustainability. This case study highlights the implementation of a sustainable business model in a context of a company's demand and supply chain network.

Case study

The European case study in focus applies the frameworks used by [22], [23] Svensson and Wagner (2011a, b) in their examination of business sustainability of a Swedish fast food chain and a regional dairy producer of Sweden.

The case study is based on HÅG (www.hag.no), a Norwegian manufacturer of office chairs. The data were collected in late 2010 and early 2011 and are based on a series of semi-structured in-depth interviews with top executives of the company as well as observations and content analyses of internal and external documents about the company. Strict confidentiality of collected case study data has been maintained in the research process until the company's approval of the correctness and accuracy of case description was obtained. The clearance was not obtained until after numerous iterations of proofreading during the research process by the company executives to identify possible misunderstandings, misinterpretations and errors in the case description.

The headquarters of the company is located in Oslo, while the production plant is at Røros approximately 400 km to the north. Seat fittings are produced there in a production process consisting of pressing steel, welding, surface treatment and assembling of those and other parts.

The assortment of office chairs consists of nine different models. Annual production is 350.000 office chairs with a turnover of USD 100 million generating a profit of USD 5 million. The European market outside Norway represents three-quarters of the corporate sales. The sales in the export markets are organised by subsidiary companies or agents, and distributed through local retailers.

Origin of HÅG's business sustainability

HÅG's effort of business sustainability originates from a product developer coming back to her position in the company after a pregnancy leave in the early 1990s. During the leave at home with her newborn, she became strongly interested in environmental issues. Once back in the office she first convinced her manager, then the top managers, and finally the board of the company, that striving towards business sustainability was the way to move the business of the company into the future.

Notably, there was no attention to or demand for this either in the market or society at the time in the 1990s, and it is not until in recent years that it has become an essential aspect of doing successful business in the marketplace. Interestingly, the company did not perform any market research before engaging in the efforts of business sustainability. Most importantly, the customers" opinion was not part of the decision-making process as the company did not have these expectations when it was all initiated. The corporate belief was that having a genuine environmental profile would in the long run differentiate the company in both market and society in relation to the competitors.

After consulting with an external research partner, Ostfold Research, HÅG started in 1994 to apply a life-cycle assessment measuring its impact on the natural environment and producing estimates of the company's carbon footprint. The total carbon footprint caused by the company in 2010 was approximately 15,000 tons. The production, assembly and sales offices generated only a share of this, about 2,500 tons (i.e. internal carbon footprint), where 95 per cent of that amount was related to the production and assembly of office chairs and the rest to headquarters, sales and subsidiary companies. Subsequently, the raw material producers, the value-adding suppliers, the storage and other intermediaries of the HÅG's supply chain represented more than 80 per cent of HÅG's total carbon footprint on Earth.

Environmentally-oriented companies tend to focus on the carbon footprint through a limited product life cycle, while others go beyond. HÅG follows the product and examines how recyclable raw materials can generate new products through the supply chain business network. Their life-cycle approach starts with the design criteria having an environmental focus that is transferred to procurement processes in which recycled raw materials are preferably used in the production of chairs, thereby extending the product life into recycled parts to be used in new products.

Not surprisingly, the current environmental profile of the company in the market and society is an important ingredient of the corporate brand strategy. This logic has been market-oriented, as HÅG, a manufacturer in a high-cost country, needs to offer customers additional decisions criteria beyond pricing. Building an environmental profile and implementing a range of environmental initiatives into the business as a part of the positioning strategy has proven to be highly successful.

The business sustainability model

The examination of the case study in focus refines a business sustainability model by [22] Svensson and Wagner (2011a), as shown in Figure 1 [Figure omitted. See Article Image.], consisting of the following updated structure and areas:

- the company's connection and re- connection to the mother of all stakeholders, namely "the planet Earth";

- the company's "vision and mission" of business sustainability;

- the "sources" of carbon footprint and impact on the natural environment, such as: raw material and energy, transport and storage, procurement (inbound), production and assembly (in-house), and physical distribution (outbound); and

- such "stakeholders" that generate a carbon footprint and have an impact on the natural environment such as: producers and suppliers, organisations and employees, wholesalers and retailers, customers and end-users, and market and society.

Figure 1 [Figure omitted. See Article Image.] summarises and provides an overview of HÅG's business sustainability model. It is described in the following paragraphs.

Earth

As indicated previously, HÅG's interest in business sustainability goes back many years. It has been a long-term process as well as corporate commitment, in which the company has long applied a so-called "cradle-to-cradle"-approach. In other words, it is not limited to a "cradle-to-grave"-approach; HÄG aspires to truly minimising its impact on the natural environment and the carbon footprint in the long-term perspective. When the service life of its products ends HÅG strives to see them re-cycled and the raw materials recovered to be used in new products. A thorough documentation is kept to demonstrate credibility in the market and in society - subsequently, this is not about window-dressing or any other kind of superficial attempts to gain short-term market success. It also means that the company strives to do a number of different things simultaneously in order to reduce its impact on the natural environment and in extension the carbon footprint on Earth. As CEO of HÅG, Lars Røiri expresses:

[...] to be an environmental friendly company one needs to build a system and to document what is being done. This is not a communication activity, but a challenge to the whole supply chain.

Business vision and mission

HÅG's vision is "[...] to make the world a better place to sit [...]" according to CEO Lars Røiri. Evidently this goes back to the production of office chairs, but the core of their business is not only about the ergonomics of their products. Lars Røiri refers here to the company's environmental impact on Earth, as well as the ergonomic design of the company's office chairs to safeguard the well-being of the person sitting in the chair and to ensure a correct sitting position. The company has invested significant efforts in transforming itself into a more sustainable business by making the use of its chairs a better option in relation to the natural environment.

HÅG's mission is about "[...] doing-the-right-thing [...]" according to CEO Lars Røiri. This is not just about accomplishing quality standards such as ISO14001, but also about many other matters, both major and minor. For example, ISO 14001 is designed to assist companies in reducing their negative impact on the natural environment. However, it is not an environmental management system as such and therefore does not dictate absolute environmental performance requirements; rather it serves instead as a framework to assist organisations in developing their own environmental management system. HÅG also strives to involve suppliers in their corporate mission - i.e. in their aspirations to reduce the impact on the natural environment - through the use of recyclable raw materials instead of non-recyclable ones. For example, PET (polyethylene terephthalate i.e. a recyclable plastic) replaces PUR (i.e. polyurethane - a non-recyclable plastic), polypropylene replaces polyamide, and recycled aluminium is used in products.

The company also applies environmental design criteria of products, such as striving for low weight that leads to the use of less material. It also strives for fewer components that in turn lead to the need for fewer tools in production and assembly; the assembly process becomes simpler as well as needing less transport. In addition, the office chairs should have a long service life, which means that they are durable (i.e. at least 15 years) and be made of high quality materials that are recyclable. Finally, parts should be easy to replace with spares. Estimates from external auditors indicate that the carbon footprint during the chairs' service life of 15 years is less than half compared to best competitors.

HÅG's business sustainability is dedicated to continuous improvement; when it comes to plans for the future it is the company's intention to enhance product design so as to have less and less impact on the natural environment and its carbon footprint on Earth by continuously searching for better sourcing options, more efficient production processes and optimised transport solutions. HÅG intends to lead developments in the field, not follow them.

Raw material and energy

When it comes to raw materials the corporate direction is towards using only renewable and recycled materials that are both recyclable. Furthermore, the energy bought should be renewable.

As of today, wool, accounting for 1 per cent of the raw materials, is the only renewable raw material used in the chairs. This may appear strange at first. However, while wood, bamboo and cotton are considered renewable, office chairs with these raw materials will not have sufficient quality for a long product life of 15 years. Notwithstanding, to be able to use more renewable raw materials, a research program is investigating the possibility of replacing plastic with a soybean oil product.

HÅG works systematically and continuously towards its goals of being a company minimising its carbon footprint on Earth, of not being hazardous to health and of contributing to minimal amounts of waste. To reach these goals HÅG has strict environmental requirements for raw materials and product solutions. Value-adding suppliers must comply with these requirements and are invited into the product development process in order to contribute to better environmental solutions. To formalise the requirements, HÅG has developed a commitment agreement with all its suppliers, one that all must follow to qualify as a supplier.

Transport and storage

The guiding principle in transportation and storage is "raw materials in - office chairs out". The production and assembly plant is located in an area where the only option for transportation of the finished goods is by truck. The environmentally friendlier railroad was closed several years age. It is also too far from the sea to use that mode of transportation. Given the fact that trucks are the only alternative, a route planning software is used to optimise the transportation routes and subsequently the impact on the natural environment. Subsequently, as fully loaded trucks bring materials into the production plant, office chairs are shipped out to customers as return loads on the same trucks.

The third party logistics company in charge of transport has a fleet of modern vehicles. Trucks use biogas fuel and are equipped with low friction tires. Furthermore, the drivers have undergone courses in eco-driving in order to reduce fuel consumption and maintenance of the trucks. In addition, the company buys "free on board" (i.e. FOB - from suppliers' delivery points) as HÅG desires to take the responsibility for the different transports and coordinate them for delivery at the plant. HÅG has also refused to use offers of cost, insurance and fright (CIF) as it may be contra-productive to coordinating and optimise transports with deliveries from other suppliers.

Aspects of storage are considered in the design of office chairs and their components as this too has an eventual impact on packaging formats and the utility of loading space and onward transportation. HÅG applies JIT and keeps a storage buffer of 24 hours. The product packaging and the products are designed for optimal logistics solutions by optimising the available space on trucks. Currently, the number of office chairs conveyed by one truck has doubled compared to before focusing on this issue. As with other vendors, the transport company chosen focuses on environmental issues and its ability to comply with HÅG's environmental requirements for suppliers.

Procurement - in

HÅG's procurement decisions are based on an approach labelled as "Best Available Technology (BAT)", all of which is an industry standard. In other words, it is a requirement that suppliers have to accomplish. The company assures that suppliers follow, and are up-to-date with, this standard. There are different sourcing criteria involved in BAT in the selection of suppliers, such as what their environmental impact is, what kind of materials they use and the amount of residue or waste they generate from their operations. CEO Lars Røiri states that:

[...] sustainability must be a part of the product development process [...]

Recycled materials are, if possible, purchased and used as raw materials in HÅG's own products. For example, household metal waste from North Germany is used as one of the raw materials. The waste is sorted, washed and melted by an intermediary company specialising in the handling and selling of recycled raw metal.

Production and assembly

All production and assembly at HÅG is on confirmed customer orders only. Components are or have been labeled to facilitate their recycling at the end of the office chairs' service life. The waste generated in production is sorted for recycling.

A closed loop system of water is in place at the production plant. All water used that requires purification is performed in-house and then pumped into public sewage system.

The company has experienced that, with changing current products and reducing the impact on the natural environment, it can be difficult to achieve the current environmental goals of the company. A more appropriate way is to design new products and incorporate the environmental focus into the design process. In newly developed chairs, 95 per cent of the components are recyclable. Textiles and foam are the only components not regarded by HÅG as recyclable, although they can be re-used for example as insulation material. When recycled, these components are down-scaled in quality and hence not regarded by HÅG's Environmental Report as recyclable components.

Distribution - out

HÅG's physical distribution of sold office chairs consists of two major approaches. Flat packaging is used for orders through retailers as it saves space in both storage and transport. When direct deliveries are performed to customers then a so-called "blanket packaging" is offered to customers to aspire them to be aware of the impact of packaging on the natural environment. The benefit of using blanket packaging is that it can all be recovered, returned and re-used in other direct deliveries on other occasions. Overall, non-recyclable packaging material is not used.

Producer and supplier

HÅG applies selection procedures for suppliers (and producers). For example, they have to fulfil documented ISO 14001. Furthermore, they also are required to fulfil ISO 14025, all of which establishes the principles and specifies the procedures for developing an environmental declaration program.

There is also a policy of "Environmental Requirements towards Suppliers" (ERS) in the selection procedure consisting of a set of evaluation criteria. For example, one criterion examined is the suppliers' (or producers') use of energy. Another is their generated amount of waste. There is also a blacklist of chemicals that are prohibited for use. Finally, their current carbon footprint is also examined.

Important elements in the ERS are the environmental goals for suppliers. They shall at all times use the industry's best practices in their own production processes. These also include the suppliers' value-adding intentions and plans to reduce their carbon footprint. The ERS explicitly specifies chemicals and substances that HÅG's suppliers are not allowed to use in the production of their goods or services. This list could be compared with an athletes' doping list. If ingredients or substances on the list are used, the supplier will be disqualified from future deliveries. Suppliers with environmental certifications such as ISO 14025 are preferred in the procurement process.

Organisation and employee

HÅG has developed a culture of business sustainability where the natural environment is crucial in all decision-making. It is supported by the board and top management of the company. All new employees undergo a formal training program introducing HÅG's environmental efforts. Also, when new products are introduced into the market, all employees are informed on how the new product meets the design criteria and how they can thereby contribute to the company's vision and mission of business sustainability.

Employees are encouraged to restrict travelling, and video conferences are used whenever possible. In fact, this has so far led to a 34 per cent reduction in costs for HÅG's business travels from 2008 to 2010.

Wholesaler and retailer

HÅG's distribution channels consist of subsidiary companies or agents in the different export countries. Independent retailers sell to the end consumer in the Norwegian market. These independent retailers cannot be fully controlled by HÅG, and they may have less focus on the environmental perspective. However, HÅG strives to be a role model for them going by beyond compliance. For example, the Vice President of Environment Carl Peter Aaser says:

[...] We have a saying here in HÅG, we go beyond compliance [...]

HÅG has striven to accomplish this for many years - long before it paid off! The business sustainability of wholesalers and retailers is encouraged through different arguments and communicating environmental concepts such as: "long service life" of office chairs to reduce the impact of the natural environment, the "recycling" of raw materials, components and waste and the reduction of "carbon footprint", each designed to make them aware of their impact on the natural environment.

Customer and end-user

HÅG also tries to influence its customers and end-users through different actions. For example, information brochures are distributed with the office chairs about the company's endeavours of business sustainability in order to trigger their awareness. Assistance and or guidance are offered and the recycling of HÅG's products encouraged through facts sheets, which encourage users to hand back their chairs for re-circulation, as well as information on how to disassemble the chairs. Buyers of new chairs may return their old chairs of any brand to HÅG for recycling free of charge, although so far only in the domestic market. In 2010, 72,000 chairs were sold in Norway, but only 1,000 old chairs returned. That means that only 1.5 per cent were handed in, but this may be explained by the fact that employees in Norway are often given the old office chairs when replaced for use at home, thereby extending their service life.

Market and society

HÅG is participating in the EU's Eco-Management and Audit Scheme (EMAS), all of which is EU's voluntary agreement for those companies who want to improve their environmental efforts beyond those regulated or demanded in the market and society. EMAS is a management tool for companies to evaluate, report and improve their environmental performance.

Furthermore, HÅG uses external auditors and external research institutes to generate their environment reports to create credibility in the market and society. For example, Det Norske Veritas (www.dnv.no) is used as an external auditor for the yearly EMAS. Ostfold Research (www.ostfoldforskning.no), a Norwegian research foundation focusing on environmental protection and regional business development, has measured the carbon footprint through the supply chain of the company. Ostfold Research is also used as a source of new competences for further developments towards an improved sustainable business.

Implications and lessons learned

A number of lessons can be learned from HÅG's efforts of business sustainability. For example, focusing on the corporate impact of the natural environment can be highly profitable. Customers, especially larger companies, tend to be less price-sensitive when a product with a lower carbon footprint is available. Carbon footprint is becoming a criterion in the decision-making process of customers across industries.

The process towards sustainable business must be anchored and supported by the top-level management and sometimes by the owners of companies, and it has to be a long-term commitment. As seen in the case study in focus, the development towards business sustainability is an ongoing process, and resources have been allocated over time. Sustainability has been seen as a part of the long-term product development process. As the CEO of HÅG expresses:

[...] this is not about market communication, but a way of thinking [...]

The best results occur when analysing the whole demand and supply chain networks, focusing not only on the carbon footprint from the company's own production facilities. In this case we have learned that the majority of the reduction potential of HÅG's derived carbon footprint is external and from sources upstream and or downstream network.

It is important to involve external expertise to measure improvements and suggest further actions. Customers are increasingly demanding neutral documentation on stakeholders' impact on the natural environment and carbon footprint. Subsequently, external and independent documentation of audits is crucial to evaluate actions taken to achieve credibility.

It seems not only reasonable, but also crucial to look at the carbon footprint through the whole service life-cycle based on the knowledge that the vast majority of the impact on the natural environment caused by the office chairs is not generated by the company itself, but is derived from other sources of carbon footprint, both previous to the production plant and after the assembly of the office chairs.

The awareness of business sustainability is increasing in both the domestic and international markets. During the first decade and a half, HÅG focused on the natural environment, but at the time neither the market, nor society were particularly interested. It has not been until the last few years that the environmental profile and efforts of the company's business sustainability have become an important and positive element in relation to the competition.

Customers are becoming increasingly aware of the importance of considering the natural environment and are beginning to require documentation of a product's carbon footprint. Choosing products with a low carbon footprint helps the customers reach their own environmental goals. In particular, larger customers are concerned with the environmental impact of the products to be bought, and choose products with a proven track record of environmentally friendly production.

According to HÅG's top level management, the carbon footprint of the products is one of the criteria in all of the bidding competitions in Norway nowadays, and is regarded by the sales organisation as an important factor in the decision process in approximately 80 per cent of bidding competitions. To further increase the awareness of recycling, facts sheets follow newly designed products to encourage users to hand back the chairs for re-circulation and informing them of how to disassemble them.

Concluding thoughts

Based on the case study of HÅG, it appears evident that a genuine effort of business sustainability is not a utopia anymore. The case study confirms that business sustainability is not about increasing costs; it is the very opposite - it reduces costs! Furthermore, it is quite possible in a competitive marketplace. Interestingly, profitability is maintained and even strengthened.

It appears that achieving the best results of business sustainability occurs when the whole demand and supply chain networks are taken into consideration, and not only focusing on the carbon footprint from the company's own business operations. It also appears important to involve external expertise to measure improvements and suggest further actions.

The case study of HÅG shows that a genuine dedication to go beyond compliance may pay off in the long run. A spin-off effect is the improved corporate reputation in the market and society. The case study clearly shows that there is no need for state-intervention or allowances, though it may speed up the process on a broader scale of business.

Most importantly, business sustainability is not about doing one thing, but doing many different things at the same time. Window-dressing or any kind of superficial efforts is not recommendable, but a genuine long-term commitment is required to gain benefits in the market and society. In fact, business sustainability may be a requirement in many industries in the future. Frankly speaking, it is here to stay, just as the planet Earth is the mother of all stakeholders regarding business sustainability; we should not forget that we human beings have only got the one planet.

An important contribution of the current case study is a refinement of the transformative business sustainability concept by [22] Svensson and Wagner (2011a) as applied to describe HÅG's business sustainability in terms of vision and mission; likewise as applied to the sources and stakeholders of their impact on the natural environment and of their carbon footprint. Furthermore, it builds upon other case studies and frameworks (e.g. [22], [23], [24] Svensson and Wagner, 2011a, b, c). In addition, the case study also shows that it is possible to reduce the carbon footprint using current technological advances. In other words, there is no need or excuse to wait for further technological advancements.

A suggestion for further research is to perform additional case studies that relate to the current case study and serve as a foundation to develop and refine the applied business sustainability model. It is an area of research that suffers from a shortage of real world examples and best practice illustrations. The exploration of business sustainability is too important to mankind not to be thoroughly grounded in reality, rather than philosophical, theoretical and conceptual foundations. In fact, the presence of such blinkers may distort the understanding and deviate from a sound development of business sustainability models and theory generation of business sustainability.

We argue that research into business sustainability needs at this stage of development to be inductive rather than deductive - it may be an irreversible mistake to try to re-package existing theory into business sustainability, as climate change prediction and the poor condition of the Earth have not been fully understood or comprised in previous theory. In sum, we contend that the field of business sustainability should originate from a blank sheet, bringing in existing theory only when the empirical findings support it, not the opposite way when the empirical findings are adapted to fit existing theory.

Received 9 March 2011. Revised 17 July 2011. Accepted 20 August 2011.